Gen. Star Nat'l Ins. Co. v. Adams Valuation Corp.

69 F.Supp.3d 742

General Star National Insurance Company, Plaintiff

v.Adams Valuation Corporation, Douglas Adams, and Diane Goldring Nesbitt, Defendants.

14 C 1821

United States District Court, N.D. Illinois, Eastern Division.

Signed September 23, 2014

Gustavo Adolfo Otalvora, Sarah Hope Dearing, Hinkhouse Williams Walsh LLP, Chicago, IL, for Plaintiff.

Craig Michael Capilla, Justin Nathan Fielkow, Franklin Law Group, Northfield, IL, Stuart Jay Chanen, Margot Klein, Valorem

Law Group LLC, Chicago, IL, for Defendants.

Memorandum Opinion and Order

Gary Feinerman, United States District Judge

In late 2013, Diane Goldring Nesbitt sued Adams Valuation Corporation and Douglas Adams (together, “Adams”), along with several other individuals and a law partnership, in Nesbitt v. Regas, 13 C 8245 (N.D.Ill.) (Tharp, J.). General Star National Insurance Company, which had issued an insurance policy to Adams, then filed this suit against Adams and Nesbitt, seeking a declaration under 28 U.S.C. § 2201 that it has no duty to defend Adams in the Nesbitt case. Doc. 1. Subject matter jurisdiction lies under 28 U.S.C. § 1332 because the parties are completely diverse and the amount in controversy exceeds $75,000. General Star has moved for judgment on the pleadings under Federal Rule of Civil Procedure 12(c). Doc. 21. Adams opposes the motion, while Nesbitt has remained silent. The motion is granted.

Background

A. The Nesbitt Suit

The Nesbitt suit alleges that two of Adams's co-defendants, James Regas and Christian Nesbitt, “engaged in a massive scheme to defraud two banks out of millions of dollars through the making of unsupportable and improper insider loans” and that Adams “actively participated with [them] to effectuate the Scheme,” which “involved countless lies, conflicts of interest, material omissions, and criminal acts.” Doc. 1–2 at ¶¶ 1, 10. According to the Nesbitt complaint, “[a] central part of the Scheme was to cause appraisals of property values to be wildly inflated and then to skim proceeds from the loans that were issued in reliance on the inflated appraisals.”Id . at ¶ 36. The Nesbitt suit alleges that Regas and Christian Nesbitt “used false appraisals prepared by Adams,” id . at ¶ 30, that Regas “arranged for Adams ... to be retained on approximately 50% of the appraisals ... during the Scheme,” and that Adams and Regas “agreed to overvalue by as much as 30–80% the property appraisals that Adams ... performed ..., and sometimes more,” id . at ¶ 36. The Nesbitt complaint lists several of those appraisals, id . at ¶ 40, and alleges that Regas and Christian Nesbitt “were fully aware of the inflated appraisals that were being prepared by Adams,” id . at ¶ 41.

Adams is named as a defendant in four counts of the Nesbitt complaint. Count I alleges violations of the Racketeer Influenced Corrupt Organizations Act (“RICO”), 18 U.S.C. § 1962(c). Doc. 1–2 at ¶¶ 62–69. That count alleges: “Defendants conducted and participated in, both directly and indirectly, an enterprise. The enterprise was comprised of a group of individuals [including Douglas Adams], one partnership, and one company [Adams Valuation Company], who were associated in fact.” Id . at ¶ 64. Count I further alleges that “[t]he primary objective of the Racketeering Enterprise was to illegally steal funds belonging to the Banks and to make other unwitting third parties—and not themselves—legally responsible in the event that any of the fraudulent loans, which the Racketeering Enterprise cause the Banks to issue, were not repaid,” and that “[t]he RICO Defendants conducted the affairs on the Enterprise through a pattern of racketeering activity, most specifically a series of violations of the United States mail fraud statute, 18 U.S.C. § 1341... and the United States obstruction of justice statute, 18 U.S.C. § 1512(c)(1) ( ‘destroying ... or concealing a document with the intent to obstruct justice’).” Id . at ¶¶ 64–65. Count II alleges a RICO conspiracy under 18 U.S.C. § 1962(d) and incorporates Count I by reference. Id . at ¶¶ 70–73. Count V, which asserts a claim for common law fraud, alleges that “[e]ach of the makers of these misrepresentations and/or material omissions knew the statements to be false at the time they were made.” Id . at ¶ 90. And Count VI alleges that Adams aided and abetted the fraud committed by Regas and certain other co-defendants. Id . at ¶¶ 95–104.

B. The General Star Policy

General Star issued a Real Estate Errors and Omissions Liability Insurance Policy to Adams. Doc. 1–1. The policy provides coverage for “all sums which the Insured shall become legally obligated to pay as Damages for Claims ... arising out of any act, error, omission, or Personal Injury in the rendering of or failure to render Professional Services by an Insured.” Id . at 5. The policy defines “claim” as “a demand for money, the filing of Suit or the institution of arbitration or mediation proceedings naming the Insured and alleging an act, error, omission or Personal Injury resulting from the rendering of or failure to render Professional Services.” Id . at 10. It defines “professional services” in relevant part as “services performed by an Insured in an Insured's capacity as ... [an] appraiser of real estate,” where “such service is rendered on or behalf of the customer or client in return for a fee, commission, or other compensation.” Id . at 12. And in the “Exclusions” section, the Policy states in relevant part that it:

does not apply to Claims: A) Arising out of a dishonest, fraudulent, criminal or malicious act or omission, or intentional misrepresentation, (including, but not limited to, actual or alleged violations of state or federal anti-trust, price-fixing, restraint of trade or deceptive trade practice laws, rules or regulations) committed by, at the direction of, or with the knowledge of any Insured.

Id. at 8.

Discussion

The court reviews a Rule 12(c) motion for judgment on the pleadings under the same standard as a Rule 12(b)(6) motion to dismiss for failure to state a claim. See Guise v. BWM Mortg., LLC, 377 F.3d 795, 798 (7th Cir.2004). The court may consider “the complaint, the answer, and any written instruments attached as exhibits.” N. Ind. Gun & Outdoor Shows, Inc. v. City of South Bend, 163 F.3d 449, 452 (7th Cir.1998). All facts are considered in the light most favorable to the non-movant. See United States v. Wood, 925 F.2d 1580, 1581 (7th Cir.1991).

The parties agree that Illinois law governs, and so that is the law the court will apply. See McFarland v. Gen. Am. Life Ins. Co., 149 F.3d 583, 586 (7th Cir.1998). As the Seventh Circuit has explained:

In Illinois, insurance policies are contracts; the general rules governing the interpretation and construction of contracts govern the interpretation and construction of insurance policies. Illinois courts aim to ascertain and give effect to the intention of the parties, as expressed in the policy language, so long as doing so does not contravene public policy. In doing so, they read the policy as a whole and consider the type of insurance purchased, the risks involved, and the overall purpose of the contract. If the policy language is unambiguous, courts apply it as written. Policy terms that limit an insurer's liability are liberally construed in favor of coverage, but only when they are ambiguous, or susceptible to more than one reasonable interpretation.

Clarendon Nat'l Ins. Co. v. Medina, 645 F.3d 928, 933 (7th Cir.2011) (internal citations omitted). Although ambiguities are construed in the insured's favor, “a court will not search for ambiguity where there is none.” Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill.2d 352, 307 Ill.Dec. 653, 860 N.E.2d 307, 314 (2006) ; see also Native Am. Arts, Inc. v. Hartford Cas. Ins. Co., 435 F.3d 729, 732 (7th Cir.2006). “Insurers have the burden of proving that an exclusion applies. Insureds, in turn, have the burden to prove that an exception to an exclusion restores coverage.” Santa's Best Craft, LLC v. St. Paul Fire & Marine Ins. Co., 611 F.3d 339, 347 (7th Cir.2010) (citation omitted).

“To determine whether an insurer has a duty to defend its insured, [the court] compare[s] the factual allegations of the underlying complaint ... to the language of the insurance policy. If the facts alleged in the underlying complaint fall within, or potentially within, the policy's coverage, the insurer's duty to defend arises.” Amerisure Mut. Ins. Co. v. Microplastics, Inc., 622 F.3d 806, 810 (7th Cir.2010) (citations and internal quotation marks omitted). An insurer may decline to defend only when “it is clear from the face of the underlying complaint that the allegations set forth ... fail to state facts to bring a case within, or potentially within, the coverage of the policy.” Swiderski Elecs., 307 Ill.Dec. 653, 860 N.E.2d at 315 ; see also Lyerla v. AMCO Ins. Co., 536 F.3d 684, 688 (7th Cir.2008). That is, “an insurer has no duty to defend unless the underlying claim contains explicit factual allegations that potentially fall within policy coverage.” Microplastics, 622 F.3d at 810 ; see also In re Country Mut. Ins. Co., 321 Ill.Dec. 305, 889 N.E.2d 209, 209–10 (2007) (“[B]ecause the duty to defend is gauged by the allegations of the complaint, what the facts subsequently show is immaterial. If the underlying complaint alleges facts within or potentially within policy coverage, an insurer is obligated to defend its insured even if the allegations are groundless, false or fraudulent.”); Lexmark Int'l, Inc. v. Transp. Ins. Co., 327 Ill.App.3d 128, 260 Ill.Dec. 658, 761 N.E.2d 1214, 1221 (2001) (“[O]nly the allegations in the underlying complaint, considered in the context of the relevant policy provisions, ... should determine whether an insurer owes a duty to defend an action brought against an insured.”) (internal quotation marks omitted). “Both the policy terms and the allegations in the underlying complaint are liberally construed in favor of the insured, and...