Continental Casualty Company v. Homecorp Management, Inc. et al
MEMORANDUM OPINION AND ORDER that Continental Casualty's 69 MOTION for Summary Judgment is GRANTED in part and DENIED in part as follows: 1. Continental Casualty's claim that it has no duty to indemnify is DISMISSED without prejudice; 2. Continental Casualty's 69 Motion for Summary Judgment on its claim that it has no duty to defend is GRANTED; 3. HomeCorp Management's counterclaim is DISMISSED with prejudice; It is further DECLARED that the Real Estate Professional Erro rs and Omissions Policy, Policy No. 25414965709, issued by Continental Casualty Company to HomeCorp Management, Inc., does not impose on Continental Casualty Company any duty to defend HomeCorp Management, Inc., Herbert Scheuer, Michael Goldner, Step hen Coleman, or W. Lloyd Strickland in the case of Hart et al. v. CWCapital, LLC, et al., CV-09-900311, pending in the Circuit Court of Houston County, Alabama, or in the case of Blumberg et al. v. CWCapital, LLC, et al., CV-09-900305, pending in the Circuit Court of Houston County, Alabama; that a separate final judgment will be issued. Signed by Chief Judge William Keith Watkins on 3/29/2012. (cc, )
IN THE UNITED STATES DISTRICT COURT
FOR THE MIDDLE DISTRICT OF ALABAMA
) CASE NO. 2:10-CV-566-WKW
HOMECORP MANAGEMENT, INC., )
HERBERT SCHEUER, JAMES
CURTIS, MICHAEL GOLDNER,
STEPHEN COLEMAN, W. LLOYD
STRICKLAND, VAN E. HART JR.,
HOSEA HOLDINGS, LLC, LARRY )
BLUMBERG, LESLIE BLUMBERG, )
SECURITIES I, LLC,
MEMORANDUM OPINION AND ORDER
Before the court is Plaintiff Continental Casualty Company’s Motion for
Summary Judgment (Doc. # 69), which is accompanied by a supporting brief and
evidentiary submissions (Docs. # 70, 72). Defendant HomeCorp Management, Inc.
filed a response in opposition (Doc. # 76), which Defendants Van E. Hart, Jr., Hosea
Holdings, LLC, Larry Blumberg, and Leslie Blumberg adopted (Docs. # 77, 78).1
Defendants CWCapital Mortgage Securities I, LLC and James Curtis have not filed
responses to Continental Casualty’s Motion for Summary Judgment. HomeCorp Management
Continental Casualty replied (Doc. # 81) and filed a supplemental evidentiary
submission (Doc. # 82).
The parties contest the rights and duties under an errors and omissions
insurance policy (“Policy”) issued by Continental Casualty to HomeCorp
Management. Continental Casualty contends that it has no duty to defend or
indemnify HomeCorp Management or any of its covered insureds in two underlying
state court actions.2 HomeCorp Management admits that it does not seek coverage
under the Policy for the breach of contract claims or claims for indemnity in the
underlying lawsuits.3 (Def.’s Resp. Br. 32, 34.) The court only will address the rights
and duties of the parties in the context of the disputed claims.4 After careful
made arguments on behalf of Defendants Scheuer, Goldner, Coleman, and Strickland in its
response. Although not explicitly stated, and because the court has an independent duty to
ensure summary judgment is or is not appropriate, the court presumes for purposes of this
motion that HomeCorp Management also represented the interests of these individual
Defendants in its response.
The underlying lawsuits are Hart et al. v. CWCapital, LLC, et al., CV-09-900311
(“Hart Action”), and Blumberg et al. v. CWCapital, LLC, et al., CV-09-900305 (“Blumberg
Action”), which are both pending in the Circuit Court of Houston County, Alabama. These
cases have been consolidated. (Order (Pl.’s Ex. 9).)
HomeCorp Management does not contend that Curtis is an insured under the Policy.
(Def.’s Resp. Br. 33 n.8.) HomeCorp Management also concedes that it is not seeking coverage
for the following claims: (1) the Cross-Claim in the Blumberg Action; (2) Counts 9, 10, 11, and
12 of the Second Amended Complaint in the Hart Action; and (3) Counts 4, 6, 8, and 9 of the
Second Amended Complaint in the Blumberg Action.
These disputed claims include Counts 5, 6, 7, and 8 of the Hart Second Amended
Complaint and Counts 5 and 7 of the Blumberg Second Amended Complaint as they pertain to
HomeCorp Management, Scheuer, Goldner, Coleman, and Strickland.
consideration of the arguments of counsel, the applicable law and the record as a
whole, the court finds that Continental Casualty’s Motion for Summary Judgment is
due to be partially granted with the balance of the claims to be dismissed.
II. JURISDICTION AND VENUE
The court properly exercises subject matter jurisdiction over this action,
pursuant to 28 U.S.C. § 1332, 28 U.S.C. § 2201, and 28 U.S.C. § 2202. Personal
jurisdiction and venue are adequately pleaded and not contested.
III. STANDARD OF REVIEW
On summary judgment, the evidence and the inferences from that evidence
must be viewed in the light most favorable to the nonmovant. See Jean-Baptiste v.
Gutierrez, 627 F.3d 816, 820 (11th Cir. 2010). Hence, “‘facts, as accepted at the
summary judgment stage of the proceedings, may not be the actual facts of the case.’”
Lee v. Ferraro, 284 F.3d 1188, 1190 (11th Cir. 2002) (quoting Priester v. City of
Riviera Beach, 208 F.3d 919, 925 n.3 (11th Cir. 2000)).
“Summary judgment is appropriate if the pleadings, depositions, answers to
interrogatories, and admissions on file, together with the affidavits, if any, show there
is no genuine issue as to any material fact and that the moving party is entitled to
judgment as a matter of law.” Greenberg v. BellSouth Telecomms., Inc., 498 F.3d
1258, 1263 (11th Cir. 2007) (per curiam) (citation and internal quotation marks
omitted); see Fed. R. Civ. P. 56(a) (“The court shall grant summary judgment if the
movant shows that there is no genuine dispute as to any material fact and the movant
is entitled to judgment as a matter of law.”).
The party moving for summary judgment “always bears the initial responsibility
of informing the district court of the basis for its motion, and identifying those
portions of [the record, including pleadings, discovery materials and affidavits], which
it believes demonstrate the absence of a genuine issue of material fact.” Celotex Corp.
v. Catrett, 477 U.S. 317, 323 (1986). The movant may meet this burden by presenting
evidence indicating there is no dispute of material fact or by showing that the
nonmoving party has failed to present evidence in support of some element of its case
on which it bears the ultimate burden of proof. Id. at 322–24.
If the movant meets its evidentiary burden, the burden shifts to the nonmoving
party to establish, with evidence beyond the pleadings, that a genuine issue material
to each of its claims for relief exists. Shiver v. Chertoff, 549 F.3d 1342, 1343 (11th
Cir. 2008); Fed. R. Civ. P. 56(c). When the nonmovant fails to set forth specific facts
supported by appropriate evidence sufficient to establish the existence of an element
essential to its case and on which the nonmovant will bear the burden of proof at trial,
summary judgment is due to be granted in favor of the moving party. Celotex Corp.,
477 U.S. at 323 (“[F]ailure of proof concerning an essential element of the nonmoving
party’s case necessarily renders all other facts immaterial.”).
HomeCorp Management and HomeCorp Affordable
HomeCorp Management was created by Defendants Michael Goldner and
Herbert Scheuer in 1996 to “engage in the business of owning, managing, improving,
holding for investment, acting and otherwise dealing in real estate of all types and
kinds.” (Articles of Incorporation of HomeCorp Management, Articles II(a) & V
(Pl.’s Ex. 10).) Scheuer serves as the president of HomeCorp Management with
Goldner as the vice president/secretary. (Resp. of HomeCorp Management to Pl.’s
Interrog. 2 (Pl.’s Ex. 17).)
The two are the sole shareholders of HomeCorp
Management. (Aff. of Michael Goldner ¶ 2 (Def.’s Ex. 1).) Defendants Stephen
Coleman and W. Lloyd Strickland were employees of HomeCorp Management during
the policy period.6 (Aff. of Michael Goldner ¶ 11.)
The actual facts may be different than those stated here, although the facts as presented
are largely undisputed. See Lee, 284 F.3d at 1190.
It is unclear what positions Coleman and Strickland held with HomeCorp Management.
Continental Casualty served Strickland and Coleman with interrogatories, asking them to state
the basis for their contention that they were “Insureds” under the Policy. On March 23, 2011,
Coleman and Strickland both responded that they were an insured under the Policy but neither
asserted that he was an employee of HomeCorp Management. (Answers to Interrogs. (Pl.’s
Suppl. Exs. 2, 3).) However, Goldner’s August 3, 2011 Affidavit states that Coleman and
Strickland were employees of HomeCorp Management. Because Defendants are the nonmoving
party, it will be inferred that Coleman and Strickland were employees of HomeCorp
In 2005, Scheuer, Goldner, Coleman, and Strickland created HomeCorp
Affordable Communities, LLC7 for the purpose of engaging “in the business of
purchasing, owning, developing, constructing improvements, mortgaging, and real
property brokerage,” developing “multi-family and single family residential
developments,” and conducting “any and all commercial and residential property
development services.” (Articles of Organization of HomeCorp Affordable, Articles
III(a), V, & VIII (Pl.’s Ex. 11).) Scheuer, Goldner, Coleman, and Strickland each own
a 17.5% interest in HomeCorp Affordable and serve as the company’s managers.
(Ownership Chart (Pl.’s Ex. 16, Def.’s Ex. 2).8) HomeCorp Affordable has four other
members: Five Star Investments, LLC, which is owned by Defendant James Curtis;
Defendants Larry Blumberg and Leslie Blumberg (the “Blumbergs”); and Defendant
Hosea Holdings, LLC, which is owned by Defendant Van E. Hart, Jr. (Ownership
Chart.) Defendants adopted an operating agreement for HomeCorp Affordable, which
set out the distributions of net cash flow to Scheuer, Goldner, Coleman, and Strickland
as initial members. (HomeCorp Affordable’s Operating Agreement (Pl.’s Ex. 14).)
Management as this entitles them to coverage under the Policy.
HomeCorp Affordable is not a party to this action.
These exhibits are the same and contain a chart of the entities that own Oak Creek
Acquisition of Oak Creek Apartments9
In March 2006, HomeCorp Affordable entered into a contract to purchase Oak
Creek Apartments, a 216-unit apartment complex located in Douglasville, Georgia.
To close on the purchase of Oak Creek Apartments and to obtain financing from
Defendant CWCapital, LLC, HomeCorp Affordable “created a complex structure of
related entities,” which included Oak Creek Partners, LLC, Oak Creek Home, LLC,
and Douglas Company, LLC. (Hart Action Second Am. Compl. ¶ 25.) HomeCorp
Affordable owned 92% of Oak Creek Home and also served as Oak Creek Home’s
manager. (Ownership Chart; Oak Creek Home, LLC’s Operating Agreement (Pl.’s
Ex. 15).) Oak Creek Home and Douglas Company each owned a 50% interest in Oak
Creek Partners, with Oak Creek Home serving as its manager. (Ownership Chart.)
Oak Creek Partners was the entity that ultimately purchased Oak Creek Apartments.
The apartments were to be managed by HomeCorp Management.
The purchase of the property was financed through a combination of equity and
debt. To fund the equity portion, HomeCorp Affordable raised more than $1,750,000
through the sale of membership interests in Douglas Company. To fund the debt
portion, Oak Creek Partners obtained a $7,200,000 loan from CWCapital. (Cash
Unless otherwise noted, these facts are alleged in the complaints of the underlying
lawsuits. (See Pl.’s Exs. 2, 3.)
Management Agreement (Def.’s Ex. 5).) The collateral on the loan from CWCapital
included the apartment complex and personal guaranties. Initially, CWCapital
required guaranties from “key principals,” which included Scheuer, Goldner,
Coleman,10 and Strickland (the managers of HomeCorp Affordable), as well as Curtis
(a member of HomeCorp Affordable). After CWCapital determined that these key
principals had insufficient assets to support the loan, CWCapital required HomeCorp
Affordable to find additional guarantors. HomeCorp Affordable, through Scheuer and
Coleman, asked Hart and the Blumbergs to sign guaranties. Scheuer told Hart and the
Blumbergs that the guaranty would be “non-recourse” with standard carve-outs, which
meant that CWCapital would be barred from recovering directly from these
guarantors, with limited exceptions. Relying on these representations, Hart and the
Blumbergs signed the guaranties.
Pursuant to the loan requirements, Oak Creek Partners executed a Cash
Management Agreement to regulate the collection and use of all rents and other
income from Oak Creek Apartments, as well as property management expenditures.
(Cash Management Agreement.) HomeCorp Management, as the property manager,
countersigned and agreed to comply with the Cash Management Agreement. Oak
Coleman was removed as a guarantor later because his “balance sheet would be
harmful to CWCapital’s plan to securitize and sell the loan.” (Hart Action Second Am. Compl.
Creek Partners also executed a Property Management Agreement with HomeCorp
(Property Management Agreement (Def.’s Ex. 6).)
agreement, HomeCorp Management’s duties included preparing budgets, monthly
income, expense and cash flow statements, as well as annual profit and loss
statements, employing personnel to maintain and operate the property, maintaining the
buildings and grounds, insuring the property, and collecting rent.
Management Agreement, Article III.)
The Underlying Lawsuits
The venture was not successful. By 2009, there was a $5.28 million shortfall
resulting from the operation of Oak Creek Apartments. CWCapital called on Oak
Creek Partners and then the individual guarantors to make up the difference. It was
then that Hart and the Blumbergs discovered that the guaranties they signed were
drafted more broadly than Scheuer represented. The guaranties were not “nonrecourse” and essentially held the guarantors liable for the economic failure of Oak
In 2009, Hart, Hosea Holdings and the Blumbergs filed suit in the Circuit Court
of Houston County, Alabama. In Counts 5, 6, and 7 of the Hart Action, Hart and
Hosea Holdings bring claims against Coleman, Scheuer, and HomeCorp Management
for misrepresentation, concealment and suppression of material facts, and negligence.
(Hart Action Second Am. Compl. ¶¶ 110–25 (Pl.’s Ex. 2).) Count 8 of the Hart
Action alleges that Coleman engaged in constructive fraud in carrying out his notary
public duties. (Hart Action Second Am. Compl. ¶¶ 126–31.) In Counts 5 and 7 of the
Blumberg Action, the Blumbergs allege that Scheuer, Goldner, Coleman, and
Strickland negligently or intentionally failed to disclose material facts and that they
breached their duty of due care as managing members of HomeCorp Affordable
and/or as officers of HomeCorp Management. (Blumberg Second Am. Compl.
¶¶ 69–72, 77–80 (Pl.’s Ex. 3).)
Continental Casualty issued Real Estate Professional Errors and Omissions
Policy No. 2541496570 to HomeCorp Management for the claims-made period from
September 15, 2009, to September 15, 2010. (Policy, Pl.’s Ex. 1.) The Policy
provides coverage for HomeCorp Management and “any person who is or becomes
[HomeCorp Management’s] partner, officer, director, employee or independent
contractor during the policy period” but “only while rendering professional real estate
services11 on [HomeCorp Management’s] behalf for others.” (Policy 5 (emphasis
Professional real estate services is defined under the Policy as “those services rendered
by an Insured for others as a real estate agent, real estate broker, real estate personal assistant,
real estate consultant or counselor, real estate appraiser, property manager, real estate leasing
agent, short term escrow agent, mortgage broker or auctioneer of real property, provided that all
necessary licenses or certifications are held by the Insured at the time of the act or omission
giving rise to the claim. Professional real estate services also include services rendered by an
omitted).) Under the Policy, Continental Casualty has a duty to defend those covered
by the Policy against a claim, and to indemnify the insureds if they are found legally
liable. (Policy 1.) However, Section V of the Policy lists exclusions under which
Continental Casualty is not obligated to defend or indemnify an insured against a
claim. (Policy 6–8.) The relevant exclusions will be discussed later in this opinion.
Continental Casualty contends that summary judgment is due to be entered in
its favor and that the court should enter a declaratory judgment stating that, under the
Policy, Continental Casualty has no duty to defend or indemnify Defendants
HomeCorp Management, Scheuer, Goldner, Coleman, or Strickland in the underlying
lawsuits. In particular, Continental Casualty argues that the Policy contains three
exclusions that bar coverage for the underlying lawsuits. Continental Casualty also
argues that because it is entitled to summary judgment, HomeCorp Management’s
counterclaim, which seeks a declaration from the court that the underlying lawsuits
are covered by the Policy, should be dismissed.
(Pl.’s Summ. J. Br. 1–2.)
Insured for others as a notary public; or member of a formal real estate accreditation, standards
review or similar real estate board or committee. Services as a construction manager are not
professional real estate services.” (Policy 5 (emphasis omitted).)
Defendants12 argue that the claims in the underlying lawsuits are covered by the Policy
and that none of the Policy’s exclusions applies. (Def.’s Resp. Br. 11.)
Part A will address the court’s discretion under the Declaratory Judgment Act
to decide the indemnity issue. Part B will set out the applicable Alabama law for
cases involving an insurance company’s duty to defend. Finally, a determination of
whether the Policy’s exclusions apply will be made in Part C.
Discretion to Decide the Indemnity Issue
Courts treat an insurance company’s duty to defend and duty to indemnify as
distinct and analyze them separately. See Allstate Indem. Co. v. Lewis, 985 F. Supp.
1341, 1349 (M.D. Ala. 1997). A controversy exists regarding the duty to defend when
the insured seeks a defense from an insurance company, but the insurance company
denies that it is obligated. See Am. Fid. & Cas. Co. v. Pa. Threshermen & Farmers’
Mut. Cas. Ins. Co., 280 F.2d 453, 461 (5th Cir. 1960).13
In contrast, courts have declined to exercise their discretion under the
Declaratory Judgment Act to decide questions about the duty to indemnify when the
While HomeCorp Management is the only Defendant that filed a substantive response,
“Defendants” refers to Scheuer, Goldner, Coleman, and Strickland, as well as to Hart, Hosea
Holdings, and the Blumbergs who have adopted the arguments contained in HomeCorp
Management’s response brief. See supra note 1.
See Bonner v. City of Prichard, 661 F.2d 1206, 1209 (11th Cir. 1981) (en banc)
(adopting as binding precedent all of the decisions of the former Fifth Circuit handed down prior
to the close of business on September 30, 1981).
underlying action is pending. See, e.g., Nationwide Mut. Fire Ins. Co. v. Dillard
House, Inc., 651 F. Supp. 2d 1367, 1373 (N.D. Ga. 2009) (“[T]he court will follow the
‘wealth of authority’ counseling against exercising jurisdiction over the premature
issue of the duty to indemnify . . . .”); Pa. Nat’l Mut. Cas. Ins. Co. v. Roberts Bros.,
Inc., 550 F. Supp. 2d 1295, 1303 (S.D. Ala. 2008) (“[I]n the exercise of the Court’s
sound discretion, [Plaintiff’s] claims for a declaratory judgment on the question of its
duty to indemnify are dismissed without prejudice.”); Emp’rs Mut. Cas. Co. v. All
Seasons Window & Door Mfg., Inc., 387 F. Supp. 2d 1205, 1211–12 (S.D. Ala. 2005)
(“It is simply inappropriate to exercise jurisdiction over an action seeking a
declaration of the plaintiff’s indemnity obligations absent a determination of the
insureds’ liability.”), but see Evanston Ins. Co. v. N. Lake Condo Club, LLC, No.
3:09cv310, 2009 WL 4059001, at *3 (M.D. Ala. Nov. 20, 2009) (rejecting an
argument that the indemnity issue was premature where the underlying suits were
pending because the duty to indemnify and defend were governed by the same
insurance policy provisions). Resolving the duty to indemnify before the underlying
case is concluded could potentially waste resources of the court because the issue
evaporates if the insured prevails in the underlying lawsuit. Guar. Nat’l Ins. Co. v.
Beeline Stores, Inc., 945 F. Supp. 1510, 1515 (M.D. Ala. 1996). Until the underlying
suit is resolved, the duty to indemnify presents “nice and intriguing questions which
today may readily be imagined, but may never in fact come to pass.” Am. Fid., 280
F.2d at 461. Continental Casualty’s duty to indemnify is presently an abstract,
academic question. Thus, in the exercise of the court’s discretion, the duty to
indemnify claim will be dismissed without prejudice, and the court will address
Continental Casualty’s duty to defend.14
Alabama Insurance Law15
Insurance contracts are governed by the general rules of contracts and “are
construed so as to give effect to the intention of the parties.” Attorneys Ins. Mut. of
Ala., Inc. v. Smith, Blocker & Lowther, P.C., 703 So. 2d 866, 870 (Ala. 1996).
Alabama law is clear that “‘insurance companies have the right, in the absence of
statutory provisions to the contrary, to limit their liability and write policies with
narrow coverage; the insured has the option to purchase the policy or look
Continental Casualty requests that the court defer a ruling on the question of the duty
to indemnify should the court find that the claim is premature and cites Atlantic Casualty
Insurance Co. v. GMC Concrete Co., No. 07-0563-WS-B, 2007 WL 4335499 (S.D. Ala. Dec. 7,
2007) (Steele, J.). (Pl.’s Summ. J. Br. 15 n.10.) That case is distinguishable. In GMC Concrete,
the defendants filed a motion to dismiss the declaratory judgment action filed by the insurance
company. Judge Steele found that the duty to defend issue was ripe, but that the duty to
indemnify issue was premature because the underlying lawsuit was not resolved. 2007 WL
4335499, at *5. Judge Steele retained jurisdiction on the duty to indemnify issue “until the
earlier of (a) final disposition of the [underlying lawsuit]; or (b) a ruling on the duty to defend.”
Id. at *6. In GMC Concrete, the duty to defend claim survived the motion dismiss, and thus, was
not resolved. The approach adopted by Judge Steel cannot be employed here because this
opinion will provide a final disposition on the duty to defend.
It is undisputed that Alabama law governs the issue of whether Continental Casualty
owes HomeCorp Affordable, Scheuer, Goldner, Coleman, or Strickland a duty to defend. (See
Def.’s Resp. Br. 10.)
elsewhere.’” Int’l Paper Co. v. QBE Ins. Corp., Nos. 3:09-CV-347-WKW, 3:07-CV206-WKW, 3:05-CV-1001-WKW, 2010 WL 1856193, at *3 (M.D. Ala. May 5, 2010)
(quoting Cotton States Ins. Co. v. Diamond Hous. Mobile Homes, 430 F. Supp. 503,
505 (N.D. Ala. 1977)); see also Hooper v. Allstate Ins. Co, 571 So. 2d 1001, 1002
(Ala. 1990) (“[I]nsurance companies have the right to limit the coverage offered
through the use of exclusions in their policies.”).
An insurer’s duty to defend “is determined primarily by the allegations
contained in the complaint” of the underlying lawsuit.16 Hartford Cas. Ins. Co. v.
Merchs. & Farmers Bank, 928 So. 2d 1006, 1009 (Ala. 2005) (internal quotation
marks omitted). The court may also “look [outside the bare allegations of the
underlying lawsuit’s complaint] to facts which may be proved by admissible
evidence.” Id. at 1010. The insured bears the burden of establishing coverage by
demonstrating that a claim falls within the policy, Colonial Life & Accident Ins. Co.
v. Collins, 194 So. 2d 532, 535 (Ala. 1967), while the insurer bears the burden of
proving the applicability of any policy exclusion. Universal Underwriters Ins. Co. v.
Stokes Chevrolet, Inc., 990 F.2d 598, 605 (11th Cir. 1993). “Exclusions are to be
interpreted as narrowly as possible, so as to provide maximum coverage for the
Under Alabama law, “it is well established that [an] insurer’s duty to defend is more
extensive than its duty to pay.” U.S. Fidelity & Guar. Co. v. Armstrong, 479 So. 2d 1164, 1168
(Ala. 1985). The Policy’s exclusion language applies equally to Continental Casualty’s duty to
defend and duty to indemnify.
insured, and are to be construed most strongly against the insurance company that
drafted and issued the policy.” Am. States Ins. Co. v. Martin, 662 So. 2d 245, 247
The Policy Exclusions
For purposes of this opinion, it will be assumed that HomeCorp Management,
Scheuer, Goldner, Coleman, and Strickland are covered under the Policy for the
disputed claims in the underlying lawsuits.17 Continental Casualty’s duty to defend
turns on whether any of the Policy’s exclusions apply.
Financial Interest Exclusion
Under the Policy’s financial interest exclusion, Continental Casualty has no
duty to defend “any claim . . . arising out of the actual or attempted purchase of
property by . . . any entity in which any Insured has a financial interest . . . provided
that such financial interest existed at the time of the act or omission giving rise to the
claim.” (Policy ¶ V.L. (emphasis omitted).)
The parties agree that the claims of the underlying lawsuits arise out of the
purchase of Oak Creek Apartments. However, the source of contention between the
It is undisputed that HomeCorp Management is an insured under the Policy, and for
purposes of summary judgment, Continental Casualty does not dispute that Goldner and Scheuer
satisfy the definition of an insured. (Pl.’s Summ. J. Br. 17 n.11.) For purposes of this opinion, it
will be assumed that Strickland and Coleman also qualify as insureds.
parties is the meaning of “a financial interest.” The Policy does not define this term.
It is undisputed that Scheuer, Goldner, Coleman, and Strickland each have a 17.5%
membership interest in HomeCorp Affordable, and that HomeCorp Affordable owns
92% of Oak Creek Home which, in turn, owns 50% of Oak Creek Partners.
Continental Casualty argues that this exclusion applies because the individual
Defendants “had financial interests in Oak Creek Partners through HomeCorp
Affordable and Oak Creek Home.” (Pl.’s Summ. J. Br. 18.) Defendants respond that
the exclusion does not apply because the individual Defendants did not have a
membership interest in Oak Creek Partners (the entity that purchased Oak Creek
Apartments) and by Alabama law, have no interest in specific limited liability
company property. (Def.’s Resp. Br. 18–19.)
Under Alabama law, courts should construe undefined terms in a policy
“according to the meaning a person of ordinary intelligence would reasonably give it.”
Safeway Ins. Co. of Ala., Inc. v. Herrera, 912 So. 2d 1140, 1143 (Ala. 2005).
Alabama courts often turn to dictionary definitions to determine this meaning. See,
e.g., id. at 1143–44 (citing Black’s Law Dictionary and Merriam-Webster’s Collegiate
Dictionary to determine the meaning of “forcible entry” under an insurance policy);
see also Carpet Installation & Supplies of Glenco v. Alfa Mut. Ins. Co., 628 So. 2d
560, 562 (Ala. 1993) (“What is a dictionary definition if not an assertion of that very
meaning that an ordinary person would give a particular word?”). “Financial
interest”18 has been defined as either “(1) a monetary right, title, or legal share in the
[entity]; (2) a monetary advantage, profit, and responsibility, i.e., a monetary stake or
claim in the [entity]; or (3) a monetary share of ownership or control in the [entity].”
JAM Inc. v. Nautilus Ins. Co., 128 S.W. 3d 879, 894 (Mo. Ct. App. 2004) (looking to
Black’s Law Dictionary to define “financial interest” and Webster’s Third New
International Dictionary of the English Language Unabridged to define “interest”); see
also Continental Cas. Co. v. Bowen, No. 2:09-cv-00810-TC, 2011 WL 222340, at *4
(D. Utah Jan. 21, 2011) (quoting JAM Inc.’s definition of “financial interest”); Black’s
Law Dictionary 828 (8th ed. 2004) (defining “financial interest” as “[a]n interest
equated with money or its equivalent; esp., an interest in the nature of an investment”).
The question of whether a contractual provision, such as an insurance policy
exclusion, is ambiguous is a matter of law for the court to decide. Herrera, 912 So. 2d at 1143.
However, if the provision at issue is ambiguous, “the determination of the true meaning of the
contract is a question of fact” for the jury. McDonald v. U.S. Die Casting & Dev. Co., 585 So.
2d 853, 855 (Ala. 1991). To determine whether a provision in an insurance contract is
ambiguous, the court applies “the common interpretation of the language alleged to be
ambiguous.” State Farm Fire & Cas. Co. v. Slade, 747 So. 2d 293, 309 (Ala. 1999). Ambiguity
exists “only if the policy’s provisions are reasonably susceptible to two or more constructions or
there is reasonable doubt or confusion as to their meaning.” Id. at 308–09. “[T]he mere fact that
a word or a phrase used in a provision in an insurance policy is not defined in the policy does not
mean that the word or phrase is inherently ambiguous.” Herrera, 912 So. 2d at 1143. The court
finds that “financial interest” is unambiguous. The definitions submitted by the parties are
largely similar and do not lead to two or more constructions. See Carpet Installation & Supplies
of Glenco, 628 So. 2d at 562 (finding the term “rent” in an insurance policy to be unambiguous
where the court “found no definition of that word restricting [the policy’s] exclusion any more
than the definitions cited in the trial court’s order”).
It is clear that Scheuer, Goldner, Coleman, and Strickland each had a monetary
stake in Oak Creek Partners. That stake can only be described as a financial interest.
If Oak Creek Apartments did well, then by the terms of the operating agreements, a
percentage of the profits would flow to Oak Creek Partners, then to Oak Creek Home,
followed by HomeCorp Affordable and its members, which include the individual
On the other hand, if Oak Creek Apartments performed poorly,
CWCapital would look to Oak Creek Partners, as well as the individual guarantors,
including Scheuer, Goldner, and Strickland, to satisfy the loan. This is exactly what
In support of their position that the financial interest exclusion does not apply,
Defendants present several arguments that are unpersuasive. First, Defendants mischaracterize the exclusion’s language as applying only when the insureds have a
financial interest in the property purchased. However, a plain reading of the exclusion
indicates that the insured’s financial interest must be in the entity that does the
purchasing. As discussed above, these individual defendants clearly had a financial
interest in Oak Creek Partners, the entity that purchased Oak Creek Apartments.
Second, the financial interest exclusion is not defeated simply because Scheuer,
Goldner, Coleman, and Strickland were not members of Oak Creek Partners. See
Bowen, 2011 WL 222340, at *4 (“Although an ownership interest in an entity would
certainly be considered a financial interest in that entity, ownership is not necessary
to have a financial interest.” (citing JAM Inc., 128 S.W. 3d at 895)). Defendants had
a monetary stake or claim in Oak Creek Partners through HomeCorp Affordable. See
JAM Inc., 128 S.W. 3d at 895 (holding that a financial interest existed because the
plaintiff “had a monetary stake or claim in the insured real property as a shareholder
in the corporation that owned the property”). Defendants’ argument that Scheuer,
Goldner, Coleman, and Strickland are only minority shareholders of HomeCorp
Affordable does not eliminate their financial interest. The exclusion applies whenever
any insured has a financial interest in any entity, and it is immaterial whether the
individual Defendants had a majority or minority shareholder’s interest. Thus, any
financial interest in Oak Creek Partners will trigger the exclusion. See State Farm
Fire & Cas. Co. v. Davis, 612 So. 2d 458, 466 (Ala. 1993) (The terms “an” and “any”
are synonymous when used in an insurance exclusion.).
Finally, Defendants’ argument that the financial interest exclusion would be “an
unforseen trap to deny insureds coverage any time an insured might own stock or
shares in a company or mutual fund that might have some alleged attenuated interest
in another company” is not persuasive. (Def.’s Resp. Br. 21.) This case is not the
hypothetical situation that Defendants have surmised. The individual Defendants
were wearing two hats, only one of which, activities as professional real estate
services agents, entitled them to insurance coverage. In the insurance world, the
investor/developer hat knocks the first hat off. These individual Defendants were not
passive investors or merely real estate agents but were the project’s playmakers. They
were acutely aware of their financial interests tethered to Oak Creek Apartments
through HomeCorp Affordable, Oak Creek Home, and Oak Creek Partners. They
created and were the managers of HomeCorp Affordable, which was the manager of
Oak Creek Home, which in turn was the manager of Oak Creek Partners. HomeCorp
Affordable initially entered into a contract to purchase Oak Creek Apartments, and
these men created the companies needed to obtain financing for the project.
HomeCorp Affordable, through its managers, sought out the $7.2 million loan for Oak
Creek Partners. They were the initial guarantors on the loan. Scheuer and Coleman
also found additional guarantors when CWCapital required it. Furthermore, Oak
Creek Partners executed a Property Management Agreement with HomeCorp
Management of which all four individual Defendants were board members or
Though the parties did not argue it, the court cannot fathom how an essentially
unlimited personal guaranty would not be a financial interest. By definition, a
guaranty is a monetary responsibility because it is “[a] promise to answer for the
payment of some debt . . ., in case of the failure of another who is liable in the first
instance.” Black’s Law Dictionary (9th ed. 2009). The guaranties signed by Scheuer,
Goldner, and Strickland gave them a monetary responsibility to repay the loan if and
when Oak Creek Partners could not. See Davenport & Harris Undertaking Co. v.
Roberson, 121 So. 733, 734 (Ala. 1929) (“[A] guarantor is only bound if and when the
creditor is unable to collect from the principal debtor.”) As discussed above, Scheuer,
Goldner, and Strickland had a financial interest in Oak Creek Partners, because if it
did not do well financially, they would be obligated to repay the loan.
Based on this undisputed evidence, the financial interest exclusion applies to
Scheuer, Goldner, Coleman, and Strickland. Moreover, this exclusion applies to
HomeCorp Management as well. The exclusion applies to any claim arising out of the
purchase of property by an entity in which any insured has a financial interest. All
the disputed claims arise out of the purchase of Oak Creek Apartments by Oak Creek
Partners, in which four other insureds had a financial interest.
HomeCorp Management may not have had a financial interest in Oak Creek Partners,
the exclusions still applies because Scheuer, Goldner, Coleman, and Strickland did.
See Davis, 612 So. 2d at 466 (holding that a policy exclusion applied to both insureds
where the provision excluded coverage for “an insured” under certain circumstances
and only one insured fell under these circumstances). Thus, because of the financial
interest exclusion, Continental Casualty does not have a duty to defend Scheuer,
Goldner, Coleman, Strickland, or HomeCorp Management .
Entity Purchase Exclusion
Continental Casualty also argues it has no duty to defend under the Policy’s
entity purchase exclusion. Under this exclusion, Continental Casualty has no duty to
defend “any claim . . . based on or arising out of the formation, syndication, operation
or administration of any property syndication, real estate investment trust or any other
form of corporation, general or limited partnership or joint venture formed for the
purpose of investing in, buying, selling, or maintaining real property.” (Policy ¶ V.I.)
“Any claim” renders this a claim-based exclusion, not an insured-based exclusion.
The exclusion is concerned with the nature of the claim, not the name or identity of
The claims clearly arise out of the operations of HomeCorp Affordable, and this
exclusion denies a defense to any claim arising out of that operation. First, HomeCorp
Affordable, as an LLC, qualifies as “any other form” of corporation or partnership and
was formed for the purpose of purchasing and developing residential properties. See
Ala. Code § 10A-5-1 et seq.; United States v. Hagerman, 545 F.3d 579, 581 (7th Cir.
2008) (“Limited liability companies are a relatively new business structure allowed
by state statute, having some features of corporations and some features of
partnerships.” (internal quotation marks omitted)). Second, the claims in the
underlying lawsuits arise out of HomeCorp Affordable obtaining financing and
acquiring Oak Creek Apartments. Thus, this exclusion also applies to deny a defense
to HomeCorp Management, Scheuer, Goldner, Coleman, and Strickland under the
Property Development Exclusion
Finally, Continental Casualty argues that a third exclusion cancels its duty to
defend. Under the Policy’s property development exclusion, Continental Casualty has
no duty to defend “any claim . . . based on or arising out of the Insured’s interests,
operations, or activities as . . . [a] property developer.” (Policy ¶ V.O. (emphasis
This exclusion applies because the claims arise out of Scheuer’s,
Goldner’s, Coleman’s, and Strickland’s interests, operations, or activities as property
Defendants argue that HomeCorp Management acted as a property management
company and not as a property developer in relation to Oak Creek Apartments.
Defendants further argue that the claims against Scheuer, Goldner, Coleman, and
Strickland are in their capacities as officers or representatives of HomeCorp
Management, the property manager. (Def.’s Resp. Br. 23–26.) However, the
Blumberg and Hart Actions also assert claims against Scheuer, Goldner, Coleman, and
Strickland in their capacities as the managing members of HomeCorp Affordable (See,
e.g., Blumberg Action Second Am. Compl. ¶ 70; Hart Action Second Am. Compl.
116.) The claims against Scheuer, Goldner, Coleman and Strickland arise out of their
interests as property developers: They formed HomeCorp Affordable to develop
property; they used HomeCorp Affordable to enter into a contract to purchase Oak
Creek Apartments; they executed guaranties to obtain financing for the project; and
they persuaded other members of HomeCorp Affordable to sign guaranties to obtain
the needed financing. Thus, this exclusion applies to the claims asserted against
Scheuer, Goldner, Coleman, and Strickland.
For the foregoing reasons, it is ORDERED that Continental Casualty’s Motion
for Summary Judgment (Doc. # 69) is GRANTED in part and DENIED in part as
1. Continental Casualty’s claim that it has no duty to indemnify is DISMISSED
2. Continental Casualty’s Motion for Summary Judgment (Doc. # 69) on its
claim that it has no duty to defend is GRANTED; and
3. HomeCorp Management’s counterclaim is DISMISSED with prejudice.
It is further DECLARED that the Real Estate Professional Errors and Omissions
Policy, Policy No. 25414965709, issued by Continental Casualty Company to
HomeCorp Management, Inc., does not impose on Continental Casualty Company any
duty to defend HomeCorp Management, Inc., Herbert Scheuer, Michael Goldner,
Stephen Coleman, or W. Lloyd Strickland in the case of Hart et al. v. CWCapital,
LLC, et al., CV-09-900311, pending in the Circuit Court of Houston County,
Alabama, or in the case of Blumberg et al. v. CWCapital, LLC, et al., CV-09-900305,
pending in the Circuit Court of Houston County, Alabama.
A separate final judgment will be issued.
DONE this 29th day of March, 2012.
/s/ W. Keith Watkins
CHIEF UNITED STATES DISTRICT JUDGE
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