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M&K Rest. LLC v. Farmers Ins. Co., Inc.

United States District Court, E.D. Arkansas, Western Division

July 8, 2014

M&K RESTAURANT LLC, et al., PLAINTIFFS
v.
FARMERS INSURANCE COMPANY, INC., DENNIS RAY HENLEY d/b/a HENLEY INSURANCE AGENCY, JOHN DOES 1-10, DEFENDANTS

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For M& K Restaurant LLC, Kay Perry, Juanita Canton Perry, Michael Clay Perry, Individually and on behalf of Joe Perry, Harvey Doyne Perry, Martha Shirlene Perry Jones, Jay Brook Perry, Carla Janette Perry, Stanley Brian Perry, Sherri Perry, Michael Kerri Perry, Brian Perry, Jonathan Culver, Plaintiffs: Jason W. Earley, LEAD ATTORNEY, Chisenhall, Nestrud & Julian, P.A., Little Rock, AR.

For Farmers Insurance Company Inc, Defendant: Richard N. Watts, LEAD ATTORNEY, Watts, Donovan & Tilley, P.A., Little Rock, AR; William R. DeJean, LEAD ATTORNEY, Nielsen Carter & Treas, L.L.C., Metairie, LA.

For Dennis Ray Henley, doing business as Henley Insurance Agency, Defendant: Donald H. Bacon, LEAD ATTORNEY, Edie R. Ervin, Friday, Eldredge & Clark, LLP, Little Rock, AR.

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OPINION AND ORDER

Kristine G. Baker, United States District Judge.

Before the Court are cross motions for summary judgment, a motion to dismiss, a motion to quash the jury demand, and a motion to strike. Plaintiffs (" the Perrys" ) have moved for partial summary judgment (Dkt. No. 12). Defendant Farmers Insurance Company (" Farmers" ) has responded in opposition (Dkt. No. 18), and the Perrys have replied (Dkt. No. 23). The Perrys seek partial summary judgment in their favor that Farmers breached a flood insurance contract with the Perrys. Farmers in its cross motion for summary judgment raises several arguments in support of its position that the Perrys' claims are barred and that the Perrys should not recover under the policies (Dkt. No. 46). The Perrys have responded to that motion (Dkt. No. 69). Additionally, Farmers has filed a motion to dismiss (Dkt. No 44) to which the Perrys have responded (Dkt. No. 66). Farmers also filed a motion to quash the jury demand (Dkt. No. 39) to which the Perrys have responded (Dkt. No. 43) and Farmers has replied (Dkt. No. 62). Finally, the Perrys have filed a motion to strike (Dkt. No. 67).

Farmers participates in the United States' National Flood Insurance Program (" NFIP" ), regulated primarily by the Federal Emergency Management Agency (" FEMA" ), as a Write-Your-Own carrier (" WYO" ). See 42 U.S.C. § 4071. WYOs issue flood insurance policies underwritten by the U.S. Treasury and must use the Standard Flood Insurance Policy (" SFIP" ) promulgated by federal regulations at 44 C.F.R. § 61, app. A. In return for administering these SFIPs, WYOs receive profits for their participation based upon a percentage of premiums paid. See Eddins v. Omega Ins. Co., 825 F.Supp. 752, 753 (N.D. Miss. 1993). Farmers and the Perrys represent that, on May 2, 2011, separate defendant Dennis Henley sold the Perrys an SFIP for their motel property in Lonoke County, Arkansas, and that one day later, on May 3, 2011, the Perrys' property flooded. The instant action and contested issues flow from that insurance policy and the ensuing flood. For the reasons set forth below, the Court denies both motions for summary judgment and Farmers' motion to dismiss. The Court also grants in part and denies in part the Perrys' motion to strike and Farmers' motion to quash the jury demand.

I. Jurisdiction

The Perrys claim, and Farmers admits, jurisdiction pursuant to 42 U.S.C. § 4072 and 28 U.S.C. § 1367. While § 4072 clearly allows suits against the Administrator of FEMA when the Administrator denies a

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claim, it does not mention actions against WYO carriers. Neither the Perrys nor Farmers have sued the Administrator of FEMA. The Eighth Circuit has never addressed directly the issue of federal jurisdiction over suits against WYO carriers under § 4072, and there is no consensus among the circuits that have. Stoner v. S. Farm Bureau Cas. Ins. Co., 2013 WL 593459 at *2 (E.D. Ark. Feb. 15, 2013) (citations omitted). All courts that have addressed the issue, however, agree that the federal question jurisdiction statute, 28 U.S.C. § 1331, grants federal courts jurisdiction over policies issued under the NFIP. Id. The Court is thus satisfied that it has jurisdiction over the instant case concerning a policy issued under the NFIP pursuant to § 1331 and can proceed to the merits of the case.

II. Factual Background

Michael and Kay Perry own M& K Restaurant LLC (" M& K" ). In 2008, M& K took over operations of Perry's Motel, a small motel along Interstate 40 in Lonoke County, Arkansas. Perry's Motel has been owned by the Perry family for decades. The Perrys allege that, from 2008 to 2011, they restored the motel, financed through a home equity line of credit from Bank of the Ozarks obtained on July 10, 2008. That loan was collateralized through a mortgage on the home of the 81-year old family matriarch, Ms. Juanita Canton, who allegedly depends upon the income from the motel.

The motel property is not mentioned in the July 10, 2008, line of credit document (Dkt. No. 47-8), but a June 22, 2008, letter from Bank of the Ozarks to Mr. Perry advises that the Bank of the Ozarks could not use the motel property as collateral for a loan, since the motel was located on leased property, but notes that " the loan is to be used for renovation of the motel property and the resulting revenues used to repay the loan" (Dkt. No. 71-4, at PC 000127). The Bank instead held Ms. Canton's property located at 321 Woodlawn Drive in Lonoke as " primary collateral," with the stipulation that a fire policy be kept on Ms. Canton's property and that a fire and flood policy be placed on the motel property ( Id. ). The Perrys assert that this and other correspondence from the Bank of the Ozarks shows that income from and repairs to the motel were the driving forces behind the loan ( See also id., at PC 00104-05).

The Perrys allege that in March of 2011 they sought a quote for flood insurance on Perry's Motel from separate defendant Dennis Henley. They allege that on May 1, 2011, Mr. Henley provided them a quote for the insurance coverage. On May 2, 2011, the Perrys submitted to Mr. Henley an application for flood insurance with a letter attached from Bank of the Ozarks regarding their loan, and Mr. Henley sold the Perrys an SFIP for their motel property. One day later, on May 3, 2011, Perry's Motel flooded.

Mr. Henley represented to the Perrys, and requested in the Perrys' application to Farmers, that coverage would bind immediately (Dkt. No. 12-1, PERRY 001-003). However, under the NFIP, coverage under a new contract for flood insurance generally does not become effective until 30 days after the insurance applicants complete all of their obligations for coverage. 42 U.S.C. § 4013(c)(1). This provision does not apply where " the initial purchase of flood insurance coverage" is purchased " in connection with the making, increasing, extension, or renewal of a loan." 42 U.S.C. § 4013(c)(2)(A). Whether the Perrys' initial purchase of flood insurance coverage from defendants was purchased " in connection with the making, increasing, extension, or renewal of a loan," specifically the

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nature of the Perrys' loan with the Bank of the Ozarks to finance Perry's Motel and whether the Perrys misled defendants about the nature of the loan, is contested by the parties.

On May 10, 2011, Farmers sent the Perrys a Declaration Page with a June 1, 2011, coverage beginning date (Dkt. No. 71-6, at PC 005-007). On May 11, 2011, after the Perrys complained, Farmers sent the Perrys a revised Declaration Page with a May 2, 2011, coverage beginning date ( Id., at 009-010). Farmers alleges that it did so predicated on the assumption that the lender required the flood policies in connection with a loan.

The Perrys allege, and Mr. Henley corroborates that, before the Perrys began repairs on the motel, Farmers advised Mr. Henley that the Perrys would be covered for the flood damage (Dkt. No. 12-2, ¶ 21). In his deposition, Mr. Henley states that he contacted Farmers to ask if demolition had been fully approved and that Farmers responded, " Yes, they can do it." (Dkt. No. 72-1, at 48). The Perrys further allege that, during the adjustment of their claims, the adjuster retained by Farmers, Anthony Childers, who was dispatched to Perry's Motel after the flood waters receded, was called away to deal with claims arising from Hurricane Irene. For this reason, his adjustment of the Perrys' claims was delayed months while the Perrys spent over $200,000.00 on repairs (Dkt. No. 12-2, ¶ ¶ 22-24).

On June 7, 2011, Mr. Childers issued a report to Farmers recommending that Farmers deny the Perrys' claim " due to the fact that the policy was not 30-days into its effective period." (Dkt. No. 47-15). It goes on to advise, that the

loan documentation papers state that there is no mortgage on the insured property due to the fact the property is constructed on leased property. The lending organization would not issue mortgage on the insured property but took mortgage on residence owned by the policy holder to make renovations to the hotel. It was stated in the loan papers in 2008 that flood policy should be taken for the hotel property. The insured did not pursue flood policy until an impending Flood-In-Progress threatened to damage the risk.

Id. Mr. Childers issued another report on July 8, 2011, that stated the loan documentation was sufficient to waive the 30-day waiting period but to deny the claim based on a flood-in-progress which he claimed began on April 26, 2011, before the Perrys applied for the policy (Dkt. No. 18-8). Mr. Childers issued a third report on September 21, 2011, wherein he amends his prior final report to state that there was no flood in progress at the time the Perrys secured flood insurance (Dkt. No. 23-2, PC 000191-93; see also Dkt. No. 72-5, at 46, 53-61 (Mr. Childers's deposition explaining the research that led to his change of opinion regarding the flood-in-progress issue); Dkt. No. 23-5, PC 000417-18 (Mr. Childers's technical explanation as to why there was no flood in progress at issue with regard to the Perrys' claim)).

On June, 27, 2011, the Perrys submitted to Farmers proof of loss forms claiming zero dollars ($0) (Dkt. No. 18-10). The Perrys allege that this was done " as instructed by" Mr. Childers (Dkt. No. 12-2, ¶ 19). Mr. Childers in his deposition stated that he believes he filled out the proofs of loss with the zero dollar amount and believed that this would preserve the Perrys' rights under their policy (Dkt. No. 72-5, at 36-38). Mr. Henley in his deposition also stated that either Mr. Childers or Farmers sent him and the Perrys the proofs of loss with the zero dollar loss amount (Dkt. No. 72-1, at 53:23-54:2) On September 1, 2011, the Perrys sent an

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email to Mr. Childers requesting finalization of their claim (Dkt. No. 12-4).

On September 9, 2011, Farmers sent a letter to the Perrys stating in part that " [t]he adjusters supplemental report indicates you have not submitted your signed, dated and sworn supplemental proof of loss for additional damages. You will need to submit the supplemental signed, dated and notarized proof of loss and request for waiver without further delay." (Dkt. No. 47-4). The letter further stated that the Perrys' claim would " remain closed at this time pursuant to the Standard Flood Insurance Policy," and " [i]f you do not agree with your insurer's decision to deny your claim or any part of the claim Federal law allows you to appeal that decision within 60 days of the date of this denial letter." Id.

On September 12, 2011, Mr. Childers responded to the Perrys' email with the building damage estimates (Dkt. No. 12-4). In his email, Mr. Childers told the Perrys that if they signed and submitted the proofs of loss forms attached to his email it would " get over 400K in [their] hands" ( Id. ). That day, the Perrys signed the proofs of loss forms for $130,056.25 and $286,468.68 attached to Mr. Childers's email.

On September 26, 2011, National Flood Services - Stone River (" NFS" ), the vendor who services Farmers' flood policies, through its employee Alana Jackson sent an email to FEMA stating that the flood damages to the Perrys' property were covered under the policy and that the Perrys were entitled to recover for the damages, concluding that the lender-required policy became effective on May 2, 2011 (Dkt. No. 69-1, at 34:16-36:1).

On November 17, 2011, FEMA required Farmers to submit a copy of its entire file to FEMA for review of the Perrys' claim, and Farmers claims it submitted the file the next day (Dkt. No. 47-18). However, further correspondence between NFS and FEMA shows that on December 2, 2011, FEMA requested additional documentation substantiating the loan closing date--specifically the June 22, 2008, letter from Bank of the Ozarks to Mr. Perry which states that flood insurance was to be in place since 2008 for the duration of the loan and documents pertaining to Bank of the Ozarks attempting to force place flood insurance--documents FEMA states it did not receive (Dkt. No. 71-8, at PC 00135-37). A few hours after FEMA requested the additional documentation, Ms. Jackson replied that she would " need to call the agent to see if he can obtain this for me. I will send this to you as soon as I have received it." ( Id., at PC 00135). On December 6, 2011, FEMA wrote back to Ms. Jackson at NFS stating

As I stated last week, [the Claims Department of the Federal Insurance & Mitigation Administration, an entity within FEMA,] received Congressional correspondence regarding this case. At this point, Claims has decided to move forward with their response to the correspondence and denial of the insured's appeal due to insufficient loan closing/mandatory purchase documentation on which to support the policy's effective date and waiving of the 30 day waiting period. If at some point the insured does provide the proper documentation, please feel free to forward it to me.

( Id. ).

Amy Itschner, Corporate Representative of Farmers, stated in her deposition that she believed from this correspondence that, by December 6, 2011, Ms. Jackson had not provided the loan closing documentation from Bank of the Ozarks which FEMA requested (Dkt. No. 69-1, at 102:3-108:4). There is some indication in Ms. Itschner's deposition based on her review

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of an " Exhibit 24" that Ms. Jackson may have submitted some or all of these documents on or around December 12, 2011, but Ms. Itschner states that it appeared that the FEMA representative with whom Ms. Jackson had been corresponding did not have the relevant documents ( Id., at 108:23- 109:17).

On December 30, 2011, Farmers sent a Declination Letter to the Perrys stating that the flood began in the Perrys' " area" on May 3, 2011 (Dkt. No. 12-6). Farmers notes in its letter that this date is prior to the inception date of the Perrys' SFIP as a 30-day wait period was applied to their policy because the loan documentation they provided was insufficient to issue the policy immediately as " lender required" ( Id. ).

On January 9, 2012, Edward Connor, the Deputy Associate Administrator for Federal Insurance within FEMA, sent a letter to Senator Mark Pryor pursuant to Senator Pryor's constituent inquiry regarding the Perrys' claim. Within the letter Mr. Connor explained, as Farmers did in its letter to the Perrys, that the 30-day waiting period applied to the Perrys because the flood policy was not " required by a lender for a loan closing" (Dkt. No. 18-2, PC 000045). Mr. Connor additionally determined that there was a " flood in progress" on May 2, 2011, at the time the Perrys requested coverage which would void any coverage over losses in connection with that flood, even if coverage for the Perrys began immediately ( Id. ). Mr. Connor further noted that " Farmers received a letter from Bank of the Ozarks dated June 22, 2008, describing the borrowers requirement to obtain and maintain flood insurance," but nevertheless found that a 30-day waiting period applied because the policy was not purchased until almost three years later and one day prior to the loss ( Id. ). The Perrys contest that the 30-day waiting period applied, contest that there was a flood in progress on May 2, 2011, and maintain that there is no information in the record to determine how Mr. Connor arrived at the conclusions in his letter or if he wrote the letter ( See Dkt. No. 69-1, at 22:11-24:17).

On February 23, 2012, after Farmers and FEMA had reviewed and denied the Perrys' claim, Farmers sent the Perrys another revised Declaration Page with a June 1, 2011, coverage beginning date (Dkt. No. 18-1, UW 7-8 & 44-45).

In a September 13, 2012, letter to Michael Perry, James Sadler, the Director of Claims for the NFIP wrote that FEMA had reviewed the June 22, 2008, letter from Bank of the Ozarks confirming the " requirement to obtain and maintain flood insurance," but found that a 30-day waiting period applied because the policy was not purchased until almost three years later and one day prior to the loss (Dkt. No. 47-10). His letter does not mention a flood-in-progress issue ( Id. ).

The Perrys filed this suit on December 18, 2012.

III. Requests To Exclude Documents From Consideration

The Perrys object to the January 9, 2012, letter from Mr. Connor and the September 13, 2012, letter from Mr. Sadler as inadmissible evidence on the grounds of lack of authentication and hearsay. It is well settled that a party may not defeat a motion for summary judgment by relying solely on inadmissible hearsay. See, e.g., BancorpSouth Bank v. Hazelwood Logistics Ctr., LLC, 706 F.3d 888, 900 (8th Cir. 2013); Guest v. Shell, 2013 WL 1089039 (E.D. Ark. Mar. 14, 2013). However, the standard is not whether the evidence at the summary judgment stage would be admissible at trial--it is whether it could be presented at trial in an admissible

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form. Gannon Int'l, Ltd. v. Blocker, 684 F.3d 785, 793 (8th Cir. 2012). Rule 56 of the Federal Rules of Civil Procedure permits a party to object to evidence cited by the other party at the summary judgment stage and requires the Court to make a determination regarding whether the evidence could be presented at trial in an admissible form. See Fed.R.Civ.P. 56(c)(2). The Court finds that these letters could be properly authenticated, among other ways, with a supporting affidavit or testimony. Further, through supporting affidavits or testimony, Farmers could establish that these letters meet the requirements of records of a regularly conducted activity and, therefore, are an exception to hearsay. See Fed.R.Evid. 803(6). The Court will consider these documents at the summary judgment stage.

The Perrys also move to strike the affidavit of Scott Holmes attached to Farmers' motion for summary judgment at Dkt. No. 47-1 and amicus briefs filed by FEMA through the Department of Justice in 1998 and 2000 in unrelated NFIP cases at Dkt. Nos. 45-5 and 45-6 (Dkt. No. 67). Regarding the motion to strike the affidavit of Scott Holmes, Federal Rule of Civil Procedure 26(a)(1)(A)(i) requires parties to disclose the names of all individuals likely to have discoverable information, along with the subjects of that information, that the disclosing party may use to support its claims or defenses. Federal Rule of Civil Procedure 37(c)(1) provides that failure to identify a witness as required by Rule 26(a) bars the use of that witness on a motion, unless the failure was substantially justified or is harmless. The Perrys assert that Farmers did not name Mr. Holmes in its initial disclosures, as a corporate representative, or in response to any discovery request. Since the discovery deadline in this case has passed, the Perrys assert that the inclusion of Mr. Holmes's affidavit is prejudicial because they will not be able to take his deposition or otherwise inquire about the bases for his affidavit through discovery. Farmers did not respond to this motion, and the time to do so has passed. Therefore, the Court grants in part the Perrys' motion to strike as it relates to Mr. Holmes's affidavit, thus striking the affidavit from the record.

Regarding the amicus briefs, the Perrys offer various arguments to support their claim that the amicus briefs are not admissible evidence, that the Court should not take judicial notice of the briefs because the briefs do not constitute the current official position of FEMA on this lawsuit or on the NFIP in general, and that admission of these briefs would be prejudicial to the Perrys and that the briefs should therefore be excluded. As noted above, Farmers did not respond to this motion, and the time to do so has passed.

These amicus briefs relate to issues raised in the pending motion to dismiss, and the Court will examine their admissibility in that context. In reviewing a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6), the district court is not precluded in its review of the complaint from taking notice of items in the public record. Papasan v. Allain, 478 U.S. 265, 268 n. 1, 106 S.Ct. 2932, 92 L.Ed.2d 209 (1986); Stutzka v. McCarville, 420 F.3d 757, 761 n. 2 (8th Cir. 2005); Stahl v. U.S. Dep't of Agriculture, 327 F.3d 697, 700 (8th Cir. 2003). Court records are public records. Nixon v. Warner Communications, Inc., 435 U.S. 589, 597-98, 98 S.Ct. 1306, 55 L.Ed.2d 570 (1978). " Documents that are part of the public record, such as court records, can be ...


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