Federal court remands dispute over insurance funds to state court

Summary

• Federal court remanded a Missouri insurance coverage dispute to state court for lack of diversity jurisdiction.
• Plaintiffs and S.M. Wilson & Co. were found to have competing claims to limited Liberty Mutual insurance coverage.
• The court rejected Liberty Mutual’s argument that S.M. Wilson was fraudulently joined.
• Judge John A. Ross ruled the competing claims created an actual and substantial controversy over policy proceeds.

An actual and substantial conflict exists between policyholders over the limited pool of insurance coverage in a construction defect dispute, the Eastern District of the U.S. District Court of Missouri ruled on June 3, remanding the case to state court for lack of diversity citizenship.

Legacy Building Group, C. Rallo Legacy and C. Rallo Contracting Company filed suit against Liberty Mutual Fire Insurance Company in Missouri state court over the fallout of a construction defect dispute, which the plaintiffs alleged Liberty refused to defend and indemnify and settle claims.

The action included claims for declaratory judgment, breach of contract, vexatious refusal and bad faith refusal to settle, as well as a declaratory judgment claim against S.M. Wilson & Co., another company involved in the construction defect dispute.

Liberty removed the action to federal court, asserting complete diversity of citizenship among the parties because Liberty is a citizen of Wisconsin and Massachusetts, and the plaintiffs are citizens of Missouri.

Wilson, a Delaware corporation which represents that its principal place of business is in Missouri, should be disregarded for purposes of diversity jurisdiction, according to Liberty, which also argued that Wilson was fraudulently joined because the plaintiffs’ complaint failed to state any colorable claims against Wilson.

The plaintiffs responded with a motion to remand back to state court, arguing that Wilson was properly joined as an indispensable party and that they had an actionable and colorable declaratory judgment claim against Wilson.

Liberty objected, maintaining that Wilson should be realigned with the plaintiffs, that the plaintiffs had no colorable claims against Wilson due to a complete release of all claims and that there was no limited pool of insurance funds in dispute.

Siding with the plaintiffs, U.S. District Court Judge John A. Ross granted the motion to remand.

The plaintiffs argued that they had adverse, competing and conflicting claims with Wilson against Liberty for a limited amount of coverage from Liberty, such that a declaration of rights in one party’s favor would impede and impact the rights of another.

“The Court finds that an actual and substantial conflict exists between Plaintiffs and Wilson,” the court wrote. “The complaint sufficiently alleged a dispute between Plaintiffs and Wilson concerning priority of entitlement to coverage under the Liberty policies. Plaintiffs allege that Plaintiffs and Wilson seek combined relief in excess of $8,500,000 and are thus competing for the $6,000,000 total limits of coverage. There is thus a live controversy whether Plaintiffs or Wilson are entitled to coverage under the Liberty policies and if one party has priority over the other. Accordingly, an ‘actual and substantial conflict exists’ between Plaintiffs and Wilson. The interests of Plaintiffs and Wilson are clearly not aligned because they are directly competing for entitlement to coverage.”

Given this controversy, the court also disagreed with Liberty that Wilson was fraudulently joined.

In a prior lawsuit, the plaintiffs released any and all claims against Wilson in a settlement agreement, which Liberty contended barred any priority of recovery claim, as a declaration regarding priority would adversely affect either the plaintiffs or Wilson.

But Liberty had no standing to enforce the agreement between the plaintiffs and Wilson, the court pointed out, and the agreement “expressly preserved” any and all claims involving Liberty Mutual.

“Plaintiffs’ declaratory judgment claim against Wilson necessarily involves Liberty because it requests a declaration concerning priority of entitlement to coverage under the Liberty policies,” the court said. “It is thus a claim ‘involving’ Liberty and is preserved pursuant to the agreement between Plaintiffs and Wilson.”

The court next determined that the plaintiffs asserted a cognizable and colorable declaratory judgment claim because they had “a direct interest in coverage under the Liberty policies and would be adversely affected if Wilson was found to have priority of coverage in a declaratory judgment,” the court wrote. “Given that Plaintiffs and Wilson have made competing claims for priority of coverage, Plaintiffs allege a colorable and cognizable claim.”

The respective money demands made by the plaintiffs and Wilson against Liberty are in conflict because the combined sums exceed the liability coverage limit, the court added.

Alternatively, Liberty argued that the allegations of the plaintiff’s complaint established that it was not competing with Wilson for a limited pool of insurance funds, but the court was unpersuaded.

“The Court is required to assume the allegations in the complaint are true in evaluating Plaintiffs’ motion to remand,” the court said. “While Liberty argues at length that Plaintiffs and Wilson have no competing claims to an insufficient pool of funds, the Court is not in a position at this stage of litigation to resolve that factual dispute.”

Finally, the court rejected Liberty’s attempt to distinguish the case from an earlier 2021 lawsuit involving the plaintiffs.

“The Court finds that while the 2021 action is not the ‘law of the case’ as characterized by Liberty, there are no substantive differences between that case and the present case for purposes of assessing Plaintiffs’ motion to remand,” the court said. “The parties, causes of action, and arguments are essentially the same. … As the Court discerns no basis to depart from the previous decision to remand the 2021 action to state court, this action will likewise be remanded to the [state court].”

Concluding that Liberty failed to satisfy its burden of proving by a preponderance of the evidence that the plaintiffs’ claim against Wilson is frivolous or illegitimate and filed only to prevent removal, the court found Wilson was an appropriate defendant for purposes of assessing diversity jurisdiction. Since the plaintiffs and Wilson are citizens of the same state, the court remanded to state court.

Angela M. Clark of Wallace Saunders in Lee’s Summit, who represented Liberty, did not respond to a request for comment.

Neither did Kansas City attorney Scott D. Hofer of Baker Sterchi, who represented the plaintiffs.

The case is Legacy Building Group, LLC v. Liberty Mutual Fire Insurance Company, No. 4:25-cv-01624-JAR.