Magnolia Financial Group LLC v. Antos et al

Filing 205

ORDER AND REASONS granting in part Maxum Casualty Insurance Co's 144 Motion to Dismiss for Failure to State a Claim. Plaintiff's claims for bad faith breach of conventional obligation and negligent breach of contract against Maxum are DISMISSED. Plaintiff's claims for fraud, negligent misrepresentation, and general negligence remain. Signed by Judge Jane Triche Milazzo. (ecm)

UNITED STATES DISTRICT COURT
EASTERN DISTRICT OF LOUISIANA
MAGNOLIA FINANCIAL GROUP

CIVIL ACTION

VERSUS

NO: 15-7144

KENNETH ANTOS, ET AL

SECTION “H”

ORDER AND REASONS
Before the Court is a Motion to Dismiss filed by Defendant-in-CrossClaim Maxum Casualty Insurance Co. (“Maxum”) (Doc. 144). For the following
reasons, this Motion is GRANTED IN PART.
BACKGROUND
This is a declaratory judgment action on a promissory note that was
removed from the 29th Judicial District Court for the Parish of St. Charles. On
November 11, 2013, Defendants KCI Investments, LLC (“KCI”), Kenneth
Antos, and David Becklean executed a Secured Promissory Note (the “Note”)
with Plaintiff Magnolia Financial Group, LLC, (“Magnolia”) for the principal
sum of $2,000,000 with an interest rate of 15% per annum. Defendant
Becklean also executed a Pledge and Security Agreement (the “Security
Agreement”) in favor of Magnolia, wherein he pledged his interest in the

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proceeds of a Settlement Agreement dated September 22, 2012 among Twin
Towers Trading Site Management, LLC, Jeffrey Brandon, Eric Scholer,
Becklean, and SMG Group (the “Settlement Agreement”). This pledge was
recorded. Subsequently, on January 13, 2015, Defendants entered into a
second agreement to borrow an additional $100,000 from Magnolia (the
“Second Note”). Plaintiff contends that no principal payments were made on
the Notes by the maturity dates and that $2,457,805.60 of principal and
interest remains due and owing on the Notes. On November 20, 2015, Plaintiff
filed the instant suit seeking a declaratory judgment recognizing its rights
under the Notes and the Security Agreement.
The Court granted Plaintiff summary judgment recognizing Plaintiff as
attorney-in-fact for the purposes of carrying out the Security Agreement and
establishing Plaintiff’s right to collect attorneys’ fees at the termination of the
litigation. 1
Twin Towers intervened in this action and filed an interpleader
complaint relative to a portion of the Settlement Agreement proceeds. Plaintiff
responded, averring that Twin Towers is not entitled to interpleader relief.
Plaintiff also brought cross claims against, inter alia, Twin Towers, Donald
Porges, and Porges & Eisenberg CPA, LLC (collectively the “Porges
Defendants”) for tortious interference with contractual relations, fraud, bad
faith breach of conventional obligation, negligent breach of contract, negligent
misrepresentation, and general negligence. 2 Plaintiff alleges that Porges,
acting personally and on behalf of the other Porges Defendants, represented to
Plaintiff that Twin Towers would forward payments under the Settlement
Agreement to Plaintiff in the event of Defendants’ default, but later acted to
prevent Plaintiff from obtaining the funds.
1
2

Doc. 25.
Docs. 48, 123.

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On motions by the Porges Defendants, the Court dismissed Plaintiff’s
claims for tortious interference with contractual relations and denied summary
judgment as to the remaining claims. 3
Plaintiff’s Cross-Claim also alleges that Defendant-in-Cross-Claim
Maxum has an insurance policy providing coverage to Twin Towers and its
employees, including Donald Porges, for Plaintiff’s claims against it. Pursuant
to Louisiana’s direct action statute, Plaintiff asserts those claims against
Maxum as a solidary obligor. Maxum now moves to dismiss the claims against
it under Rule 12(b)(6).
LEGAL STANDARD
To survive a Rule 12(b)(6) motion to dismiss, a plaintiff must plead
enough facts “to state a claim to relief that is plausible on its face.” 4 A claim is
“plausible on its face” when the pleaded facts allow the court to “draw the
reasonable inference that the defendant is liable for the misconduct alleged.” 5
A court must accept the complaint’s factual allegations as true and must “draw
all reasonable inferences in the plaintiff’s favor.” 6 The Court need not,
however, accept as true legal conclusions couched as factual allegations. 7
To be legally sufficient, a complaint must establish more than a “sheer
possibility” that the plaintiff’s claims are true. 8 “A pleading that offers ‘labels
and conclusions’ or ‘a formulaic recitation of the elements of a cause of action’’
will not suffice. 9 Rather, the complaint must contain enough factual allegations
Docs. 70, 200.
Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550
U.S. 544, 570 (2007)).
5 Id.
6 Lormand v. U.S. Unwired, Inc., 565 F.3d 228, 232 (5th Cir. 2009).
7 Iqbal, 556 U.S. at 678.
8 Id.
9 Id. at 678 (quoting Twombly, 550 U.S. at 555).
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to raise a reasonable expectation that discovery will reveal evidence of each
element of the plaintiff’s claim. 10
LAW AND ANALYSIS
Maxum asserts three independent grounds for dismissal of Plaintiff’s
claims against it: 1) that Louisiana law does not authorize direct action against
an insurer on claims arising from a breach of contract, 2) that the policy’s
contract exclusion precludes coverage for Plaintiff’s claim against Twin
Towers, and 3) that Twin Towers failed to notify Maxum during the policy
period. The Court previously held that it would consider Maxum’s insurance
policy on a motion to dismiss because the policy was specifically referenced in
Plaintiff’s Cross-Claim. 11
I.

Direct Action
Maxum first argues that Plaintiff cannot maintain a direct action

against it because Plaintiff’s claims are contractual. Louisiana law grants a
plaintiff the right to proceed directly against a liability insurer only when the
plaintiff has a cause of action against the insured sounding in tort. 12 Whether
an action states a tort claim depends on the source of the duty that was
breached. 13 If the insured breached an obligation that he contractually
assumed, whether as an explicit promise or implied duty, the action sounds in

Lormand, 565 F.3d at 255–57.
See Doc. 172.
12 See La. Stat. Ann. § 22:1269(B) (2017); Mentz Const. Servs., Inc. v. Poche, 87 So.
3d 273, 276 (La. Ct. App. 2012).
13 See Mentz Const. Servs., 87 So. 3d at 276.
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contract. 14 If the insured breached a general duty owed to all persons, then the
action sounds in tort. 15
Here, Plaintiff’s claims for bad faith breach of conventional obligation
and negligent breach of contract sound in contract and are therefore ineligible
for direct action. On the other hand, Plaintiff’s claims for fraud, negligent
misrepresentation, and general negligence could be based on a duty in either
contract or tort. 16 Contrary to Maxum’s argument, these claims do not arise
from a contract simply because they relate to the Settlement Agreement. The
proper standard is whether the duty allegedly breached was contained in a
contract, and Plaintiff’s remaining claims do not depend on a breach of the
Settlement Agreement. Plaintiff’s Complaint states a plausible claim that
Maxum’s insureds could be liable in tort, and Plaintiff may therefore proceed
in direct action against Maxum for the fraud, negligent misrepresentation, and
general negligence of Defendants covered by Maxum’s policy.
Accordingly, Plaintiff’s claims against Maxum for bad faith breach of
conventional obligation and negligent breach of contract are DISMISSED.
II.

The Contract Exclusion
Maxum next argues that Plaintiff’s claims against it should be dismissed

because its policy contains an exclusion denying coverage for claims arising
from a contract. Maxum’s Director, Officer, and Corporate Liability policy
extends three insuring agreements to Twin Towers, promising to pay all loss
resulting from a properly reported claim against an insured person or entity
for any wrongful act. Paragraph A extends the insurance to insured persons,
paragraph B to the insured entity to the extent it indemnified insured persons,
Id.
Id.
16 See Orleans Par. Sch. Bd. v. Chubb Custom Ins. Co., 162 F. Supp. 2d 506, 516
(E.D. La. 2001) (allowing direction action on a complaint that pled both contract and tort
claims).
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and paragraph C to the insured entity itself. 17 The policy excludes coverage for
a claims “based upon, arising out of, directly or indirectly resulting from or in
consequence of, or in any way involving any actual or alleged breach of any
oral or written contract or agreement.” 18
Maxum argues that the contract exclusion applies to all of Plaintiff’s
claims against it because they “involve” a breach of contract—the promissory
notes and Security Agreement—by other parties in the lawsuit. However,
Maxum cites no legal authority holding that a contract exclusion such as the
one contained in this policy excludes claims that are related to the breach of a
contract to which the insured was not a party. The cases Maxum does cite are
distinguishable. In Provost v. Homes by Lawrence & Pauline, Inc. and Everett
v. Philibert, the insureds were sued for breaching their own contracts to build
homes. 19 In Rodco Worldwide, Inc. v. Arch Specialty Insurance Co., the insured
brokers violated their contract with an insurance company when they issued
policies outside the company’s scope. 20 In Gemini Insurance Co. v. The Andy
Boyd Co., an insured employee breached a non-disclosure agreement with a
previous employer. 21
Instead, Louisiana law uses a limited interpretation of exclusions like
this one. In Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Casualty
Co., the Fifth Circuit held that a contract exclusion to an advertising injury

Doc. 144-4 at 15.
Doc. 144-4 at 20.
19 See Provost v. Homes by Lawrence & Pauline, Inc., 103 So. 3d 1280, 1282 (La. Ct.
App. 2012); Everett v. Philibert, 13 So. 3d 616, 620 (La. Ct. App. 2009).
20 Rodco Worldwide, Inc. v. Arch Specialty Ins. Co., 306 F. App’x 111, 112–15 (5th
Cir. 2009).
21 Gemini Ins. Co. v. The Andy Boyd Co. LLC, 243 F. App’x 814, 814–16 (5th Cir.
2007). The court in Gemini did read the contract exclusion broadly, but relied on Texas law.
Id. at 815.
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insurance agreement would not be read expansively by Louisiana courts. 22
Instead, the court reasoned that Louisiana would apply the “but for” test,
under which a claim will not be excluded if it arises from a duty other than one
imposed by contract. 23 At least one other court examining the exact language
used in the contract exclusion here also read it in this narrow fashion, albeit
under California law. 24 The Court finds that the contract exclusion here
applies only to those claims that arise from a breach of a contractual duty owed
by an insured.
Additionally, the exclusion applies only to the section of the insuring
agreement that extends coverage to the insured entity itself. 25 Plaintiff alleges
claims against Twin Towers, the insured entity of the policy, but also against
Donald Porges, and Porges & Eisenberg CPA, LLC. Plaintiff further alleges
that Donald Porges, personally and through Porges & Eisenberg CPA, was an
employee or worked on behalf of Twin Towers. 26 Plaintiff has therefore alleged
facts that make it plausible that Plaintiff can recover against individuals
insured by agreements to which the contract exclusion does not apply.
Accordingly, Plaintiff’s claims for fraud, negligent misrepresentation,
and general negligence remain with respect to all insureds to the extent the
claims do not rely on a contractual duty. The Court already found that Plaintiff
may not proceed in direct action against Maxum for the bad faith and negligent
breach of contract claims. The contract exclusion provides an additional ground

Looney Ricks Kiss Architects, Inc. v. State Farm Fire & Cas. Co., 677 F.3d 250,
257 (5th Cir. 2012).
23 Id. at 257.
24 See Church Mut. Ins. Co. v. U.S. Liab. Ins. Co., 347 F. Supp. 2d 880, 887 (S.D. Cal.
2004).
25 Doc. 144-4 at 20.
26 Docs. 48 at 13–14, 123 at 4.
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for dismissing those claims with respect to a breach of contract by Twin
Towers, though not by Donald Porges or Porges & Eisenberg CPA.
III.

Reporting Period
Third, Maxum argues that Plaintiff’s claims should be dismissed because

Maxum’s insurance contract is a claims-made-and-reported policy, and
Plaintiff failed to notify Maxum of the claim during the policy period. Maxum
argues that a claim was first made against the insureds when Plaintiff sent
the notice of default to Twin Towers and demanded payment of the Settlement
Agreement pursuant to Plaintiff’s security interest. Because this occurred
before the policy period of the policy Plaintiff identified in its Amended CrossClaim, Maxum argues that Plaintiff fails to state a claim for relief.
The policy states that it will pay “all ‘Loss’ arising from any ‘Claim’ first
made against the [insured] during the ‘Policy Period’ and reported to the
‘Insurer’ in writing during the ‘Policy Period’ or within 90 days thereafter, for
any actual or alleged ‘Wrongful Act.’” 27 It defines a “claim” to include among
other things, “a written demand for monetary or non-monetary relief.” 28
Plaintiff’s demand asking that Twin Towers pay the Settlement Agreement
proceeds to Plaintiff was therefore a “claim” under the policy. However, it was
not a claim “for any actual or alleged ‘Wrongful Act.’” 29 Rather, the demand
was pursuant to a security agreement that the beneficiaries of the Settlement
Agreement granted Plaintiff. Because the notice of default did not demand any

Doc. 144-4 at 15.
Doc. 144-4 at 17.
29 Doc. 144-4 at 15.
27
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payment as a result of an insured’s wrong, it did not fall within the insuring
agreement’s reporting requirement.
Plaintiff has stated a plausible claim that the policy covers the acts of
the complaint.
CONCLUSION
For the foregoing reasons Maxum’s Motion to Dismiss is GRANTED IN
PART. Plaintiff’s claims for bad faith breach of conventional obligation and
negligent breach of contract against Maxum are DISMISSED. Plaintiff’s
claims for fraud, negligent misrepresentation, and general negligence remain.
New Orleans, Louisiana this 30th day of August, 2017.

____________________________________
JANE TRICHE MILAZZO
UNITED STATES DISTRICT JUDGE

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