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

• Citation: 326 F.Supp.3d 1332
• Decision Date: 28 June 2018
• Docket Number: Case No. 8:17–cv–2106–T–23CPT
• Parties: The TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, Plaintiff, v. RICHARD MCKENZIE & SONS, INC., and Hermanns Real Estate Ventures, LLC, Defendants.
• Court: U.S. District Court — Middle District of Florida

326 F.Supp.3d 1332

The TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, Plaintiff,
v.
RICHARD MCKENZIE & SONS, INC., and Hermanns Real Estate Ventures, LLC, Defendants.

Case No. 8:17–cv–2106–T–23CPT

United States District Court, M.D. Florida, Tampa Division.

Signed June 28, 2018

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Aaron L. Warren, Michael D. Ford, Sina Bahadoran, Clyde & Co. U.S. LLP, Miami, FL, for Plaintiff.

Kenneth W. Waterway, Waterway Black P.A., Oscar E. Soto, Jose A. Rodriguez, The Soto Law Group, PA, Fort Lauderdale, FL, Ashley Leigh Cooper, Saxe Doernberger & Vita, P.C., Naples, FL, Gregory David Podolak, Saxe Doernberger & Vita, P.C., Trumbull, CT, for Defendants.

ORDER

STEVEN D. MERRYDAY, UNITED STATES DISTRICT JUDGE

Citrus-grove owner Richard Hermanns attempts to squeeze $2.965 million from Travelers Indemnity Company based on Hermanns's consent judgment against Richard McKenzie, the former manager of Hermanns's grove and a former insured under a Travelers Commercial General Liability (CGL) policy with a "farm care-taker liability" endorsement. The consent judgment results from an episode in which McKenzie—according to Hermanns's allegations in earlier civil and criminal actions—allegedly misappropriated fuel, trees, and fertilizer from the grove and breached the parties' contract. Hermanns's effort to concentrate on the endorsement yields no fruit: The insurance policy excludes coverage, the consent judgment is unreasonable, and the insurer owed no duty to defend.

BACKGROUND

Convinced that citrus growing would yield a large profit, Richard Hermanns bought 265 acres of citrus groves in Polk County in 2010 and 2011. Before the first purchase, Hermanns (through his partnership, Hermanns Real Estate Ventures) requested an appraisal from Brent Burris, a knowledgeable appraiser of agricultural real estate. Burris questioned the suitability of the tract for growing and observed that the land was prone to cold and standing water and that the sandy soils were not conducive to growing citrus. (Doc. 107–3 at 19–30) Despite Burris's appraisal, Hermanns bought a 100–acre grove in 2010, and the next year Hermanns bought a 165–acre grove contiguous to the first grove. Soon after buying the first grove, Hermanns hired Richard McKenzie's company, Richard McKenzie & Sons, to "maximize the grove's profit"

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and in effect provided McKenzie carte blanche in the operation of the grove. (Hermanns Depo. at 35–36) Rather than charge a management fee per acre, McKenzie billed Hermanns for supplies purchased and labor expended, but—with Hermanns' understanding and tacit approval—McKenzie "mark[ed] up" the bills. (Hermanns Depo. at 35–36) For example, McKenzie might charge Hermanns ten dollars for a pound of fertilizer purchased for eight dollars.

McKenzie hired Matthew Carter, another grove caretaker, to re-plant a fraction of the grove, which the parties call the "Sinkhole Road grove," and to spray pesticide on the trees. From January 2013 until July or August 2013, Carter worked on the grove, but late that summer McKenzie stopped paying Carter, who inquired directly with Hermanns about the money owed to Carter for working on Hermanns's grove. (Carter Depo. at 25, 37, 64–66)

Carter's inquiry prompted Hermanns to scrutinize McKenzie's bills. After reviewing the bills and consulting with Carter (who identified several instances in which McKenzie charged Hermanns for "Carter services" never provided by Carter) Hermanns pressed the State Attorney for Polk County to charge McKenzie with theft. Finding probable cause to suspect that McKenzie deliberately billed Hermanns for $113,000 in trees never delivered to the Sinkhole Road grove, billed Hermanns for fuel that McKenzie used for his own purposes, and billed Hermanns for fertilizer and other products not applied to Hermanns's crop, the State Attorney charged McKenzie with a scheme to defraud and with grand theft exceeding $100,000. These criminal charges remain pending in state court.

Before the criminal action, Hermanns asked Kyle Story, another grove care-taker, to assess the condition of the grove. Several sights struck Story. First, the groves appeared "thinly" planted. In 2010 and 2011, most growers planted about 150 trees per acre, but Story counted just 115 trees per acre. Second, many trees appeared injured by water saturation. Story later concluded that inadequate drainage and improper maintenance of the irrigation system left stagnant water in the grove for days or weeks. Third, most of the trees appeared infected by "huanglongbing," more commonly known as greening, a disease that impedes a root's absorption of nutrients. The incurable disease reduces a tree's yield, and the remaining fruit is misshapen, unsightly, and unsuitable for sale except to an orange-juice producer. (Story Depo. at 18–19) Eventually, greening kills the tree. Story and Carter initially thought that greening affected at least 80% of the grove, an infection rate similar to most groves in Florida. Hermanns concluded that greening affected most if not all of his trees. (Hermanns Depo. at 101) Late in 2013, Hermanns fired McKenzie and hired Story to manage the grove.

In February 2015, Hermanns sued McKenzie in the Circuit Court for Polk County. Hermanns alleged breach of an oral contract (count one) and breach of fiduciary duty (count three) and demanded an equitable accounting (count two) for the money paid to McKenzie under the contract. In the breach-of-contract claim, Hermanns alleged that his damages included the money paid to McKenzie and the profit lost because of McKenzie's mismanagement. In the accounting claim, Hermanns alleged that McKenzie acted "with the intent to permanently deprive" Hermanns of "its monies and profits[,] otherwise appropriating same as its own or for its own uses." Through discovery, Hermanns learned that from 2009 to 2013 Travelers Indemnity Company insured McKenzie's company under a CGL with an endorsement for "farm care-taker liability." Although the CGL obligated McKenzie to

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notify Travelers "as soon as practicable of an 'occurrence' or an offense" that might result in a claim (Doc. 105–10 at 55), the record contains no evidence that McKenzie promptly notified Travelers about an "occurrence" or about Hermanns's claims. McKenzie believes that he notified Travelers about the state-court civil action at some unspecified "later time." (McKenzie Depo. at 75)

In February 2016, less than two weeks after the State Attorney charged McKenzie with grand theft and a scheme to defraud, Hermanns amended the civil complaint to add a negligence claim (count four). Hermanns cannot explain the purpose of the amendment and cannot recall "any new facts or evidence" that warranted the amendment. (Hermanns Depo. at 70) As in the breach-of-contract claim, Hermanns sought in the negligence claim profit lost because of McKenzie's conduct. After the amended complaint, Hermanns provided McKenzie with an "expert" opinion letter (Doc. 107–21) signed by Story, the manager whom Hermanns hired to replace McKenzie. Without receiving compensation other than that paid for managing the grove (Story Depo. at 56), Story opined in the letter that Hermanns lost at least $464,625 in "net income" in 2016 from McKenzie's purportedly "negligent" care and maintenance. Story wrote that these damages "will continue for the next 20 years because of the thin planting" and concluded that Hermanns incurred "damages in excess of $2,965,750." Despite claiming that damages would continue for twenty years, Story never calculated the damages beyond 2021 because Story felt that "reaching out beyond that period of time was irresponsible." (Story Depo. at 104) Erin Moore, Travelers' corporate representative, testified that Travelers learned about the state-court action when Hermanns's counsel demanded coverage for McKenzie based on the amended complaint. (Moore Depo. at 26)

McKenzie's attorney in the state-court civil action, Ken Waterway, never retained a rebuttal expert to analyze and refute Story's damages calculation. Waterway's "investigation" of the claimed damages consisted only of providing the Story letter to McKenzie and asking for McKenzie's thoughts on the letter. Sometime in the fall of 2016, Hermanns and McKenzie agreed to settle the civil action. Under the settlement, McKenzie agreed to pay $200,000 to resolve the claims for breach of contract, for an equitable accounting, and for breach of fiduciary duty. On count four, the negligence claim, McKenzie agreed to a consent judgment against him for $2,965,750, but Hermanns agreed not to execute against McKenzie. Instead, McKenzie assigned to Hermanns all of McKenzie's rights under the Travelers CGL, including the right to sue for breach of contract and, if Hermanns successfully establishes coverage in this action, for bad faith. Finally, Hermanns agreed to recommend to the State Attorney the resolution "most favorable" to McKenzie in the criminal action. (Doc. 107–19 at 6) Hermanns understood the provision as obligating Hermanns—assuming McKenzie pays the $200,000—to discourage the State Attorney's pursuing jail time, and McKenzie contemplated a pretrial diversion in which he would serve no jail time.

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