Opinion
No. 8:98 CV 507
September 28, 2001
MEMORANDUM AND ORDER
This mailer is before the court on defendants' motion for partial summary judgment, Filing No. 96, and defendants' second motion in limine to exclude expert testimony, Filing No. 126. On review of the evidence submitted in support of and in opposition to the motions, the court finds as follows.
A hearing on the motions in limine was held on May 24, 2001. At that time the parties were granted additional time in which to submit the supplemental report of expert Michael Reavis. Defendants then moved in limine to exclude testimony in the supplemental report. Defendants' first motion in limine, Filing No. 105, has been rendered moot by the court's finding herein.
I. BACKGROUND
This is an action by workers' compensation insurers for breach of contract, fraud and conspiracy in connection with workers' compensation premiums. Plaintiffs allege that defendants breached contracts of workers' compensation insurance by failing to pay premiums due under the contracts and misrepresented the nature of their business to obtain lower premiums. Defendants have filed a counterclaim for breach of contract.
Specifically, in the first claim, Travelers alleges that Protemps materially breached its contract by refusing to pay $346, 099 in premiums. Travelers' allegations with respect to that claim involve JoAngela King's alleged misclassification of employees. In the second claim, Liberty Mutual asserts that First Temps materially breached its contract by refusing to pay an additional $5, 348, 930 in premiums. Liberty Mutual's claims involve alleged attempts to lower premiums through procuring a new "experience mod." In the third claim, Liberty Mutual alleges that First Temps, JoAngela King, and James King conspired and made fraudulent misrepresentations in an application for insurance that injured Liberty Mutual. With reference to this claim, plaintiffs assert that First Temps was created fraudulently "for the purpose of continuing Protemps under a new name" to avoid the application of Protemps' higher premiums.
Defendants Protemps, Inc. (Protemps) and First Temporaries, Inc. (First Temps) are Nebraska corporations engaged in the business of providing temporary workers to employers. JoAngela King is the sole shareholder, director and officer of Protemps. Protemps was incorporated in 1993 and provides clerical workers to employers. James King is the sole shareholder, director and officer of First Temps, which was incorporated in 1995. First Temps provides light industrial workers to employers. Jo Angela King and James King are husband and wife and operate the businesses out of their home.
Under the Nebraska Workers' Compensation Act, Neb. Rev. Stat. § 48-101 et. seq. (Reissue 1998), employers are required to procure workers' compensation insurance. If an employer is unable to obtain such insurance on the voluntary market, the statute provides that the employer may apply for coverage under the state's "assigned risk system," or Plan. Both Protemps and First Temps obtained workers' compensation insurance through the Nebraska's assigned risk system. The National Council of Compensation Insurance, Inc. (NCCI), a nonprofit insurance organization, drafted and administered the plan.
Between October 19, 1993, and June 30, 1997, Nebraska's assigned risk system was called the Workers' Compensation Insurance Plan. The Plan was drafted and administered by the National Council on Compensation Insurance, Inc., a nonprofit insurance rating bureau. Pursuant to statute, the NCCI was given general authority to determine experience ratings for the State of Nebraska. The rules for the development and administration of experience ratings are contained in NCCI's Experience Rating Plan Manual, that was filed with and approved by the Nebraska Department of Insurance in accordance with Neb. Rev. Stat. § 44-5001 et seq. (Reissue 1998). On July 1, 1997, a new workers' compensation plan replaced the former plan. Under the new plan, Aon Risk Services implemented and administered the assigned risk system and Employers Insurance of Wausau is the sole carrier.
Under Nebraska's assigned risk system, premiums are computed through the manipulation of three variables: (1) payroll; (2) the type of work being performed; and (3) claims experience. To determine of the type of work, each job is assigned a classification code and a "manual rate." Manual rates are computed according to riskiness-the riskier the job, the higher its manual rate and, correspondingly, the higher the premium. Claims experience is reflected in an employer's "experience modification factor" or "mod." A mod reflects an employer's claims experience since it is a multiple applied to the sum of the manual rate plus payroll. The mod increases an employer's premiums when the employer has an above-average number of claims and decreases the premiums when an employer has a below-average number of claims. Generally, a mod cannot be calculated into an employer's premium until at least the second year of insurance. At the end of the first policy period, the insurer typically audits the employer's actual payroll records, and the final premium for next policy period is calculated based on the actual payroll and the classification applicable to the employer's operations.
During the time period at issue, NCCI was given general authority to determine experience ratings for the State of Nebraska. NCCI, in turn, contracted with insurers. For both Protemps and First Temps, NCCI gathered and stored the data used to calculate the mod, then performed the actual calculations. NCCI had contractual relationships with both Travelers and Liberty Mutual.
Travelers issued a workers' compensation policy to Protemps on October 19, 1993, and continued coverage until October 9, 1997. During its relationship with Travelers, Protemps paid $420, 597.41 in premiums. Liberty Mutual issued a workers' compensation policy to First Temps on September 8, 1995, and continued coverage through May 5, 1998. During that time, First Temps paid $438, 807 in premiums.
Travelers audited Protemps for the 1994-95 policy term during the 1996-97 policy year. It found that Protemps had misclassified many of its employees, and accordingly changed the codes that it had used in earlier policy terms and assessed an additional premium of $346, 099.
Liberty Mutual audited First Temps for the 1995-96 policy period, but did not change any codes. However, the record shows that Paul Holtrup of Liberty Mutual contacted NCCI in December 1997, requesting information about Protemps, JoAngela King, and James King in connection with an investigation "for premium fraud and mod avoidance" on the part of First Temps. In January 1998, an underwriter from Liberty Mutual wrote to NCCI reporting the results of an investigation into the common ownership of the two companies and requesting the two companies be combined for experience ratings purposes. In March 1998, NCCI wrote to Liberty Mutual stating that "based on the ownership information dated 01-27-97 [from Liberty Mutual]" the experience rating of Protemps would be combined with that of First Temps. Filing No. 97, Ex. 7, at 33. NCCI stated that the ratings should be combined because the two businesses "share a common address and a continuous interchange of employees and monies," and made the finding retroactive to September 8, 1997. Id. The action increased First Temps' premium significantly.
This is because, as a new business, First Temps was entitled to a neutral experience rating of 1.0 (equaling the claims experience of the average insured). Combining it with Protemps' experience mod increased its rating to 3.5 (meaning that Protemps' claims experience had been calculated to be three and a half times the normal rate of claims).
In March 1998, Holtrup of Liberty Mutual wrote to NCCI's counsel to inquire "whether NCCI had already retained outside counsel for the carriers." Id., Ex. 10 at 37. Also, on May 4, 1998, the Liberty Mutual underwriter wrote to NCCI with an addendum to the "request for a combinability ruling, " setting forth additional rules and authority to apply in making the ruling, despite the fact that the request had already been granted in March. Id., Ex. 8 at 34. The following day, Paul Holtrup again wrote to NCCI counsel asking, "[p]lease advise if counsel has already been retained for the carriers, or should I retain counsel on my own." Id., Ex. 12 at 39.
Additionally, the undisputed evidence shows that sometime in 1999, Paul Holtrup contacted Robert Curran at Wausau concerning the present lawsuit. He discussed what Travelers and Liberty Mutual had found on audits, and provided Curran with a copy of the complaint in this case. Curran was advised of the NCCI's combinability decision and informed of recalculations of premiums pursuant to the decision. Wausau then reclassified First Temps' employees and increased First Temps' premiums due in part to this information.
The dispute between Protemps and First Temps and their workers' compensation caters has been the subject of two separate adjudications in Nebraska state court. See Filing No. 97, Ex. 1, 2, 3, 4, at 1-27.
With respect to the first adjudication, the record shows that First Temps first appealed the NCCI's initial combinability finding to NCCI's review board under the plan's dispute resolution procedures. In June 1998, the NCCI Review Board affirmed the combinability decision. Filing No. 97, Ex. 9 at 35. First Temps appealed that decision to the Nebraska Department of Insurance pursuant to Neb. Rev. Stat. § 44-5022. After an adversarial hearing on August 13, 1999, the Director of Insurance ruled in favor of NCCI. First Temps then appealed to the Lancaster County District Court. In August 2000, the court reversed the finding of the Department of Insurance. It found that the mod rates were not combinable because First Temps was not a successor business of Protemps. Filing No. 97,
Specifically, it found that Protemp's higher experience mod should be applied to First Temps because there had been a transfer of ownership interests between First Temps and Protemps. It further found that the Kings had acted in concert to change the business focus of Protemps without telling NCCI, which was evidence that the Kings had attempted to prevent application of Protemps' mod to First Temps. Filing No. 97, Ex. 1 at 7-8.
Ex. 2 at 18. In view of its finding that First Temps was not a successor business to Protemps, the court found it unnecessary to reach the issue of whether First Temps had "taken action to evade" the provision of the Experience Rating Plan Manual that deals with successor corporations and experience ratings so as to entitle an insurer to retroactive application of the experience rating. Id. at 14. The record is unclear as to whether that decision has been appealed. In accordance with the district court's ruling, the Department of Insurance vacated its earlier order finding that the experience ratings of the two companies be combined and ordered that First Temps' premiums be recalculated without combining First Temps' mod with Protemps' mod. Filing No. 97, Ex. 19.
With respect to the second adjudication, the evidence shows that Liberty Mutual insured First Temps from September 1995 until May 1998 under the assigned risk system in place during that time. After the change in Nebraska's assigned risk system, Employers Insurance of Wausau (Wausau) took over. Wausau issued policies from September 1997 to September 1998 (the "first policy") and issued subsequent yearly policies (the "second" and "third" policies) through September 2000. The record further shows that Liberty Mutual has purchased Wausau.
In March 1999, Wausau informed First Temps that it had discovered during its February 1999 final audit that First Temps had misclassified certain payroll codes. As a result, the codes were changed on First Temps' first policy and the premium was increased by $184, 599.02. After an internal review, Wausau refused to alter the reclassifications or to reduce the increased premium. First Temps appealed Wausau's decision to the Nebraska Department of Insurance. After an adversarial hearing, at which Wausau was represented by the law firm that represents the plaintiffs in this action, the Department found that Wausau's classification changes regarding the policy period covering October 1997 to October 1998 did not comport with Nebraska law, the Workers' Compensation plan, or the policy. Filing No. 97, Ex. 4, at 26. Specifically, the Department found "Wausau did not have authority under Nebraska law, the plan, the policy, or the NCCI manuals and rules to unilaterally and retroactively reclassify entire blocks of First Temporaries' payroll and to bill First Temporaries an additional $184, 599.02 for premium for the 1997-1998 policy period." Id. Accordingly, the court ordered that Wausau was precluded from collecting the additional premium. Id. Wausau did not appeal the order.
In their motion for partial summary judgment, defendants assert that the doctrine of collateral estoppel bars relitigation of the issues that were resolved in the two Nebraska state court proceedings.
II. DISCUSSION
A. Issue Preclusion
Summary judgment is proper if the evidence, viewed in the light most favorable to the nonmoving party, demonstrates that no genuine issue of material fact exists and the moving party is entitled to judgment as a matter of law. Henerey v. City of St. Charles, 200 F.3d 1128, 1131 (8th Cir. 1999); Fed.R.Civ.P. 56(c). Where the unresolved issues are primarily legal rather than factual, summary judgment is particularly appropriate. Haberer v. Woodbury County, 188 F.3d 957, 961 (8th Cir. 1999). The question of whether the state court judgments at issue herein should be afforded preclusive effect is a purely legal question and is appropriate for resolution on a motion for summary judgment.
"Collateral estoppel, like the related doctrine of res judicata, has the dual purpose of protecting litigants from the burden of relitigating an identical issue with the same party or his privy and of promoting judicial economy by preventing needless litigation." Parkiane Hosiery Co. v. Shore, 439 U.S. 322, 326 (1979) (citations omitted). Application of both doctrines is central to the purpose for which civil courts have been established, the conclusive resolution of disputes within their jurisdictions. Montana v. United States, 440 U.S. 147, 154 (1979). Unlike res judicata, however, collateral estoppel will in some cases bar relitigation of a particular issue even where both disputing parties were not bound by the earlier judgment. Parklane, at 327-28, 331. This added potential for binding effect operates fairly only because collateral estoppel requires that the issue have been fairly and fully litigated in the first suit, and that it be necessarily decided by that suit's outcome. Id. at 327.
Collateral estoppel is an issue of substantive law requiring the application of state law in diversity actions. Jaramillo v. Burkhart, 999 F.2d 1241, 1243 (8th Cir. 1993). Under Nebraska law, collateral estoppel will preclude further litigation of a specific issue if: (1) the identical issue was decided in a prior action; (2) there was a final judgment on the merits; (3) the party against whom the rule is to be applied was a party to, or is in privity with a party to, the prior action; and 4) there was an opportunity to fully and fairly litigate the issue in the prior action. Woodward v. Anderson, 627 N.W.2d 742, 748 (Neb. 2001).
An issue is identical "in the absence of a significant factual change." Kopecky v. National Farms, Inc., 510 N.W.2d 41, 49 (Neb. 1994). An unreviewed administrative hearing can preclude later litigation of the same issues, so long as the administrative body wag acting in a quasi-judicial capacity with jurisdiction of the parties and subject matter. Scott v. Maningly, 488 N.W.2d 349, 351-52 (Neb. 1992). Moreover, a party's appeal of a decision does not affect the conclusiveness of the decision for collateral estoppel purposes. Peterson v. Nebraska Nat. Gas, 281 N.W.2d 525, 527 (1979).
Because due process requires that the rule of collateral estoppel operates only against persons who have had their day in court, this court must assure that the party against whom collateral estoppel is to be applied is either a party to the prior suit or is in privity with a party to the prior litigation. Gottsch v. Bank of Stapleton, 458 N.W.2d 443, 457 (Neb. 1990). Privity implies a relationship by succession or representation between the party to the second action and the party to the prior action with respect to the right adjudicated in the first action. Id. In its broadest sense, the definition of "privity" includes "such an identification of interest of one person with another as to represent the same legal right." Id. However, the mere fact that litigants in different cases are interested in the same question or desire to prove or disprove the same fact or set of facts is not a basis for privity between the litigants. Id. at 4584.
Privity of all parties, however, is not required for collateral estoppel. JED Constr. Co. v. Lilly, 305 N.W.2d 1, 3 (Neb. 1981). A stranger to a primary suit can assert the theory of issue preclusion in a subsequent suit provided the issue is identical, it was raised and litigated in the prior action, it was material and relevant to the disposition of the prior action, and the determination was necessary and essential to the resulting judgment. Id.; Saporta v. Stephenson, 751 F.2d 312, 314 (8th Cir. 1985).
The strict rule that a judgment is operative only in regard to parties and privies is sometimes expanded to include as parties or privies a person who is not technically a party to a judgment or in privity with a party, but who is, nevertheless, connected with it by his or her interest in the prior litigation and right to participate therein, at least where such right is actively exercised. Jaramillo, 999 F.2d at 1245. Moreover, the interests fostered by the doctrine of collateral estoppel are implicated when nonparties assume control over litigation in which they have a direct financial or proprietary interest and then seek to redetermine issues previously resolved. Montana v. United States, 440 U.S. at 154 (1979) (noting that the persons for whose benefit and at whose direction a cause of action is litigated cannot be said to be a stranger to the cause). Thus, one who prosecutes or defends a suit in the name of another to establish and protect his own right, or who assists in the prosecution or defense of an action in aid of some interest of his own is as much bound as he would be if he had been a party. Id.
In the related context of res judicata, the common law notion of privity, "that claim preclusion only works against those who had a fair chance to contest the earlier suit, " has been liberalized, "and the focus of the claim preclusion inquiry has in some instances shifted from whether a party itself participated in the prior litigation to whether the party's interests were litigated in the earlier case, albeit by another." County of Boyd v. US Ecology, 48 F.3d 359, 361 (8th Cir. 1995). The focus is not the nature of the relationship between the parties alleged to be privies, but the identity of their interests in the first litigation. See Headley v. Bacon, 828 F.2d 1272, 1277 (8th Cir. 1987) (regarding privity for res judicata).
Application of those principles to the present case shpws that issue preclusion bars relitigation of issues that have already been decided in Nebraska state court. Defendants have shown: that two issues that are identical to issues in this case were decided; the issue of whether First Temps is a successor corporation to Protemps for purposes of application of Protemps' experience mod; and whether an insurer can retroactively reclassify employees. As limited by the Nebraska courts' narrow findings, the issues are identical. It is uncontroverted that the decisions were on the merits of these two issues. The only serious dispute is whether plaintiffs can be considered privies to the prior action. If so, it can be said that they, through NCCI, had an opportunity to fully and fairly litigate the issues. The court finds that defendants have shown that plaintiffs were in privity to NCCI in the state court actions.
The uncontroverted evidence shows an "identification of interest" between the parties to the state court proceedings and the plaintiffs herein that warrants issue preclusion. With respect to the combinability issue at the heart of the state court adjudication involving First Temps and NCCI, the evidence shows that Liberty Mutual and Travelers had contractual relationships with NCCI and that NCCI was, as a practical matter, acting as Liberty Mutual's agent. NCCI's decision on the combinability issue was made at the behest of and based on the investigation of Liberty Mutual. Liberty Mutual and NCCI corresponded about retaining counsel to represent their common interest concerning the combinability decision and the carriers claim in the present case. Significantly, any court's adoption of NCCI's position in the litigation inured to the benefit of the Liberty Mutual: it was Liberty Mutual who would be entitled to collect the increased premium due under a court's adoption of NCCI's interpretation. At the hearing before the Nebraska Department of Insurance and on appeal to Lancaster County Court, NCCI advanced the identical arguments-that First Temps is a successor corporation to Protemps and was created to avoid higher premiums-that Travelers and Liberty Mutual now advance. In view of the many connections and interrelationships between Liberty Mutual, Travelers, and NCCI, the court finds it proper to afford collateral estoppel or issue preclusion to those issues previously resolved in the state court litigation.
Similarly, although the connections between the parties are not as stark with respect to the Wausau litigation, the court finds the identity of interest again makes issue preclusion appropriate. Wausau's reclassification was instigated by Liberty Mutual. Wausau's position in the state court proceedings is identical to arguments advanced by plaintiffs in the present litigation. Although the classification issue that was resolved in the Wausau litigation involved a period of coverage under the policy that is not at issue here, the conclusions of law and the interpretations of Nebraska law with respect to retroactivity of premiums deserve preclusive effect as applied to similar, if not identical situations. The Department of Insurance considered as evidence First Temps' classification while insured by Liberty Mutual and considered the successive relationships between L.M. and Wausau as workers' compensation insurers for First Temps.
The evidence before the court, which is essentially the same evidence presented to the state court tribunals, establishes that the present litigation is plaintiffs' attempt to get a second bite at the apple. The important considerations of judicial economy, protection from vexatious litigation, and conclusiveness of adjudications will be served by preventing relitigation of these two issues.
Alternatively, even if issue preclusion did not apply, the court would be bound as a matter of law to follow the state court rulings at issue. In this diversity action, the court looks to state law. See, e.g., Bell v. Allstate Life Ins. Co., 160 F.3d 452, 455 (8th Cir. 1998) ("[s]tate law controls the construction of insurance policies when a federal court is exercising diversity jurisdiction"). Definitive rulings on the precise issues now confronting the court are provided in the state court decisions at issue. Thus, even if not accorded preclusive effect, the Nebraska Courts' findings on the legal questions at issue would be controlling.
Accordingly, the court find issue preclusion applies. Plaintiffs will be precluded from arguing that First Temps was a successor to Protemps for purposes of combining their experience ratings; plaintiffs will be similarly precluded from arguing that Nebraska law, the workers' compensation plan or policies allow retroactive classification of workers. Although the court will afford preclusive effect to the state court findings, defendants have not prayed for summary judgment on the merits of plaintiffs' claims. In light of the court's ruling on the issue preclusion, however, the court will grant the parties additional time in which to file dispositive motions.
Plaintiffs' arguments that they were not parties to the actions and could not direct litigation strategies or choice of counsel are of no consequence, since those considerations do not determine whether issue preclusion is proper. The fact remains that certain issues that are identical to issues to be decided in this litigation have been adjudicated and resolved. The evidence shows that plaintiffs were aware of the proceedings and could have either entered an appearance of counsel or joined the litigation as a party in order to protect their interests.
Plaintiffs' argument that the fraud issue was not decided in the NCCI litigation is similarly without merit. Although fraud was not decided in the NCCI litigation, it is nevertheless true that granting preclusive effect to the state court findings in the NCCI litigation will negatively impact, if not obliterate, plaintiffs' ability to prove its allegations of fraud. The fraud alleged to have been perpetrated by JoAngela King and James King was the creation and incorporation of First Temps to lessen or avoid workers' compensation insurance premiums. The object of lower premiums could be accomplished because a new corporation would have a neutral experience modifier (or 1.0), while the old corporation would have a higher experience mod and thus higher premiums. To prove fraud, plaintiffs would have to show that the two corporations were essentially the same, and that the second corporation was, for all intents and purposes, the same company as the first, that is, its successor. Under the preclusive effect granted the NCCI ruling, plaintiffs would likely be unable to show such fraud.
B. Motion in Limine
Plaintiffs have submitted a revised expert designation pursuant to this court's order of May 24, 2001. After a hearing on the motion, the court ordered plaintiffs to submit a supplemental report of the testimony of insurance industry expert, Michael Reavis, that was limited to: (1) Dr. Reavis's investigation of the defendants' conduct; and (2) his opinion regarding why the defendants' conduct did not comply with the expectations of the contract. Plaintiffs were additionally informed that Dr. Reavis would not be allowed to offer an opinion as to the ultimate facts (i.e., state of mind) that are the ultimate province of the jury. The court has reviewed the second report and finds that it again contains legal opinions, opinions on defendant JoAngela King's and James King's state of mind, and opinions that invade the province of the jury.
Under Federal Rule of Evidence 702, which governs the admission of expert testimony, a qualified expert may give opinion testimony if the expert's specialized knowledge would help the jury understand the evidence or decide a fact in issue. United States v. Whitted, 11 F.3d 782, 785 (8th Cir. 1993). Opinion testimony that is reliable and would aid the trier of fact in understanding complicated transactions is properly the subject of expert testimony. See United States v. Whitehead, 176 F.3d 1030, 1035 (8th Cir. 1999) (allowing expert testimony about a check-kiting scheme). Courts have frequently recognized the value of expert testimony in defining terms of a technical nature and determining whether such terms have acquired a well-recognized meaning in a business or industry. See Nucor Steel Co. v. Nebraska Pub. Pwr. Dist, 891 F.2d 1343, 1350 (8th Cir. 1989).
Although an expert opinion is not inadmissible merely because it embraces an ultimate issue to be decided by the trier of fact, not all expert opinions are admissible. Whitted, 11 F.3d at 785. Thus, opinions that are "phrased in terms of inadequately explored legal criteria" or that "merely tell the jury what result to reach" are not deemed helpful to the jury. Id. Moreover, an expert's testimony may not invade the jury's exclusive province to decide witness credibility. Id. Legal opinions are clearly outside the proper scope of expert testimony-such testimony is not helpful to the fact-finder if it is couched as a legal conclusion. Hogan v. American Tel. Tel. Co., 812 F.2d 409, 411 (8th Cir. 1987).
The court finds defendants' motion in limine to exclude the testimony of Dr. Reavis should be granted in part; Dr. Reavis will not be allowed to testify concerning defendants' state of mind and will not be allowed to offer opinions on credibility or to offer opinions on what result the jury should reach. Dr. Reavis will similarly be precluded from testifying regarding the meaning or import of Nebraska law, except he may testify about the standard practice of businesses substantially similar to the defendants' which implement applicable law. He may testify to the later only if sufficient foundation for his opinion is demonstrated. In opposition to the motion, plaintiffs have offered the defendants' expert witness disclosure which, interestingly, reveals that defendants seek to offer similar expert testimony. The court notes that the same proscriptions will apply to all expert testimony.
Accordingly,
IT IS HEREBY ORDERED:
1. Defendants' motion for partial summary judgment, Filing No. 96, is granted in part. State court rulings are to be granted preclusive effect. Plaintiffs are precluded from arguing that First Temps was a successor to Protemps for purposes of combining their experience ratings. Plaintiffs are similarly precluded from arguing that Nebraska law, the workers' compensation plan or policies allow retroactive classification of workers.
2. Defendants' motion for partial summary judgment, Filing No. 96, is denied in part. Factual issues preclude entry of summary judgment on the merits. The deadline for filing dispositive motions will be extended in accordance with entry of a new progression order which the magistrate judge is hereby directed to enter.
3. Defendants' first motion in limine, Filing No. 105, is denied as moot.
4. Defendants' second motion in limine, Filing No. 126, is granted in part and denied in part. Expert testimony will be allowed only in accordance with this opinion.