The HONORABLE CHARLES R. WOLLE, Chief United States District *

Judge for the Southern District of Iowa, sitting by designation.

___________

No. 95-2142

___________

Joseph L. Koehnen, *

*

Plaintiff - Appellant, *

*

v. * 

* Appeal from the United States

Herald Fire Insurance Company, * District Court for the

* District of Minnesota.

Defendant/Garnishee - *

Appellee, *

*

Rachel Sarah Paul, *

*

Defendant. *

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 Submitted: December 14, 1995

 Filed: July 11, 1996

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Before BOWMAN and LOKEN, Circuit Judges, and WOLLE, Chief District Judge. *

___________

LOKEN, Circuit Judge.

When a liability insurer denies coverage and refuses to defend its

insured, Minnesota law allows the plaintiff-claimant and the defendantinsured to enter into a "Miller-Shugart" settlement, collectible only from

the insurer. The plaintiff then proceeds against the insurer by a

garnishment action, seeking to establish coverage and collect the

settlement. See Miller v. Shugart, 316 N.W.2d 729 (Minn. 1982). In this

case, Joseph Koehnen is the 
 The HONORABLE RICHARD H. KYLE, United States District Judge 1

for the District of Minnesota. 

 The HONORABLE ANN D. MONTGOMERY, United States Magistrate

2

Judge for the District of Minnesota.

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personal injury plaintiff. He entered into a Miller-Shugart settlement

with defendant Rachel Paul, collectible only from the proceeds of the

homeowner's insurance policy issued by Herald Fire Insurance Company to

Rachel's mother. When Koehnen proceeded by garnishment action in Minnesota

state court, Herald Fire removed. The district court denied Koehnen's

1

motion to remand the action to state court and affirmed the magistrate

judge's decision denying Koehnen leave to file a garnishment complaint

2

because the settlement is unreasonable. Koehnen appeals both rulings,

which terminated the removed action. We affirm.

I. Background.

Rachel Paul's parents divorced in 1988. The divorce decree provides

that Rachel's mother has legal custody of Rachel, that her parents "share

the parental responsibility," and that Florida is her "primary physical

residence." Rachel moved with her mother to Florida in 1988 but returned

to Minnesota in 1989 to complete high school. While in Minnesota, Rachel

lived with her father. She visited her mother in Florida from time to time

before completing high school in 1992, including a two-month summer visit

in 1990. On September 20, 1991, Rachel hosted a party at her father's

home, providing two kegs of beer and selling cups to those who attended.

Three underaged, beer-drinking guests attacked Koehnen, who was visiting

a neighbor, inflicting permanent head injuries. Koehnen sued Rachel, her

father and mother, the assailants, and their parents in Minnesota state

court. 

Koehnen sought damages from Rachel and her parents under the

Minnesota Civil Damages Act, Minn. Stat. Ann. § 340A.801, subd. 1 
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(also known as the Dram Shop Act), on the ground that Rachel illegally sold

liquor to the assailants. Mr. Paul's insurer agreed to defend Rachel and

her father. Herald Fire agreed to defend its named insured, Rachel's

mother, but declined to defend Rachel, claiming that she was not a policy

"insured." Herald Fire's letter declining to defend noted that Rachel was

being defended by her father's insurer. 

Without Herald Fire's participation, Rachel and Koehnen settled his

claim against Rachel by stipulating to the entry of judgment in the amount

of $325,000 to be satisfied "from insurance coverage available to Rachel

Paul under the [Herald Fire] policy." Judgment was entered in accordance

with this Stipulation in state court. Now a judgment creditor, Koehnen

served a garnishment summons on Herald Fire. See Minn. Stat. Ann.

§ 571.72, subd. 2. When Herald Fire denied liability, Koehnen moved for

leave to file a supplemental garnishment complaint to recover his judgment

against Rachel from Herald Fire. See Minn. Stat. Ann. § 571.75. Herald

Fire removed the garnishment action before the state court ruled. See

Randolph v. Employers Mut. Liab. Ins. Co., 260 F.2d 461, 463-64 (8th Cir.

1958) (as a matter of federal law, garnishment is a separate proceeding for

removal purposes), cert. denied, 359 U.S. 909 (1959); 1A James W. Moore &

Brett A. Ringle, Moore's Federal Practice ¶ 0.167[12.--3], at 526-27 (2d

ed. 1996). 

II. The Remand Issue.

A notice of removal "shall be filed" within thirty days after

defendant receives "a copy of the initial pleading setting forth the claim

for relief upon which such action or proceeding is based." 28 U.S.C.

§ 1446(b). Herald Fire filed its notice of removal on January 3, 1995,

more than thirty days after it received Koehnen's November 1994 garnishment

summons, but within thirty days 
 This filing was unnecessary as a matter of state law because 3

removal "carries with it all pending proceedings" in the state

court garnishment action. Minn. Stat. Ann. § 571.87.

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of receiving Koehnen's motion for leave to file a supplemental complaint

in the state court. 

A party objecting to removal must file a motion to remand "within 30

days after the filing of the notice of removal." 28 U.S.C. § 1447(c).

Within thirty days after Herald Fire removed, Koehnen filed a motion to

remand on the ground that removal was untimely. However, nine days

earlier, Koehnen had moved the district court for leave to file a

supplemental complaint against Herald Fire. Koehnen vigorously argued

3

that motion, and Magistrate Judge Montgomery ruled in Herald Fire's favor

before the district court heard Koehnen's motion to remand. In these

circumstances, the court held that Koehnen had waived his right to seek

remand. The court explained: "Having received an adverse ruling in

federal court [from Magistrate Judge Montgomery], pursuant to his own

motion, Koehnen will not be allowed to obtain a 'second bite at the apple'

in state court. . . . Based on Koehnen's affirmative federal court

conduct, remand in this matter would be offensive to fundamental principles

of fairness." We agree.

A procedural defect in removal, such as untimeliness, does not affect

the federal court's subject matter jurisdiction and therefore may be

waived. See Nolan v. Prime Tanning Co., 871 F.2d 76, 78 (8th Cir. 1989).

Federal courts consider a number of factors in determining whether a party

has waived its right to seek remand. See Midwestern Distrib., Inc. v.

Paris Motor Freight Lines, Inc., 563 F. Supp. 489, 493-95 (E.D. Ark. 1983).

A party that engages in affirmative activity in federal court typically

waives the right to seek a remand, see Financial Timing Pubs., Inc. v.

Compugraphic Corp., 893 F.2d 936, 940 (8th Cir. 1990), 
 The Judicial Improvements and Access to Justice Act, P.L. No. 4

100-702, § 1016(c), 102 Stat. 4642, 4670 (1988).

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particularly if the federal court has ruled unfavorably, see Nolan, 871

F.2d at 78-79. 

In this case, Koehnen affirmatively sought leave to file a new

complaint in federal court. By the "mere filing of an amended petition,"

Koehnen "consented to accept the jurisdiction of the United States court."

In re Moore, 209 U.S. 490, 496 (1908), overruled in part on other grounds

by Ex parte Harding, 219 U.S. 363 (1911). He then filed a motion to

remand, but instead of seeking to withdraw or stay his prior motion until

the remand motion could be decided, Koehnen vigorously briefed and argued

his substantive motion. Only when Magistrate Judge Montgomery denied that

motion -- a ruling that was effectively a dispositive order -- did Koehnen

press the district court to remand. In these circumstances, if there was

discretion to rule that the right to seek remand had been waived, the

district court plainly did not abuse that discretion.

Koehnen argues that the 1988 amendment to 28 U.S.C. § 1447(c)4

implicitly abolished the discretionary waiver doctrine by imposing a

thirty-day time limit on motions to remand. There is no hint of such an

intent in the limited legislative history, which instead manifests a

concern that the former § 1447(c) had unwisely allowed litigants to seek

remand after receiving unfavorable rulings in federal court. See H.R. Rep.

No. 889, 100th Cong., 2d Sess. 72 (1988), reprinted in 1988 U.S.C.C.A.N.

5982, 6033. Like the Fifth Circuit, "we are persuaded that [amended]

section 1447(c) is a mere reconstitution of the existing statute and

jurisprudence." In re Medscope Marine Ltd., 972 F.2d 107, 109 (5th Cir.

1992). Therefore, the district court retained, and did not abuse, the

discretion to deny Koehnen's timely motion to remand on the ground 
 We therefore need not decide which of Koehnen's state court 5

filings was the "initial pleading" for removal purposes -- his

garnishment summons to Herald Fire, or his state court motion to

file a supplemental complaint after Herald Fire had denied

garnishee liability. 

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that his prior affirmative conduct in federal court had waived his right

to seek remand on non-jurisdictional grounds.5

III. The Merits.

Under Minnesota law, if a garnishee denies liability to the judgment

debtor, the judgment creditor-plaintiff may file a supplemental complaint

against the garnishee if the creditor shows "probable cause" that the

garnishee may be liable. Minn. Stat. Ann. § 571.75, subd. 4. In this

context, probable cause means a showing that the liability insurer may be

obligated to indemnify the judgment debtor for all or part of the MillerShugart judgment. See Poor Richards, Inc. v. Chas. Olson & Sons & Wheel

Serv. Co., 380 N.W.2d 225, 227 (Minn. App. 1986). 

The judgment creditor-plaintiff seeking to enforce a Miller-Shugart

settlement must prove more than insurance coverage. Because the settling

defendant's insurer declined to defend, it did not assume the liability

insurer's customary control over the settlement process. And the settling

insured, who will not be personally liable to pay the Miller-Shugart

settlement, "has no incentive to drive a hard bargain," that is, "no

compunction to agreeing that judgment may be entered against him for the

policy limits, even if the claim is worth less than the policy limits, if

it is worth anything." Alton M. Johnson Co. v. M.A.I. Co., 463 N.W.2d 277,

280 (Minn. 1990). To guard against the obvious risk of unfairness, Koehnen

as judgment creditor-plaintiff must prove not only insurance coverage, but

also the absence of fraud or collusion and that the Miller-Shugart

settlement is reasonable. Miller, 316 N.W.2d at 734-35. The district

court found probable cause "with 
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respect to the issue of coverage" but concluded that the settlement is

unreasonable because Rachel as a social host is not liable to Koehnen under

the Civil Damages Act. Without reaching those issues, we conclude that the

settlement is collusive.

In most cases, the only potential collusion is between the insured

and the plaintiff, and the collusion inquiry is therefore satisfied by

determining whether the settlement is reasonable. See Independent Sch.

Dist. No. 197 v. Accident & Cas. Ins., 525 N.W.2d 600, 607 (Minn. App.

1995). But this case is unusual. The Miller-Shugart doctrine was

fashioned to protect an insured who has been left to her own defenses

because the insurer refuses to defend against the plaintiff's liability

claim. The insured may escape this costly dilemma if the plaintiff is

willing to undertake the burden and risk of collecting the Miller-Shugart

settlement from the insurer. Here, on the other hand, Herald Fire did not

leave Rachel Paul to her own defenses, as she was being defended by her

father's insurer. Thus, the practical significance of Herald Fire's

refusal to defend was to signal its likely unwillingness to contribute to

a settlement on Rachel's behalf or to admit a duty to indemnify her for any

judgment in Koehnen's favor. 

This set the stage for an atypical Miller-Shugart settlement.

Counsel representing Rachel, selected by Mr. Paul's insurer, agreed to

settle Koehnen's claim against Rachel for $325,000, to be collected only

from another insurer, Herald Fire. In substance, because even an

unreasonable Miller-Shugart settlement is binding on plaintiff and the

insured, the insurer that had agreed to defend Rachel thereby shifted the

entire risk that she might be liable to an insurer that denied it was even

obligated to defend. By the same token, Koehnen relinquished his right to

collect anything from the insurer that had admitted a duty to defend, in

exchange for a stipulated judgment collectible only from a nonparticipating insurer with a far more remote connection to the events in

question. From Koehnen's perspective, this settlement is rational 
 In addition, it appears that the settlement is unreasonable 6

as a matter of law because it did not allocate liability among the

defendants in the underlying tort action. See Bob Useldinger &

Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 331 (Minn. 1993).

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only if he has a better chance of proving coverage and reasonableness

against Herald Fire, than of proving liability and damages against an

insurer-defended Rachel Paul. Thus, Koehnen argues on appeal that we may

not consider Rachel's liability to Koehnen in determining whether the

Miller-Shugart settlement is reasonable, confirming that his objective in

settling was not to find a "deep pocket," but to escape the need to prove

liability.

In these circumstances, we conclude that the settlement is collusive

as a matter of law. It is not collusive in the ethical sense that any of

the attorney-negotiators did not fairly represent a client's interest. It

is collusive in the legal sense because it deprived Herald Fire of its

right to participate in the settlement process even though the insured,

Rachel Paul, was adequately defended and therefore did not require the

protections of the Miller-Shugart doctrine. Cf. Buysse v. Baumann-Furrie

& Co., 448 N.W.2d 865, 872-73 (Minn. 1989) (subsequent history omitted).6

IV. Conclusion.

In the typical Miller-Shugart case, if there is coverage but the

settlement is unreasonable, the underlying tort claim is reinstated for

trial. See Alton M. Johnson, 463 N.W.2d at 280. In this case, because the

settlement must be set aside as collusive and outside the purview of the

Miller-Shugart doctrine, we conclude that the litigating parties should

likewise be returned to the status quo ante. See Sturm v. School-Dist. No.

70, 47 N.W. 462 (Minn. 1890). Therefore, Koehnen's claim against Rachel

Paul is reinstated. Rachel will continue to be defended in the underlying

action by her father's insurer. The district court's rulings (i) that

there is probable cause to conclude that Rachel is covered 
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under the Herald Fire policy, and (ii) that Rachel as a social host is not

liable for Koehnen's injuries under the Minnesota Civil Damages Act, are

vacated as moot. As there is no diversity jurisdiction over the underlying

tort action, all remaining issues must be decided by the Minnesota courts.

The judgment of the district court denying leave to file a

supplemental complaint and dismissing this garnishment action is affirmed.

A true copy.

Attest:

CLERK, U. S. COURT OF APPEALS, EIGHTH CIRCUIT.