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Todd County v. Barlow Projects, Inc.: US District Court : INSURANCE - no coverage; interferance with contractual relations; intentional act exclusn

Todd County, Wadena County and Otter Tail
County, municipal subdivisions of the
State of Minnesota,
Plaintiffs/Counterclaim Defendants/
Civil No. 04-4218 ADM/AJB
Barlow Projects, Inc.,
Creditor/Plaintiff on Supplemental
Minnesota Counties Insurance Trust,
Garnishee/Defendant on Supplemental
Randy G. Gullickson, Esq., and Cory D. Olson, Esq., Anthony Ostlund & Baer, P.A., on behalf
of Barlow Projects, Inc.
Jay T. Squires, Esq., Ratwik, Roszak & Maloney, P.A., and Tony R. Krall, Esq., Hanson Lulic &
Krall, LLC, on behalf of Minnesota Counties Insurance Trust.
On October 16, 2007, the undersigned United States District Judge heard oral argument
on Minnesota Counties Insurance Trusts (MCIT) Motion for Summary Judgment [Docket No.
90]. In its Motion for Summary Judgment, MCIT asserts that there is no genuine issue of
material fact regarding its denial of Todd, Wadena, and Otter Tail Countys (the Counties)
claim for coverage. For the reasons set forth herein, MCITs Motion is granted.
1 On a motion for summary judgment, the Court views the evidence in the light most
favorable to the nonmoving party. Ludwig v. Anderson, 54 F.3d 465, 470 (8th Cir. 1995).
Barlow Projects, Inc. (Barlow) is a Colorado corporation involved in the development
and operation of waste-to-energy facilities. Miller-Shugart Stipulation [Doc. No. 71] at 1. In
2001, Barlow contracted with the City of Perham (the City) to retrofit and manage a Quadrant
Resource Recovery Facility (QRR facility) that the Minnesota Pollution Control Agency had
closed. May 11, 2005, Order [Docket No. 41] at 3. Subsequently, the Counties executed an
agreement with the City for waste delivery to the QRR facility (the Waste Delivery
Agreement). Id. Under the Waste Delivery Agreement, the Counties agreed to deliver waste to
the facility for a tipping fee. Id. at 4. The Agreement also required the Counties to deliver a
specific tonnage of waste to the facility per month, provide capital for the project through the
repayment of bonds issued by Perham, commit to twenty years at an open-ended price, and be
responsible for losses if the facility was not successful. Id. In exchange, the Counties were
entitled to share in any income generated by the facility. Id. The City and the Counties assert
that they lost money every year since the QRR facility began operation. Id
In September 2004, the City terminated Barlow and stopped paying as otherwise required
under the contract. Miller-Shugart Stipulation at 2. The Counties subsequently filed suit against
Barlow asserting two counts of common law fraud based on misrepresentation, common law
fraud based on omissions, negligent misrepresentation, breach of fiduciary duty, engineering
malpractice, and breach of contract. Compl. [Docket No. 1]. In its Answer [Docket No. 43],
Barlow asserted the following counterclaims: (1) tortious interference with contract; (2) tortious
interference with prospective economic advantage; (3) unjust enrichment; and (4) civil
conspiracy. The suit by the Counties and the counterclaims asserted by Barlow underlie the
present action.
After receiving Barlows counterclaims, the Counties filed a claim with MCIT seeking
coverage for defense of the claims and indemnification for any award of damages. Miller-
Shugart Stipulation at 3. MCIT is a self-insurance pool created pursuant to Minn. Stat.
471.59 and 471.981. MCIT Bylaws (Zylstra Decl. [Docket No. 94] Ex. R) at 2. The Counties
are all members of the MCIT. Miller-Shugart Stipulation at 3. Members of the MCIT pool
funds in order to [d]evelop and administer a risk management program and [d]efend and
protect, in accordance with the Joint Powers Agreement, bylaws and coverage documents, any
Member against stated liability or loss. MCIT Bylaws at 2. On June 8, 2005, MCIT explained
its denial of the Counties claim for coverage and cited General Exclusion C of the Coverage
Document provided to its members. Letter from MCIT to David J. Hauser, Otter Tail County
Atty (Zylstra Decl. Ex. J) at 2. General Exclusion C disclaims coverage for Contractual
Penalties, Breach of Contract. Id. MCIT then instructed the Counties of their right to appeal
the denial by submitting a written request for review to the MCIT Board of Directors within
twenty-one days of receiving notice of MCITs decision. Id.
The Counties submitted a Notice of Appeal and MCIT scheduled a hearing. Letter from
MCIT to David J. Hauser, Otter Tail County Atty (July 20, 2005) (Zylstra Decl. Ex. O) at 3
(hereinafter Hauser 7/20/05 Letter). Before the hearing, MCIT informed the Counties that it was
amending its position. Id. In addition to citing General Exclusion C, MCIT asserted that
Barlows counterclaims alleging intentional torts triggered the Coverage Documents provision
2 A Miller-Shugart agreement allows a plaintiff to settle with an insured and enter into a
stipulated judgment which creates a garnishment action for plaintiff to proceed against
defendants liability insurer. R.W. v. T.F., 528 N.W.2d 869, 871 (Minn. 1995) (citing Miller v.
Shugart, 316 N.W.2d 729 (Minn. 1982)).
disclaiming coverage for Intentional Wrongdoing. Id. MCIT explained its position as
follows: MCIT will have no duty to defend the Counties for [Barlows] allegations nor will the
MCIT have any obligation to indemnify the Counties for any award of damages based on the
breach of contract or intentional tort and unlawful conspiracy allegations. Id. In November
2005, the MCIT Board denied the Counties appeal and affirmed its decision to deny coverage.
Member Appeal from Coverage (Zylstra Decl. Ex. DD).
In March 2006, the Counties entered into a Miller-Shugart Stipulation with Barlow in
which they conceded that there would be a substantial risk that a jury would conclude that the
Counties are legally liable to Barlow as a result of Barlows tort counterclaims against them.2
Miller-Shugart Stipulation at 3. According to the terms of the Stipulation, the Counties and
Barlow agreed to a judgment of 0,000 against each of the defendant counties for a total
judgment of 0,000. Id. at 7. In exchange, Barlow agreed not to execute the judgment against
the Counties but instead reserved the right to execute judgment against MCIT. Id. at 8.
Pursuant to the Stipulation, Barlow filed a Supplemental Complaint [Docket No. 85]. In
Count I of its Complaint, Barlow asserts a claim for declaratory judgment that MCIT is required
to indemnify the Counties for the damages due to Barlow and for Barlows attorneys fees. In
Count II, Barlow, asserting the contractual rights assigned to it by the Counties, asserts a claim
for breach of contract. Barlow contends that MCIT is contractually required to pay Barlow the
damages set forth in the Miller-Shugart Stipulation. In denying coverage, Barlow contends
MCIT breached its contract with the Counties. MCIT seeks summary judgment on these claims.
Federal Rule of Civil Procedure 56(c) provides that summary judgment shall issue if the
pleadings, depositions, answers to interrogatories, and admissions on file, together with the
affidavits, if any, show that there is no genuine issue as to any material fact and that the moving
party is entitled to a judgment as a matter of law. Fed. R. Civ. P. 56(c); see Matsushita Elec.
Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986); Anderson v. Liberty Lobby, Inc.,
477 U.S. 242, 252 (1986); Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). On a motion for
summary judgment, the Court views the evidence in the light most favorable to the nonmoving
party. Ludwig, 54 F.3d at 470. The nonmoving party may not rest on mere allegations or
denials, but must demonstrate on the record the existence of specific facts which create a genuine
issue for trial. Krenik v. County of Le Sueur, 47 F.3d 953, 957 (8th Cir. 1995).
A. Judicial Review
In its Motion for Summary Judgment, MCIT contends that this Court may not review its
coverage decision because section 7.11 of its Bylaws states that all coverage decisions are final
and binding. Barlow contends that section 7.11 is subject to section V(D)(2) of MCITs
Coverage Document, which reads: In the event that any dispute or controversy between the
parties arises out of, or is related to, this Coverage Document, such dispute or controversy shall
3 The parties do not contend that section V(D)(2) precludes the removal of this action
from Ramsey County District Court to the U.S. District Court for the District of Minnesota.
be subject to the exclusive jurisdiction of the Minnesota District Court in and for Ramsey,
County, Minnesota.3
Section 7.11 of the Bylaws provides that All decisions of the Board shall be final and
binding on the Member and the Board, subject to the terms of the Agreement, Bylaws, and
Coverage Document. MCIT contends that section 7.11 outlines its alternative dispute
resolution (ADR) procedure and that because courts typically limit review of ADR decisions
to whether the decisions are unconstitutional or contrary to public policy, any review of MCITs
decision under section V(D)(2) is similarly limited.
The plain language of the Bylaws indicates that the final and binding provision is
subject to the Coverage Document. Section V(D)(2) of the Coverage Document unambiguously
provides for court review of MCIT decisions arising out of the Coverage Document without any
limitation as to subject matter. The exclusions cited by MCIT in support of its denial of
coverage are contained in the Coverage Document. Accordingly, a determination regarding
whether MCIT correctly determined that the exclusions apply is a determination arising from the
Coverage Document and is reviewable by this Court under section V(D)(2).
B. Denial of Coverage
The parties dispute the standard of review the Court should apply in considering MCITs
denial of coverage. MCIT urges the Court to apply the arbitrary and capricious standard
whereby the Court must uphold MCITs decision unless Barlow demonstrates it was arbitrary
and capricious or unsupported by substantial evidence. Barlow contends that MCIT functions
as an insurance carrier and thus that its denial of coverage is subject to the same standard of
review this Court would apply to any insurance companys coverage decision. Under Minnesota
law, the interpretation and construction of an insurance policy is a matter of law for the trial
court to determine. Auto-Owners Ins. Co. v. Jensen, 667 F.2d 714, 717 (8th Cir. 1981).
Regardless of whether this Court reviews MCITs decision under an arbitrary and capricious
standard or reviews it de novo, there is no genuine issue of material fact for trial.
In the Miller-Shugart Stipulation, the Counties and Barlow agreed that a reasonable jury
could find the Counties liable for Barlows tort counterclaims and stipulated to a monetary
settlement. Accordingly, Barlows tort counterclaims are the underlying basis for Barlows
claim for coverage. In the underlying suit, Barlow alleged two tort claimsCount One: tortious
interference with contract; and Count Two: tortious interference with prospective economic
advantage. Barlow Answer and Counterclaim 30-39. In Count One, Barlow alleged that the
Counties intentionally and improperly procured the breach of [its contract with the City] by
engaging in wrongful conduct. Id. 33. In Count Two, Barlow alleged that [e]ach of the
Counties intentionally and improperly interfered with these prospective contractual relations
with the City by inducing the City not to continue with its hiring of Barlow as the operator of the
QRR Facility. Id. 37.
In its Motion for Summary Judgement, MCIT contends that Barlows tort claims arise
out of its contract with the City, that the Counties are third-party beneficiaries to that contract,
and, accordingly, that the claim is barred by General Exclusion C of the Coverage Document.
Barlow contends that while the Counties third-party beneficiary status might entitle the
Counties to enforce Barlows contractual obligations owed to the City, third-party beneficiary
status does not make the Counties contractually responsible for the Citys contractual
obligations to Barlow. In short, the Counties third-party beneficiary status does not create the
type of obligation necessary for General Exclusion C to apply. Barlow further contends that its
claims against the Counties were not premised on breach of contract, but rather were based upon
tortious conduct.
General Exclusion C excludes coverage for [a]ny Claim based upon breach of contract
or other obligation, including an obligation arising out of a written agreement creating an
obligation on behalf of a Member to another person or entity. MCIT Coverage Document
(Zylstra Decl. Ex. K) at 44. General Exclusion C precludes claims for coverage where a
members liability arises from its failure to comply with an obligation created either by contract
or arising out of a written agreement. In this case, the Counties status as third-party
beneficiaries to the contract between the City and Barlow did not create a contractual obligation,
rather it afforded the Counties with the necessary standing to enforce the contract against the
contracting parties. The Court is also persuaded by Barlows contention that its claims sound in
tort and are not based upon breach of contract or other obligation. There is no genuine issue of
fact for trial regarding whether General Exclusion C bars Barlows claim for coverage.
Regardless of whether the Court utilizes the arbitrary and capricious standard advocated by
MCIT or the de novo standard advocated by Barlow, MCIT has failed to demonstrate that
Barlows claim for coverage is excluded by General Exclusion C.
MCIT also contends that its decision to deny coverage is supported by a provision in the
Coverage Document excluding coverage for intentional wrongdoing by public officials. The
intentional wrongdoing exclusion precludes coverage for [a]ny Claim arising out of a
Wrongful Act committed intentionally and with knowledge of wrongdoing. MCIT Coverage
Document at 14. MCIT argues that because Barlows underlying claims allege intentional acts,
the intentional wrongdoing exclusion applies. Barlow contends that MCITs conclusion that the
intentional wrongdoing exclusion applies relies on a misreading of the exclusion. Barlow
asserts, in order for the exclusion to apply, it is not enough to demonstrate that the wrongdoer
intended to act, rather, MCIT must also demonstrate that the act was committed with knowledge
of wrongdoing. Barlow defines the knowledge of wrongdoing requirement as requiring proof
that the wrongdoer acted with specific intent to injure. Utilizing that definition, Barlow contends
there is no evidence in the record demonstrating that the Counties acted with knowledge of
wrongdoing leaving a genuine issue of fact for trial. MCIT does not address the meaning of the
knowledge of wrongdoing clause; however, even applying Barlows definition the Court
concludes that there is no genuine issue of material fact for trial.
A tortious interference with contractual relationship claim requires proof of: (1) the
existence of a contract; (2) the alleged wrongdoers knowledge of the contract; (3) intentional
procurement of its breach; (4) without justification; and (5) damages. Furley Sales & Assocs.,
Inc. v. N. Am. Auto. Warehouse, Inc., 325 N.W.2d 20, 25 (Minn. 1982). A claim of tortious
interference with prospective economic advantage requires proof that the actor intentionally
committed a wrongful act that improperly interfered with a prospective economic advantage.
United Wild Rice, Inc. v. Nelson, 313 N.W.2d 628, 633 (Minn. 1982) (adopting the Restatement
(Second) of Torts 766B (1977)). The interference may consist of inducing or otherwise
causing a third person not to enter into or continue the prospective relation, or preventing the
other from acquiring or continuing the prospective relation. Restatement (Second) of Torts
766B. Both tort theories require proof that the Counties intended to injure Barlow by
intentionally procuring the breach of its contract with the City or by intentionally preventing the
continuation of Barlows prospective relationship with the City.
Barlow contends that the factual record before the Court merely demonstrates that the
Defendant Counties sought to cause the various parties to renegotiate their contracts in order to
better their financial position in the QRR Facility. Accordingly, Barlow asserts that the
Counties desire to bring about renegotiation does not demonstrate intent to cause damages and
that [a]t a minimum, there are factual issues to be resolved at trial. However, there is ample
evidence in the record demonstrating that the Counties intended to both cause the City to
renegotiate its contract with Barlow, and if renegotiation was not possible, cause the City to
breach its contract. Otter Tail County official Michael Hannan testified regarding the Counties
intentional interference with Barlows contract: I think we saw termination as an option and we
saw negotiations as an option. Hannon Dep. (Zylstra Decl. Ex. S) at 197. This position is also
reflected in a Todd County Resolution in which the County resolved to Renegotiate agreements
between the City of Perham and the participating counties . . . [and] exercise our right to
terminate Perhams operating agreement with Barlow Projects. Todd County Resolution
(Zylstra Decl. Ex. GG) at 4.
That the Counties had a dual purpose in interfering with the Citys contract with Barlow
does not create a genuine issue as to whether they intended to cause the breach or interfere with
Barlows prospective economic relationship with the City. They intended to cause the breach
and intended to interfere with Barlows prospective economic relationships and were successful
in doing so. Accordingly, there is no genuine issue of material fact as to whether the Counties
acted with knowledge of wrongdoingthat is, with intent to injure. Barlow has failed to
demonstrate that MCITs denial of coverage based on the intentional acts exclusion is
unsupported by substantial evidence or should not survive de novo review.
Based upon the foregoing, and all the files, records, and proceedings herein, IT IS
HEREBY ORDERED that MCITs Motion for Summary Judgment [Docket No. 90] is
s/Ann D. Montgomery
Dated: November 26, 2007.


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