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Kmart Corporation, A Michigan Corporation v. Footstar

March 30, 2012

KMART CORPORATION, A MICHIGAN CORPORATION, PLAINTIFF,
v.
FOOTSTAR, INC., A DELAWARE CORPORATION, ) LIBERTY MUTUAL FIRE INSURANCE COMPANY, A WISCONSIN CORPORATION, DEFENDANTS.



The opinion of the court was delivered by: Magistrate Judge Susan E. Cox

MEMORANDUM OPINION AND ORDER*fn1

In this breach of contract, insurance coverage, and declaratory judgment action, plaintiff, Kmart Corporation ("Kmart"), seeks reimbursement of $141,755.92 in defense costs plus indemnification for $300,000.00 and a $10,000.00 Kmart gift card paid by Kmart to settle an underlying lawsuit, Judy Patrick and Michael Patrick v. Kmart Corporation (the "Patrick Lawsuit"). That suit involved a Kmart shopper who, while being assisted by an employee of defendant Footstar, Inc. ("Footstar"), was struck by a stroller that fell off a shelf.*fn2 On August 3, 2011, Kmart, as well as defendants Footstar and its insurer, Liberty Mutual Fire Insurance Company ("Liberty"), filed cross-motions for summary judgment.*fn3 For the reasons set forth below, Kmart's motion is granted in part, and denied in part [dkt. 208], Footstar's motion is denied [dkt. 211] and Liberty's motion is denied [dkt. 205].

I. JURISDICTION AND VENUE

Kmart is a Michigan corporation based in Hoffman Estates, Illinois, whose stores sell and distribute various retail and consumer goods.*fn4 Footstar was a company incorporated in Delaware that engaged in the business of operating footwear departments in certain Kmart stores.*fn5 Liberty is a Wisconsin company based in Boston, Massachusetts, that underwrites commercial general liability insurance for businesses such as Footstar.*fn6 The Court has jurisdiction over this matter pursuant to

28 U.S.C. § 1332 because the amount in controversy exceeds $75,000.00, and the parties are citizens of different states. Venue is proper under 28 U.S.C. § 1391(a) and pursuant to Section 21.7 of the Amended and Restated Master Agreement between Kmart and Footstar, which provides that the parties shall submit to the jurisdiction of "the United States District Court at Chicago, Illinois" with respect to "any right or remedy in connection with [the agreement]."*fn7

II. STATEMENT OF FACTS*fn8

On July 27, 2005, Judy Patrick and her daughter, Tina Patrick, visited Kmart store # 4296 in Hollywood, Florida. The Patricks were shopping in the infant department when they requested that an employee assist them with viewing a combination stroller, which had been chained to other strollers atop a four foot tall display. While Mrs. Patrick was receiving assistance, she was struck and injured by a falling infant carrier that dislodged from one of the combination strollers. Mrs. Patrick suffered a broken nose and required two surgeries on her neck vertebrae, including a disk fusion and the insertion of a metal plate.*fn9 She and her husband sued Kmart for negligence and loss of consortium on May 7, 2006, believing that only Kmart employees had been involved in her accident. On October 28, 2008, Kmart settled the case by paying the Patricks $300,000.00, plus a $10,000.00 Kmart gift card.*fn10 Kmart now seeks reimbursement for that sum, plus legal expenses, from Footstar and Footstar's insurer, Liberty, because a Footstar employee had been assisting Mrs. Patrick at the time of her injury.

A. The Master Agreement Between Kmart and Footstar

On July 1, 1995, Kmart and Melville Shoe Corporation ("Melville") entered into a master agreement regarding the operation of footwear departments in certain Kmart stores by certain subsidiaries of Melville.*fn11 By this time, Kmart and Melville had already executed three prior agreements, which would have been available for review during negotiations.*fn12 On March 25, 1996, Melville assigned its rights and obligations under the Master Agreement to Footstar.*fn13

On August 24, 2005, Kmart and Footstar entered into the Amended and Restated Master Agreement (the "Master Agreement"), which remained in effect until December 31, 2008.*fn14

Pursuant to the Master Agreement, Footstar operated footwear departments in approximately 2,500 Kmart stores, including store #4296 located in Hollywood, Florida.*fn15 It is undisputed that the majority of Footstar's revenue came from its contract with Kmart.*fn16

The Master Agreement required Footstar to, among other things: (1) obtain a liability insurance policy for personal injury "arising out of or relating to the goods and services provided by [the Master Agreement]," (2) name Kmart as an additional insured, and (3) provide a copy of that insurance policy upon Kmart's request.*fn17

B. The Policy Between Footstar and Liberty

Liberty issued a commercial general liability insurance policy (the "Policy")*fn18 to Footstar,*fn19 which listed Kmart as an additional insured under a Blanket Additional Insured Amendment.*fn20

Before Liberty issued the Policy, Footstar provided a copy of the Master Agreement to Liberty for underwriting purposes.*fn21 In 2000, Liberty also issued an Alternate Employer Endorsement that insured Kmart when Footstar employees were injured in the course of "special and temporary employment" by Kmart.*fn22
Footstar was permitted to notify Liberty of incidents under the Policy through Liberty's claims reporting telephone line.*fn23 Liberty's claims handlers would complete a standard form based on the information received from Footstar's telephone call.*fn24 Once Liberty determined that Footstar was covered, Liberty investigated the claim or lawsuit, assigned counsel, and participated in the claim's resolution.*fn25 Liberty admits that it determined whether additional insured coverage was triggered by the Policy,*fn26 and Footstar admits that, in this case, it delegated to Liberty the responsibility for determining whether Footstar was required to defend and indemnify Kmart in the Patrick Lawsuit.*fn27

C. Pre-suit Activity Related to the Patrick Claim

On July 27, 2005, Judy Patrick was injured while shopping in Kmart Store #4296.*fn28 An incident report completed by Kmart on that date identifies the location of the incident as "infant dept. / strollers" and states under the heading "Customer's Description of Incident" that "[Judy Patrick] was trying to turn a stroller around and a car seat fell and hit her on the head."*fn29 The report contains the names, "clock" numbers, and signed statements of Kmart employee, Maribel Hohney, and Alex Sehat.*fn30 These statements indicate that, while Mr. Sehat was attempting to "bring down a stroller" for Mrs. Patrick at her request, she was injured while trying to take down another stroller by herself.*fn31 Though Mr. Sehat was a Footstar employee at the time, the report did not expressly identify him as such.*fn32

On July 27, 2005, the incident was reported to Kmart's third party claims administrator, Sedgwick Claims Management Systems ("Sedgwick").*fn33 A claim intake form was prepared, which stated that "[t]he carrier which is attached to the stroller, fell off, and struck the claimant on the forehead."*fn34 In August of 2005, Dee Shelton of Sedgwick began investigating the Patrick incident and recorded her findings in a computer system called Juris.*fn35 On November 4, 2005, Ms. Shelton documented in Juris that Mr. Sehat was from the "shoe department."*fn36
On January 26, 2006, Mrs. Patrick, through her attorney, made a pre-suit settlement demand on Kmart for $210,000.00.*fn37 In response, Kmart offered $2,000 to settle the claim, which Mrs. Patrick rejected.*fn38 Juris notes from that date reflect Kmart's belief that Mrs. Patrick's medical bills totaled approximately $5,600, and that she had discontinued her treatment around that time.*fn39 Mrs. Patrick's demand was not communicated to Footstar.*fn40

D. Correspondence After the Initialand First Amended Patrick Complaints

On May 17, 2006, Judy and Michael Patrick filed a two-count complaint against Kmart and Sears in Broward County, Florida, alleging negligence and loss of consortium in connection with the July 27, 2005 incident.*fn41 The complaint did not name Footstar because the Patricks were unaware that a Footstar employee had been involved.*fn42 In fact, the complaint identified no specific employee, and merely alleged that "[d]efendants, through its [sic] agents, employees, staff and/or representatives who were acting in the course and scope of their employment" were negligent "in one or more of the following ways," including failing to properly secure merchandise on shelves, limit the height of merchandise on shelves, adequately warn of risks, and train employees.*fn43

Kmart states that, at this point, it was also unaware that a Footsar employee had been involved in the incident.*fn44 Footstar disputes this on the basis that Mr. Sehat's name, clock number, and a phone number attributed to Mr. Sehat would have appeared on the July 27, 2005 incident report.*fn45 On June 30, 2006, the Patricks filed an amended complaint which dropped Sears, but was identical in all other material respects.*fn46

On August 14, 2006, Kmart's defense counsel noted an interview with Mr. Sehat, during which Mr. Sehat stated that he was a Footstar employee.*fn47 The interview was documented in the TLEX system, which Kmart used to communicate with Sedgewick's claims handlers and outside counsel.*fn48 Footstar states, and Kmart does not dispute, that "Kmart had all the information it needed to tender the Patrick Lawsuit to Footstar in August of 2006."*fn49

Kmart states that, in May 2007, Marcia Kaiser, Managing Litigation Counsel for Sears Holdings Management Corporation, sent a letter to Maureen Richards, General Counsel for Footstar, requesting defense and indemnification for the Patrick Lawsuit, as well as a copy of the Policy.*fn50

The letter, dated May 23, 2007, states that it was sent via certified mail.*fn51 However, no Footstar employee has confirmed receipt of the letter.*fn52 And, for reasons unknown, Kmart has produced no return receipt for the letter in discovery.*fn53 Further, the letter's author, Marcia Kaiser, does not recall having received a return receipt,*fn54 and there is no evidence that the letter was recorded in Juris.*fn55 Footstar states, and Kmart does not dispute, that "[a]fter allegedly sending the May 23, 2007 letter to Footstar, Kmart did not follow-up with Footstar until January 24, 2008."*fn56

The Patricks did not know that Mr. Sehat was a Footstar employee until May 2007.*fn57 On

May 30, 2007, the Patricks' attorney, Michael Feiner, called Maureen Richards of Footstar in relation to the suit and requested a copy of Mr. Sehat's employment records.*fn58 On June 6, 2007, a representative of Footstar reported the Patrick incident to Liberty as an "incident only" claim.*fn59

Footstar claims that it first became aware of the Patrick Lawsuit on this date.*fn60 Liberty accepted telephonic notice of the Patrick Lawsuit, and did not require anything in writing.*fn61 While Liberty's claims handler testified that it was normal practice to request a copy of the complaint when investigating coverage, there is no evidence that Liberty did so in this case.*fn62

Liberty kept claims notes on the Patrick Lawsuit which document its initial correspondence with Footstar.*fn63 A claims handler at Liberty recorded that "[t]here is a law suit filed against Kmart for this incident. The only reason the [insured] is calling in the accident due to their employee helping the [claimant] at the time of the incident. The caller states they are not involved in the suit at this time."*fn64 An entry reflecting a June 7, 2007, interview with Mr. Sehat reads: "[w]hile attempting to pull a box, the box fell and struck the plaintiff . . . [Mr. Sehat] doesn't know who exactly was pulling the box at the time."*fn65 Mr. Sehat was further recorded as stating that "he felt compelled to" assist the Patricks, and that "any other [employee] would have done the same to try and prevent the customers from making a scene."*fn66 The entry continued:"Customer does not want us to make contact with [plaintiff's] attorney or Kmart's employee at this time as we are not yet a party in this case."*fn67
After speaking with Mr. Sehat, Liberty's claims handler verified coverage for Footstar and set a reserve of $3,500.00.*fn68 On June 12, 2007, the claims handler wrote: "I expect we will be brought in as a party to the case in the near future and we must be prepared for same. If that is the situation, we will look to tender the claim to Kmart . . . ."*fn69

Kmart admits that, on July 31, 2007, Mrs. Patrick made an offer of judgment on Kmart for $185,400.00, and that Kmart did not communicate this offer to Footstar.*fn70

E. Depositions in the Patrick Lawsuit

From August through November of 2007, there were various depositions taken in the Patrick Lawsuit.*fn71 It does not appear that Kmart provided Footstar with prior notice of these depositions.*fn72 Meanwhile, on August 16, 2007, a supervising claims handler at Liberty wrote that: "The [insured's] employee may or may not be involved. Did they have their hand on the stroller and if they did were the [sic] pulling it."*fn73 On August 21, 2007, Mr. Sehat was deposed without representation from counsel.*fn74 It is undisputed that, by this time, Kmart was aware that Mr. Sehat was a Footstar employee.*fn75

The accounts of the July 2005 incident provided in the deposition testimony of Mr. Sehat and Ms. Hohney differ significantly from that provided by Judy and Tina Patrick. All four witnesses testified that Mr. Sehat called someone over the loudspeaker to assist the Patricks with the stroller.*fn76

Mirabel Hohney testified that she went to the infant department after "someone told [her] that they needed help in the stroller department."*fn77 However, Mr. Sehat and Ms. Hohney testified that Judy Patrick smelled of alcohol on the date of the incident and Mr. Sehat described her behavior as "erratic."*fn78 Mr. Sehat also testified that "in front of [Judy and Tina Patrick] were a whole bunch of big stroller boxes opened, knocked down, and the entire aisle was covered with merchandise, which was taken out of boxes."*fn79 In contrast, Judy and Tina Patrick testified that Judy Patrick was not erratic on the date of the incident, had not had any alcohol to drink,*fn80 and that there were no boxes in the aisle of the infant department.*fn81

Both Mr. Sehat and Ms. Hohney testified that Judy Patrick was pulling on an elevated display stroller when a car seat fell out and struck her about the face.*fn82 Judy and Tina Patrick, on the other hand, testified that Judy Patrick never touched the strollers on display, and Judy Patrick testified that, while Mr. Sehat was attempting to untangle the wheels of two strollers, she was "just sitting there watching . . . ."*fn83 Tina Patrick testified that Mr. Sehat "jiggled," "wiggled," "pushed," and "pulled" the strollers, and that the stroller fell shortly after.*fn84 It is undisputed that Mr. Sehat did not touch the infant carrier which dislodged from one of the strollers and struck Judy Patrick.*fn85

Two managers from Kmart store #4296 testified in depositions. Roshan Garnadia, the manager responsible for securing overhead merchandise,*fn86 stated that, from 2001 to July 26, 2007, the stroller section of the relevant Kmart store contained one to seven strollers on a four foot shelf.*fn87

In addition, Mr. Garnadia testified that securing overhead merchandise was important to customer safety,*fn88 and that he had never seen a car seat not locked into a stroller.*fn89 George Calhoun, the store's loss prevention manager, testified (in response to a hypothetical) that a chained stroller would not come off the shelf.*fn90

On October 5, 2007, Liberty's claims handler wrote: "liability possible . . . Did Footstar employee touch the stroller causing it have [sic] the car seat fall out or was this the action of the claimant in trying to remove the stroller.*fn91 The claims handler then references a conversation with Footstar, and states: "Customer wants us to keep a low profile."*fn92

F. Kmart's Request is Received by Footstar and Transmitted to Liberty

On January 24, 2008, Kmart's defense counsel, Dorothy Negrin, sent a letter to Footstar requesting a defense and indemnity, as well as a copy of the Policy.*fn93 This request was documented in Juris.*fn94 The letter did not contain the words "additional insured" or "insurance coverage."*fn95 Footstar forwarded the request to Liberty on January 30, 2008.*fn96 The following day, the Patricks amended their complaint by naming Footstar as a defendant, and identifying Mr. Sehat as "an employee of Defendant Footstar, and/or an apparent agent of Defendant, Kmart."*fn97

G. The Second Amended Patrick Complaint is Filed

The Patricks' Second Amended Complaint included detailed allegations. It alleged that Mrs. Patrick and her daughter were shopping for a combination baby stroller and infant carrier at Kmart when they asked Mr. Sehat if he worked at the store.*fn98 After Mr. Sehat allegedly responded "in the affirmative," Mrs. Patrick "summoned [him] for assistance in order to take a closer look at the combination strollers, that were displayed on top of an overhead platform."*fn99 The Patricks allege that Kmart employee Maribel Hohney arrived and "assisted [Mr.] Sehat, in assisting [Mrs. Patrick],"*fn100 and that the combination strollers -- which were linked together by a loose chain -- sat atop an overhead shelf, and the infant carrier within the stroller in question "sat on top of said stroller, in an unsecured and/or unlocked fashion."*fn101 The Patricks asserted that Mr. Sehat and Ms. Hohney "had no knowledge" and "never warned" Mrs. Patrick that the infant carrier was unsecured.*fn102 The Patricks also alleged that "[Mr.] Sehat attempted to bring down the combination stroller in question from the overhead platform, and in doing so, the infant carrier fell out of the stroller, and struck [Mrs. Patrick] about her face."*fn103

Mrs. Patrick alleged separate negligence claims against Kmart and Footstar.*fn104 Mr. Patrick also alleged a derivative claim for loss of consortium against both Kmart and Footstar.*fn105

1. Count I - Kmart

Mrs. Patrick alleged that Kmart "did negligently and carelessly, own, operate, maintain and control" the premises, "in one or more of the following ways:"

a) by allowing unsecured merchandise to exist on an overhead platform

b) by failing to properly maintain the merchandise as described above, although Defendant knew, or in the exercise of reasonable care should have known, about the existence of said condition . .

c) by failing to properly remove the merchandise as described above from the overhead platform, although defendant knew, or in the exercise of reasonable care should have known, about the existence of said condition . . .

d) by failing to provide adequate warnings and/or other reasonable notice of the aforedescribed unsafe, dangerous, and hazardous conditions to customers . . .

e) The aforedescribed conditions were a continuous and ongoing condition on Defendant's premises, and for that reason Defendant was on actual and/or constructive notice of said condition.

f) The aforedescribed conditions were created by the Defendant, and for that reason Defendant was on actual and/or constructive notice of said condition.*fn106

2. Count II - Footstar

Mrs. Patrick also alleged that Footstar "did negligently and carelessly, own, operate, maintain and control" the premises "in one or more of the following ways:"

a) by failing to properly remove the merchandise as described above from the overhead platform, although defendant knew, or in the existence of said condition . . .

b) by failing to provide adequate warnings and/or other reasonable notice of the aforedescribed unsafe, dangerous, and hazardous conditions to customers . . . .*fn107

3. Count III - Kmart and Footstar

Mr. Patrick alleged that, as a result of Kmart and Footstar's negligence, he has been "deprived of the services, society, and consortium" of Mrs. Patrick.*fn108

H. Liberty Assumes the Defense of Footstar and Denies Coverage to Kmart

On February 1, 2008, Liberty decided to defend Footstar in connection with the Patrick Lawsuit.*fn109 Footstar sent Liberty a copy of the second amended complaint,*fn110 and Liberty retained the Law Office of Maria Dantes Sanches to defend Footstar, which assigned attorney Richard Llerena to the case.*fn111 The claims notes contain Mr. Llerena's summaries of interrogatory answers, depositions, and medical records from the Patrick Lawsuit.*fn112 These summaries show that Mr. Llerena was aware of Mrs. Patrick and Tina Patrick's deposition testimony that Mrs. Patrick did not touch the strollers and was struck by the infant carrier because "Alex Sehat was trying to disentangle the wheels of 2 different strollers, one of which [Mrs. Patrick and Tina Patrick] wanted to see."*fn113

In the claim notes, Mr. Llerena expressed doubt as to whether he could successfully defend Footstar on a theory that Mr. Sehat was acting outside the scope of his employment.*fn114

Footstar objects to the admissibility of statements taken from the Patricks' deposition testimony on hearsay grounds.*fn115 However, we find that the depositions are admissible because Kmart is not introducing the testimony for the truth of the matter asserted, i.e. to show what actually took place during the July 27, 2005 incident. As Kmart points out, whether or not the Patricks' testimony is "true" is not relevant to our inquiry, which instead looks to whether the Patricks' allegations put Liberty on notice that Kmart was facing liability for a potentially covered claim.*fn116

In his notes, Mr. Llerena described the following legal strategy for defending Footstar in the Patrick Lawsuit:

We can get by allowing Kmart to take the lead in defending the case, and then we can come in and deflect liability by essentially pointing to this flawed policy with Kmart. This will significantly reduce legal expenses. We anticipate that Kmart will likely look to point the finger at Footstar. ...


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