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McCalla Corporation v. Certain Underwriters at Lloyd's, London

United States District Court, D. Kansas

May 1, 2014

McCALLA CORPORATION and McCALLA CORPORATION, as a Member of EMPLOYMENT PRACTICES RISK MANAGEMENT ASSOCIATION, Plaintiff,
v.
CERTAIN UNDERWRITERS AT LLOYD'S, LONDON, Subscribing to Policy No. KAH100513, Defendant.

MEMORANDUM AND ORDER

SAM A. CROW, Senior District Judge.

This declaratory judgment case comes before the court on cross-motions for summary judgment. The primary issue is whether insurance issued by the Defendant obligates Defendant to defend and to pay certain amounts arising from Plaintiff's criminal charges.

I. Summary Judgment Standard

A court grants a motion for summary judgment under Rule 56 of the Federal Rules of Civil Procedure if a genuine issue of material fact does not exist and if the movant is entitled to judgment as a matter of law. The court is to determine "whether there is the need for a trial-whether, in other words, there are any genuine factual issues that properly can be resolved only by a finder of fact because they may reasonably be resolved in favor of either party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986). "Only disputes over facts that might affect the outcome of the suit under the governing law will... preclude summary judgment." Id. There are no genuine issues for trial if the record taken as a whole would not persuade a rational trier of fact to find for the nonmoving party. Matsushita Elec. Indust. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986).

"Cross-motions for summary judgment are to be treated separately; the denial of one does not require the grant of another." Buell Cabinet Co. v. Sudduth, 608 F.2d 431, 433 (10th Cir. 1979). To the extent the cross-motions overlap, however, the court addresses the legal arguments together. Where the parties file cross motions for summary judgment, the court is "entitled to assume that no evidence needs to be considered other than that filed by the parties, but summary judgment is nevertheless inappropriate if disputes remain as to material facts." James Barlow Family Ltd. Partnership v. David M. Munson, Inc., 132 F.3d 1316, 1319 (10th Cir. 1997), cert. denied, 523 U.S. 1048 (1998).

II. Uncontested Facts

Plaintiff, McCalla Corporation, is organized under the laws of Kansas. Defendant, Certain Underwriters at Lloyd's London Subscribing to Policy Number KAH100513, issued policies of insurance to Plaintiff. Plaintiff is a defined "Insured" under the Policy as a member of Plaintiff Employment Practices Risk Management Association (EPRMA), an Illinois unincorporated association.

In August of 2012, Plaintiff received notice that it was a target of a U.S. Immigration and Customs Enforcement investigation. The next month, a search warrant was executed on Plaintiff's premises. Plaintiff retained counsel to defend the criminal investigation and agreed to pay expenses as they were incurred. During the policy period, the federal government filed a one-count information charging Plaintiff with violating 18 U.S.C. § 1546(b)(2) - knowingly aiding and abetting the use of an identification document, having reason to know the document was false, for the purpose of satisfying a requirement of the Employee Eligibility Verification Act program.

On November 1, 2012, pursuant to the notice requirements of the insurance policy, Plaintiff demanded that Defendant assume its duty of defense and pay defense costs for Plaintiff, as provided in the Policy. On December 3, 2012, Plaintiff entered a plea to the criminal charge, admitting the following facts:

In about March 2011, McCalla Corporation's director of operations (supervisor) met with the manager of one of the McDonald's restaurants it operates in Wichita, Kansas, and told the store manager that the supervisor needed to update the store manager's 1-9 form using current identity documents as required by the Department of Homeland Security Employment Eligibility Verification program, as the documents the store manager had previously used on her 1-9 form were expired or not otherwise valid. Two days later, as proof of employment eligibility, the store manager presented to the supervisor a "resident alien" card that the supervisor knew did not appear to be genuine, but the supervisor updated the manager's 1-9 form and McCalla Corporation took no further action concerning the manager's employment as a McCalla McDonald's restaurant store manager, a position which she held from May 2009 to September 2012. The supervisor also was aware that it took weeks, not two days, for a foreign national to obtain a "resident alien" card, giving him further reason to know that the resident alien card presented to him by the store manager was not genuine. As a result of the defendant's conduct, it derived or had proceeds traceable to, indirectly or directly, the amount of $100, 000.

The Judgment against Defendant ordered a $300, 000 fine and a $100, 000.00 forfeiture to the United States pursuant to 18 U.S.C. § 982(a)(6)(A). Dk. 23, Exh. 6.

The day after Plaintiff entered its plea, Plaintiff was informed that Defendant declined to provide coverage or a defense. After Defendant waived any mediation requirement delineated in the policy, Plaintiff filed this suit. Plaintiff seeks the following: a declaration that Defendant owed it a duty to defend Plaintiff in the above-referenced criminal proceeding; a finding that Defendant acted in bad faith in not doing so; recovery of its costs of defense ($104, 302.58); and reimbursement for or payment of the $100, 000 forfeiture ordered by the court in the criminal case.

III. Governing Law

Plaintiffs assert that the "parties agreed in the pre-trial order that Kansas law applies." Dk. 23, p. 10. But the pretrial order is not so unconditional, stating in relevant part: "[s]ubject to the court's determination of the law that applies to the case, the parties believe and agree that the substantive issues in this case are governed by the following law: The State of Kansas." Dk. 19, p. 2. The insurance contract at issue contains a choice of law clause stating that "any dispute concerning the interpretation of this Policy shall be governed by the laws of Illinois, U.S.A." Dk. 7, Exh. A, p. 28. Yet neither party acknowledges this language or raises the issue of choice of law, and the Court need not raise it sua sponte. See Flying J Inc. v. Comdata Network, Inc., 405 F.3d 821, 831 n. 4 (10th Cir. 2005).

But the court's standard approach in diversity cases is to apply the substantive law, including choice of law rules, of the forum state. See BancOklahoma Mortgage Corp. v. Capital Title Co., 194 F.3d 1089, 1103 (10th Cir. 1999). Where, as here, the parties to a contract have entered an agreement that incorporates a choice of law provision, Kansas courts generally effectuate the law chosen by the parties to control the agreement. Brenner v. Oppenheimer & Co. Inc., 273 Kan. 525, 539-540 (2002). Kansas courts will not, however, enforce a choice of law provision shown to be contrary to the public policy of the forum state. Id., at 540-41. But that narrow exception applies only when enforcing the foreign law would contravene a prominent public policy- an inconsistency between the chosen law and the forum state's law is not enough. Alexander v. Beech Aircraft Corp., 952 F.2d 1215, 1223 (10th Cir. 1991) (citing Restatement (Second) of Conflict of Laws § 90 [1969]). See Enterprise Bank & Trust v. Barney Ashner Homes, Inc., 2013 WL 1876293, 9 (Kan.App. 2013). No such showing has been made here.

A second exception may also exist. "The Brenner court suggested that a choice-of-law provision might be constitutionally suspect if it called for using substantive legal principles from a jurisdiction having no connection to the underlying transaction or the extant dispute. Brenner, 273 Kan. at 534-35, 44 P.3d 364." Enterprise Bank & Trust, 2013 WL 1876293 at 9. But Plaintiff is a member of an Illinois association through which it is insured, and Defendant is an insurance company whose address for purposes of service of process is in Chicago, Illinois. Dk. 7, pp. 1-2 and Exh. A, pp. 1, 3. The pleadings thus indicate that the State of Illinois has sufficient connection to the underlying transaction to satisfy due process. Accordingly, the Court shall apply the substantive law of the State of Illinois to this dispute, in accordance with the parties' choice of law in the insurance contract.

IV. Insurance Contracts, generally

The construction, interpretation, or legal effect of a contract is a matter to be determined by the court as a question of law. Avery v. State Farm Mutual Automobile Insurance Co., 216 Ill.2d 100, 129 (2005). The general rules in Illinois for construing the language of an insurance policy are well-established.

When construing the language of an insurance policy, a court's primary objective is to ascertain and give effect to the intentions of the parties as expressed by the words of the policy. Hobbs v. Hartford Insurance Co. of the Midwest, 214 Ill.2d 11, 17, 291 Ill.Dec. 269, 823 N.E.2d 561 (2005). Because the court must assume that every provision was intended to serve a purpose, an insurance policy is to be construed as a whole, giving effect to every provision ( Central Illinois Light Co., 213 Ill.2d at 153, 290 Ill.Dec. 155, 821 N.E.2d 206), and taking into account the type of insurance provided, the nature of the risks involved, and the overall purpose of the contract ( American States Insurance Co. v. Koloms, 177 Ill.2d 473, 479, 227 Ill.Dec. 149, 687 N.E.2d 72 (1997)). If the words used in the policy are clear and unambiguous, they must be given their plain, ordinary, and popular meaning, and the policy will be applied as written, unless it contravenes public policy. Hobbs, 214 Ill.2d at 17, 291 Ill.Dec. 269, 823 N.E.2d 561. "Although policy terms that limit an insurer's liability will be liberally construed in favor of coverage, this rule of construction only comes into play when the policy is ambiguous." Id.

Knezovich v. Hallmark Ins. Co., 975 N.E.2d 1165, 1171, 363 Ill.Dec. 856, 862 (Ill.App. 1 Dist. 2012).

The entire document is to be examined to determine the parties' intentions with consideration given to the contract's subject matter and purpose as well as the policy's language. Hannigan v. Country Mutual Insurance Co., 264 Ill.App.3d 336, 339, 201 Ill.Dec. 465, 636 N.E.2d 897 (1994). If an insurance policy's language is capable of more than one reasonable interpretation, then the interpretation that favors coverage prevails. Outboard Marine Corp. v. Liberty Mutual Ins. Co, 154 Ill.2d 90 at 119, 180 Ill.Dec. 691, 607 N.E.2d 1204 (1992). All doubts and uncertainties in an insurance policy's language must be construed strictly against the drafter and in favor of coverage. Id., 154 Ill.2d at 121.

Plaintiff asserts that Defendant's duties in this case arise under two policy provisions: the Employment Practices Liability (EPL) section, and the ...


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