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Catlin Specialty Insurance Co. v. CBL & Associates Properties, Inc.

Superior Court of Delaware

September 20, 2017

CATLIN SPECIALTY INSURANCE COMPANY, Plaintiff,
v.
CBL & ASSOCIATES PROPERTIES, INC., CBL & ASSOCIATES LIMITED PARTNERSHIP, CBL & ASSOCIATES MANAGEMENT, INC., and JG GULF COAST TOWN CENTER, LLC, Defendants.

          Submitted: June 20, 2017

         Upon Defendants CBL & Associates Properties, Inc., CBL & Associates Limited Partnership, CBL & Associates Management, Inc., and JG Gulf Coast Town Center, LLP's Motion for Judgment on the Pleadings, DENIED.

         Upon Plaintiff Catlin Specialty Insurance Company's Motion for Judgment on the Pleadings, GRANTED.

          Emily K. Silverstein, Esquire, Marks, O'Neill, O'Brien, Doherty & Kelly P.C., Wilmington, Delaware, Louis H. Kozloff, Esquire (pro hac vice) (argued), Goldberg Segalla LLP, Philadelphia, Pennsylvania, Attorneys for Plaintiff.

          John A. Sensing, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Alan E. Popkin, Esquire (pro hac vice), David W. Sobelman, Esquire (pro hac vice), Melissa Z. Baris, Esquire (pro hac vice), Husch Blackwell LLP, St. Louis, Missouri, Attorneys for Defendant.

          MEMORANDUM OPINION AND ORDER

          PAUL R. WALLACE, JUDGE.

         I. INTRODUCTION

         Plaintiff Catlin Specialty Insurance Company ("Catlin") and Defendants CBL & Associates Properties, Inc., CBL & Associates Limited Partnership, CBL & Associates Management, Inc. (collectively, "CBL Defendants"), and JG Gulf Coast Town Center, LLC ("GCTC") each ask this Court to enter a declaratory judgment outlining the rights and obligations of an insurance policy between Catlin and CBL Defendants in connection with claims asserted against CBL Defendants by Wave Lengths Hair Salon of Florida, Inc. d/b/a Salon Adrian ("Salon Adrian"). Salon Adrian's claims against CBL Defendants are currently pending in the United States District Court for the Middle District of Florida ("Underlying Action").[1] Salon Adrian's lawsuit against the CBL Defendants and GCTC arises out of those defendants' allegedly fraudulent scheme devised to purposefully and fraudulently overcharge Salon Adrian (and many others) for electricity.

         Following the filing of that suit, CBL Defendants and GCTC sought Catlin's insurance coverage for the Underlying Action, pursuant to a policy in effect from December 31, 2015 until December 31, 2016 (the "Catlin Policy").[2] In this action, Catlin argues that each and every claim in the Underlying Action is based upon Defendants' allegedly intentional, knowing, and wrongful conduct.[3] And so, Catlin argues: its policy does not cover such claims; it has no duty to defend CBL Defendants in the Underlying Action; and it has no obligation to pay any defense costs or damages incurred by the litigation. CBL Defendants and GCTC counter that they are entitled to Catlin's insurance coverage because the Underlying Action involves alleged negligent acts, errors, or omissions in the rendering of professional services-something explicitly covered by the Catlin Policy.[4]

         Before the Court are each side's cross-motions for Judgment on the Pleadings.[5] Each asks for declaratory judgment that there either is or is not coverage under the Catlin Policy.

         II. FACTUAL AND PROCEDURAL BACKGROUND

         Plaintiff Catlin is a Delaware corporation with its principal place of business in Atlanta, Georgia.[6] Defendant CBL & Associates Properties, Inc., is a Delaware corporation with its principal place of business in Chattanooga, Tennessee.[7] Defendant CBL & Associates Limited Partnership is a limited partnership organized under the laws of Delaware, with its principal place of business in Chattanooga, Tennessee.[8] CBL & Associates Management, Inc., is a Delaware corporation with its principal place of business in Chattanooga, Tennessee.[9] Defendant GCTC is a limited liability company organized under the laws of Ohio, with its principal place of business in Chattanooga, Tennessee.[10]

         A. THE UNDERLYING FLORIDA ACTION GIVES RISE TO THIS DELAWARE LITIGATION.

         On March 16, 2016, on behalf of itself and all others similarly situated, Salon Adrian filed suit against "CBL & Associates, Inc." alleging that company had "executed a fraudulent scheme through a criminal enterprise to overcharge small business tenants for electricity at its shopping malls" resulting in "fraudulent and illegal markups [that] exceeded 100% of the tenant's actual electricity usage charges."[11] On July 1, 2016, Salon Adrian amended the complaint, naming CBL Defendants and GCTC.[12]

         Underlying Plaintiff Salon Adrian is an upscale salon located in the GCTC, a shopping mall in Fort Myers, Florida.[13] In 2006, Salon Adrian executed a ten-year lease with JG Gulf Coast, the owner of GCTC, [14] with CBL Management signing as JG Gulf Coast's agent.[15] One lease provision concerned billing for utilities.[16] Section 2.5 of the Lease stated:

Tenant shall pay promptly, as and when the same become due and payable, all water rents, rates and charges, all sewer rents and all charges for electricity, gas, heat, steam, hot and/or chilled water, air conditioning, ventilating, lighting systems, and other utilities supplied to the Leased Premises. If any such utilities are not separately metered or assessed or are only partially separately metered or associated and are used in common with other tenants in the Shopping Center, Tenant will pay to Landlord a proportionate share of such charges in addition to Tenant's payments of the separately metered charges. Landlord may install registering meters and collect any and all charges aforesaid from Tenant, making returns to the proper utility company or government unit, provided that Tenant shall not be charged more than the rates it would be charged for same services if furnished directly to the Leased Premises by the Local Utility Company, as hereinafter defined.[17]

         As expected, Salon Adrian began receiving electricity invoices.[18] Its energy bills averaged $500-$600 per month.[19] Sometimes, though, the bills would range from $600-$700 per month, far higher than Salon Adrian paid at another location it operated.[20] In response, Salon Adrian began to "tak[e] on additional debt to purchase state of the art high efficiency lightbulbs and other products."[21] It also upgraded to energy-efficient appliances.[22] Nothing helped. Salon Adrian's bills continued to average $600 per month.[23]

         Concurrently, CBL Defendants had a contract with non-party Valquest, an energy audit company.[24] Valquest provided CBL Defendants and its tenants with energy surveys. According to Salon Adrian, the surveys project energy costs or substantiate CBL Defendants' billed energy costs.[25] Salon Adrian says the CBL Defendants directed Valquest to inflate its electricity costs in its projections or audits and that CBL Defendants reaped the profits.[26]

         In 2009, Salon Adrian complained to CBL Defendants about Salon Adrian's rising electricity costs.[27] In May of that year, Valquest performed an energy audit for Salon Adrian at CBL Defendants' request in order to justify its electricity charges.[28] Salon Adrian contends that the audit results are inflated.[29]

         In September 2015, Wells Fargo sued JG Gulf Coast for defaulting on its mortgage loan.[30] Wells Fargo assumed ownership of GCTC and hired new management.[31] The new operator performed its own electrical usage audit.[32] It informed Salon Adrian that Salon Adrian's energy charge would be reduced to $269.00/month, less than half the $600-$700 Salon Adrian had normally been charged.[33]

         Once Salon Adrian confirmed its previous suspicions that it had been paying allegedly inflated electricity prices for about a decade, it filed the Underlying Action. In it, Salon Adrian suggests that CBL Defendants' conduct occurred nationwide, and seeks to certify several groups of classes.[34]

         Salon Adrian alleges six causes of action against the CBL Defendants. First, Salon Adrian contends CBL Defendants violated the Racketeer Influenced and Corrupt Organizations ("RICO") Act.[35] Second, it alleges CBL Defendants are unjustly enriched by receiving inflated payments for electricity from tenants nationwide. Third, it alleges CBL Defendants violated Florida's Deceptive and Unfair Trade Practices Act ("FDUTPA").[36] Fourth, it alleges CBL Defendants violated Florida's Civil Remedies for Criminal Practices Act.[37] Fifth, it alleges that JG Gulf Coast breached its contract by charging inflated electricity rates. Last, it alleges that JG Gulf Coast breached the implied covenant of good faith and fair dealing.

         B. CBL DEFENDANTS DEMAND CATLIN DEFEND THEM IN THE UNDERLYING ACTION.

         Catlin issued a Contractor's Protective, Professional, and Pollution Liability Insurance Policy, No. CPL-680077-1216, to CBL & Associates Properties, Inc. as the Named Insured, with a policy period of December 31, 2015-December 31, 2016.[38] CBL Defendants tendered the Underlying Action to Catlin for coverage.[39]Catlin agreed to defend CBL Defendants under a full reservation of rights, including the right to seek a declaratory judgment that it has no duty to defend or indemnify CBL Defendants.[40] Not surprisingly, Catlin is now seeking such a declaration.

         In July 2016, Catlin filed its complaint. In it, Catlin makes three claims. Its first two claims seek declarations that it does not have to cover CBL Defendants and JG Gulf Coast. Its third claim is an unjust enrichment claim.[41] Catlin alleges that its defense of CBL Defendants in the Underlying Action unjustly enriches CBL Defendants at Catlin's expense.

         III. CHOICE OF LAW

         A. THE PARTIES' CHOICES OF LAW.

         The parties disagree on the law that should govern this action. Catlin says Tennessee law applies, while CBL Defendants argue for Florida law.

         Catlin is headquartered in Tennessee. The insurance policy was delivered to CBL Defendants in Tennessee.[42] And CBL Defendants are headquartered in Tennessee.[43] Invoking Delaware's choice-of-law rules, Catlin suggests that the location of the insured's headquarters is an important factor. Catlin notes that Salon Adrian has filed a proposed class action. If that class is certified, then CBL Defendants may face claims nationwide. It would be sensible for the Court to apply Tennessee law to these claims, as Catlin provides nationwide coverage and may be subject to nationwide claims.[44]

         On the other hand, CBL Defendants argue for Florida law. CBL Defendants assert that this is an isolated claim; thus, the location of the insured's covered activities should is most important.[45] And, no class has yet been certified. So, CBL Defendants currently only face liability in Florida for claims arising under Florida law.

         B. DELAWARE CHOICE-OF-LAW RULES.

         Delaware applies its own choice-of-law rules as the forum state.[46] The Court must consider facts in accordance with the most significant relationship test.[47] That test is set forth in the Restatement (Second) of Conflict of Laws Section 188.[48]Section 188 provides:

(1)The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in [Restatement (Second) of Conflict of Laws] § 6.
(2) In the absence of an effective choice of law by the parties (see § 187), the contacts to be taken into account in applying the principles of § 6 to determine the law applicable to an issue include:
(a) the place of contracting,
(b)the place of negotiation of the contract,
(c)the place of performance,
(d)the location of the subject matter of the contract, and
(e)the domicil[e], residence, nationality, place of incorporation and place of business of the parties.
These contacts are to be evaluated according to their relative importance with respect to the particular issue.[49]

         Section 188's comment e states the location of the contract's subject matter is an important factor when the contract deals with a specific physical thing, such as land or a chattel, or affords protection against a localized risk. "The state where the thing or the risk is located will have a natural interest in transactions affecting it."[50]

         Section 6 of the Restatement (Second) of Conflict of Laws enumerates the following factors:

[T]he factors relevant to the choice of the applicable rule of law include
(a) the needs of the interstate and international systems,
(b)the relevant policies of the forum,
(c)the relevant policies of other interested states and the relative interests of those states in the determination of the particular issue,
(d)the protection of justified expectations,
(e)the basic policies underlying the particular field of law,
(f)certainty, predictability and uniformity of result, and
(g)ease in the determination and application of the law to be applied.[51]

         Section 193 of the Restatement (Second) of Conflict of Laws provides:

The validity of a contract of fire, surety or casualty insurance and the rights created thereby are determined by the local law of the state which the parties understood was to be the principal location of the insured risk during the term of the policy, unless with respect to the particular issue, some other state has a more significant relationship under the principles stated in § 6 to the transaction and the parties, in which event the local law of the other state will be applied.[52]

         Where a claim under an insurance policy involves nationwide risk, the Restatement recognizes that Section 193 assumes less significance because there is no single, principal location of the insured risk. And it would be impractical to apply the law of multiple states to a claim under one insurance policy covering multiple locations.[53]

         In complex insurance cases with risks in multiple states such as this one, Delaware courts have generally held that the most significant factor for the conflict-of-laws analysis is the principal place of business of the insured because it is ...


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