Greenwich Insurance Company v. Garrell et al
ORDER: IT IS THEREFORE ORDERED that Greenwich's Motion for Judgment on the Pleadings [Doc. # 22 ] is DENIED without prejudice to Greenwich's right to raise the issues therein at the bench trial in this matter. IT IS FURTHER ORDERED that the Garrell Defendants' Motion for Summary Judgment [Doc. # 34 ] is also DENIED without prejudice to Greenwich's right to raise the issues therein at trial. IT IS SO ORDERED. Signed by Honorable R Bryan Harwell on 3/7/2013.(mcot, )
IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF SOUTH CAROLINA
Greenwich Insurance Company,
Joe Garrell, Joe Garrell & Associates, Inc. )
d/b/a Litus Group, Garrell Properties, LLC )
d/b/a Litus Group,
Carol P. Moore, individually and on behalf )
of LandBank LLC, LandBank Fund IV
LLC, and LandBank Fund V, LLC,
E. Wade Byrd, Jr. and Nancy W. Byrd
Living Trust, individually and on behalf
of LandBank Fund IV, LLC, Benton H.
Walton, III, individually and on behalf
of LandBank, LLC and LandBank Fund V )
LLC, Charles L. Tate Jr., individually and )
on behalf of LandBank, LLC, J.D.
Carmichael, individually and on behalf
of LandBank Fund, IV, LLC, Wilbur C.
Ward, individually and on behalf of
LandBank Fund IV, LLC and Joyce Ward, )
individually and on behalf of LandBank
Fund IV, LLC and LandBank, LLC,
Necessary Party Defendants.
Civil Action No.: 4:11-cv-02743-RBH
Plaintiff Greenwich Insurance Company (“Greenwich”) filed this declaratory judgment
against Defendants Joe Garrell and other related entities (the “Garrell Defendants”) seeking a
declaration that it has no duty to defend or to indemnify the Garrell Defendants in a pending state
court action. This matter is before the Court on the following motions: (1) Greenwich’s Motion for
Judgment on the Pleadings and to Dismiss under Federal Rules of Civil Procedure 12(b)(6) and
12(c), requesting that this Court declare that Greenwich has no duty to defend the Garrell
Defendants and dismiss the Garrell Defendants’ counterclaims (“Motion for Judgment on the
Pleadings”) [Doc. # 22]; and (2) the Garrell Defendants’ Motion for Summary Judgment, requesting
that this Court dismiss Greenwich’s causes of action against them, declare that Greenwich has a duty
to defend and that their actions constitute bad faith, and award attorney’s fees (“Motion for
Summary Judgment”) [Doc. # 34]. For the reasons discussed below, both motions are denied.1
This is a declaratory judgment action involving a determination of whether insurance
coverage exists for the Garrell Defendants in connection with an amended complaint2 filed in the
Court of Common Pleas for the Fifteenth Judicial Circuit in Horry County, South Carolina,
captioned Carol P. Moore, et al. v. Joe Garrell, et al., No. 2011-CP-26-6863.
The Garrell Defendants are a group of related entities that perform, among other functions,
real estate services. Specifically, one or more of the Garrell Defendants assist various investors with
the purchase and sale of commercial real estate. Whenever the investors enter into a new real estate
transaction, a new single-purpose entity is formed with various members. These entities are typically
Under Local Rule 7.08, “hearings on motions may be ordered by the Court in its discretion.
Unless so ordered, motions may be determined without a hearing.” The issues have been briefed
by the parties, and the Court believes a hearing is not necessary.
This declaratory judgment action was filed prior to the amended complaint in the underlying
state court action. [See Compl., Doc. # 1.] However, the pending motions were all filed after
the amended state court complaint, and the parties agree that the amended state court
complaint, which is attached both to the Garrell Defendants’ Answer and to Greenwich’s
Motion for Judgment on the Pleadings, is the operative state court complaint.
identified as LandBank Fund or LandBank, with the various entities being distinguished by separate
Roman numerals (“LandBank Entities”). The LandBank Entities are managed by the LandBank
Resource Management Board (“LBRM Board”), which is comprised of members elected from the
investors or parties involved in real estate transactions related to the LandBank Entities.
The Goodstein Lawsuit3
In July 2006, LandBank Fund XIII, one of the LandBank Entities, entered into a real estate
sales contract with Arnold Goodstein. Specifically, Landbank Fund XIII’s contract with Mr.
Goodstein was for the sale and purchase of real property along the Atlantic Intracoastal Waterway
in Horry County, South Carolina. It appears that at least a portion of the property was represented
to be a former landfill. However, further research revealed that the property was suitable for single
and multipurpose residential development, making it potentially more valuable than the contract
price. According to Greenwich, restrictions on residential development were then fraudulently
placed upon the deed prior to sale. The putative transaction between Mr. Goodstein and LandBank
Fund XIII ultimately fell through.
In 2007, the LBRM Board initiated suit against Mr. Goodstein for his alleged failure to
provide earnest money pursuant to his agreement with LandBank Fund XIII (the “Goodstein
Lawsuit”). None of the Garrell Defendants were ever made a party to the Goodstein Lawsuit. It
appears that there was some discussion among members of the LBRM Board in 2010 to add one or
more of the Garrell Defendants as a party. However, this was never done. According to the Garrell
It does not appear from the record that this Court has been provided the pleadings or any other
filings from the Goodstein Lawsuit, and Mr. Goodstein is not a party to either the underlying
state court action or this federal declaratory judgment action. Accordingly, this Court’s
recitation of the facts is based solely upon the parties’ representation of what occurred during
the Goodstein Lawsuit.
Defendants, counsel advised the LBRM Board that it should not add Mr. Garrell or any of his related
entities as a party to the Goodstein Lawsuit as there was no basis for a claim against them. In support
of this proposition, the Garrell Defendants attach an email to their Answer, the authenticity of which
Greenwich does not dispute, which is dated September 27, 2010, and appears to be from an attorney
offering advice regarding the Goodstein Lawsuit. In the letter, the attorney states that LandBank
Fund XIII could possibly have a “tough” claim against Mr. Garrell for indemnification after the
Goodstein Lawsuit, but the letter also states that “it would be a mistake . . . to try and sue [Mr.
Garrell] or try to have him added as a party. For the life of this case we have argued that the efforts
taken by [Mr. Garrell] were appropriate . . . .” [Counsel Ltr., Doc. # 7-2, at 1.]
Sometime in early 2011, the Goodstein Lawsuit settled by way of a payment to Mr.
Goodstein. Other than the discussion about potentially adding one or more of the Garrell Defendants
as a party, no action was requested from any of the Garrell Defendants.
In February 2011, Greenwich issued a professional liability insurance policy (the “Policy”)
to one of the Garrell Defendants, Joe Garrell & Associates, Inc., d/b/a Litus Group. It is unclear from
the record whether the Goodstein Lawsuit settled before or after Greenwich issued the Policy;
although the parties appear to agree that the two events occurred close in time.
The Policy provides coverage for certain acts and omissions in the performance of real estate
services by the named insured and various entities or individuals affiliated with the named insured.
The Policy defines real estate services, in part, as “those professional services performed for others
in the insured’s capacity as a real estate agent [or] real estate broker . . . .” [Policy, Doc. # 1-2, at
15.] As a condition of coverage, a claim for which the insured seeks coverage cannot have been
made prior to the Policy’s February 2011 inception date. Moreover, the Policy provides coverage
is available for a claim unless, prior to the Policy’s inception, the insured had “a basis to believe that
[the act or omission at issue], or any related act or omission, might reasonably be expected to be the
basis of a claim.” [Id.]
The Underlying Lawsuit in State Court
On August 15, 2011, a number of member-investors in the LandBank Entities, proceeding
in their individual capacities and on behalf of the LandBank Entities (“Underlying Plaintiffs”),4 filed
a complaint in Horry County, South Carolina, which they amended on November 11, 2011. The
amended complaint spans seventy-two pages, lists more than fifty defendants, and contains fifteen
causes of action spelled out in three hundred and sixty-three numbered paragraphs. Among these
defendants are several attorneys who have performed work for the LandBank Entities, other
LandBank Entity members, the LBRM Board, and the Garrell Defendants. The amended complaint
claims that the defendants have caused great economic damage to the Underlying Plaintiffs, and
states a number of wide-ranging allegations, including fraud, violation of South Carolina’s Unfair
Trade Practices Act, breach of fiduciary duty, and negligence.
According to the Garrell Defendants, the lawsuit includes claims against the Garrell
Defendants for acts and omissions in the performance of real estate services. In support of this
argument, the Garrell Defendants point to the following allegations in the underlying amended
complaint, among others:
The Underlying Plaintiffs are listed as Necessary Party Defendants in this action, and have
filed a one-paragraph Response to the Garrell Defendants’ Motion for Summary Judgment
stating that the Garrell Defendants should be provided with a defense and full coverage in the
At all times relevant hereto, [Garrell Defendant Mr. Garrell] was acting within
the scope of his agency with [Garrell Defendant Litus] and the other Landbank
affiliated entities as described herein. [Am. State Court Compl., Doc. # 22-1, at
At all times relevant hereto, [Garrell Defendant Litus] was in fact the Plaintiffs
and/or the Plaintiffs companies’ real estate agent for LandBank matters, and held
itself and [Garrell Defendant Mr. Garrell] out as their real estate agent. [Id. at ¶
[Garrell Defendant Litus] did not adequately supervise [Garrell Defendant Mr.
Garrell] , knew or should have known of the misconduct complained of herein,
and otherwise failed in the discharge of its obligations to the Plaintiffs and/or
Plaintiffs’ companies, and otherwise conducted itself in a manner inconsistent
with, and in violation of, the standard of care owed to the Plaintiffs . . . .” [Id. at
The Garrell Defendants have omitted material information about the transactions
described in the complaint. [Id. at ¶ 159.]
The Garrell Defendants have falsely represented certain information regarding
cable agreements and rights. [Id. at ¶ 190.]
Joe Garrell, Garrell & Associates, LLC, and Garrell Properties, LLC made
negligent misrepresentations to the Plaintiffs regarding the Goodstein transaction
and other Landbank opportunities. [Id. at ¶ 287.]
After the underlying state court action was filed, the Garrell Defendants sought coverage
from Greenwich under the Policy. Although Greenwich agreed to provide a defense, it did so
“subject to a full and complete reservation of rights.” [Compl., Doc. # 1, at ¶ 57.]
On October 7, 2011, Greenwich filed the declaratory action before this Court, seeking a
ruling that it has no duty to either defend or indemnify the Garrell Defendants. Greenwich contends
the pending state court action never triggered coverage because the Garrell Defendants failed to
abide by certain Policy conditions – all of which appear to center on the Garrell Defendants’
knowledge of, or involvement with, the Goodstein Lawsuit. Greenwich also argues at least six
exclusions bar coverage.
On December 21, 2011, the Garrell Defendants Answered Greenwich’s Complaint, and filed
counterclaims for breach of contract, bad faith, and attorney’s fees. On March 9, 2012, Greenwich
filed its Motion for Judgment on the Pleadings, while the Garrell Defendants filed their Motion for
Summary Judgment on July 25, 2012. Both motions have been fully briefed.
Standard of Review
Because this case involves both a motion for judgment on the pleadings and a motion for
summary judgment, the Court will discuss both standards of review.5
Judgment on the Pleadings
Federal Rule of Civil Procedure 12(c) provides, “After the pleadings are closed – but early
enough not to delay trial – a party may move for judgment on the pleadings.” Courts follow “a fairly
restrictive standard” in ruling on 12(c) motions, as “hasty or imprudent use of this summary
procedure by the courts violates the policy in favor of ensuring to each litigant a full and fair hearing
on the merits of his or her claim or defense.” Pellegrin v. Berthelsen, No. 9:11–cv–00125, 2012 WL
10847, at *1 (D.S.C. Jan. 3, 2012) (quoting 5C Charles A. Wright and Arthur R. Miller, Federal
Practice and Procedure § 1368 (3d ed. 2011)). A party “may not prevail on a motion for judgment
on the pleadings if there are pleadings that, if proved, would permit recovery” for the non-moving
party. BET Plant Servs., Inc. v. W.D. Robinson Elec. Co., 941 F. Supp. 54, 55 (D.S.C. 1996).
“[A] Rule 12(c) motion for judgment on the pleadings is decided under the same standard as
Greenwich’s Motion for Judgment on the Pleadings also seeks dismissal of the Garrell
Defendants’ counterclaims under Rule 12(b)(6). However, “a Rule 12(c) motion for judgment
on the pleadings is decided under the same standard as a motion to dismiss under Rule
12(b)(6).” Deutsche Bank Nat’l Trust Co. v. I.R.S., 361 Fed. App’x 527, 529 (4th Cir. 2010).
Thus, the standard of review for a motion to dismiss under Rule 12(b)(6) is discussed herein.
a motion to dismiss under Rule 12(b)(6).” Deutsche Bank Nat’l Trust Co. v. I.R.S., 361 Fed. App’x
527, 529 (4th Cir. 2010); see also Burbach Broad Co. v. Elkins Radio, 278 F.3d 401, 405 (4th Cir.
2002). Thus, in order to survive a motion for judgment on the pleadings, the pleadings must contain
sufficient facts “to raise a right to relief above the speculative level” and “state a claim to relief that
is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 555 (2007). In reviewing the
pleadings, the court accepts all well-pleaded allegations as true and construes the facts and
reasonable inferences derived therefrom in the light most favorable to the non-moving party.
Venkatraman v. REI Sys., Inc., 417 F.3d 418, 420 (4th Cir. 2005). “When there are well-pleaded
factual allegations, a court should assume their veracity and then determine whether they plausibly
give rise to an entitlement to relief.” Ashcroft v. Iqbal, 556 U.S. 662 (2009). “If, on a motion under
Rule . . . 12(c), matters outside the pleadings are presented to and not excluded by the court, the
motion must be treated as one for summary judgment under Rule 56.” Fed. R. Civ. P. 12(d).
Summary judgment is appropriate “if the movant shows that there is no genuine dispute as
to any material fact and the movant is entitled to a judgment as a matter of law.” Fed. R. Civ. P.
56(a). The movant bears the initial burden of demonstrating that summary judgment is appropriate;
if the movant carries its burden, then the burden shifts to the non-movant to set forth specific facts
showing that there is a genuine issue for trial. See Celotex Corp. v. Catrett, 477 U.S. 317, 322– 23
(1986). “Where the record taken as a whole could not lead a rational trier of fact to find for the
non-moving party, disposition by summary judgment is appropriate.” Ricci v. DeStefano, 557 U.S.
557, 586 (2009) (quoting Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587
If a movant asserts that a fact cannot be disputed, it must support that assertion either by
“citing to particular parts of materials in the record, including depositions, documents, electronically
stored information, affidavits or declarations, stipulations (including those made for purposes of the
motion only), admissions, interrogatory answers, or other materials;” or by “showing . . . that an
adverse party cannot produce admissible evidence to support the fact.” Fed. R. Civ. P. 56(c)(1).
Accordingly, to prevail on a motion for summary judgment, the movant must demonstrate
that: (1) there is no genuine issue as to any material fact; and (2) that he is entitled to judgment as
a matter of law. As to the first of these determinations, a fact is deemed “material” if proof of its
existence or non-existence would affect disposition of the case under applicable law. Anderson v.
Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). An issue of material fact is “genuine” if the evidence
offered is such that a reasonable jury might return a verdict for the non-movant. Id. at 257. In
determining whether a genuine issue has been raised, a court must construe all inferences and
ambiguities against the movant and in favor of the non-moving party. United States v. Diebold, Inc.,
369 U.S. 654, 655 (1962).
Greenwich’s Motion for Judgment on the Pleadings and the Garrell Defendants’ Motion for
Summary Judgment are denied as to each issue raised in the respective motions.6
Greenwich claims that as a matter of law coverage has not been triggered and thus it has no
Although each motion requires a distinct standard of review, both motions address many of
the same issues. Thus, for purposes of clarity, the Court will proceed issue-by-issue and apply
the appropriate standard of review in analyzing each party’s arguments.
duty to defend.7 In contrast, the Garrell Defendants argue that Greenwich has a duty to defend
because the amended complaint in the pending state court action triggered coverage under the Policy
as a matter of law. The Court finds that a dispute of fact exists as to whether or not the pending state
court complaint triggered coverage under the Policy.8
“If the facts alleged in the complaint raise a reasonable possibility that the insured may be
held liable for some act or omission covered by the policy, then the insurer must defend. If no such
possibility is raised, no duty of defense is owed.” Liberty Life Ins. Co. v. Commercial Union Ins. Co.,
857 F.2d 945, 949 (4th Cir. 1988). Accordingly, an insurer’s duty to defend is determined by the
allegations made in the complaint and “facts outside of the complaint that are known by the insurer.”
Graphic Arts Mut. Ins. Co. v. Caldwell Chevrolet, Inc., No. 0:11–01255, 2013 WL 314450, at *3
(Jan. 25, 2013) (quoting USAA Prop. & Cas. Ins. Co. v. Clegg, 377 S.C. 643, 657, 661 S.E.2d 791,
798 (2008)). Thus, whether a duty to defend exists is determined by comparing the allegations of the
complaint and the facts that are known by the insurer to the terms of the policy. Id.; see also Liberty
Life, 857 F.2d at 949–50.9
Greenwich’s Complaint seeks a declaratory judgment that it had no duty to defend or to
indemnify the Garrell Defendants. [See Compl., Doc. # 1.] To the extent Greenwich’s Motion
for Judgment on the Pleadings also seek a ruling that there was no duty to indemnify as a
matter of law, the factual issues discussed herein particularly advise against such a legal
conclusion. See, e.g., Penn-America Ins. Co. v. Coffey, 368 F.3d 409, 413 (4th Cir. 2004).
(“[A]n insurer’s duty to indemnify will depend on resolution of facts alleged in the complaint
. . . .”).
This holding applies to the issue of whether the amended complaint in the pending state court
action triggered coverage under the Policy; this section does not address the applicability of
potential exclusions. As the parties have done, this Court has addressed exclusions in a
The parties agree that the Policy, which was issued to the Garrell Defendants in South
Carolina, is governed by South Carolina law. [See Greenwich Mot., Doc. # 22, at 11; Garrell
Resp., Doc. # 29, at 8.]
In its Motion for Judgment on the Pleadings, Greenwich argues there was no coverage
because, prior to the issuance of the Policy, the Underlying Plaintiffs first made a claim against the
Garrell Defendants; in the alternative, Greenwich argues the Garrell Defendants had knowledge of
an act or omission that they might reasonably expect to form the basis of a claim. [Greenwich Mot.,
Doc. # 22, at 9–10.] Greenwich’s arguments are based upon the Underlying Plaintiffs’ supposed
communication with the Garrell Defendants regarding the Goodstein Lawsuit, which was
commenced three years before issuance of the Policy. [Id.] Greenwich’s argument fails.10
First, in examining the amended complaint in the state court action, this Court cannot say as
a matter of law that a claim was made against the Garrell Defendants. As a condition of coverage,
the Policy requires that any claim must “first be made against” the Garrell Defendant’s during the
policy period. [Policy, Doc. # 1-2, at 15.] The Policy further defines a claim as “a demand for money
or services . . . .” [Id. at 17.] Thus, coverage is available under the Policy so long as the claim, or
claims, for which the Garrell Defendants seek coverage had not been made prior to the Policy’s
February 2011 inception date.
Here, the Garrell Defendants seek no coverage for the Goodstein Lawsuit, which has since
been resolved. [Garrell Resp., Doc. # 29, at 10–11.] Although Greenwich claims that the Underlying
Plaintiffs made a monetary demand from the Garrell Defendants during the Goodstein Lawsuit, this
Greenwich also argues that Garrell Properties, LLC, one of the many Garrell Defendants, does
not meet the definition of an “insured” under the Policy. The Garrell Defendants vigorously
dispute this assertion. Because this Court is otherwise denying Greenwich’s Motion for
Judgment on the Pleadings, a ruling on this ground is not dispositive of the entire case. Thus,
Greenwich’s Motion is denied without prejudice to its right to raise this issue at the bench
trial in this matter.
is unsupported by the amended complaint in the state court action. The provision of the amended
complaint cited by Greenwich merely states that the Underlying Plaintiffs, presumably through their
affiliation with the LBRM Board, demanded that certain parties in the Goodstein Lawsuit add the
Garrell Defendants as a party. [Am. State Court Compl., Doc. # 22-1, at ¶ 228.] In addition to the
record showing that the Underlying Plaintiff’s never actually demanded any money or services from
the Garrell Defendants in the Goodstein Lawsuit, the Garrell Defendants were never made a party
to that action. [See Greenwich Mot., Doc. # 22, at 7–10; Garrell Resp., Doc. # 29, at 19.]
Further, in their Answer, the Garrell Defendants claim that they were informed by counsel
that “no claim would be made against [them in the Goodstein Lawsuit and] that there was no basis
for such claim as regards the [Goodstein Lawsuit] . . . .” [Garrell Ans., Doc. # 7, at ¶ 106; Counsel
Ltr., Doc. # 7-2.] Additionally, as the Garrell Defendants note in their Response, Mr. Goodstein is
not a party to the underlying state court action, and the transaction at issue in the Goodstein Lawsuit
involved property held by only one of the several LandBank Entities. [Garrell Resp., Doc. # 29, at
10–13.] For purposes of Greenwich’s Motion under Rules 12(b)(6) and 12(c), and in accepting the
Garrell Defendants’ Answer as true and construing all reasonable inferences in their favor,
Greenwich has failed to show that a claim was made against the Garrell Defendants as a matter of
Second, the Court cannot say, as a matter of law, that the Goodstein Lawsuit put the Garrell
Defendants on notice that a future claim was likely.11 In addition to the provision discussed above,
In making this argument, Greenwich relies on correspondence from a party in the Goodstein
Lawsuit, which was attached to the Garrell Defendants’ Answer. [Ans., Doc. # 7-1, at 85–90.]
These letters do not change this Court’s analysis. First, the correspondence relates to the
Goodstein Lawsuit, and as discussed thoroughly herein there is a genuine dispute as to what
extent the Goodstein Lawsuit put the Garrell Defendants on notice of a claim, and to what
the Policy also required that coverage existed unless the Garrell Defendants had “a basis to believe
that [the act or omission at issue], or any related act or omission, might reasonably be expected to
be the basis of a claim.” [Policy, Doc. # 1-2, at 15.] In applying similar Virginia law, the Fourth
Circuit has held that such a prior knowledge provision constitutes a “condition precedent” to
coverage under a policy. Bryan Bros. Inc. v. Cont’l Cas. Co., 660 F.3d 827, 828 (4th Cir. 2011).
There appears to be no South Carolina or Fourth Circuit case which squarely addresses how
a similarly-worded prior knowledge provision triggers coverage. See Nat’l Specialty Ins. Co. v. Nat’l
Union Fire Ins. Co. of of Pittsburgh Pa., No. 6:10–826, 2012 WL 1825370, at *3 (D.S.C. May 18,
2012). However, in a recent case applying South Carolina law, this Court has looked to the Third
Circuit and applied a mixed two-part subjective/objective analysis to determine whether a similar
prior knowledge provision permitted coverage. Id. (citing Seiko v. Home Ins. Co., 139 F.3d 146, 152
(3rd Cir. 1998); Coregis Ins. Co. v. Baratta & Fenertv, Ltd., 264 F.3d 302, 306 (3rd Cir. 2001)).
“First, the court is to consider whether the insured had actual knowledge of the underlying facts
which are the basis of the claim (subjective), and second, would a reasonable insured in possession
of such facts have a basis to believe that these facts could constitute a claim (objective).” Id.12
extent any supposed acts or omissions alleged in the Goodstein Lawsuit are related to the
underlying state court action.
Greenwich acknowledges in its Reply that South Carolina state courts have not addressed the
application of a prior knowledge provision like the one at issue here. [Greenwich Reply, Doc.
# 31, at 5.] However, Greenwich cites to a number of cases to argue that “the majority of
courts” favor a purely objective standard when analyzing similar policies. [Id.] First, even if
this Court were to adopt Greenwich’s proposed purely objective test, it would not alter the
Court’s holding. Under an objective inquiry, the Court would still be required to determine
whether a reasonable insured would have a basis to believe a claim exists based upon the
underlying facts. As discussed herein, there appears to be a genuine dispute as to the
underlying facts of the Goodstein Lawsuit. Second, and most troubling to the Court,
Greenwich’s analysis of the authority upon which it relies is either misleading or flawed. The
The pleadings fail to show that as a matter of law, prior to the issuance of the Policy, the
Garrell Defendants had actual knowledge of the facts which are the basis of the claim at issue, or that
a reasonable insured in possession of such facts would believe they could constitute a claim. As
discussed above, in construing the pleadings in favor of the Garrell Defendants, the Garrell
Defendants were never made a party to the Goodstein Lawsuit, they were informed by counsel that
there was no basis for a future claim against them, and the Goodstein Lawsuit involved only one of
the many LandBank Entities.
Although Greenwich’s Motion is made pursuant to Rules 12(b)(6) and 12(c), the Court also
notes that there is at least a genuine dispute of fact as to whether the Goodstein Lawsuit put either
the Garrell Defendants or a reasonable insured on notice of an act or omission that could be the basis
of a claim, and to what extent any supposed act or omission in the Goodstein Lawsuit is related to
the allegations in the underlying state court action.
cases cited by Greenwich either flatly contradict adopting a purely objective standard in
analyzing prior knowledge provisions similar to the one at issue here, or deal with
substantially different prior knowledge provisions. See, e.g., Colliers Lanard & Axilbund v.
Lloyds of London, 458 F.3d 231, 237 (3d Cir. 2006) (“We hold that . . . the policy exclusion
mandates a subjective test for the first part of the necessary inquiry – whether the insured had
knowledge of a suit, act, error, or omission – and an objective test for the second part of the
necessary inquiry – whether the suit, act, error, or omission might reasonably be expected to
result in a claim or suit.”); HSB Group, Inc. v. SVB Underwriting, Ltd., 664 F. Supp. 2d 158,
193 (D. Conn. 2009) (specifically applying a subjective-objective test); City of Brentwood,
Mo. v. Northland Ins. Co., 397 F. Supp. 2d 1143, 1148 (E.D. Mo. 2005) (“[T]his language
instructs the court to first look at the insured’s subjective knowledge ‘and then the objective
understanding of a reasonable [insured] with that knowledge.’”); Holmes & Graven, 23 F.
Supp. 2d 1057, 1066 n.7 (D. Minn. 1998) (applying objective test where policy spoke only of
what the insured “knew, or could have reasonably foreseen”, but also acknowledging that
courts apply a subjective test when determining whether an insured had a “basis to believe”);
Evanston Ins. Co. v. Sec. Assurance Co., 715 F. Supp. 1405, 1414 (N.D. Ill. 1989) (applying a
purely objective test but in the context of a prior knowledge provision that discussed whether
the insured “had knowledge [or] could have reasonably forseen [sic] any circumstance which
might result in a claim”).
A South Carolina district court has recently analyzed a somewhat similar situation. In that
case, a professional liability policy was issued to a firm that offered both accounting and legal
services. Cont’l Casualty Co. v. Jones, No. 3:09-cv-1004, 2011 WL 3880963, at * 3 (D.S.C. Sept.
2, 2011) (hereinafter Jones I). Though the accountant and the lawyer shared a professional liability
policy related to accounting and operated as a single entity, they worked independently in their
respective accounting practices. Id. at *3. The liability policy contained a prior knowledge provision
which provided coverage so long as “prior to the effective date of this Policy, none of you had a
basis to believe that any such act or omission, or interrelated act or omission, might reasonably be
expected to be the basis of a claim . . . .” Id.
The accountant signed the policy, unaware that the lawyer had been committing numerous
illegal acts exposing the organization to liability. Id. The victims of these illegal acts sued the firm.
Id. Ultimately, coverage was requested from the accountant, and the insurer argued that there was
no coverage for claims arising out of the misconduct “because a condition precedent to coverage was
that no insured had knowledge, prior to the inception of the policy, of an act that was reasonably
likely to become the basis for a claim against the [firm].” Id. at *6
In Jones I, the court initially granted summary judgment in favor of the insurance company.
Id. The court examined the record in the case and determined that the claims in the underlying
lawsuit all arose out of the lawyer’s “scheme to defraud his clients of money and to cover his tracks.
Because [the lawyer’s] acts were interrelated, his prior knowledge precludes coverage in this case.”
Id. at *7. The court rejected the accountant’s argument that “members of the accounting practice did
not participate in the misconduct that otherwise precludes coverage under the policy.” Id. at *6.
However, in Jones II, the court granted a motion to reconsider its holding. Order on Motion
to Reconsider, Jones, No. 3:09-cv-1004, at Doc. # 213 (D.S.C. filed December 13, 2011) (hereinafter
Jones II). The court found that “the question of whether the claims against [the lawyer] by the
remaining defendants in this case are interrelated [to the claims against the accountant] presents a
genuine issue of material fact precluding summary judgment.” Id. at 3–4. In a later order, the court
expounded that it had “hastily granted summary judgment despite the existence of contested factual
issues . . . .” Jones, No. 3:09-cv-1004, 2012 WL 530002, at *2 (D.S.C. Feb. 17, 2012).
The Jones case supports this Court’s finding that genuine disputes of fact are present in the
current case. Here, like Jones, there is a question as to what extent the claims in the Goodstein
Lawsuit are related to the claims in the underlying state lawsuit. As the Garrell Defendants point out
in their Response, there are numerous references in the underlying state court complaint that involve
property apparently not at issue in the Goodstein Lawsuit. [Garrell Resp., Doc. # 29, at 11–12.]
Resolving any such factual discrepancy is particularly relevant in analyzing the broad scope of
Greenwich’s duty to defend. Under South Carolina law, insurance policies are construed in favor of
coverage and the duty to defend is triggered where the underlying complaint includes any allegation
that raises the possibility of coverage. See, e.g, M & M Corp. of S.C. v. Auto–Owners Ins. Co., 390
S.C. 255, 259, 701 S.E.2d 33, 35 (2010) (holding that “[p]olicies are construed in favor of
coverage”); Isle of Palms Pest Control Co. v. Monticello Ins. Co., 319 S.C. 12, 16, 459 S.E.2d 318,
319 (Ct. App. 1994) (“[T]he inclusion of some noncovered claims does not abrogate the insurer’s
duty to defend when a complaint raises claims covered by the policy.”); Town of Duncan v. State
Budget and Control Bd., 326 S.C. 6, 16, 482 S.E.2d 768, 773–74 (1997) (same).
There are also issues here that were not present in Jones, which further counsel against
disposing of this case at this early stage and without further factual development. One, in Jones, the
court reversed itself after having granted summary judgment on a well-developed record. See Jones
I, 2011 WL 3880963, at *1–4; Jones II, Doc. # 214, at 1–5. Here, discovery is not complete, there
is no such well-developed record, and, at least in Greenwich’s case, it is seeking judgment not under
Rule 56, but under Rules 12(b)(6) and Rule 12(c), which are more “restrictive.” See Pellegrin, 2012
WL 10847, at *1. Two, summary judgment as to the accountant was ultimately denied in Jones, even
though the lawyer, who was one of the insured parties, was plainly involved in misconduct against
the individuals who ultimately filed suit against the firm. See Jones I, 2011 WL 3880963, at *3–4;
Jones III, 2012 WL 530002, at * 3. In contrast, the Garrell Defendants, the insured in this case, were
never a party to the Goodstein Lawsuit, which is the litigation that supposedly provided the Garrell
Defendants a “basis to believe” that some future related claim would be forthcoming. [See Policy,
Doc. # 1-2, at 15.] Three, the Garrell Defendants, unlike the accountant in Jones, allege that counsel
and the LBRM Board informed Mr. Garrell that no claim would be made against him regarding the
Goodstein Lawsuit, and that there was no basis for such a claim. [See Garrell Ans., Doc. # 7, at ¶
106; Counsel Ltr., Doc. # 7-2.]
Garrell Defendants’ Motion
The Garrell Defendants seek a ruling from this Court that the amended complaint in the
underlying state court action triggered Greenwich’s duty to defend because, as a matter of law, the
complaint raises a reasonable possibility that the Garrell Defendants may be held liable for some act
or omission covered by the policy. [Garrell Mot., Doc. # 34-1, at 13–14.] Although this is a much
closer call, for the reasons discussed above there is at least a genuine dispute as to the following: (1)
to what extent the Goodstein Lawsuit put the Garrell Defendants on notice of any alleged acts or
omissions in the underlying state court action; (2) to what extent any supposed acts or omissions in
the Goodstein Lawsuit are interrelated to the allegations in the underlying state court action that do
not reference the Goodstein Lawsuit; and (3) depending upon resolution of these first two disputes,
would a reasonable insured in possession of such information have a basis to believe that these facts
could constitute a claim.
Additionally, summary judgment is inappropriate because the Court must also evaluate the
issues above in light of “facts outside of the complaint that are known by the insurer.”See Graphic
Arts Mut. Ins. Co., 2013 WL 314450, at *3 (quoting Clegg, 377 S.C. at 657, 661 S.E.2d at 798). As
the Garrell Defendants themselves argue in their Motion, “Greenwich cannot turn a blind eye to facts
that have been made available to it regarding the nature and extent of the allegations against the
Garrell Defendants in the underlying lawsuit . . . , including what Joe Garrell had been told . . . .”
[Garrell Mot. Doc. # 34-1, at 12.] To the extent the Garrell Defendants are calling upon this Court
to weigh the importance of the facts known by Greenwich, that will be appropriate at the bench trial
of this case, as it is not a proper function of the Court at the summary judgment stage. See Emmett
v. Johnson, 532 F.3d 291, 305 (4th Cir. 2008).13
Greenwich claims in its Motion for Judgment on the Pleadings that the Policy’s “property
syndication” exclusion operates to bar coverage as to all Garrell Defendants as a matter of law. The
Garrell Defendants counter in their Motion for Summary Judgment that each of the six exclusions
invoked by Greenwich in its Complaint are inapplicable based upon the record in this case.
The Goodstein Lawsuit, on which Greenwich bases its argument that coverage is unavailable,
settled within the same time period that Greenwich issued the Policy. [See Compl, Doc. # 1, at
¶¶ 40, 43; Garrell Mot., Doc. # 34-1, at 8.] It could be highly relevant if Greenwich was
familiar with the Goodstein Lawsuit when it issued the Policy.
For purposes of determining whether an insurer has a duty to defend, “the allegations in the
[underlying complaint] must be applied to the policy in its entirety, which necessarily includes the
exclusions section.” Clegg, 377 S.C. at 657, 661 S.E.2d at 798. However, this does not change the
fundamental precept of South Carolina law that the insurer bears the burden of establishing the
exclusion’s applicability, and that all exclusions of coverage are to be “most strongly” construed
against the insurer. See Owners Ins. Co. v. Clayton, 364 S.C. 555, 560, 614 S.E.2d 611, 614 (2005);
M & M Corp., 390 S.C. at 259, 701 S.E.2d at 35.
Property Syndication Exclusion
The parties dispute the applicability of the property syndication exclusion in the Policy.
Under the Policy, coverage is excluded if a claim is caused by “property syndication or real
estate investment trusts . . . .” [Policy, Doc. # 1-2, at 22.] A previous section of the Policy defines
property syndication as follows:
[T]he formation of, or engagement in, a general or limited partnership, joint venture,
unincorporated association or similar organization for the purpose of investment or
gain from an interest in real property, including but not limited to a sale, exchange,
trade or development of such real property, on behalf of others.
[Id. at 22.]
In its Motion for Judgment on the Pleadings, Greenwich claims this exclusion bars coverage
for the Garrell Defendants as a matter of law. Greenwich argues that the amended complaint in the
pending state court action asserts that one or more of the Garrell Defendants are members of the
LBRM Board, which has control over the management and operations of the LandBank Entities.
[Greenwich Mot., Doc. # 22., at 12; see also Am. State Court Compl., Doc. # 22-1, at ¶¶ 24–26.]
Greenwich further argues that the LandBank Entities’ purpose is buying and selling the property
rights of large, undeveloped tracts of land. [Greenwich Mot., Doc. # 22., at 12 (citing Am. State
Court Compl., Doc. # 22-1, at ¶¶ 11, 13, 15).] According to Greenwich, LandBank’s actions
constitute property syndication, and because the Garrell Defendants were members of LandBank’s
management they too participated in property syndication and coverage is excluded for the current
In its Motion and subsequent Reply, Greenwich cites thirteen paragraphs from the threehundred and sixty-three-paragraph amended complaint filed in the underlying state court action to
argue that the property syndication exclusion bars coverage for all claims against each of the Garrell
Defendants. [See Greenwich Mot., Doc. # 22, at 11–12; Greenwich Reply, Doc. # 31, at 9–12.]
However, the amended complaint in the state court action states that the Garrell Defendants
performed real estate services, and that “at all times relevant hereto,” at least one of the Garrell
Defendants acted as a real estate agent and held itself and other Garrell Defendants out as such. [See
Am. State Court Compl., Doc. # 22-1, at ¶¶ 17, 20; see also Policy, Doc. # 1-2, at 15 (providing
coverage for acts or omissions in the performance of “real estate services”).] Greenwich itself, in its
subsequently filed Response to the Garrell Defendants’ Motion for Summary Judgment, argues that
“the Underlying Complaint is ambiguous in what capacity the Insured was acting in with regard to
the real estate transactions involved in the Underlying Action.” [Greenwich Resp., Doc. # 36, at 5.]
Greenwich does not argue that the property syndication exclusion applies merely because the
Garrell Defendants may have had an ownership interest in the LandBank Entities, but rather
because the Garrell Defendants, assuming they were providing real estate services, provided
those real estate services for an organization whose purpose was to invest in real property.
[See Greenwich Reply, Doc. # 31, at 10.] There is a separate exclusion under the Policy that
would bar coverage if the Garrell Defendants had a financial interest of greater than twenty
percent of the real property at issue. [Policy, Doc. # 1-2, at 22–23.] The parties disagree over
the value of the Garrell Defendants financial stake in the underlying property, and thus the
applicability of this exclusion. [See Garrell Mot., Doc. # 34-1, at 8.] The only evidence in the
record on this issue appears to be an affidavit signed by Mr. Garrell. [Id.]
In light of Greenwich’s burden of proof, particularly when coupled with the current record in the
case and the “fairly restrictive standard” embodied in Rules 12(b)(6) and 12(c) and, the Court cannot
say as a matter of law that all claims were caused by purported property syndication. See Pellegrin,
2012 WL 10847 at *1.
The Garrell Defendants, in their Motion for Summary Judgment, appear to merely argue that
Greenwich fails to establish the applicability of the property syndication exclusion, as opposed to
showing that the exclusion is inapplicable as a matter of law. [Garrell Mot. Doc. # 34-1, at 26–29.]
In fact, in their Response to Greenwich’s Motion for Judgment on the Pleadings, the Garrell
Defendants specifically state that “even assuming arguendo, there were allegations in the underlying
complaint to support each element regarding the existence of a property syndicate, this exclusion
would still not be appropriate for resolution as a matter of law.” [Garrell Resp., Doc. # 29, at 26.]
The Garrell Defendants have failed to carry their burden of demonstrating that summary judgment
is appropriate. See Celotex Corp., 477 U.S. at 322–23.15
Given this Court’s disposition of the pending motions, it will reserve ruling on the Garrell
Defendants’ argument that the property syndication exclusion is ambiguous, and thus
unenforceable as a matter of law. However, this Court feels compelled to note that Greenwich
appears to take the position that this exclusion would operate to deny coverage to any real
estate agent who performs their services for any organization formed for the purposes of
investment in real property. [Greenwich Reply, Doc. # 31, at 10.] In its Response to the
Garrell Defendants’ Motion for Summary Judgment, Greenwich is even more direct.
Greenwich explains that the exclusion would deny coverage for claims against a real estate
agent working with such an organization, even if the claim was against the insured strictly in
his capacity as a real estate agent. [Greenwich Resp., Doc. # 36, at 20–21.] However, the
Policy provides coverage for acts and omissions that occur in the course of providing “real
estate services,” defined as “those professional services performed for others in the insured’s
capacity as a real estate agent, real estate broker, leasing agent, property manager, real estate
auctioneer, [or] real estate appraiser . . . .” [Policy, Doc. # 1-1, at 15, 20.] In light of the stated
purpose of the Policy, and under Greenwich’s own interpretation of the property syndication
provision, it seems difficult to fathom how the exclusion is not one “which purports to bar
coverage for claims arising out of the very operation sought to be insured . . . .” Isle of Palms
In their Motion for Summary Judgment, the Garrell Defendants argue the remaining
exclusions invoked by Greenwich in its Complaint are inapplicable as a matter of law. The Court has
thoroughly reviewed the record in this case in light of the parties’ arguments. Even if this Court were
to grant the Garrell Defendant’s Motion for Summary Judgment as to the remaining exclusions, the
case would still proceed to bench trial. At this juncture, the Court finds it prudent to reserve ruling
on this issue and thus denies the Garrell Defendants’ Motion as to the remaining exclusions without
prejudice to their right to raise these issues at the bench trial in these proceedings. See United States
v. Goodson, 204 F.3d 508, 514 (4th Cir. 2000) (“[A] district court has broad discretion to manage
Bad Faith and Attorney’s Fees
Greenwich claims in its Motion for Judgment on the Pleadings that the Garrell Defendants’
claim for bad faith fails as a matter of law, and that the Garrell Defendants are not entitled to
attorney’s fees. However, Greenwich’s arguments on both of these grounds hinge upon it prevailing
in its declaratory judgment action. [See Greenwich Mot., Doc. # 22, at 13–14.]
Likewise, the Garrell Defendants claim they are entitled to summary judgment on their bad
faith claim, as well as an award of attorney’s fees. A finding that Greenwich had a duty to defend
is a prerequisite to these examining claims. [See Garrell Mot., Doc. # 34-1, at 32–33.]
Given the Court’s ruling herein, particularly in finding a genuine dispute of fact as to
Pest Control, 319 S.C. at 19, 459 S.E.2d 318 at 321. Under South Carolina law, such an
exclusion renders “the policy ambiguous” and any ambiguity must be resolved “in favor of
coverage.” Id. However, the Court reiterates that it need not decide this issue at the present
time, and the Garrell Defendants will be able to raise this argument at the bench trial.
coverage, it is plain that the applicability of bad faith and attorney’s fees cannot be decided as a
matter of law.16
IT IS THEREFORE ORDERED that Greenwich’s Motion for Judgment on the Pleadings
[Doc. # 22] is DENIED without prejudice to Greenwich’s right to raise the issues therein at the
bench trial in this matter.
IT IS FURTHER ORDERED that the Garrell Defendants’ Motion for Summary Judgment
[Doc. # 34] is also DENIED without prejudice to Greenwich’s right to raise the issues therein at trial.
IT IS SO ORDERED.
s/ R. Bryan Harwell
R. Bryan Harwell
United States District Judge
Florence, South Carolina
March 7, 2013
In neither Greenwich’s Motion for Judgment on the Pleadings nor in the Garrell Defendants’
Motion for Summary Judgment does any party appear to address the Garrell Defendants’
counterclaim for breach of contract. To the extent the parties intended their briefings to
address this point, the logic governing the Court’s disposition of the Garrell Defendants’ bad
faith claim is equally applicable to their breach of contract claim.
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