M & K Rest. LLC v. Farmers Ins. Co.

• Decision Date: 08 July 2014
• Docket Number: Case No. 4:12–cv–00783 KGB.
• Citation: 29 F.Supp.3d 1204
• Court: U.S. District Court — Eastern District of Arkansas
• Parties: M & K RESTAURANT LLC, et al., Plaintiffs v. FARMERS INSURANCE COMPANY, INC., Dennis Ray Henley d/b/a Henley Insurance Agency, John Does 1–10, Defendants.

29 F.Supp.3d 1204

M & K RESTAURANT LLC, et al., Plaintiffs

v.FARMERS INSURANCE COMPANY, INC., Dennis Ray Henley d/b/a Henley Insurance Agency, John Does 1–10, Defendants.

Case No. 4:12–cv–00783 KGB.

United States District Court, E.D. Arkansas, Western Division.

Signed July 8, 2014.

Jason W. Earley, Chisenhall, Nestrud & Julian, P.A., Little Rock, AR, for Plaintiffs.

Richard N. Watts, Watts, Donovan & Tilley, P.A., Donald H. Bacon, Edie R. Ervin, Friday, Eldredge & Clark, LLP, Little Rock, AR, William R. Dejean, Nielsen Carter & Treas, L.L.C., Metairie, LA, for Defendants.

OPINION AND ORDER

KRISTINE G. BAKER, District Judge.

Before the Court are cross motions for summary judgment, a motion to dismiss, a motion to quash the jury demand, and a motion to strike. Plaintiffs (“the Perrys”) have moved for partial summary judgment (Dkt. No. 12). Defendant Farmers Insurance Company (“Farmers”) has responded in opposition (Dkt. No. 18), and the Perrys have replied (Dkt. No. 23). The Perrys seek partial summary judgment in their favor that Farmers breached a flood insurance contract with the Perrys. Farmers in its cross motion for summary judgment raises several arguments in support of its position that the Perrys' claims are barred and that the Perrys should not recover under the policies (Dkt. No. 46). The Perrys have responded to that motion (Dkt. No. 69). Additionally, Farmers has filed a motion to dismiss (Dkt. No 44) to which the Perrys have responded (Dkt. No. 66). Farmers also filed a motion to quash the jury demand (Dkt. No. 39) to which the Perrys have responded (Dkt. No. 43) and Farmers has replied (Dkt. No. 62). Finally, the Perrys have filed a motion to strike (Dkt. No. 67).

Farmers participates in the United States' National Flood Insurance Program (“NFIP”), regulated primarily by the Federal Emergency Management Agency (“FEMA”), as a Write–Your–Own carrier (“WYO”).See 42 U.S.C. § 4071. WYOs issue flood insurance policies underwritten by the U.S. Treasury and must use the Standard Flood Insurance Policy (“SFIP”) promulgated by federal regulations at 44 C.F.R. § 61, app. A. In return for administering these SFIPs, WYOs receive profits for their participation based upon a percentage of premiums paid. See Eddins v. Omega Ins. Co., 825 F.Supp. 752, 753 (N.D.Miss.1993). Farmers and the Perrys represent that, on May 2, 2011, separate defendant Dennis Henley sold the Perrys an SFIP for their motel property in Lonoke County, Arkansas, and that one day later, on May 3, 2011, the Perrys' property flooded. The instant action and contested issues flow from that insurance policy and the ensuing flood. For the reasons set forth below, the Court denies both motions for summary judgment and Farmers' motion to dismiss. The Court also grants in part and denies in part the Perrys' motion to strike and Farmers' motion to quash the jury demand.

I. Jurisdiction

The Perrys claim, and Farmers admits, jurisdiction pursuant to 42 U.S.C. § 4072 and 28 U.S.C. § 1367. While § 4072 clearly allows suits against the Administrator of FEMA when the Administrator denies a claim, it does not mention actions against WYO carriers. Neither the Perrys nor Farmers have sued the Administrator of FEMA. The Eighth Circuit has never addressed directly the issue of federal jurisdiction over suits against WYO carriers under § 4072, and there is no consensus among the circuits that have. Stoner v. S. Farm Bureau Cas. Ins. Co., 2013 WL 593459 at *2 (E.D.Ark. Feb. 15, 2013) (citations omitted). All courts that have addressed the issue, however, agree that the federal question jurisdiction statute, 28 U.S.C. § 1331, grants federal courts jurisdiction over policies issued under the NFIP. Id. The Court is thus satisfied that it has jurisdiction over the instant case concerning a policy issued under the NFIP pursuant to § 1331 and can proceed to the merits of the case.

II. Factual Background

Michael and Kay Perry own M & K Restaurant LLC (“M & K”). In 2008, M & K took over operations of Perry's Motel, a small motel along Interstate 40 in Lonoke County, Arkansas. Perry's Motel has been owned by the Perry family for decades. The Perrys allege that, from 2008 to 2011, they restored the motel, financed through a home equity line of credit from Bank of the Ozarks obtained on July 10, 2008. That loan was collateralized through a mortgage on the home of the 81–year old family matriarch, Ms. Juanita Canton, who allegedly depends upon the income from the motel.

The motel property is not mentioned in the July 10, 2008, line of credit document (Dkt. No. 47–8), but a June 22, 2008, letter from Bank of the Ozarks to Mr. Perry advises that the Bank of the Ozarks could not use the motel property as collateral for a loan, since the motel was located on leased property, but notes that “the loan is to be used for renovation of the motel property and the resulting revenues used to repay the loan” (Dkt. No. 71–4, at PC 000127). The Bank instead held Ms. Canton's property located at 321 Woodlawn Drive in Lonoke as “primary collateral,” with the stipulation that a fire policy be kept on Ms. Canton's property and that a fire and flood policy be placed on the motel property (Id. ). The Perrys assert that this and other correspondence from the Bank of the Ozarks shows that income from and repairs to the motel were the driving forces behind the loan (See also id., at PC 00104–05).

The Perrys allege that in March of 2011 they sought a quote for flood insurance on Perry's Motel from separate defendant Dennis Henley. They allege that on May 1, 2011, Mr. Henley provided them a quote for the insurance coverage. On May 2, 2011, the Perrys submitted to Mr. Henley an application for flood insurance with a letter attached from Bank of the Ozarks regarding their loan, and Mr. Henley sold the Perrys an SFIP for their motel property. One day later, on May 3, 2011, Perry's Motel flooded.

Mr. Henley represented to the Perrys, and requested in the Perrys' application to Farmers, that coverage would bind immediately (Dkt. No. 12–1, PERRY 001–003). However, under the NFIP, coverage under a new contract for flood insurance generally does not become effective until 30 days after the insurance applicants complete all of their obligations for coverage. 42 U.S.C. § 4013(c)(1). This provision does not apply where “the initial purchase of flood insurance coverage” is purchased “in connection with the making, increasing, extension, or renewal of a loan.” 42 U.S.C. § 4013(c)(2)(B). Whether the Perrys' initial purchase of flood insurance coverage from defendants was purchased “in connection with the making, increasing, extension, or renewal of a loan,” specifically the nature of the Perrys' loan with the Bank of the Ozarks to finance Perry's Motel and whether the Perrys misled defendants about the nature of the loan, is contested by the parties.

On May 10, 2011, Farmers sent the Perrys a Declaration Page with a June 1, 2011, coverage beginning date (Dkt. No. 71–6, at PC 005–007). On May 11, 2011, after the Perrys complained, Farmers sent the Perrys a revised Declaration Page with a May 2, 2011, coverage beginning date (Id., at 009–010). Farmers alleges that it did so predicated on the assumption that the lender required the flood policies in connection with a loan.

The Perrys allege, and Mr. Henley corroborates that, before the Perrys began repairs on the motel, Farmers advised Mr. Henley that the Perrys would be covered for the flood damage (Dkt. No. 12–2, ¶ 21). In his deposition, Mr. Henley states that he contacted Farmers to ask if demolition had been fully approved and that Farmers responded, “Yes, they can do it.” (Dkt. No. 72–1, at 48). The Perrys further allege that, during the adjustment of their claims, the adjuster retained by Farmers, Anthony Childers, who was dispatched to Perry's Motel after the flood waters receded, was called away to deal with claims arising from Hurricane Irene. For this reason, his adjustment of the Perrys' claims was delayed months while the Perrys spent over $200,000.00 on repairs (Dkt. No. 12–2, ¶¶ 22–24).

On June 7, 2011, Mr. Childers issued a report to Farmers recommending that Farmers deny the Perrys' claim “due to the fact that the policy was not 30–days into its effective period.” (Dkt. No. 47–15). It goes on to advise, that the

loan documentation papers state that there is no mortgage on the insured property due to the fact the property is constructed on leased property. The lending organization would not issue mortgage on the insured property but took mortgage on residence owned by the policy holder to make renovations to the hotel. It was stated in the loan papers in 2008 that flood policy should be taken for the hotel property. The insured did not pursue flood policy until an impending Flood–In–Progress threatened to damage the risk.

Id. Mr. Childers issued another report on July 8, 2011, that stated the loan documentation was sufficient to waive the 30–day waiting period but to deny the claim based on a flood-in-progress which he claimed began on April 26, 2011, before the Perrys applied for the policy (Dkt. No. 18–8). Mr. Childers issued a third report on September 21, 2011, wherein he amends his prior final report to state that there was no flood in progress at the time the Perrys secured flood insurance (Dkt. No. 23–2, PC 000191–93; see also Dkt. No. 72–5, at 46, 53–61 (Mr. Childers's deposition explaining the research that led to his change of opinion regarding the flood-in-progress issue); Dkt. No. 23–5, PC 000417–18 (Mr. Childers's technical explanation as to why there was no flood in progress at issue with regard to the Perrys' claim)).

On June, 27, 2011, the Perrys submitted to Farmers proof of loss forms claiming zero dollars ($0) (Dkt. No. 18–10). The Perrys allege that this was done “as instructed by” Mr. Childers (Dkt. No. 12–2, ¶ 19). Mr. Childers in his deposition stated that he believes he filled out the proofs of loss with the zero dollar amount and believed that...