United States District Court, D. South Dakota, Southern Division
MEMORANDUM OPINION AND ORDER ON DEFENDANT'S
MOTION TO SET ASIDE DEFAULT JUDGMENT AND MOTION TO
Lawrence L. Piersol United States District Judge
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.
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.
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.
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.
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.
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).
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,
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
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. (§ 1305).... The board must be selected
under rules adopted by the subscribers and is required to
supervise the exchange's finances and operations to