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Heckadon v. Universal Underwriters Ins. Co.

Court of Appeals of Missouri, Western District, First Division

June 4, 2019


          Appeal from the Circuit Court of Clay County, Missouri The Honorable Timothy Jon Flook, Judge

          Before Lisa White Hardwick, P. J., Edward R. Ardini, and Thomas N. Chapman, JJ.


         This appeal and cross-appeal are taken from a judgment in a case wherein David and Diana Heckadon ("Heckadons") sought to recover against Universal Underwriters Insurance Company ("Universal")[1] and Chad Franklin ("Chad"), [2] CFS Enterprises ("CFS"), and Chad Franklin National Auto Sales North ("NAS") (collectively "Franklin"), on a variety of theories alleging wrongdoing in failing to pay an earlier judgment the Heckadons had secured against Chad and CFS. The earlier judgment was secured after the Heckadons purchased a vehicle from Chad and CFS, pursuant to their "Drive for Life" program, then filed a lawsuit alleging fraudulent misrepresentation and violation of the Missouri Merchandising Practice Act (MMPA), section 407.010, et seq., RSMo. (hereinafter "Original MMPA Action"). The Original MMPA Action resulted in the Heckadons receiving a judgment totaling $616, 534.87.[3] Universal was separately sued by Chad, NAS and Tiffany Franklin ("Tiffany") after Universal denied coverage of the Heckadons' Original MMPA Action, and settled that suit for $900, 000, none of which was paid to the Heckadons.

         In 2012 the Heckadons brought the instant action against Universal, Chad, CFS, NAS, and Tiffany.[4] The judgment from which this appeal and cross-appeal are taken found in favor of the Heckadons and against Universal and Franklin on some, but not all of the Heckadons' claims. Because both Universal and Franklin cross appeal we will refrain from referring to the parties as Appellant and Respondent and will instead (when referring to them in their capacity as litigants) use the terms from the trial court, i.e., Plaintiffs and Defendants. Given the number of issues in this appeal, we begin by summarizing the conclusions reached with respect to each issue.


         Equitable Garnishment Bench Trial

         The Heckadons asserted claims for equitable garnishment and declaratory judgment against Universal, seeking to determine Universal's obligations to indemnify the Original MMPA Action judgment. After a bench trial, the trial court determined that coverage applied and entered judgment against Universal in the sum of $647, 421.39 (the amount of the Original MMPA Action judgment). In Points 1, 2, and 3 of its cross appeal, Universal argues that the court misapplied the law in construing the insurance policy and finding coverage. We find that Franklin's conduct which was the basis for the Original MMPA Action judgment was not a covered occurrence under the Universal policy. Point 2 of Universal's cross appeal is granted. The equitable garnishment judgment entered against Universal is reversed.[5]

         Summary Judgment In Favor of Universal Regarding Settlement of Bad Faith Claims

         The Heckadons made additional claims contending that the settlement among Universal, Franklin, and Tiffany resulted in a distribution of settlement proceeds that was in fraud of their rights. The trial court granted Universal's motion for summary judgment, finding that it was not liable for the Heckadons' claims relating to its distribution of the bad faith settlement proceeds. In Points 3, 4, and 5 of their appeal, the Heckadons claim that the trial court erred in granting summary judgment on these claims. We affirm the Summary Judgment in favor of Universal.

         Jury Trial Regarding Franklin's Settlement of Bad Faith Claims

         Due to discovery violations by Franklin, the trial court sanctioned Franklin by striking its pleadings and entering an interlocutory default judgment finding Franklin liable for its distribution of the bad faith settlement proceeds. A jury trial was conducted to determine the damages to be assessed on the fraudulent transfer and MMPA claims against Franklin. The jury awarded the Heckadons $647, 334 in actual damages on the fraudulent transfer claims against Franklin, and punitive damages of $500, 000 against Chad, $500, 000 punitive damages against NAS, and $500, 000 punitive damages against CFS.[6] Franklin filed a post-trial Motion to Amend the Judgment, asserting that the amount paid to its attorney in the underlying bad faith claim was subject to a valid lien and not eligible for consideration as potential damages related to the fraudulent transfer claim. Finding that it erred in holding that § 484.130 did not establish a valid attorney fee lien, the trial court sustained the motion and reduced the award of actual damages against Franklin by the amount paid to Mayer, resulting in an award of $266, 370.41.

         In Point 1 of their appeal, the Heckadons maintain that the trial court did not have the authority to amend the judgment more than 30 days after the judgment was entered. In Point 2 they contend that this reduction (by the amount of the attorney fee lien) improperly substituted the court's verdict for the jury's verdict in the assessment of actual damages. We find that the court had the authority to properly amend the judgment more than 30 days after it was entered, but that its amendment reducing the actual damages by the amount of the attorney's fee was improper. Point 1 of the Heckadons' appeal is denied. Point 2 of the Heckadons' appeal is granted in part.

         Franklin cross appeals, asserting (in Point 1) that the trial court erred in striking its pleadings and entering default judgment on the issue of liability; asserting (in Point 2) that the trial court erred in submitting a modified instruction which failed to require the jury to make the findings (of outrageous conduct or reckless disregard) necessary to impose punitive damages; asserting instructional error (in Point 3) regarding the verdict form; and asserting (in Point 4) that the trial court erred in refusing to allow its attorney to testify regarding the reasons for allocation and distribution of the bad faith settlement proceeds. We find that the trial court did not err in striking Franklin's pleadings, and, therefore, deny Point 1 of Franklin's cross appeal. We find that the trial court erred in excluding testimony explaining the bad faith settlement, and, therefore, grant point 4 of Franklin's cross appeal. Since the effect of the trial court's evidentiary errors materially affected the merits and outcome of the proceeding, the judgment for actual and punitive damages against Franklin is reversed and remanded for proceedings consistent with this opinion. Given our disposition of Point 4, we find it unnecessary to address the claims of instructional error raised in Points 2 and 3 of Franklin's cross appeal.


         Facts and Procedure

         In September 2007, the Heckadons purchased a car from Chad and CFS under the "Drive for Life" promotion.[7] To participate in this promotion the Heckadons signed documents obligating them to a high interest loan to purchase the car, with Franklin agreeing to send them sufficient funds on a monthly basis to reduce their effective payment to only $49 a month. Unbeknownst to them at the time, the amount bundled into the loan included a charge for a $499.95 membership fee for participation in "Drive for Life," gap insurance, and an extended warranty for a car they were (under the terms of the promotion) to own for only one year. In 2008 the Heckadons traded in their first vehicle and selected a second. They were again charged a $499.95 membership fee for participation in "Drive for Life," a separate charge for gap insurance, and a separate charge for another extended warranty fee. While the sticker price of the vehicle was $17, 495, the price they were charged was $19, 495. Approximately ten months after they began participating in the program (sometime in the middle of 2008) Franklin stopped providing its share of the payments and the Heckadons then discovered that they were obligated for the full loan amount and monthly payments of $649.37 per month.

         In December of 2009, the Heckadons filed the Original MMPA Action against Chad and CFS, alleging violation of the MMPA. In May 2011, a jury awarded the Heckadons $647, 421.39, including actual damages, punitive damages, and attorney's fees on their MMPA claim.

         Meanwhile, in October of 2008, Franklin initiated a bad faith lawsuit against Universal, eventually adding Tiffany Franklin, the wife of Chad Franklin, as a plaintiff. The bad faith lawsuit settled for $900, 000 on August 31, 2010. The settlement agreement provided that $250, 000 would go to Fifth Third Bank, a creditor; $383, 629.59 to Monsees, Miller, Mayer, Presley & Amick (the attorneys who prosecuted the bad faith lawsuit for Franklin hereinafter referred to as "Mayer"); and $266, 370.41 to Tiffany Franklin.

         In April 2012, the Heckadons filed their petition in the instant action. In February of 2016, after repeated failures to compel Chad to appear at depositions, a hearing was held on the Heckadons' motion for sanctions. At that hearing, the trial court ordered Chad to appear at the next deposition in both his individual capacity and as the representative of the named entities. Chad again failed to appear at the properly noticed date. At a hearing on March 29, 2016, on the Heckadons' renewed motion for sanctions, Chad's counsel argued that his failure to appear was excusable, because he had entered an out of state drug rehabilitation program and was unreachable by counsel. Noting that Chad had been aware of the ongoing litigation when he entered the program, that he had failed to inform his counsel prior to doing so, and that he had engaged in a pattern of obstruction, the trial court struck the pleadings of Franklin, and entered a default judgment with respect to liability against Franklin on Count III (Fraudulent Transfer); Count IV (Unlawful Merchandising Practice - MMPA); Count V (Civil Conspiracy); and Count VI (Joint Venture/Joint Enterprise).

         By agreement of the parties, a bench trial was held on the equitable garnishment and declaratory judgment counts that addressed Universal's obligation to indemnify the Original MMPA Action judgment. Following that bench trial, the trial court entered judgment against Universal, finding the policy language ambiguous (regarding coverage of intentional acts), construing those ambiguities in favor of coverage, and finding that coverage applied because the policy provided that it would pay damages in "amounts awardable by a court of law."

         On March 30, 2017, the trial court granted a motion for summary judgment filed by Universal, finding that, as a matter of law, Universal was not liable on the Heckadons' claims related to distribution of the bad faith settlement proceeds.

         A jury trial was held on the issue of damages to be assessed against Franklin on the Heckadons' MMPA and Fraudulent Transfer Claims related to the disposition of the bad faith settlement funds. While the Heckadons stipulated that the $250, 000 payment to Fifth Third bank was a lien and clearly proper under Missouri's Uniform Fraudulent Transfer Act (hereinafter "MUFTA"), they maintained that the payments made to Mayer and Tiffany were improper. At trial, Mayer was permitted to testify that his firm represented Chad and Tiffany in a lawsuit against Universal and that Mayer received attorney's fees from the settlement amount. However, the trial court sustained objections to documents supporting Mayer's assertion that his firm possessed a valid lien, and, in the absence of those documents, Mayer was not permitted to testify that his firm complied with the statutory requirements for a lien under MUFTA.

         The jury awarded $647, 334 in actual damages against Franklin, and punitive damages of $500, 000 each against Chad, NAS, and CFS for a total judgment (not including the Heckadons' attorney's fees) of $2, 147, 334 on the Heckadons' fraudulent transfer claim.[8] Final judgment was entered on July 24, 2017. On July 28, 2017, the Heckadons moved the trial court to amend the judgment to include their attorney's fees. On August 21, 2017, Franklin filed a motion requesting that the trial court reduce the award of actual damages by the amount of the attorney's fees paid to Mayer to pursue the bad faith claims against Universal ($383, 629.59). On August 23, 2017, Franklin filed a motion for new trial, alleging, among other things, that the trial court erred in refusing to allow Mayer to testify regarding his attorney fee lien and the reasons why distributions were made to Mayer and Tiffany in the bad faith claims settlement. On October 24, 2017, the trial court entered an amended judgment reducing the actual damages awarded to the Heckadons by the amount of Mayer's attorney's fees, awarding the Heckadons their own attorney's fees, and denying the motion for new trial and all other post-trial motions. The instant appeal and cross appeals followed.

         I. The Court Erred in Entering Judgment Finding Universal Obligated to Indemnify the Original MMPA Action Judgment.

         After conducting a bench trial on Count I (equitable garnishment) and Count II (declaratory judgment) the trial court entered judgment finding that the insurance policy terms were ambiguous, construing them in favor of coverage, and entering judgment against Universal for the sums owed by Franklin in the Original MMPA Action judgment ($647, 421.39). Notably, the trial court made no findings whether the acts of Franklin giving rise to the MMPA Action judgment were intentional, and did not endeavor to discern whether it mattered.

         Universal maintains the trial court was in error (1) in finding that the exclusions in the policy did not apply, (2) in finding that the actions of Franklin constituted an "occurrence" as defined by the policy, and (3) in finding that the term "damages" included punitive damages.

         Because we find no ambiguity in the applicable terms of the policy, because the definition of covered occurrences did not include intentional misconduct, and because Franklins' actions (as alleged by the Heckadons in their claim for punitive damages in the original MMPA Action) were intentional, we find that Universal was not obligated to indemnify the Franklins. We reverse the trial court for the reasons set out below.

         As in any other court-tried matter, we review the trial court's judgment under the standard set forth in Murphy v. Carron, 536 S.W.2d 30 (Mo. banc 1976). Schmitz v. Great Am. Assur. Co., 337 S.W.3d 700, 705 (Mo. App. W.D. 2010). "[W]e will affirm the judgment unless it is against the weight of the evidence, it is not supported by substantial evidence, or it erroneously declares or misapplies the law." Penn-Star Ins. Co. V. Griffey, 306 S.W.3d 591, 596 (Mo. App. W.D. 2010). However, "[t]he interpretation of an insurance policy is a question of law" and as a consequence our review of the language of the contract is essentially de novo. Seeck v. Geico General Ins. Co., 212 S.W.3d 129, 132 (Mo. banc 2007).

         Before beginning our analysis we recognize that "'[i]n general, an insurance policy is a contract to afford protection to an insured and will be interpreted, if reasonably possible, to provide coverage.'" Safeco Ins. Co. Of Am. V. Smith, 318 S.W.3d 196, 199 (Mo. App. W.D. 2010) (quoting Haulers Ins. Co. v. Pounds, 272 S.W.3d 902, 905 (Mo. App. S.D. 2008)). In the process of conducting that review:

It is a longstanding principle that courts "read a contract as a whole and determine the intent of the parties, giving effect to that intent by enforcing the contract as written." In so doing, we give the language in an insurance contract its plain and ordinary meaning. "If, giving the language used its plain and ordinary meaning, the intent of the parties is clear and unambiguous, we cannot resort to rules of construction to interpret the contract."

Peterson v. Discover Prop. & Cas. Ins. Co., 460 S.W.3d 393, 402-03 (Mo. App. W.D. 2015) (internal citations omitted) (quoting Thiemann v. Columbia Pub. Sch. Dist., 338 S.W.3d 835, 840 (Mo. App.W.D. 2011)).

         When evaluating whether a party pursuing a claim of equitable garnishment establishes coverage, "the burden of showing that the loss and damages are covered under the insurance policy is placed on the plaintiff; the burden of showing that there is an applicable exclusion is on the defendant insurer." Am. States Ins. Co. v. Herman C. Kempker Const. Co., 71 S.W.3d 232, 235 (Mo. App. W.D. 2002). See also Fischer v. First Am. Title Ins. Co., 388 S.W.3d 181, 187 (Mo. App. W.D. 2012) ("[T]he insured bears the burden of proving coverage under an insurance policy….").

         In the instant case, the trial court found that coverage was provided under coverage parts 500 and 970 of the 2008 Universal policy which would indemnify Franklin for the Heckadons' judgment in the Original MMPA Action. The policy language, in relevant part, provides coverage for injury as follows:[9]

WE will pay those sums the INSURED legally must pay as DAMAGES because of INJURY to which this insurance applies…caused by an OCCURRENCE arising out of YOUR GARAGE OPERATIONS.…"

         Both coverage parts utilize the same definition of "occurrence" which states, in relevant part:

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.

         The Policy also excludes coverage under both coverage parts, in pertinent part, as follows:

This insurance does not apply to:
B. Dishonest Acts an OCCURRENCE, SUIT or claim arising out of any dishonest, fraudulent or criminal acts committed by any INSURED.
B. Intent to Cause Harm any act committed by or at the direction of the INSURED with intent to cause harm.

         The Heckadons asserted, and the trial court found, that the language of the policy is conflicting and ambiguous. We disagree, as there is nothing facially vague or ambiguous in the policy language. The policy provides coverage for occurrences which it defined as accidents resulting in an injury "neither intended nor expected from the standpoint of a reasonably prudent person." The policy excludes coverage for actions that are dishonest, fraudulent or criminal, or where harm is intended.[10]

         While "accident" is not defined, "[i]t is well-settled Missouri law that when a 'liability policy defines occurrence as meaning accident Missouri courts consider this to mean injury caused by the negligence of the insured.'" Stark Liquidation Co. V. Florists' Mut. Ins. Co., 243 S.W.3d 385, 393 (Mo. App. W.D. 2007) (quoting Wood v. Safeco Ins. Co. of Am., 980 S.W.2d 43, 49 (Mo. App. E.D. 1998). Where the act was intended and the harm expected or intended, coverage does not apply. Am. Family Mut. Ins. Co. v. Franz, 980 S.W.2d 56, 57-58 (Mo. App. W.D. 1998); Cameron Mut. Ins. Co. v. Moll, 50 S.W.3d 329, 332-33 (Mo. App. E.D. 2001).

         In Lewellen v. Universal Underwriters Ins. Co., No. WD 81171, 2019 WL 579635 (Mo. App. W.D. Feb. 13, 2019), reh'g and/or transfer denied (Mar. 26, 2019) (hereafter Lewellen II), [11] in a matter that had been consolidated with the instant action for trial on issue of insurance coverage, we recently addressed an identical policy, found no ambiguity, and addressed covered occurrences as follows:

"The determinative inquiry into whether there was an 'occurrence' or 'accident' is whether the insured foresaw or expected the injury or damages." However, in reviewing the insured's foresight of these injuries we employ an objective standard-whether a reasonably prudent person would foresee this ...

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