First Media Insurance Specialists, Inc. et al v. OneBeacon Insurance Company et al

Filing 39

MEMORANDUM AND ORDER granting in part and denying in part 23 Motion to Dismiss for Failure to State a Claim or for a More Definite Statement. Signed by District Judge Eric F. Melgren on 11/16/2011. (cm)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF KANSAS

FIRST MEDIA INSURANCE
SPECIALISTS, INC., J. LAWRENCE
WORRALL, JR. AND TRACY MICHELLE
WORRALL TILTON,
PLAINTIFFS

vs.

Case No. 10-CV-2501-EFM/KGG

ONEBEACON INSURANCE COMPANY,
ONEBEACON PROFESSIONAL
INSURANCE, INC., f/k/a ONEBEACON
PROFESSIONAL PARTNERS, INC.,
MATTHEW P. DOLAN, RANDALL G.
OATES, JOSHUA O. STEIN AND TAMMI
B. DULBERGER,
DEFENDANTS

MEMORANDUM AND ORDER
How specific must a plaintiff’s allegations of fraud and related torts be to survive a motion
to dismiss or for a more definite statement? Defendants make several arguments, but essentially
they all claim that since Plaintiffs’ claims for fraud, negligent misrepresentation, breach of fiduciary
duty and negligent supervision fail to allege specific damages arising from tortious conduct which
is separate from a related breach of contract claim, and that since the tort claims fail to plead the
basic elements and fail to plead with the required particularity, they must be dismissed for failure

to state a claim. Defendants further claim that Plaintiffs’ claim for rescission fails to allege a breach
of sufficient materiality and should also be dismissed for failure to state a claim. Our review of the
details alleged by Plaintiffs persuades us that the allegations are sufficient to withstand 12(b)(6)
dismissal, even in the context of allegations of fraud, and further to deny Defendants’ requests for
a more definite statement. We conclude that Plaintiffs’ claim for conversion, however, is
insufficiently independent of Plaintiffs’ contract claims, and dismiss it.

I. Factual and Procedural Background
This matter arises from a transaction dispute between Plaintiffs First Media Insurance
Specialists, Inc. (“FMIS”), J. Lawrence Worrall, Jr. (“Worrall”), and Tracy Michelle Worrall Tilton
(“Tilton”), and Defendants OneBeacon Insurance Company (“OBIC”), OneBeacon Professional
Insurance, Inc. (“OBPI”), Matthew P. Dolan (“Dolan”), Randall G. Oates (“Oates”), Joshua A. Stein
(“Stein”), and Tammi B. Dulberger (“Dulberger”).
FMIS is a corporation in the media insurance business. Worrall was, at the relevant times,
the Chief Executive Officer and majority shareholder of FMIS. Tilton is Worrall’s daughter, and
was the President and minority shareholder of FMIS.
OBIC is a corporation that underwrites insurance products. OBPI is a subsidiary corporation
of OBIC that provides speciality liability insurance products. Dolan, Oates, Stein, and Dulberger
are individuals who either were previously or are currently employed by OBIC and/or OBPI.
In 2004, executives of OBPI approached Worrall and Tilton about the possibility of a sale
of FMIS’ business and assets to OBPI. After a period of negotiations, FMIS, Worrall, and Tilton
entered into an Asset Purchase Agreement, a Non-Disclosure Agreement, and a Non-Compete

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Agreement (collectively, the “APA”) with OBIC and OBPI in 2005. The APA detailed the sale of
the assets and business of FMIS to OBIC and OBPI. Some of the assets included in the transaction
were customer lists, policy forms and endorsements, underwriting rating plans, intellectual property,
and the rights to approximately eight million dollars of media liability renewal premium.
After the calculations were made and the Defendants began to make payments under the
APA, FMIS and its executives were alarmed. Plaintiffs allege that the amounts Defendant paid were
significantly inconsistent with the purchase price and non-compete consideration they anticipated
due to the representations made in the negotiation process. As a result, Plaintiffs filed a complaint
against Defendants that alleges fraud, negligent misrepresentation, breach of fiduciary duty, breach
of contract, rescission, conversion, and negligent supervision.1 Primarily, Plaintiffs allege that
Defendants misrepresented material terms with regard to the formulas they would use to calculate
the payment amounts due to FMIS under the APA. Each of Plaintiffs’ claims is premised on the
theory that due to the misrepresented terms, the formulas produced significantly lower consideration
for the contract – such that Plaintiffs would not have entered into the APA had they known the true
formula that would be used.
Plaintiffs assert that OBIC and OBPI provided a number of documents during the negotiation
process that misstated the formulas by which Defendants would calculate the sums due. Two such
documents were pro formas and an acquisition term sheet (“term sheet”). The pro formas contained
projections as to the amounts of pay-outs Plaintiffs could expect to receive under the APA. The

1

The plaintiffs’ complaint (Doc. 1) also includes a claim under the Connecticut Unfair Trade Practices Act.
The Court will not address it at this time due to the Plaintiffs’ indication of their intent to voluntarily dismiss it in
their Suggestions in Opposition to Defendants’ Motion to Dismiss and Motion for a More Definite Statement (Doc.
33). To date, the Plaintiffs have not done so. Plaintiffs are directed to file a motion to dismiss the CUTPA claim if
they do not wish to proceed with the claim.

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term sheet was intended to set forth a summary of the parties’ agreement.
Plaintiffs claim that after the APA’s closing, Defendants unilaterally introduced other
actuarial terms into the formula actually used to calculate the amounts. The terms that Plaintiffs
claim were improperly inserted are components of “incurred but not reported” terms (“IBNR”),
including “Net Losses Incurred,” “Net Losses Ultimate,” “Net ALAE Incurred,” “Net ULAE
Incurred,” and “Net ULAE Reserve Increase.” They allege that the added terms resulted in an
artificial inflation of FMIS’ expenses and losses, thereby causing a reduction of the earn-out
purchase price and non-compete consideration obligations owed to Plaintiffs in the amount of
approximately twenty-three million dollars. Plaintiffs also claim that Defendants inflated the
operating expenses allocable to the premium written by FMIS to further reduce the purchase price
and non-compete considerations.
Plaintiffs base their fraud claim primarily on the allegation that Defendants promised to make
certain deferred purchase price and non-compete payments under the APA with the intent to deceive
Plaintiffs and with the knowledge that Plaintiffs would rely on the promises. Plaintiffs allege that
Defendants had no intention of making the payments at the time the APA was executed, and never
did make the payments. Plaintiffs argue that their reliance upon the representations was reasonable,
and that they have suffered damages as a result. Plaintiffs request the purchase price due under the
APA (in excess of $5,000,000) and interest, the non-compete consideration and interest due each
Plaintiff, punitive damages, reasonable attorneys fees, pre-judgment and post-judgment interest, and
costs. Similarly, as to the negligent misrepresentation claim, Plaintiffs argue that Defendants
provided false information regarding the purchase price and non-compete payments and that
Plaintiffs suffered damage as a result of their reliance on the false information. They request the

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same relief as for the fraud claim.
Plaintiffs claim that Defendants breached their fiduciary duty because OBIC and OBPI had
superior knowledge of the facts relating to the calculation of the purchase price and non-compete
considerations due under the APA, but failed to act in good faith as to their obligations within the
APA. Plaintiffs also allege Defendants misrepresented the nature and amount of certain tax
deductions, which resulted in artificially inflated losses and expenses that the Defendants attributed
to FMIS’ business. Plaintiffs allege that Defendants OBIC and OBPI breached their duties of good
faith and fair dealing and, in doing so, acted with reckless indifference to Plaintiffs’ rights – the
culmination of which caused Plaintiffs to incur damages. Plaintiffs request the same relief for this
claim.
In their breach of contract claim, Plaintiffs argue that they have fully performed all of their
obligations in the APA in reasonable reliance on the belief that Defendants OBIC and OBPI would
also perform. They allege that Defendants OBIC and OBPI failed to perform by failing to pay the
agreed-upon purchase price, failing to pay the agreed-upon consideration for Worrall and Tilton’s
non-compete agreements, and otherwise failed to perform all obligations in the APA. Plaintiffs
claim they have suffered damages as a result of the breaches, and request the same relief.
Plaintiffs’ rescission of contract claim is based upon their argument that OBIC and OBPI
made material misrepresentations regarding the amounts of the purchase and non-compete
consideration, and that Plaintiffs relied on such misrepresentations. Plaintiffs explain that they
would not have entered into the APA but for their reliance upon the pro forma documents and
misleading statements that intentionally overstated the purchase price and non-compete
consideration to induce their performance. They argue that without this reliance, FMIS would not

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have transferred its revenue-producing assets to OBIC and OBPI, and that therefore the revenue
produced by the assets belongs to FMIS and should be held in trust. Plaintiffs request the Court void
the APA and return the assets to FMIS. They also request that the Court award FMIS, Worrall, and
Tilton damages in the form of disgorgement of premiums paid and a reasonable licensing fee from
2005 to the date of judgment. Plaintiffs further request reasonable attorneys fees, pre- and postjudgment interest, and costs.
For the conversion claim, FMIS claims that OBIC and OBPI obtained the assets of FMIS by
utilitizing false and misleading information regarding the purchase and non-compete amounts.
FMIS claims that OBIC and OBPI’s failure to honor the APA caused them to forfeit their right to
the assets, and that Defendants have therefore wrongfully converted them.
Defendants moved to dismiss Plaintiffs’ fraud claim pursuant to Fed. R. Civ. P. 9(b) and
12(b)(6) for failure to state a claim and failure to plead fraud with particularity. They assert that
Plaintiffs have not sufficiently alleged a statement made by a defendant satisfying the elements of
fraud, or any damages attributable solely to fraud. They argue that similarly, the elements of
negligent misrepresentation were not sufficiently alleged, and that claim should also be dismissed.
Defendants also argue that the breach of fiduciary duty claim should be dismissed pursuant
to 12(b)(6) for failure to state a claim. They state that a fiduciary relationship does not arise in arm’s
length dealings such as these – absent special circumstances – and that such special circumstances
do not exist here. In support, Defendants rely on a number of cases they cite for the proposition that
everyday business transactions do not give rise to fiduciary relationships, unless intended.2 They
attempt to refute the idea that superior knowledge on their part would give rise to such a
2

Denison State Bank v. Madeira, 230 Kan. 684, 696 (1982); Terra Venture, Inc. v. JDN Real Estate
Overland Park, LP, 443 F.3d 1240, 1246 (10th Cir. 2006).

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relationship. They cite Burton v. R.J. Reynolds Tobacco Co., which states, “a buyer/seller
relationship does not create a fiduciary duty because the parties are dealing at arm’s length and
seeking for themselves the best advantage . . . Since it almost goes without saying that the seller of
a product will likely know more about its features and capabilities then would the buyer, this
superior knowledge is hardly a basis for grounding a fiduciary relationship.”3
Defendants argue that a more definite statement is needed regarding the breach of contract
claim. Defendants also argue that the rescission claim should be dismissed for failure to state a
claim because Plaintiffs have not alleged special circumstances that would elevate the breach of
contract claim to one for rescission. Defendants also allege that Plaintiffs are barred from asserting
the conversion claim because it is not independent of the breach of contract claim.
Finally, Defendants argue that Plaintiffs’ negligent supervision claim failed to state a claim
upon which relief could be granted because they have not demonstrated they were injured as a result
of any tortious conduct.
Plaintiffs contend that they have alleged sufficient facts upon which to state a claim.
Plaintiffs further state that the rescission claim is merely a requested remedy for the fraud claim.
They argue that the requested disgorgement under their rescission claim constitutes damages
specifically attributable to Defendants’ fraudulent conduct. They also claim that they have pled
fraud with particularity, and itemized the actions of each Defendant as they relate to the fraud
claims.
Plaintiffs assert that Defendants were in a position of superior knowledge and trust in the
transaction, and that an implied-in-law fiduciary relationship was created as a result. Plaintiffs rely

3

397 F.3d 906, 911-12 (10th Cir. 2005).

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on the proposition that “there is no invariable rule which determines the existence of a fiduciary
relationship” and that the existence of a fiduciary relationship is a question of facts to be determined
on the facts and circumstances of each case.4 Plaintiffs argue that, at a minimum, a factual dispute
exists as to the relationship of the parties and therefore dismissal of their breach of fiduciary duty
claim at this point is inappropriate.
Plaintiffs argue that the conversion claim is an independent tort and does not concern the
same subject matter as the breach of contract claim.
They claim that their breach of contract claim sets forth sufficient detail to allow Defendants
to respond, and direct the Court to refer back to paragraphs 171 through 178 of the Complaint.
Plaintiffs specifically cite Paragraph 177, which they claim sets forth with particularity the breaches:
“a). [Defendants] failed to satisfy their obligations under the APA to pay the agreed upon purchase
price; b). [Defendants] failed to satisfy their obligations under the APA to pay the agreed up on
considerations for Mr. Worrall and Ms. Tilton’s non-compete agreements; and c). [Defendants]
failed to perform all of their obligations under the APA.”
Plaintiffs allege that the other claims they have pled, particularly fraud and negligent
misrepresentation, form the underlying tortious conduct for their negligent supervision claim to
proceed.
II. Legal Standard
1. Motion to Dismiss
“To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted

4

Olsen v. Harshman, 223 Kan. 1055, 1058 (1983).

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as true, to ‘state a claim for relief that is plausible on its face.’”5 “[T]he mere metaphysical
possibility that some plaintiff could prove some set of facts in support of the pleaded claims is
insufficient; the complaint must give the court reason to believe that this plaintiff has a reasonable
likelihood of mustering factual support for these claims.”6 “The court’s function on a Rule 12(b)(6)
motion is not to weigh potential evidence that the parties might present at trial, but to assess whether
the plaintiff’s complaint alone is legally sufficient to state a claim for which relief may be granted.”7
A motion made under 12(b)(6) is viewed with disfavor and rarely granted.8 In determining
whether a claim is facially plausible, the court must draw on its judicial experience and common
sense.9 All well pleaded facts in the complaint are assumed to be true and are viewed in the light
most favorable to the plaintiff.10 Allegations that merely state legal conclusions, however, need not
be accepted as true.11
“Federal Rules of Civil Procedure 9(b) requires that ‘a party must state with particularity the
circumstances constituting fraud or mistake.’ Although on its face Fed.R.Civ.P. 9(b) only concerns
‘fraud or mistake’ allegations, several courts, including the District of Kansas and the Eastern
District of Virginia, have considered this rule and concluded that inequitable conduct must be pled

5

Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009) (quoting Bell Atl. Corp. v. Twonbly, 550 U.S. 544, 570

(2007)).
6

Ridge at Red Hawk, L.L.C. v. Schneider, 493 F.3d 1174, 1177 (10th Cir. 2007).

7

Dubbs v. Head Start, Inc., 336 F.3d 1194, 1201 (10th Cir. 2003).

8

Allen v. Kline, 507 F.Supp.2d 1150, 1155 (D. Kan. 2007) (citing Lone Star Indus., Inc. v. Horman Family
Trust, 960 F.2d 917, 920 (10th Cir. 1992)).
9

Iqbal, 129 S.Ct. at 1950.

10

See Zinermon v. Burch, 494 U.S. 113, 118 (1990); Swanson v. Bixler, 750 F.2d 810, 813 (10th Cir. 1984).

11

See Hall v. Bellmon, 935 F.2d 1106, 1110 (10th Cir. 1991).

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with particularity. Under Rule 9(b), a party must plead with particularity the time, place and
contents of the false representation, the identity of the person making the false statements, and the
consequences thereof.”12
2. Motion for a More Definite Statement
A party may move for a more definite statement when a pleading is “so vague or ambiguous
that a party cannot reasonably be required to frame a responsive pleading.”13 Such motions are
generally disfavored, and are granted only when a party is unable to determine the issues he must
respond to.14 “A motion for more definite statement should not be granted merely because the
pleading lacks detail; rather, the standard to be applied is whether the claims alleged are sufficiently
specific to enable a responsive pleading in the form of a denial or admission.”15 The decision
whether to grant or deny such a motion lies in the court’s sound discretion.16
III. Analysis
1. Motion to Dismiss
a. Fraud, Rescission, and Negligent Misrepresentation Claims
Plaintiffs have complied with Rule 9(b) for fraud, which requires the party to plead with
particularity the time, place and contents of the false representation, the identity of the person
making the false statements, and the consequences thereof.”17 Plaintiffs allege that in October of

12

Hudson Assoc. Consulting, Inc. v. Weidner, 2010 WL 1946414, *4 (D. Kan. 2010).

13

Fed. R. Civ. P. 12(e).

14

Resolution Tr. Corp. v. Thomas, 837 F.Supp. 354, 355 (D. Kan. 1993).

15

Advantage Homebuilding, LLC v. Assurance Co. of America, 2004 WL 433914, at *1 (D. Kan. 2004).

16

Graham v. Prudential Home Mortgage Co., 186 F.R.D. 651, 653 (D. Kan.1999).

17

Hudson , 2010 WL 1946414 at *4.

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2004, Oates provided Worrall and Tilton with several pro forma calculations containing
misrepresentations. Plaintiffs further included copies of some of the pro formas as exhibits.
Plaintiffs also describe an email from Oates on October 27, 2004, that references the pro formas and
reiterated Defendants’ faith in them. Additionally, Plaintiffs reference the term sheet that OBIC
and OBPI provided to them on February 23, 2005, which they allege contained misrepresentations.
Plaintiffs allege that they relied on the pro formas, email, and term sheet to their detriment and have
incurred damages in the form of lowered purchase price and earn-out payments. Plaintiffs also
request specific damages in the form of disgorgement. Plaintiffs further detailed these specifics in
their response. These allegations fulfill the requirement set forth in 9(b).
As for the rescission claim, Plaintiffs indicate that they have simply included it as a separate
remedy for fraud; therefore, any alleged deficiencies in the rescission claim are addressed by the
same arguments as those for fraud. The negligent misrepresentation claims have similar bases as
those for fraud, and are therefore also sufficiently pled.
b. Breach of Fiduciary Duty Claim
Plaintiffs alleged special circumstances in their claim that would impose an implied fiduciary
duty. They allege that Defendants were in a position of superior knowledge and trust that gave rise
to an implied-in-law fiduciary duty. Although Defendants cite authority they submit stands for the
proposition that such superior knowledge does not give rise to a fiduciary duty, the authority they
cite is distinguishable. The cases they cite appear to contemplate scenarios such as those where a
seller knows more about his product than a buyer – not one where the buyer has superior knowledge
about the amount he intends to pay as consideration.18 Bearing in mind the standard for dismissal,

18

Burton, 397 F.3d at 911-12.

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the Court finds Plaintiff’s argument from Olson persuasive.19 The Court will determine the
existence of a fiduciary relationship on a case-by-case basis. The claim will proceed for such an
inquiry.
c. Conversion Claim
The conversion claim, however, is not so easily dealt with. Generally, “when parties enter
into a contract which defines their respective rights and duties, tort causes of action concerning the
same subject matter as the contract are precluded.”20 However, “when conduct could satisfy the
elements of both a breach of contract or of an independent tort, unless the conduct is permitted by
express provisions of a contract, a plaintiff may pursue both remedies.”21 The determinative inquiry
is whether the two claims are “independent” of each other.22
The independence inquiry is intertwined with the economic loss rule, which is “designed to
prevent a party from asserting a tort remedy in circumstances governed by the law of contracts.”23
Determining when a claim is independent, however, can be difficult.24 Kansas courts are persuaded
that a tort claim is independent from a breach of contract claim when the duties and liabilities the
plaintiff attempts to impose are not those bargained for in the relevant contract.25
19

Olsen, 233 Kan. At 1058.

20

Regal Ware, Inc. v. Vita Craft Corp., 653 F.Supp.2d 1146, 1152 (D. Kan. 2006) (citing Ford Motor
Credit Co. v. Suburban Ford, 237 Kan. 195, 203-05 (1985); see also Parsons v. Davis, 1997 WL 446264, at *5 (D.
Kan. 1997) (granting summary judgment on conversion claim because contract created and defined the rights to the
property which was subject matter of the conversion claim).
21

Id. (citing Burcham v. Unison Bancorp, Inc., 276 Kan. 393, 414 (2003)).

22

See generally Regal Ware.

23

In re Bryant Manor, LLC, 434 B.R. 629, 635 (Bkrtcy. D. Kan. 2010).

24

Burcham v. Unison Bancorp, Inc., 276 Kan. 393, 414 (2003).

25

Burcham, 276 Kan. at 415-16; Regal Ware, 653 F.Supp.2d at 415.

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In their complaint, Plaintiffs make the following argument: Defendants failed to honor the
APA terms – which constitutes a forfeiture of their rights to the FMIS assets – and therefore
Defendants converted those assets.
Defendants correctly argue that Plaintiffs do not assert an independent tort. Plaintiffs’ claims
clearly arise from the contract (the APA), and Plaintiffs assert a breach of the duty created by the
APA. Plaintiffs have failed to plead sufficient facts to allege a claim that is plausible on its face
because the facts pled concern the same subject matter as that of their breach of contract claim.
Accordingly, the conversion claim is dismissed for failure to state a claim.
d. Negligent Supervision Claim
As discussed above, Plaintiffs have sufficiently alleged facts to plead their claims of fraud
and negligent misrepresentation. As a result, they identified a “tortfeasor” and therefore have
sufficiently pled the underlying harm required for a negligent misrepresentation claim to proceed.
2. Motion for a More Definite Statement
Plaintiff’s breach of contract claim contains enough allegations for the Defendants to
understand the issues they must respond to. Plaintiffs clearly allege that there was a contract (the
APA) between Plaintiffs and Defendants and that Defendants breached the contract by failing to pay
the agreed-upon purchase price, by failing to pay the agreed-upon considerations for Mr. Worrall
and Ms. Tilton’s non-compete agreements, and failing to perform all of their obligations under the
APA. Plaintiffs allege that they were harmed as a result of the breaches. Defendants can respond
to the issue of whether they breached the contract with at least an admission or denial, and that is
all the case law requires.

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III. Conclusion
Plaintiffs have alleged sufficient facts for the fraud, negligent misrepresentation, breach
of fiduciary duty, breach of contract, rescission, and negligent supervision claims to proceed.
They have not done so for the conversion claim. Defendants can be reasonably expect to form a
response to the breach of contract claim.
IT IS ACCORDINGLY ORDERED this 16th day of November, 2011 that Defendant’s
Motion to Dismiss and Motion for a More Definite Statement (Doc. 23) is hereby GRANTED
IN PART and DENIED IN PART.
IT IS SO ORDERED.

ERIC F. MELGREN
UNITED STATES DISTRICT JUDGE

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