The Hammocks LLC v. Harleysville Mutual Insurance Company
Filing
127
ORDER denying 117 Motion for Judgment as a Matter of Law. Signed by District Judge Martin Reidinger on 4/29/13. (nll)
THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF NORTH CAROLINA
ASHEVILLE DIVISION
CIVIL CASE NO. 1:10-cv-00022-MR-DLH
THE HAMMOCKS, LLC d/b/a Richmond
Hill Inn, Debtor-in-Possession,
)
)
)
Plaintiff,
)
)
vs.
)
)
)
HARLEYSVILLE MUTUAL INSURANCE
)
COMPANY,
)
Defendant.
)
____________________________________ )
ORDER
THIS MATTER is before the Court on the Plaintiff’s Motion for
Judgment in Part as Matter of Law [Doc. 117].
I.
PROCEDURAL BACKGROUND
On March 19, 2009, an arson fire damaged one of the structures at
the Richmond Hill Inn known as the “Mansion.” After its insurance claim
was denied, the owner of the Richmond Hill Inn, The Hammocks, LLC
(“The Hammocks”), commenced this action against the insurer, Harleysville
Mutual Insurance Company (“Harleysville”), alleging a breach of contract.1
1
The Hammocks also brought causes of action for bad faith refusal to pay or settle an
insurance claim, and for unfair or deceptive trade practices. [Complaint, Doc. 9-1 at
The Defendant denied coverage, alleging inter alia that the insurance policy
was void ab initio, and/or that coverage was otherwise precluded because
1) The Hammocks, its members, or its affiliates caused the arson that
destroyed
the
Mansion;
2)
The
Hammocks
made
material
misrepresentations on its application for insurance; and 3) The Hammocks
made material misrepresentations in the presentation of the claim,
specifically with respect to the sworn proof of loss and the sworn testimony
of member-manager William Gray (“Gray”).
The case proceeded to a trial by jury on November 26, 2012. On
November 29, 2012, the jury returned a verdict in favor of Harleysville,
finding that The Hammocks had intentionally participated in the burning of
the Mansion.2 [Verdict Sheet, Doc. 115]. On December 12, 2012, the
Court entered Judgment in favor of Harleysville based on the jury’s verdict,
declaring that Harleysville has no duty to provide coverage for the claim of
loss tendered by The Hammocks and that the insurance at issue is null and
¶¶30-40]. Both of these causes of action were dismissed with prejudice prior to trial and
are therefore not at issue here. [Order, Doc. 20].
2
In response to the first issue on the Verdict Sheet, the jury found that there were no
material misrepresentations made in the application for insurance. Because the jury
found that The Hammocks had intentionally participated in the burning in response to
the second issue, the jury did not reach the subsequent issues on the Verdict Sheet,
including whether material misrepresentations were made in the presentation of the
claim of loss.
2
void, under the terms and conditions of the policy, as a result of The
Hammocks’ intentional burning of the insured property. [Judgment, Doc.
116].
On January 7, 2013, The Hammocks filed the present Motion,
seeking a partial judgment as a matter of law pursuant to Rule 50(b) of the
Federal Rules of Civil Procedure, with respect to the issue of The
Hammocks’ intentional participation in the burning of the Mansion. [Doc.
117]. Harleysville filed a Response brief on February 4, 2013, opposing
The Hammocks’ Motion. [Doc. 125]. The Hammocks opted not to file a
reply brief. [See Doc. 126].
Having been fully briefed, this matter is now ripe for disposition.
II.
STANDARD OF REVIEW
Rule 50 of the Federal Rules of Civil Procedure provides, in pertinent
part, as follows:
If a party has been fully heard on an issue during a
jury trial and the court finds that a reasonable jury
would not have a legally sufficient evidentiary basis
to find for the party on that issue, the court may:
(A) resolve the issue against the party; and
(B) grant a motion for judgment as a matter of law
against the party on a claim or defense that, under
the controlling law, can be maintained or defeated
only with a favorable finding on that issue.
3
Fed. R. Civ. P. 50(a)(1). If the court does not grant a Rule 50(a) motion at
trial, the movant may file a renewed motion for judgment as a matter of law
within 28 days after the entry of judgment. Fed. R. Civ. P. 50(b).
A jury verdict will withstand a Rule 50(b) motion unless the
nonmovant has presented no substantial evidence to support the jury
verdict. Stamathis v. Flying J, Inc., 389 F.3d 429, 436 (4th Cir. 2004). A
Rule 50 motion for judgment as a matter of law is reviewed under the same
standard as that applied in reviewing a motion for summary judgment.
Thus, in considering The Hammocks’ motion, the Court must view the
evidence in the light most favorable to Harleysville and draw all reasonable
inferences in Harleysville’s favor. See Dennis v. Columbia Colleton Med.
Ctr., Inc., 290 F.3d 639, 644-45 (4th Cir. 2002). A verdict may not be set
aside unless the Court “determines that the only conclusion a reasonable
trier of fact could draw from the evidence is in favor of the moving party.”
Tools USA and Equip. Co. v. Champ Frame Straightening Equip., Inc., 87
F.3d 654, 656-57 (4th Cir. 1996) (quoting Winant v. Bostic, 5 F.3d 767, 774
(4th Cir. 1993)).
III.
DISCUSSION
The second issue on the Verdict Sheet presented to the jury states:
“Did the plaintiff intentionally participate in the burning of the Richmond Hill
4
Inn Mansion?” [Verdict Sheet, Doc. 115 at 1].
In connection with this
issue, the jury was instructed that the insurance policy at issue reads, in
pertinent part, as follows:
The defendant insurance company does not pay for
loss caused by or resulting from criminal, fraudulent,
dishonest, or illegal acts committed alone or in
collusion with another by the plaintiff insured, others
to whom the plaintiff insured entrusts the property,
the agents of the plaintiff insured or others to whom
the plaintiff insured entrusted the property, whether
they are -- whether or not they are at work.
[Trial Transcript (“Trial Tr.”), Doc. 120 at 179-80].
The jury was further instructed, in pertinent part, as follows:
An insured who has intentionally participated,
directly or indirectly, in the burning of property may
not collect insurance for the loss or damage to that
property. On this issue the burden of proof is on the
defendant insurance company. This means that the
defendant must prove, by the greater weight of the
evidence, the following two things. First, that the
Richmond Hill Inn Mansion was intentionally burned
and, second, that the plaintiff limited liability
company participated, either directly or indirectly, in
the burning.
*
*
*
Mere proof that the insured property was
intentionally burned does not relieve the defendant
insurance company from its obligation to pay under
the policy.
A Limited Liability Company may
properly insure itself against a fire set by others
without its knowledge or consent. The defendant
5
must prove that if the property was intentionally
burned the plaintiff participated directly or indirectly
in that burning. A person participates in a burning if
he (a) burns the property himself; or (b) helps
another burn the property; or (c) procures or
arranges for someone else to do the burning; or (d)
agrees with the person who ultimately sets the fire
that the property shall be burned.
The defendant asserts that the plaintiff participated
in the burning through the actions of William Gray.
Whether the plaintiff Limited Liability Company
participated in an intentional burning of its property
depends on whether William Gray himself
participated in the burning and, if so, whether
William Gray was acting as a member manager of
the plaintiff Limited Liability Company and on its
behalf in such participation.
An intentional burning cannot be attributed to a
Limited Liability Company unless it is established
that the perpetrator acted with the Limited Liability
Company’s assent. Thus, if an individual who is not
in control of the company’s affairs participates in the
burning of the premises without the complicity of the
company, then that act is not attributable to the
company. If, however, an individual participates in
the burning of the premises and such individual was
also vested with virtually exclusive management
and control of the company’s affairs, then the
company must be denied recovery under the policy.
Accordingly, if you find that William Gray
participated in the burning of the Richmond Hill Inn
Mansion, and that he did so, either with the assent
of the company or while he had virtually exclusive
management and control of the company’s affairs,
then the plaintiff must be denied recovery under the
policy.
6
[Id. at 180-82].
As noted above, the jury answered this issue in the
affirmative, thereby precluding recovery for The Hammocks under the
insurance policy.
The Hammocks argues that there is insufficient evidence in the
record to support the jury’s finding that Gray acted as a member-manager
of The Hammocks and on its behalf in intentionally burning the Mansion.3
Specifically, The Hammocks argues that Harleysville failed to produce any
substantial evidence to show that Gray was the only manager of the LLC;
that Gray dominated or had exclusive control of the LLC’s management;
that Gray had a controlling membership interest in the LLC; that the other
LLC members and managers had ceded exclusive control of the LLC’s
management to Gray alone; or that the LLC had “entrusted” the Mansion to
Gray alone. [Doc. 118 at 7-14].
The Hammocks’ argument that Gray had to be vested with
“exclusive” control of the LLC is not supported by the law.
The Court
specifically instructed the jury that if it found that Gray participated in the
burning of the Mansion and that he did so “while he had virtually exclusive
management and control of [The Hammocks’] affairs, then [The
3
In the present motion, The Hammocks does not appear to dispute that Gray was
responsible for the burning of the Mansion, but rather contests only whether Gray’s
actions can be attributed to the LLC.
7
Hammocks] must be denied recovery under the policy.” [Trial Tr., Doc. 120
at 182 (emphasis added)]. The requirement that Gray had to have “virtually
exclusive management and control” of The Hammocks’ affairs did not imply
that Gray had to dominate or completely control the affairs of The
Hammocks. By definition, the term “virtually” means “almost entirely” or
“for all practical purposes”; it does not require complete domination and
control.
See Webster’s Third New Int’l Dictionary 2556 (2002).
Establishing a member’s complete domination or control is simply not
required by the law. See Kimball Ice Co. v. Hartford Fire Ins. Co., 18 F.2d
563, 567 (4th Cir. 1927) (affirming jury verdict in favor of insurer where
arson was committed by minority stockholder and general manager of
corporation); K&T Enters., Inc. v. Zurich Ins. Co., 97 F.3d 171, 177-78 (6th
Cir. 1996) (rejecting the “complete” or “exclusive” control requirement on
the rationale that it would (1) require proof that is very difficult except in the
smallest of businesses, (2) would “encourage some corporate officers
deliberately to remain blissfully ignorant of any plans for arson” by others,
(3) would create incentives to disperse at least apparent authority in
distressed corporations, and (4) would “encourage arson for profit”).
The testimony adduced at trial from non-party fact witnesses, as well
as The Hammocks’ own members, established substantial evidence to
8
support the jury’s finding that Gray had virtually exclusive management and
control of The Hammocks’ affairs at and around the time Gray intentionally
burned the Mansion.
For example, Margaret Michel testified that Gray
retained a realtor, who in turn approached the Michels regarding the
purchase of the Inn, and that Gray was the “point of contact” for the Inn’s
sale by the Michels to The Hammocks. [Trial Tr., Doc. 122 at 309, 311].
Virginia Love (“Love”), who was a member of The Hammocks and a lawyer
practicing in Chattanooga, Tennessee, admitted that she had nothing to do
with the negotiations for the purchase of the Inn. In fact, she was not even
supplied with the Inn’s financial information prior to its purchase. [Trial Tr.,
Doc. 121 at 117].
Evidence presented at trial also established that during The
Hammocks’ ownership and operation of the Inn, Gray infused money into
The Hammocks, which not only resulted in Gray becoming an individual
owner in The Hammocks, but also demonstrated Gray’s significant
personal investment in the Inn. [See Trial Tr., Doc. 121 at 106]. Gray’s
personal investment in The Hammocks also took the form of controlling the
Inn’s aesthetics by way of significant contributions of Gray’s own antiques,
art, and other valuables which Gray estimated to be “several hundred”
items, which varied in value from $50 to $10,000. [Trial Tr., Doc. 123 at 719
73, 97].
Further, while all of The Hammocks’ members authorized its
Chapter 11 bankruptcy, The Hammocks’ bankruptcy attorney testified that it
was his understanding that Gray was “authorized to act on behalf of The
Hammocks with regard to [such] discussions.” [Trial Tr., Doc. 122 at 41].
Further demonstrating Gray’s control and management of The
Hammocks was the testimony of James Sloggatt (“Sloggatt”), a member of
The Hammocks, who testified that Gray demanded that Sloggatt deed over
an adjacent tract to The Hammocks prior to its bankruptcy filing. [Trial Tr.,
Doc. 121 at 224].
When Sloggatt had not deeded the tract to The
Hammocks by the time an order of foreclosure on the Inn was entered on
March 16, 2009, The Hammocks retained Love’s law firm to pursue a claim
against Sloggatt. Love prepared a letter to Sloggatt on her firm’s letterhead
demanding that Sloggatt pay $9 million, which Love testified was per the
request of Gray. [Trial Tr., Doc. 121 at 164, 176]. The $9 million dollar
demand was the approximate amount that The Hammocks owed its
creditors at the time. [Trial Tr., Doc. 121 at 177-78].
Additionally, multiple employees testified at trial regarding Gray’s
virtually exclusive day-to-day management and control of the Inn. Robert
Gentry, a long-time employee of the Inn, testified that Gray “was always [at
the Inn].
I know [The] Hammocks had a couple of additional people
10
involved with it. I only met them a couple of times. But Mr. Gray was pretty
much on the property.” [Trial Tr., Doc. 122 at 130]. Mr. Gentry testified
that Gray was presented to him as the person in charge of the ownership of
the Richmond Hill Inn, and that Gray made his control clear to the Inn
employees. [Trial Tr., Doc. 122 at 130, 131].
Frank Comito, another employee of the Richmond Hill Inn, also
confirmed that Gray was solely responsible for managing the Richmond Hill
Inn. When asked who was responsible for “overseeing the [I]nn” after The
Hammocks purchased it, Mr. Comito responded, “Mr. Gray.”
[Trial Tr.,
Doc. 122 at 249]. Mr. Comito went on to testify that “as far as a manager of
the property and who was making the calls, it would be Mr. Gray.” [Id.]
The documentary evidence admitted at trial provides further
substantial evidence of Gray’s virtually exclusive management and control
of The Hammocks’ affairs and of the Inn. The Fifth Amendment to the
Operating Agreement of The Hammocks, which was in effect at all times
relevant to these proceedings, named Gray as the sole member-manager
of The Hammocks. [Defendant Trial Exhibit (“Def. Tr. Ex.”) 17 at 1-2].
Gray’s virtually exclusive authority is further demonstrated by other
substantial documentary evidence, such as the October 2006 and 2007
modifications to the Michels’ Note and Deeds of Trust, which were signed
11
by Gray. [Def. Tr. Ex. 10 at 3; Def. Tr. Ex. 156 at 2]. According to the
LLC’s Articles of Organization, Gray was the agent for service of process
for The Hammocks and the only member identified as an individual in
whom The Hammocks’ management was vested. [Trial Tr., Doc. 121 at
273-74; Def. Tr. Ex. 1].
Documentary evidence admitted at trial further showed that Gray had
control and authority with respect to The Hammocks’ real estate
transactions. In September 2005, Love and Sloggatt provided Gray with
Powers of Attorney to act on their behalf with respect to the purchase of a
tract of property located near the Richmond Hill Inn.4 [Trial Tr., Doc. 121 at
111-17, 217-18; Def. Tr. Exs. 139, 168]. In February 2008, The Hammocks
attempted to sell the Richmond Hill Inn property to Stonehouse Resort
Properties, LLC. [Trial Tr., Doc. 121 at 168]. The documents associated
with this attempted sale, most notably the agreement for the purchase and
sale of the property, were negotiated and executed solely by Gray on
behalf of The Hammocks. [Def. Tr. Ex. 122; Trial Tr., Doc. 121 at 269-71].
4
The Hammocks argues that Love and Sloggatt’s Powers of Attorney were
unenforceable under North Carolina law because the original Powers of Attorney were
never delivered or recorded. [Doc. 118 at 15-16]. Regardless of their enforceability,
however, these Powers of Attorney are nevertheless relevant to showing the dominion
and control that the other members of the LLC intended to bestow on Gray.
12
Communications by and between The Hammocks’ Members, Love
and Sloggatt, further showed Gray’s virtually exclusive management and
control of The Hammocks’ affairs. As early as February 2006, Sloggatt emailed Love discussing his strained relationship with Gray, and notifying
her that Sloggatt had “agreed to go through [Gray] for all future plans and
purchases for the [Richmond Hill Inn].” [Def. Tr. Ex. 72 at 1]. In June 2006,
Love stated in an e-mail to the longtime Innkeeper regarding the decision to
terminate his position: “I felt like I just was not close enough to the situation
to be able to act contrary when my verbal admonitions did not get
anywhere. I know I am just too busy to try to replace [Gray] . . . .” [Def. Tr.
Ex. 29 at 1].
After Gray burned the Mansion, documents show that he continued to
act as the controlling manager of The Hammocks. Gray was the only
member to sign The Hammocks’ original and amended bankruptcy
petitions. [Def. Tr. Exs. 84 at 2, 85 at 2]. Gray signed the Sworn Proof of
Loss submitted to Harleysville for The Hammocks, and Gray served as the
Member Manager of The Hammocks to give testimony on behalf of The
Hammocks at the Examination under Oath conducted by Harleysville.
[Trial Tr., Doc. 123 at 138, Doc. 121 at 257; Def. Tr. Exs. 151A at 1, 151B
at 1, 151C at 1].
The foregoing testimony and exhibits presented
13
substantial evidence from which a reasonable jury could find that Gray
maintained virtually exclusive control and management of The Hammocks’
affairs up to and through the date that Gray burned the Mansion.
In making its Rule 50(b) Motion, The Hammocks relies heavily on the
fact that Gray was not a majority owner in The Hammocks and therefore
argues that Gray did not have the right to act on The Hammocks’ behalf
when he burned the Mansion.
It is undisputed that Gray effectively
maintained a 42% ownership interest in The Hammocks. The fact that
Gray was not a majority owner, however, is not determinative of whether
Gray had “virtually exclusive management and control” of The Hammocks’
affairs at the time Gray burned the Mansion. Indeed, it has long been
recognized that a minority shareholder can have sufficient control over a
company’s affairs for his or her arson to be imputed to the company. See,
e.g., Vicksburg Furniture Mfg., Ltd. v. Aetna Cas. & Sur. Co., 625 F.2d
1167, 1170 (5th Cir. 1980) (concluding that evidence supported insurer’s
defense of “corporate arson” where there was evidence indicating that one
of officers, who was also a director and 25% shareholder of the corporate
insured, had control of the company’s affairs); Kimball Ice, 18 F.2d at 56567 (denying recovery by insured where arson was committed by minority
shareholder who also served as general manager of the company).
14
The Hammocks argues that the jury’s verdict lacks sufficient
evidentiary support because there is no evidence that there was a
supermajority vote of The Hammocks’ members authorizing Gray to burn
the Mansion. [Doc. 118 at 14-15]. Contrary to The Hammocks’ argument,
however, there is no requirement that formal authorization by a
supermajority of The Hammocks’ members be established in order to show
assent to Gray’s intentional burning of the Mansion. Rather, as the Court
noted in its instructions [Trial Tr., Doc. 120 at 182], circumstantial evidence
such as motive may be proof to show a corporate entity’s assent to arson.
See Cora Pub, Inc. v. Continental Cas. Co., 619 F.2d 482, 486 (5th Cir.
1980) (recognizing that “proof of corporate assent to arson . . . is not likely
to be found in the archives of the corporation” and so insurers may prove
arson by a variety of methods, including circumstantial evidence).
Here, Harleysville presented substantial evidence at trial with respect
to The Hammocks’ financial motive to burn the Mansion. Between 2006
and 2008, The Hammocks operated at a loss of over a million dollars per
year. [Trial Tr., Doc. 121 at 202]. In the months preceding the arson, The
Hammocks faced foreclosure on the property by the previous owners, the
Michels, and The Hammocks’ members were contemplating bankruptcy.
[Trial Tr., Doc. 121 at 148-49]. Unable to obtain financing, The Hammocks’
15
members were forced to make personal contributions to help finance the
Richmond Hill Inn’s operations. [Trial Tr., Doc. 121 at 157]. An attempt to
sell the property for $8.8 million fell through in August 2008. [Trial Tr., Doc.
123 at 91, 93].
In February 2009, The Hammocks was notified that
Buncombe County would initiate foreclosure proceedings for The
Hammocks’ failure to pay property taxes unless payment was made within
14 days. [Trial Tr., Doc. 121 at 264; Def. Tr. Ex. 154]. On March 16, 2009,
following months of proceedings on the pending foreclosure by the Michels,
the Buncombe County Clerk issued an order allowing a foreclosure sale of
the Inn within a few weeks. [Trial Tr., Doc. 121 at 264-65]. When the fire
occurred three days later, The Hammocks owed approximately $7.9 million
to creditors, including $6.9 million on the Note to the Michels. [Def. Tr. Ex.
84 at 3, 4]. In addition, The Hammocks owed approximately $1.1 million in
unpaid state and federal taxes. [Trial Tr., Doc. 122 at 53-54; Def. Tr. Ex.
71]. This evidence constitutes substantial evidence of The Hammocks’
financial motive to burn the Mansion and recover over $6 million in
insurance proceeds.
For the foregoing reasons, the Court concludes that there is
substantial evidence from which the jury could have reasonably concluded
that The Hammocks intentionally participated in the burning of the insured
16
property. Accordingly, The Hammocks’ motion for a partial judgment as a
matter of law is denied.
ORDER
IT IS, THEREFORE, ORDERED that the Plaintiff’s Motion for
Judgment in Part as Matter of Law [Doc. 117] is DENIED.
IT IS SO ORDERED.
Signed: April 29, 2013
17
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?