MBS Management Services, Inc. v. Hartford Fire Insurance Company et al

Filing 525

ORDER AND REASONS granting in part 486 Omnibus Motion in Limine as stated herein. FURTHER ORDERED that a separate order will be forthcoming to address the other issues raised in Defendant's Omnibus Motion in Limine. Signed by Judge Nannette Jolivette Brown on 3/20/2012. (clm, )

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
CLAUDE C. LIGHTFOOT, JR., substituted as
Trustee of the Unsecured Creditors’ Trust formed in
connection with the bankruptcy of MBS
MANAGEMENT SERVICES, INC.

CIVIL ACTION

VERSUS

CASE NO. 07-4833

HARTFORD FIRE INSURANCE COMPANY,
HOMELAND INSURANCE COMPANY OF NEW
YORK, RSUI INDEMNITY COMPANY,
AMERICAN E & S INSURANCE BROKERS NEW
YORK, INC., and WRIGHT AND PERCY
INSURANCE AGENCY, A DIVISION OF
BANCORPSOUTH INSURANCE SERVICES, INC.

SECTION: G(3)

ORDER AND REASONS
Before the Court is Defendant’s Omnibus Motion in Limine, filed March 7, 2012.1 Plaintiff
filed its response on March 9, 2012,2 and following leave of Court, Defendant filed its reply
memorandum in further support of the Omnibus Motion in Limine on March 12, 2012.3 On March
13, 2012, this Court requested further briefing from the parties.4 Plaintiff and Defendant each timely

1

Rec. Doc. 486.

2

Rec. Doc. 493

3

Rec. Doc. 501.

4

Rec. Doc. 504 (“Considering that the Court has already ruled as a matter of law that coverage for business
interruption losses under the insurance policy in question only extends to the named insured under the policy, [n. 1
Although Plaintiff avers that whether “MBS’ operation as one company is not a theory, but a FACT” that should be
decided by the jury, Rec. Doc. 493 at p. 3, the Court has already determined, as a matter of law, that only MBSMS,
the named insured, was insured under the policy and that only MBSMS can recover for losses pursuant to the policy.
See Rec. Doc. 313 at pp. 9-10, 14.] whether it is proper to allow a jury to hear evidence of the losses of entities not
named on the insurance policy in a claim for business interruption losses where the allegation is that the other
business operated as one with the insured.”)

1

submitted the requested briefs,5 and following leave of Court, Defendant filed a reply brief.6
Having considered the motion, the response, the reply, the additional briefings, the prior
orders issued in this case, the Record, and the applicable law, for the following reasons, the Court
will allow Plaintiff to present evidence, if it exists, to the jury regarding business interruption losses,
including lost acquisition fees, that were directly sustained by MBS Management Services, Inc.
(“MBSMS”) but will disallow evidence of lost acquisition fees, earnings, profits, or other
compensation that would have been paid directly to MBS Realty Investors, Ltd. (“MBSRI”) or other
entities and then transferred to MBSMS.

I. Background
This case has a long and drawn-out history, with the majority of activity having occurred
prior to the date on which the case was reassigned from Section “A”, Judge Zainey, to Section “G”
of this Court on October 7, 2011.7 The case involves an insurance dispute regarding coverage under
several different insurance policies for business interruption losses incurred as a result of Hurricane
Katrina. The specific factual and procedural background of this case has been outlined previously,
and the Court will refer the parties to prior orders issued in this case for a more complete recitation.8
The remaining parties herein are Claude C. Lightfoot, Jr. (“Plaintiff”), as trustee of the Unsecured
Creditors’ Trust established by the bankruptcy plan of MBSMS, and Homeland Insurance Company

5

Rec. Doc. 513 (Plaintiff) and Rec. Doc. 512 (Defendant).

6

Rec. Doc. 522.

7

Rec. Doc. 461.

8

See, e.g., Rec. Doc. 313.

2

(“Defendant”), Plaintiff’s excess insurer.9
When MBSMS’s claims arose, MBSMS managed multi-family residential apartment
complexes. MBSMS claims that it was also in the business of buying and selling these complexes
for a profit through various companies operating as one with MBSMS; however, Defendant claims
that companies related to MBSMS, including MBSRI, handled the buying and selling of the
complexes and that MBSMS only managed the properties. The only entity named on the business
interruption insurance policy is MBSMS. MBSMS filed an insurance claim, which included claims
resulting from losses due to MBSRI’s inability to buy and sell properties. Defendant disputed the
claim, primarily on the basis that the claim included losses of entities not covered by the policy, and
refused to pay it. As a result, Plaintiff filed this lawsuit on August 28, 2007.10
On October 13, 2010, Judge Zainey granted partial summary judgment in this case, finding
that no genuine issue of material fact existed regarding whether entities other than MBSMS were
insured under the Defendant’s insurance policy.11 Judge Zainey ruled, as a matter of law, that
MBSRI, a company Plaintiff says “acted as one” with MBSMS,12 was not covered by the insurance

9

As an excess insurer, Defendant covers Plaintiff for losses that exceed Plaintiff’s primary layer of
insurance. Therefore, Defendant covers losses that exceed $10 million plus the applicable deductible. Defendant’s
policy follows the form of the first layer insurer’s, Hartford Fire Insurance Company’s, policy.
10

Rec. Doc. 1.

11

Rec. Doc. 313 at p. 14.

12

See, e.g., id. at p. 3.

3

policy in question as a named insured,13 additional insured,14 or third party beneficiary.15 He further
stated that, pursuant to the policy, “MBSRI’s reimbursements to MBSMS do not permit MBSMS
to recover on behalf of MBSRI,”16 and found that “MBSMS may not recover losses on behalf of
MBSRI under [the insurers’] policies.”17 Accordingly, Judge Zainey ruled as a matter of law that
damages sustained by affiliated entities are not covered under the insurance contract and that
“Plaintiff may not recover for business interruption losses incurred by MBSRI or any other MBS
entity other than MBSMS.”18
Plaintiffs twice sought reconsideration of this order, once before Judge Zainey19 and once
before this section of the Court.20 Both motions for reconsideration were denied.21 However, Judge
Zainey’s June 8, 2011 order granting partial summary judgment provided that “[n]evertheless,
Plaintiff is free to present evidence at trial of any business interruption losses sustained by MBSMS
and the extent of that coverage.”22 The question now before the Court is whether Judge Zainey’s

13

Id. at pp. 8-9 (“Thus, the close relationship between MBSMS and MBSRI is not enough for Plaintiff to
extend coverage from MBSM S to MBSRI.”).
14

Id. at pp. 9-10.

15

Id. at p. 10.

16

Id. at p. 9.

17

Id. at p. 10.

18

Id. at p. 14.

19

Rec. Doc. 362.

20

Rec. Doc. 473.

21

Rec. Doc. 421 (denying motion to reconsider grant of summary judgment as to “failed acquisition”
claims, which was granted partially on the basis that damages were incurred by an uninsured MBS entity); Rec. Doc.
484 (finding the standard for reconsideration not met).
22

Rec. Doc. 421. at p. 14.

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prior orders left open the question of whether Plaintiff can present evidence at trial of losses
sustained by MBSRI that may have resulted in indirect, secondary losses for the named insured,
MBSMS, by decreasing its gross earnings.

II. Parties’ Arguments and Analysis
In Defendant’s Memorandum in Support of its Omnibus Motion in Limine,23 Defendant
requests this Court:
preclude Plaintiff from introducing evidence of (1) Plaintiff’s single entity theory that
MBSMS and other related “MBS” entities should be treated as one consolidated
entity, or that MBSMS may recover for losses of other “MBS” entities or resulting
from a decline in the amounts of transfer of funds from other “MBS” entities to
MBSMS.24
Defendant also requests the exclusion of other evidence, which this Court will address, as necessary,
at a later time. In essence, Defendant argues that Plaintiff can only recover for “Actual Loss
Sustained due to the necessary interruption of business operations” of MBSMS, and not for losses
sustained by other entities.25 In support of this argument and foreshadowing the arguments submitted
in response to this Court’s request for further briefing, Defendant relies upon previous rulings issued
by Judge Zainey in this case to argue that the Court had already rejected the theory that MBSMS
could recover for the losses of MBSRI because the two companies acted as one entity and that the
Court had also already decided that any relationship between the different MBS companies is not

23

Rec. Doc. 486-1.

24

Id. at p. 1.

25

Id. at p. 2.

5

enough to support coverage of losses incurred by MBSRI, rather than directly by MBSMS.26
In response to the Motion in Limine, Plaintiff argues that Defendant is “attempting to
disguise factual issues that must be presented to the jury as [] issues to be decided by the Court.”27
Plaintiff further states that all business interruption losses were those of MBSMS because it was “the
only entity that had any operations whatsoever.”28 Therefore, Plaintiff’s arguments again center
upon the so-called “single entity” theory that Defendant asserts this Court has already rejected.29 The
Court notes that Plaintiff claims it does not have a “single entity” theory because “MBS’ operation
as one company is not a theory, but a FACT.”30
Plaintiff misses the mark in that even if the question of whether MBS operated as a single
company is a matter of fact, Plaintiff cannot escape the legal conclusion that entities other than
MBSMS are not covered for losses under the policy. The Court previously ruled that Plaintiff may
not recover for losses of other uninsured entities merely because of a close relationship between the
entity and MBSMS.31 The Court has repeatedly determined that Plaintiff may not present evidence
regarding business interruption losses sustained by entities other than MBSMS. The only issue that
possibly remains on this subject is whether MBSMS may recover for losses incurred by other entities
that resulted in decreased gross earnings for MBSMS. It was on this issue that the Court requested

26

Id. at p. 3.

27

Rec. Doc. 493 at pp. 1-2.

28

Id. at p. 2.

29

Id. at p. 3.

30

See Rec. Doc. 493 at p. 3.

31

Rec Doc. 313 at pp. 7-10.

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further briefing.
In response to the Court’s question, Plaintiff cites cases from other circuits and law review
articles as authority for “reverse piercing the corporate veil,” wherein courts allow someone other
than the insured to recover under a policy. Plaintiff cites these cases in support of its attempt to
introduce as evidence losses of companies whose revenues flowed through to MSBMS, the only
entity insured under the policy. Specifically, Plaintiff cites a Minnesota Supreme Court case,32 in
which the court disregarded the corporate form to allow a widow to recover benefits from an
automobile insurance company when the named insured was the deceased husband’s corporation,
rather than the deceased husband. Plaintiff argues that reverse veil piercing is a proper action under
Louisiana law.33 However, just because Louisiana allows reverse veil piercing in some situations
does not mean that it is warranted here. As Defendant notes, “Plaintiff cites no authority under
which an insurance company becomes liable under an insurance contract for losses sustained by a
non-insured entity simply because funds flowed through or were transferred to an insured entity.”34
In fact, as Defendant further notes, “Louisiana courts have rejected similar arguments in insurance
cases, as this Court previously recognized.”35
32

Roepke v. Western Nat’l Mutual Ins. Co., 302 N.W .2d 350 (S. Ct. Minn. 1981).

33

For the proposition that Louisiana recognizes the doctrine of reverse veil piercing, Plaintiff cites United
States v. Newman, 100 Fed. Appx. 958 (5th Cir. 2004), an unpublished Fifth Circuit opinion. In this case, the Fifth
Circuit found that the district court did not abuse its discretion by reverse piercing the corporate veil in order to issue
an injunction to prohibit disposal of corporate assets, so as to secure repayment of a personal restitution debt. The
court noted that “Louisiana has long recognized and applied the doctrine of piercing the veil of single-shareholder,
family, and other closely-held corporations to determine alter ego status, as well as the practice of disregarding the
corporate form once alter ego status is determined.” Id. at 958.
34

Rec. Doc. 415 at p. 5.

35

Id. (citing Rec. Doc. 313, at pp. 7-10 (reviewing cases where courts determined that “direct payments or
reimbursement payments made by a party to an insurance provider do not create a right to recover under an
insurance policy when the party is not a named insured or listed anywhere in the policy”)).

7

Plaintiff has failed to demonstrate that such reverse piercing is warranted here, and the
Minnesota Supreme Court case that Plaintiff states “clearly illustrate[s]” the situation here is
inapposite, in addition to having no precedential value upon this Court and being in conflict with the
Louisiana case law cited by Judge Zainey. Further, the Court finds these examples unpersuasive and
inconsistent with the Rule of Law articulated by Judge Zainey in his earlier ruling, and articulated
by this Court in its denial of reconsideration of that ruling, that “as a matter of law, based on the
insurance policy and applicable law, [] only MBSMS can recover for losses under the policy.”
Plaintiff argues that MBSMS received acquisition fees earned and collected by MBSRI and,
therefore, the loss of these fees falls under the insurance policy’s coverage for business interruption
losses sustained by MBSMS.36 Specifically, Plaintiff argues that there is a question of fact for the
jury as to what constituted MBSMS’ gross earnings over the period in which business was
interrupted following Hurricane Katrina. Plaintiff states, “[b]ecause the insurance policy provides
coverage for loss of gross earnings, evidence of MBSMS’ gross earnings will play a substantial role
in defining the business interruption losses the company sustained.”37 Plaintiff argues that fees
collected by MBSRI should be presented to the jury and that the jury should be allowed to decide,
as a matter of fact, whether those fees were part of MBSMS’ gross earnings.
Plaintiff is correct that “the question of the amount of gross earnings lost as a result of
interruption in business is a question of fact, not a question of law.”38 In calculating gross earnings

36

Rec. Doc. 513 at p. 2 (“The fact is that all revenues either went to MBSMS for the acquisitions,
management and disposition of the partnerships or money went to a company such as MBSRI and then flowed back
to MBSM S. The business interrupted was that of MBSM S.”).
37

Id. at p. 5.

38

Id.

8

and in defining the scope of MBSMS’ business interruption losses, Plaintiff believes it is entitled
to “include facts to support the compensation that MBSMS ordinarily would have received from
MBSRI [presumably because it operated as one company with MBSMS] but for the interruption in
business.”39 However, it is a matter of law whether the losses incurred by MBSRI and reflected as
lost compensation to MBSMS are covered by the insurance policy.
Plaintiff’s brief primarily argues, as Plaintiff argued in response to the Omnibus Motion in
Limine and as Plaintiff has argued on multiple occasions, that the two companies operated as a single
entity and, therefore, the losses of MBSRI were also those of MBSMS. As noted previously, Judge
Zainey explicitly rejected this argument in finding that “the loan and exchange of money between
MBSRI and MBSMS. . . is not sufficient to allow MBSMS to recover losses on behalf of MBSRI”
and that “MBSRI’s reimbursements to MBSMS do not permit MBSMS to recover on behalf of
MBSRI.”40 Although Judge Zainey determined that Plaintiff was free to present evidence of
damages sustained by MBSMS, Plaintiff now seeks, once again, to present evidence of losses
sustained by MBSRI as proof of losses sustained by MBSMS, albeit indirectly, as decreases in
MBSMS’ gross earnings.
For this proposition, Plaintiff argues that the dictionary definition of “gross earnings” states
that gross earnings are “[t]otal receipts of a person or business before deductions and expense.”41
Plaintiff claims, therefore, that these lost receipts constitute a decrease in gross income for MBSMS,
which should be recoverable under the policy’s business interruption provision. In contrast,

39

Id. at p. 8.

40

Rec. Doc. 313 at p. 9.

41

Rec. Doc. 513 at p. 8 (citing Black’s Law Dictionary (6th ed. 1990)).

9

Defendant points to specific language in the policy defining gross earnings:
W e will pay for the Actual Loss Sustained due to the necessary interruption of business operations
caused by direct physical loss of or damage to property at premises (including business personal
property within 1000' of the premises) for which applicable Business Interruption Limit of Insurance
are stated in the Declarations, but not exceeding the reduction in G ross Earnings Less charges and
expenses which do not necessarily continue during the Period of Restoration. The loss or damage
must be caused by or result from a Covered Cause of Loss.
Gross Earnings

Gross Earnings means the sum of:
1.

The total net sales value of merchandise; and

2.

Other income from business operations, less the following
expenses to the extent they do not continue:
a.

The net cost of merchandise sold, including packaging
materials and transportation expenses; and

b.

The cost of services purchased from vendors (not
employees) which do not continue under contract.

No other costs will be deducted in determining Gross Earnings.
W e will give due consideration to the experience of business operations
before the date of covered loss or damage and what your probable
42
experience would have been had there been no covered loss or damage.

This Court is persuaded by Defendant’s argument that the insurance policy covered only losses
sustained due to the necessary interruption of the insured’s business operations, because to hold
otherwise would be to interpret the policy unreasonably,43 and it is contrary to Louisiana law to
interpret a policy “in an unreasonable or a strained manner.”44 Therefore, losses not sustained as a
result of business interruption to MBSMS are not covered by the policy. Furthermore, the insurance
policy specifically states that recoverable losses are not to exceed the reduction in gross earnings of
the insured business; it does not state that it will necessarily cover up to the full value of any

42

Rec Doc. 512-1 at p. 61, Hartford Policy, Business Interruption Coverage for Non-Manufacturers.

43

If Plaintiff is correct, where would the line be drawn in situations where one’s business is negatively
affected by losses suffered by other entities who were not insured under a business interruption policy but
contributed to the overall profits of the insured business?
44

Sher v. Lafayette Ins. Co., 988 So. 2d 186, 193 (La. 2008).

10

reduction in gross earnings.
Plaintiff relies heavily on Judge Zainey’s ruling in Defendant Homeland’s Motion in Limine
to Preclude Any Evidence of Alleged Loss of Acquisition Fees. In that order, issued on June 17,
2011 just prior to a previously scheduled trial, Judge Zainey denied Defendant’s motion because the
Court found, and stated in a two page order, “that issues of fact exist as to whether acquisition fees
were paid to MBSMS.”45 However, Judge Zainey did not expound on this decision, nor did he
provide his reasoning or analysis. Nevertheless, considering his prior rulings and the underlying
authorities and analysis provided, when Judge Zainey denied Defendant’s Motion in Limine to
Preclude Any Evidence of Alleged Loss of Acquisition Fees, he apparently did so because he found
that issues of fact existed as to whether acquisition fees were paid directly to MBSMS. Given his
earlier ruling that MBSMS could not recover for losses sustained by MBSRI, he could only have
been considering admitting evidence of acquisition fees paid directly to MBSMS, the only covered
entity. Again, Plaintiff has not cited, and this Court has been unable to find, any authority in this
Circuit to allow recovery for business interruption losses of entities not named in the insurance
policy.
While the “measure of losses under a business interruption insurance policy” may be “a
question of fact for the jury,”46 this does not provide carte blanch to provide irrelevant and
inadmissible evidence to the jury if it would only serve to confuse the jurors and could result in a
verdict not supported by law. Defendant correctly notes that allowing Plaintiff to recover for indirect

45

Rec. Doc. 345 at p. 2.

46

Rec. Doc. 513 at p. 7 (citing Consolidated Cos. v. Lexington Ins. Co., No. 06-4700, 2009 U.S. Dist.
LEXIS 8542 (E.D. La. Jan. 23, 2009)).

11

losses that MBSMS allegedly sustained would be to allow Plaintiff to recover “for losses resulting
from business operations that were never intended to be insured.”47 As Defendant also notes, Judge
Zainey previously determined that it was undisputed that no person, on either side of the transaction,
intended to buy or sell insurance coverage for MBSRI.48 Therefore, business interruption losses
regarding the buying and selling of properties, which was not a business function of MBSMS,49 was
solely an interruption in MBSRI’s business, and Judge Zainey has already determined that MBSRI’s
losses were not covered by the insurance policy at issue here.
Therefore, although Plaintiff is correct in its position that deciding what constitutes “gross
earnings” is an issue of fact for the jury, Plaintiff’s argument is flawed in ignoring that the gross
earnings are limited to those of MBSMS and that any losses felt by MBSMS indirectly due to
business interruption or other losses incurred by entities not covered by the policy are inappropriate
for consideration by a jury here as a matter of law. Those entities charging costs and passing the fees
on to MBSMS are not covered by the policy at issue. Judge Zainey issued numerous rulings in this
case, all of which indicated that MBSMS could only present evidence as to its own business losses,
not the losses of MBSRI or some other entity. Although Judge Zainey previously stated that “issues
of fact exist as to whether acquisition fees were paid to MBSMS,”50 he could only have meant to
leave open the door to evidence regarding lost acquisition fees paid directly to MBSMS.
By attempting to introduce evidence of losses of other entities whose fees flowed through
47

See Rec. Doc. 512 at p. 12.

48

See id. (citing Rec. Doc. 171 at pp. 9-10, 13; Rec Doc. 195-1 at pp. 17-18).

49

In Chief Executive Officer Michael Smuck, Sr.’s corporate deposition, he did not list acquisition as part
of MBSMS’ business. See Rec Doc. 515-3 at p. 7.
50

Rec. Doc. 435 at p. 2.

12

MBSMS because they acted as “one entity,” Plaintiff now seeks to do indirectly what Judge Zainey
previously ruled that it could not do directly – that is, seek damage for uncovered entities – and
Plaintiff has cited no authority to indicate why this Court should allow it to end-run the orders
previously issued in this case. Accordingly, at trial, MBSMS may only present evidence of losses
sustained as a result of the necessary suspension of its own business operations, not those of MBSRI,
and may only introduce evidence of direct losses suffered by MBSMS. Fees that merely would have
been passed on to MBSMS cannot be included in computing the business interruption losses of
MBSMS.

III. Conclusion
For the reasons set forth above,
IT IS HEREBY ORDERED that Defendant’s Omnibus Motion in Limine is GRANTED
IN PART to the extent that Plaintiff MAY NOT PRESENT AT TRIAL evidence as to any alleged
business interruption losses that were not directly sustained by MBSMS. Any evidence as to losses
sustained by MBSRI, even if indirectly sustained by MBSMS because it operated as one with
MBSRI, will be precluded.
IT IS FURTHER ORDERED that a separate order will be forthcoming to address the other
issues raised in Defendant’s Omnibus Motion in Limine
NEW ORLEANS, LOUISIANA, this ______ day of March, 2012.
20th

________________________________________
NANNETTE JOLIVETTE BROWN
UNITED STATES DISTRICT JUDGE
13