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Municipal Revenue Service, Inc. v. Houston Casualty Co.

United States District Court, W.D. Pennsylvania

March 5, 2014

HOUSTON CASUALTY COMPANY, a foreign corporation, Defendant.


MAURICE B. COHILL, Jr., Senior District Judge.

Pending before the Court is Houston Casualty Company's ("HCC") Motion to Dismiss [ECF No. 8] pursuant to Rule 12 of the Federal Rules of Civil Procedure. In its Motion to Dismiss, HCC asserts that it did not breach its insurance contract with Municipal Revenue Service, Inc. and Charles L. Herron (individually "MRS" and "Herron", respectively, and collectively "Plaintiffs"), because the Professional Liability Errors & Omissions Insurance Policy (the "Policy") at issue did not insure against the alleged wrongful acts that were the subject of a lawsuit filed against the Plaintiffs [ECF No. 8 at 2]. HCC asserts the underlying dispute was over business transactions that were not performed in the course of "Professional Services" to clients.

On June 5, 2013, Plaintiffs MRS and its officer and agent Herron, filed a Complaint in Civil Action [ECF No. 1] seeking compensatory and punitive damages, plus costs of suit, interest and attorneys' fees, for wrongful denial of a defense and indemnity for an underlying lawsuit against MRS and Herron. The Complaint alleges Count I, Breach of Insurance Contract, and Count II, Bad Faith and Violation of 42 Pa.C.S.A. § 8371 [ECF No. 1].

On July 11, 2013, HCC filed its Motion to Dismiss and supporting Brief [ECF Nos. 8 and 9], claiming the acts of the Plaintiffs at issue in the underlying litigation were excluded from coverage under the Insurance Policy. Therefore, the lawsuit should be dismissed because no coverage, no duty to defend, and no indemnity obligation were available to Plaintiffs as a matter oflaw. As would logically follow, with no duty imposed on HCC by way of the Insurance Policy, any claim of bad faith must fail as a matter of law as well. On August 12, 2013, MRS and Herron filed their Brief in Opposition to HCC's Motion to Dismiss [ECF No. 10] contesting HCC's characterization of the underlying case and alleging that, indeed, there was a duty imposed on HCC, under the contract, to defend and indemnify Plaintiffs. For the reasons set forth below, Defendant's Motion to Dismiss will be denied.

I. Standard of Review.

In ruling on a Rule 12(b)(6) Motion for Failure to State a Claim upon which Relief can be Granted, a court must "accept all factual allegations as true, construe the complaint in the light most favorable to the plaintiff, and determine whether, under any reasonable reading of the complaint, the plaintiff may be entitled to relief.'" Phillips v. County of Allegheny , 515 F.3d 224, 233 (3d Cir. 2008) (quoting Pinker v. Roche Holdings Ltd. , 292 F.3d 361, 374 n. 7 (3d Cir. 2002)); (see also Bell Atlantic Corp. v. Twombly , 550 U.S. 544, 563, n.8 (2007)). A valid complaint requires only "a short and plain statement of the claim showing that the pleader is entitled to relief." Fed.R.Civ.P. 8(a)(2). Rule 8 "demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation." Ashcroft v. Iqbal , 556 U.S. 662, 678 (2009) (citing Twombly , 550 U.S. at 555).

"To survive a motion to dismiss a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face.'" Iqbal , 556 U.S. at 678 (quoting Twombly , 550 U.S. at 570). "A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Id . at 678 (citing Twombly , 550 U.S. at 556). "Factual allegations [of a complaint] must be enough to raise a right to relief above the speculative level." Twombly , 550 U.S. at 555. "This [standard] does not impose a probability requirement at the pleading stage, ' but instead simply calls for enough facts to raise a reasonable expectation that discovery will reveal evidence of the necessary element." Phillips , 515 F.3d at 234 (quoting Twombly , 550 U.S. at 556). Thus, "a plaintiff's obligation to provide the' grounds' of his entitle[ment] to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do." Twombly , 550 U.S. at 555 (citation omitted).

The Supreme Court in Iqbal explained that although a court must accept as true all of the factual allegations contained in a complaint, that requirement does not apply to legal conclusions; therefore, pleadings must include factual allegations to support the legal claims asserted. See 556 U.S. at 678. "Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements do not suffice." Id . (citing Twombly , 550 U.S. at 555); see also Phillips , 515 F.3d at 232 ("We caution that without some factual allegation in the complaint, a claimant cannot satisfy the requirement that he or she provide not only fair notice, ' but also the grounds' on which the claim rests.") (citing Twombly , 550 U.S. at 555 n. 3 (2007)). Accordingly, to survive a motion to dismiss, a plaintiff must plead "factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged." Iqbal , 556 U.S. at 678.

Finally, if the court decides to grant a motion to dismiss for failure to state a claim upon which relief can be granted pursuant to Fed.R.Civ.P. 12(b)(6), the court must next decide whether leave to amend the complaint must be granted. As explained in Phillips, "We have instructed that if a complaint is vulnerable to 12(b)(6) dismissal, a district court must permit a curative amendment, unless an amendment would be inequitable or futile." 515 F.3d 236 (citing Grayson v. Mayview State Hosp. , 293 F.3d 103, 108 (3d Cir.2002)).

II. Relevant Facts.

Municipal Revenue Service, Inc. and Charles L. Herron, as well as William R. Balaban, Pamela Herron, and the law firm of Stevens & Lee were defendants ("Defendants") in a case filed by Elliott Greenleaf & Siedzikowski, P.C. ("EGS") in the United States District Court for the Eastern District of Pennsylvania in February of 2012 [ECF No. 9 at 1]. EGS sought equitable relief to enjoin Defendants' on-going criminal, civil and fiduciary misconduct, and to protect its, and its clients', confidential, proprietary, and trade secret information. EGS also sought compensatory and punitive damages, attorneys' fees and costs. [See EGS Complaint ECF No. 1, Exhibit B]. The facts of the underlying case were that EGS represented public entities in the purchase of tax liens and worked throughout the year to prepare for tax lien sales closings. Herron and others contacted the taxing entities and advised them of the need to pass new resolutions [ECF No. 9 at 3]. This paved the way for Herron and Balaban to replace the original purchaser with a purchaser controlled by Herron, all as part of an alleged scheme to move business from EGS to Balaban's new firm [ECF No. 9 at 3]. Herron was also accused of having secretly stolen and transferred the files from EGS to a remote internet location where it could be accessed by Herron without the permission of EGS [ECF No. 9 at 4].

In February of 2012 EGS sued the Defendants alleging a total of six (6) counts. The alleged counts were: Count I - Violations of Computer Fraud and Abuse Act (Defendants Balaban and Herron Defendants); Count II - Violations of 18 Pa.C.S. 5741 (Wiretap Act)(All Defendants); Count III ¶ Violation of Pennsylvania Trade Secrets Act (All Defendants); Count IV - Conversion (All Defendants); Count VI - Tortious Interference with Present and Prospective Business Relationships (All Defendants); and Count VIII - Civil Conspiracy and Aiding and Abetting (All Defendants). MRS was not named as a Defendant in the EGS Amended Complaint [ECF No. 9 at 5]. MRS was added in a Second Amended Complaint filed by EGS [ECF No. 9 at 5]. This litigation is now concluded [ECF No. 9 at 1].

MRS and Herron promptly notified HCC of the EGS lawsuit [ECF No. 10 at 5]. MRS and Herron requested that HCC defend and indemnify them in accordance with the terms of a Professional Liability Errors & Omissions Insurance Policy [ECF No. 10 at 5]. HCC is the insurer of the Policy and the insured is "Chuck Herron CPA and Municipal Revenue Services, Inc." [ECF ...

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