ISCO Indus., Inc. v. Fed. Ins. Co.

587 F.Supp.3d 558

ISCO INDUSTRIES, INC., Plaintiff

v.FEDERAL INSURANCE COMPANY, Defendant

CIVIL ACTION NO. 3:20-CV-00583-GNS

United States District Court, W.D. Kentucky, Louisville Division.

Signed February 28, 2022

Andrew M. Barrios, John D. Shugrue, Reed Smith LLP, Chicago, IL, David A. Calhoun, Jake E. Smith, Wyatt, Tarrant & Combs, LLP, Louisville, KY, for Plaintiff.

Cassandra L. Jones, Paul F. Matousek, Walker Wilcox Matousek, LLP, Chicago, IL, Frederick R. Bentley, III, Matthew W. Breetz, Stites & Harbison, PLLC, Louisville, KY, Tony L. Draper, Walker Wilcox Matousek, LLP, Houston, TX, for Defendant.

MEMORANDUM OPINION AND ORDER

Greg N. Stivers, Chief Judge

This matter is before the Court on Defendant's Motion to Dismiss (DN 13) and Defendant's Motion for Leave to File Supplemental Authority (DN 31). The motions are ripe for adjudication. For the reasons stated below, the motion to dismiss is GRANTED , and the motion for leave is DENIED .

I. BACKGROUND

A. Statement of Facts

This insurance-coverage dispute between ISCO Industries, Inc. ("ISCO") and its fiduciary liability insurer, Federal Insurance Company ("Federal"), arises out of a class-action lawsuit alleging violations of the Employee Retirement Income Security Act of 1974 ("ERISA"). (Compl. ¶¶ 1, 2, DN 1). Many of the pertinent facts are not disputed by the parties.

On January 25, 2017, Participants in the ISCO Employee Stock Ownership Plan ("ISCO ESOP") filed a class-action lawsuit against Wilmington Trust, N.A. ("Wilmington Trust"), trustee for the ISCO ESOP (the "Underlying Lawsuit").¹ (Compl. ¶¶ 1-2, 20). Pursuant to a provision in the Trust Agreement between ISCO and Wilmington Trust, ISCO had a contractual obligation to indemnify Wilmington Trust in connection with the Underlying Lawsuit. (Compl. ¶¶ 1-2, 26-27).

On January 30, 2017, ISCO filed a claim for the Underlying Lawsuit with Federal under the insurance policy Federal issued to ISCO, Policy No. 8247-1426, effective March 19, 2016, to March 19, 2017 (the "Policy"). (Compl. ¶¶ 5, 28). On January 31, 2017, Federal sent ISCO a letter acknowledging ISCO's claim for coverage under the Policy and advising that Tracy Tkac ("Tkac") would be handling the matter on behalf of Federal. (Compl. ¶ 40).

On February 13, 2017, Tkac sent an email to ISCO's insurance broker that in part reads:

Originally, I did not think that there was coverage for the matter because it was a liability assumed under contract but there is a carve back on the exclusion where the indemnification arises out of the original formation of the ESOP.

You can let the insured know that the preliminary review of coverage is positive in terms of defending the matter.

[A] more formal letter should be forthcoming in the near future. In the meantime, Federal reserves all rights under the Policy and at law.

(Compl. ¶ 41 (alteration in original)). ISCO acknowledges that Federal did not send a more formal letter confirming coverage. (Compl. ¶ 42). ISCO, however, alleges that in multiple communications over the next two months Federal and its claim representative, Tkac, confirmed that coverage existed. (Compl. ¶¶ 6, 43-49). The Complaint asserts that in those multiple communications, "Federal never issued any communication to ISCO or its broker specifically identifying any particular coverage defenses or issues upon which [Federal] reserved the right to deny coverage." (Compl. ¶¶ 6, 43-49). The Complaint also alleges that Federal proceeded to coordinate a defense for Wilmington Trust and reimburse its defense costs. (Compl. ¶¶ 6, 48-49).

ISCO asserts, in reliance upon Federal's coverage representations, it re-purchased "certain shares of ISCO stock from the ISCO ESOP, which is reflected by the fact that the value of Federal's coverage for the Underlying Lawsuit was expressly factored into the pricing of that re-purchase transaction." (Compl. ¶¶ 7, 49). Additionally, ISCO "forgave certain obligations of the ESOP in reliance of Federal's representations that it would provide coverage for the Underlying Lawsuit." (Compl. ¶¶ 7, 49).

According to ISCO, one year later, on March 28, 2018, Federal "abruptly reversed course" and announced in correspondence to ISCO that there was no coverage for the Underlying Lawsuit. (Compl. ¶¶ 8, 50). Federal indicated it would continue defending Wilmington Trust in the Underlying Lawsuit due to its previous admissions that coverage existed. (Compl. ¶¶ 8, 51).

The parties in the Underlying Lawsuit then proceeded to mediation in May 2019. (Compl. ¶¶ 9, 52). Although Federal consented to Wilmington Trust's participation in the mediation, Federal reiterated that coverage for the Underlying Lawsuit did not exist under the Policy, but indicated it would continue to defend Wilmington Trust. (Compl. ¶¶ 9, 53). Wilmington Trust eventually settled the Underlying Lawsuit for $5 million and demanded that ISCO pay a portion of that settlement based on ISCO's contractual indemnity obligations to Wilmington Trust. (Compl. ¶ 10). The Complaint alleges that Federal refused ISCO's demand that Federal provide coverage for the full amount of ISCO's indemnity to Wilmington Trust, instead offering to pay only a small portion of the indemnity that Wilmington Trust sought from ISCO. (Compl. ¶ 10).

B. Procedural History

On August 19, 2020, ISCO filed this lawsuit asserting claims of estoppel; waiver; breach of contract; bad faith in violation of the Kentucky Unfair Claims Settlement Practices Act ("KUSCPA"), KRS 304.12-230(1), (6), and (7) ; and bad faith under Kentucky common law. (Compl. ¶¶ 56-65, 66-74, 75-84, 85-94, 95-102). On November 18, 2020, Federal moved under Fed. R. Civ. P. 12(b)(6) to dismiss the Complaint for failure to state a claim upon which relief can be granted. (Def.’s Mot. Dismiss 1, DN 13). ISCO responded (Pl.’s Resp. Def.’s Mot. Dismiss, DN 23 [hereinafter Pl.’s Resp.]), and Federal replied (Def.’s Reply Mot. Dismiss, DN 30 [hereinafter Def.’s Reply]).²

II. JURISDICTION

The Court has original jurisdiction over this matter pursuant to 28 U.S.C. § 1332(a)(1). There is complete diversity between the two parties because ISCO is a Kentucky corporation with its principal place of business in Louisville, Kentucky, and Federal is an Indiana corporation with its principal place of business in Warren, New Jersey. (Compl. ¶¶ 15-16). Further, the amount in controversy as pleaded exceeds the $75,000.00 the jurisdictional minimum. (Compl. ¶ 17).

III. STANDARD OF REVIEW

A. Dismissal Pursuant to Rule 12(b)(6)

To survive dismissal for failure to state a claim under Fed. R. Civ. P. 12(b)(6), "a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face." Ashcroft v. Iqbal , 556 U.S. 662, 678, 129 S.Ct. 1937, 173 L.Ed.2d 868 (2009) (internal quotation marks omitted) (citation omitted). A claim is facially plausible "when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id. This "plausibility standard is not akin to a ‘probability requirement,’ but it asks for more than a sheer possibility that a defendant has acted unlawfully." Id. (quoting Bell Atl. Corp. v. Twombly , 550 U.S. 544, 556, 127 S.Ct. 1955, 167 L.Ed.2d 929 (2007) ). "Where a complaint pleads facts that are merely consistent with a defendant's liability, it stops short of the line between possibility and plausibility of entitlement to relief." Id. (internal quotation marks omitted) (quoting Twombly , 550 U.S. at 557, 127 S.Ct. 1955 ).

When considering a defendant's motion to dismiss, the Court will "accept all the [plaintiff's] factual allegations as true and construe the complaint in the light most favorable to the [plaintiff]." Hill v. Blue Cross & Blue Shield of Mich. , 409 F.3d 710, 716 (6th Cir. 2005) (citation omitted). "A pleading that offers labels and conclusions or a formulaic recitation of the elements of a cause of action will not do. Nor does a complaint suffice if it tenders naked assertion[s] devoid of further factual enhancement." Iqbal , 556 U.S. at 678, 129 S.Ct. 1937 (internal quotation marks omitted) (citation omitted). Thus, to survive a 12(b)(6) motion, "[the] complaint must contain (1) ‘enough facts to state a claim to relief that is plausible,’ (2) more than ‘a formulaic recitation of a cause of action's elements,’ and (3) allegations that suggest a ‘right to relief above a speculative level.’ " Tackett v. M & G Polymers, USA, LLC , 561 F.3d 478, 488 (6th Cir. 2009) (quoting Twombly , 550 U.S. at 570, 127 S.Ct. 1955 ). Ultimately, this inquiry is a "context-specific task that requires the reviewing court to draw on its judicial experience and common sense." Iqbal , 556 U.S. at 679, 129 S.Ct. 1937.

B. Consideration of Documents Not Attached to the Complaint

Generally, courts may not consider matters outside the pleadings in reviewing a Rule 12(b)(6) motion to dismiss except when the motion is treated as a motion for summary judgment under Rule 56. Stein v. HHGregg, Inc. , 873 F.3d 523, 528 (6th Cir. 2017) (citing Gavitt v. Born , 835 F.3d 623, 640 (6th Cir. 2016) ); see Fed. R. Civ. P. 12(d). As the Sixth Circuit has noted:

[A] court may consider exhibits attached to the complaint, public records, items appearing in the record of the case, and exhibits attached to defendant's motion to dismiss, so long as they are referred to in the complaint and are central to the claims contained therein, without converting the motion to one for summary judgment.

Gavitt , 835 F.3d at 640 (citations omitted).

The only pleading filed in this case is the Complaint. See Fed. R. Civ. P. 7(a)(1)-(7). Although the Policy and certain correspondence are referred to and quoted verbatim throughout the Complaint, these documents are not attached to the Complaint. (Compl. ¶¶ 1-102). Instead, they appear in the record as exhibits in support of Federal's motion to dismiss. (Def.’s Mot. Dismiss Exs. B to E, DN 13-4 to 13-7)....