Terry Harrington v. City of Council Bluffs

United States Court of Appeals
FOR THE EIGHTH CIRCUIT
___________
No. 11-1429
___________
Cascades Development of Minnesota, *
LLC, doing business as Anytime *
Fitness, Inc.; Associated Insurance *
Agents, Inc.; Nicholas Newton; *
Westport Insurance Corporation, *
*
Plaintiffs - Appellants, *
* Appeal from the United States
v. * District Court for the
* District of Minnesota.
National Specialty Insurance, also *
known as NSI; Jade Janina Benson, *
and her legal guardians Jeffrey Arthur *
Benson and Janina Faye Benson; West *
Bend Insurance Company, *
*
Defendants - Appellees. *
___________
Submitted: November 15, 2011
Filed: April 4, 2012
___________
Before WOLLMAN, MURPHY, and BENTON, Circuit Judges.
___________
BENTON, Circuit Judge.
Nicholas Newton, Cascades Development of Minnesota, LLC, Associated
Insurance Agents, Inc., and Westport Insurance Corp. sued West Bend Insurance Co.
and National Specialty Insurance, seeking indemnification and reformation of a

-- 1 of 7 --

workers’ compensation insurance policy. The district court granted summary
judgment to the defendants. Because the district court lacked subject matter
jurisdiction, this court vacates and remands.
The jurisdictional facts are not in dispute. Cascades Development operated a
fitness facility in Inver Grove Heights, Minnesota. In September 2006, it obtained
workers’ compensation insurance from National Specialty Insurance (a division of
West Bend Insurance), through a local agency, Associated Insurance Agents.
Nicholas Newton was an insurance agent with Associated, but also the brother of one
of Cascades’ principals. Newton promised his brother to begin the insurance on
September 1, but the policy did not go into effect until September 20.
An employee of Cascades was permanently disabled in a car accident on
September 18 – before the policy’s effective date. West Bend refused to pay the
workers’ compensation claim. Payment was made by Associated Insurance Agents’
errors-and-omissions carrier, Westport Insurance, which agreed to be a de facto
workers’ compensation insurer.
At the same time, Cascades assigned its right to indemnification against West
Bend to Newton, Associated Insurance Agents, and Westport Insurance. The
assignment states:
Cascades Development possesses a rights of indemnity for
workers’ compensation claims and defense costs against West Bend
(“Claim”) for the potential liability to which Cascades Development is
exposed because of [the employee]’s workers’ compensation claim.
Cascades Development assigns its Claim to AIA, Nick Newton and
Westport.
-2-

-- 2 of 7 --

It does not list any specific consideration provided by Newton for the assignment.1
In March 2009, Cascades and Westport Insurance settled the employee’s claim
against Cascades, including an ongoing compensation plan. According to Newton,
he has not incurred any out-of-pocket loss from the employee’s injury.
In September 2009, Newton, Cascades, Associated Insurance Agents, and
Westport Insurance sued West Bend in state court. They sought reformation of the2
workers’ compensation policy to reflect an effective date of September 1, 2007, and
indemnification under the re-formed contract. They contend that Newton’s promise
to his brother bound West Bend to insure Cascades effective September 1. West
Bend removed this case to federal court under 28 U.S.C. § 1441, asserting diversity
jurisdiction under 28 U.S.C. § 1332.
The plaintiffs did not challenge subject matter jurisdiction at the time of
removal. On its own, the district court ordered West Bend to show cause for diversity
jurisdiction, noting that the pleadings did not reveal the citizenship of the members
of Cascades. Both plaintiff Newton and defendant West Bend are citizens of
Wisconsin. However, the district court retained jurisdiction, finding that Westport
– a Missouri corporation – is the real party in interest and that Newton’s presence did
not destroy diversity because he is a nominal party. The district court granted West
Bend’s motion for summary judgment, dismissing all claims on the merits.
The agreement recites the consideration for the assignment as “the assumption1
of the obligation to defend and indemnify Cascades Development for the
[employee’s] workers’ compensation claim undertaken by AIA and Westport.”
The complaint also lists as defendants the employee and her legal guardians,2
who have not participated in this case, and National Specialty Insurance, which is a
division of West Bend.
-3-

-- 3 of 7 --

The threshold issue is whether the district court had subject matter jurisdiction.
This court reviews subject matter jurisdiction de novo. Slater v. Republic-Vanguard
Ins. Co., 650 F.3d 1132, 1134 (8th Cir. 2011). “If the district court did not have
original jurisdiction when the case was removed, remand to state court is required,
even after final judgment . . . .” Id.
Diversity jurisdiction requires “complete diversity, that is ‘where no defendant
holds citizenship in the same state where any plaintiff holds citizenship.’” Junk v.
Terminix Int’l Co., 628 F.3d 439, 445 (8th Cir. 2010), cert. denied, 132 S. Ct. 94
(2011), quoting In re Prempro Prods. Liab. Litig., 591 F.3d 613, 620 (8th Cir.), cert.
denied, 131 S. Ct. 474 (2010). “However, if the ‘nondiverse’ plaintiff is not a real
party in interest, and is purely a formal or nominal party, his or its presence in the
case may be ignored in determining jurisdiction.” Iowa Pub. Serv. Co. v. Medicine
Bow Coal Co., 556 F.2d 400, 404 (8th Cir. 1977), citing Salem Trust Co. v.
Manufacturers’ Fin. Co., 264 U.S. 182 (1924).
A “‘real party in interest’ is the person who, under governing substantive law,
is entitled to enforce the right asserted.” Id. In this diversity case, the governing
substantive law is the law of Minnesota. See Erie R.R. Co. v. Tompkins, 304 U.S.
64, 78 (1938). Cascades argues that it assigned its claims under the policy to Newton,
and he is therefore entitled to enforce its rights to indemnification against West Bend
and to reformation of the insurance policy.
Cascades’ gratuitous assignment to Newton is valid under Minnesota law. See
Minnesota Mut. Life Ins. Co. v. Anderson, 504 N.W.2d 284, 287 (Minn. Ct. App.
1993), citing Bowen v. Willard, 281 N.W. 256, 259 (Minn. 1938). “Under Minnesota
law, no particular form of words is required for an assignment, but the assignor must
manifest an intent to transfer and must not retain any control or any power of
revocation.” Id. at 286, citing Guaranty State Bank of St. Paul v. Lindquist, 304
N.W.2d 278, 280-81 (Minn. 1980). “[A] gratuitous assignment is irrevocable if ‘the
-4-

-- 4 of 7 --

assignment is in a writing either signed or under seal that is delivered by the
assignor.’” Lansing v. Concrete Design Specialties, Inc., No. A05-1543, 2006 WL
1229638, at *6 (Minn. Ct. App. May 9, 2006) (unpublished), quoting Restatement
(Second) of Contracts § 332 (1981). The assignment in this case is valid, as it is in
writing, signed by Cascades, and delivered to Newton.
West Bend argues that Newton – despite the valid assignment – is still not
entitled to enforce any right to indemnification against West Bend, because he has not
incurred “any loss arising from [the employee]’s accident.” True, “[t]he doctrine of
indemnity is based upon the idea that when one is compelled to pay money which in
justice another ought to pay, the former may recover of the latter the amount actually
paid unless barred by the former’s wrongful conduct.” Geldert v. American Nat’l
Bank, 506 N.W.2d 22, 29 (Minn. Ct. App. 1993), citing Lunderberg v. Bierman, 63
N.W.2d 355, 359 (Minn. 1954). However, “[a]n assignment operates to place the
assignee in the shoes of the assignor, and provides the assignee with the same legal
rights as the assignor had before assignment.” Illinois Farmers Ins. Co. v. Glass
Serv. Co., 683 N.W.2d 792, 803 (Minn. 2004) (emphasis added).
When A assigns its right to indemnification to B, B receives the right to
reimbursement from C for A’s loss as assignor, not B’s loss as assignee. See Geldert,
506 N.W.2d at 28-29. In Geldert, the payee of several stolen checks settled with the
payor bank in exchange for $5,000 and an assignment of the payor bank’s right to
indemnification against the depositary and collection banks. Id. at 24. The payee
sued the depositary and collection banks. The Minnesota Court of Appeals held that
the payee’s recovery under the assigned right to indemnification was determined by
the payor bank/assignor’s loss. Id. at 29. The payee/assignee’s loss was irrelevant.
Id.
The key in this case is to identify the reimbursable loss from the perspective
of Cascades (the assignor), not from the perspective of Newton (the assignee).
-5-

-- 5 of 7 --

Through its settlement with the injured employee, Cascades’ liability was set and its
right to indemnification arose. See Altermatt v. Arlan’s Dep’t Stores, 169 N.W.2d
231, 232 (Minn. 1969) (per curiam) (“[A] right of indemnity arises where the one
seeking indemnity has incurred liability because of a breach of duty owed to him by
the one sought to be charged [and] the right to recover indemnity is not lost by reason
of any settlement with the claimant.” (internal quotation marks omitted)). Cascades
validly assigned its right to indemnification against West Bend to Newton. Newton
is therefore entitled to enforce the assigned right to indemnity.
Newton is also entitled to enforce the asserted right to reformation of the
insurance policy. “An insurance policy . . . may be reformed by the courts if it can
be proved that: ‘(1) there was a valid agreement between the parties expressing their
real intentions; (2) the written instrument failed to express the real intentions of the
parties; and (3) this failure was due to a mutual mistake of the parties, or a unilateral
mistake accompanied by fraud or inequitable conduct by the other party.’”
Leamington Co. v. Nonprofits’ Ins. Ass’n, 615 N.W.2d 349, 354 (Minn. 2000),
quoting Nichols v. Shelard Nat’l Bank, 294 N.W.2d 730, 734 (Minn. 1980).
West Bend maintains that Newton is not a party to the insurance policy and
therefore may not seek its reformation. However, parties in privity with the original
parties to a contract are entitled to reformation. See 66 Am. Jur. 2d Reformation of
Instruments § 60 (2011) (“Reformation may be had not only by the original parties
to the instrument but also by the following: a real party in interest claiming privity to
the instrument such as . . . an assignee . . . .”); Restatement (Second) of Contracts
§ 155 cmt. e (1981) (“Reformation may be granted at the request of any party to the
contract . . . or of a party’s successor in interest.”); cf. Manderfeld v. Krovitz, 539
N.W.2d 802, 805 (Minn. Ct. App. 1995) (“Reformation is generally allowed against
the original parties to an instrument and those in privity with the immediate parties.”
(emphasis added)). As an assignee of Cascades’ rights as an original party to the
contract, Newton is in privity with the original parties and may seek reformation of
-6-

-- 6 of 7 --

the policy. See La Mourea v. Rhude, 295 N.W. 304, 307 (Minn. 1940) (“A, by3
contract, secures a promise from B. A may transfer his right of enforcement to C. C
thereby succeeds to A’s right of action, and, in consequence, comes into the
relationship with A and B which we call privity of contract.”); 76 C.J.S. Reformation
of Instruments § 65 (2011) (“Assignees in privity with the original parties succeed
to the remedy of reformation.”).
Newton – as Cascades’ assignee – is entitled to enforce both the right to
indemnification and the right to reformation. He is a real party in interest, destroying
diversity jurisdiction. The district court lacked subject matter jurisdiction and should
have remanded back to the state court.
* * * * * * *
The judgment is vacated, and the case remanded to the district court for remand
to state court.
______________________________
In its brief, West Bend assumes that Westport may assert the right to3
reformation. Westport – like Newton – was not an original party to the policy, and
– like Newton – its ability to enforce the right to reformation arises from its status as
Cascades’ assignee.
-7-

-- 7 of 7 --