Court Opinion

ID: 4426311
Source: CourtListenerOpinion
Date Created: 2019-08-16 16:00:45.228498+00
Date Added: 2024-06-11T14:52:57.668839
License: Public Domain

United States Court of Appeals
                             For the Eighth Circuit
                         ___________________________

                                 No. 18-1372
                         ___________________________

                 John Brand; Daniel Juhl; John Mitola; Jeff Bendel

                                      Plaintiffs - Appellants

                                          v.

            National Union Fire Insurance Company of Pittsburgh, PA

                                      Defendant - Appellee
                                   ____________

                     Appeal from United States District Court
                    for the District of Minnesota - Minneapolis
                                   ____________

                             Submitted: March 14, 2019
                               Filed: August 16, 2019
                                   ____________

Before SHEPHERD, ERICKSON, and KOBES, Circuit Judges.
                         ____________

ERICKSON, Circuit Judge.

       John Brand, Daniel Juhl, John Mitola, and Jeff Bendel (collectively, “Insured
Directors”), plaintiffs in this declaratory judgment action seeking to allocate defense
costs among insured and uninsured parties, appeal the district court’s1 adverse grant

      1
       The Honorable Wilhelmina M. Wright, United States District Judge for the
District of Minnesota.
of summary judgment in favor of defendant-appellee National Union Fire Insurance
Company of Pittsburgh, Pennsylvania (“National Union”). The Insured Directors
contend that the district court erred in two particulars: first, in holding that they failed
to meet their burden to show that National Union’s allocation was improper, and,
second, in failing to conform the pleadings to the facts. We affirm.

I.     Background

       The Insured Directors are executives of Juhl Energy, Inc., a Minnesota-based
energy company. National Union wrote a Directors and Officers (“D & O”) insurance
policy covering Juhl Energy’s directors and officers for the coverage period of June
24, 2013, to July 1, 2014. The policy provides personal liability coverage for the
directors and officers of Juhl Energy and its subsidiaries for up to $3 million, with a
$100,000 deductible.

      Juhl Energy’s subsidiary, Juhl Energy Development, Inc. (“JEDI”), contracted
with Unison Co. Ltd. (“Unison”), a South Korean wind turbine manufacturer, to
purchase two wind turbine generators for a community wind farm developed and
owned by Winona County Wind, LLC (“WCW”). JEDI secured a financing loan
from Unison for this purchase in the amount of $2,574,900. At the time the turbines
were purchased, WCW was a subsidiary of the Winona County Economic
Development Authority, however, JEDI purchased WCW after executing the contract
with Unison. Following this purchase, Unison sued JEDI in the District of
Minnesota, claiming that JEDI’s acquisition of WCW was in breach of the financing
agreement. An amended complaint was filed in December 2013, alleging 17 separate
causes of action. The Insured Directors were named as defendants in three of these
claims; the remaining 14 counts were asserted against various non-insured entities,
many of which included Juhl Energy and its subsidiary companies.

                                            -2-
       In January 2014, the Insured Directors filed a motion seeking to compel
arbitration. The district court denied their motion, and the Insured Directors
appealed. While the appeal was pending in this court, non-insureds JEDI and WCW
commenced arbitration against Unison, alleging breach of contractual warranties by
selling JEDI defective turbines. JEDI claimed that the turbines worked only
sporadically, and design defects (caused by Unison’s failure to account for
Minnesota’s cold climate) rendered the turbines useless during winter months. In
May 2015, this court reversed the district court’s denial of the Insured Directors’
motion to compel arbitration. Unison Co. v. Juhl Energy Dev., Inc., 789 F.3d 816
(8th Cir. 2015). On remand, the district court stayed Unison’s suit until arbitration
was completed. On October 23, 2015, Unison asserted the 17 claims as counterclaims
in the arbitration, plus one additional claim against JEDI for legal fees and expenses.

       Upon notice of the Unison lawsuit, National Union (via claims analyst, AIG
Claims, Inc.) sent a letter to Brand stating that potential coverage was available but
only for the Insured Directors. National Union subsequently sent Brand an email
proposing the coverage allocation to be 20%, basing its estimate on the percentage
of covered claims in the suit. National Union also informed Brand that there was no
coverage for JEDI/WCW’s arbitration claims against Unison and requested that the
law firm representing these parties bill separately for them. In a separate email,
National Union notified Stuart Turner, broker for the insured parties, that
JEDI/WCW’s prosecution of affirmative claims against Unison were not defense
costs under the policy and therefore would not be covered. Turner responded that the
Insured Directors strongly disagreed with AIG’s 20% allocation, asserting that the
affirmative arbitration claims were “inextricably intertwined” with the federal lawsuit
against the directors and “necessary to the defense of the litigation as a strategic
matter” because JEDI’s breach of warranty claims constituted its principal defense
to Unison’s claims in the federal lawsuit. JEDI claimed that under these facts the
arbitration was defensive in nature.

                                         -3-
       National Union disagreed with this analysis and took the position that 40% of
the expenses and costs of the federal lawsuit was an appropriate allocation, because
the Insured Directors constituted four out of the ten defendants. National Union
declined to reimburse any fees associated with the arbitration prior to October 23,
2015, when Unison filed its counterclaim. National Union offered to allocate 10%
of the arbitration fees and costs incurred after that date because the arbitration
primarily involved JEDI/WCW’s product defect/warranty claims against Unison, and
only three of the 18 claims involved the Insured Directors. The Insured Directors
rejected this proposal.

       When the parties were unable to reach agreement, the Insured Directors sued
National Union in Minnesota district court, seeking a declaratory judgment declaring
that the Insured Directors were entitled to an allocation of 100% of the fees, costs,
disbursements, and expenses incurred by the Insured Directors in both the district
court action and the arbitration. Additionally, the Insured Directors requested that
National Union reimburse the costs of JEDI/WCW’s arbitration against Unison,
asserting that it was defensive in nature. Both parties moved for summary judgment,
and the district court granted summary judgment for National Union. The Insured
Directors filed this appeal.

II.   Discussion

      A.     Summary Judgment

      “We review the district court’s grant of summary judgment de novo, reading
the record in a light most favorable to the non-moving party and granting all
reasonable inferences in his favor.” Hannoon v. Fawn Eng’g Corp., 324 F.3d 1041,
1045-46 (8th Cir. 2003) (citation omitted). Summary judgment is proper when the
record before the district court establishes that there is “no genuine dispute as to any
material fact” and the moving party is “entitled to judgment as a matter of law.” Fed.

                                          -4-
R. Civ. P. 56(a). A genuine dispute as to a material fact exists “if the evidence is such
that a reasonable jury could return a verdict for the nonmoving party.” Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Courts must construe the evidence
in the light most favorable to the nonmoving party and draw all reasonable inferences
in favor of that party. See Young v. United Parcel Serv., Inc., 135 S. Ct. 1338, 1347
(2015) (citation omitted).

       Under Minnesota law, “[t]he interpretation of an insurance policy, including
the question of whether a legal duty to defend or indemnify arises, is one of law.”
Midwest Family Mut. Ins. Co. v. Wolters, 831 N.W.2d 628, 636 (Minn. 2013)
(quoting Auto-Owners Ins. Co. v. Todd, 547 N.W.2d 696, 698 (Minn. 1996)). When,
as here, the policy does not include a duty to defend, the burden of proving allocation
rests with the insured party. UnitedHealth Grp. Inc. v. Columbia Cas. Co., 47 F.
Supp. 3d 863, 873 (D. Minn. 2014) (citation omitted).

       Below, the Insured Directors requested declaratory relief for 100% of the
federal lawsuit and arbitration expenses and costs. The Insured Directors argued in
the alternative that if they are not entitled to 100% coverage than they are entitled to
82% of the total litigation costs based on the theory that 14 of the 17 claims are
“derivative” of their conduct. The district court found that the Insured Directors had
not met their burden of proof and denied declaratory relief. We agree that the Insured
Directors failed to carry their burden of proof. We find the district court
appropriately considered the only issue properly raised before it – that is, the Insured
Directors’ all-or-nothing claim for entitlement to 100% of the advance defense costs.
The Insured Directors’ failure to carry their burden of showing entitlement to 100%
coverage was the dispositive issue before the district court and is dispositive on
appeal.

                                          -5-
      B.       Failure to Conform the Pleadings to the Evidence

       The Insured Directors argue that the district court erred in failing to conform
the pleadings to include the alternative allocation of 40% for both Unison’s federal
lawsuit and the arbitration action. Rule 15(b)(2) of the Federal Rules of Civil
Procedure provides that “[w]hen an issue not raised by the pleadings is tried by the
parties’ express or implied consent, it must be treated in all respects as if raised in the
pleadings.” Fed. R. Civ. P. 15(b)(2). “While Rule 15(b) provides parties with
methods to amend a pleading any time during or after trial, and is therefore not
directly applicable to this situation where the parties intended to amend the complaint
before trial, the Federal Rules do recognize instances when a pleading may be
amended by the implied consent of the parties.” Cook v. City of Bella Villa, 582 F.3d
840, 852 (8th Cir. 2009).2 However, implied consent is presumed only when the
parties have “understood the evidence to be aimed at the unpleaded issue.”
Wichmann v. United Disposal, Inc., 553 F.2d 1104, 1107 n.3 (8th Cir. 1977) (quoting
MBI Motor Co. v. Lotus/East, Inc., 506 F.2d 709, 711 (6th Cir. 1974)). It would not
be accurate to say that the parties understood the evidence to be aimed at the Insured
Directors’ proposed alternative allocations of 82% and 40%. The evidence advanced
by the Insured Directors–consisting chiefly of the policy itself and communications
between the parties discussing proposed allocations–was not aimed at any particular
allocation.

       Further, under Rule 15(b), “[a]mendments are allowed when the parties have
had actual notice of an unpleaded issue and have been given an adequate opportunity
to cure any surprise resulting from the change in the pleadings.” Cook, 582 F.3d at
852 (alteration in original) (quoting Kim v. Nash Finch Co., 123 F.3d 1046, 1063 (8th
Cir. 1997)). This issue was raised for the first time in the Insured Directors’ reply
brief to the motion for summary judgment. The Insured Directors’ amended

      2
          Cook applied Rule 15(b) at the summary judgment stage, as we do here.

                                           -6-
complaint sought only “declaratory relief in the form of an order requiring National
Union to reimburse 100% of all the fees, costs, disbursements, and expenses incurred
by [the Insured Directors] in conjunction with the Unison action . . . whether they be
by arbitration or in the U.S. Federal District Court.” The Insured Directors sought
summary judgment only on a claim of 100% allocation. Only in the summary
judgment reply brief did the Insured Directors seek alternative allocations of 82% and
40% for the federal lawsuit and the arbitration–well after National Union would have
had adequate opportunity to address them at summary judgment.

      Finally, the Insured Directors did not file a Rule 15(b) motion in district court.
Rather, they argue for the first time on appeal that we must reverse the district court’s
decision based on its failure to amend the Insured Directors’ complaint sua sponte.
As the Eleventh Circuit has noted, doing so “would render the summary judgment
process an exercise in futility, and would place the onus on the district court to distill
any possible argument which could be made based on the materials before the court.”
Blue Cross Blue Shield of Alabama v. Weitz, 913 F.2d 1544, 1550 (11th Cir. 1990).
While the district court may have authority to do so, it has no obligation, absent a
request by the party that would benefit from such an allocation.

III.   Conclusion

      The district court did not err in concluding that the Insured Directors failed to
meet their burden of proving an allocation different from that proposed by National
Union. We affirm the district court’s denial of declaratory relief.
                       ______________________________

                                           -7-