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Ohio Security Insurance Co. v. K R Enterprises, Inc.

United States District Court, S.D. West Virginia, Bluefield

December 14, 2017

OHIO SECURITY INSURANCE COMPANY, Plaintiff,
v.
K R ENTERPRISES, INC., et al., Defendants.

          MEMORANDUM OPINION AND ORDER

          David A. Faber, Senior United States District Judge.

         There were a number of motions pending before the court in this matter. On September 27, 2017, a hearing was held on those motions. By Order entered on December 8, 2017, the court ruled on a number of those motions. The reasons for those rulings follow.

         I. Factual and Procedural Background

         Plaintiff Ohio Security Insurance Company (“Ohio Security”) is an insurance company organized under the laws of New Hampshire with its principal place of business in Boston, Massachusetts. See Second Amended Complaint ¶ 5. Defendant K R Enterprises, Inc. (“K R Enterprises”) is a Virginia corporation with its principal place of business located in Martinsville, Virginia. See id. at ¶ 6. Defendant Jackson Hewitt, Inc. is a Virginia corporation with its principal place of business in Parsippany, New Jersey. See id. at ¶ 7. During the relevant time period, Ohio Security issued a BusinessOwners Liability Policy to K R Enterprises, Policy Number BZS (15) 56 08 16 29. See Amended Complaint at ¶ 68. The Ohio Security Policy also included Data Compromise and CyberOne Coverage endorsements. See id. at ¶¶ 81 and 83.

         The instant dispute centers on fraudulent tax returns filed by defendant Jeremy Evans, a former employee of defendant K R Enterprises, doing business as Jackson Hewitt.[1] Specifically, former customers of K R Enterprises have alleged that Evans improperly accessed the records of K R Enterprises to obtain their personal and confidential information for the purpose of fraudulently filing their 2014 income tax returns. All of the former customers had sought assistance preparing their 2013 tax returns from K R Enterprises and their confidential information had been saved in the company's database.

         Upon discovering Evans' conduct, these customers of K R Enterprises filed suit in the Circuit Court of McDowell County, West Virginia, against Evans, K R Enterprises, and Jackson Hewitt raising various state law claims including, but not limited to, Breach of Fiduciary Duty, Negligence, and Invasion of Privacy. There are six of these lawsuits currently pending in the McDowell County Circuit Court.[2] All of the state lawsuits allege that Evans was arrested on or about February 4, 2015, at a K R Enterprise location and that Evans admitted to police that he had used the customers' 2013 tax return information to fraudulently file 2014 tax returns in their names. For his part, Evans faces criminal charges of identity theft, attempted felony, forgery, uttering, petit larceny, and fraudulent schemes.

         On December 18, 2015, Ohio Security Insurance Company filed the instant declaratory judgment action on the basis of diversity jurisdiction pursuant to 28 U.S.C. § 1332 and, on March 14, 2016, it filed an amended complaint. Ohio Security asks this court to determine that it has no duty to defend or indemnify K R Enterprises, Evans, or Jackson Hewitt[3] under the BusinessOwners liability coverage and/or or the Data Compromise and CyberOne coverage for the six underlying lawsuits.

         On March 23, 2017, the court denied defendants' motions to dismiss and/or stay urging the court to decline to exercise its authority under the Declaratory Judgment Act in favor of allowing the issue of coverage to be resolved by the pending state actions. See ECF No. 54. In so doing, the court considered the Nautilus factors and found that the entanglement factor weighed in favor of retaining jurisdiction and that the efficiency factor weighed slightly in favor of retaining jurisdiction. See id.

         Thereafter, on May 22, 2017, the court granted Ohio Security's motion to amend the complaint to add Cathy S. Goodman as a defendant to the lawsuit. See ECF No. 70. On February 27, 2017, Goodman had filed an amended complaint in the Circuit Court of Wood County raising allegations similar to the six underlying lawsuits pending in McDowell County and naming Jackson Hewitt, Ohio Security, Evans, and K R Enterprises as defendants. See id.

         II. Analysis

         A. Defendants' Renewed Motion to Dismiss or Stay.

         Defendants urge the court to reconsider its earlier ruling denying their motions to dismiss and/or stay, arguing that subsequent developments with respect to Jeremy Evans suggest that this court's decision with respect to the efficiency factor was wrong. As this court noted in its earlier order, the Fourth Circuit Court of Appeals has enunciated four specific factors by which the court's analysis is to be guided:

(i) the strength of the state's interest in having the issues raised in the federal declaratory action decided in the state courts; (ii) whether the issues raised in the federal action can more efficiently be resolved in the court in which the state action is pending; . . . (iii) whether permitting the federal action to go forward would result in unnecessary “entanglement” between the federal and state court systems, because of the presence of “overlapping issues of fact or law” [; and (iv)] whether the declaratory judgment action is being used merely as a device for “procedural fencing” - that is, “to provide another forum in a race for res judicata” or “to achieve a federal hearing in a case otherwise not removable.”

Centennial Life Ins. Co. v. Poston, 88 F.3d 255, 257 (4th Cir. 1996)(quoting Nautilus Ins. Co. v. Winchester Homes, Inc., 15 F.3d ...


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