N.Y. Inn Inc. v. Associated Indus. Ins. Co. (In re N.Y. Inn Inc.)

1

In re: New York Inn Inc. d/b/a Viva Inn Motel Debtor.

New York Inn Inc. d/b/a Viva Inn Motel, and Viva Inn, Inc. Plaintiffs, v. Associated Industries Insurance Company, Inc. Defendant.

No. 21-30958-mvl11

Adv. Pro. No. 22-03037

United States Bankruptcy Court, N.D. Texas, Dallas Division

April 12, 2023

ORDER GRANTING DEFENDANT'S MOTION TO DISMISS

MICHELLE V. LARSON UNITED STATE BANKRUPTCY JUDGE.

Before the Court is Defendant Associated Industries Insurance Company, Inc.'s ("AIIC" or the "Defendant") 12(c) Motion to Dismiss and Brief in Support (the "Motion to Dismiss") filed on December 9, 2022.^[1] The Motion to Dismiss seeks to dismiss New York Inn, Inc. ("New York Inn") as a plaintiff for lack of standing to bring the claims specified in the Amended Original Complaint (the "Amended Complaint"), filed on November 1, 2022.^[2] By the Amended Complaint, Plaintiffs New York Inn and Viva Inn, Inc. ("Viva Inn" and together with New York Inn, the "Plaintiffs") assert certain causes of action under an insurance policy (the "Policy") for property damage to a hotel and the resulting business interruption caused by the February 2021 Texas freeze event.^[3] Having considered the pleadings and the attached exhibits, the Court finds that Defendant's Motion to Dismiss should be and is hereby GRANTED.

I. JURISDICTION AND VENUE.

Venue is proper in this district pursuant to 28 U.S.C. § 1409(a). The District Court has subject matter jurisdiction over the adversary proceeding under 28 U.S.C. § 1334. Although bankruptcy courts do not have independent subject matter jurisdiction over bankruptcy cases and proceedings, 28 U.S.C. § 151 grants bankruptcy courts the power to exercise certain "authority conferred" upon the district courts. Under 28 U.S.C. § 157, district courts may refer bankruptcy cases and proceedings to bankruptcy courts for either entry of a final judgment in core proceedings or, absent consent of the parties, proposed findings and conclusions of noncore, "related to" proceedings.

This Court has related to jurisdiction over this matter pursuant to 28 U.S.C. § 157(c)(1). A proceeding is "related to" a case under title 11 "when the outcome of that proceeding could conceivably have any effect on the estate being administered in bankruptcy,"^[4] in other words, "if the outcome could alter the debtor's rights, liabilities, options, or freedom of action (either positively or negatively) and which in any way impacts upon the handling and administration of the bankruptcy estate."^[5] Here, New York Inn is the debtor in the underlying Chapter 11 bankruptcy case.^[6] The outcome of this adversary proceeding could conceivably impact the administration of New York Inn's bankruptcy case because if it prevails in the instant suit and is awarded any of the damages it seeks, that money will become property of the estate pursuant to 11 U.S.C. § 541(a) and be subject to the liabilities New York Inn disclosed on its schedules.^[7] Any money potentially won in a lawsuit such as this one conceivably would have an effect on administration of the bankruptcy estate.^[8]

II. AUTHORITY TO ENTER A FINAL ORDER

Rule 12 of the Federal Rules of Civil Procedure (the "Rules") applies to this adversary proceeding pursuant to Rule 7012 of the Federal Rules of Bankruptcy Procedure (the "Bankruptcy Rules"). The Defendant in this case has not consented to the entry of final orders by this Court, but has declined to move this Court to withdraw the reference under 28 U.S.C. § 157(d). Should the United States District Court find that this Court did not have authority to enter a final order in this case, this Court requests that the District Court convert this Order into a Report and Recommendation.

III. BACKGROUND.

According to the Amended Complaint, New York Inn is a Wyoming corporation, authorized to do business in the State of Texas, with its principal place of business located at 1904 E. Pioneer Parkway, Arlington, TX 76010 (the "Property").^[9] Viva Inn is a Texas corporation, with its principal place of business also listed at the same address.^[10] On August 9, 2020, Viva Inn purchased property, business interruption, and commercial liability insurance from AIIC, as evidenced by the Policy.^[11] On or about August 17, 2020, Plaintiffs' principal, Danny Patel ("Mr. Patel"), requested through an insurance agent that AIIC add New York Inn as an additional insured on the Policy.^[12] Plaintiffs allege that this request was prompted by a request from Spectra Bank, the mortgagee of the Property, who was identified as a loss payee on the Policy.^[13] Following that request, AIIC added New York Inn as an additional insured specifically as to commercial liability coverage via an endorsement.^[14] Subsequently, the Property suffered a catastrophic water leak as a result of Winter Storm Uri in February of 2021, causing considerable damage and halting hotel operations entirely.^[15]

On December 9, 2022, the Defendant filed its second Motion to Dismiss. On January 12, 2023, the Plaintiffs filed their Response to 12(c) Motion to Dismiss Amended Complaint and Brief in Support (the "Response"),^[16] which requested that the Court deny the Motion to Dismiss, or in the alternative, requested that the Court grant the Plaintiffs a further opportunity to amend and replead if the Court was inclined to grant the Motion to Dismiss. The Defendant filed its Reply to Response to 12(c) Motion to Dismiss (the "Reply") on January 23, 2023.^[17] The next day, on January 24, 2023, the Plaintiff filed its Surreply to 12(c) Motion to Dismiss Amended Complaint and Brief in Support (the "Surreply").^[18] The Court held a hearing on January 25, 2023, hearing argument on Defendant's Motion to Dismiss. Counsel for both parties appeared. At the conclusion of the hearing, the Court took the matter under advisement. The following will constitute the Court's ruling on the Motion to Dismiss.

IV. LEGAL STANDARD - MOTION TO DISMISS

The Defendant has asked this Court to dismiss the Complaint pursuant to Rule 12(c), as incorporated by Bankruptcy Rule 7012(b).^[19] Rule 12(c) provides that "[a]fter the pleadings are closed but within such time as not to delay the trial, any party may move for judgment on the pleadings."^[20] This allows the Court to dismiss a claim when it is clear that the Plaintiff can prove no set of facts in support of its pleaded claims that would entitle it to relief.^[21] Generally, in considering a motion under Rule 12(c), the Court must limit itself to the pleadings, including attachments thereto.^[22] The standard for dismissal under Rule 12(c) is the same as dismissal for failure to state a claim under Rule 12(b)(6).^[23] As such, the Court must accept all well-pleaded facts as true and view them in the light most favorable to the Plaintiff.^[24]

V. ANALYSIS

The Defendant argues that New York Inn, specifically, lacks standing to bring the claims alleged in the Amended Complaint and as such, the Amended Complaint fails to state a claim upon which relief may be granted.^[25] Plaintiffs allege that New York Inn has standing to plead separate causes of action for breach of contract and extracontractual damages under a number of legal theories because New York Inn was an intended and disclosed third-party beneficiary to the Policy and is the owner of the damaged premises suffering the financial loss.^[26] Alternatively, the Plaintiffs argue that there is contractual uncertainty in the Policy and requests this Court reform the contract to include New York Inn as a named insured for property coverage and issue a declaratory judgment in its favor, thereby granting New York Inn the right to sue the Defendant for breach of the insurance contract.^[27] The Court will address each of the parties' contentions in turn.

A. Standing - Breach of Contract

In Texas, a party who is not "a named insured, additional insured, or third-party beneficiary has no standing to sue for failure to pay insurance benefits."^[28] Courts applying Texas law have consistently ruled that, "[w]hen interpreting an insurance policy with multiple coverages, each of the coverages, along with its definitions and exclusions, must be read as separate and distinct."^[29]In other words, "[s]eparate coverages comprise distinct, contemporaneous contracts."^[30]

AIIC posits that New York Inn lacks standing to assert a breach of contract claim as the claim arises under the property damage and business interruption portions of the Policy, to which it is not a named insured, additional insured, nor a third-party beneficiary.^[31] AIIC also points out that in this Court's prior ruling on the Defendant's original Motion to Dismiss, the Court noted that Viva Inn is the sole named insured for the purposes of property coverage and business interruption on the Policy.^[32] The Plaintiffs do not specifically allege that New York Inn was ever a named insured to the operative portions of the Policy.^[33] Instead, Plaintiffs allege that New York Inn has standing to bring a breach of contract action because it was "an intended and disclosed third-party beneficiary to the [P]olicy at the very least."^[34]

In order for New York Inn to qualify as a third-party beneficiary of the property insurance portion of the Policy, Plaintiffs would have to plausibly plead three things: (1) that New York Inn was not privy to the written agreements, (2) that the contracts were actually made for New York Inn's benefit, and (3) that the contracting parties intended for New York Inn to benefit by their written agreements.^[35] The Supreme Court of Texas has provided the following guidance:

[a] court will not create a third-party beneficiary contract by implication. The intention to contract or confer a direct benefit to a third-party must be clearly and fully

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