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Fluharty v. Peoples Bank, N.A.

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

July 24, 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,
v.
PEOPLES BANK, NA, PEOPLES INSURANCE AGENCY, LLC, and GREAT AMERICAN INSURANCE COMPANY OF NEW YORK. Defendants.

          MEMORANDUM OPINION AND ORDER

          ROBERT C. CHAMBERS UNITED STATES DISTRICT JUDGE.

         Great American Insurance Company of New York's (“Great American”) Motion to Dismiss is currently pending before this Court. In that motion, Great American requests that this Court dismiss Plaintiff's claims against it. Supporting that request, Great American argues, in essence, that Plaintiff has admitted noncompliance with the terms of the insurance policy. Great Am.'s Mot. to Dismiss, ECF No. 20, at 1-2. Based upon that alleged noncompliance, Great American contends that Plaintiff can neither maintain a breach of contract claim nor a bad faith claim. Id. at 2. However, as explained below, the Court disagrees with Great American's argument. Therefore, the Court DENIES Great American's Motion to Dismiss (ECF No. 20).

         Having previously addressed other motions to dismiss filed in this case, the Court will not recount the complete, complex factual background of this case. For a brief overview of the facts of this case, review the orders already issued by this Court. See Fluharty v. Peoples Bank, NA (“June Order”), No. 3:17-4220, 2018 WL 3097329, at *1-*2 (S.D. W.Va. June 22, 2018) (describing background); Fluharty v. Peoples Bank, NA (“April Order”), No. 3:17-4220, 2018 WL 1954829, at *1 (S.D. W.Va. Apr. 24, 2018) (same).

         However, the Court will provide a brief introduction of the facts particular to Great American's involvement in this matter. Great American issued an insurance policy to one of the Coal Group[1] entities, Southern Marine Terminal LLC (“SMT”), with the Policy No. MAC 4025594. Great Am.'s Mem. in Supp. of Mot. to Dismiss, ECF No. 21, at 3.[2] That policy, effective from November 21, 2014 until November 21, 2015, covered SMT's Ivel coal wash plant. See Id. at 2-3. The Ivel plant suffered a belt collapse on May 18, 2018, which caused physical damage to the facility and hampered the operation of both SMT specifically and the Coal Group generally. See June Order, at *1-*2.

         SMT submitted claims for both property loss and business interruption arising from the belt collapse. Compl., ECF No. 1, at ¶¶ 34, 50. Although Great American did issue payment for the property loss claim, it refused to pay out on the business interruption claim beyond a $100, 000 advance in early December of 2015. Id. at ¶¶ 50, 65, 80, 85, 218. From these circumstances, Plaintiff brought the current claims against Great American.

         Plaintiff claims that Great American's actions constitute two separate, wrongful acts.[3]First, Plaintiff claims that Great American, in concert with the other defendants, made the payment for the property damage claim in bad faith. Id.; Pl.'s Resp. to Great Am.'s Mot. to Dismiss, ECF No. 32, at 7. And, second, Plaintiff claims that Great American refused to fulfill its obligations to satisfy in full the business interruption claim. Id.; Pl.'s Resp. to Great Am.'s Mot. to Dismiss, ECF No. 32, at 7.

         Great American bases its argument for dismissal upon two basic premises: (1) “Plaintiff's Complaint fails to state a breach of contract claim;” (2) “Plaintiff admits [through allegations contained in his Complaint] that SMT failed to comply with the [insurance policy's] conditions precedent.” Great Am.'s Mem. in Supp. of Mot. to Dismiss, at 7, 9. The second premise, according to Great American, requires dismissal for two independent, but related reasons. Failure to comply, or allege compliance, with the conditions precedent of the insurance policy contract both prevents Plaintiff from bringing a “legal action” against Great American, and “negates coverage under the Policy.” Id. 9-14. In other words, because SMT did not comply with the conditions precedent as laid out in the contract, he cannot bring suit under the contract, and the policy coverage terminated, thus there was no effective obligation under which Plaintiff can state a claim.

         Specifically, Great American focuses upon Plaintiff's, or SMT's, failure “to submit to an examination under oath [or] provide proof of loss.” Great Am.'s Mem. in Supp. of Mot. to Dismiss, at 12. According to the insurance policy contract, those two conditions precedent must be fulfilled before “[an insured] may bring a legal action against [Great American] under this [policy].” Id. at 3. Great American points out that Plaintiff “admits that SMT failed to comply” with these requirements. Id. at 9. As such Great American argues that Plaintiff cannot maintain a lawsuit against it under the insurance policy contract.

         In addition to arguing that Plaintiff improperly commenced this action, Great American contends that Plaintiff's failure to satisfy those two conditions precedent prior to filing suit “negates coverage under the Policy.” Id. at 13. Failure to comply with the policy contract's terms, Great American reasons, breaches the contract, and thereby ends coverage. Thus, where no coverage exists, Great American contends that Plaintiff may not maintain his bad faith claims on behalf of SMT and the Coal Group. Cognizant of these arguments made by Great American, the Court reviews Plaintiff's Complaint under the 12(b)(6) standard.

         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).

         Hearing this case under federal question subject matter jurisdiction with supplemental state law claims, the Court must apply the choice of law analysis of the forum state to determine what law applies to the claims. See In re Merritt Dredging Co., Inc., 839 F.2d 203, 205-06 (4th Cir. 1988) (“[I]n absence of a compelling federal interest which dictates otherwise, the [rule of applying the forum's choice of law analysis] should prevail . . . .”); see also Mitchell v. HCL Am., Inc., 190 F.Supp.3d 477, 487-88 (E.D. N.C. 2016) (“In federal question cases with supplemental state law claims, the court applies the forum state's choice of law analysis absent an ‘overwhelming federal policy that requires the court to formulate a choice of law rule as a matter of independent federal judgment.'” (quoting In re Merritt Dredging Co., Inc., 839 F.2d at 206)). As such, the Court applies West Virginia conflicts of law principles to determine which law applies to the insurance policy.

         Under West Virginia conflicts of law analysis, a court reviewing questions regarding an insurance policy should apply the conflicts rules applicable to contracts. Howe v. Howe, 625 S.E.2d 716, 721 ( W.Va. 2005). Generally, the law of the state where the policy was issued and performed controls an insurance contractual relationship. Kenney v. Indep. Order of Foresters, No. 3:12-CV-123, 2013 WL 1314596, at *4 (N.D. W.Va. Mar. 27, 2013) (citing Lee v. Saliga, 373 S.E.2d 345, 348 ( W.Va. 1988)); see also Mass. Mut. Life Ins. v. Factory Mut. Ins. Co., No. 3:05-CV-69, 2007 WL 3273452, at *2 (N.D. W.Va. 2007) (citing same). But West Virginia courts recognize multiple exceptions to that general rule of application. The place where the policy was issued and performed will control unless: (1) the parties made a choice of applicable law in the contract; (2) the other state law offends West Virginia public policy; or (3) another state has a more “significant relationship” to the parties or the policy. See Howe, 625 S.E.2d at 721-22; Kenney, 2013 WL 1314596, at *4; Mass. Mut. Life Ins. Co., 2007 WL 3273452, at *1-*2. In this case, the policy was issued in Kentucky, to a Kentucky company, and the loss at the center of the claims against Great American occurred in Kentucky. See Great Am.'s Mem. in Supp. of Mot. to Dismiss, at 6. And none of the three exceptions to the general rule apply in this case. Therefore, the Court will proceed to analyze Great American's motion under the substantive law of Kentucky.

         Turning to Great American's first argument for dismissal, the Court does not find it convincing. Great American argues that because “Plainitff's Complaint . . . only vaguely alleged that Great American has breached its contract, ” Plaintiff's claims must be dismissed as a matter of law. Great Am.'s Mem. in Supp. of Mot. to Dismiss, at 7-8. Great American attempts to advance its argument syllogistically, building upon two predicates. First, it asserts that “a first-party bad faith claim is predicated upon providing a breach of contract claim.” Great Am.'s Reply in Supp., ECF No. 37, at 2-3 (emphasis original). Second, Great American notes that Plaintiff has admitted that he has not stated a claim for breach of contract. Id. Therefore, says Great American, Plaintiff's bad faith claims must fail. Id. This, however, distorts the elements for a bad faith claim, as constructed by Kentucky courts.

         Under Kentucky law, a plaintiff may maintain a bad faith claim based upon any, or all, of these sources: a common law duty of good faith or statutory duties under either the Consumer Protection Act (Ky. Rev. Stat. Ann. § 367.110 et seq.) or the Unfair Claims Settlement Practices Act (Ky. Rev. Stat. Ann. § 304.12-230). Davidson v. Am. Freightways, Inc., 25 S.W.3d 94, 99-100 (Ky. 2000). Despite the distinct sources of a bad faith claim, the Supreme Court of Kentucky distilled the requirements of each type of bad faith claim into a single test. Id. The test consists of three elements that an insured must prove:

(1) the insurer must be obligated to pay the claim under the terms of the policy; (2) the insurer must lack a reasonable basis in law or fact for denying the claims; and (3) it must be shown that the insurer either knew there was no reasonable basis for denying the claim ...

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