Affinity Living Grp., LLC v. Starstone Specialty Ins. Co.

959 F.3d 634

AFFINITY LIVING GROUP, LLC; Charles E. Trefzger, Jr., Plaintiffs – Appellants,

v. STARSTONE SPECIALTY INSURANCE COMPANY, Defendant – Appellee,andHomeland Insurance Company of New York, Defendant.

No. 18-2376

United States Court of Appeals, Fourth Circuit.

Argued: January 30, 2020

Decided: May 26, 2020

ARGUED: Carl Abbott Salisbury, BRAMNICK, RODRIGUEZ, GRABAS, ARNOLD & MANGAN, LLC, Scotch Plains, New Jersey, for Appellants. David L. Brown, GOLDBERG SEGALLA LLP, Greensboro, North Carolina, for Appellee. ON BRIEF: Thomas W. Waldrep, Jr., Francisco T. Morales, WALDREP LLP, Winston-Salem, North Carolina, for Appellants. Martha P. Brown, GOLDBERG SEGALLA LLP, Greensboro, North Carolina, for Appellee.

Before KING, HARRIS, and RICHARDSON, Circuit Judges.

Vacated and remanded by published opinion. Judge Richardson wrote the opinion, in which Judge Harris joined. Judge King wrote a dissenting opinion.

RICHARDSON, Circuit Judge:

Affinity Living Group, LLC and Charles E. Trefzger, Jr. (collectively, "Affinity") were sued for allegedly submitting Medicaid reimbursement claims for services that they never provided. Affinity then sought coverage for the suit under its insurance policy with StarStone Specialty Insurance Company. StarStone denied coverage because the lawsuit’s claims did not fall within the policy’s coverage for "damages resulting from a claim arising out of a medical incident." J.A. 110. Affinity sued. Agreeing with StarStone that the policy did not cover the lawsuit, the district court granted judgment on the pleadings against Affinity on a declaratory-judgment claim and a breach-of-contract claim. After Affinity then stipulated to the dismissal of its extra-contractual claims, it sought to appeal.

Looking first to our own jurisdiction, we find that Affinity properly appeals from a "final" decision. Turning to the merits, we apply North Carolina law to hold that the allegations in the underlying complaint fall within the insurance policy’s coverage provision. We thus vacate the district court’s order and remand for further proceedings.

I. Background

In 2016, Stephen Gugenheim filed a false-claims-act action against Affinity as an operator of adult care homes.¹ In a false-claims-act suit, a private party brings an action on the government’s behalf and that party may receive a share of the recovery if successful. ACLU v. Holder , 673 F.3d 245, 248 (4th Cir. 2011). Gugenheim alleged that Affinity submitted reimbursement claims for resident services that were never provided. Because those allegedly false claims were submitted to the government as part of the Medicaid program, he alleged Affinity’s actions violated the federal False Claims Act, 31 U.S.C. § 3729, and the North Carolina False Claims Act, N.C. Gen. Stat. § 1-605.

Affinity sought coverage for the false-claims-act suit under a policy issued by StarStone.² That policy provided indemnification and defense against certain claims. StarStone denied Affinity’s request for coverage, so Affinity sued in federal court, bringing four claims. In Count 1, Affinity asked for a declaratory judgment that StarStone breached its coverage obligations. Based on the same theory, Count 2 was a breach of contract claim for StarStone’s denial of coverage. In Counts 3 and 4, Affinity sought extra-contractual relief: Count 3 alleged a breach of the common law duty of good faith and fair dealing and Count 4 alleged a violation of North Carolina’s Unfair and Deceptive Trade Practices Act.

On Counts 1 and 2, StarStone moved for judgment on the pleadings. And Affinity sought partial summary judgment on whether StarStone had a duty to defend Affinity in the false-claims-act suit. The district court granted StarStone’s motion for judgment on the pleadings and denied Affinity’s motion for partial summary judgment.

The district court determined that the insurance policy did not cover the false-claims-act suit, so it rejected Affinity’s claim for a declaratory judgment (Count 1). And since the policy did not require coverage, the court held that StarStone did not breach its contract with Affinity by denying coverage (Count 2). But two claims remained against StarStone: Count 3 (duty of good faith and fair dealing) and Count 4 (North Carolina’s Unfair and Deceptive Trade Practices Act).

Affinity stipulated with StarStone that Counts 3 and 4—the only remaining counts in the action—"are dismissed without prejudice." J.A. 398; see Fed. R. Civ. Pro. 41(a)(1)(A). The stipulation explained that any amendment to Counts 3 and 4 "cannot revive the claims in this case, in consequence of the Court’s dismissal on summary judgment of Counts I and II, and this action has therefore been finally resolved on the merits." Id. Affinity now appeals the dismissal of Counts 1 and 2 against StarStone.

II. Appellate Jurisdiction

Although Affinity and StarStone urge this appeal properly lays before us, "we must assure ourselves of jurisdiction regardless of [the parties’] wishes." Sprint Nextel Corp. v. Wireless Buybacks Holdings, LLC , 938 F.3d 113, 122 (4th Cir. 2019). With few exceptions, we may review district court judgments only once they have become "final." 28 U.S.C. § 1291. But what constitutes a "final" decision under § 1291 has consistently confused litigants and courts alike.

Generally, a final decision disposes of all claims and "ends the litigation on the merits." Catlin v. United States , 324 U.S. 229, 233, 65 S.Ct. 631, 89 L.Ed. 911 (1945). So "orders that dispose of only some of the claims in the lawsuit typically are not final and appealable." Sprint Nextel Corp. , 938 F.3d at 122 ; see also Fed. R. Civ. P. 54(b). And since the district court dismissed only Counts 1 and 2 against StarStone—leaving Counts 3 and 4—the Parties faced a finality problem when planning this appeal. See Williamson v. Stirling , 912 F.3d 154, 169 (4th Cir. 2018).

Anticipating the finality issue, Affinity and StarStone stipulated to the dismissal of Counts 3 and 4 without prejudice. With all counts thus dismissed, the Parties contend an appealable final judgment exists. But this stipulation raises a separate concern about whether the Parties agreed to the "voluntary dismissal[ ] as a subterfuge to manufacture jurisdiction for reviewing [an] otherwise non-appealable, interlocutory order[ ]." Waugh Chapel S., LLC v. United Food & Commercial Workers Union Local 27 , 728 F.3d 354, 359 (4th Cir. 2013). This we cannot abide. So to solve one problem, StarStone and Affinity may have created another.

Just three years ago, the Supreme Court addressed this concern with manufacturing finality through a voluntary dismissal. In Microsoft Corp. v. Baker , ––– U.S. ––––, 137 S.Ct. 1702, 1710, 198 L.Ed.2d 132 (2017), consumers brought a design-defect claim on behalf of a putative class. But the district court struck the plaintiffs’ class allegations—thus functionally denying the class certification. The court’s decision did not end the case because the individual claims remained. But the ability to seek damages on behalf of a class, rather than the individual claims, motivated the case. Id . at 1711, 1711 n.7. Class certification decisions are " ‘inherently interlocutory,’ " not final under § 1291. Id . at 1706 (quoting Coopers & Lybrand v. Livesay , 437 U.S. 463, 470, 98 S.Ct. 2454, 57 L.Ed.2d 351 (1978) ). So to create an appealable final order on the class certification question, the Microsoft plaintiffs voluntarily dismissed all their claims while reserving the right to revive their dismissed claims if the order striking class allegations was reversed on appeal. Giving finality a "practical rather than technical construction," the Supreme Court found appellate jurisdiction lacking. Id . at 1712–13 (internal quotation marks and citation omitted). The plaintiffs could not "subvert[ ] the final-judgment rule" to obtain review of the order striking their class allegations by dismissing their legally viable claims. Id. at 1712. They had to first "pursue their individual claims on the merits to final judgment, at which point the denial of class-action certification becomes ripe for review." Id. at 1706. Permitting these plaintiffs to avoid the merits and obtain an immediate appeal of the class order would have improperly created piecemeal litigation and subverted, for plaintiffs alone, the established scheme for interlocutory class-certification appeals. Id. at 1712.

Similarly, in Keena v. Groupon, Inc. , 886 F.3d 360, 362-63 (4th Cir. 2018), our Court applied Microsoft and rejected a plaintiff’s attempt to manufacture a final order. Keena sought to appeal an interlocutory order staying the action and compelling arbitration of her claims. Id. at 362 ; cf. Lamps Plus, Inc. v. Varela , ––– U.S. ––––, 139 S.Ct. 1407, 1414, 1414 n. 1–2, 203 L.Ed.2d 636 (2019) (finding that an order compelling arbitration but also dismissing the claims qualifies as a "final" decision). After the district court entered the order, Keena voluntarily dismissed her entire complaint. Even though Keena did so with prejudice, we held that the final-judgment rule would not tolerate that voluntary-dismissal tactic. Like the Microsoft plaintiffs, Keena had to have the merits of her claims addressed in arbitration before she could secure a final judgment to appeal the arbitration order. In finding jurisdiction lacking, we noted that Keena’s tactic violated the "long-settled principle" that " ‘no appeal lies from a judgment of voluntary nonsuit.’ " Keena , 886 F.3d at 365 (quoting Kelly v. Great Atlantic & Pacific Tea Co. , 86 F.2d 296, 297 (4th Cir. 1936) ); see also Central Transportation Co. v. Pullman’s Palace Car Co. , 139 U.S. 24, 39, 11 S.Ct. 478, 35 L.Ed. 55 (1891) ; United States v. Evans , 9 U.S. (5 Cranch) 280, 281, 3 L.Ed. 101 (1809).³

At first glance, it might seem the Parties here defied Microsoft and Keena —Affinity voluntarily stipulated to dismissing Counts 3 and 4 to appeal the court’s dismissal of Counts 1 and 2. And, as in Microsoft , Affinity...