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Lewellen v. Universal Underwriters Insurance Co.

Court of Appeals of Missouri, Western District, First Division

February 13, 2019

LILLIAN M. LEWELLEN, Appellant-Respondent,
v.
UNIVERSAL UNDERWRITERS INSURANCE COMPANY, et al. CHAD FRANKLIN, CHAD FRANKLIN NATIONAL AUTO SALES NORTH, LLC and CFS ENTERPRISES, INC., Respondent-Appellant.

          APPEAL FROM THE CIRCUIT COURT OF CLAY COUNTY The Ho norable Timothy J. Flook, Judge

          Before Lisa White Hardwick, Presiding Judge, Edward R. Ardini and Thomas N. Chapman, Judges

          Lisa White Hardwick, Judge

         This appeal and cross-appeal arises from judgments entered by the circuit court on Lillian Lewellen's claims against Chad Franklin, Chad Franklin National Auto Sales North, LLC, and CFS Enterprises, Inc. (collectively "Franklin")[1] and Universal Underwriters Insurance Company and Zurich American Insurance Company (collectively "Universal").[2]

         Lewellen appeals: (1) the judgment denying insurance coverage on her claim that Franklin committed fraudulent misrepresentation in the sale of a vehicle; (2) the summary judgment in favor of Universal on her claims concerning a civil conspiracy to commit a fraudulent transfer and violations of the Missouri Merchandising Practices Act ("MMPA"); and (3) the summary judgment in favor of Universal on her claim for tortious interference with a business expectancy.

         Universal cross-appeals the judgment granting insurance coverage for actual and punitive damages on Lewellen's MMPA claim. Franklin's cross-appeal alleges a series of procedural and evidentiary errors that he contends resulted from the improper striking of his pleadings after several alleged discovery violations.

         For reasons explained herein, we affirm in part, reverse in part, and remand for proceedings consistent with this opinion.

         Factual and Procedural History

         In October of 2007, Lewellen purchased a vehicle at Franklin's car dealership during the "Drive for Life" promotion. Based on the promotion, a sales representative told Lewellen that she could purchase a vehicle and make payments of $49.00 a month for one year, at which time she could return the car and pick a new vehicle under the same payment arrangement. Lewellen signed loan documents stating that she would be responsible for making market-rate payments for the vehicle; however, she was reassured by the sales representative that, pursuant to the promotion, Franklin would send her monthly checks to offset the difference between the $49.00 promotional price and the market rate. After the purchase, Lewellen received the offset payments from Franklin for approximately six months. She was unable to make the market-rate payments once the offset payments stopped, and her vehicle was repossessed.

         In 2008, Franklin became a party to several lawsuits alleging a variety of claims and damages relating to the "Drive for Life" promotion. During this time, Franklin was insured by Universal. Universal denied defense and coverage for the claims.

         On October 21, 2008, Chad and CFS Enterprises, Inc. filed suit against Universal alleging wrongful denial of their insurance defense. In December 2009, Chad and Chad Franklin National Auto Sales North filed a second lawsuit against Universal alleging bad faith. Tiffany Franklin, who at the time was Chad's wife, was also a named insured on the Universal policy and was added as a party to both lawsuits. David Mayer of the law firm Monsees, Miller, Presley, & Amick, P.C. represented all plaintiffs in these lawsuits against Universal.

         On August 31, 2010, Universal, Franklin, and Tiffany Franklin agreed to a settlement that disposed of the bad faith claims against Universal. As part of the settlement, Universal agreed to make a payment of $900, 000 to Chad and Tiffany Franklin. These funds were disbursed as follows: $250, 000 to Fifth Third Bank, $266, 370.41 to Tiffany Franklin, and $383, 629.59 to Mayer's law firm. The distribution to Fifth Third Bank, a secured creditor of Franklin's car dealership operation, was made pursuant to a garnishment filed against Universal. This $900, 000 settlement agreement is the transfer that Lewellen would later allege was fraudulently made between Universal and Franklin.

         On December 15, 2010, Lewellen filed suit against Franklin alleging fraudulent misrepresentation and violations of the MMPA. In June 2012, Lewellen was awarded $25, 000 in actual damages and $1 million in punitive damages against Chad individually for his fraudulent misrepresentation, and $25, 000 in actual damages and $500, 000 in punitive damages against Chad Franklin National Auto Sales North, LLC for a violation of the MMPA.[3] Lewellen was also awarded attorneys' fees totaling $82, 810.00.

         In April 2013, Lewellen filed the instant action against Universal and Franklin. In Counts I and II of her third amended petition, Lewellen asserted equitable garnishment and declaratory judgment claims against Universal seeking insurance coverage for the judgment against Chad and Chad Franklin National Auto Sales North on her fraudulent misrepresentation and MMPA claims. In Counts III through VII, Lewellen asserted claims of fraudulent transfer, MMPA violations, civil conspiracy, joint venture/joint enterprise, and a bill in equity against Universal and Franklin based upon their August 2010 settlement agreement. In Count VIII, Lewellen asserted a claim of tortious interference with a business expectation against Universal. [4]

         The court held a bench trial on Counts I and II of Lewellen's third amended petition. Count I alleged an equitable garnishment claim against Universal in which she sought coverage for the judgment against Chad and Chad Franklin National Auto Sales North on her fraudulent misrepresentation and MMPA claims. Count II requested a judgment declaring that Franklin's insurance policy with Universal applied to Lewellen's judgment and damages. The court declined to reach Count II and entered judgment on Count I finding that Lewellen's fraudulent misrepresentation claim was not entitled to coverage, but that her MMPA claim was covered under Franklin's policy with Universal.

         In March 2017, the court granted summary judgment in favor of Universal on Counts III through VIII. Discovery proceeded on Lewellen's claims against Franklin. After Chad failed to appear for his deposition, the court struck Franklin's responsive pleadings and entered a default judgment in Lewellen's favor on the fraudulent transfer and MMPA claims. During a subsequent trial on damages, the jury awarded Lewellen $266, 370.41 in actual damages and $450, 000 in punitive damages on each of her two claims. The punitive damages were divided among the defendants: Chad was assessed $250, 000 ($500, 000 total) individually, while Chad Franklin National Auto Sales North and CFS Enterprises were each assessed $100, 000 ($200, 000 total). The court merged the actual damages on the two claims but granted the total amount of punitive damages and awarded Lewellen $189, 060 in attorneys' fees. Lewellen appeals. Franklin and Universal cross-appeal.

         Analysis

         I. Equitable Garnishment Judgment

         Both Lewellen and Universal challenge the equitable garnishment judgment in several of their points on appeal. Lewellen contends the court erred in denying insurance coverage for the damages awarded on her fraudulent misrepresentation claim, while Universal contends the court erred in allowing coverage for the damages awarded to Lewellen on her MMPA claim.

         A. Standard of Review

         In determining whether Universal's policy affords coverage for the damages awarded Lewellen, we interpret the insurance policy de novo. Swadley v. Shelter Mut. Ins. Co., 513 S.W.3d 355, 357 (Mo. banc 2017). Our review of factual determinations made by the circuit court, however, are reviewed under the standard set forth in Murphy v. Carron, 536 S.W.2d 30, 32 (Mo. banc 1976). Vill. at Deer Creek Homeowners Ass'n Inc. v. Mid-Continent Cas. Co., 432 S.W.3d 231, 239 (Mo. App. 2014). Thus, we will affirm the circuit court's judgment "unless there is no substantial evidence to support it or unless it is against the weight of the evidence, it erroneously declares the law, or it erroneously applies the law." Schmitz v. Great Am. Assurance Co., 337 S.W.3d 700, 705 (Mo. banc 2011). We "must view the evidence in a light most favorable to the judgment and disregard all contrary evidence and permissible inferences." Rissler v. Heinzler, 316 S.W.3d 533, 536 (Mo. App. 2010).

         In reviewing the language contained in insurance policies, we apply the meaning of the terms that "would be attached by an ordinary person of average understanding if purchasing insurance," Seeck v. Geico Gen. Ins. Co., 212 S.W.3d 129, 132 (Mo. banc 2007) (internal citation and quotations omitted), and we will interpret the contract "as to afford coverage rather than defeat" it. Universal Underwriters Ins. Co. v. Dean Johnson Ford, Inc., 905 S.W.2d 529, 533 (Mo. App. 1995). Where no ambiguity exists, we will enforce the contract according to its terms. Swadley, 513 S.W.3d at 357. However, if we find an ambiguity within the policy, we will resolve that ambiguity against the insurer. Id.

         "An ambiguity exists when there is duplicity, indistinctness, or uncertainty in the meaning of the language in the policy. Language is ambiguous if it is reasonably open to different constructions." Id. (internal citation and quotations omitted). Further, we do not review each provision of a policy in isolation but instead evaluate the policy as a whole. Seeck, 212 S.W.3d at 133.

         B. Coverage for Fraudulent Misrepresentation Claim

         i. The fraud and dishonest act exclusion is not ambiguous.

         In Point I, Lewellen contends the circuit court erred in denying insurance coverage for the damages awarded to her and against Franklin on her claim of fraudulent misrepresentation. She asserts that the insurance policy exclusion concerning dishonest and fraudulent acts is ambiguous and should be construed against the insurer, Universal, to provide coverage for the damages award.[5]

         The exclusion at issue states: "This insurance does not apply to: (a) INJURY, EMPLOYMENT RELATED DEFENSE, COVERED POLLUTION DAMAGES, CUSTOMER COMPLAINT DEFENSE, or STATUTE AND TITLE E&O, if caused by any dishonest, fraudulent or criminal acts committed by any INSURED."[6] Lewellen alleges that the words "dishonest" and "fraudulent" create an ambiguity because the terms serve to include several forms of conduct, some intentional and others unintentional. The policy does not confer any special definition to these terms; therefore, we may look to the dictionary definition of the terms to illuminate our path. Strader v. Progressive Ins., 230 S.W.3d 621, 624 (Mo. App. 2007). "Dishonest" is defined as "characterized by lack of truth, honesty, probity, or untrustworthiness, or by an inclination to mislead, lie, cheat, or defraud." Dishonest, Webster's Third New International Dictionary 650 (1993). "Fraudulent" is defined as "belonging to or characterized by fraud[, ]" Fraudulent, Webster's Third New International Dictionary at 904, with "fraud" defined as "an instance or an act of trickery or deceit esp[ecially] when involving misrepresentation." Fraud, Webster's Third New International Dictionary at 904.

         Applying dictionary definitions of the terms "dishonest" and "fraudulent" to the language of the exclusion, we find no ambiguity. An ordinary person of average understanding would clearly understand that purchasing this policy would not protect against acts that were designed to mislead, perpetrate a fraud, or those involving trickery, deceit, or misrepresentation. See Seeck, 212 S.W.3d at 132. Lewellen attempts to create an ambiguity where none exists.

         Lewellen's reliance on Dean Johnson, to demonstrate that the fraud exclusion is ambiguous is similarly misplaced. In Dean Johnson, we reviewed a grant of summary judgment for the insurer concerning the relationship between two policy clauses-one that set forth the insurer's duty to defend the insured, and another that the insurer said removed that same obligation. 905 S.W.2d at 533-34. We found the fraud exclusion in that case, which is similar to the one at issue in this case, to be ambiguous with respect to the insurer's duty to defend. Id. at 534-35. We did not find that the fraud exclusion was ambiguous in its exclusion of coverage for damages assessed against an insured, however. Id. In fact, we specifically stated:

A more reasonable interpretation, and one which gives effect to both the exclusion and the provisions for defense costs for Legal Damages and for Product Related Damages, is that the exclusion simply excluded coverage for damages actually awarded against the insured for acts proved to be intentionally dishonest or fraudulent.

Id. (emphasis added). Lewellen's Point I is denied.

         ii. The definition of "occurrence" does not provide insurance coverage for damages on Lewellen's fraudulent misrepresentation claim.

         In Point II, Lewellen further contends the circuit court erred in denying insurance coverage for the damages awarded against Franklin on her claim of fraudulent misrepresentation. In this point, she makes a series of arguments in an attempt to demonstrate that the previously-discussed fraud exclusion, and a different exclusion for acts committed with the intent to cause harm, do not apply to Franklin's conduct. Before reaching the fraud and intent exclusions, however, we must first decide whether the definition of "occurrence" contained in the insuring agreement provides coverage for the damages awarded on Lewellen's fraudulent misrepresentation claim.

         As a threshold matter, both parties allege that the other has the burden to demonstrate the applicability of the "occurrence" clause of the policy to the instant conduct. Because the operation of the "occurrence" language and its applicability to the conduct at issue presents a question of coverage, and not one of exclusion, it is well-settled that the party seeking coverage-here, Lewellen-has the burden to prove that Franklin's conduct is covered under the "occurrence" clause contained within the policy. Universal Reins. Corp. v. Greenleaf, 824 S.W.2d 80, 83 (Mo. App. 1992). If we must reach the policy exclusions, however, it is an equally well-settled proposition that the burden of demonstrating that an exclusion applies to bar coverage is one carried by the insurer. Manner v. Schiermeier, 393 S.W.3d 58, 62 (Mo. banc 2013).

         The insuring agreement in Coverage Part 500 states, in pertinent part: "WE will pay all sums the INSURED legally must pay as DAMAGES (including punitive DAMAGES where insurable by law) because of INJURY to which this insurance applies caused by an OCCURRENCE arising out of GARAGE OPERATIONS or AUTO HAZARD."[7] At issue in this point is the definition of "occurrence," which is defined later in the same Coverage Part as "an accident, including continuous or repeated exposure to conditions, which results in such INJURY or COVERED POLLUTION DAMAGES during the Coverage Part period neither intended nor expected from the standpoint of a reasonably prudent person."

         As the term "accident" is not defined in Coverage Part 500, we must look elsewhere for its meaning. "[W]hen a liability policy defines occurrence as meaning accident, Missouri courts consider this to mean injury caused by the negligence of the insured." Vill. at Deer Creek, 432 S.W.3d at 246 (internal citations and quotations omitted). Further, courts have stated that an "accident" does not necessarily have to be the result of a sudden event; it can be the result of a process. Columbia Mut. Ins. Co. v. Epstein, 239 S.W.3d 667, 672 (Mo. App. 2007). "The determinative inquiry into whether there was an 'occurrence' or 'accident' is whether the insured foresaw or expected the injury or damages." D.R. Sherry Constr., Ltd., Am. v. Family Mut. Ins. Co., 316 S.W.3d 899, 905 (Mo. banc 2010) (emphasis added). However, in reviewing the insured's foresight of these injuries we employ an objective standard-whether a reasonably prudent person would foresee this accident-instead of an analysis of Franklin's subjective intent or expectation. Truck Ins. Exch. v. Pickering, 642 S.W.2d 113, 116 (Mo. App. 1982).

         Prior to answering this question, we must clear the parties' apparent confusion about the evidence presented at the jury trial against Franklin and during the equitable garnishment bench trial. In the fraudulent misrepresentation action, the court struck Franklin's pleadings and entered an interlocutory default judgment in Lewellen's favor.[8] Lewellen now alleges that this default judgment decided liability but did not make any finding as to whether Franklin's conduct was that of an intentional or negligent tort. However, an interlocutory judgment of default "admits the traversable allegations in the petition constituting the plaintiff's cause of action and the defendant's liability thereunder[.]" Beckmann v. Miceli Homes, Inc., 45 S.W.3d 533, 541 (Mo. App. 2001). Further, a default judgment entered as a response to a discovery violation, as occurred here, is not a "true default judgment" and is, instead, "treated as a judgment upon trial by the court." Norber v. Marcotte, 134 S.W.3d 651, 662 (Mo. App. 2004) (internal citations and quotations omitted).

         In a subsequent equitable garnishment proceeding, this judgment can have a preclusive effect that cannot be collaterally attacked if the party had the opportunity to control the litigation, the court issuing judgment had subject-matter jurisdiction, and the judgment is not void on its face. Assurance Co. of Am. v. Secura Ins. Co., 384 S.W.3d 224, 232 (Mo. App. 2012). The Supreme Court of Missouri described this preclusive effect, stating:

[T]he first judgment is conclusive on the plaintiff and defendant, and hence the garnishee, as to defendant's liability to plaintiff on the tort cause of action in the amount of the verdict rendered. Nevertheless, the judgment in the tort action is not conclusive on the parties in the garnishment suit as to facts not actually litigated in the first action or to facts that were merely evidentiary or . . . inferentially involved in the first.

Allen v. Bryers, 512 S.W.3d 17, 33 (Mo. banc 2016) (alteration in original) (quoting Drennen v. Wren, 416 S.W.2d 229, 234 (Mo. App. 1967)). Further, and perhaps more importantly, the "underlying judgment is conclusive in a later action on the indemnity contract as to those issues and questions necessarily determined in the underlying judgment." Id. (internal citation and quotations omitted).

         Here, the interlocutory default entered against Franklin was a judgment upon trial by the court admitting the traversable elements of fraudulent misrepresentation. Even if we were to accept Lewellen's argument that she pleaded both intentional and negligent versions of this tort and the judgment left both open for use, she has plainly chosen to advance the theory of an intentional act. During the underlying trial, Lewellen offered punitive damage instructions that were modeled off of Missouri Approved Instruction ("MAI") 10.01-the instruction charging punitive damages for intentional torts. See Notes on Use [2008 Revision] to MAI 10.01 ("Where the claim for actual damages is submitted on negligence as opposed to an intentional tort, MAI 10.01 is not applicable; use MAI 10.02 or MAI 10.07, whichever is appropriate."); see also Sharp v. Robberson, 495 S.W.2d 394, 399 (Mo. banc 1973). Further, Universal provided the court with evidence supporting its contention that Lewellen had argued, in the underlying trial, that Franklin intended to defraud her.[9] Although the interlocutory entry of default took the question of liability from the jury and, therefore, limited what facts were necessary to the jury's finding, the court's judgment concerning liability and Lewellen's subsequent litigation strategy during the damages portion made Franklin's intentionality a material and necessary fact to the judgment. It was only during the equitable garnishment proceeding, when it became clear that asserting an intentional tort would harm her interests, that Lewellen reasserted her negligence claim.

         As an occurrence is an accident, defined as an injury caused by the negligence of the insured that was neither intended nor expected, and we have determined that Franklin acted intentionally, we find that the insurance policy does not provide coverage for Lewellen's fraudulent misrepresentation claim. "When an intentional act results in injuries which are the natural and probable consequences of the act, the injuries as well as the act are intentional." Pickering, 642 S.W.2d at 116. When Franklin intentionally completed the fraudulent misrepresentation, it was a natural and probable consequence that Lewellen would suffer the type of injury that ultimately occurred. Because we have found that the fraudulent misrepresentation claim is categorically denied coverage because it is not an "occurrence," we need not reach Lewellen's arguments concerning the applicability of other exclusions. Lewellen's Point II is denied.

         C. Coverage for MMPA Claim / Concurrent Proximate Cause Rule

         In Universal's Points I and II, Universal contends the circuit court erred in finding Franklin's policy covers Lewellen's MMPA claim. Universal asserts that the fraud exception should prevent coverage under Coverage Part 500 and the policy definition of occurrence should prevent coverage under Coverage Parts 970 and 980. In Point III, Lewellen asserts that, not only does Franklin's policy afford coverage to her MMPA claim, but the coverage of that claim triggers the concurrent proximate cause rule granting coverage to her extinguished fraudulent misrepresentation claim.

         Coverage Part 970 and 980 states:

WE will pay for LOSS, subject to the terms and conditions of this Coverage Part, in excess of
(a) coverage provided in any UNDERLYING INSURANCE;
(b) coverage provided to an INSURED in any other insurance;
(c) in the absence of (a) or (b) the retention shown in the declarations.

         Loss is defined as "all sums the INSURED legally must pay as DAMAGES because of INJURY to which this insurance applies caused by an OCCURRENCE." The definition of occurrence applicable to Lewellen's claims is the same definition as the one contained in Coverage Part 500. Further, the conduct underlying the fraudulent misrepresentation and MMPA claim is the same conduct. As we have previously found Franklin's actions were intentional and, therefore, not occurrences, we find the same for the MMPA claims. No coverage is extended under Coverage Parts 970 and 980. Universal's Point II is granted.

         That does not end the inquiry, however. It is unclear whether Lewellen seeks coverage for her MMPA claim under the clause for "customer complaint defense" or "statute and title E&O" contained in Coverage Part 500. Coverage Part 500 defines "customer complaint defense" as "any SUIT filed against YOU during the Coverage Part period by or on behalf of a customer arising out of the sale, lease, rental, service or repair of YOUR PRODUCT, other than as a direct result of an OCCURRENCE or as defined in STATUTE AND TITLE E&O." As for Statute and Title E&O, Coverage Part 500 states, in pertinent part: "WE will pay all sums the INSURED legally must pay as DAMAGES (including punitive DAMAGES where insurable by law) because of STATUTE AND TITLE E&O when such insurance is included in the declarations." Statute and Title E&O is defined as:

any claim or SUIT filed against YOU, other than as a result of an OCCURRENCE or CUSTOMER COMPLAINT DEFENSE, by or on behalf of:
(a) a customer arising out of GARAGE OPERATIONS, because of an alleged violation during the Coverage Part period, of any federal, state, or local:
(1) odometer law;
(2) truth-in-lending or truth-in-leasing law;
(3) auto damage disclosure law;
(4) competitive auto parts law;
(5) used car "Buyers Guide," including federal regulation 455;
(b) any person or organization who has suffered a financial loss due to the failure of YOUR employee, to properly specify during the Coverage Part period, the name of the security interest or "legal owner" on auto title papers . . .

         It is clear that Lewellen's claim, if it were covered, would be included in one of these sections of Franklin's insurance contract with Universal. Regardless of which section ultimately applies, the claim is still governed by the exceptions to the policy that we have discussed supra. As we previously determined that Franklin engaged in an intentional, fraudulent tort, we now find that this conduct is specifically contemplated by Exclusion (a), which states "This insurance does not apply to: (a) INJURY, EMPLOYMENT RELATED DEFENSE, COVERED POLLUTION DAMAGES, CUSTOMER COMPLAINT DEFENSE, or STATUTE AND TITLE E&O, if caused by any dishonest, fraudulent or criminal acts committed by any INSURED." Therefore, no coverage is extended to Lewellen's MMPA claim. Universal's Point I is granted, and the equitable garnishment judgment in favor of Lewellen on the MMPA claim is reversed.

         Finally, as we have found that neither claim is to be afforded coverage under Universal's policy, we must also find that the concurrent proximate cause rule does not apply to Lewellen's claims. "The concurrent proximate cause rule states that an insurance policy will be construed to provide coverage where an injury was proximately caused by two events -even if one of these events was subject to an exclusion clause -if the differing allegations of causation are independent and distinct." Am. Family Mut. Ins. Co. v. Parnell, 478 S.W.3d 489, 492 (Mo. App. 2015) (internal citations and quotations omitted). ...


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