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Bodywell Nutrition, LLC, A Florida Limited v. Fortress Systems

February 21, 2012

BODYWELL NUTRITION, LLC, A FLORIDA LIMITED LIABILITY COMPANY, PLAINTIFF,
v.
FORTRESS SYSTEMS, LLC, A NEBRASKA LIMITED LIABILITY COMPANY, D/B/A FSI NUTRITION, DEFENDANT.



ORDER ADOPTING REPORT AND RECOMMENDATION

THIS CAUSE is before the Court upon the Report and Recommendation [DE 79] ("Report") filed by United States Magistrate Judge Barry S. Seltzer regarding Bodywell Nutrition, LLC's ("Bodywell's") Motion for Proceedings Supplementary and to Implead James River [DE 62], Bodywell's Motion for Entry of Rule Nisi to Establish Liability of James River [DE 64], and James River Insurance Company's ("James River's") Motion to Strike Bodywell's Insurance-Related Motions [DE 76]. Pursuant to 28 U.S.C. § 636(b)(1), the Court has conducted a de novo review of the record herein, including the Report, the applicable motions, Bodywell's Objections to the Report [DE 80], James River's Response to the Objections [DE 83], Bodywell's Reply to the Response [DE 84], and is otherwise fully advised in the premises.

I. BACKGROUND

On August 2, 2010, Bodywell filed this action against Defendant Fortress Systems, LLC ("FSI") in the Circuit Court of the Seventeenth Judicial Circuit, Broward County, Florida. See Complaint [DE 1-1 at 4-17]. Thereafter, on September 7, 2010, FSI removed the case to this Court based on diversity jurisdiction. See Notice of Removal [DE 1].

Bodywell, a sports nutrition and dietary supplement company, had retained FSI to manufacture a powder form drink, which was supposed to be soluble in liquid. However, according to the Complaint, the product was defective because the powder clumped together, turned hard, fused together, and became insoluble. The Complaint therefore asserted claims for breach of express warranty (Count I), breach of implied warranty for fitness for particular purpose (Count II), and breach of implied warranty of merchantability (Count III). FSI filed a Counterclaim [DE 38] for breach of contract, alleging that Bodywell failed to pay certain money owed under the manufacturing agreement. Finally, Bodywell filed an Amended Complaint [DE 50] to add an additional claim for negligent shipping/transport of the product by FSI's subcontractors (Count IV).

During the relevant period, FSI had a commercial general liability policy with James River, with a $5 million policy limit. James River refused to defend FSI against Bodywell's claims, denied coverage, and failed to respond when FSI forwarded Bodywell's settlement offer to James River.

Ultimately, on March 4, 2011, Bodywell and FSI entered into a settlement agreement in which they agreed that (1) they would file a stipulation of settlement and joint motion for entry of final judgment requesting that the Court enter a final judgment in Bodywell's favor only on Count IV in the amount of $10,450,000; (2) Bodywell would dismiss with prejudice its remaining claims against FSI, and FSI would dismiss its counterclaim; and (3) FSI would assign its right to pursue its claim under the James River policy to Bodywell. The settlement agreement contemplated that, if by 5:00 p.m. on March 8, 2011, James River either accepted FSI's defense and agreed to provide coverage or agreed to pay Bodywell the $5 million policy limit, then the settlement agreement would be null and void and of no legal effect. When FSI brought this information to James River's attention, James River offered to provide FSI with a defense but reserved its right to dispute coverage. As FSI informed James River, such an offer was insufficient to invalidate the settlement agreement. Accordingly, the settlement agreement was binding and final. On March 14, 2011, Bodywell and FSI filed their Settlement Agreement [DE 54] under seal, and on March 17, 2011, they filed their Stipulation of Settlement [DE 56] and Joint Motion for Entry of Final Judgment [DE 57. On March 18, 2011, the Court entered a Final Judgment [DE 59] in accordance with the parties' filings.

Meanwhile, on March 15, 2011, James River had filed a Complaint for Declaratory Relief against FSI and Bodywell. See Complaint [DE 1] in James River Insurance Company v. Fortress Systems, LLC & Bodywell Nutrition, LLC, Case No. 11-cv-60558-Cohn/Seltzer ("Declaratory Action"). Back in this action, on April 19, 2011, Bodywell filed its Motion for Proceedings Supplementary and to Implead James River [DE 62] and its Motion for Entry of Rule Nisi to Establish Liability of James River [DE 64]. James River then intervened in this action for the limited purpose of moving to strike the pending motions. On September 19, 2011, James River filed its Motion to Strike Bodywell's Insurance-Related Motions [DE 76].

II. DISCUSSION

The sole matter in Judge Seltzer's Report is whether the insurance coverage dispute should be decided in proceedings supplementary in this action or in the separate Declaratory Action. The parties agree that the issues in the two proceedings are identical.

After a thorough analysis of the pending motions, related filings, and applicable law and facts, Judge Seltzer recommended that the undersigned grant James River's Motion to Strike Bodywell's Insurance-Related Motions [DE 76], strike Bodywell's Motion for Proceedings Supplementary and to Implead James River [DE 62] and Motion for Entry of Rule Nisi to Establish Liability of James River [DE 64], and decide the insurance coverage dispute in the Declaratory Action. In making his recommendation, Judge Seltzer emphasized "the paucity of cases considering the insurance coverage in proceedings supplementary" and the fact "that the insurance coverage issue was first raised in the Declaratory Judgment Action." Report at 11.

Bodywell has filed five objections to the Report. First, Bodywell argues that Florida case law entitles a party to proceedings supplementary when that party satisfies the statutory prerequisites. However, as Judge Seltzer noted, this is not the typical case in which supplementary proceedings are invoked. See Report. at 7. The typical case is one in which "the judgment creditor seeks to implead a third party to whom the judgment debtor has (allegedly) transferred its assets or to implead a third party who (allegedly) is the alter ego of the judgment debtor." Id. In its Objections and its Reply, Bodywell still fails to cite any case in which proceedings supplementary were instituted against an insurance company when a declaratory judgment action regarding identical issues was already pending. As Judge Seltzer noted, and as James River emphasizes in its briefing, granting Bodywell's motions would transform coverage litigation in Florida. Id. at 10.

To be sure, declaratory judgment actions regarding coverage would be rendered meaningless because the very moment a final judgment is entered in an underlying case, the underlying plaintiff will inevitably move to implead the defendant's insurer and file a rule nisi to have coverage determined in that action. In effect, the pending coverage action would be abruptly dissolved, which is exactly what Bodywell advocates here. Not only does this outcome violate basis notions of fairness, it is directly contrary to well-established precedent that an insurer acts in good faith by expeditiously filing a declaratory judgment action to resolve coverage disputes.

Id. at 10-11 (quoting James River's Reply in Support of Motion to Strike [DE 78] at 2).

Second, Bodywell asserts that Florida Statute ยง 56.29 and the Federal Rules require that James River be afforded its full due process rights during the supplementary proceedings. Bodywell makes this argument in response to Judge Seltzer's concern that James River's discovery and procedural rights might be compromised if James River were forced to continue in a supplementary proceeding as opposed to the Declaratory Action. Bodywell concedes that "no case on point provides for James River's right to all discovery tools, including Rule 26 specifically," Obj. at 4, but contends that the proceedings supplementary statute and Federal Rules provide sufficiently broad powers for the Court to ensure that James River will enjoy full procedural rights. Yet, as Judge Seltzer noted in his Report, "the parties have not cited (and the undersigned's own research has not found) any authority expressly ruling that the Federal Rules of Civil ...


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