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The Travelers Indemnity Company of Connecticut v. Richard Mckenzie & Sons, Inc.

United States District Court, M.D. Florida, Tampa Division

June 28, 2018

THE TRAVELERS INDEMNITY COMPANY OF CONNECTICUT, Plaintiff,
v.
RICHARD MCKENZIE & SONS, INC., and HERMANNS REAL ESTATE VENTURES, LLC, Defendants.

          ORDER

          STEVEN D. MERRYDAY UNITED STATES DISTRICT JUDGE

         Citrus-grove owner Richard Hermanns attempts to squeeze $2.965 million from Travelers Indemnity Company based on Hermanns's consent judgment against Richard McKenzie, the former manager of Hermanns's grove and a former insured under a Travelers Commercial General Liability (CGL) policy with a “farm care-taker liability” endorsement. The consent judgment results from an episode in which McKenzie - according to Hermanns's allegations in earlier civil and criminal actions - allegedly misappropriated fuel, trees, and fertilizer from the grove and breached the parties' contract. Hermanns's effort to concentrate on the endorsement yields no fruit: The insurance policy excludes coverage, the consent judgment is unreasonable, and the insurer owed no duty to defend.

         BACKGROUND

         Convinced that citrus growing would yield a large profit, Richard Hermanns bought 265 acres of citrus groves in Polk County in 2010 and 2011. Before the first purchase, Hermanns (through his partnership, Hermanns Real Estate Ventures) requested an appraisal from Brent Burris, a knowledgeable appraiser of agricultural real estate. Burris questioned the suitability of the tract for growing and observed that the land was prone to cold and standing water and that the sandy soils were not conducive to growing citrus. (Doc. 107-3 at 19-30) Despite Burris's appraisal, Hermanns bought a 100-acre grove in 2010, and the next year Hermanns bought a 165-acre grove contiguous to the first grove. Soon after buying the first grove, Hermanns hired Richard McKenzie's company, Richard McKenzie & Sons, to “maximize the grove's profit” and in effect provided McKenzie carte blanche in the operation of the grove. (Hermanns Depo. at 35-36) Rather than charge a management fee per acre, McKenzie billed Hermanns for supplies purchased and labor expended, but - with Hermanns' understanding and tacit approval - McKenzie “mark[ed] up” the bills. (Hermanns Depo. at 35-36) For example, McKenzie might charge Hermanns ten dollars for a pound of fertilizer purchased for eight dollars.

         McKenzie hired Matthew Carter, another grove caretaker, to re-plant a fraction of the grove, which the parties call the “Sinkhole Road grove, ” and to spray pesticide on the trees. From January 2013 until July or August 2013, Carter worked on the grove, but late that summer McKenzie stopped paying Carter, who inquired directly with Hermanns about the money owed to Carter for working on Hermanns's grove. (Carter Depo. at 25, 37, 64-66)

         Carter's inquiry prompted Hermanns to scrutinize McKenzie's bills. After reviewing the bills and consulting with Carter (who identified several instances in which McKenzie charged Hermanns for “Carter services” never provided by Carter) Hermanns pressed the State Attorney for Polk County to charge McKenzie with theft. Finding probable cause to suspect that McKenzie deliberately billed Hermanns for $113, 000 in trees never delivered to the Sinkhole Road grove, billed Hermanns for fuel that McKenzie used for his own purposes, and billed Hermanns for fertilizer and other products not applied to Hermanns's crop, the State Attorney charged McKenzie with a scheme to defraud and with grand theft exceeding $100, 000. These criminal charges remain pending in state court.

         Before the criminal action, Hermanns asked Kyle Story, another grove care-taker, to assess the condition of the grove. Several sights struck Story. First, the groves appeared “thinly” planted. In 2010 and 2011, most growers planted about 150 trees per acre, but Story counted just 115 trees per acre. Second, many trees appeared injured by water saturation. Story later concluded that inadequate drainage and improper maintenance of the irrigation system left stagnant water in the grove for days or weeks. Third, most of the trees appeared infected by “huanglongbing, ” more commonly known as greening, a disease that impedes a root's absorption of nutrients. The incurable disease reduces a tree's yield, and the remaining fruit is misshapen, unsightly, and unsuitable for sale except to an orange-juice producer. (Story Depo. at 18-19) Eventually, greening kills the tree. Story and Carter initially thought that greening affected at least 80% of the grove, an infection rate similar to most groves in Florida. Hermanns concluded that greening affected most if not all of his trees. (Hermanns Depo. at 101) Late in 2013, Hermanns fired McKenzie and hired Story to manage the grove.

         In February 2015, Hermanns sued McKenzie in the Circuit Court for Polk County. Hermanns alleged breach of an oral contract (count one) and breach of fiduciary duty (count three) and demanded an equitable accounting (count two) for the money paid to McKenzie under the contract. In the breach-of-contract claim, Hermanns alleged that his damages included the money paid to McKenzie and the profit lost because of McKenzie's mismanagement. In the accounting claim, Hermanns alleged that McKenzie acted “with the intent to permanently deprive” Hermanns of “its monies and profits[, ] otherwise appropriating same as its own or for its own uses.” Through discovery, Hermanns learned that from 2009 to 2013 Travelers Indemnity Company insured McKenzie's company under a CGL with an endorsement for “farm care-taker liability.” Although the CGL obligated McKenzie to notify Travelers “as soon as practicable of an ‘occurrence' or an offense” that might result in a claim (Doc. 105-10 at 55), the record contains no evidence that McKenzie promptly notified Travelers about an “occurrence” or about Hermanns's claims. McKenzie believes that he notified Travelers about the state-court civil action at some unspecified “later time.” (McKenzie Depo. at 75)

         In February 2016, less than two weeks after the State Attorney charged McKenzie with grand theft and a scheme to defraud, Hermanns amended the civil complaint to add a negligence claim (count four). Hermanns cannot explain the purpose of the amendment and cannot recall “any new facts or evidence” that warranted the amendment. (Hermanns Depo. at 70) As in the breach-of-contract claim, Hermanns sought in the negligence claim profit lost because of McKenzie's conduct. After the amended complaint, Hermanns provided McKenzie with an “expert” opinion letter (Doc. 107-21) signed by Story, the manager whom Hermanns hired to replace McKenzie. Without receiving compensation other than that paid for managing the grove (Story Depo. at 56), Story opined in the letter that Hermanns lost at least $464, 625 in “net income” in 2016 from McKenzie's purportedly “negligent” care and maintenance. Story wrote that these damages “will continue for the next 20 years because of the thin planting” and concluded that Hermanns incurred “damages in excess of $2, 965, 750.” Despite claiming that damages would continue for twenty years, Story never calculated the damages beyond 2021 because Story felt that “reaching out beyond that period of time was irresponsible.” (Story Depo. at 104) Erin Moore, Travelers' corporate representative, testified that Travelers learned about the state-court action when Hermanns's counsel demanded coverage for McKenzie based on the amended complaint. (Moore Depo. at 26)

         McKenzie's attorney in the state-court civil action, Ken Waterway, never retained a rebuttal expert to analyze and refute Story's damages calculation. Waterway's “investigation” of the claimed damages consisted only of providing the Story letter to McKenzie and asking for McKenzie's thoughts on the letter. Sometime in the fall of 2016, Hermanns and McKenzie agreed to settle the civil action. Under the settlement, McKenzie agreed to pay $200, 000 to resolve the claims for breach of contract, for an equitable accounting, and for breach of fiduciary duty. On count four, the negligence claim, McKenzie agreed to a consent judgment against him for $2, 965, 750, but Hermanns agreed not to execute against McKenzie. Instead, McKenzie assigned to Hermanns all of McKenzie's rights under the Travelers CGL, including the right to sue for breach of contract and, if Hermanns successfully establishes coverage in this action, for bad faith. Finally, Hermanns agreed to recommend to the State Attorney the resolution “most favorable” to McKenzie in the criminal action. (Doc. 107-19 at 6) Hermanns understood the provision as obligating Hermanns - assuming McKenzie pays the $200, 000 - to discourage the State Attorney's pursuing jail time, and McKenzie contemplated a pretrial diversion in which he would serve no jail time.

         In this coverage action (the second in the Coblentz tryptych), Travelers sues (Doc. 9) for a declaration exonerating Travelers from liability to Hermanns under the CGL. As the assignee of McKenzie's rights under the CGL, Hermanns counterclaims (Doc. 39) for breach of the insurance policy and for a declaration that Travelers owes a duty to indemnify McKenzie for the $2.965 million consent judgment. Moving for summary judgment, Travelers argues (Doc. 108) that the policy excludes expected or intended damage, that the settlement is unreasonable and resulted from collusion between Hermanns and McKenzie, that Travelers owed no duty to defend McKenzie against Hermanns's claims in the state-court civil action, and that the parties improperly attribute to the negligence claim damages from the breach-of-contract and the breach-of-fiduciary-duty claims. Hermanns moves (Doc. 106) for partial summary judgment on Travelers' duty to defend McKenzie in the state-court civil action.

         DISCUSSION

         To recover from Travelers under the Coblentz agreement, Hermanns must show that the CGL covers the settlement, that Travelers wrongfully refused to defend McKenzie in the state-court civil action, that the settlement is reasonable, and that McKenzie and Hermanns settled “in good faith” and without colluding. Mid-Continent Cas. Co. v. Royal Crane, LLC, 169 So.3d 174 (Fla. 4th DCA 2015). To the extent Travelers requests exoneration based on an exclusion, Travelers must show the applicability of the exclusion. LaFarge Corp. v. Travelers Indem. Co., 118 F.3d 1511, 1516 (11th Cir. 1997).

         I. Coverage

         Among other items, the policy covers “property damage” caused by an “occurrence, ” which means “an accident, including continuous or repeated exposure to substantially the same general harmful conditions.” (Doc. 105-10 at 46 and 59) Under the policy, “property damage”[1] means:

a. Physical injury to tangible property, including all resulting loss of use of that property. All such loss of use shall be deemed to occur at the time of the physical injury that caused it; or
b. Loss of use of tangible property that is not physically injured. All such loss of use shall be deemed to occur at the time of the “occurrence” that caused it.

         (Doc. 105-10 at 60) But the policy excludes coverage for “property damage” to:

j(6) That particular part of real property on which you or any contractors or subcontractors working directly or indirectly on your behalf are performing operations, if the “property damage” arises out of those operations.

         (Doc. 105-10 at 49)

         A. The policy excludes “expected or intended” damage.

         In arguing for coverage under the CGL, Hermanns finds himself in an intractable bind. The CGL excludes property damage “expected or intended” from McKenzie's “standpoint, ”[2] and Hermanns alleges (and the State Attorney, after weighing Hermanns's testimony and the evidence marshaled by Hermanns, alleges in the criminal action) that McKenzie intentionally pilfered or otherwise purloined materials that belonged to Hermanns. (Doc. 107-12 at 5-9) For example, a memorandum from Hermanns to McKenzie in the state-court civil action claims a “minimum” of $451, 804.77 in damage from misappropriated fuel, undelivered trees, and fictitious fertilizer applications. (Doc. 107-18)

         Travelers correctly observes the impracticability of distinguishing between damage that resulted from the purported “negligence” and damage that resulted from McKenzie's “intentional” misconduct. For example, Story attributes the grove's “thin” planting to negligence, but Hermanns's allegations in the other action and his communications with the State Attorney establish that the Sinkhole Road grove lacked the industry-standard 150 trees per acre partly because (to quote Hermanns) McKenzie “intentionally” diverted to his own use trees that belonged to Hermanns. Because the damage from McKenzie's calculated theft and the damage from McKenzie's so-called negligence appear indistinguishable, Hermanns cannot recover under the CGL. See Bradfield v. Mid-Continent Cas. Co., 143 F.Supp.3d 1215, 1245-48 (M.D. Fla. 2015) (Hodges, J.) (holding that the failure to apportion between covered and uncovered damages precludes recovery under a CGL); Highland Holdings, Inc. v. Mid-Continent Cas. Co., 2016 WL 3447523 (M.D. Fla. June 23, 2016) (same), aff'd, 687 Fed.Appx. 819 (11th Cir. May 2, 2017).

         B. The CGL excludes damage to “[t]hat particular part of real property on which you . . . are performing operations.”

         Provision j(5) excludes property damage to “[t]hat particular part of real property on which you . . . are performing operations.” Similar to the exclusions in Weedo, this “business risk” exclusion excludes coverage for property damage that “aris[es] from ongoing work.” Oak Ford Owners Ass'n v. Auto-Owners Ins. Co., 510 F.Supp.2d 812, 819 (M.D. Fla. 2007) (Whittemore, J.). Throughout this action, Hermanns admitted that McKenzie managed the entire 265-acre grove and that the grove incurred damage during McKenzie's tenure. The amended state-court complaint alleges that Hermanns suffered damage from McKenzie's “negligently performing [] services” on the grove. (Doc. 107-12 at 9) Because Hermanns claims damage to the “particular part” of the “real property”[3] on which McKenzie was “performing operations, ” provision j(5) excludes coverage.

         Citing Essex Ins. Co. v. Kart Const., Inc., 2015 WL 4730540 (M.D. Fla. Aug. 10, 2015), Hermanns argues that interpreting “that particular part” to mean the 265-acre grove “falls well short of the granular dissection” required by the exclusion. In Essex, which involves facts decisively different from this action, a company hired a contractor to weld a 10-foot section of a 127-foot cellular tower. In preparation for the welding, the contractor removed debris from the entire tower, doused the entire tower with water, and posted nearby a monitor who watched the tower during the welding. Despite the contractor's care, a fire destroyed the tower. The insurer denied coverage based partly on the j(5) exclusion ...


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