Fed. Ins. Co. v. Sorge (In re Sorge), Case No.: 16–04142–5–JNC

566 B.R. 369

IN RE: Dennis P. SORGE, Debtor

Federal Insurance Company, Great Northern Insurance Company, and Pacific Indemnity Company, Plaintiffs

v.Dennis P. Sorge, Defendant

Case No.: 16–04142–5–JNC

Adversary Proceeding No.: 16–00168–5–JNC

United States Bankruptcy Court, E.D. North Carolina, Raleigh Division .

Signed February 6, 2017

Paul A. Fanning, Ward and Smith, P. A., Greenville, NC, Michael Justin Parrish, Ward and Smith, P.A., New Bern, NC, William B. Pollard, III, Duane Morris LLP, New York, NY, for Plaintiff.

Matthew W. Buckmiller, William H. Kroll, Stubbs & Perdue, P.A., Raleigh, NC, for Defendant.

ORDER REGARDING DEFENDANT'S MOTION TO DISMISS ADVERSARY PROCEEDING

Joseph N. Callaway, United States Bankruptcy Judge

The matter before the court is the Defendant Dennis P. Sorge's Amended Motion to Dismiss the complaint filed by Federal Insurance Company, Great Northern Insurance Company, and Pacific Indemnity Company (collectively, "Federal"), pursuant to Federal Rule of Civil Procedure 12(b)(6), made applicable to this adversary proceeding by Federal Rule of Bankruptcy Procedure 7012, Dkt. 9. A hearing took place on January 12, 2017 in Greenville, North Carolina.

Mr. Sorge filed a voluntary petition for relief under chapter 11 of the Bankruptcy Code on August 9, 2016. Federal filed the complaint in this adversary proceeding on November 7, 2016, seeking a determination that Mr. Sorge's debt owed to Federal should be excepted from discharge pursuant to 11 U.S.C. §§ 523(a)(2) and (a)(4), that certain property is held by Mr. Sorge in constructive trust for the benefit of Federal, and that certain property is neither exempt nor property of the estate. Dkt. 1. The complaint was amended on November 9, 2016, to correct a typographical error. Dkt. 3. Mr. Sorge filed a motion to dismiss the adversary proceeding on November 15, 2016, Dkt. 4, and an amended motion to dismiss on November 22, 2016, Dkt. 9. Mr. Sorge also filed a memorandum in support of the motion on November 18, 2016. Dkt. 7. Federal filed its opposition to the motion on December 15, 2016, Dkt. 19, and Mr. Sorge filed a reply brief on December 27, 2016, Dkt. 21.

BACKGROUND

Mr. Sorge was previously employed by Federal as a property claims adjuster. Dkt. 3 at ¶ 15. Federal contends that during his employment from March 1, 2005 to August 2011, Mr. Sorge made recommendations to his superiors that resulted in payments of millions of dollars to settle insurance claims assigned to him. Federal maintains that Mr. Sorge was a fiduciary who owed Federal a duty of utmost loyalty. Dkt. 3 at ¶ 15–16. Federal further contends that "[b]etween 2005 and 2011, [Mr.] Sorge routinely authorized and/or recommended claim payments on the basis of fraudulent repair estimates prepared by Paul H. Mertz and The Mertz Company ... who were then consultants assisting Federal in the adjustment of those claims," Dkt. 3 at ¶ 18, while Mr. Sorge concealed from Federal "that Mertz and The Mertz Company were acting both as Federal's building consultant and the insured's repair contractor." Dkt. 3 at ¶ 22.

Federal filed a civil action against Mr. Sorge, Mr. Mertz, and The Mertz Company in the United States District Court for the Southern District of New York, Federal Insurance Co., et al. v. Paul H. Mertz, Jr ., et al. , 12–cv–1597–NSR (the "New York Action"). Dkt. 3 at ¶ 2. The complaint alleged causes of action for fraud, breach of fiduciary duty, faithless servant, and unfair and deceptive acts and practices under Connecticut law with respect to eight customer claims submitted to and paid by Federal. Dkt. 3 (Ex. A) at 18–65. A jury returned a verdict in the New York Action on July 8, 2016, Dkt. 3 (Ex. B) at 66–97, approximately one month before Mr. Sorge filed his chapter 11 petition. On October 14, 2016, the parties entered a stipulation lifting the automatic stay for the purpose of allowing the district court judge in the New York Action to enter a judgment on the verdict, although the parties now disagree as to the scope of the modification of the stay.¹ Case No. 16–04142–5–JNC, Dkt. 51. As of the date of this order, the judgment has not yet been entered. On January 25, 2017, however, the district court entered a Stipulation and Order in the New York Action concluding that the jury's findings established liability of Mr. Sorge to Federal under the "faithless servant doctrine," and that the period of faithlessness ran from March 1, 2005 to Mr. Sorge's retirement in August 2011, during which time Mr. Sorge's compensation from Federal was $851,883.58 (the "New York Order"). On January 27, 2017, Federal filed an Emergency Motion for Supplemental Order Lifting the Automatic Stay, Case No. 16–04142–5–JNC, Dkt. 102, seeking additional relief to allow entry of final judgment on the verdict in the New York Action. That motion is set for hearing before this court on February 7, 2017.

The jury verdict form rendered in the New York Action, attached as Exhibit B to the Amended Complaint, shows the following jury findings with respect to Mr. Sorge:

Berlin Claim

Fraud: No

Breach of Fiduciary Duty: Yes

Damages: $328,358.77

Fuller Claim

Fraud: No

Breach of Fiduciary Duty: Yes

Damages: $536,076.74

Iddison Claim

Fraud: Yes

Damages: $1,432,513.81

McAlley Claim

Fraud: No

Breach of Fiduciary Duty: Yes

Damages: $699,107.66

Talbot Claim

Fraud: No

Breach of Fiduciary Duty: Yes

Damages: $262,298.59

Palaia Claim

Fraud: No

Breach of Fiduciary Duty: Yes

Damages: $559,613.24

Hostetter Claim

Fraud: No

Breach of Fiduciary Duty: No

Snow Claim

Fraud: No

Breach of Fiduciary Duty: No

Dkt. 3 (Ex. B) at 66–96. Federal's claims for violation of the Connecticut Unfair Trade Practices Act were not submitted to the jury with respect to Mr. Sorge. Id. at 97. According to Federal, the amount of the damages as of the petition date, inclusive of prejudgment interest, totals over $2.7 million for the Iddison Claim on which the jury found fraud (defined in the Amended Complaint as the "Fraud Debt"), and over $5.0 million for the five claims on which the jury found breach of fiduciary duty (defined in the Amended Complaint as the "Fiduciary Debt"). Dkt. 3 at ¶ 28.

The Amended Complaint includes the following claims for relief:

Count I: Fraud Debt Not Dischargeable, 11 U.S.C. §§ 523(a)(2), (a)(4)

Count II: Fiduciary Debt Not Dischargeable, 11 U.S.C. § 523(a)(4)

Count III: Constructive Trust Contingent Upon the District Court's Actions

Count IV: Non–Exempt Assets

Dkt. 3. Mr. Sorge's motion seeks dismissal of all counts pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure, contending that even if all of the facts as pled in this action are true, Federal cannot prevail as a matter of law. At the hearing, the parties agreed that dismissal of Counts III and IV² could not be considered until the district court entered its order with respect to the "faithless servant" doctrine in the New York Action. The New York Order was subsequently entered on January 25, 2017. As a result, this court can now rule on the motion to dismiss with respect to Counts III and IV as well.

DISCUSSION

A. The Standard for Dismissal Pursuant to Rule 12(b)(6).

Rule 8(a)(2) of the Federal Rules of Civil Procedure provides that "[a] pleading that states a claim for relief must contain ... a short and plain statement of the claim showing that the pleader is entitled to relief." If a complaint fails to meet this threshold obligation, the action should be dismissed under Rule 12(b)(6) for "failure to state a claim upon which relief can be granted." Fed. R. Civ. P. 12(b)(6). For purposes of Rule 12(b)(6), all allegations of fact contained in a complaint must be accepted as true. E.I. du Pont de Nemours &Co. v. Kolon Indus., Inc., 637 F.3d 435, 440 (4th Cir. 2011).

In Bell Atlantic Corp. v. Twombly , the Supreme Court of the United States held that a complaint must include "enough facts to state a claim to relief that is plausible on its face." 550 U.S. 544, 570, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007). The Court elaborated in Ashcroft v. Iqbal that "the tenet that a court must accept as true all of the allegations contained in a complaint is inapplicable to legal conclusions," and that "only a complaint that states a plausible claim for relief survives a motion to dismiss." 556 U.S. 662, 129 S.Ct. 1937, 1949, 173 L.Ed.2d 868 (2009) ; see also Adcock v. Freightliner, LLC , 550 F.3d 369, 374 (4th Cir. 2008) (mere legal conclusions do not warrant automatic assumption of truth by the court). The allegations must be more than a "formulaic recitation of the elements" of a claim. Iqbal, 129 S.Ct. at 1951.

A claim has facial plausibility when the plaintiff pleads enough "factual content to allow the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Clatterbuck v. City of Charlottesville, 708 F.3d 549, 554 (4th Cir. 2013). "The plausibility standard is not akin to a 'probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully." Iqbal, 129 S.Ct. at 1949. Thus, dismissal under Rule 12(b)(6) is proper when, from the face of the complaint, it is clear that the plaintiff's claims are not supported by law, that one or more facts necessary to assert a valid claim have not been pled, or that facts exist that necessarily defeat the plaintiff's claims.

B. Count I: Fraud Debt Not Dischargeable, 11 U.S.C. §§ 523(a)(2), (a)(4)

The jury found that Mr. Sorge was liable to Federal for fraud with respect to the Iddison Claim in the amount of $1,432,513.81, Dkt. 3 (Ex. B) at 75–76, which amount plus asserted interest constitutes the Fraud Debt. In Count I, Federal seeks a determination that the Fraud Debt is excepted from discharge pursuant to §§ 523(a)(2) and 523(a)(4) of the Bankruptcy Code.

Section 523(a)(2) excepts from discharge a debt "(2) for money, property, services, or an extension, renewal, or refinancing of credit, to the extent obtained by—(A) false pretenses, a false representation, or actual fraud, other than a statement...