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Northend Investors, LLC v. Southern Trust Ins. Co.

United States District Court, W.D. Tennessee, Eastern Division

June 9, 2017




         Before the Court is Defendant Southern Trust Insurance Company's Motion to Dismiss Punitive Damages and All Costs Claims, filed on September 26, 2016. (ECF No. 24.) Plaintiff Northend Investors, LLC (“Northend”) has responded in opposition (ECF No. 29), and Defendant has filed a reply brief (ECF No. 37), making the matter ripe for adjudication. Defendant has also moved, in the alternative, to bifurcate punitive damages issues at trial. (ECF No. 34.) Plaintiff has not responded to this motion. For the reasons discussed below, Defendant's partial motion to dismiss is GRANTED IN PART AND DENIED IN PART and its alternative motion to bifurcate is GRANTED.[1]

         I. BACKGROUND

         The following facts are gleaned from Plaintiff's amended complaint, which the Court accepts as true for the purposes of the instant motion. (See ECF No. 11; see also Scheuer v. Rhodes, 416 U.S. 232, 236 (1974).) Plaintiff owned a commercial building in Lexington, Tennessee, containing warehouse and office space, and leased the premises to a third party. Plaintiff purchased a three-year policy from Defendant, a Georgia corporation, insuring the premises against direct physical loss or damage. On February 4, 2015, an accidental fire occurred on the premises, causing physical damage. Plaintiff timely reported the loss, which had occurred during the policy term, to Defendant, which then sent an adjuster to inspect the property. The adjuster observed extensive smoke damage, specifically to the vinyl-backed ceiling and wall insulation, and suggested that Defendant consider hiring an electrical contractor and an “environmentalist/hygienist” to further investigate the extent of the damage. (ECF No. 11 at 4.) Another inspector who surveyed the damage determined that the insulation needed to be replaced and other significant restoration work was required.

         Defendant concluded that a professional cleaning of the warehouse would be sufficient to remedy the damage caused by the fire. Plaintiff disagreed, insisting that significant repairs were needed. The parties, through representatives, communicated extensively regarding this dispute and the cost of cleaning the premises. Plaintiff eventually hired its own experts to survey the damage; they determined that significant restorative work was necessary, as soot had accumulated in the wall cavities and conduits inside the building. On December 3, 2015, Plaintiff submitted to Defendant a sworn proof of loss statement formalizing its claim, with an estimate of $2, 570, 070.39. To date, Defendant has made no payments to Plaintiff.

         On April 29, 2016, Plaintiff filed suit in the Circuit Court of Henderson County, Tennessee at Lexington, alleging breach of contract and statutory bad faith, and requesting compensatory damages, punitive damages, and costs. (ECF No. 1-1.) Defendant removed the case to this Court on diversity grounds on June 6, 2016 (ECF No. 1), and Plaintiff filed an amended complaint soon after (ECF No. 11). Defendant now moves to dismiss the claims for punitive damages, attorney's fees, and costs, averring that Tennessee law limits Plaintiff's potential recovery.


         A defendant may move to dismiss a claim “for failure to state a claim upon which relief can be granted” under Federal Rule of Civil Procedure 12(b)(6). When considering a Rule 12(b)(6) motion, the Court must treat all of the well-pleaded allegations of the pleadings as true and construe all of the allegations in the light most favorable to the non-moving party. Scheuer v. Rhodes, 416 U.S. 232, 236 (1974); Saylor v. Parker Seal Co., 975 F.2d 252, 254 (6th Cir. 1992). However, legal conclusions or unwarranted factual inferences need not be accepted as true. Morgan v. Church's Fried Chicken, 829 F.2d 10, 12 (6th Cir. 1987). “To avoid dismissal under Rule 12(b)(6), a complaint must contain either direct or inferential allegations with respect to all the material elements of the claim.” Wittstock v. Mark a Van Sile, Inc., 330 F.3d 899, 902 (6th Cir. 2003). Under Federal Rule of Civil Procedure 8, a complaint need only contain “a short and plain statement of the claim showing that the pleader is entitled to relief.” Fed.R.Civ.P. 8(a)(2). Although this standard does not require “detailed factual allegations, ” it does require more than “labels and conclusions” or “a formulaic recitation of the elements of a cause of action.” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009); see Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007); see also Reilly v. Vadlamudi, 680 F.3d 617, 622 (6th Cir. 2012) (quoting Twombly, 550 U.S. at 555). In order to survive a motion to dismiss, the plaintiff must allege facts that, if accepted as true, are sufficient “to raise a right to relief above the speculative level” and to “state a claim to relief that is plausible on its face.” Twombly, 550 U.S. at 555, 570. “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.” Iqbal, 556 U.S. at 678.

         III. ANALYSIS

         “In a diversity action involving an insurance contract, a federal court applies the substantive law of the forum state.” Talley v. State Farm Fire & Cas. Co., 223 F.3d 323, 326 (6th Cir. 2000) (citing Erie R.R. Co. v. Tompkins, 304 U.S. 64 (1938)). This Court must apply state law in accordance with the decisions of the state's highest court, in this case, the Tennessee Supreme Court. Talley, 223 F.3d at 326. If the court has not spoken on a particular issue, this Court must attempt to anticipate how it would rule. In re Dow Corning Corp., 419 F.3d 543, 549 (6th Cir. 2005). “Decisions of the Tennessee Court of Appeals are viewed as persuasive authority unless it is shown that the Tennessee Supreme Court would decide the issue differently.” Roberts v. Allstate Ins. Co., No. 2:09-0016, 2009 WL 2851017, at *2 (M.D. Tenn. Aug. 29, 2009) (citing Dow Corning Corp., 419 F.3d at 549). Also, the Court obviously “must follow . . . Sixth Circuit precedent.” Smith v. Hoffner, No. 14-cv-14067, 2014 WL 6986436, at *1 (E.D. Mich. Dec. 10, 2014).

         A. The Bad-Faith Statute and Punitive Damages

         1. Tennessee statutory development

         The Tennessee Supreme Court has held that “[a]lthough as a general matter, punitive damages are not available in a breach of contract case, [they] may be awarded . . . under certain circumstances.”[2] Rogers v. Louisville Land Co., 367 S.W.3d 196, 211 n.14 (Tenn. 2012) (citation omitted). In a breach of contract action involving an insurance policy, an insured may seek a statutory penalty in addition to compensatory damages, pursuant to Tennessee Code Annotated section 56-7-105 (“the bad-faith statute”).[3] The bad-faith statute “provides for a 25 percent penalty against an insurance company, in addition to the loss and interest, where the refusal to pay an insurance claim within 60 days is not in good faith.” Gaston v. Tenn. Farmers Mut. Ins. Co., 120 S.W.3d 815, 822 (Tenn. 2003). The relevant section of the statute reads thus:

The insurance companies of this state, and foreign insurance companies and other persons or corporations doing an insurance or fidelity bonding business in this state, in all cases when a loss occurs and they refuse to pay the loss within sixty (60) days after a demand has been made by the holder of the policy or fidelity bond on which the loss occurred, shall be liable to pay the holder of the policy or fidelity bond, in addition to the loss and interest on the bond, a sum not exceeding twenty-five percent (25%) on the liability for the loss; provided, that it is made to appear to the court or jury trying the case that the refusal to pay the loss was not in good faith, and that the failure to pay inflicted additional expense, loss, or injury including attorney fees upon the holder of the policy or fidelity bond; and provided, further, that the additional liability, within the limit prescribed, shall, in the discretion of the court or jury trying the case, be measured by the additional expense, loss, and injury including attorney fees thus entailed.

Tenn. Code Ann. § 56-7-105(a).

         In Myint v. Allstate Insurance Co., the Tennessee Supreme Court held that this bad-faith penalty did not preclude plaintiffs in insurance cases from also pursuing claims for treble damages under the Tennessee Consumer Protection Act (“TCPA”). 970 S.W.2d 920 (Tenn.1998); see Tenn. Code Ann. § 47-18-101 et seq. In other words, the TCPA was “complementary legislation” to the insurance bad-faith statute-plaintiffs could seek both remedies. Myint, 970 S.W.2d at 926 (emphasis omitted). In 2011, however, the Tennessee General Assembly passed Tennessee Code Annotated section 56-8-113 in response to Myint. This section provides that

         Notwithstanding any other law, title 50 and this title shall provide the sole and exclusive statutory remedies and sanctions applicable to an insurer, person, or entity licensed, permitted, or authorized to do business under this title for alleged breach of, or for alleged unfair or deceptive acts or practices in connection with, a contract of insurance as such term is ...

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