Harleysville Insurance Company v. Holding Funeral Home, Inc. et al

Filing 43

OPINION AND ORDER denying 26 Motion to Dismiss. Signed by Judge James P. Jones on 9/8/16. (sas)

IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF VIRGINIA
ABINGDON DIVISION
HARLEYSVILLE INSURANCE
COMPANY,
Plaintiff,
v.
HOLDING FUNERAL HOME, INC.,
ET AL.,
Defendants.

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Case No. 1:15CV00057
OPINION AND ORDER
By: James P. Jones
United States District Judge

Robert Tayloe Ross, Robert S. Reverski, Jr., and David Paul Abel, Midkiff,
Muncie & Ross, P.C., Richmond, Virginia, for Plaintiff; C. Thomas Brown, Silver
& Brown, Fairfax, Virginia, for Defendants.
The plaintiff, an insurer of commercial property, invoking this court’s
diversity jurisdiction, seeks a declaratory judgment that it is not obligated to pay
claims filed by the insureds for damages resulting from arson, that the insurance
contract is void due to material misrepresentations by the insureds, and that the
insurer is entitled to a refund of all advances made by it under the insurance
contract. The defendants, the insureds, have moved to dismiss for failure to state a
claim and have asserted a counterclaim against the insurer.
Reviewing the plaintiff’s allegations in the light most favorable to it, I find
that the Second Amended Complaint states plausible claims for declaratory relief.
Accordingly, the defendants’ Motion to Dismiss is denied.

I.
The Second Amended Complaint alleges the following facts, which I must
accept as true for purposes of deciding the Motion to Dismiss.
Harleysville Insurance Company (“Harleysville”) is a corporation organized
and existing under the laws of the Commonwealth of Pennsylvania, with its
principal place of business in Harleysville, Pennsylvania. Harleysville is licensed
to do business as an insurance company under the laws of the Commonwealth of
Virginia.
Defendants and Counterclaimants Holding Funeral Home, Inc. (“Holding”)
and L.J. Horton Florist are corporations, organized under the laws of the
Commonwealth of Virginia, with principal places of business in Big Stone Gap,
Virginia. Marvin Blake Wilson, Jr. is the sole owner of these two entities.
Golden Rule Family Management, LLC, doing business as Holding Funeral
Home of Castlewood (“Holding of Castlewood”), is a corporation, also organized
under the laws of the Commonwealth of Virginia, with its principal place of
business in Castlewood, Virginia. Michael Riebe and Marvin Blake Wilson, Jr.
each hold a fifty percent interest in Holding of Castlewood.
Harleysville and the defendants were parties to a renewal contract of
insurance issued by Harleysville for the time period of November 23, 2013, to
November 23, 2014 (the “Insurance Contract”). The Insurance Contract provides
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commercial property insurance coverage for Holding of Castlewood for a funeral
home located in Castlewood, Virginia.
On October 22, 2014, a fire damaged the funeral home.

Harleysville

conducted an independent investigation and found both that the fire had been
intentionally set and that it had been directly or indirectly caused or arranged for
by the defendants. The limit of property insurance coverage had been increased
from $850,000 to $1,200,000 less than three weeks prior to the fire.

Upon

receiving notice of the fire loss and the resulting claims on October 22, 2014,
Harleysville began investigating the claims.

During the course of the claims

investigation, Riebe and his wife gave false alibis regarding their whereabouts
around the time of the fire, and Riebe falsely informed Harleysville that he was
unaware of any police arson investigation, that certain corporate documents
requested by Harleysville had been burned in the fire, that he had placed an
advertisement offering a reward for information relating to the fire, and that he had
not been at the premises in the days prior to the fire.
Harleysville requested that Holding of Castlewood provide documents and
information needed for the investigation. Holding of Castlewood responded with

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only a partial document production. Harleysville renewed its request on twenty
subsequent occasions. 1
On March 23, 2015, Harleysville provided Holding of Castlewood with
proof of loss forms for the building, contents, and business income claims. On
April 8, 2015, Holding of Castlewood filed a Sworn Statement in Proof of Loss as
to the building, which was dated April 3, 2015, and contained a claimed Partial
Replacement Cost of $1,151,002.10 and a claimed Partial Actual Cash Value of
$921,997.24. Harleysville neither accepted nor rejected the proof of loss for the
building pending its investigation of the claim.
On May 22, 2015, Holding of Castlewood filed a Sworn Statement in Proof
of Loss as to the contents, with a claimed Partial Replacement Cost of $182,261.76
and a claimed Partial Actual Cash Value of $145,998.73. Although requested to
do so, Holding of Castlewood did not provide an itemized inventory or any
documentation to support its claim with respect to the loss of its contents. The
same day, Holding of Castlewood also filed a Sworn Statement in Proof of Loss as
to the business income, with a claimed Partial Replacement Cost of “Not
Determined.” (Compl. Ex. 24, ECF No. 1.)

1

Harleysville renewed its requests by correspondence dated December 2, 2014,
and January 5, February 6, February 24, February 27, March 6, March 23, April 27, June
12, July 9, August 5, August 18, August 19, September 4, September 14, September 17,
September 29, October 15, November 2, and November 10, 2015.
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Harleysville neither rejected nor accepted the proofs of loss for the contents
and business income claims because its investigation of the fire claim was still
pending, the proofs of loss were incomplete and failed to identify the full amount
of the claims, and Holding of Castlewood failed to document the amounts of the
claims as required under the Insurance Contract. On June 12, 2015, Harleysville
requested via letter that Holding of Castlewood properly complete the business
income proof of loss forms and produce documents to support its claim in that
regard.
Holding of Castlewood claimed a total loss amount of $1,333,263.86.
Pursuant to an advance payment receipt, Harleysville made advance payments
totaling $582,674.63 to the defendants, their mortgagee, and the loss payee on this
claim.
Examinations Under Oath (“EUOs”) were conducted on August 24-26,
2015, at which time Holding of Castlewood produced an inventory of contents
alleged to have been damaged by the fire in the amount claimed on the May 22
proof of loss.

Harleysville’s investigation of the fire and claim revealed

misrepresentations regarding the contents claim in excess of $46,000. During the
EUOs, Holding of Castlewood also confirmed the existence, as well as its
possession, of financial documents and information that had been requested but not
yet produced.
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Holding of Castlewood has failed to comply with the “Duties in the Event of
Loss” conditions of the Insurance Contract, including the duty to cooperate with
Harleysville during its investigation of the claim.

In this regard, Holding of

Castlewood has failed to produce certain requested financial records, including
bank statements, ledgers, and journals, and has failed to provide access to its
accountant.
Harleysville filed this action pursuant to diversity jurisdiction, alleging that
the amount in dispute exceeds $75,000, Harleysville is a citizen of the
Commonwealth of Pennsylvania, and the defendants are citizens of the
Commonwealth of Virginia. (Second Am. Compl. ¶¶ 4-9, ECF 25.) Harleysville
seeks a declaration that (1) the defendants caused, or directly or indirectly procured
and/or arranged for, the intentional burning of the property at issue; (2) the
insurance contract is void as a result of the defendants’ intentional
misrepresentations and/or concealments of material facts during the claims
investigation; and (3) Harleysville has no duty to pay insurance benefits to the
defendants in connection with the fire or resulting claims because the defendants
have materially breached the Insurance Contract by failing to comply with the
contract’s duties after loss conditions, which are conditions precedent to insurance
coverage under the contract.

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The defendants filed an Answer and Counterclaim on March 4, 2016, that
includes two breach of contract claims. (Defs.’ Answer and Countercl. ¶¶ 118-28,
ECF No. 20.) In addition, on June 3, 2016, the defendants moved to dismiss the
Complaint for failure to state a claim upon which relief can be granted or, in the
alternative, for a more definite statement. They argue that Harleysville seeks “an
advisory opinion on a hypothetical denial” of the insurance claim. (Defs.’ Mem. in
Supp. of Mot. to Dismiss 3, ECF No. 27.)

The defendants also argue that

Harleysville’s factual allegations with respect to its fraud claims are inadequate
because they are insufficiently specific and therefore fail to satisfy Rule 9 of the
Federal Rules of Civil Procedure.
The defendants’ motions are ripe for decision, having been fully briefed by
the parties.2
II.
Rule 12(b)(6) of the Federal Rules of Civil Procedure provides for dismissal
of actions that fail to state a claim upon which relief can be granted. See Fed. R.
Civ. P. 12(b)(6). “The purpose of a Rule 12(b)(6) motion is to test the sufficiency
of a complaint.” Edwards v. City of Goldsboro, 178 F.3d 231, 243 (4th Cir. 1999).

2

I will dispense with oral argument because the facts and legal contentions are
adequately presented in the materials before the court, and argument would not
significantly aid the decisional process.
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In order to survive a motion to dismiss under Rule 12(b)(6), a “complaint
must contain sufficient factual matter, accepted as true, to ‘state a claim to relief
that is plausible on its face.’” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting
Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). “A claim has facial
plausibility when the plaintiff pleads factual content that allows the court to draw
the reasonable inference that the defendant is liable for the misconduct alleged.”
Ashcroft, 556 U.S. at 678 (citing Twombly, 550 U.S. at 556).
In deciding whether a complaint will survive a Rule 12(b)(6) motion to
dismiss, the court considers the complaint and any documents attached or
incorporated by reference into the complaint. Zak v. Chelsea Therapeutics Int’l,
Ltd., 780 F.3d 597, 606 (4th Cir. 2015) (quoting E.I. du Pont de Nemours & Co. v.
Kolon Indus., Inc., 637 F.3d 435, 448 (4th Cir. 2011)). In ruling, the court must
regard as true all of the factual allegations contained in the complaint, Erickson v.
Pardus, 551 U.S. 89, 94 (2007), and must view those facts in the light most
favorable to the plaintiff. Christopher v. Harbury, 536 U.S. 403, 406 (2002).
However, “the tenet that a court must accept as true all of the allegations contained
in a complaint is inapplicable to legal conclusions.” Ashcroft, 556 U.S. at 678.
“While legal conclusions can provide the framework of a complaint, they must be
supported by factual allegations.” Id. at 679.

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A.
The defendants first assert that Harleysville’s Second Amended Complaint
should be dismissed because it seeks an advisory opinion, rather than a declaratory
judgment. The defendants argue that without denial of the insurance claim, there is
no case or controversy.
The Declaratory Judgment Act provides that “[i]n a case of actual
controversy within its jurisdiction,” the court “may declare the rights and other
legal relations of any interested party seeking such declaration.”

28 U.S.C.

§ 2201(a). A federal court may properly exercise jurisdiction to issue declaratory
relief when three requirements are met: (1) the complaint alleges an actual
controversy between the parties; (2) the court has an independent basis for
jurisdiction; and (3) the exercise of jurisdiction is not an abuse of discretion. Volvo
Constr. Equip. N. Am., Inc. v. CLM Equip. Co., 386 F.3d 581, 592 (4th Cir. 2004).
Here, the defendants contend that there is no case or controversy until Harleysville
denies the claim.
The inquiry as to whether the dispute is a case or controversy “focuses on
whether the controversy is definite, concrete, real and substantial[,] as opposed to
simply a request for an advisory opinion involving some hypothetical, abstract, or
academic question.” Newton v. State Farm Fire & Cas. Co., 138 F.R.D. 76, 78
(E.D. Va. 1991) (internal citations and quotation marks omitted).
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In support of their argument, the defendants cite to United Public Workers of
America v. Mitchell, 330 U.S. 75 (1947). The plaintiffs in Mitchell sought a
declaratory judgment concerning the unconstitutionality of certain statutory
language. Id. at 82. The court found that the plaintiffs clearly sought “advisory
opinions upon broad claims of rights” protected by the Constitution and held that,
for adjudication of constitutional issues, concrete legal issues, rather than
abstractions, must be presented in actual cases.

Id. at 89.

However, unlike

Mitchell, the facts set forth in the present action show “that there is a substantial
controversy, between parties having adverse legal interests, of sufficient
immediacy and reality to warrant the issuance of a declaratory judgment.” Md.
Cas. Co. v. Pac. Coal & Oil Co., 312 U.S. 270, 273 (1941).
“It is well established that a declaration of parties’ rights under an insurance
policy is an appropriate use of the declaratory judgment mechanism.” United
Capital Ins. Co. v. Kapiloff, 155 F.3d 488, 494 (4th Cir. 1998). Here, Harleysville
is seeking a declaratory judgment to clarify “a construction of definite stated
rights” under the Insurance Contract.

Id.

Specifically, Harleysville seeks a

declaratory judgment to determine (1) whether the defendants have complied with
the terms of the Insurance Contract; (2) whether arson and subsequent material
misrepresentations by the defendants render the Insurance Contract void ab initio;
and (3) whether the defendants’ claims are otherwise covered under the terms of
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the Insurance Contract. This is precisely the type of contractual uncertainty that
declaratory judgments are designed to address, because a determination of these
issues will “serve a useful purpose in clarifying the legal relations in issue” and
“will terminate and afford relief from the uncertainty, insecurity, and controversy
giving rise to the proceeding.” Newton, 138 F.R.D. at 79 (internal quotation marks
omitted). Indeed, a determination that the Insurance Contract is void due to arson
or material misrepresentations would be dispositive of the action. Accordingly, I
find that Harleysville has properly stated a claim for a declaratory judgment.
B.
The defendants also argue that the Second Amended Complaint fails to
properly and specifically allege fraud and the particulars of the lack of a condition
precedent as required by Rule 9 of the Federal Rules of Civil Procedure.
“In alleging fraud or mistake, a party must state with particularity the
circumstances constituting fraud or mistake.” Fed. R. Civ. P. 9(b). “The standard
set forth by Rule 9(b) aims to provide defendants with fair notice of claims against
them and the factual ground upon which they are based, forestall frivolous suits,
prevent fraud actions in which all the facts are learned only following discovery,
and protect defendants' goodwill and reputation.” McCauley v. Home Loan Inv.
Bank, 710 F.3d 551, 559 (4th Cir. 2013); see also United States ex rel. Nathan v.
Takeda Pharm. N. Am., Inc., 707 F.3d 451, 455–56 (4th Cir. 2013). A court
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“should hesitate to dismiss a complaint under Rule 9(b) if [the court is] satisfied
(1) that the defendant has been made aware of the particular circumstances for
which it will have to prepare a defense at trial, and (2) that [the] plaintiff has
substantial prediscovery evidence of those facts.” McCauley, 710 F.3d at 559
(internal citation and quotation marks omitted).
In Count II of its Second Amended Complaint, Harleysville alleges the
following:
Holding of Castlewood intentionally concealed from,
and/or misrepresented to, Harleysville a number of facts
during the investigation of the Claim, including but not
limited to, Holding of Castlewood’s inflated and
exaggerated contents claim; Mr. Wilson’s and Mr.
Riebe’s false denial of their knowledge of the law
enforcement authorities’ investigation of the Fire; Mr.
Riebe’s false statement to Harleysville that he had posted
a reward for information relating to the Fire; and, Mr.
Riebe’s false representations regarding the removal of
documents from the Premises prior to the Fire and the
destruction of documents during the Fire.
(Second Am. Compl. ¶ 53, ECF No. 25.)
“[T]he circumstances required to be pled with particularity under Rule 9(b)
are the time, place, and contents of the false representations, as well as the identity
of the person making the misrepresentation and what he obtained thereby.”
McCauley, 710 F.3d at 559 (internal quotation marks and citations omitted).
Harleysville alleges the identity of the person making each of these
misrepresentations or concealments as well as the contents of the statements or
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concealments. Although Harleysville fails to allege precisely when and where
such misrepresentations were made, it does allege that such statements or
concealments were made “during the investigation of the Claim.” (Second Am.
Compl. ¶¶ 53-54, ECF No. 25.) Accordingly, I find that the facts alleged in the
Complaint provide adequate notice to the defendants of “the particular
circumstances for which [they] will have to prepare a defense at trial,” McCauley,
710 F.3d at 559 (internal quotation marks and citation omitted), and that
Harleysville has sufficiently pleaded Count II with the specificity required by Rule
9(b).
In Count III, Harleysville alleges that the Insurance Contract is void because
the defendants failed to comply with certain conditions precedent required under
the Insurance Contract. The federal rules provide that “when denying that a
condition precedent has occurred or been performed, a party must do so with
particularity.” Fed. R. Civ. P. 9(c).
Specifically, Harleysville contends that the defendants failed to produce
documents and information or otherwise respond to a number of specific requests
by Harleysville, failed to comply with the condition allowing Harleysville access
to the defendants’ accountant and financial records, and failed to comply with the
condition that signature pages of EUO transcripts be notarized and returned.
Viewing these allegations in the light most favorable to Harleysville, I find it has
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satisfied the heightened pleading requirement under Rule 9(c).

Harleysville

identifies the sections of the Insurance Contract setting forth the requisite
conditions precedent and specifically identifies which of these conditions the
defendants have failed to satisfy. Although Count III does not specifically identify
which documents the defendants have failed to produce, Harleysville previously
supplied the defendants with specific requests for information and documents.
Therefore, the defendants have been afforded adequate notice. Accordingly, I find
that Count III sufficiently states a claim for which relief can be granted and will
deny the defendants’ motion in this regard.
C.
Finally, the defendants argue that the plaintiff’s Complaint fails to allege
proper causes of action because it seeks relief that cannot be provided by a
declaratory judgment. The defendants contend that this court can neither enter an
order stating that the Insurance Contract is unenforceable nor enter a money
judgment in favor of Harleysville for amounts previously paid to the defendants.
Because I have already determined that Harleysville has properly stated a
claim for declaratory judgment, it follows that “[f]urther necessary or proper relief
based on a declaratory judgment or decree may be granted, after reasonable notice
and hearing, against any adverse party whose rights have been determined by such
judgment.” 28 U.S.C. § 2202. Therefore, if I were to enter a declaratory judgment
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declaring the Insurance Contract void, I would have the power to order a return of
any amounts previously paid.
III.
I emphasize that I merely hold that Harleysville’s claims are sufficient to
survive a motion to dismiss. See Tobey v. Jones, 706 F.3d 379, 387 (4th Cir. 2013)
(“A Rule 12(b)(6) motion to dismiss ‘does not resolve contests surrounding facts,
the merits of a claim, or the applicability of defenses.’” (quoting Republican Party
of N.C. v. Martin, 980 F.2d 943, 952 (4th Cir. 1992))).
For the foregoing reasons, it is ORDERED that the Motion to Dismiss (ECF
No. 26) is DENIED.
ENTER: September 8, 2016
/s/ James P. Jones
United States District Judge

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