Bus. Dev. Corp. of S.C. v. Rutter & Russin, LLC

BUSINESS DEVELOPMENT CORPORATIONOF SOUTH CAROLINA, Plaintiff, v. RUTTER & RUSSIN, LLC, et al., Defendants.

Case No. 1:19-cv-2609

UNITED STATES DISTRICT COURT NORTHERN DISTRICT OF OHIO EASTERN DIVISION

April 7, 2021

Judge J. Philip Calabrese

Magistrate Judge Kathleen B. Burke

OPINION AND ORDER

Business Development Corporation of South Carolina was a mortgagee to a piece of real property in Shaker Heights, Ohio, a suburb of Cleveland. A burst pipe damaged the dwelling on that property, resulting in an insurance claim in State court against State Farm Fire and Casualty Company. That action settled. Now, Business Development Corporation alleges it was improperly excluded from the settlement proceeds in that case. It sued all parties involved in the earlier action, except the insured, for abuse of process and a host of other State-law tort claims.

Defendants in this action, including Rutter & Russin, Gallagher Gams, and several named individual partners at those law firms, moved to dismiss under Rules 12(b)(1) and 12(c). In response, Business Development Corporation seeks to convert part of the Rule 12(c) motion to one for summary judgment, leave to amend its complaint, and to compel discovery.

BACKGROUND

The facts are drawn from the complaint Plaintiff Business Development Corporation of South Carolina filed (ECF No. 1), documents from the underlying State court proceeding of which the Court can take notice, and documents central or attached to the complaint or the Rule 12 motions. See Watermark Senior Living Ret. Cmtys. Inc. v. Morrison Mgmt. Specialists, Inc., 905 F.3d 421, 425-26 (6th Cir. 2018).

A. BDC's Loan and the Property Damage

In April 2008, Business Development Corporation of South Carolina loaned approximately $800,000 to a limited liability company Steven and Elizabeth Sugg owned and operated. (ECF No. 1, ¶ 20, PageID #5.) As part of BDC's loan, the Suggs put up as collateral their property in Shaker Heights, executing a mortgage secured by a promissory note in favor of BDC. (Id.) When BDC recorded its mortgage interest it was third in priority, directly behind MidFirst Bank; both lenders were behind Bank of America. (Id., ¶ 21, PageID #6.) The Suggs still owed Bank of America $17,428.95 and also owed MidFirst Bank $78,281.81. (Id.)

The Suggs maintained an insurance policy for the property, through Defendant State Farm Fire and Casualty Company, which was in effect between April 13, 2013 and April 14, 2014. (Id., ¶¶ 22-23.) The policy had several damage caps on it, including for damage to the home itself ($306,200.00), extensions to the home ($30,620.00), and for personal property ($15,310.00). (Id. at ¶ 24.) The total aggregate coverage amounted to $352,130.00. (Id.) All three lenders—Bank of America, MidFirst Bank, and BDC—were listed in that order on the policy as mortgagees. (Id., ¶ 25.) In the event of a covered loss, they were paid in order of theirpriority. (ECF No. 1-1, PageID #37 ("If a mortgagee is named in this policy, any loss payable under Coverage A shall be paid to the mortgagee and you, as interests appear. If more than one mortgagee is named, the order of payment shall be the order of precedence of the mortgages.").)

In July 2014, the Suggs filed a claim with State Farm under that insurance policy for water damage to the home the past winter. (ECF No. 7-1, PageID #124.) State Farm denied coverage, claiming the Suggs failed adequately to heat the home causing the burst pipe, meaning they were not entitled to coverage. (Id.)

B. State Court Proceedings

After State Farm denied coverage, the Suggs sued in State court seeking a declaratory judgment that they were entitled to coverage and asserting claims for breach of contract and lack of good faith by their insurer. (ECF No. 7-1, ¶¶ 1-20, PageID #117-79.) The Suggs named State Farm as a defendant, along with four mortgagees: Bank of America, MidFirst Bank, BDC, and South State Bank. (Id., PageID #116.) The Suggs served each defendant. (ECF No. 7-2, PageID #128-34.) Bank of America appeared. (Id.) So did State Farm. (Id.) Business Development Corporation did not. (See id.) It does not appear MidFirst Bank did either. (See id.)

C. The Suggs' Settlement Agreement

After several months of litigation, the Suggs and State Farm reached a settlement agreement. Shortly thereafter, the Suggs moved to enforce the settlement, which contemplated State Farm paying Bank of America and MidFirst Bank, but not BDC. (ECF No. 73, PageID #135-37.) The basis for their motion was not a disagreement about the amount State Farm was going to pay in total, butinstead the amounts payable to each named party, based on the Suggs' "understanding with Bank of America and MidFirst Bank that payment will be made to each of these mortgagees in the amount necessary to pay off each of their respective liens." (Id., PageID #135-36.) The Suggs sought a court order that, "[a]lthough BDC [was] listed as a mortgagee on the policy," it was "not entitled to be a payee" because it: failed to comply with the policy's one-year deadline to sue, elected not to appear, and was not entitled to settlement funds because the policy only provides for payment to mortgagees after a covered loss. (Id., PageID #136.) To that motion, the Suggs attached two documents: (1) the certified insurance policy record (ECF No. 7-3, PageID #139-70); and (2) an email from counsel for BDC to the Suggs' counsel (ECF No. 7-3, PageID #171). The email stated, on behalf of BDC, that it saw itself as "more or less a nominal party" in the State action, and as such, it would "not be appearing in the Ohio Insurance litigation." (Id.)

State Farm was the only party to respond to the request for the order, agreeing that a settlement was in place, but stating it needed to know which mortgagees to pay and in what amounts. (ECF No. 7-4, PageID #173-74.) To that end, it agreed BDC never "answered or filed an appearance" and "failed to bring suit against State Farm within the one-year period permitted under the policy." (Id., PageID #173.) State Farm believed, however, that it was "constrained by the policy language to include BDC as a mortgagee" unless the State court ordered otherwise. (Id., PageID #174.)

In November 2015, the State court did order otherwise and granted the Suggs' motion to enforce the settlement agreement. (ECF No. 7-5, PageID #176.) In a hand-written portion of that order, the State court found "that Defendant Business Development Corporation has no right to the settlement proceeds and State Farm is within its rights to exclude BDC from any settlement payments." (Id.) The State court denoted the amounts for each check State Farm should issue, and to whom those checks should be payable: $13,500 to Bank of America; $78,281.81 to MidFirst Bank; and the balance—$273,218.19—to Rutter & Russin jointly with Mr. and Ms. Suggs. (Id.) On February 1, 2016, the State court entered its final judgment and dismissed the case with prejudice. (ECF No. 7-2, PageID #132.)

Stepping back, the Suggs' actions make some practical sense from their standpoint. With BDC choosing not to appear, and with Bank of America and MidFirst Bank having somewhat smaller interests in the property, the roughly $350,000 aggregate damage cap in the policy left about $250,000 for the Suggs to recover, less attorneys' fees and costs. Unless, that is, BDC also made a claim for its full interest of approximately $200,000.

D. BDC's Lawsuit in Federal Court

In December 2016, BDC allegedly found out it had been excluded from the settlement. (See ECF No. 40-1, ¶ 54, PageID #555.) Nearly three years later, in November 2019, it initiated this lawsuit. (ECF No. 1.) BDC alleges the Suggs' State-court counsel, Defendant Rutter & Russin and its partners Defendants Robert Rutter and Justin Rudin (together, "Rutter & Russin"), Defendant State Farm, and its State-court counsel Defendant Gallagher Gams and its partner Defendant Mark Gams(together, "Gallagher Gams"), failed to serve the settlement-related documents on BDC. (Id., ¶¶ 32-33, PageID #7.) BDC argues the motion to enforce the settlement agreement was a sham and that Rutter & Russin "for their own personal gain" excluded BDC from accessing the settlement proceeds. (Id., ¶¶ 36-45, PageID #8-10.)

Based on this theory, BDC asserts nine claims, including: abuse of process against all Defendants (Count 1); breach of contract (Count 2) and bad faith (Count 3) against State Farm; conversion (Count 4), fraudulent misrepresentation (Count 5), promissory estoppel (Count 6), tortious interference with contract (Count 7), and unjust enrichment (Count 8) against Rutter & Russin; and tortious interference (Count 9) against Gallagher Gams. (Id., ¶¶ 54-135, PageID #11-22.)

E. Pending Motions

Rutter & Russin, State Farm, and Gallagher Gams each answered BDC's complaint. (ECF Nos. 7, 8, & 12.) After doing so, Rutter & Russin and Gallagher Gams' filed separate motions under Rule 12, and BDC filed three motions of its own.

E.1. Rutter & Russin's Motion to Dismiss Under Rule 12(b)(1) and Rule 12(c).

Rutter & Russin move to dismiss the counts against it under both Rule 12(b)(1) and Rule 12(c). (ECF No. 30.) With respect to Rule 12(b)(1), they maintain the Court does not have the ability to hear this case because the Rooker-Feldman doctrine precludes jurisdiction. (Id., PageID #378-80.) Beyond that, they maintain that res judicata bars BDC's claims in any event. (Id., PageID #380-83.) If those arguments fail, Rutter & Russin seek a judgment on the pleadings regarding the abuse of processand tortious interference claims as untimely under Ohio's four-year statute of limitations. (Id., PageID #383-84.) Rutter & Russin also maintain BDC's claim for tortious interference fails to allege damages (id., PageID #385) and that they are entitled to judgment on the conversion and unjust enrichment claims because BDC is not entitled to the settlement proceeds in the first place (id., PageID #386).

E.2. Gallagher Gams' Motion to Dismiss Unde...