Starr Indemnity & Liability Company v. i3 Verticals, LLC
MEMORANDUM OPINION OF THE COURT. Signed by District Judge Aleta A. Trauger on 10/23/2018. (DOCKET TEXT SUMMARY ONLY-ATTORNEYS MUST OPEN THE PDF AND READ THE ORDER.)(am)
UNITED STATES DISTRICT COURT
MIDDLE DISTRICT OF TENNESSEE
STARR INDEMNITY & LIABILITY
i3 VERTICALS, LLC
Case No. 3:16-cv-2832
Judge Aleta A. Trauger
Pending before the court is a Motion for Leave to File Amended Complaint (Docket No.
103) filed by the plaintiff, Starr Indemnity and Liability Company (“Starr”), to which the
defendant, i3 Verticals, LLC, aka Charge Payment, LLC (“i3 Verticals”), has filed a Response
(Docket No. 107), and Starr has filed a Reply (Docket No. 109). For the reasons discussed herein,
Starr’s motion will be granted.
Starr is an insurance company. i3 Verticals is an independent services operator that
facilitates credit and debit card payments for merchants. On October 31, 2015, Starr and i3
Verticals entered into a Resolute Portfolio for Private Companies Policy (“Policy”), under which
Starr issued insurance to i3 Verticals. The relevant insuring provision reads as follows:
C. The Insurer shall pay on behalf of the Company the Loss arising from a Claim
first made during the Policy Period (or Discovery Period, if applicable), against
the Company for any Wrongful Act, and reported to the Insurer in accordance
with the terms of this policy.
(Docket No. 1-1 at 18 (emphasis in original).) The bolded terms are defined in the Policy.
“Wrongful Act” is defined as, “with respect to [i3 Verticals], any actual or alleged breach of duty,
neglect, error, misstatement, misleading statement, omission or act by [i3 Verticals].” (Id. at 22.)
On June 14, 2016, a class of merchants (“Underlying Claimants”) filed suit in California
state court against four companies, including Merchant Processing Solutions, LLC (“Payment
Systems”) and i3 Verticals. (Docket 1-2.) The Underlying Claimants’ complaint (“Underlying
Complaint”) alleges that Payment Systems engaged in a host of improper practices related to
merchant services for payments made via credit and debit cards. Payment Systems allegedly
offered these services—including payment processing services, payment processing equipment
leasing, monthly billing, collections, and attendant customer service—to small businesses. In its
Complaint, Starr summarizes the allegations in the Underlying Complaint as follows:
Payment Systems targets small “mom and pop” merchants with false promises of
savings by reducing costs for merchant services if they switch providers and
“induce ‘mom and pop’ merchants to purchase merchant services via every type of
artifice and deception in the book, including but not limited to (a) failing to disclose
fees they know the merchant will be charged; (b) affirmatively misrepresenting to
merchants they will not be charged fees they know will be charged; (c) informing
merchants that by signing they are only agreeing to ‘apply’ for services when in
fact their signatures bind them to long-term, non-cancellable deals; (d) promising
agreed-upon pricing information will be written on the contract documents after the
merchant signs and then later including much higher pricing information; (e)
forging merchant signatures and initials on contract documents; (f) burying
unconscionable provisions that are never discussed with customers in the middle of
fine print contract documents; and (g) attempting to ensure that the merchant does
not read the contract document before signing.
(Docket No. 1 at 8 (quoting Docket No. 1-2 at 12).) i3 Verticals is implicated as an alleged
successor-in-interest to Payment Systems. (See, e.g., Docket No. 1-2 at 24).)
On August 23, 2016, i3 Verticals notified Starr of the Underlying Claimants’ lawsuit and
requested coverage from Starr pursuant to the Policy. On October 6, 2016, Starr advised i3
Verticals via letter that, pursuant to exclusions set forth in the Policy,1 the Policy did not cover the
Underlying Claimants’ suit. Starr stated unequivocally its position on coverage:
For the reasons set forth above, we regret to advise that coverage is unavailable
under the Starr Policy for the allegations set for in the [Underlying Complaint] and
Starr will not agree to defend or indemnify i3 Verticals in connection with this
(Docket No. 71-1 at 4.) Starr also explicitly reserved its right to rely upon additional defenses or
bases for its conclusion that the Policy did not provide coverage:
The foregoing discussion should not be construed as the exclusive bases upon
which Starr’s coverage position are based and as such Starr reserves its right to
supplement this coverage position. Starr continues to reserve all of its rights,
remedies and defenses in connection with this matter . . . . No subsequent action,
if any, that may be taken by Starr with respect to this matter should be construed as
a waiver of any conclusion set forth in this letter, or any letters previously issued,
or any rights, remedies or defenses otherwise available to Starr.
(Id. at 4–5.)
On October 18, 2016, i3 Verticals challenged Starr’s decision and demanded coverage
under the Policy. (Docket No. 71-2.) Starr subsequently reversed course and, in a November 3,
The exclusions upon which Starr relied in denying coverage, excerpted in relevant part as follows,
This policy shall not cover any Loss in connection with any Claim:
(e) based upon, arising from, or in consequence of any actual or
alleged liability of any Insured under any express contract or
agreement, except to the extent that such Insured would have been
liable in the absence of such contract or agreement;
(s) alleging, arising out of, based upon or attributable to the
rendering or failure to render any professional service to a customer
or client of the Insured;
(Docket No. 1-2 at 22–25 (emphasis in original).) Starr also set forth additional defenses which
are not relevant to this motion.
2016 letter, agreed to defend i3 Verticals against the lawsuit. (Docket No. 71-3.) Starr made the
agreement pursuant to a full and complete reservation of rights and defenses. (Id. at 1.) Starr
again specifically stated that there was no coverage available under the Policy: “It is Starr’s
position that the allegations of the [Underlying Complaint] do not trigger coverage under the
[Policy].” (Id. at 2.) The letter also included the same language from Starr’s initial denial letter,
quoted above, regarding the reservation of additional defenses or bases for its coverage position.
(Id. at 4.) That same day, Starr filed its Complaint in this court, seeking declaratory judgment that,
due to the relevant exclusions, the Policy does not provide coverage to i3 Verticals for the
Underlying Claimants’ lawsuit and Starr is entitled to repayment of defense costs paid to i3
Verticals. (Docket No. 1.) Starr thereafter defended i3 Verticals in the underlying lawsuit. On
September 29, 2017, i3 Verticals and the Underlying Claimants reached an agreement in principle
on a class-wide settlement. i3 Verticals agreed to pay nearly one million dollars as part of the
settlement. On May 21, 2018, Starr filed a Motion for Judgment on the Pleadings (Docket No.
81), requesting that the court enter judgment declaring that Starr owes no duty to defend or
indemnify i3 Verticals based on the Policy’s exclusions.
On August 7, 2018, the court denied Starr’s Motion for Judgment on the Pleadings (Docket
No. 100 at 14.) In doing so, the court addressed an argument raised by Starr for the first time in
its reply brief: that coverage was never triggered under the Policy because the Underlying
Complaint did not allege any Wrongful Act by i3 Verticals. Starr made the argument in response
to i3 Verticals’ position that the relevant Policy exclusions—upon which Starr relied in initially
denying coverage—were not triggered because the Underlying Complaint contained only
conclusory legal allegations against i3 Verticals, not factual allegations of wrongdoing. The court
By successfully establishing that the Underlying Complaint does not allege any
breach, neglect, error, or act of its own doing, i3 Verticals has perhaps proven too
much. By i3 Verticals’ own telling, the Underlying Complaint does not allege any
“Wrongful Act,” as defined under the Policy, by i3 Verticals, but rather by Payment
Systems. In its Sur-Reply, i3 Verticals contends that the Underlying Complaint
does in fact allege a “Wrongful Act” by i3 Verticals, specifically “that i3 Verticals
is liable as either the agent of or successor in interest to Payment Systems (which
are both pled in conclusory fashion).” (Docket No. 99 at 7–8.) Even construing
the Policy “liberally” in favor of i3 Verticals and “strictly” against Starr, Elsner v.
Walker, 879 S.W.2d 852, 854–55 (M.D. Tenn. 1994) (citing Alvis v. Mutual Benefit
Health & Accident Ass’n, 297 S.W.2d 643, 646 (Tenn. 1956)), this legal conclusion
plainly falls outside the contours of the Policy’s definition of “Wrongful Act,”
which is limited to acts or omissions committed by i3 Verticals.
(Id. at 13.) However, because Starr’s Complaint did not seek declaratory relief that no “Wrongful
Act” was alleged in the Underlying Complaint and that coverage was, therefore, never triggered,
the court declined to further address the matter. On August 24, 2018, Starr moved to amend its
Complaint. Starr seeks to assert additional allegations regarding the parties’ coverage positions,
and correspondence related thereto, and to add a new count, seeking declaratory judgment that the
Underlying Complaint does not allege any Wrongful Act as required to trigger coverage under the
Policy. (Docket No. 103-2.)
Federal Rule of Civil Procedure 15(a) governs amending pleadings before trial. A party
may amend a pleading once as a matter of course within (a) twenty-one days after serving it, or
(b) if the pleading is one to which a responsive pleading is required, twenty-one days after service
of a responsive pleading or twenty-one days after service of a motion under Rule 12(b), (e) or (f),
whichever is earlier. Fed. R. Civ. P. 15(a)(1). In all other cases, a party may only amend a pleading
by obtaining the opposing party’s written consent or receiving leave of the court. Fed. R. Civ. P.
15(a)(2). Where it is requested, “[t]he court should freely give leave when justice so requires.”
Id. “Furthermore, the thrust of Rule 15 is to reinforce the principle that cases should be tried on
their merits rather than the technicalities of pleadings.” Moore v. City of Paducah, 790 F.2d 557,
559 (6th Cir. 1986) (quoting Tefft v. Seward, 689 F.2d 637, 639 (6th Cir. 1982) (internal quotation
The district court has broad discretion to determine “when justice so requires.” Martin v.
Assoc. Truck Lines, Inc., 801 F.2d 246, 248 (6th Cir. 1986). A motion to amend may be denied
where there is “undue delay, bad faith or dilatory motive on the part of the movant, repeated failure
to cure deficiencies by amendments previously allowed, undue prejudice to the opposing party by
virtue of allowance of the amendment, futility of amendment, etc.” Riverview Health Inst. LLC v.
Med. Mut. of Ohio, 601 F.3d 505, 520 (6th Cir. 2010) (quoting Foman v. Davis, 371 U.S. 178, 182
(1962)). A proposed amendment is futile if the amendment could not withstand a Rule 12(b)(6)
motion to dismiss or a Rule 12(c) motion for judgment on the pleadings. Rose v. Hartford
Underwriters Ins. Co., 203 F.3d 417, 420 (6th Cir. 2000) (citing Thiokol Corp. v. Dept. of
Treasury, State of Mich., Revenue Div., 987 F.2d 376, 382–83 (6th Cir. 1993)); see also Kottmyer
v. Maas, 436 F.3d 684, 689 (6th Cir. 2006) (“A Rule 12(c) motion for judgment on the pleadings
for failure to state a claim upon which relief can be granted is nearly identical to that employed
under a Rule 12(b)(6) motion to dismiss.”). Stated differently, allowing an amendment that would
subsequently be dismissed under a Rule 12(b)(6) motion or a Rule 12(c) motion for judgment on
the pleadings does not serve the interests of justice.
i3 Verticals makes three arguments against Starr’s motion: that amendment would be futile
because Starr is estopped from raising a new basis for denying coverage, that amendment is not
warranted because of undue delay and prejudice, and that amendment would be futile because the
Underlying Complaint does allege a Wrongful Act against i3 Verticals. The court will address
each argument in turn.
i3 Verticals first contends that Starr is estopped from asserting that no Wrongful Act was
alleged because Starr did not reserve that argument. In Tennessee, insurers who wish to afford a
defense to an insured pursuant to a reservation of rights must clearly advise the insured that it
reserves the right to later deny or litigate coverage under the governing policy. Richards Mfg. Co.
v. Great Am. Ins. Co., 773 S.W.2d 916, 918 (Tenn. Ct. App. 1988). Moreover, “the reservation of
rights or non-waiver notice given by the insurance company will be held sufficient only if it fairly
informs the insured of the insurer’s position.” Transamerica Ins. Grp. v. Beem, 652 F.2d 663, 666
(6th Cir. 1981). Tennessee law thus demands a “high level of clarity in documents prepared by an
insurer which purport to give notice to an insured of an insurer’s reservation of rights.” KnoxTenn Rental Co. v. Home Ins. Co., 2 F.3d 678, 683 (6th Cir. 1993). Applying these standards, i3
Verticals argues that Starr, by failing to reserve its right to claim that no Wrongful Act was alleged,
did not fairly inform i3 Verticals of its coverage position.
Tennessee courts have rejected a requirement that insurers reserve individual bases for
denials of coverage:
We hold that it is not required that the reason given for the insurer’s position be
legally correct. The position taken may be correct, but for other legal reasons. It
is the insurer’s conclusion regarding the existence or non-existence of certain
coverage that must be clearly and fairly communicated to the insured, not its legal
Richards Mfg. Co., 773 S.W.2d at 919. Whether a reservation of rights is sufficiently clear thus
turns on whether the insurer provided adequate notice of its ultimate position regarding whether
coverage exists. In both its initial coverage denial letter and its subsequent letter agreeing to defend
i3 Verticals pursuant to a full reservation of rights, Starr left no doubt as to its position that
coverage was not available under the Policy. See (Docket No. 71-1 at 4 (“For the reasons set forth
above, we regret to advise that coverage is unavailable under the Starr Policy for the allegations
set for in the [Underlying Complaint]”); Docket No. 71-3 at 2 (“It is Starr’s position that the
allegations of the [Underlying Complaint] do not trigger coverage under the [Policy].”).) Starr
thus informed i3 Verticals of its coverage position in a sufficiently fair and clear manner.
The cases cited by i3 Verticals do not counsel otherwise. In Richards Mfg. Co. v. Great
Am. Ins. Co., the court held that the insurer’s reservation of rights letter advising that there was no
coverage for punitive damages was valid, even though the letter did not identify the correct bases
upon which coverage was being denied. 773 S.W.2d at 919. The court also found that the insurer
was liable for compensatory damages because its reservation of rights letter made no mention of
them and because the insurer separately acknowledged liability for them. Id. Starr at no point
acknowledged liability under the Policy. It clearly asserted its position that no coverage was
available to i3 Verticals. In fact, Starr went even further. It explicitly reserved the right to later
assert a different basis for its coverage position: “The foregoing discussion should not be construed
as the exclusive bases upon which Starr’s coverage position are based and as such Starr reserves
its right to supplement this coverage position.” (Docket No. 71-3 at 4.) Starr now seeks to do just
that. The relevant holding from Richards MFG. Co. v. Great Am. Ins. Co. is that the insurer was
not estopped from seeking punitive damages, despite providing its bases for its coverage decision
in its reservation of rights. Id. Starr is likewise not barred from asserting a new justification for
its prior position.
In Transamerica Ins. Grp. v. Beem, the court found an insurer estopped from relying on
policy defenses. 652 F.2d at 666. The relevant issue was notice to the insured. Id. The insurer
gave its insured notice only that it was reserving its rights during an investigation of the accident
underlying the claim. Id. Had the insurer invoked its policy defense following the investigation,
there would have been no issue of estoppel, because the insured was on notice that investigative
efforts did not constitute a waiver of rights by the insurer. But, the court explained, the company
went beyond investigation. It retained an attorney who filed an answer on behalf of the insured,
and it entered into serious negotiations with the injured party. Id. These steps, the court found,
rendered the insurer’s reservation of rights insufficient because it did not fairly inform the insured
of the scope of the reservation. Id. The same cannot be said of Starr’s reservation of rights. In
agreeing to defend i3 Verticals, Starr fully reserved rights to litigate coverage issues in the future.
(Docket No. 71-3 at 2.) And it specifically included language disclaiming additional actions or
efforts as a waiver of its right to raise new defenses in the future: “No subsequent action, if any,
that may be taken by Starr with respect to this matter should be construed as a waiver of any
conclusion set forth in this letter, or any letters previously issued, or any rights, remedies or
defenses otherwise available to Starr.” (Id. at 4.) Unlike the insurer in Transmerica Group v.
Beem, Starr fairly informed i3 Verticals of its position.
Finally, in Knox-Tenn Rental Co. v. Home Ins. Co., the court held that an insurer was
estopped from raising a policy defense against one of its insureds, Lowe. 2. F.3d at 680. Lowe
was one of multiple defendants in a lawsuit, and the insurer provided notice of its reservation of
rights to another defendant, the corporation that employed Lowe. Id. The court found that the
reservation of rights was insufficient as to Lowe because he was never personally put on notice.
Id. The reservation of rights letter was sent to the corporation, was not addressed to Lowe, and
Lowe, an accountant, was not made privy to all correspondence between the insurer and the
corporation. Id. This is plainly distinguishable from Starr’s reservation of rights letter, reception
of which i3 Verticals does not contest. Because these cases do not support i3 Verticals’ position
that Starr insufficiently reserved its rights, Starr is not estopped from asserting its Wrongful Act
i3 Verticals next argues that Starr’s motion should be denied because Starr has waited
nearly two years to amend its Complaint. However, delay alone is insufficient to justify denial of
amendment. See Tefft, 689 F.2d at 640 n.2 (“Delay that is neither intended to harass nor causes
any ascertainable prejudice is not a permissible reason, in and of itself[,] to disallow an amendment
of a pleading.”). The Sixth Circuit has set forth several considerations for determining what
In determining what constitutes prejudice, the court considers whether the assertion
of the new claim or defense would: require the opponent to expend significant
additional resources to conduct discovery and prepare for trial; significantly delay
the resolution of the dispute; or prevent the plaintiff from bringing a timely action
in another jurisdiction.
Phelps v. McClellan, 30 F.3d 658, 662–63 (6th Cir. 1994) (internal citations and quotation marks
omitted). Starr counters that it was only put on notice of its defense approximately 80 days before
filing its motion. However, the court need not determine the exact length of Starr’s delay if no
prejudice is found. See Langley v. Credit Suisse First Boston Corp., 89 F. App’x 938, 944 (6th
Cir. 2004) (allowing amendment despite two year delay where no prejudice found); Tefft, 689 F.2d
at 640 (same, with four year delay); Moore, 790 F.2d at 562 (same, with nearly two year delay).
i3 Verticals contends that it has suffered prejudice in various forms. It asserts that it agreed
to settle the underlying lawsuit for almost one million dollars based, in part, on its assessment of
the merits of Starr’s coverage position. i3 Verticals argues that, because it “believed it had a good
chance of prevailing in this case because Starr was only making two exclusion-related arguments,”
it was therefore “more inclined to agree to settle the Underlying Lawsuit because it would
eventually get the amounts back from Starr.” (Docket No. 107 at 12.) But, as noted above, Starr
expressly stated in its reservation of rights letter its exclusion-based arguments for denying
coverage “should not be construed as the exclusive bases upon which Starr’s coverage position are
based and as such Starr reserves its right to supplement this coverage position.” (Docket No. 713 at 4.) Starr consistently maintained, throughout its coverage dispute with i3 Verticals and the
subsequent underlying litigation, that it did not owe coverage to i3 Verticals under the Policy. In
entering the settlement agreement with the Underlying Claimants, i3 Verticals proceeded with full
and fair notice that Starr disputed coverage and might later provide new arguments in support of
its position. i3 Verticals assumed the risk that Starr could thereafter change its decisional bases
for denying coverage. Therefore, if i3 Verticals was prejudiced by entering the settlement
agreement, the prejudice was of its own making and cannot redound to the detriment of Starr.
i3 Verticals offers additional examples of prejudice. It contends that, had Starr stated in its
coverage letters that it intended to later rely on a Wrongful Act defense, i3 Verticals could have
focused more on that defense in its briefing against Starr’s motion for judgment on the pleadings.
This does not constitute prejudice because i3 Verticals has now had the opportunity—in response
to this motion—to brief the issue in full. i3 Verticals also claims that it provided Starr with
privileged and confidential materials, including its mediation brief from the underlying lawsuit. i3
Verticals contends that this constitutes prejudice because it would not have provided such
materials, had Starr initially asserted a Wrongful Acts defense. But i3 Verticals does not explain
how the provision of these materials prejudiced it. Starr does not rely on the materials in its
briefings. The materials are not part of the record in this case. As far as the court can tell, Starr
has derived no substantial benefit in this litigation from its possession of such materials.
Notable are the ways in which i3 Verticals does not contend it was prejudiced. No
additional discovery would be required if Starr’s motion were granted. Amendment would not
significantly delay resolution of this dispute: the discovery deadline is not until March 1, 2019,
and the trial is not set to begin until November 19, 2019. Allowing Starr to amend would not
prevent i3 Verticals from bringing any action in another jurisdiction. Indeed, Starr’s provision of
costs and fees for independent defense counsel has allowed i3 Verticals to expeditiously proceed
with the underlying litigation through the pendency of this matter. Even assuming that Starr’s
amendment constituted a significant delay, i3 Verticals has not suffered prejudice from it. Starr’s
motion will therefore not be denied due to delay.
Finally, i3 Verticals contends that amendment would be futile because the Underlying
Complaint alleges that it committed Wrongful Acts. As the court has previously indicated, in its
view, the Underlying Complaint does not allege any act—wrongful or otherwise—committed by
i3 Verticals. It alleges a variety of fraudulent acts committed by another company, Payment
Systems, and asserts that i3 Verticals is legally liable for those acts as Payment Systems’ successorin-interest. In its Response, i3 Verticals argues that, “if successor liability is established Payment
Systems and i3 Verticals are one in [sic] the same and the acts of Payment Systems are the acts of
i3 Verticals.” (Docket No. 107 at 15.) This misunderstands the nature of successor liability.
Successor liability is an exception to the general rule that, when one corporate or
other juridical person sells assets to another entity, the assets are transferred free
and clear of all but valid liens and security interests. When successor liability is
imposed, a creditor or plaintiff with a claim against the seller may assert that claim
against and collect payment from the purchaser.
George W. Kuney, Successor Liability in Tennessee, Tenn. B.J., May 2007, at 24. Successor
liability is, by definition, the imposition of legal liability on an entity for the acts or omissions of
another entity. Establishing that i3 Verticals is liable for Payment Systems’ acts does not change
who committed those acts. It establishes only liability, which is not a Wrongful Act as defined by
the Policy. Wrongful Acts are limited to, “with respect to [i3 Verticals], any actual or alleged
breach of duty, neglect, error, misstatement, misleading statement, omission or act by [i3
Verticals].” (Id. at 22.) i3 Verticals and Starr are sophisticated business entities. They were free
to negotiate a policy that covered Wrongful Acts of predecessors-in-interest but chose not to do
so. Because allegations of liability for the Wrongful Acts of other entities are not covered under
the Policy, i3 Verticals fails to show that amendment would be futile on this basis.
For the foregoing reasons, Starr’s Motion to Amend is hereby GRANTED. An appropriate
order will enter.
ENTER this 23rd day of October 2018.
ALETA A. TRAUGER
United States District Judge
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