Travelers Indem. Co. of Conn. v. Richard McKenzie & Sons, Inc.

• Decision Date: 26 August 2021
• Docket Number: No. 18-13172,18-13172
• Citation: 10 F.4th 1255
• Parties: The TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, Plaintiff-Appellee, v. RICHARD MCKENZIE & SONS, INC., Hermanns Real Estate Ventures, LLC, Defendants-Appellants.
• Court: U.S. Court of Appeals — Eleventh Circuit

10 F.4th 1255

The TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, Plaintiff-Appellee,

v.RICHARD MCKENZIE & SONS, INC., Hermanns Real Estate Ventures, LLC, Defendants-Appellants.

No. 18-13172

United States Court of Appeals, Eleventh Circuit.

August 26, 2021

Sina Bahadoran, Aaron Warren, Michael David Ford, Clyde & Co US, LLP, MIAMI, FL, for Plaintiff - Appellee.

Kenneth W. Waterway, Berger Singerman, LLP, FORT LAUDERDALE, FL, Ashley Cooper, Saxe Doernberger & Vita, PC, NAPLES, FL, for Defendant - Appellant RICHARD MCKENZIE & SONS, INC.

Gregory David Podolak, Saxe Doernberger & Vita, PC, TRUMBULL, CT, Ashley Cooper, Saxe Doernberger & Vita, PC, NAPLES, FL, Jose A. Rodriguez, BRANDON, FL, Oscar E. Soto, Soto Law Group, PA, FORT LAUDERDALE, FL, for Defendant - Appellant HERMANNS REAL ESTATE VENTURES, LLC.

Mark Andrew Boyle, Sr., Alexander Brockmeyer, Molly Ann Chafe Brockmeyer, Boyle Leonard & Anderson, PA, FORT MYERS, FL, for Amicus Curiae UNITED POLICYHOLDERS.

Before BRANCH, TJOFLAT, and ED CARNES, Circuit Judges.

ED CARNES, Circuit Judge:

It is sometimes said that the only way to find out if you can trust someone is to trust them. As this case proves, there is much truth in that adage. And in a related one, which is that trusting someone can lead to litigation.

I. FACTS AND PROCEDURAL HISTORY

When Richard Hermanns bought his first citrus grove in 2009, he hired Richard McKenzie — who had experience with starting and managing citrus groves — to take care of things for him.¹ He relied on McKenzie for everything: clearing the land, buying the supplies, planting the trees, keeping the trees healthy, maintaining the groves, and picking the fruit. McKenzie, in turn, billed Hermanns for materials purchased and labor expended. Hermanns left everything in McKenzie's hands and did not visit the groves often.

Trusting McKenzie was a mistake. Hermanns would later allege that McKenzie billed him for hundreds of thousands of dollars’ worth of trees that were never planted, fertilizer that was never applied, and diesel fuel that was never delivered. He also stole some of Hermanns’ diesel fuel for his own use. And through his negligence, McKenzie damaged Hermanns’ groves: He planted only 115 trees per acre instead of the industry-standard 150, planted many of the trees too deep, failed to apply enough fertilizer and pesticides, failed to dig enough drainage ditches, and generally did a bad job of caring for the trees. Hermanns discovered McKenzie's fraud, theft, and negligence and fired him.

Hermanns eventually convinced the State Attorney's Office in Polk County to charge McKenzie for his alleged fraud and theft, but what happened with that criminal case does not matter given how we are deciding this case. On the civil side of things, Hermanns sued McKenzie in Florida state court. His original complaint alleged facts about McKenzie falsely billing Hermanns and stealing from him, and based on that it asserted claims for breach of contract, breach of fiduciary duty, and an equitable accounting. The complaint had no claim for negligence. Almost a year later, and two days after finding out that McKenzie had an insurance policy issued by Travelers, Hermanns moved to amend the complaint to add a claim for negligence; that motion was granted. Hermanns notified Travelers of the amended complaint against McKenzie. Travelers disclaimed coverage.

In the state court litigation, Hermanns and McKenzie entered into a settlement agreement. They settled the three non-negligence claims for $200,000, which was to be paid by McKenzie personally. But as to the negligence claim, they attempted to bring that part of the settlement within the " Coblentz doctrine," meaning McKenzie would not be on the hook for paying it. Their attempt consisted of agreeing that McKenzie owed to Hermanns $2,965,750 in damages for the negligence claim, but that Hermanns would not try to collect any of the judgment from McKenzie. Instead, Hermanns could only go after Travelers for those damages. As contemplated by their settlement agreement, the state trial court entered a consent judgment awarding Hermanns $2,965,750 on his negligence claim against McKenzie.

Travelers filed this declaratory judgment action against McKenzie and Hermanns in March 2017. It sought a judgment declaring that, based on the insurance policy's provisions, it had no duty to defend against or indemnify McKenzie for Hermanns’ original state court complaint, or his amended state court complaint, or the state court consent judgment that had been entered for Hermanns against McKenzie. Travelers also asked the court to rule that the consent judgment was unenforceable because it was the result of collusion between McKenzie and Hermanns and was for an unreasonable amount of money.

Hermanns filed in federal court two counterclaims against Travelers, one alleging breach of contract and one seeking a declaratory judgment. The breach of contract claim was based on Travelers’ refusal to defend and indemnify McKenzie against Hermanns’ state court lawsuit, which Hermanns claimed Travelers was required to do by McKenzie's insurance policy. The declaratory judgment that Hermanns sought was one stating that the state court consent judgment was enforceable against Travelers. McKenzie later joined Hermanns’ counterclaims against Travelers.

Travelers moved for summary judgment on all the claims and counterclaims. Hermanns moved for partial summary judgment, contending that because Travelers breached its duty to defend, it was liable for the costs that McKenzie incurred in defending the state-court action and for the attorney's fees that Hermanns incurred in bringing his counterclaim. Hermanns sought the attorney's fees McKenzie had incurred in defending against Hermanns’ lawsuit because in the settlement Hermanns had been assigned all of McKenzie's rights under the insurance policy. McKenzie joined Hermanns’ motion for partial summary judgment.

The district court granted summary judgment in favor of Travelers on all of the claims and counterclaims. On the consent judgment issue, the court ruled that it was unenforceable for three independent reasons. First, it was for an unreasonable dollar amount. Second, it was collusive and entered into in bad faith. Third, McKenzie's insurance policy did not cover the allegations in Hermanns’ complaint. Explaining the third reason, the court relied on two exclusions in McKenzie's insurance policy, one for damage that the insured "expected or intended" to cause and one for damage caused to real property by the insured's "operations." On the duty to defend counterclaim, the court concluded that those same two policy exclusions meant that Travelers had no duty to defend McKenzie against Hermanns’ complaint.

This is McKenzie's and Hermanns’ appeal. They contend that there are genuine issues of material fact concerning the enforceability of the settlement agreement and that they are entitled to summary judgment on Travelers’ duty to defend McKenzie against Hermanns’ complaint.

II. ANALYSIS

We start with the duty to defend, and we end there because it also determines the enforceability of the settlement agreement. If Hermanns and McKenzie lose on the duty to defend, they lose on everything. And the district court ruled that they lost on the duty to defend. One of the bases for its ruling was that the damages alleged in Hermanns’ amended complaint were not covered by the insurance policy because of applicable policy exclusions. We agree. And because there was no duty to defend, there was no wrongful refusal by Travelers to defend McKenzie, which means the settlement agreement is unenforceable.

When an insurance company wrongfully refuses to defend its insured, Florida law lets the insured settle the case himself in exchange for the plaintiff's promise to collect the settlement only from the insurance company. That type of settlement is called a " Coblentz agreement," named for the Fifth Circuit case that first approved one. See Coblentz v. Am. Sur. Co. of N.Y., 416 F.2d 1059 (5th Cir. 1969).²

A Coblentz agreement can be enforced only if the plaintiff can make several showings. The agreements "traditionally ha[ve] occurred where an insurer breaches its duty to defend," Perera v. U.S. Fid. & Guar. Co., 35 So. 3d 893, 900 (Fla. 2010), and the plaintiff must show "coverage, wrongful refusal to defend, and that the settlement was reasonable and made in good faith," Quintana v. Barad, 528 So. 2d 1300, 1301 n.1 (Fla. 3d DCA 1988). Hermanns’ and McKenzie's claims fail at the start: they can show neither coverage nor a wrongful refusal to defend. And for purposes of this case, the analysis for those two requirements is the same. Cf. Fun Spree Vacations, Inc. v. Orion Ins. Co., 659 So. 2d 419, 422 (Fla. 3d DCA 1995) ("Since [the insurer] had no duty to defend the insureds, correspondingly, there is no duty to indemnify them nor to pay the consent judgment.").

Under Florida law, "an insurer's duty to defend its insured against a legal action arises when the complaint alleges facts that fairly and potentially bring the suit within policy coverage." Jones v. Fla. Ins. Guar. Ass'n, 908 So. 2d 435, 442–43 (Fla. 2005). The duty to defend is a broad one, broader than the duty to indemnify, and "[t]he merits of the underlying suit are irrelevant." Mid-Continent Cas. Co. v. Royal Crane, LLC, 169 So. 3d 174, 181 (Fla. 4th DCA 2015). We determine whether an insurer has a duty to defend its insured based only on "the eight corners of the complaint and the policy," id. at 182, and only as the complaint's alleged facts are "fairly read," Fun Spree Vacations, Inc., 659 So. 2d at 421. The "facts" we consider in evaluating the duty to defend come solely from the complaint, regardless of the actual facts of the case and regardless of any later developed and contradictory factual record. Jones, 908 So. 2d at 442–43. "Any doubts regarding the duty to defend must be resolved in favor of the insured," id. at 443, and "where a...