Who's on First?

Insurer Files Interpleader to Allow Claim Payment to Proper Competing Claims Against Funds

Barry Zalma

Apr 10, 2024

Transcript

PUBLIC POLICY CAN BAN PAYMENT

The Hanover I jury held that:

1. Christopher C. Brown (“Brown”) and Tattooed Millionaire Entertainment, LLC (“TME”) were indistinguishable; and

2. Brown/TME made material misrepresentations with the intent to deceive and committed unlawful insurance acts during the claims process, and thus Hanover was entitled to recover the advance payments made to Brown/TME.

3. The Hanover I jury also held that Falls did not make material misrepresentations or commit unlawful insurance acts, and thus awarded him the maximum amount covered by his policy: $2.5 million in Business Personal Property (“BPP”) and an additional $250,000 in Business Income (“BI”).

After the jury trial concluded, the USDC granted Hanover’s Rule 50(b) motion for judgment notwithstanding the verdict and entered an amended judgment denying Falls’ recovery. The Sixth Circuit, however, reversed the post-trial ruling and remanded with instructions to reinstate the jury verdict as to Falls, which the USDC did.

INTERPLEADER & DECLARATORY RELIEF ACTION

In the current action: “Hanover II,” Hanover filed its Complaint for interpleader and declaratory relief. Hanover claims that the $2.5 million BPP insurance awarded to Falls is subject to multiple competing claims. Hanover’s Declaratory Relief Complaint seeks a declaration that the $2.5 million BPP award is null and void as a matter of Tennessee public policy. It also pleads in the alternative that the Court must resolve the various competing claims to the BPP insurance proceeds and declare to whom, and in what amount, those funds should be paid.

Stipulated to Facts

Prior to trial the Parties stipulated to the following facts during pre-trial conference:

John Falls leased Studio B at the former House of Blues studio located on Rayner Street in Memphis, Tennessee, and the equipment therein from Christopher Brown who owned TME.
Falls obtained insurance from Hanover that included, inter alia, $2.5 million in coverage for BPP and $500,000 in coverage for BI.
Brown/TME had a separate policy that covered, inter alia, the structure of the studio building.
On November 5, 2015, an arson fire occurred at the House of Blues recording studio located on Rayner Street in Memphis, Tennessee, causing substantial damage to the building and the BPP therein.
The evidence presented at the trial of the original action (Hanover I) established that Brown/TME falsified documents and submitted fake invoices, phony receipts, and doctored bank account statements in connection with the insurance claims following the fire.
In the appeal regarding the original action, the Sixth Circuit wrote: “The jury awarded Falls $2,500,000 as the amount of insurance he was owed, up to his policy limit, for Business Personal Property coverage …. The BPP payment covers the loss of the gear in Falls’ studio. However, Brown is the ultimate owner of the lost gear, on which Falls had a perpetually renewable leasehold.”

The public-policy argument, an ancient equity maxim that no one should benefit from his own wrongdoing does not mean that Falls takes nothing of the $2,500,000 BPP award.

The Court’s Previous Rulings

The Court ruled on several Summary Judgment motions and held that claim preclusion prevents Hanover from asserting claims or arguments against Falls regarding his interests in BPP but does not prevent Hanover from pursuing claims and arguments against TME/Brown. The Court also dismissed TME/Brown’s counterclaim for conversion against Hanover.

ANALYSIS

The key determination in this case is whether and what type of interest did Falls have regarding the BPP. As the Sixth Circuit already noted “Falls had a property interest in the ‘gear,’ in the form of his leasehold with unlimited renewal options. Leaseholds have been held to be insurable interests.”

Public Policy Question

Because the jury in Hanover I found Brown/TME to be interchangeable and Brown himself admitted to fraud in connection with Studio B, awarding Brown/TME any of the BPP profits would go against long standing public policy of not benefiting the wrongdoer for his own wrongdoing. Therefore, the Court held that Brown is not entitled to any of the BPP profits.

Summary of Court Findings

The Court found:

1 Hanover is precluded from arguing against Falls’ recovery;
2 Falls’ lease for Studio B and equipment therein did not terminate with the fire;
3 Loss Payable Clause modifies the language of the Schedule in Fall’s insurance contract, requiring Hanover to pay BPP jointly to Falls and Brown/TME as interests may require;
4 Falls is entitled to recover $2,066,217.30 for the destroyed/missing BPP;
5 The decision in the State Court Action is not binding on this Court;
6 Brown/TME are not entitled to recover any part of BPP, as such recovery would violate longstanding Tennessee public policy; and
Intervenor’s claim is moot, given that Brown/TME are unable to recover any of the BPP.

CONCLUSION

The Court ORDERED as follows:

1 Hanover SHALL pay John Falls $2,066,217.30 of the BPP;
2 Hanover SHALL NOT pay or credit the remaining $433,782.70 to Brown/TME; and
3 Intervenors’ claim is DISMISSED WITH PREJUDICE.

ZALMA OPINION

Insurance disputes are often difficult to resolve as established by this case that started with a jury verdict, a judgment notwithstanding the verdict, an appeal reversing the USDC, an interpleader action to determine who was on first and could recover more than $2 million, who shall not recover because of public policy and whether any competing claims could recover anything, and Hanover was able to keep$433,782.70 because no one was entitled to the funds. It took many years to resolve and we can only hope this is the end of a case where an insurer is required to pay an innocent person when the named insured was found to have committed fraud in an arson-for-profit scheme.