China Gate Hotel v. Penn-America Insurance Company et al

Filing 34

ORDER GRANTING IN PART AND DENYING IN PART Defendant's 27 Motion for Partial Dismissal. Signed by Judge Robert Pitman. (ml)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
AUSTIN DIVISION
BIGE, INC.,

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Plaintiff,
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V.
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PENN-AMERICA INSURANCE COMPANY;
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SPECIALTY INSURANCE MANAGERS, INC.; §
ERIC KEHS,
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Defendants.
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1-15-CV-292 RP

ORDER
Before the Court are Defendant Penn-America Insurance Company’s Motion for Partial
Dismissal of Plaintiff’s First Amended Complaint Under FRCP 9(b) and 12(b)(6), filed July 29, 2015
(Clerk’s Dkt. #27) and the responsive pleadings thereto. After reviewing the pleadings, relevant
case law, as well as the entire case file, the Court issues the following order.
I. BACKGROUND
On March 26, 2015 Plaintiff China Gate Hotel filed this action in the 146th Judicial District
Court of Bell County, Texas. Plaintiff named as defendants Penn America Insurance Company
(“Penn-America”), Specialty Insurance Managers, Inc. (“Specialty”) and Eric Kehs (“Kehs”). The
action was removed to this court on April 17, 2015. Plaintiff thereafter dismissed its claims against
Specialty. Plaintiff also sought and was granted leave to substitute Bige, Inc. (“Bige”) as the real
party in interest Plaintiff.
By way of the amended complaint, Bige states it is the owner of premises (“the Property”),
operated as the China Gate Hotel, insured by a policy (“Policy”) issued by Penn-America. Plaintiff
alleges Penn-America sold the Policy, representing it included wind and hailstorm coverage for
damage to the Property. Plaintiff further alleges the Property sustained damage from a storm on
March 28, 2014. Plaintiff submitted a claim to Penn-America for the damage. (Plf. 1st Am. Compl.

¶¶ 4-19).
Plaintiff states Penn-America hired or assigned Kehs to adjust the claim, but Kehs failed
to fully investigate the claim. Plaintiff alleges, although Penn-America and Kehs acknowledged
damage to the Property, Kehs conducted a substandard and improper inspection of the Property,
which yielded a grossly inaccurate and unrealistic assessment of the cause, extent and dollar
amount of the damage to the Property. Specifically, Kehs determined the amount of damage was
less than Plaintiff’s deductible under the Policy. Plaintiff further alleges, upon receipt of the
inspection reports, Penn-America failed to review the assessment thoroughly, resulting in a failure
to provide coverage due under the Policy. Plaintiff further alleges, following receipt of Plaintiff’s
demand letter dated August 22, 2014, Penn-America and Kehs refused to conduct further
investigation that was not “outcome-oriented.” (Id. ¶¶ 20-30)
Plaintiff asserts causes of action against both defendants for: (1) unfair settlement practices
in violation of the Texas Insurance Code; (2) violation of the Texas Deceptive Trade Practices Act
(“DTPA”); (3) common law fraud and conspiracy to commit fraud; (4) failure to tender prompt
payment of claims in violation of the Texas Insurance Code; and (5) breach of the duty of good
faith and fair dealing. (Id. ¶¶ 48-55, 58-69). Plaintiff additionally asserts a cause of action against
Penn-America for breach of contract. (Id. ¶¶ 56-57).
By way of the motion, Penn-America moves to dismiss Plaintiff’s claims against them for
fraud and conspiracy to commit fraud, as well as claims asserting statutory violations based on
alleged misrepresentations, for failure to comply with Rules 9(b) and 12(b)(6) of the Federal Rules
of Civil Procedure. The parties have filed responsive pleadings and the motion is ripe for review.
II. RULE 12(b)(6)
Penn-America moves to dismiss Plaintiff’s fraud-based claims for failure to state a claim for
relief because they are barred by the economic loss doctrine.

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A. Standard of Review
When evaluating a motion to dismiss for failure to state a claim under Rule 12(b)(6) the
complaint must be liberally construed in favor of the plaintiff and all facts pleaded therein must be
taken as true. Leatherman v. Tarrant Cnty. Narcotics Intelligence & Coordination Unit, 507 U.S.
163, 164 (1993); Baker v. Putnal, 75 F.3d 190, 196 (5th Cir. 1996). Although Federal Rule of Civil
Procedure 8 mandates only that a pleading contain a “short and plain statement of the claim
showing that the pleader is entitled to relief,” this standard demands more than unadorned
accusations, “labels and conclusions,” “a formulaic recitation of the elements of a cause of action,”
or “naked assertion[s]” devoid of “further factual enhancement.” Bell Atl. v. Twombly, 550 U.S. 544,
555 (2007). Rather, a complaint must contain sufficient factual matter, accepted as true, to “state
a claim to relief that is plausible on its face.” Id. at 1974. The Supreme Court has made clear this
plausibility standard is not simply a “probability requirement,” but imposes a standard higher than
“a sheer possibility that a defendant has acted unlawfully." Ashcroft v. Iqbal, 556 U.S. 662, 678
(2009). The standard is properly guided by "[t]wo working principles." Id. First, although "a court
must accept as true all of the allegations contained in a complaint," that tenet is inapplicable to
legal conclusions" and "[t]hreadbare recitals of the elements of a cause of action, supported by
mere conclusory statements, do not suffice." Id. at 678. Second, "[d]etermining whether a
complaint states a plausible claim for relief will . . . be a context-specific task that requires the
reviewing court to draw on its judicial experience and common sense." Id. at 679. Thus, in
considering a motion to dismiss, the court must initially identify pleadings that are no more than
legal conclusions not entitled to the assumption of truth, then assume the veracity of well-pleaded
factual allegations and determine whether those allegations plausibly give rise to an entitlement
to relief. If not, “the complaint has alleged–but it has not ‘show[n]’–‘that the pleader is entitled to
relief.’” Id. (quoting FED. R. CIV. P. 8(a)(2)).

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B. Discussion
Penn-America contends dismissal of Plaintiff’s fraud-based claims is warranted because
the claims are barred by the economic loss doctrine. “The economic loss rule generally precludes
recovery in tort for economic losses resulting from a party's failure to perform under a contract
when the harm consists only of the economic loss of a contractual expectancy.” Chapman Custom
Homes, Inc. v. Dallas Plumbing Co., 445 S.W.3d 716, 718 (Tex. 2014). “Thus, a party states a tort
claim when the duty allegedly breached is independent of the contractual undertaking and the harm
suffered is not merely the economic loss of a contractual benefit.” McCaig v. Wells Fargo Bank
(Texas), N.A., 788 F.3d 463, 475 (5th Cir. 2015) (quoting Chapman, 445 S.W.3d at 718).
However, courts “have struggled to clarify the boundary between contract claims and other causes
of action.” Crawford v. Ace Sign, Inc., 917 S.W.2d 12, 13 (Tex. 1996). The relevant inquiry
involves an examination of “both the source of the defendant's duty to act (whether it arose solely
out of the contract or from some common-law duty) and the nature of the remedy sought by the
plaintiff.” Id.
According to Penn-America, dismissal of Plaintiff’s tort claims is proper because the claims
are solely due to the alleged failure to pay Plaintiff the proceeds of the Policy. Penn-America
characterizes Plaintiff’s complaint as alleging nothing more than that Plaintiff obtained a higher
estimate for repairs to the Property, and thus the entire lawsuit is simply a dispute about whether
Plaintiff is due insurance proceeds under the Policy.
Plaintiff’s complaint, however, includes allegations of a “substandard and improper
inspection” of the damage, noting the claim report omitted damage to the roofing system and
HVAC system, as well as damages to the interior of the Property. (Plf. 1st Am. Comp. ¶ 22). The
complaint also states Plaintiff obtained an estimate of $2,358,171.18 for repairs, but Penn-America
found the damages amounted to less than $39,000. (Id. ¶¶ 19 & 25). The monetary difference

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alone suggests more than a simple dispute over varying estimates.
Penn-America’s argument also runs counter to recent Fifth Circuit authority, noting “the
Texas Supreme Court has never held that underlying conduct that breaches an agreement cannot
violate the DTPA merely because it also breaches an existing contractual obligation.” McCaig, 788
F.3d at 475. Thus, “if a particular duty is defined both in a contract and in a statutory provision, and
a party violates the duty enumerated in both sources, the economic loss rule does not apply.” Id.
In this case, Plaintiff has alleged Penn-America has violated duties imposed under both the Texas
Insurance Code and the DTPA. The fact that Penn-America also owes Plaintiff particular duties
under the Policy does not protect Penn-America from possible statutory liability. See Garza v.
Scottsdale Ins. Co., 2015 WL 3756917, at *5 (S.D. Tex. June 16, 2015) (concluding economic loss
doctrine did not bar claim arising from wrongful denial of insurance policy benefits where plaintiff
alleged coverage existed, but was denied as part of a fraudulent business method). Accordingly,
Penn-America is not entitled to dismissal of Plaintiff’s claims under Rule 12(b)(6).
III. RULE 9(b)
Penn-America also moves to dismiss Plaintiff’s fraud-based claims on the ground that
Plaintiff has failed to plead its fraud-based claims with the particularity required by Rule 9(b) of the
Federal Rules of Civil Procedure.
A. Standard of Review
Pleading fraud as a cause of action requires pleading “with particularity.” FED. R. CIV. P.
9(a). Fifth Circuit precedent interprets Rule 9(b) strictly, requiring the plaintiff to “specify the
statements contended to be fraudulent, identify the speaker, state when and where the statements
were made, and explain why the statements were fraudulent.” Flaherty & Crumrine Preferred
Income Fund, Inc. v. TXU Corp., 565 F.3d 200, 207 (5th Cir. 2009); Nathenson v. Zonagen, Inc.,
267 F.3d 400, 412 (5th Cir. 2001); Williams v. WMX Techs., Inc., 112 F.3d 175, 177 (5th Cir. 1997).

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In addition, “Rule 9(b) applies by its plain language to all averments of fraud, whether they are part
of a claim of fraud or not.” Lone Star Ladies Inv. Club v. Schlotzsky's Inc., 238 F.3d 363, 368 (5th
Cir. 2001). However, “[o]ther than in the situations expressly enumerated in rule 9(b), e.g.,
allegations of actual fraud, plaintiffs must satisfy only the minimal requirements of rule 8(a).”
General Elec. Capital Corp. v. Posey, 415 F.3d 391, 396-97 (5th Cir. 2005);
B. Discussion
Penn-America moves to dismiss certain of Plaintiff’s claims for failing to comply with the
requirements of Rule 9(b). Specifically, Penn-America contends Plaintiff’s claims for fraud,
conspiracy to commit fraud, and for violations of the Texas Insurance Code and DTPA based on
misrepresentations allegedly made to Plaintiff, all fail to allege with sufficient specificity the “who,
what, when, where, and how” of the alleged representations. United State ex rel. Shupe v. Cisco
Sys., Inc., 759 F.3d 379, 382 (5th Cir. 2014).
In its response, Plaintiff does not contest dismissal of its fraud claim, admitting the
allegations supporting that claim fall short of Rule 9(b). Penn-America’s motion to dismiss is thus
properly granted as to that claim.
Plaintiff also concedes the reference to fraud in asserting the claim for conspiracy to commit
fraud is improper as the actions alleged in that portion of the complaint do not rise to the level of
fraud. Plaintiff suggests the claim should be reformed by removing the word “fraud.” As PennAmerica points out, the effect of the deletion is somewhat unclear, but appears to leave Plaintiff’s
claim as asserting a conspiracy based on the misrepresentations which are actionable under the
Texas Insurance Code and DTPA.
Plaintiff objects to dismissal of any claims under the Texas Insurance Code or DTPA, and
thus presumably the reformed conspiracy claim. Plaintiff argues those claims are not subject to
the strictures of Rule 9(b) as they are not fraud-based claims. Texas district courts, however,

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consistently apply Rule 9(b)’s requirements to claims under the Texas Insurance Code and DTPA.
See, e.g., Shakeri v. ADT Sec. Servs., Inc., 2014 WL 5780955, at *3 (N.D. Tex. Nov. 6, 2014)
(DTPA claim subject to pleading requirements of Rule 9(b)); DiNoto v. USAA Cas. Ins. Co., 2014
WL 4923975, at *6 (S.D. Tex. Sept. 30, 2014) (Texas Insurance Code and DTPA claims are
subject to the heightened requirements of Rule 9(b), citing Dalton v. State Farm Lloyd's, Inc., 2013
WL 3157532 (S.D. Tex. 2013); Frith v. Guardian Life Ins. Co., 9 F. Supp. 2d 734, 742–43 (S.D.
Tex. 1998)); Weidner v. Nationwide Prop. & Cas. Ins. Co., 2014 WL 8397281, at *5 (E.D. Tex. June
6, 2014), adopted in 2014 WL 8494527 (E.D. Tex. Aug. 19, 2014) (same); Sparling v. Doyle, 2014
WL 2448926, at *12 (W.D. Tex. May 30, 2014) (applying Rule 9(b) to DTPA claim); Berry v.
Indianapolis Life Ins. Co., 608 F.Supp.2d 785, 800 (N.D. Tex. 2009) (It is well-established that
“[c]laims alleging violations of the DTPA are subject to the requirements of Rule 9(b)”).
Plaintiff also maintains its claims under the Texas Insurance Code and DTPA adequately
meet the standard of Rule 9(b). Plaintiff cites the Fifth Circuit’s pronouncement that “‘Rule 9(b)'s
ultimate meaning is context-specific,” and thus that, “[d]epending on the claim, a plaintiff may
sufficiently ‘state with particularity the circumstances constituting fraud or mistake’ without including
all the details of any single court-articulated standard--it depends on the elements of the claim at
hand.” United States ex rel. Grubbs v. Kanneganti, 565 F.3d 180, 188 (5th Cir. 2009). Plaintiff
contends its allegations that Penn-America “misrepresented the cause of, scope of, and cost to
repair the damages to Plaintiff’s Property,” and that it did so “with the intent the Plaintiff act in
accordance with the misrepresentations in the grossly deficient damage and costs of repair
estimate prepared by Defendant Kehs” are sufficient to meet the applicable burden. (Plf. 1st Am.
Compl. ¶ 23).
Penn-America, however, correctly points out the allegations cited by Plaintiff do little more
than assert wrongdoing by Penn-America and Kehs in broad and vague terms. Lacking are
specific facts concerning statements made by, or on behalf of Penn-America, and how those
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statements amounted to misrepresentations. Nor has Plaintiff pointed to any allegation explaining
how Bige was injured as a result of the representations. See Griggs v. State Farm Lloyds, 181
F.3d 694, 701 (5th Cir. 1999) (both Texas Insurance Code and DTPA require a showing that
defendant's conduct was the cause in fact of actual damages).
Plaintiff further suggests there is no necessity for it to identify the “who” and “when” because
the misrepresentation came from Penn-America itself, and Penn-America can readily ascertain that
information from its own files. Plaintiff maintains the Fifth Circuit has recognized Rule 9(b)’s
requirements may be “to some extent relaxed” when “the facts relating to the alleged fraud are
peculiarly within the perpetrator's knowledge.” United States ex rel. Willard v. Humana Health Plan
of Tex. Inc., 336 F.3d 375, 385 (5th Cir. 2003). Notably, in that very case, the Fifth Circuit rejected
the application of a relaxed standard because the plaintiff had failed to establish the facts were
“peculiarly within” the defendant’s knowledge. Id. Similarly, while Penn-America may indeed have
relevant records in its files, Plaintiff has provided no explanation for why that information is also not
within its own knowledge. The Court thus finds Plaintiff’s claims of fraud and conspiracy. as well
as under the Texas Insurance Code and the DTPA do not meet the pleading requirements of Rule
9(b).
IV. AMENDMENT OF COMPLAINT
As a final matter, in responding to the motion to dismiss, Plaintiff requests leave to file an
amended complaint to address any pleading deficiencies. Courts are to “freely give leave” to
amend “when justice so requires.” FED. R. CIV. P. 15(a)(2). When a claim is subject to dismissal
under Rule 12(b)(6) for failure to state a claim, “district courts often afford plaintiffs at least one
opportunity to cure pleading deficiencies . . . unless it is clear that the defects are incurable or the
plaintiffs advise the court that they are unwilling or unable to amend in a manner that will avoid
dismissal.” Great Plains Trust Co. v. Morgan Stanley Dean Witter & Co., 313 F.3d 305, 329 (5th

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Cir. 2002). As the deadline for filing amended pleadings has not yet passed, the Court will afford
Plaintiff a final opportunity to amend its complaint in accordance with this order,
V. CONCLUSION
Accordingly, the Court hereby GRANTS in PART and DENIES in PART Defendant PennAmerica Insurance Company’s Motion for Partial Dismissal of Plaintiff’s First Amended Complaint
Under FRCP 9(b) and 12(b)(6) (Clerk’s Dkt. #27). Plaintiff’s claim for fraud is dismissed with
prejudice. Plaintiff is ordered to file an amended complaint within fourteen days of the date of this
order addressing the deficiencies identified in this order.
SIGNED on September 8, 2015.

ROBERT L. PITMAN
UNITED STATES DISTRICT JUDGE

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