Chuhar Chuhar et al v. Amco Insurance Company et al
Filing
42
OPINION AND ORDER: Court GRANTS IN PART AND DENIES IN PART 34 Centier Bank's Motion to Substitute Itself as Party Plaintiff. Signed by Magistrate Judge Andrew P Rodovich on 2/22/2012. (tc)
UNITED STATES DISTRICT COURT
NORTHERN DISTRICT OF INDIANA
HAMMOND DIVISION
CHUHAR CHUHAR, individually and )
dba Starlite Inn, LLC,
)
)
Plaintiffs
)
)
v.
)
)
AMCO INSURANCE COMPANY; ALLIED )
INSURANCE,
)
)
Defendants
)
CIVIL NO. 2:09 cv 332
OPINION AND ORDER
This matter is before the court on the Motion to Substitute
Itself as Party Plaintiff [DE 34], filed by non-party Centier
Bank on September 29, 2011.
For the following reasons, the
motion is GRANTED IN PART and DENIED IN PART.
Background
Merrillville Motel Associates, L.P., ("MMA") owned a hotel
located at 6201 Opportunity Lane, Merrillville, Indiana.
On
April 26, 2000, MMA executed a mortgage and promissory note
payable to Centier Bank.
The note was secured by a mortgage
granting a security interest in the motel and a commercial
security agreement pledging all intangible and tangible personal
property of MMA.
The security agreement was perfected by filing
a UCC financing statement with the Indiana Secretary of State.
On October 24, 2006, MMA entered into a Real Estate Installment Contract to sell the motel to the plaintiff, Chuhar Chuhar.
MMA was to continue to make its monthly payments of principal and
interest under the mortgage and promissory note to Centier during
the term of the installment contract.
Under the agreement,
Chuhar was required to "[m]aintain property insurance on the
Property in an amount not less than the balance of the purchase
price . . . policies to name Seller and Buyer as their respective
interests may appear . . ."
Chuhar secured property insurance
with AMCO Insurance Company and Allied Insurance.
The insurance
policy was for the term of October 23, 2006, through October 23,
2007, and covered bodily injury, property damage, and business
interruption claims.
A hail, wind, and thunderstorm occurred on August 15, 2007,
causing significant damage to the motel and interrupting business
operations.
Chuhar filed a claim for the property damage and
business interruption using the services of a third-party administrator and a general contractor.
Some of the repairs to the
motel have been completed and were paid by AMCO, however, the
remainder of the property damage and business interruption claims
remain outstanding.
On August 25, 2009, Chuhar filed the instant
law suit against AMCO, alleging breach of contract and bad faith
based on AMCO’s failure to adjust the insurance policy claims he
filed.
2
MMA continued to make the principal and interest payments on
the note to Centier until December 2009.
A balance of
$2,203,798.66 remained plus a per diem of $704.8117.
The failure
to pay constituted a default under the terms of the loan agreement, prompting Centier to commence foreclosure litigation in the
Lake County Superior Court.
Judge Jeffery Dywan issued a series
of orders, concluding that Centier had first priority in the
motel, including priority over the mechanic’s liens by the
contractors who began to repair the motel.
Judge Dywan entered
summary judgment to foreclose on Centier’s mortgage and to
establish liability as to MMA.
On August 18, 2010, judgment of
foreclosure and entry of a money judgment in the amount of
$2,264,412.47 plus $794.8117 per diem after March 5, 2010, was
entered in favor of Centier.
After the present litigation commenced, Chuhar relocated and
his current whereabouts are unknown.
Centier represents that it
has taken efforts to find Chuhar but was unsuccessful.
The
defendants served interrogatories and requests for production on
Centier and requested to depose Chuhar.
Centier responded to the
interrogatories and requests for production, which were signed by
an authorized representative of Centier.
The defendants objected
that the signatory was not Chuhar, and the court ordered Chuhar
to sign the discovery responses under oath and to provide the
3
responses to the defendants within ten days.
Centier’s counsel
indicated that it would be unable to comply with the order, and
on September 23, 2011, counsel for the defendants informed
Centier’s counsel that it would be filing a motion to dismiss.
Centier now moves to be substituted for Chuhar as the plaintiff.
Discussion
Federal Rule of Civil Procedure 25 provides for the substitution of parties if a party has died, become incompetent, has
transferred his interest, or if a public officer has been succeeded by someone else.
Rule 25 is inapplicable if a change of
parties is desired for some other reason than the four circumstances the rule sets forth.
Wright and Miller, 7A Federal
Practice and Procedure §1951 (1972).
"Rule 25 does not substan-
tively determine what actions survive the transfer of an interest; rather, it provides substitution procedures for an action
that does survive."
ELCA Enterprises, Inc. v. Sisco Equipment
Rental & Sales, Inc., 53 F.3d 186, 191 (8th Cir. 1995); Hilbrands
v. Far East Trading Co., Inc., 509 F.2d 1321, 1323 (9th Cir.
1975).
"The rule is 'designed to allow an action to continue
unabated when an interest in a lawsuit changes hands,' rather
than requiring the initiation of an entirely new lawsuit."
53 F.3d at 191 (citing General Battery Corp. v. Globe-Union,
Inc., 100 F.R.D. 258, 261 (D. Del. 1982)).
4
In a diversity
ELCA,
action, the court generally will look to state law to determine
whether the claim survives after transfer.
7C Federal Practice
and Procedure §1952.
With respect to transferring interest of a claim, Rule 25
states that "[i]f an interest is transferred, the action may be
continued by or against the original party unless the court, on
motion, orders the transferee to be substituted in the action or
joined with the original party."
It is within the discretion of
the court to substitute a party if it finds that allowing the
substitution would facilitate the conduct of the litigation.
Federal Practice and Procedure §1958.
7C
When the debtor abandons
his interest in the action, it is proper and necessary to substitute the creditor so that it can protect its interest.
Pacamor
Bearings, Inc. v. Minebea Co., 892 F.Supp. 347, 360 (D.N.H.
1995); 7C Federal Practice and Procedure §1958.
Centier insists that Chuhar transferred his interest in all
three of his claims and requests to be substituted as the real
party in interest.
The defendants disagree that Chuhar assigned
his claims for bad faith and breach of the business interruption
provision of the insurance policy and argue that the 18 month
delay in requesting substitution is fatal to Centier’s motion to
be substituted as plaintiff for the breach of the property damage
claim.
5
The defendants first dispute whether a bad faith claim may
be assigned to a third-party, arguing that the duty to deal in
good faith does not extend to third-parties, and therefore cannot
be pursued by a third-party.
A duty to deal in good faith is
implied in all insurance contracts.
Brady v. Allstate Indemnity
Co., 788 N.E.2d 916, 920 (Ind. App. 2003).
However, this duty is
limited to the interactions between the insurance company and the
insured and does not extend to the insurer’s dealings with third
parties.
Brady, 788 N.E.2d at 920 (citing Freidline v. Shelby
Ins. Co., 774 N.E.2d 37, 40 (Ind. 2002)).
Although a party may
benefit from an insurance policy, the party is not owed a duty of
good faith unless the duty is created by the agreement.
Donald
v. Liberty Mutual Insurance Co., 18 F.3d 474, 480 (7th Cir.
1994); Brady, 788 N.E.2d at 920 (explaining that the insurer did
not have a duty to act in good faith during the course of its
negotiations with an accident victim receiving a payout from the
policy).
This is because the injured party was not an intended
beneficiary and was not in privity of contract with the insurer.
Indiana has rejected direct actions by the injured party against
the insurer without first obtaining judgment against the tortfeasor.
Donald, 18 F.3d at 480.
There are, of course, exceptions to the prohibition against
tort actions brought by an injured third-party against a liabil-
6
ity carrier.
An injured party may proceed against a liability
carrier in contract or tort if the carrier refuses to honor its
contract after the injured party obtains a judgment against the
tortfeasor.
Donald, 18 F.3d at 480.
Similarly, a judgment
creditor may proceed against a liability carrier when the insured
has assigned the claim and refuses to bring suit.
Sefton, 471 N.E.2d 700, 703 (Ind. App. 1984).
Cromer v.
Finally, Indiana
recognizes that insurers owe a duty of good faith to third-party
beneficiaries of insurance contracts. Donald, 18 F.3d at 480;
Lakeshore Bank and Trust Co. v. United Farm Bureau Mutual Insurance Co., 474 N.E.2d 1024, 1026 (Feb. 21, 1985) ("Once the insurer has notice of the mortgagee's rights it is considered to
have a duty to treat the proceeds of the policy as though the
provision that the proceeds should be payable to the mortgagee
were written into the policy.").
"A third party beneficiary
contract requires first, that the intent to benefit the third
party be clear, second, that the contract impose a duty on one of
the contracting parties in favor of the third party, and third,
that the performance of the terms necessarily render to the third
party a direct benefit intended by the parties to the contract."
Donald, 18 F.3d at 481.
When these criteria are met, the third-
party beneficiary may proceed directly on a claim for bad faith
against the insurer.
7
Centier has not obtained a judgment against Chuhar and is
not a judgment creditor.
However, Centier was named in the
insurance policy as mortgagee, loss payee, and an additional
insured, and it was intended to benefit from the insurance
policy.
Because Centier was an intended beneficiary named in the
contract, the defendants owed Centier a duty of good faith to
negotiate the claim.
Although Centier may have been a benefi-
ciary of the policy, having rights thereunder, and may have been
able to pursue its own claim for bad faith, the statute of limitations for Centier to proceed on its own claim of bad faith has
expired.
However, this does not address whether Chuhar assigned
Centier his claim for bad faith, which was timely filed.
Indiana prohibits assignment of tort claims arising from a
personal injury.
Allstate Insurace Co. v. Axsom, 696 N.E.2d 482,
485 (Ind. App. 1998).
This includes wrongs done to the person,
reputation, or feelings of the injured party.
When considering
whether a tort claim may be assigned, the court looks to the
underlying cause of the actual damages the person suffered.
When
the damages arise from an injury to personal property, not the
person, the tort claim may be assigned.
Under these circum-
stances, the "third-party cannot recover damages personally
suffered by the insured such as pain and suffering, embarrassment, mental anguish and humiliation.
8
The assignee can only
recover the insured’s pecuniary losses."
Allstate, 696 N.E.2d at
485.
Applying these principles, the court in Allstate allowed the
insured to assign his bad faith claim against his insurer to a
third-party.
Allstate, 696 N.E.2d at 484 ("In some circumstances
a claim for an insurer’s bad faith failure to settle also may be
assigned.").
The court explained that because the third-party
had an interest in the property, his claim was "in reality the
insured’s claim".
Allstate, 696 N.E.2d at 485. The court pro-
ceeded to limit the assignee’s recovery to the insured’s pecuniary losses, stating "[i]f the excess judgment and resulting
injury to [the plaintiff’s] property is the consequence of
oppressive, i.e. tortious, conduct by Allstate, then punitive
damages, the remedy for such conduct, should also be assignable."
Allstate, 696 N.E.2d at 485.
"In short the effect of the assign-
ment is to relieve the insurance company of the liability for
damages of a personal nature suffered by its insured, but still
make it responsible for the pecuniary and punitive damages caused
by its wrongful conduct. . . .
Thus, allowing an assignment of
punitive damages would force insurance companies to deal in good
faith with their insureds as opposed to unreasonably exposing
them to personal liability if a jury were to return a verdict in
9
excess of policy limits."
Allstate, 696 N.E.2d at 485 (citations
omitted).
Allstate made clear that bad faith claims against an insurer
can be assigned to third parties provided the claim arises from
property damage as opposed to personal injury.
Chuhar’s claim
arose from the defendants’ failure to settle his claim for property damage to the motel and was assignable.
Under this stan-
dard, Centier could have been assigned the claim, but it would be
limited to recovering the amount of Chuhar’s pecuniary losses.
However, the defendants argue that the record is ambiguous on
whether Chuhar intended to assign his claim for bad faith because
Chuhar did not make an express or written assignment of the
claim.
Instead, he abandoned his claim and turned prosecution
over to Centier.
The defendants contend that Chuhar’s actions
were insufficient to constitute an assignment of his claim for
bad faith and that assignment would violate the provision of the
policy prohibiting assignment without the defendants’ consent.
Rule 25(c) grants the court authority to substitute a party
when the interest in the underlying property has been transferred.
Although the filing party may continue to pursue the
claim, it is within the court’s discretion to allow substitution
or joinder of the party holding the transferred interest if the
court believes the transferree’s presence will facilitate litiga-
10
tion.
7C Federal Practice and Procedure §1958.
Other jurisdic-
tions have recognized that abandonment of a claim in favor of a
creditor or a statutory provision transferring all assets constitutes a transfer under Rule 25(c).
Pacamor, 892 F.Supp. at 359;
Negron-Almeda v. Santiago, 579 F.3d 45, 53 (1st Cir. 2009).
Rule
25 does not set forth any formal requirements for effectuating an
assignment.
Rather, by its express terms, a transfer of interest
in the underlying property is all that is required to invoke the
court's exercise of discretion to allow substitution.
See Rule
25.
At the time the proceedings began, Chuhar retained an
interest in the motel.
Pursuant to the loan agreement, Centier
foreclosed on the motel, and any interest Chuhar had was given up
in favor of Centier.
Because Rule 25 does not demand a formal
written assignment of the claim, the transfer of property was
enough to satisfy the requirements set forth by Rule 25.
How-
ever, the insurance policy imposed a heightened standard, demanding written consent of assignment by the defendants.
The terms of the loan agreement and insurance policy gave
Centier an interest in both the property and insurance proceeds.
Although the documents did not expressly assign any bad faith
claims arising from failure to settle, the right is implied from
assignment of the property damage claim.
11
It naturally follows
that if the loan documents and insurance policy created a right
in the property, a proposition the defendants do not oppose, it
also created an interest in settling the claim.
The failure to
settle affects the value of and Centier’s interest in the property and is a necessary enforcement mechanism to protect the
property’s value.
It would be illogical to conclude that Centier received a
transferred interest in the property but could not recover for
the loss of value caused by the defendants’ failure to settle.
By issuing the insurance policy to Chuhar and acknowledging
Centier’s interest therein, the defendants consented to the
assignment.
Moreover, Chuhar initially sought relief for the
damage to his interest in the property, which later was transferred to Centier.
The defendants have not shown why Centier
should be denied full value of the transferred interest.
Pursu-
ant to the transfer of interest and assignment, Centier is taking
over Chuhar’s claim and should be permitted to obtain relief of
the full value of the property, including the loss caused from
failure to settle.
See Allstate, 696 N.E.2d at 485 (explaining
that the assignee’s claim is in reality the insured’s claim).
It
is, therefore, within the court’s discretion to allow substitution of Centier on this claim.
12
The defendants counter that it would be an abuse of discretion to compel involuntary substitution.
See State Farm Mutual
Automobile Insurance v. Estep, 873 N.E.2d 1021, 1027 (Ind. 2007)
(holding that the court cannot involuntarily assign a claim for
bad faith).
In Estep, it was determined that the trial court
could not force involuntary assignment of a bad faith claim.
Forcing assignment would circumvent the direct action rule and
allow third-parties to proceed directly against the insured.
The
concern arose because the insured did not believe the insurer
acted in bad faith during negotiations and declined to pursue its
own suit.
Estep, 873 N.E.2d at 1027 ("[I]nvoluntary assignment
of claims against carriers whose insureds do not believe they
have been wronged by their insurance companies was inconsistent
with the direct action rule.").
The court explained that permit-
ting involuntary assignments could lead to multiple litigation,
change the dynamics of settlement negotiations, and increase the
risk and cost borne by the insureds who never make a claim and
found the insurer’s service satisfactory.
Estep, 873 N.E.2d at
1027.
Here, the pertinent facts do not pose the same threats.
Chuhar claimed the defendants acted in bad faith, as is evident
by his pursuit of the claim, extinguishing the fear that the
direct action rule would be circumvented by assignment.
13
More-
over, Chuhar did not involuntarily assign his claim.
Chuhar
voluntarily entered the loan agreement and insurance policy which
gave Centier a right to the property and the insurance policy
proceeds.
Pursuant to the loan agreement, Centier initiated
foreclosure proceedings, dissolving Chuhar of any interest in the
property.
Because Chuhar no longer has an interest in the
property, there is no risk of multiple litigation, change in the
dynamics of settlement negotiations, or cost.
Finding the
assignment voluntary and that the risk of involuntary assignment
does not threaten the present litigation, the court finds that it
would not be an abuse of discretion to allow substitution.
The bad faith claim, whether it is pursued by Chuhar or
Centier, arose from the same conduct.
See Allstate, 696 N.E.2d
at 485 (explaining that the assignee’s claim is in reality the
insured’s claim).
The defendants have not argued that they would
be injured or prejudiced by allowing substitution of Centier for
Chuhar, and it does not appear that additional discovery would
have to be conducted.
Finding no reason to deny Centier’s
request, the court GRANTS Centier’s motion to be substituted as
the plaintiff for Chuhar’s claim for bad faith for failure to
settle the claim for property damage.
Centier also argues that it should be substituted as the
plaintiff for Chuhar’s breach of contract under the loss of
14
business revenue provision of the insurance policy and bad faith
for failing to settle this claim.
attenuated.
However, this argument is more
The insurance policy stated that Chuhar’s rights and
duties could not be transferred without the defendants’ written
consent except in the event of death.
(See Defts. Br. Ex. 4)
Neither the loan documents nor the insurance policy gave Centier
any right to Chuhar’s business revenue.
Absent some indication
of the defendants' consent, the court cannot find contrary to the
insurance policy and hold that the claim was assigned to Centier.
The court determined that Centier’s interest in the bad
faith claim arising from the breach of the property damage
provision was derivative of the assignment of the claim for
breach of the respective provision.
However, Centier was not
similarly assigned an interest in the loss of business revenue
policy provision.
Absent assignment and consent by the defen-
dants, the court cannot find that the claim for bad faith arising
from failure to negotiate the loss of business revenue claim was
impliedly assigned.
For these reasons, Centier cannot be substi-
tuted as the plaintiff for Chuhar’s breach of the policy provision covering loss of business revenue or any bad faith claims
arising thereunder.
Centier’s motion is DENIED with respect to
these claims.
15
Finally, Centier moves to be substituted as the plaintiff
for Chuhar’s claim for breach of the property damage policy.
"Where a positive duty is imposed upon the mortgagor to insure
for the benefit of the mortgagee, the mere existence of the duty
is sufficient to impress upon the proceeds of any policy taken
out by the mortgagor an equitable lien in favor of the mortgagee."
Lakeshore Bank, 474 N.E.2d at 1026.
Once the insurer is
aware of the mortgagee’s rights, the insurer has a "duty to treat
the proceeds of the policy as though the provision that the
proceeds should be payable to the mortgagee were written into the
policy."
Lakeshore Bank, 474 N.E.2d at 1026.
The insurance policy Chuhar procured with the defendants
acknowledged that Centier was a mortgagee, loss payee, and
additional insured.
Pursuant to these terms, Centier was enti-
tled to recover from the insurer the amount due on its security
agreement in the event that physical damage destroyed the motel.
By entering the agreement, the defendants acknowledged the
relationship between Centier and Chuhar and its duty to treat the
proceeds of the policy as payable to Centier.
Rule 25 does not
enforce formal requirements for substituting a party.
Rather,
the only imposition is that the party to be substituted has a
transferred interest in the property at issue.
Pursuant to the
foreclosure proceedings, all interest in the motel was trans-
16
ferred to Centier.
It is, therefore, within the court’s discre-
tion to allow substitution of Centier as the plaintiff.
The only argument the defendants raise in opposition to
substituting Centier for Chuhar on this claim is that the 18
month delay in moving for such relief is unjustified.
However,
Rule 25(c) does not impose a time limit on moving for substitu7C Federal Practice and Procedure §1958.
tion.
The defendants
have not demonstrated that permitting substitution would impose a
greater burden or create undue hardship.
Whether Chuhar or
Centier proceeds with the claim, the surrounding facts and
necessary discovery are identical.
Finding no reasons to prevent
just resolution of this matter, the court, within its discretion,
GRANTS Centier’s request to be substituted as the plaintiff for
the breach of property damage policy.
_______________
Based on the foregoing, the Motion to Substitute Itself as
Party Plaintiff [DE 34], filed by non-party Centier Bank on
September 29, 2011, is GRANTED IN PART and DENIED IN PART.
Centier may be substituted as the plaintiff for the claim for
breach of the property damage policy provision and the claim for
bad faith arising thereunder, but may not pursue Chuhar’s claim
for breach of the policy provision covering lost business revenue
17
and any claim for bad faith arising from the defendants’ failure
to settle this claim.
ENTERED this 22nd day of February, 2012
s/ ANDREW P. RODOVICH
United States Magistrate Judge
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