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Archway Insurance Services, LLC; Union One Insurance Group, LLC v. James Harris; Gregory Harris; Harris Consulting Services

June 15, 2011

ARCHWAY INSURANCE SERVICES, LLC; UNION ONE INSURANCE GROUP, LLC;
NEVADA INVESTMENT PARTNERS, LLC; AND
TRINITY CAPITAL MANAGEMENT GROUP, LLC,
PLAINTIFFS,
v.
JAMES HARRIS; GREGORY HARRIS; HARRIS CONSULTING SERVICES, INC.; BANK OF COMMERCE AND TRUST; GARDEN CITY STATE BANK;
PEABODY STATE BANK; KENDELL STATE BANK; FIRST UNITED BANK AND TRUST;
KELLY DROUILLARD; AND QUIVIRA CAPITAL, LLC, DEFENDANTS.



The opinion of the court was delivered by: DuBOIS, J.

MEMORANDUM

I. INTRODUCTION

This case arises out of a loan a group of Pennsylvania investment firms obtained from a Kansas lender and used to fund a Nevada insurance business. When the insurance business foundered, litigation followed. In this action, the investment firms bring an array of claims against both the successors to the lender and the principals of the insurance business. In a series of five motions presently before the Court, all defendants have moved to dismiss the Complaint and/or transfer this action in whole or in part to other venues. For the reasons that follow, the Court severs Counts I and II from Counts IV, V, VI, and VII;*fn1 transfers Counts I and II to the District of Nevada; and transfers Counts IV, V, VI and VII to the District of Kansas. In view of that disposition, the Court does not rule on the motions to dismiss.

II. BACKGROUND

A. The Parties

The plaintiffs are four Pennsylvania investment firms: Archway Insurance Services ("Archway"), Union One Insurance Group ("Union One"), Nevada Investment Partners ("NIP") and Trinity Capital Management Group ("Trinity"). They brought this action against James Harris and his son, Gregory Harris (collectively "the Harrises"), as well as a consulting business the Harrises run, Harris Consulting, Inc. ("Harris Consulting"). The Harrises live in Nevada, and Harris Consulting is a Nevada-based company. The Harrises and Harris Consulting will be referred to collectively as "the Harris Defendants" at times in this Memorandum.

Plaintiffs also asserted claims against five banks ("the Banks") they claim are the successors in interest to the institution, Brooke Credit Corporation ("Brooke"), that financed the loan at the center of this case and the individual, Kelly Drouillard, who negotiated the terms of the loan on behalf of Brooke. Also named as a defendant is Quivira Capital, LLC ("Quivira"), which plaintiffs allege is an alias name for a successor to Brooke. Drouillard is a Kansas resident. Four of the five banks are located in Kansas; the fifth is located in Maryland. Quivira is based in Kansas. The Banks, Drouillard and Quivira will be referred to collectively as "the Bank Defendants" at times in this Memorandum.

B. The Loans

The Harrises are insurance brokers in Las Vegas, Nevada. Before 2005, both worked at an insurance company named Brown & Brown. (Compl. ¶ 21.) That year, Gregory Harris left Brown & Brown and formed his own insurance company, The Harris Agency, LLC ("THA") (Id. ¶ 22.) The individual principals of Archway, Union One and Trinity formed a new company, NIP, to fund THA and establish an insurance presence in Las Vegas. (Id. ¶ 23.)

Two years later, James Harris also left Brown & Brown and joined his son at THA. (Id. ¶ 25.) James Harris, however, had a non-competition agreement with Brown & Brown. (Id.) Brown & Brown filed suit against the Harrises and THA in Nevada state court, alleging, inter alia, that the diversion of James Harris's "book of business" -- his portfolio of insurance clients -- from Brown & Brown to THA violated the terms of the non-competition agreement. (Id.)

To settle the Nevada state court litigation, the plaintiffs in the instant action*fn2 offered to fund the Harrises' purchase of the book of business from Brown & Brown. (Id. ¶ 26.) The parties entered into these settlement negotiations in Nevada. As part of the negotiations, James Harris produced reports that showed the annual revenue of his book of business was $3.2 million. (Id. ¶ 27.) Thereafter, plaintiffs sought a loan to fund the purchase. (Agnew Aff. ¶ 6.) Toward that end, they initiated negotiations with Drouillard, who worked for Brooke, a Kansas-based lender. (Compl. ¶ 34; Agnew Aff. ¶ 12.) Brooke eventually agreed to lend the plaintiffs $5.25 million, a little less than 1.7 times the annual value of the book of business. (Compl. ¶ 28).

Plaintiffs and Brooke agreed that the loan would be paid in three installments: 50 percent shortly after the agreement was executed, 25 percent in January 2008 and the final 25 percent in October 2008. (Id. ¶ 34.) In September 2007, Brooke notified plaintiffs that, as an additional requirement of the loan, plaintiffs would have to pay $36,625, ostensibly to fund a mandatory "credit" insurance policy to secure the loan in case of default. (Id. ¶ 37.)

Plaintiffs accepted the terms of the loan and entered into an Account Acquisition Agreement ("the Agreement") with Brooke on October 16, 2007. (Id. ¶ 39.) The Agreement included a forum selection clause that reads as follows:

At Lender's option, jurisdiction and venue for any dispute arising under or in relation to this Agreement will lie only in Phillips County, Kansas or a U.S. District Court having jurisdiction over Phillips County, Kansas. (Banks' Mot. to Dismiss or Transfer, Ex. A ¶ 16.)

Two days later, the Harrises and THA entered into a Settlement Agreement and Mutual Release of Claims ("Settlement Agreement") with Brown & Brown. (Compl. ¶ 33.) Under the terms of the Settlement Agreement, the Harrises and THA acquired James Harris's book of business from Brown & Brown for $5.25 million. (Id.)

Once the agreements were signed, the Harrises created budgets for THA, and plaintiffs funded the operations of THA in accordance with those budgets. (Id. ¶ 40-41.) Plaintiffs also loaned $25,000 to Diane Curry, an employee hired by the Harrises, to help her acquire a new home. (Id. ¶ 42.) The Harrises pledged to repay the loan if Curry failed to do so. (Id. ¶ 43.)

C. The Fallout

In January 2008, the entire operation began to unravel. Brooke notified plaintiffs that it would not pay the second installment under the loan agreement unless it received "personal guarantees" from principals of the plaintiffs. (Id. ¶ 46 at 11.)*fn3 As a result of this alleged breach of the Agreement, plaintiffs were forced to borrow $1,312,500 -- the amount of the second installment -- from M&T Bank ("M&T"). (Id. ¶ 49 at 11.) The Harrises guaranteed plaintiffs that they would repay the value of the M&T loan. (Id. ¶ 48 at 11.)

Even with the M&T loan secured, the Harrises' insurance business struggled. THA could not generate sufficient income to sustain itself or repay the loans obtained for the acquisition of James Harris's book of business. (Id. ¶ 45 at 12.) Plaintiffs learned in October 2008 that James Harris's book of business had been worth substantially less than he had represented. (Id. ¶ 44 at 12.)

A raft of litigation ensued. In January 2009, THA filed for bankruptcy in the Eastern District of Pennsylvania. (Id. ¶ 46 at 12.) The bankruptcy proceedings resulted in the sale of the assets of THA to Gregory Harris for $2 million. See In re The Harris Agency, LLC, No. 09-10384 (Bankr. E.D. Pa. Jan 5, 2011) (order approving asset sale to Gregory Harris).

Also in 2009, the Banks sued Union One -- one of the plaintiffs in this action -- in the Eastern District of Pennsylvania for, inter alia, breach of contract related to the loan from Brooke. See Complaint, Kendall State Bank v. Union One Ins. Grp., LLC (hereinafter "Kendall I"), No. 09-494 (E.D. Pa. Feb. 4, 2009). The Banks also sought a preliminary injunction to force Union One under the management of a consultant, in accord with a contractual provision requiring oversight when the value of Union One's assets decreased. See Motion to Place Matter on Active Docket and for Preliminary Injunction to Enforce Agreement to Appoint Management Consultant and Prevent Dissipation of Collateral, Kendall I, No. 09-494 (E.D. Pa. June 10, 2010). The judge in that case denied the motion for preliminary injunction, see Kendall I, No. 09-494 (E.D. Pa. June 23, 2010) (order denying motion for preliminary injunction), and the case was dismissed voluntarily without prejudice. See Notice of Dismissal, Kendall I, No 09-494 (E.D. Pa. Dec. 27, 2010).

On October 29, 2010, plaintiffs instituted the instant action. The claims involved are described below. Two weeks later, all of the Bank Defendants filed a separate action in the District of Kansas against three of the four plaintiffs in the action before this Court (all except Trinity). See Complaint, Kendall State Bank v. Archway Ins. Servs., LLC (hereinafter "Kendall II"), No. 10-2617 (D. Kan. Nov. 12, 2010). The Complaint in the Kansas action alleged causes of action sounding in breach of contract and replevin, as well as a request for a declaratory judgment that the Banks are not liable as successors in interest to Brooke. Kendall II is still pending in Kansas.

D. The Present Action

In the instant action, plaintiffs allege the following claims:

* Count I: Fraud against the Harrises for misrepresenting the value of their business contacts

* Count II: Breach of contract against the Harrises for failure to honor their agreements to guarantee the loan to ...


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