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Spagnola v. Chubb Corp.

January 7, 2010

FRED SPAGNOLA, INDIVIDUALLY AND ON BEHALF OF ALL THOSE SIMILARLY SITUATED, PLAINTIFF,
v.
THE CHUBB CORPORATION, FEDERAL INSURANCE COMPANY, GREAT NORTHERN INSURANCE COMPANY, JOHN D. FINNEGAN AND THOMAS F. MOTAMED, DEFENDANTS.
JONATHAN A. BERNSTEIN, INDIVIDUALLY AND ON BEHALF OF ALL THOSE SIMILARLY SITUATED, PLAINTIFF,
v.
THE CHUBB CORPORATION, FEDERAL INSURANCE COMPANY, GREAT NORTHERN INSURANCE COMPANY, JOHN D. FINNEGAN AND THOMAS F. MOTAMED, DEFENDANTS.



The opinion of the court was delivered by: Hon. Harold Baer, Jr., United States District Judge

OPINION & ORDER

The Plaintiffs in these putative class actions -- Fred Spagnola ("Spagnola") and Jonathan A. Bernstein ("Bernstein") (collectively, "Plaintiffs") -- seek damages and injunctive relief from The Chubb Corporation ("Chubb"), Federal Insurance Company ("FIC"), Great Northern Insurance Company ("Great Northern") (collectively, "Defendants")*fn1 based on alleged wrongful conduct related to Plaintiffs' and the putative class's homeowners' insurance policies and following a remand from the Court of Appeals. Before the Court are Defendants' Motion to Dismiss, Defendants' Motion to Deny Class Certification and Plaintiffs' Motion to Strike Certain Portions of Defendants' Motion to Deny Class Certification. For the reasons set forth below, Defendants' Motion to Dismiss is granted in part and denied in part, Defendants' Motion to Deny Class Certification is granted, and Plaintiffs' Motion to Strike is denied.*fn2

I. FACTUAL BACKGROUND*fn3

Spagnola and his wife purchased a Masterpiece homeowner's insurance policy (the "Policy") issued by Great Northern for a one-year term in 2001. The Masterpiece Policy offered three different types of coverage: (1) an "extended replacement cost" policy, in which the insurer pays the cost of reconstruction even if the cost exceeds the amount of the insured's coverage, (2) a "verified replacement cost" policy, in which the insurer pays the reconstruction cost only up to the specified amount of coverage and (3) a "conditional replacement cost" policy, in which the insurer pays only a portion of the reconstruction costs that cannot exceed the amount of coverage. Spagnola's Policy was an extended replacement cost policy and expressly stated that Great Northern would pay the costs of reconstruction "even if this amount is greater than the amount of coverage shown in [Spagnola's] policy." The amount of coverage was listed in the Policy's Coverage Summary and during each annual policy period, the Summary indicated that the coverage amount "will be increased daily to reflect the current effect of inflation. At the time of a covered loss, your amount of house coverage will include any increase in the United States Consumer Price Index from the beginning of the policy period." The coverage amount could be changed "when appraisals are conducted and when the policy is renewed, to reflect current costs and values." The term "current costs and values" is not further defined in the Policy. For five consecutive years, Spagnola renewed his Policy and paid each year's increased premium.

Bernstein purchased an extended replacement cost homeowners' policy in 1988 for his Park Avenue apartment and renewed it 17 times until 2006. He also purchased an extended replacement cost policy for a house he built in East Hampton in 1999. The terms of Bernstein's homeowner's policies were identical to those contained in Spagnola's Policy. Upon switching carriers in 2006,*fn4 Bernstein learned that both properties were underinsured.

Great Northern, the insurer with which both Spagnola and Bernstein contracted to obtain their respective Policies, is one of several insurance companies within the "Chubb Group of Insurance Companies" (the "Chubb Group"). The Chubb Corporation is the parent corporation of each of the insurers in the Chubb Group. FIC is the largest of the insurance companies within the Chubb Group and manages the other companies.

Plaintiffs allege that the Chubb Corporation established the uniform contract language and practices that were part and parcel of the Masterpiece Policies that form the basis of these actions and provided "material assistance in the perpetration of the wrongs" complained of and that "participation in the creation of the contracts and practices with respect to their implementation make [ ] it a party to the policies between [Plaintiffs and Great Northern]." Plaintiffs allege that, among other things, Chubb, FIC and Great Northern have a significant overlap in directors and senior management and share a principal place of business, and that certain key documents and agreements indicate that Chubb and its subsidiaries are sometimes referred to as a single entity. Plaintiffs also allege that the cover letter that is transmitted to insureds with the Masterpiece Policies is sent from Chubb, not Great Northern; that a coordinated marketing and advertising scheme refers only to Chubb and not its insurance subsidiaries; and each Masterpiece Policy bears the Chubb logo and directs insureds to make inquiries to Chubb at its place of business in New Jersey or by email at "___@Chubb.com."

II. PROCEDURAL HISTORY

Spagnola's action was removed from New York Supreme Court, New York County to this Court on October 19, 2006. Spagnola filed an amended complaint on November 30, 2006 and subsequently filed yet another amended complaint on December 29, 2006 (the "First Amended Federal Complaint"). The First Amended Federal Complaint alleged five separate causes of action: (1) breach of contract;*fn5 (2) violation of N.Y. Insurance Law § 3425; (3) violation of N.Y. General Business Law § 349; (4) unjust enrichment and (5) injunctive relief. On January 19, 2007, Defendants moved to dismiss the First Amended Federal Complaint, arguing, among other things, that none of Spagnola's claims stated a cause of action upon which relief could be granted, and that all claims against Defendants other than Great Northern should be dismissed because Great Northern was the only party with which Spagnola had contracted. On March 27, 2007, this Court granted Defendants' motion in its entirety. Because the Court agreed that Spagnola's causes of action were unsustainable, it did not reach the alternative question of whether the Defendants other than Great Northern should be dismissed.

Spagnola appealed, but while that appeal was pending, his counsel filed a separate complaint on behalf of Plaintiff Bernstein. As noted, the Bernstein Complaint is identical to the Spagnola Complaint in all material respects, and alleges the same causes of action against the same Defendants. The only differences between the Bernstein and Spagnola Complaints are the years and amounts of coverage obtained in their respective extended replacement cost Masterpiece Policies. Bernstein's case was assigned to Judge Paul A.Crotty, but the parties stipulated to a stay of that action pending the outcome of Spagnola's appeal.

On July 28, 2009, the U.S. Court of Appeals for the Second Circuit affirmed the dismissal of Spagnola's Complaint in all respects except one: relying on a recent decision of the Appellate Division, the court found that Spagnola's breach of contract claim wouldsurvive themotion to dismiss, but only to the extent thatit was based on theincrease in coverage and premiums "in a way that did not reflect current costs and values." Spagnola v. Chubb Corp., 574 F.3d 64, 71-72 (2d Cir. 2009) (following Beller v. William Penn Life Ins. Co. of N.Y., 8 A.D.3d 310 (2d Dep't 2004)). The Second Circuit also found that the voluntary payment doctrine -- which "precludes a plaintiff from recovering payments 'made with full knowledge of the facts' and with a 'lack of diligence' in determining his contractual rights and obligations'" -- did not bar Spagnola's claim at the motion to dismiss phase. Id. at 72-73. That is, while the court acknowledged that "the voluntary payment doctrine may ultimately bar Spagnola's breach of contract claim," it nonetheless held that "it is too early in this case to conclusively answer that question." Id. at 73. Accordingly, the Second Circuit remanded the Spagnola case for further proceedings on the breach of contract claim insofar as it was premised on Defendants' alleged failure to change coverage according to "current costs and values."

After remand, the Bernstein action was reassigned from Judge Crotty to the undersigned, and the actions were coordinated for the purposes of discovery, motion practice and trial. The Court held a Rule 16 conference in both actions on October 30, 2009, entered a Pretrial Scheduling Order and set a briefing schedule on any anticipated motions. Defendants filed their Motion to Deny Class Certification on November 20, 2009 and filed their Motion to Dismiss on November 30, 2009. Plaintiffs have moved to strike an affidavit that Defendants submitted in support of their class certification motion, as well as certain portions of the motion papers themselves. Plaintiffs contend that those materials address the merits of the action and not class certification, and as such should not be countenanced.

III. MOTION TO DISMISS

While Defendants' Motion to Dismiss is multi-faceted on its face, the ultimate goal of the motion is to telescope both the Bernstein and Spagnola actions and to limit each to a single claim -- breach of contract based on an alleged failure to increase premiums and coverage in accordance with "current costs and values" -- against a single defendant, Great Northern. In their efforts to achievethat end, Defendants move to dismiss (1) all claims from the Bernstein action whose dismissal was affirmed by the Second Circuit in Spagnola, (2) all claims against the Individual Defendants in both actions,*fn6 and (3) all claims against Chubb and FIC for failure adequately to plead (a) alter-ego liability, (b) agency theory, or (c) standing. As will be discussed below, Plaintiffs do not appear to dispute the first two of these contentions. With respect to Chubb and FIC, however, Plaintiffs argue that, although they are not named in the Policies at issue, they may be sued on the basis of an alter-ego and/or agency theory.*fn7 Each of these contentions will be addressed in turn.

A. Legal Standard on Motion to Dismiss

The Supreme Court in Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 570 (2007) and, more recently, Ashcroft v. Iqbal, 129 S.Ct. 1937, 1949 (2009), articulated the standards that apply to Defendants' motion to dismiss pursuant to Rule 12(b)(6). "To survive a motion to dismiss, 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, 129 S.Ct. 1937, 1949 (2009) (quoting Twombly, 550 U.S. at 570). "A claim has facial plausibility 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. (citing Twombly, 550 U.S. at 556). The Court must accept all factual allegations as true, but this requirement does not apply to "[t]hreadbare recitals of the elements of a cause of action, supported by mere conclusory statements." Id. The court's determination of whether a complaint states a "plausible claim for relief" is a "context-specific inquiry" that requires application of "judicial experience and common sense." Id. Unless a plaintiff's well-pleaded allegations have "nudged [its] claims across the line from conceivable to plausible, [the plaintiff's] complaint must be dismissed." Twombly, 550 U.S. at 570.

In decidinga motion to dismiss, the Court may consider documents attached as exhibits to the complaint or incorporated into the complaint by reference, documents that are integral to the plaintiff's claims, even if not explicitly incorporated by reference, and matters of which judicial notice may be taken. See Fed. R. Civ. P. 10(c); Chambers v. Time Warner, Inc., 282 F.3d 147, 153 (2d Cir. 2002); De Jesus v. Sears, Roebuck & Co., 87 F.3d 65, 69 (2d Cir. 1996); Cortec Indus., Inc. v. Sum Holding L.P., 949 F.2d 42, 46-48 (2d Cir. 1991), cert. denied, 503 U.S. 960 (1992); Allen v. WestPoint-Pepperell, Inc., 945 F.2d 40, 44 (2d Cir. 1991); Thomas v. Westchester County Health Care Corp., 232 F. Supp. 2d 273, 275 (S.D.N.Y. 2002). When documents are integral, known of and possessed by the plaintiff, and there is no dispute as to their authenticity, the Court may consider them on a motion to dismiss. Thomas, 232 F. Supp. 2d at 276 (citing Parrino v. FHP, Inc., 146 F.3d 699, 705 & n.4 (9th Cir. 1998); Cortec, 949 F.2d at 48).*fn8

B. Claims Dismissed from Spagnola's Complaint are Likewise Dismissed from Bernstein's Complaint

Among other things, Defendants moved to dismiss all causes of action from Bernstein's Complaint whose dismissal from Spagnola's Complaint has now been affirmed by the Second Circuit. To wit, Defendants seek to dismiss Count I (violation of New York Insurance Law § 3425), Count III (deceptive trade practices under New York General Business Law § 349), Count IV (unjust enrichment) and Count V (injunctive relief). Defendants also argue that Bernstein's breach of contract claim (Count II) should be dismissed to the extent it advances any theory of liability other than that Bernstein's coverage was increased in a manner that did not comport with "current costs and values." After Defendants filed their Motion to Dismiss, but before it was fully submitted, Bernstein filed a Notice of Voluntary Dismissal that dismissed "all claims other than Count II." Accordingly, Plaintiffs contend that this portion of Defendants' motion is moot. However, to the extent that the Notice of Voluntary Dismissal did not explicitly limit Count II to the theory on which the Second Circuit permitted Spagnola's claim to proceed, it did not moot the motion. As each of the causes of action in Bernstein's Complaint that Defendants seek to dismiss is identical to the claims whose dismissal was affirmed by the Second Circuit in Spagnola's case, they must be dismissed, and the only cause of action in Bernstein that mayproceed is the breach of contract claim insofar as it is based on "current costs and values."

C. Chubb and FIC as Defendants

It is an elementary principle of contract law that no claim for breach of contract can lie where there exists no contract between the parties. See, e.g., National Market Share, Inc. v. Sterling Nat'l Bank, Inc., 392 F.3d 520, 525 (2d Cir. 2004). As the only party with which either of the Plaintiffs contracted in obtaining their Masterpiece Policies was Great Northern, and no contract is alleged to exist between Plaintiffs and either Chubb or FIC, Defendants seek dismissal of Chubb and FIC from this action. The Court agrees that, unless Plaintiffs have adequately alleged the existence of alter-ego liability or actual or apparent authority under an agency theory based on the relationship between Great Northern and Chubb and/or FIC, no claim for breach of contract can be sustained against these non-contracting Defendants.*fn9

1. Alter-Ego Liability*fn10

As an initial matter, Plaintiffs appear to argue categorically that the issue of whether the corporate veil should be pierced so as to impose liability on a corporate alter-ego is an inherently factual question and that "motions to dismiss these claims are not granted pre-discovery."

Plaintiffs are mistaken in this regard, as courts routinely consider, and grant, motions to dismiss for failure adequately to allege facts sufficient to support the imputation of liability on an alleged alter-ego. See, e.g., G4S Justice Servs., Inc. v. Correctional Program Servs., Inc., 07-cv-00945-JMS-SEB, 2009 U.S. Dist. LEXIS 88689, at *3-4 (S.D. Ind. Sept. 25, 2009); Masterson Personnel, Inc. v. McClatchy Co., Civ. No. 05-1274 (RHK/JJG), 2005 U.S. Dist. LEXIS 29565, at *17-18 (D. Minn. Nov. 22, 2005); SICK, Inc. v. Motion Control Corp., Civil No. 01-1496 (JRT/FLN), 2003 U.S. Dist. LEXIS 10612, at *28 (D. Minn. June 19, 2003); Group Health Plan, Inc. v. Philip Morris Inc., No. 98-1036 (PAM/JGL), 1999 U.S. Dist. LEXIS 9640, at *18-19 (D. Minn. Apr. 1, 1999).

In both Minnesota and Indiana, alter-ego liability is only rarely imposed and is seen as a "severe" remedy used only in the most compelling circumstances. See, e.g., Escobedo v. BHM Health Assocs., Inc., 818 N.E.2d 930, 933 (Ind. 2004) (noting that limited shareholder liability is a "bedrock" principle of corporate law and finding "the burden on a party seeking to 'pierce the corporate veil' is severe"); Groves v. Dakota Printing Servs., Inc., 371 N.W.2d 59, 62 (Minn. Ct. App. 1985) (finding that "[l]imited liability for shareholders of corporations is the general rule" and "[p]iercing the corporate veil is an exception to be used only under limited circumstances"); see also Parks v. McNeilus Cos., inc., Civil No. 02-4733 (PAM/JSM), 2004 U.S. Dist. LEXIS 3230, at *7 (D. Minn. Mar. 3, 2004)(finding courts "must begin with the general presumption that absent fraud or bad faith, a corporation will not be held liable for the acts of its subsidiaries") (quoting Association of Mill & Elevator Ins. Co. v. Barzen Int'l, Inc., 553 N.W.2d 446, 449 (Minn. Ct. App. 1996)). To properly plead alter-ego liability under Minnesota law, a plaintiff must meet two requirements: first, it must plead that the relationship between the shareholder and the corporation is such that the corporation was not operated as a separate legal entity; and second, that to shield the shareholder from liability would result in "injustice or fundamental unfairness." Victoria Elevator Co. of Minneapolis v. Meriden Grain Co., Inc., 283 N.W.2d 509, 512 (Minn. 1979); see also Trustees of the Graphic Commc'ns Int'l Union Upper Midwest Local 1M Health & Welfare Plan v. Bjorkedal, 516 F.3d 719, 730-31 (8th Cir. 2008) (applying Minnesota law). Similarly, under Indiana law, a plaintiff must plead (1) that "the corporate form was so ignored, controlled or manipulated that it was merely the instrumentality of another," and (2) "that the misuse of the corporate form would constitute a fraud or promote injustice." Aronson v. Price, 644 N.E.2d 864, 867 (Ind. 1994).

To satisfy the first prong of the analysis, plaintiffs may rely upon several "significant" factors, including (1) insufficient capitalization for purposes of corporate undertaking, (2) failure to observe corporate formalities, (3) nonpayment of dividends, (4) insolvency of debtor corporation at the time of the transaction in question, (5) siphoning of funds by the dominant shareholder, (6) nonfunctioning of other officers and directors, (7) absence of corporate records, and (8) the existence of the corporation as a mere façade for individual dealings. Victoria Elevator, 283 N.W.2d at 512; Aronson, 644 N.E.2d at 687. To survive a motion to dismiss, a plaintiff must allege that "a number of these factors [are] present." Victoria Elevator, 283 N.W.2d at 512.*fn11 To satisfy the second prong of the inquiry, "proof of strict common law fraud is not required, but, rather, evidence that the corporate entity has been operated as a constructive fraud or in an unjust manner must be presented." Groves, 371 N.W.2d at 62-63 (quoting White v. Jorgenson, 322 N.W.2d 607, 608 (Minn. 1982)); see also Extra Energy Coal Co. v. Diamond Energy & Res., Inc., 467 N.E.2d 439, 441-42 (Ind. Ct. App. 1984) ("Indiana courts are reluctant to disregard corporate identity and do so only to protect innocent third parties from fraud or injustice when transacting business with a corporate entity."); cf. Cooper v. Lakewood Eng'g & Mfg. Co., 874 F. Supp. 947, (D. Minn. 1994) ("Minnesota law is clear that the plaintiff's misfortune of being deprived of a potentially liable party is not, standing alone, an injustice. An 'injustice' warranting the equitable remedy of piercing the corporate veil exists only when the subsidiary was operated as a . . . constructive fraud or in an unjust manner.").

It is incumbent upon Plaintiffs to plead sufficient facts to support both prongs of the veil-piercing inquiry -- that is, both disregard for the corporate form and resulting fraud or injustice. See Escobedo, 818 N.E.2d at 934-35; Groves, 371 N.W.2d at 62. In pleading these elements, Plaintiffs must do more that merely parrot the factors enumerated ...


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