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FILED
United States Court of Appeals
Tenth Circuit
September 8, 2009
Elisabeth A. Shumaker
PUBLISH Clerk of Court
UNITED STATES COURT OF APPEALS
TENTH CIRCUIT
SHELBY MOSES,
Plaintiff-Appellant,
v.
CHRIS HALSTEAD,
Nos. 08-3088
08-3199
Defendant,
and
ALLSTATE INSURANCE COMPANY,
Garnishee-Appellee.
Appeal from the United States District Court
for the District of Kansas
(D.C. No. 2:05-CV-02488-KHV)
William J. Pauzauskie of Topeka, Kansas, for Plaintiff-Appellant.
Barrett J. Vahle (Curtis E. Woods with him on the brief), of Sonnenschein Nath &
Rosenthal LLP, Kansas City, Kansas, for Garnshiee-Appellee.
Before MURPHY, SEYMOUR, and TYMKOVICH, Circuit Judges.
SEYMOUR, Circuit Judge.
Shelby Moses brings this appeal, asserting that the district court erred in its
choice-of-law and state-law determinations. Ms. Moses requested a garnishment
order, in Kansas, against Allstate Insurance Company (“Allstate”) for its alleged
negligent or bad faith refusal to settle Ms. Moses’ claim against Chris Halstead,
Allstate’s insured. The district court found for Allstate, concluding that Missouri
law applies and requires an actual assignment to Ms. Moses by the insured of its
claim against Allstate for its failure to settle, an assignment Ms. Moses does not
have. Because we conclude that Kansas law applies to this dispute, we reverse
and remand.
I.
In Missouri, on November 22, 1996, Chris Halstead wrecked a car given to
Ms. Moses by her father and insured by Allstate. Allstate had issued the
insurance policy in Kansas to Ms. Moses’ father, a Kansas resident, covering
liability for uninsured motorist benefits. Ms. Moses, a passenger in the car, was
injured in the accident. Shortly thereafter her father reported the accident to
Allstate, requesting coverage for his daughter’s injuries. Allstate began an
investigation.
A year later, Ms. Moses’ counsel made an offer to Allstate to settle her
claims against Mr. Halstead under the Allstate policy for the policy limit of
$25,000. Allstate rejected Ms. Moses’ offer. Both Ms. Moses’ offer to settle and
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Allstate’s rejection of it occurred in Kansas.
Ms. Moses then filed a tort action against Mr. Halstead in Missouri, the
place of the accident. The jury awarded her $100,000 in actual damages. After
the judgment was entered, Allstate paid Ms. Moses $25,000 in partial satisfaction
of the judgment. Ms. Moses registered the judgment in Kansas state court and
requested an Order of Garnishment against Allstate for its alleged negligent or
bad faith refusal to settle with her on her claim against Mr. Halstead. Allstate
removed the case to federal court.
Thereafter, Allstate filed a motion for summary judgement. The parties
based their summary judgment arguments on Kansas law and the district court,
without addressing any governing law issue, applied Kansas law in ruling on the
motion. The court denied the motion, determining there were material issues of
fact that if backed by evidence would prove Allstate’s negligent or bad faith
refusal to settle Ms. Moses’ claims against Mr. Halstead.
At trial, Allstate changed course and contended that Missouri law should be
applied. The district court took the issue under advisement, noting in the pretrial
order that Allstate had asserted the applicability of Missouri law. After a bench
trial, the court denied Allstate’s motion for a judgment as a matter of law and
held that Missouri law governs Ms. Moses’ claim. The district court then found
that, under Missouri law, Allstate had acted in bad faith in refusing to settle and
entered judgment for Ms. Moses. Allstate filed a motion for reconsideration
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arguing that, among other things, Missouri law requires an assignment from the
insured, in this case Mr. Halstead, before a judgment creditor can file an action
against the insurance company for its bad faith refusal to settle. Mr. Halstead did
not assign his claim against Allstate for bad faith refusal to settle to Ms. Moses.
The district court granted Allstate’s motion for judgment, rejecting Ms. Moses’
argument that the court should have applied Kansas law, which does not require
an assignment in these circumstances.
II.
We review the district court’s choice-of-law and state-law determinations
de novo. Trierweiler v. Croxton & Trench Holding Corp., 90 F.3d 1523, 1535
(10th Cir. 1996) (“We review choice of law determinations de novo, and findings
of fact underlying those determinations for clear error.”); Woolard v. JLG Indus.,
Inc., 210 F.3d 1158, 1168 (10th Cir. 2000) (“A federal district court’s state-law
determinations are entitled to no deference and are reviewed de novo.”). On
appeal, the parties focus on two main issues: (1) whether Missouri or Kansas law
governs the negligent or bad faith refusal to settle claim; and (2) whether under
the applicable law Ms. Moses can garnish Allstate for $75,000, an amount in
excess of the policy limit, for negligent or bad faith refusal to settle.
A. The Governing Law
In Kansas, an insurance company can be held liable not only for acting in
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bad faith but also for acting negligently. See Spencer v. Aetna Life & Cas. Ins.
Co., 611 P.2d 149, 155 (Kan. 1980). In Missouri, however, to hold an insurance
company liable for bad faith refusal to settle the plaintiff must provide proof that
the insurer acted in bad faith. See Ganaway v. Shelter Mut. Ins. Co., 795 S.W.2d
554, 556 (Mo. Ct. App. 1990). The district court, in this diversity case, was
initially correct in applying Kansas law to determine whether Kansas or Missouri
law should govern Ms. Moses’ negligent or bad faith refusal to settle claim. See
Mem’l Hosp. of Laramie County v. Healthcare Realty Trust, Inc., 509 F.3d 1225,
1229 (10th Cir. 2007).
In Kansas, an insurer’s duties are contractually based. 1 See Glenn v.
Fleming, 799 P.2d 79, 90 (Kan. 1990) (stating that “a wrongful failure to settle
arises from the insurer’s contractual obligation to defend” and “[a]n action to
enforce that obligation is accordingly based on breach of contract.”). Breach of
this contractual duty, however, is determined by a tort standard of care. See id.
Since 1957, Kansas courts “have used ‘negligence,’ ‘due care,’ and other tort
expressions to describe the substance of what is a contract duty.” Id. This
contract-tort fusion has created confusion in defining the duty of good faith, and
1
Kansas courts “see little distinction in principle between a garnishment
proceeding to establish an indebtedness within policy limits and one to establish
an indebtedness outside these limits arising from a breach of the insurer’s duty to
exercise reasonable care and good faith in settling a claim against the insured. In
either case the action sounds in contract.” Glenn v. Fleming, 799 P.2d 79, 89
(Kan. 1990).
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in describing situations involving negligent or bad faith breaches of duties to
settle and defend. See id.
This case involves two issues regarding the district court’s choice-of-law
determination arising out of the insurance contract. First, whether the district
court erred in applying Missouri law to determine whether Allstate had a
contractual obligation to act in good faith to settle. Second, whether the district
court was wrong in applying Missouri law to the question of Allstate’s fulfillment
of such obligation.
1. Law Governing the Existence of Allstate’s Contractual Obligation to
Act in Good Faith to Settle
Kansas courts follow the Restatement (First) of Conflict of Laws (1934) in
addressing choice-of-law issues. See ARY Jewelers, L.L.C. v. Krigel, 85 P.3d
1151, 1161 (Kan. 2004). The Restatement contains two general rules for
contracts cases. See Restatement (First) of Conflict of Laws §§ 332 and 358
(1934).
When the question raised by the contractual dispute goes to the substance
of the obligation, Kansas courts apply the primary rule contained in section 332,
lex loci contractus, which calls for the application of the law of the state where
the contract is made. See Layne Christensen Co. v. Zurich Canada, 38 P.3d 757,
766-67 (Kan. Ct. App. 2002); Restatement (First) of Conflicts of Law § 358,
Cmnt. b (1934); cf. In re K.M.H., 169 P.3d 1025, 1031-32 (Kan. 2007) (“[T]o the
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extent this case is viewed as a contractual dispute, Kansas courts apply the
Restatement (First) of Conflict of Laws § 332 (1934), and the doctrine of lex loci
contractus, i.e., the law of the state where the contract is made governs.”). It is
only when the question goes to the manner and method of performance that the
law of the place of performance applies. See Layne Christensen Co., 38 P.3d at
766-67; Restatement (First) of Conflicts of Law, § 358, Cmnt. b (1934).
Kansas courts have struggled in determining whether questions raised in
cases before them are governed by the law of the place of performance or the
place where the contract was made. See Layne Christensen Co., 38 P.3d at 766-
76 (comparing Novak v. Mutual of Omaha Ins. Co., 28 P.3d 1033 (Kan. Ct. App.
2001), applying lex loci contractus when determining validity of contract
provision, and Aselco, Inc. v. Hartford Ins. Group, 21 P.3d 1011 (Kan. Ct. App.
2001), applying performance rule on duty to defend issue and lex loci contractus
to contract interpretation issue). The Restatement recognizes the difficulty in
drawing a line between these concepts:
[T]here is no logical line which separates questions of the obligation
of the contract, which is determined by the law of the place of
contracting, from questions of performance, determined by the law of
the place of performance. There is, however, a practical line which is
drawn in every case by the particular circumstances thereof. When
the application of the law of the place of contracting would extend to
the determination of the minute details of the manner, method, time
and sufficiency of performance so that it would be an unreasonable
regulation of acts in the place of performance, the law of the place of
contracting will cease to control and the law of the place of
performance will be applied. On the other hand, when the application
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of the law of the place of performance would extend to a regulation
of the substance of the obligation to which the parties purported to
bind themselves so that it would unreasonably determine the effect of
an agreement made in the place of contracting, the law of the place
of performance will give way to the law of the place of contracting.
Restatement (First) of Conflicts of Law § 358, Cmnt. b (1934) (emphasis added).
Allstate relied on Aselco in arguing that the law of the place of performance
of Allstate’s duty to defend should apply, asserting that the Missouri tort action
was where the duty to defend occurred. Ms. Moses, on the other hand, relied on
Novak, which rejects Aselco’s approach, to contend the law of the place of
contracting should apply. The district court agreed with Allstate.
In Aselco, a panel of the Kansas Court of Appeals held that where an
insurance company’s performance of its duty to defend takes place in Kansas,
Kansas law governs the determination of the existence of such duty. See Aselco,
21 P.3d at 1018. But Aselco neither cited to any Kansas cases nor offered any
analysis for its holding. See id. Moreover, Aselco so held despite admitting that
it was not required to reach the governing law issue because it was not raised in
the trial court. See id.
A few months later in Novak, another panel of the Kansas Court of
Appeals, including one of the judges on Aselco, declined to follow Aselco to
apply the place of performance rule. 28 P.3d at 1039. The court held that the law
of the place where the contract was made governed the validity of the one-year
limitations provision in the contract. See id. The panel noted that “[a]lthough
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some Kansas conflicts cases have involved issues of performance, few cases have
used the place of performance rule to resolve contract choice of law decisions.”
Id. at 1039 (citing cases).
Aselco and Novak each declared it was following the Restatement (First) of
Conflicts of Law (1934). See Aselco, 21 P.3d at 1018; Novak, 28 P.3d at 1039.
But neither case actually explained how its analysis comported with the
Restatement. Aselco stated that “[b]ecause [the insurance company’s]
performance of its duty to defend would have taken place in Kansas, Kansas law
governs the determination of the existence of the duty.” Aselco, 21 P.3d at 1018.
Novak relied on the fact that an overwhelming majority of Kansas Supreme Court
and Court of Appeals cases have applied the law of place of contracting. See
Novak, 28 P.3d at 1039. In Layne Christensen Co., however, a case decided a few
months later by the same panel that decided Aselco, the court provided further
guidance on what question to ask in applying the Restatement. See Layne
Christensen Co., 38 P.3d at 766-67 (holding that the meaning of the coverage
limit is governed by the law of place of contracting because it goes to the
substance of obligation). In Layne Christensen Co., the court acknowledged the
Novak and Aselco panels’ struggles in applying the law of the place of
performance versus the place of contracting. See id. at 766. It did not endorse
either outcome. Instead, it followed Kansas Supreme Court precedent adopting
the test set out in the Restatement and provided guidance based on section 358,
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Comment b. This test focuses on whether the question before the court goes to
the substance of the obligation or the manner of performance. See Layne
Christensen Co., 38 P.3d at 767 (citing Simms v. Metropolitan Life Ins. Co., 685
P.2d 321 (Kan. 1984) and 4 Holmes’ Appleman on Insurance 2d, Conflicts and
Choice of Law, § 21.5 p. 274-75 (1998)). Unlike Layne Christensen Co., neither
Novak nor Aselco analyzed whether the question before them went to the
substance of the obligation or the manner of performance.
The Kansas Supreme Court has not directly addressed whether the law of
place of contracting or performance governs the question whether an injured party
may, under Kansas law, bring an action for negligent or bad faith refusal to settle
against a tortfeasor’s insurance company in a garnishment action. Therefore, we
“must predict what the Kansas Supreme Court would do if faced with the issue.”
Westar Energy, Inc. v. Lake, 552 F.3d 1215, 1228 (10th Cir. 2009).
Based on the foregoing analysis, we predict that the Kansas Supreme Court
would agree with the reasoning of Layne Christensen Co. and hold that whether
Ms. Moses has a cause of action for negligent or bad faith refusal to settle against
Allstate goes to the substance of Allstate’s contractual duties rather than the
manner of performance under the insurance policy. Therefore, the issue is
governed by the law of the place where the contract was made, in this case
Kansas. Accordingly, we reverse the district court’s decision applying Missouri
law to this issue.
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2. Law Governing Whether Allstate Fulfilled Its Contractual Obligation
to Act in Good Faith in Response to Ms. Moses’ Settlement Offer
Applying the Layne Christensen Co. test, we address the next issue before
us: does determining whether Allstate fulfilled its contractual obligation to act in
good faith to settle Ms. Moses’ claim go to the substance of the obligation or the
manner and method of performance? In general, fulfillment of a contractual
obligation goes to the manner and method of performance by the party charged
with the obligation. Therefore, the law of the place of performance determines
whether Allstate fulfilled its contractual obligation to act in good faith to settle.
The record shows that both Ms. Moses’ offer to settle and Allstate’s rejection of
the offer took place in Kansas. Accordingly, Kansas is the place Allstate was
required to perform its contractual obligation to consider Ms. Moses’ settlement
offer in good faith, and the district court should have applied Kansas law to
determine whether Allstate fulfilled this contractual obligation.
B. Applying Kansas Law
The district court incorrectly applied Missouri law to Ms. Moses’ claim for
bad faith refusal to settle. As the court recognized, Missouri law requires the
insured to assign its contractual claim against the insurance company for bad faith
refusal to settle to its judgment creditor. See District Court Order, filed Oct. 23,
2007, citing cases. Ms. Moses contends that Kansas law does not require such an
assignment of rights in order for her to proceed against Allstate by way of a
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garnishment action. Allstate relies on Benchmark Insurance Co. v. Atchison, 138
P.3d 1279 (Kan. Ct. App. 2006), a case not on point, to argue that Kansas law
requires an assignment in the circumstances here. In so doing, it disregards
Kansas’ long-standing garnishment law.
Under Kansas law, Ms. Moses, as a judgment creditor, has a right to
proceed by garnishment against Allstate. Nichols v. Marshall, 491 F.2d 177, 184
(10th Cir. 1973) (applying Kansas law) (“When judgment was duly entered in
[plaintiff’s] action against [defendant] . . . Allstate’s contractual duty became
fixed, inuring to the benefit and use of [plaintiff], and became subject to
garnishment.”). “Under long standing garnishment law in Kansas, once judgment
has entered, the judgment creditor then takes the place of the judgment debtor and
may take that which the latter could enforce.” Id. at 183 (citing Burlington &
M.R.R. Co. v. Thompson, 1 P. 622 (1884)). Therefore, Ms. Moses, “a judgment
creditor in a typical personal injury case where the tort-feasor is alive, and not
deceased, may proceed by garnishment against the tort-feasor’s insurer to satisfy
within policy limits the judgment obtained against the tortfeasor.” 2 Id.
2
Moreover, “Kansas courts have gone a step farther and have held that a
judgment creditor may proceed by garnishment against a tort-feasor’s insurer for
the unpaid balance of the judgment which is in excess of the policy limits where
the insurer refused to settle within policy limits by virtue of negligence or bad
faith, the courts holding that such claim sounds in contract and is subject to
garnishment even though unliquidated.” Nichols, 491 F.2d at 183 (citing Gilley v.
Farmer, 485 P.2d 1284 (Kan. 1971) and Bollinger v. Nuss, 449 P.2d 502 (Kan.
1969)).
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The case on which Allstate relies is fully distinguishable. It involved an
interpleader action by the insurance company, not a garnishment. See Benchmark
Ins. Co., 138 P.3d at 1280. The case was brought before any judgment was
rendered against the insured or the insurance company and the injured party was
not a judgment creditor. 3 See id. at 1280-82. Thus, Benchmark addressed the
requirement of an assignment for a non-judgment creditor in an interpleader
action – not an assignment to a judgment creditor in a garnishment action.
Allstate has not cited any Kansas case requiring the judgment creditor to
obtain an assignment before it can bring a garnishment action against the
insurance company for negligent or bad faith refusal to settle on behalf of the
tortfeasor. 4 Moreover, contrary to Allstate’s assertion, when dealing with whether
an injured party has to obtain an assignment of rights from the insured in order to
have standing to assert a damages claim in excess of the policy limit against the
insured, the Kansas Court of Appeals has expressly stated:
Kansas law is settled that in a garnishment action, a garnishor is a
3
“[A]n insured’s claim against an uninsured motorist carrier for failing to
settle the claim in good faith does not accrue before the conclusion of the
underlying litigation for the contractual uninsured motorist insurance benefits.”
Nungesser v. Bryant, 153 P.3d 1277, 1286 (Kan. 2007) (quoting Blanchard v.
State Farm Mut. Auto. Ins. Co., 575 So.2d 1289, 1291 (Fla. 1991)).
4
The mere fact that in some cases an insured might decide to assign its
contractual rights under the insurance policy, including the right to bring an
action against its insurance company for negligent or bad faith refusal to settle,
does not require the conclusion that such an assignment is a legal requirement
under Kansas law. Cf. Glenn, 799 P.2d at 91.
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third-party beneficiary of the underlying contract of insurance
entitled to assert a claim arising from a breach of the insurance
company’s duty to exercise reasonable care and good faith in efforts
to settle a claim against its insured. See Gilley v. Farmer, 207 Kan.
536, 543-44, 485 P.2d 1284 (1971); Farmco, Inc. v. Explosive
Specialists, Inc., 9 Kan. App.2d 507, 515, 684 P.2d 436 (1984).
Johnson v. Westhoff Sand Co., 62 P.3d 685, 699 (Kan. Ct. App. 2003).
Accordingly, under Kansas law Ms. Moses did not need to obtain an assignment
of rights from Mr. Halstead before she acquired the right, as his judgment
creditor, to bring a claim against Allstate in excess of the policy limit for a
negligent or bad faith refusal to settle.
With respect to the merits of the claim against Allstate, under Kansas law
an insurance company has a “duty to exercise reasonable care and good faith in
efforts to settle a claim against its insured.” Id. To trigger this duty, the insured
need only put the insurer on notice of the claim. Cf. Glickman, Inc. v. Home Ins.
Co., 86 F.3d 997, 1001 (10th Cir. 1996) (stating that based on “settled insurance
contract law in this circuit and Kansas . . . the duty to defend is triggered when
there is a potential of liability.”). Allstate’s duty to act with reasonable care and
good faith was thus triggered when Ms. Moses’ father put the company on notice
of the accident.
The district court applied Kansas law at the summary judgment stage and
concluded that there were material issues of fact preventing the court from
granting Allstate’s motion. District Court Order, filed Feb. 28, 2007. At trial, the
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district court applied Missouri law and found that Allstate refused to settle the
claims with Ms. Moses in bad faith. District Court Order, filed July 23, 2007. In
so doing, the court relied on almost identical sets of facts to (1) deny Allstate’s
summary judgment motion (under Kansas law) and (2) find that Allstate refused
to settle in bad faith at trial (under Missouri law). Compare District Court
Orders, filed Feb. 28, 2007 and July 23, 2007. Nevertheless, because the district
court has not had the opportunity to apply Kansas law to its findings of fact, we
remand for it to do so in the first instance.
For the foregoing reasons, this case is REVERSED and REMANDED to
the district court for further proceedings in accordance with this opinion. 5
5
Because the case is being remanded, we need not address the parties’
arguments regarding Ms. Moses’ attorney fees.
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