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Fluharty v. Peoples Bank, NA

United States District Court, S.D. West Virginia, Huntington Division

June 22, 2018

THOMAS H. FLUHARTY, Trustee of the Bankruptcy Estates of Dennis Ray Johnson, II No. 316-BK-30227; DJWV2, LLC No. 316-BK- 30062; Southern Marine Services, LLC No. 316-BK-30063; Southern Marine Terminal, LLC No. 317-BK-30064; Redbud Dock, LLC No. 316-BK-30398; Green Coal, LLC No. 316-BK-30399; Appalachian Mining & Reclamation, LLC No. 316-BK-30400 Producer's Land, LLC 316-BK-30401; Producer's Coal, Inc. 316-BK-30402; Joint Venture Development, LLC No. 316-BK-30403, Plaintiffs,



         Pending before the Court, among other motions, is Defendant Peoples Insurance Agency, LLC's (“Peoples Insurance”) Motion to Dismiss (ECF No. 23). In that motion, Peoples Insurance requests that this Court dismiss Count Ten of Plaintiff's Complaint, titled “Bad Faith Claim Against Insurers.” Peoples Insurance argues that Plaintiff's bad faith claim should be dismissed against it because it is not an insurer, but is instead an insurance broker. Due to its status as a “middleman between the insured and the insurer, ” Peoples Insurance claims that the contractual obligations that would give rise to a bad faith claim do not exist between it and the group of entities for which Plaintiff is the trustee (“Coal Group”). And the relevant statutory obligations do not apply to an insurance broker in this context. The Court agrees with Peoples Insurance, and thus, as explained below, GRANTS Defendant Peoples Insurance's Motion to Dismiss (ECF No. 23).

         This case-having been initiated by the filing of a 68-page complaint, with roughly 50-pages in attachments-has a long and winding factual narrative. For part of the factual background of this matter, refer to the Court's previously filed Order Granting Defendant Burkons's Motion to Dismiss. Fluharty v. Peoples Bank, NA, No. 3:17-4220 (ECF No. 87), 2018 WL 1954829, at *1-*2 (S.D. W.Va. Apr. 24, 2018) (Chambers, J.). In this order, the Court will not traverse the complete factual development that led to the claims currently before it. However, the Court will simply provide a summary of the limited scope of facts that are relevant to Peoples Insurance's Motion to Dismiss.

         After obtaining financing for the acquisition and operation of various entities comprising the Coal Group[1], one of the Coal Group entities, Southern Marine Terminal, LLC (“SMT”), obtained insurance on a recently leased coal-wash facility. Compl, at ¶¶ 33, 34. SMT had leased the facility, called the Ivel wash plant, located in Floyd County, Kentucky, from Prater Creek Coal Corporation (“Prater”). Id.

         Mr. Johnson, both individually and on behalf of various Coal Group entities, had obtained the funding for the business growth from Peoples Bank, NA (“Peoples Bank”). Although Peoples Bank and Peoples Insurance are separate business entities, they have, at times, simultaneously shared at least one common officer. Pl.'s Resp. to People Insurance's Mot. to Dismiss, ECF No. 33, at 6. Due to the closeness of those two businesses, SMT obtained insurance for the Ivel wash plant through Peoples Insurance. Compl, at ¶ 34. SMT, with Peoples Insurance serving as the insurance broker, entered in to an insurance policy with Great American Insurance Company of New York (“GAI”), another defendant in this case.

         In August 2014, roughly two years after first leasing the Ivel wash plant, SMT agreed to purchase it from Prater. Id. at ¶ 35. In connection with that seller-financed purchase, SMT “directed Peoples Insurance to add [Prater] as a loss payee/additional insured on the property loss coverage.” Id. Soon, the Ivel wash plant, vital to the operation of the Coal Group, would experience an unfortunate property loss.

         On May 18, 2015, a coal beltline at the Ivel plant broke and fell. Id. at ¶ 48. With the beltline out, the plant was largely left inoperable for a period of time. Id. Allegedly, this disruption not only threatened the operation of the plant, but also the value of the entire Coal Group, causing modifications to the plant's operations and forcing additional expenditures in an effort to stay afloat. Id.

         SMT filed a claim on its insurance policy with GAI for the Ivel wash plant loss. SMT reported a claim for both the property loss itself, as well as the business interruption. Id. ¶ 50. Although SMT attempted to maintain business operations through the pendency of the claim's processing, Plaintiff alleges that those efforts were undermined by the acts and omissions in the treatment, processing, and payment of its Ivel-related claims. Id. Ultimately, Plaintiff contends that these acts and omissions caused Prater to declare SMT in default of its financing agreement for the Ivel facility.

         Emanating from those alleged acts and omissions, Plaintiff has asserted a bad faith claim arising under a Kentucky common law obligation to act in good faith, the Kentucky Consumer Protection Act (“KCPA”) (Ky. Rev. Stat. Ann. § 367.110 et seq.), and the Kentucky Unfair Claims Settlement Practices Act (“KUCSPA”) (Ky. Rev. Stat. Ann. § 304.12-230). Compl., at ¶ 218. Peoples Insurance argues that Plaintiff cannot properly state a claim against it under either the common law duty or the duties derived from the statutory provisions. The Court agrees with Peoples Insurance. After laying out the standard on consideration of a 12(b)(6) motion to dismiss, the Court will address Plaintiff's bases for the bad faith claim. In hashing out its reasoning, the Court will discuss each of those bases in reverse order.

         To overcome a motion to dismiss under Federal Rule 12(b)(6), a complaint must state a plausible claim. Bell Atl. Corp. v. Twombly, 550 U.S. 544, 546 (2007). This standard requires a plaintiff to set forth the “grounds” for an “entitle[ment] to relief” that is more than mere “labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Id. at 555 (internal quotations and citations omitted). A complaint must contain “sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (internal quotations and citation omitted). Facial plausibility exists when a claim contains “factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. (citation omitted).

         Further, the Court accepts the factual allegations in the complaint as true. Those allegations, however, “must be enough to raise a right to relief above the speculative level . . . . ” Twombly, 550 U.S. at 555 (citations omitted). If the allegations in the complaint, assuming their truth, do “not raise a claim of entitlement to relief, this basic deficiency should . . . be exposed at the point of minimum expenditure of time and money by the parties and the court.” Id. at 558 (internal quotations and citations omitted). “Although for the purposes of a motion to dismiss we must take all of the factual allegations in the complaint as true, we are not bound to accept as true a legal conclusion couched as a factual allegation.” Iqbal, 556 U.S. at 678 (internal quotations and citation omitted).

         Assessing first the applicability of the KUCSPA to Peoples Insurance, the Court finds that Peoples Insurance is not subject to claims under that statute in this case. Although not stated explicitly, the Kentucky case law strongly militates toward the inapplicability of the KUCSPA to insurance agents or brokers.

         Both parties largely rely upon the same case, Davidson v. Am. Freightways, Inc., 25 S.W.3d 94 (Ky. 2000), but differ in their respective readings of the case. Plaintiff contends the lack of an express prohibition against holding insurance agent accountable under the KUCSPA in the caselaw, means that insurance agents or brokers are subject to the KUCSPA's obligations. Pl.'s Resp. to People Insurance's Mot. to Dismiss, at 3-4. Thus, Plaintiff argues, he may bring a claim against Peoples Insurance under the KUSCPA. Id. Unlike Plaintiff, Peoples Insurance, focuses upon what the court in Davidson said, instead of what the court did not say. Mem. in Supp. of Mot. to Dismiss, ECF No. 24, at 7-8. The court in Davidson, as pointed out by Peoples Insurances, provided that the KUCSPA, and bad faith claims generally, applies “only to those persons or entities (and their agents) who are ‘engaged . . . in the business of entering into contracts of insurance.'” Davidson v. Am. Freightways, Inc., 25 S.W.3d 94, 102 (KY 2000) (quoting KRS 304.1-040). Indeed, “[t]he gravamen of the [KUCSPA] is that an insurance company is required to deal in good faith . . . with respect to a claim which the insurance company is contractually obligated to pay.” Id. at 100 (emphasis original).

         The Court agrees with Peoples Insurance's reading of Davidson, and believes that the case counsels against applying the KUCSPA to Peoples Insurance. Limiting the reach of the KUCPSA, the Supreme Court of Kentucky relied upon the contractual obligation involved in an insurance company's relationship to an insured. Id. at 100-02 (generally emphasizing that bad faith claims, and the KUCSPA, depend upon the contractual obligation). The Kentucky court reviewed its previous distillations of bad faith claims under Kentucky law. Condensing both statutory and common law bad faith claims, the Supreme Court of Kentucky, in a 1993 case called Wittmer v. Jones, had “gathered all ...

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