Splitting Cause – Duplicative Suits – Dismissed

Insurer Must Defend Itself When Prosecutors Arrest and Fail to Convict Fraud Perpetrator

Insurance companies are compelled by state law to investigate suspicions of insurance fraud and to turn over to the authorities any facts when they believe a fraud is being attempted or that it occurred. When the authorities file criminal charges only to have the charge dismissed by a court the insurer is subject to litigation from the person arrested even though the report of the suspicion of fraud provides the reporting insurer with immunity from suit.

In Maher Waad; Marks One Car Rental, Incorporated; Marks One Collision v. Farmers Insurance Exchange, a California Corporation; Allen Keller; Thomas Berry, No. 18-1588, United States Court Of Appeals For The Sixth Circuit (January 30, 2019) Maher Waad, Marks One Car Rental, Inc., and Marks One Collision (collectively, “Plaintiffs”) sued Farmers Insurance Exchange (“Farmers”) after Farmers accused Plaintiffs of insurance fraud. The district court dismissed the complaint under Federal Rule of Civil Procedure 12(b)(6) because Plaintiffs improperly split their claims among the three lawsuits and engaged in duplicative litigation.

FACTS

Waad owns Marks One Car Rental and Marks One Collision. Marks One Collision is an automobile collision repair business that specializes in repairing cars covered by insurance, including Farmers. After repairing a damaged vehicle, Plaintiffs would submit the repair bill directly to Farmers. Farmers employees Allen Keller and Scott Wood investigated Plaintiffs’ businesses for insurance fraud in late 2013.  Keller and Wood produced a report concluding that Plaintiffs were indeed engaging in insurance fraud by submitting receipts for repair work not actually performed. Farmers sent the report to law enforcement. Law enforcement then conducted its own investigation, raided Plaintiffs’ businesses on April 23, 2014, and arrested Waad four days later. Waad was bound over for trial by the Macomb County district court, finding probable cause for the arrest, but eventually quashed the criminal information for lack of probable cause.

According to Plaintiffs, the investigation and report were merely an excuse to harm Waad—an Arab-American—and his businesses because of racial animus. Plaintiffs reacted to the Farmers investigation and Farmers’ coordination with Macomb County law enforcement by filing lawsuits in 2013, 2016, and 2017.

WAAD SUES FARMERS

Suit Number One

In the “2013 Case” Plaintiffs sued Farmers and six other insurance companies for tortious interference, defamation, violation of Michigan’s consumer protection act, civil conspiracy, and racial discrimination.  On May 28, 2014, Plaintiffs filed a second amended complaint, adding factual allegations that Farmers and its employees, including Tom Berry, were cooperating with Macomb County law enforcement. Curiously, however, Plaintiffs’ second amended complaint did not include any claims regarding the raid or Waad’s arrest.

The district court barred the filing of any further changes to the second amended complaint. The district court eventually dismissed the claims against the other insurance companies. Plaintiffs’ counsel, Steven Haney, withdrew after the insurance companies filed numerous motions to disqualify him because he formerly served as legal counsel to Farmers. Finally, the district court granted Farmers’ summary judgment motion, holding that Plaintiffs failed to establish any damages to their business or harm to their reputation due to Farmers’ actions.

Suit Number Two

The Michigan Court of Appeals affirmed the circuit court’s ruling dismissing the criminal action. See People v. Waad, No. 326568, 2016 WL 3088182 (Mich. Ct. App. May 31, 2016).

The dismissal of the criminal case led to the “2016 Case” where Plaintiffs sued Farmers again for false arrest, false imprisonment, and malicious prosecution, and other assorted state law charges based on the April 23, 2014 raid on Plaintiffs’ businesses and Waad’s arrest. This time, Plaintiffs added as defendants Farmers’ employee Allen Keller and various Macomb County law enforcement officials and alleged that Farmers and its employees were acting in concert with Macomb County law enforcement.

The district court dismissed Farmers and Keller sua sponte because Plaintiffs did not allege that Farmers and Keller were state actors or that they acted in concert with state actors, so Plaintiffs did not plead plausible claims against them under § 1983.

The Third Suit

Seven-and-a-half months after Farmers and Keller were dismissed from the 2016 Case, Plaintiffs filed a third lawsuit, the “2017 Case.” In this action, Plaintiffs again brought claims tracing back to the raid and Waad’s arrest. This time, Plaintiffs corrected their earlier failure.

Farmers, Keller, and Berry moved to dismiss the 2017 complaint for improper claim splitting, duplicative litigation, and res judicata. The district court granted the motion on claim-splitting and duplicative-litigation grounds and dismissed the 2017 Case in its entirety. Specifically, the district court held that the allegations in the 2013, 2016, and 2017 Cases were all based upon the same set of allegations.

The district court also held that the 2016 and 2017 Cases were duplicative litigation.

ANALYSIS

Claim-splitting and duplicative litigation are variations of res judicata. Res judicata—more specifically here, claim preclusion—bars subsequent litigation of causes of action where a court has already issued a final decision on the merits in an earlier case and the causes of action were, or should have been, litigated in the earlier case between the same parties.

The test for claim splitting is not whether there is finality of judgment, but whether the first suit, assuming it were final, would preclude the second suit. Essentially, claim splitting is the same as res judicata, but with a presumption of a final judgment instead of an actual final judgment. In a similar vein, the doctrine of duplicative litigation allows a district court to stay or dismiss a suit that is duplicative of another federal court suit using its general power to administer its docket. The difference between claim splitting and duplicative litigation is in name only and the terms are used interchangeably.

Plaintiffs could have petitioned the district court for leave to file a third amended complaint. They did not.

The district court correctly held that the 2016 and 2017 Cases were improperly split and duplicative. Duplicative litigation allows district courts to dismiss later-filed cases because of the preclusive effects that the earlier cases would have on the litigation. Plaintiffs alleged that the search warrants for Plaintiffs’ businesses and the arrest warrant for Waad were based on the “Defendant Farmers Insurance Allen Keller investigative report as well as the willfully fabricated investigative findings of Detective David Kriss.

Plaintiffs failed to plead state action between private and state actors, a basic element of any § 1983 claim. Indeed, Farmers and Keller listed failure to state a claim as one of their affirmative defenses. Plaintiffs could have amended their complaint by right to allege state action in response. They did not. As a result, the district court dismissed Farmers and Keller.

Plaintiffs’ claims in the 2017 Case were duplicative of and improperly split from the 2016 Case.

The district court could have consolidated the 2016 Case with the 2013 Case. Plaintiffs could have properly pled their § 1983 claim in the 2016 Case in the first instance or moved to amend after the district court pointed out the error. None of these prudent and practical moves occurred, however. Instead, Plaintiffs filed the 2017 Case, which was duplicative of the 2016 Case, and the district court did not abuse its discretion by dismissing it.

It is well-settled that a plaintiff may not use the tactic of filing substantially identical complaints to expand the procedural rights he would have otherwise enjoyed. Because Plaintiffs’ 2017 case would thus be subject to claim preclusion presuming a final judgment in the 2016 case, the 2017 case constitutes improper claim splitting.

ZALMA OPINION

Because it followed the law, investigated Waad, turned that investigation to the proper authorities only to have him arrested, bound over for trial, and then dismissed without the presentation of evidence, Farmers was forced to defend three lawsuits. Because of the failure of Waad’s counsel to act prudently and, instead, filing duplicative lawsuits, Waad’s case was dismissed. If he did not commit fraud and had a viable case against Farmers and the state, he is not without a remedy, he can always sue his lawyers.


© 2019 – Barry Zalma

This article, and all of the blog posts on this site, digest and summarize cases published by courts of the various states and the United States.  The court decisions have been modified from the actual language of the court decisions, were condensed for ease of reading, and convey the opinions of the author regarding each case.

Barry Zalma, Esq., CFE, now limits his practice to service as an insurance consultant  specializing in insurance coverage, insurance claims handling, insurance bad faith and insurance fraud almost equally for insurers and policyholders. He also serves as an arbitrator or mediator for insurance related disputes. He practiced law in California for more than 44 years as an insurance coverage and claims handling lawyer and more than 50 years in the insurance business. He is available at http://www.zalma.com and zalma@zalma.com.

Mr. Zalma is the first recipient of the first annual Claims Magazine/ACE Legend Award.

Books from Full Court Press

Zalma on Property and Casualty Insurance

The earnings of almost every civil lawyer in the United States are funded by the insurance industry. Insurance can best be described as the mother’s milk of the law profession. The civil defense lawyer is paid by an insurer for each hour he or she works. The civil plaintiffs’ lawyer is usually paid by taking a percentage of any judgment entered in favor of the plaintiff, which judgment is usually paid by the defendant’s insurer.

In almost every situation in which a civil lawyer practices law the funds for that work come, either directly or indirectly, from insurance. Consequently, lawyers must use their wits and energies to avoid or to pursue litigation to the benefit of the client. Both sides understand that an insurer will eventually pay one or both sides in the dispute. Insurance is important to every civil dispute and even some that fall within the criminal courts.

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About Barry Zalma

An insurance coverage and claims handling author, consultant and expert witness with more than 48 years of practical and court room experience.
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