### 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 State s Herald Fire Insurance Company, * District Court for the * District of Minnesota. Defendant/Garnishee - * Appellee, * * Rachel Sarah Paul, * * Defendant. *

___________ Submitted: December 14, 1995 Filed: July 11, 1996

___________ Before BOWMAN and LOKEN, Circuit Judg es, and WOLLE, Chief District Judge. *

___________ LOKEN, Circuit Judge.

When a l iability insurer denies coverage and refuses to defend it s insured, Minnesota law allows the plaintiff-claimant and the defendant

insured to enter into a "Miller-Shugart" settlem ent, collectible only from the insurer. The plaintiff then proceeds against the insurer by a gar nishment action, seeking to establish coverage and collect th e settlement. See Mill er 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 Magistrat e 2 

### Judge for the District of Minnesota.
-2- person al injury plaintiff. He entered into a Miller-Shugart settlemen t with de fendant Rachel Paul, collectible only from the proceeds of th e homeow ner's insurance policy issued by Herald Fire Insurance Company t o Rachel's mother. When Koehnen proceeded by garnishment action in Minnesot a stat e court, Herald Fire removed. The district court denied Koehnen' s 1 motio n to remand the action to state court and affirmed the magistrat e judge's decision denying Koehnen leave to file a garnishment complain t

2 becaus e the settlement is unreasonable. Koehnen appeals both rulings , which terminated the removed action. We affirm.

I. Background.
Rachel Paul's parents divorced in 19 88. The divorce decree provides that Rachel's mother has legal custody of Rachel, that her parents "share the pa rental responsibility," and that Florida is her "primary physica l residence." Rachel m oved 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 tim e before completing hig h 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, inflictin g permanent head injuries. Koehnen sued Rachel, her fat her and mother, the assailants, and their parents in Minnesota stat e court.

Koehnen sought damages from Rachel and her parents under th e Minnesota Civil Damages Act, Minn. Stat. Ann. § 340A.801, subd. 1

### -3-

(also known as the Dram Shop Act), on the ground that Rachel illegally sol d liquor to the assaila nts. 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 de fend noted that Rachel was being defended by her father's insurer.

Without H erald 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 [Heral d Fire] policy." Judgment was entered in accordance with this Stipulation in state court. Now a judgment creditor, Koehne n
ser ved 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 complai nt 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. Se e 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 fo r removal purposes), ce rt. 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 n otice of removal "shall be filed" within thirty days afte r defendant receives "a copy of the initial pleadi ng 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 garnishmen t 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 stat e court garnishment action. Minn. Stat. Ann. § 571.87.
-4- of receiving Koehnen's motion for leave to file a supplemental complaint in the state court.
A party objecting to removal must fi le a motion to remand "within 30 days aft er the filing of the notice of removal." 28 U.S.C. § 1447(c)

. Within thirty days after Herald Fire removed, Koehnen filed a motion t o remand on the ground that removal was untimely. However, nine day s earlier, Koehnen had moved the district court for leave to file a supp lemental complaint against Herald Fire. Koehnen vigorously argue d 3 that motion, and Magi strate Judge Montgomery ruled in Herald Fire's favor before the district court heard Koehnen's motion to remand. In thes e circumstances, the court held that Koehnen had waived his right to see k
rema nd. The court explained: "Having received an adverse ruling i n federa l court [from Magistrate Judge Montgomery], pursuant to his ow n motion, Koehnen will not be allowed to obtain a 'second bite at the apple' in state court. . . . Based on Koehnen's affirmative federal cour t conduct, remand in this matter would be offensive to fundamental principle s of fairness." We agree.
A procedural defect in removal, such as untimeliness, does not affect the fe deral court's subject matter jurisdiction and therefore may b e waived. See Nolan v. Prime Tanning Co. , 871 F.2d 76, 78 (8th Cir. 1989). Federal courts consider a number of factors in d etermining 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 p arty that engages in affirmative activity in federal court typicall y 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 J ustice Act, P.L. No. 4 

### 100-702, § 1016(c), 102 Stat. 4642, 4670 (1988). -5- par ticularlyif the federal court has ruled unfavorably, see Nolan , 87 1 F.2d at 78-79.

In thi s case, Koehnen affirmatively sought leave to file a ne w 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 t o remand, but instead o f seeking to withdraw or stay his prior motion until the remand motion cou ld be decided, Koehnen vigorously briefed and argued his substantive motion. Only when Magistrate Ju dge Montgomery denied that motion -- a ruling that was effectively a dispos itive order -- did Koehnen press the district co urt to remand. In these circumstances, if there was dis cretion to rule that the right to seek remand had been waived, th e district court plainly did not abuse that discretion.

Koehnen argues that the 1988 amendment to 28 U.S.C. § 1447(c) 4 im plicitlyabolished the discretionary waiver doctrine by imposing a thirty-daytime 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 ] sect ion 1447(c) is a mere reconstitution of the existing statute an d jurisprudence." In re Medscope Marine Ltd. , 972 F.2d 107, 109 (5th Cir. 1992)

. Therefore, the district court retained, and did not abuse, th e 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 -- hi s garnishment summons to Herald Fire, or his state court motion t o fi le a supplemental complaint after Herald Fire had denie d garnishee liability. -6- 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 th e garn ishee may be liable. Minn. Stat. Ann. § 571.75, subd. 4. In thi s context, probable cau se means a showing that the liability insurer may be obligated to indemnif y 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 judgm ent creditor-plaintiff seeking to enforce a Miller-Shugart settlement must prove more than insurance coverage. Because the settling def endant's insurer declined to defend, it did not assume the liabilit y insurer's customary control over the settlement process. And the settling insu red, who will not be personally liable to pay the Miller-Shugar t sett lement, "has no incentive to drive a hard bargain," that is, "n o compunction to agreeing that judgment may be entered against him for the policy limits, even i f 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, Koehne n as judgment creditor-plaintiff must prove not on ly insurance coverage, but also the absence of fraud or collusion and that the Miller-Shugar t settl ement is reasonable. Miller , 316 N.W.2d at 734-35. The distric t court found probable cause "with

### -7-

respe ct to the issue of coverage" but concluded that the settlement i s unreasonable because Rachel as a social host is not liable to Koehnen unde r the Civil Damages Act. Without reaching those issues, we conclude that th e settlement is collusive.

In most cases, the only potential collusion is between the insure d and the plaintiff, and the collusion inquiry is therefore satisfied b y determ ining whether the settlement is reasonable. See Independent Sch

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

. 199 5). But this case is unusual. The Miller-Shugart doctrine wa s fas hioned to protect an insured who has been left to her own defense s becaus e the insurer refuses to defend against the plaintiff's liabilit y claim. The insured may escape this costly dilemma if the plaintiff i s 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 R achel Paul to her own defenses, as she was being defended by he r 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

. Counse l representing Rachel, selected by Mr. Paul's insurer, agreed t o settle Koehnen's claim against Rachel for $325,000, to be collected only from another insurer, Herald Fire. In substance, because even a n
unre asonable Miller-Shugart settlement is binding on plaintiff and th e insured, the insurer that had agreed to defend Rachel thereby shifted the entire risk that she might be liable to an insur er that denied it was even obligated to defend. By the same token, Koehnenrelinquished his right to collect anything from the insurer that had admitted a duty to defend, in exchan ge for a stipulated judgment collectible only from a non

participating 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). -8- only if he has a better chance of proving coverage and reasonablenes s against Herald Fire, than of proving liability and damages against a n insurer-defended Rach el Paul. Thus, Koehnen argues on appeal that we may not co nsider Rachel's liability to Koehnen in determining whether th e Miller-Shugart settle ment is reasonable, confirming that his objective in settling was not to f ind 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 represen t a client's interest. It is collusive in the legal sense because it deprived Herald Fire of it s rig ht to participate in the settlement process even though the insured , Rachel Paul, was adequately defended and therefore did not require th e protections of the Mi ller-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 th e settle ment is unreasonable, the underlying tort claim is reinstated fo r trial. See Alton M. Johnson , 463 N.W.2d at 280. In this case, because th e settlement must be set aside as collusive and outside the purview of the Miller-Shugart doctrine, we conclude that the litigating parties shoul d 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 actio n by her father's insurer. The district court's rulings (i) tha t there is probable cause to conclude that Rachel is covered

### -9-

under the Herald Fire policy, and (ii) that Rach el 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 underlyin g tort action, all remaining issues must be decide d by the Minnesota courts.

The judgment of the district court denying leave to file a supplemental complaint and dismissing this garni shment action is affirmed.

A true copy.

Attest:

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