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McKenzie v. Farmers Insurance Exchange

United States District Court, D. South Dakota, Southern Division

February 7, 2018

JULIE MCKENZIE, Plaintiff,
v.
FARMERS INSURANCE EXCHANGE, Defendant and Third-Party Plaintiff,

          MEMORANDUM OPINION AND ORDER ON DEFENDANT'S MOTION TO SET ASIDE DEFAULT JUDGMENT AND MOTION TO DISMISS

          Lawrence L. Piersol United States District Judge

         Pending before the Court is Defendant's Motion to Set Aside Default Judgment and Motion to Dismiss. Doc. 23. The Court requested Plaintiffs initial response to the motion only address whether or not the Court had jurisdiction to enter default judgment because without jurisdiction, the Court has no reason to determine whether or not to set aside the default judgment on other grounds. The Court has considered all filings and for the reasons set forth below, Defendant's motion is granted.

         FACTUAL BACKGROUND

         In June 2014, Julie McKenzie's ('Plaintiff s") home was damaged during hailstorms that went through the Sioux Falls region. Plaintiff timely submitted a claim to Farmer's Insurance Exchange ("Defendant"), her insurer of 18 years, for the hail damage to her home. After conducting an initial inspection in November 2014, Defendant notified Plaintiff in a letter dated January 5, 2015, that it was going to temporary close Plaintiffs claim in order to "complete a safe and practical inspection" when whether conditions allowed. The letter went on to prohibit Plaintiff from making the necessary repairs until it conducted another inspection. Defendant never reopened Plaintiffs claim and never returned for another inspection.

         Defendant was served with a Summons and Complaint in this action on February 14, 2017, but failed to appear and answer the Complaint. Accordingly, on March 9, 2017, Plaintiff filed a Motion for Entry of Default under Fed.R.Civ.P. 55(a), Doc. 8. Default was entered by the Clerk on March 9, 2017, Doc. 9. On March 10, 2017, Plaintiff filed a Motion for Entry of Default Judgment under Fed.R.Civ.P. 55(b)(2), Doc. 10, and a hearing on Plaintiffs motion was held before the Court on Monday, May 8, 2017, at 10:00 A.M., Doc. 12. Plaintiff appeared personally along with her attorneys of record, Eric T. Preheim and Molly K. Beck. Defendant was not present. After reviewing the record and pleadings and having heard argument from Plaintiffs counsel, the Court entered Default Judgment in favor of the Plaintiff on May 12, 2017, Doc. 20. Plaintiff was awarded contractual damages in the amount of $49, 290, plus prejudgment interest thereon from May 17, 2016, at the statutory rate of 10% per annum under S.D.C.L. §§ 21-1-13.1 and 54-3-16 in the amount of $4, 807.46. Plaintiff was also awarded attorneys' fees in the amount of $15, 300, plus 6.5% sales tax of $994.50, for a total amount of $16, 294.50. Further, Plaintiff was awarded bad faith damages in the amount of $50, 000 for emotional distress and physical manifestations from that distress, as well as punitive damages in the amount of $397, 160, a ratio of 4-to-1, four times $99, 390 ($49, 290 $50, 000), for a total award against Defendant in the amount of $571, 551.96.

         On May 23, 2017, Defendant filed this Motion to Set Aside Default Judgment and Motion to Dismiss, Doc. 23, stating that, because both Plaintiff and Defendant, an unincorporated association formed under California law, are citizens of South Dakota, diversity jurisdiction does not exist and the Court lacks subject matter jurisdiction over the action. Therefore, Defendant asserts the default judgment asserted against it is void. In the alternative, Defendant asks the Court to relieve Defendant of the default judgment due to excusable neglect. On May 25, 2017, the Court requested briefs addressing Defendant's contention that the Court lacked subject matter jurisdiction over the action.

         DISCUSSION

         A motion to vacate a default judgment order pursuant to Fed.R.Civ.P. 60(b) is addressed to the discretion of the trial judge unless the district court was powerless to enter the judgment in the first place. See Kocher v. Dow Chemical Co., 132 F.3d 1225, 1229 (8th Cir. 1997). Thus, if the underlying judgment is void because the court lacked subject matter jurisdiction, "relief from void judgments is not discretionary." See Id. (quoting Chambers v. Armontrout, 16 F.3d 257, 260 (8th Cir. 1994)). Accordingly, Fed.R.Civ.P. 60(b)(4) allows the Court to relieve a party from a final judgment, order, or proceeding if the judgment is void.

         Plaintiffs complaint alleges the Court has subject matter jurisdiction over this action pursuant to 28 U.S.C. § 1332, which requires complete diversity of citizenship between the parties. For diversity jurisdiction, a corporation can be a citizen of its State of incorporation, as well as the State where it has its principal place of business. 28 U.S.C. § 1332(c). However, this grant of citizenship has not been extended to unincorporated entities and thus the courts have "adhere[d] to our oft-repeated rule that diversity jurisdiction in a suit by or against the entity depends on the citizenship of 'all [its] members.'" Carden v. Arkoma Associates, 494 U.S. 185, 196 (1990) (quoting Chapman v. Barney, 129 U.S. 677, 682 (1889)). Despite the frequency with which the Court has referred to this rule, however, the Supreme Court has never expressly defined the term "members." Id. Instead, relying on specific States' laws, "we have identified the members of a joint-stock company as its shareholders, the members of a partnership as its partners, the members of a union as the workers affiliated with it, and so on." See Americold Realty Trust v. Conagra Foods, Inc., 136 S.Ct. 1012, 1015 (2016). Defendant is an unincorporated reciprocal or inter-insurance exchange formed under the laws of the State of California. Accordingly, the citizenship of Defendant is dependent upon the citizenship of its members and the Court must look to California law to define "member." Historically, interinsurance exchanges were formed by individuals, partnerships, or corporations engaged in a similar line of business who undertook to indemnify each other against certain kinds of losses by means of a mutual exchange of insurance contracts. See Lee v. Interinsurance Exchange, 57 Cal.Rptr.2d 798, 803 (Cal.Ct.App. 1996) (citing Reinmuth, The Regulation of Reciprocal Insurance Exchanges (1967) ch. I, "The Development and Classification of Reciprocal Exchanges, " pp. 1-2 [hereinafter, "Reinmuth"]). These contracts were usually exchanged through the medium of a common attorney-in-fact, who was appointed by the policyholders, or "subscribers." See Id. (citing Reinmuth, supra). Thus, under this historical form, "each subscriber was both an insured and an insurer, and had several, not joint, liability on all obligations of the exchange." Id. (citing Reinmuth, supra, ch. II, "The Legal Status of Reciprocal Exchanges, " pp. 10-20). That liability, then, stood in the place of capital stock that a shareholder of an incorporated entity would possess. See Id. (citing Reinmuth, supra, ch. I, p. 2).

         The original concept of reciprocal insurance allowed for the allocation of any surplus remaining from premium deposits to the individual subscribers. See Id. (citing Reinmuth, supra, ch. I, p. 2, ch. II, pp. 30-31). Over time, reciprocals began to accumulate unallocated surplus in the event of catastrophic losses. See Id. (citing Reinmuth, supra, ch. II, pp. 32-37, ch. X, "Conclusions and Policy Alternatives, " pp. 186-87). This led to many reciprocals, like the Defendant in this case, to obtain statutory rights to issue nonassessable policies. See Id. (citing Reinmuth, supra, ch. II, p. 18). Nonassessable policies function like non-exchange insurance policies in that subscribers have no contingent liability for the claims of the exchange. See id. (citing Reinmuth, supra, ch. II, p. 39). However, some exchanges, again like that of the Defendant in this case, are managed by an attorney-in-fact. See Id. at 803-04. (citing Reinmuth, supra, ch. II, p. 39).

         The California Insurance Code provides that any persons may exchange reciprocal or interinsurance contracts with one another providing insurance...among themselves against any loss which may be insured against under other provisions of law." Cal. Ins. Code § 1300. "Such persons are termed subscribers." § 1301. In its exploration of interinsurance exchanges, the California Court of Appeals for the Second District, Division 3 laid out the defining statutory characteristics of modern day California interinsurance exchanges.

First, section 1303 [of the California Insurance Code] now provides that reciprocals are no longer truly reciprocal enterprises, i.e., it is no longer true that each subscriber is both an insurer and an insured. Rather, section 1303 provides that a reciprocal insurance company, or interinsurance exchange, "shall be deemed the insurer while each subscriber shall be deemed an insured."
As in historical times, a present-day interinsurance exchange is managed by an attorney-in-fact, who is appointed pursuant to powers-of-attorney executed by the exchange's subscribers. (ยง 1305).... The board must be selected under rules adopted by the subscribers and is required to supervise the exchange's finances and operations to ...

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