EFGroupATL, LLC v. Eat Fit Go Healthy Foods, LLC

EFGROUPATL, LLC, Plaintiff, v. EAT FIT GO HEALTHY FOODS, LLC, Defendant, v. CONTINENTAL CASUALTY COMPANY, Garnishee.

8:20-CV-286

UNITED STATES DISTRICT COURT FOR THE DISTRICT OF NEBRASKA

December 21, 2020

MEMORANDUM & ORDER

This matter comes before the Court on Plaintiff's Application to Determine Garnishee Liability, Filing 7. For the reasons stated herein, Plaintiff's Application will be granted in part.

I. BACKGROUND

This is a garnishment action by which Plaintiff/Judgment Creditor, EFGroupATL, LLC ("EFGroupATL"), seeks to collect from Garnishee, Continental Casualty Company ("Continental"), a default judgment (the "Judgment") against Defendant/Judgment Debtor, Eat Fit Go Healthy Foods, LLC ("Eat Fit Go").

The Eat Fit Go concept "involves [franchise] retail locations that sell healthful, ready-to-eat meals that customers may either eat in an Eat Fit Go store or may take out and eat at home or work." Filing 1-1 at 3. EFGroupATL was interested in opening an Eat Fit Go franchise location in Atlanta, Georgia, and began initial discussions with Eat Fit Go regarding a potential franchise purchase in March 2016.¹ Filing 1-1 at 4. On April 20, 2016, Eat Fit Go sent EFGroupATL's members a franchise disclosure document dated April 11, 2016 ("FDD"). In Item 19 of the FDD, Eat Fit Go stated that it did not provide financial performance representations and did not authorize employees to provide such representations. Filing 1-1 at 4. Also on April 20, 2016, Eat Fit Go sent EFGroupATL members "an email message with an attached spreadsheet showing what was represented to be the actual costs and revenues being realized by stores owned . . . in the Omaha, Nebraska area." Filing 1-1 at 4. On April 25, 2016, Eat Fit Go and EFGroupATL discussed the contents of the email and spreadsheet, and Eat Fit Go confirmed the projections provided were correct and reliable. Filing 1-1 at 4. EFGroupATL used the representations as a "basis for evaluating the potential profitability of the franchise, developing financial projections that they provided to lenders as well as to [Eat Fit Go's] representatives, and ultimately in deciding to invest in the Eat Fit Go system." Filing 1-1 at 5. Eat Fit Go amended its franchise disclosure document ("FDD 2") with an issuance date of June 29, 2016, and provided this amended FDD to EFGroupATL on August 4, 2016. Filing 1-1 at 5. Negotiations continued while Eat Fit Go searched for a location for a kitchen in Atlanta, and the parties signed an Area Development Agreement ("ADA") dated January 12, 2017. Filing 1-1 at 5. Under the ADA, EFGroupATL was to open thirteen stores over a period of three years, but the ADA did not specify a deadline for opening of the first store, did not require a certain number of stores to be opened before Eat Fit Go would open the kitchen necessary to supply meals, and did not indicate a convenience fee would be charged. Filing 1-1 at 5-6, 8.

EFGroupATL prepared to open its first store in August 2017. Filing 1-1 at 6. In July 2017, Eat Fit Go notified EFGroupATL that it would have to open three retail stores before Eat Fit Go would open the necessary kitchen. Filing 1-1 at 6. EFGroupATL postponed opening its first store and rushed the development of two other stores. Filing 1-1 at 6-7. Once they opened, the actual results achieved by the three stores were "dramatically worse" than the financial performance representations provided by Eat Fit Go and did not achieve a profit as projected but instead incurred significant losses. Filing 1-1 at 7. EFGroupATL claims had it known the true nature of the profitability of the franchise, it would never have entered into an agreement with Eat Fit Go. Filing 1-1 at 8. Following the opening of the EFGroupATL Atlanta area locations, Eat Fit Go charged EFGroupATL what it called a "Convenience Fee." Filing 1-1 at 8. There is no Convenience Fee described in the FDDs, nor is any provision made for it in the ADA or the Franchise Agreements. Filing 1-1 at 8.

EFGroupATL filed a complaint against Eat Fit Go in the District Court of Douglas County, Nebraska, on July 30, 2019 (the "Complaint"). Filing 1-1. The Complaint asserted six causes of action against Eat Fit Go: (1) fraudulent misrepresentation; (2) negligent misrepresentation; (3) breach of contract; (4) breach of the duty of good faith and fair dealing; (5) violation of the Nebraska Consumer Protection Act; and (6) violation of the Official Code of Georgia Annotated § 51-1-6. Filing 1-1. On November 7, 2019, the court granted EFGroupATL's motion for default judgment, entering judgment against Eat Fit Go and awarding damages in the amount of $3,277,241.92 to EFGroupATL. Filing 1-2 at 2. This amount reflected the amount claimed in EFGroupATL's proof of claim filed in the Eat Fit Go bankruptcy proceeding. Filing 16-1 at 2.

EFGroupATL contends that an insurance policy issued by Continental to Eat Fit Go (the "Policy") provides coverage for the Judgment.² Continental issued the Policy, EPack Extra Policy No. 596835000, to Eat Fit Go for the period of October 11, 2017, to October 11, 2019. Filing 9-1 at 21 & 78. The Policy contains two coverage parts: (i) a Directors and Officers Liability Coverage Part ("D&O") and (ii) a Miscellaneous Professional Liability Coverage Part ("MPL"). Filing 9-1 at 21. The D&O Coverage contains an "insuring agreement" that grants coverage under limited circumstances. Filing 9-1 at 53.

EFGroupATL asserts that the Judgment against Eat Fit Go constitutes a covered loss under the D&O Coverage Part and therefore Continental, as the garnishee, is liable to EFGroupATL for the Judgment. Filing 7 at 2-3. Continental claims two exclusions under the D&O Coverage Part of the Policy independently bar coverage: the deliberate acts exclusion and the professional services exclusion. Filing 15 at 12. In the alternative, Continental argues a portion of the Judgment is not a covered loss under the D&O policy. Filing 15 at 15.

II. GARNISHEE STANDARD

The Nebraska garnishee statute, Neb. Rev. Stat. § 25-1030 et seq., was designed to create an expedited garnishment proceeding, protecting third parties from protracted litigation. Huntington v. Pederson, 883 N.W.2d 48, 57 (Neb. 2016) (citing ML Manager v. Jensen, 842 N.W.2d 566 (Neb. 2014)). Under Neb. Rev. Stat. § 25-1030.02, a garnishee is liable to a judgment creditor if "the garnishee was (1) indebted to the defendant, or (2) had any property or credits of the defendant[] in his possession or under his control at the time of being served with the notice of garnishment." "The plaintiff has the burden to establish why the garnishee was liable to the defendant at the time notice of garnishment was served." Gerdes v. Klindt, 570 N.W.2d 336, 342 (Neb. 1997). When the garnishee is an insurer, the question is whether the judgment obtained by the plaintiff against the defendant "constituted a loss of the nature insured against." Bank of Mead v. St. Paul Fire & Marine Ins. Co., 275 N.W.2d 822, 824 (Neb. 1979).

III. ANALYSIS

EFGroupATL's application for garnishee liability is granted in part because EFGroupATL proved the Judgment is covered under the policy except for a portion of fees discussed below, and Continental failed to prove the insurance policy's exclusionary language applies to the covered losses.

A. Prima Facia Case

EFGroupATL met its burden to prove that the Judgment obtained against Eat Fit Go constituted a covered loss under the Policy issued by the garnishee, Continental. "The interpretation of an insurance policy presents a question of law . . . ." Federated Serv. Ins. Co. v. All. Const., LLC, 805 N.W.2d 468, 474 (Neb. 2011). The plaintiff carries the burden of proving the loss is covered under the insuring agreement of an in-force policy. See Kaiser v. Allstate Indem. Co., 949 N.W.2d 787, 793 (Neb. 2020); Cont'l Cas. Co. v. Emp. Ins. Co. of Wausau, 60 A.D.3d 128, 134 (N.Y. App. Div. 1st Dept. 2008) (stating that to prove coverage under a policy, the insured had to show "that the actual injury occurred in the policy period and that it arose solely out of an ongoing operation"), leave to appeal denied, 918 N.E.2d 962 (N.Y. 2009); Performance Autoplex II Ltd. v. Mid-Continent Cas. Co., 322 F.3d 847, 856 (5th Cir. 2003) (stating that under Texas law, "[i]t is an insured's burden to put forth evidence that its claim against an insurer is within the policy's coverage").

EFGroupATL established the Policy exists and proved it by way of providing the Policy in its entirety including the declarations page. Filing 9-1 at 21. The Policy was originally in force from October 11, 2017, to October 11, 2018, and was subsequently extended until October 11, 2019. Filing 9-1 at 78. The Policy was in force when the claim was made.

The Policy's D&O³ insuring agreement grants coverage as follows:

The Insurer shall pay on behalf of Insured Entity:

1. that Loss, in excess of the retention (if any) and up to the applicable limit of liability, resulting from any Claim first made during the Policy Period or the Extended Reporting Period, if applicable, against the Insured Entity for a Wrongful Act;

Filing 9-1 at 53 (bold in original).

The Policy defines "Loss" to include "damages, settlements, judgments (including any award of pre-judgment and post-judgment interest on a covered judgment) and Defense Costs for which the Insured is legally obligated to pay on account of a covered Claim." Filing 9-1 at 41. A "Claim" includes "a formal civil or criminal administrative or regulatory proceeding; against an Insured alleging a Wrongful Act . . . . Such Claim shall be deemed made on the earliest date of service upon, or other receipt by, any Insured of a complaint." Filing 9-1 at 35-36 (bold in original).

Wrongful Act in the D&O Coverage Part is defined as:

1. any actual or alleged error, misstatement, misleading statement, act, omission, neglect or breach of duty (including violations of the privacy provisions of the Health Insurance Portability and Accountability Act (HIP

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