World Harvest Church v. Guideone Mut. Ins. Co.

• Court: U.S. Court of Appeals — Eleventh Circuit
• Writing for the Court: Carnes
• Citation: World Harvest Church v. Guideone Mut. Ins. Co., 586 F.3d 950 (11th Cir. 2009)
• Decision Date: 30 October 2009
• Docket Number: No. 08-17258.
• Parties: WORLD HARVEST CHURCH, INC., Plaintiff-Appellant, v. GUIDEONE MUTUAL INSURANCE COMPANY, Defendant-Appellee.

586 F.3d 950

WORLD HARVEST CHURCH, INC., Plaintiff-Appellant, v. GUIDEONE MUTUAL INSURANCE COMPANY, Defendant-Appellee.

No. 08-17258.

United States Court of Appeals, Eleventh Circuit.

October 30, 2009.

Amy Lin Hadra, Paul Edwin Nystrom, III, Andrew J. Ekonomou, Ekonomou, Atkinson & Lambros, LLC, Atlanta, GA, for Plaintiff-Appellant.

Linda Bridgewater Foster, Rahul Karnani, Wiessman, Nowack, Curry & Wilco, Atlanta, GA, for Defendant-Appellee.

Appeal from the United States District Court for the Northern District of Georgia.

Before CARNES, FAY and ALARCÓN,^* Circuit Judges.

CARNES, Circuit Judge:

This is an insurance case raising some questions of Georgia law.

Without issuing a written reservation of rights, an insurer assumed the defense of a lawsuit for almost eleven months but stopped defending near the end of the discovery period because it decided that there was no coverage. At that point the policy holder hired its own attorneys to defend the lawsuit. About one month after the new attorneys entered an appearance in the lawsuit, the insurer filed a motion for summary judgment. The policy holder's new attorneys filed a motion requesting more time for discovery, and that motion was denied. The case was transferred to another judge, who partially granted summary judgment to the plaintiff and awarded damages. The final judgment was entered about 17 months after the policy holder's new lawyers had filed notice of their appearance in the case. An appeal was taken but the plaintiff and policy holder later settled for a damage award of $1 million.

The policy holder, who is the plaintiff in this case, has filed this lawsuit against the insurer in an attempt to force the insurer to treat the earlier judgment as covered under the policy even though it actually was not.¹ Whether that attempt will succeed depends on the doctrine of waiver and estoppel.

Under Georgia law, "risks not covered by the terms of an insurance policy, or risks excluded therefrom, while normally not subject to the doctrine of waiver and estoppel, may be subject to the doctrine where the insurer, without reserving its rights, assumes the defense of an action or continues such defense with knowledge, actual or constructive, of noncoverage." Prescott's Altama Datsun, Inc. v. Monarch Ins. Co., 253 Ga. 317, 319 S.E.2d 445, 446 (1984) (emphasis added) (citations omitted). The first issue this case presents is whether the insurer's actions effectively reserved its rights. If the answer to that issue is, as we believe, that they did not reserve its rights, the second and more difficult issue is whether the waiver and estoppel doctrine requires a showing that the insured actually was prejudiced by the insurer's assumption of the defense. And, if actual prejudice must be shown, the third issue is whether the facts of this case do show it.

The only way we can be sure that the state law questions that underlie those three issues are answered correctly is to certify them to the Georgia Supreme Court. See Blue Cross & Blue Shield of Ala., Inc. v. Nielsen, 116 F.3d 1406, 1413 (11th Cir.1997) (noting that the final arbiter of state law is the state supreme court, which means it is the only authoritative voice on that state's law).

I.

Between 1995 and 1999, Michael E. Gause and Charles Richard Homa operated an automobile title lending business called Cash 4 Titles or C4T, which was actually an elaborate Ponzi scheme. See SEC v. Homa, 514 F.3d 661, 664 (7th Cir.2008). Innocent investors in that scheme lost more than $165,000,000. Id. During that time Gause, who was a member of World Harvest Church, donated a great deal of money to it. His donations included a $1 million wire transfer from a Cayman Islands bank account.

In October 1999 government officials arrested Gause and Homa for operating the Ponzi scheme. SEC v. Homa, No. 99 C 6895, 2004 WL 1093492, at *1 (N.D.Ill. May 13, 2004) (unpublished). The Securities and Exchange Commission then filed a civil enforcement lawsuit against Gause, Homa, and the other Ponzi scheme participants.² Id. World Harvest was not a defendant in the SEC lawsuit. See id.

The SEC lawsuit proceeded in federal district court in Illinois, and in November 1999 that court appointed Phillip Stenger as Receiver to marshal and conserve for the benefit of investors the assets of the individuals and the entities involved in the Ponzi scheme. Id. ("The Receiver's general mandate is to marshal C4T related assets for the benefit of investors."). At the conclusion of the SEC lawsuit, Homa consented to a civil judgment in the amount of $157,993,830.25, plus $35,248,523.55 in prejudgment interest. Homa, 514 F.3d at 665 n. 3. Gause also agreed to make a civil disgorgement in the amount of $193,242,353.80. Stenger v. World Harvest Church, Inc., No. Civ. A.1:04CV00151-RW, 2006 WL 870310, at *1 (N.D.Ga. March 31, 2006) (unpublished). In 2000 Homa pleaded guilty to criminal charges of securities fraud and served time in prison. See id.; Homa, 514 F.3d at 665 n. 4. In 2001 Gause pleaded guilty to securities fraud in federal district court in New York and was also sentenced to prison. Stenger, 2006 WL 870310, at *1.

Continuing his work as Receiver, Stenger sought to recover additional money for the people who had invested in the Ponzi scheme. In February 2001 Stenger demanded that World Harvest return about $1.8 million of Gause's donations. He sent World Harvest a letter asserting that:

[s]ince the money contributed by Gause and Pearson through their related entities was fraudulently obtained from the Cash 4 Titles ponzi scheme, the transfers were clearly fraudulent conveyances. It makes no difference that the church may have received the funds in good faith or that the money may have already been spent on religious or charitable activities. Controlling case law makes it clear that under such circumstances the Receiver is entitled to recover all funds and assets that the church received from Michael Gause, Dean Pearson and their related entities.

World Harvest did not return the money, so in November of 2002 Stenger filed a lawsuit against it in federal court in Illinois asserting fraudulent transfer and unjust enrichment claims. In February of 2003, Julie Loehr, Office Administrator for World Harvest, sent a letter to GuideOne Mutual on behalf of Pastor Mirek Hufton, informing GuideOne Mutual that the church had been named as a defendant in the Illinois lawsuit. Loehr's letter asked GuideOne Mutual to "provide clarification concerning either coverage for litigation costs or any indemnification coverage." Because the lawsuit had been filed in Illinois, GuideOne Mutual's Indianapolis office, GuideOne Elite Insurance Company, reviewed the claim.³ In February 2003 GuideOne Elite responded with a certified letter to Loehr at World Harvest expressing concern about whether World Harvest's insurance policy covered the claims in the Illinois lawsuit. The letter explained to Loehr and to World Harvest that GuideOne Elite "reserve[d] the right to deny any and all liability." GuideOne Elite ultimately concluded that the policy did not cover the Illinois action. The Illinois federal lawsuit was later dismissed for lack of personal jurisdiction.

In January 2004 Stenger filed a similar lawsuit (the lawsuit that would lead to this one) against World Harvest in the United States District Court for the Northern District of Georgia. The day after the lawsuit was filed, counsel for World Harvest called Dale Hubbell, who worked in the GuideOne Mutual Claims Department, and informed him about that lawsuit. World Harvest's counsel followed up his phone call with a letter to Hubbell, enclosing a copy of the complaint and the other documents that had been served on World Harvest. GuideOne Mutual determined that there were potential "coverage issues," so it "split the file." What that means is that GuideOne Mutual assigned one claims adjuster, Doug Sleezer, to address liability issues and a different adjuster, Dale Hubbell, to address coverage issues.

Hubbell testified in his deposition that he was assigned to determine whether the insurance policy covered "[a]ny or some of the claims" that had been made against World Harvest in the lawsuit Stenger had filed against World Harvest in Georgia. He also testified that Sleezer was assigned to "be in charge of handling the defense of this particular case for the underlying liability claims being made against the policy holder." In the present lawsuit Hubbell testified as follows about his conversation with World Harvest's counsel about the split file:

My only conversation with [World Harvest's counsel] was, you know, we discussed early on that my handling of the case would be strictly on any coverage issues and that if he needed to talk to someone in the office about liability issues it would have to go to Mr. Doug Sleezer who would be handling the defense of the case while myself would be undertaking the issues presented under the policy discussing with [World Harvest's counsel] that, you know, we didn't see coverage but we would have to evaluate what we have currently to see if there would be coverage issues.

In March 2004 the liability adjuster hired a law firm to defend World Harvest in the Georgia lawsuit. Neither at that time nor at any time thereafter did GuideOne Mutual send World Harvest a written reservation of its right to deny coverage. On January 26, 2005, Hubbell finally did send World Harvest a letter informing it that "GuideOne will not be in a position to indemnify World Harvest Church against the claims in [Stenger's Georgia lawsuit] because the damages sought by Phillip S. Stenger are not covered under the policy." Hubbell also informed World Harvest that "effective thirty (30) days from the date of this letter, GuideOne will no longer provide World Harvest Church with a defense." In light of that decision World Harvest hired some attorneys to represent it, and they entered an appearance in...