Western District refuses to dismiss coverage dispute after material change in circumstances.

A pending declaratory relief action brought by Scottsdale Insurance Co. (“Scottsdale”) in the Western District of Missouri has the potential to send tremors throughout the financial and insurance industries. The litigation relates to a coverage dispute regarding a $57 million arbitration award arising from alleged violations of the Fair Credit Reporting Act. 

Scottsdale filed its declaratory relief action on May 4, 2022 against American Detective Services, Inc. (“ADS”) and James Smith (“Smith”), after Smith obtained more than $54 million during arbitration relating to the withdrawal of job offers allegedly resulting from ADS’ background check on Smith and similarly situated class members. Scottsdale alleged that the high arbitration award and subsequent $57 million judgment was the result of collusion, that it was prejudiced by lack of notice and opportunity to mitigate damages, and has requested that the Court enter a declaratory judgment that Scottsdale owes no duty to indemnify and that there is no coverage under the applicable policy. ADS moved to dismiss.

Prior to the Court’s ruling on ADS’ motion to dismiss, ADS’ counsel filed a related equitable garnishment action in Missouri State Court on June 7, 2022, and sought dismissal on the basis that a parallel state action raised the same issues presented in the declaratory relief action.  While the Motion to Dismiss was pending, the garnishment action was removed and remanded, with the remand order stayed pending an appeal before the Eighth Circuit under the Class Action Fairness Act.

On February 21, 2023, the Western District Denied the Motion to Dismiss without prejudice, stating that the Motion cannot be granted pending the outcome of the Eighth Circuit’s appellate case.  The Court reasoned that a reversal of the remand order would erase the basis for dismissal, i.e. a parallel state court action regarding the same parties and same justiciable issue.  The Western District also found that if the Eighth Circuit affirmed the remand Order the factors the court must consider (particularly judicial economy related to the progress achieved in the federal declaratory relief action) will be so substantially different that the arguments presented in the moving papers will not adequately address the issue before the court.  As such, the Court issued an Order denying the motion to dismiss.

The Eighth Circuit has not rendered a decision in Scottsdale’s appeal.  However, ADS renewed its efforts to dismiss the declaratory relief action, in a separate Motion filed this month, contending that the Eighth Circuit’s failure to issue a decision operates as a denial under the Class Action Fairness Act. 

Baker Sterchi will continue to monitor these actions and provide the community with insight and guidance as the matter develops.