JON P. McCALLA, District Judge.
Before the Court is Plaintiff Hanover American Insurance Company ("Hanover")'s Application for Temporary Restraining Order, Preliminary Injunction and Constructive Trust, filed November 14, 2016. (ECF No. 29.) On November 22, 2016, the Court in part denied the Temporary Restraining Order. (ECF No. 41.) Following limited discovery and further briefing by the parties, on December 7, 2016, the Court entered an Order Concerning Assets of Defendant Christopher C. Brown Prior to Preliminary Injunction Determination, ordering that Defendant Brown's $1.2 million home not be encumbered or sold until the Court rules on Hanover's Application for Preliminary Injunction. (ECF No. 58.)
The Court held a Preliminary Injunction Hearing on January 6, 2017. (Min. Entry, ECF No. 74.) At the hearing, Hanover requested that the Court extend its Order (ECF No. 58) and order that Brown's home not be encumbered or sold until all proceedings in the instant case are concluded. For the reasons stated below, the Court GRANTS Hanover's Motion for Preliminary Injunction, and ORDERS that Defendant Brown refrain from selling or otherwise encumbering his $1.2 million home until resolution of this case or with leave of the Court. Hanover shall post a $400,000.00 security bond.
Hanover's Complaint, which was filed on October 14, 2016, alleges that Defendants Tattooed Millionaire Entertainment LLC, and its owner Christopher C. Brown, along with Defendants Daniel C. Mott and John Falls, committed insurance fraud in connection with a November 5, 2015 fire that damaged a recording studio and its contends in Memphis, TN. (
Defendant Christopher Caleb Brown formed Defendant Tattooed Millionaire Entertainment LLC ("TME"), a music production company, in 2014, as the sole owner and member. (ECF No. 1 ¶ V;
On February 5, 2015, TME submitted a Commercial Insurance Application to Hanover. (Id. ¶ X; ECF No. 68 at PageID 1835.) The application requested Building Coverage, Business Personal Property, and Business Income, for coverage in total amount of $10.75 million. (
Before securing this insurance, Brown asserts that he purchased millions of dollars' worth of studio equipment and gear. (ECF No. 61-1 at PageID 998: 12-25.) According to Brown, Michael Sargenti is one seller Brown used "over the last few years" to make these purchases. (
On November 5, 2015, an arson fire occurred at the insured premises, causing substantial damage to the building and studio property therein (e.g., equipment). (ECF No. 1 ¶ XVII.) In addition to the fire, Defendants allege that local gang members started the fire and stole equipment. (
On November 10, 2015, Coastal Technical Services ("CTS") was hired by Hanover to inspect the fire damaged studio and studio equipment that was there. (ECF No. 61-16 at PageIDs 1340-41.) TME "also engaged CTS to perform moving, packing and storage of the remaining [equipment] . . . [,which] included shipping some of the equipment . . . to Orlando, Florida." (
Following the fire, Brown understood that he would need to substantiate any claims of loss to Hanover with documentation. (ECF No. 61-1 at PageIDs 1017:15-25, 1018:1-7.) Brown then contacted Sargenti, telling "[Sargenti] to give [him] a copy of gear that [he] had purchased from [Sargenti]" over the years. (
After Sargenti sent these documents by postal mail, Brown gave the falsified documents to his public adjuster, Keith Hayman, who tendered them to Hanover for a claim of loss. (ECF No. 61-1 at PageIDs 1015:14-25; 1037:1-19.) Hayman provided these documents to Hanover in December 2015. (
Hanover's adjuster Barkman then "made initial advance payments to the defendants on February 24, 2016." (ECF No. 72-1 at PageID 2318.) Hanover specifically paid Defendants Brown and TME $1,208,898.49 for building coverage and $1,096,265.68 for business personal property coverage. (ECF No. 1 at PageID 12.)
Thereafter, it came to Hanover's attention that the documents it received were falsified, leading Hanover to file the current cause of action to recover benefit payments paid and to void the policy.
On October 14, 2016, Hanover filed its Complaint. (
A TRO hearing was held on November 22, 2016. (Min Entry, ECF No. 39.) The Court denied the TRO in part for lack of adequate factual development. (ECF No. 41.) Accordingly, the Court permitted the parties to conduct limited discovery before deciding the issue of a preliminary injunction. (
On December 7, 2016, the Court held an in-person Scheduling Conference. (Min. Entry, ECF No. 54.) At the conference, the Court granted Hanover leave to amend its complaint to (1) add the public adjusting firm as a party, and (2) clarify its claims against Defendants Mott and Falls, and if it did so, the Court noted that the Motions to Dismiss for Failure to State a Claim would be rendered moot. (ECF No. 57.) Also on December 7, 2016, the Court entered an Order Concerning Assets of Defendant Christopher C. Brown Prior to Preliminary Injunction Determination, ordering that Brown's $1.2 million home not be encumbered in any way or sold until the Court has ruled on Hanover's Application for Preliminary Injunction. (ECF No. 58.)
On December 19, 2016, Hanover filed its Amended Complaint. (ECF No. 60.) On December 22, 2016, Hanover filed its Memorandum in Support of its TRO and Preliminary Injunction application. (ECF No. 61.) Defendants filed responses in opposition on December 30, 2016. (ECF Nos. 64-65.) On December 30, 2016, Hanover also responded to Defendants' Motions to Dismiss for Failure to State a Claim. (ECF Nos. 62-63.)
On January 3, 2017, Defendants filed their answers to Hanover's Amended Complaint. (ECF Nos. 68-69.) Defendants Falls and Mott also filed counterclaims against Hanover. (ECF No. 70.) So did TME. (ECF No. 68.)
On January 5, 2017, Defendants Falls and Mott filed forty-one affidavits by witnesses purporting to have seen equipment inside the recording studio at issue at various time prior to the 2015 fire. (ECF No. 71.) That same day, Hanover filed several affidavits in further support of its Motion for Preliminary Injunction. (ECF No. 72.) Hanover also filed a Notice that it was no long seeking injunctive relief against Defendants Mott and Falls. (ECF No. 73.)
A Preliminary Injunction hearing was held on January 6, 2017. (Min. Entry, ECF No. 74.) At the hearing, Hanover amended its request for injunctive relief. Hanover now requests that the Court extend its December 7, 2016 Order, forbidding Defendant Brown from selling or otherwise encumbering his $1.2 million home without first notifying the parties and Court, until the resolution of this case.
"The purpose of a preliminary injunction is merely to preserve the relative positions of the parties until a trial on the merits can be held."
Four factors are used to determine whether injunctive relief is appropriate: (1) the likelihood of success on the merits; (2) whether the injunction will save the movant from irreparable injury; (3) whether the injunction would cause substantial harm to others; and (4) whether the public interest would be served by the injunction.
"The Court may issue a preliminary injunction or a temporary restraining order only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained." Fed. R. Civ. P. 65(c). While the Sixth Circuit has stated a district court "errs when it fails to expressly consider the question of requiring a bond when the issue has been raised," it has also found that a court has no mandatory duty to impose a bond as a condition for issuance of injunctive relief.
Hanover asserts that there is a high likelihood of its success on the merits because Defendants clearly "acted with intent to deceive" and "to fraudulently induce Hanover to make insurance payments on claims that were fabricated and for losses [that] were not actually incurred." (ECF No. 61 at PageID 972.) Hanover contends that "[w]hen an insured lies about the existence, value, or acquisition of property in a claim to an insurer, the insured has made a material, willful misrepresentation with an intent to deceive and the entire policy is voided." (
(
Defendants TME and Brown assert that it does not matter whether or not they submitted false documents concerning the purchase of the covered equipment for two reasons. First, Defendants assert that under Tennessee law, an insurance provider may not sue based on misrepresentations to void a policy for equipment so long as the equipment existed; and here Defendants contend the equipment existed. (ECF No. 65 at PageID 1681 (citing
Although lacking the proper nomenclature, the Court construes Hanover's Complaint; Application for Temporary Restraining Order, Preliminary Injunction and Constructive Trust; and Brief in Support as requesting restitution, recovery for payments made due to fraud, and rescission of the insurance policy ("Policy"). The Court therefore addresses Hanover's likelihood of success on the merits on these claims in turn.
In Tennessee, insurance companies may sue to recover benefit payments made due to mistake or fraud.
In the instant case, Hanover's complaint alleges fraud and misrepresentation as bases for recovery. Although not exactly textually consistent with the applicable law in Tennessee, Hanover's assertions, if proved, could allow recovery, because insurance benefits paid because of fraud are recoverable.
In Tennessee, to succeed in an action for fraudulent misrepresentation, the plaintiff must show: (1) the defendant made a representation of an existing or past fact; (2) the representation was false when made; (3) the representation was in regard to a material fact; (4) the false representation was made either knowingly or without belief in its truth or recklessly; (5) the plaintiff reasonably relied on the misrepresented material fact; and (6) plaintiff suffered damage as a result of the misrepresentation.
In the instant case, Defendant Brown admitted during his deposition that he knew the documentation he supplied to Hanover prior to Hanover's initial payment was falsified:
(ECF No. 61-1 at PageID 990:6-13.)
(ECF No. 61-1 at PageID 991:8-17.)
(ECF No. 61-1 at PageIDs 999:25-1000:1-5.)
(ECF No. 61-1 at PageIDs 1015:3-21, 1016:5-8.)
Hanover's Executive General Adjuster Gary A. Barkman avers that he "specifically relied on the [Defendants' initial] sworn proofs of loss [he received on December 31, 2015] as well as the authenticity of the invoice[s] . . . and [] purported Bank of America [wire transfers]. . . . It was represented to [him] by the defendants and their agent that these documents were authentic, true documents." (ECF No. 72-1 at PageID 2318.) Barkman goes on to state that "[h]ad [he] known prior to February 24, 2016 that any one of those documents were fake, [he] would not have made any payments whatsoever on the defendants' claims." (
In light of the evidence, the Court finds that elements 1, 2, 4, 5, and 6 are satisfied.
In Tennessee, a fact is material if "a reasonable [person] would attach importance to its existence or nonexistence in determining his [or her] choice of action in the transaction in question. . . ."
Defendants contend that the admittedly falsified documents were not material to Hanover's decision to tender its initial payment. To support this argument, Defendants explain that although the documents misrepresent where Brown purchased the equipment and the price Brown paid, the documents properly represent what equipment was in the studio at the time of the fire. (ECF No. 65 at PageID 1681 (citing
Defendants ask the Court to find that the admittedly falsified documents, which were created by an untraceable source, accurately represent the equipment present in Defendants' studio at the time of the fire. The same untraceable source that created the falsified documents was also the source asserted to have sold the equipment to Defendant Brown for cash. Accordingly, no other proof of purchase or receipt exists as to these items. This untraceable story lacks credible indicia of reliability.
These facts contrast with those in the chief case Defendants rely on,
In the instant case, the Court finds that a reasonable person would have attached importance to the validity of the documents Hanover received in determining whether the equipment existed. As determined in
Having found the elements of fraudulent misrepresentation satisfied, the Court concludes that Hanover is likely to succeed on the merits on its restitution claim to recover benefit payments made due to Defendants' fraud.
Hanover also argues it is likely to succeed on the merits for its claim that Defendants' post-loss misrepresentations rescind the Policy between the parties. (ECF No. 61 at PageIDs 962-72.) Defendants contend the Policy is not void because the misrepresentations were immaterial. (ECF No. 65 at PageID 1681.)
In Tennessee, voiding or rescinding an insurance policy after a loss occurs is "in the nature of a penalty or forfeiture" and in such a case, "a strict construction should be adopted, and the forfeiture not be enforced except on the plainest grounds, if at all."
For the same reasons Hanover is likely to succeed on its restitution claim, the Court finds Hanover is likely to succeed on its rescission claim. Brown admitted that he submitted falsified documents to Hanover in an effort to substantiate a claim. As set out above, the Court finds that these falsified documents misrepresent a material fact: whether all the items listed in the falsified documents existed. Of the approximately 760 equipment items listed in the falsified documents, supplemental evidence suggests that approximately 260 items existed prior to the fire. To date, Defendants have not accounted for nearly 500 items listed in the falsified documents. For these reasons, the Court finds Hanover is likely to succeed on its rescission claim.
Thus, for the reasons stated above, the Court finds that Hanover is likely to succeed on the merits under its restitution and rescission claims. Accordingly, the Court finds this factor weighs in favor of granting injunctive relief for Hanover.
As a threshold matter, Defendants contend that this Court may not freeze Defendant Brown's assets through a preliminary injunction because Hanover seeks monetary damages. In support of this proposition, Defendants cite the Supreme Court's decision in
In
This caveat distinguishes
The Court finds that because Hanover seeks rescission of the policy and restitution of the initial partial payments, Hanover's interests may be maintained in equity, especially where the present circumstances—admitted misrepresentations, untraceable dealings, questionable existence of insured property, and Defendants' limited assets—make a legal remedy inadequate. The Court therefore finds that, in this case, it has authority to prevent Defendant Brown from selling or otherwise encumbering his $1.2 million home.
The Court next turns to whether Hanover will suffer irreparable harm without the requested preliminary injunction. Hanover asserts it will suffer irreparable harm because it is unlikely that Defendants will have adequate funds to pay Hanover damages when the Court resolves this case. (ECF No. 61 at PageID 972.) Although irreparable harm is not typically found where monetary damages are sought, Hanover contends that in specific cases where there is a high likelihood that money would be unavailable to pay the damages suffered by the moving party, there is irreparable harm. (ECF No. 61 at PageID 972 (citing
Generally, "[a] plaintiff's harm from the denial of a preliminary injunction is irreparable if it is not fully compensable by monetary damages."
In the instant case, the Court finds that it is unlikely that Defendants Brown or TME will have funds available to pay damages when the case resolves. Hanover asserts that it is entitled to the entire benefit, $2.3 million, it paid after Defendants submitted the falsified documents. The evidence before the Court fails to provide any assurance that either Brown or TME will have available funds at the resolution of this case, allowing a victory for Hanover that is meaningful. Brown testified that he did not know the current amount of money in his bank accounts. (ECF No. 61-1 at PageID 1025:20-25, PageID 1026:1-8, PageID 1045:18-25.) Brown also testified that prior to the fire he would have large amounts of cash on his person. (
The above facts fail to demonstrate that either Defendants Brown or TME is likely to have sufficient assets to pay damages at the resolution of this case. Thus, the Court finds that Hanover's restitution and rescission claims require an equitable remedy so that Hanover may have a meaningful victory. Without this relief, the Court finds Hanover would suffer irreparable harm. The Court therefore finds this factor weighs in favor of granting Hanover's injunctive relief.
Hanover initially requested "injunctive relief seek[ing] to restrain the defendants from further alienating the funds obtained from Hanover. . . ." (ECF No. 61 at PageID 974.) At the January 6, 2017 motion hearing, however, Hanover amended and limited its requested relief, seeking only to extend the Court's December 7, 2016 Order—restricting the encumbrance or sale of Defendant Brown's $1.2 million home—until the Court resolves the case. At the hearing, Defendant Brown's counsel indicated that, although Brown currently lives in the $1.2 million house, he wishes to sell it.
At this time, the Court finds that restricting Brown's sale or encumbrance of the $1.2 million home in which he currently resides pending the resolution of this case, will not cause him substantial harm. At most, Brown may be inconvenienced with continued up-keep of the house, a cost Brown would have incurred in any event until the house sold. The Court does not find that such up-keep amounts to substantial harm. Thus, the Court finds this factor weighs in favor of granting Hanover's injunctive relief.
Hanover asserts that "[t]he public interest is promoted if the defendants are prevented from depleting the monies that the defendants fraudulently obtained from Hanover." (ECF No. 61 at PageID 975.) Defendants counter that public interest favors denying injunctive relief because it sets "a horrific precedent" that "if you are an insured to whom your insurance company makes partial payments, which payments are undisputedly not based on any wrongful acts committed by you, you nevertheless must not spend the proceeds until the insurance company says it is okay." (ECF No. 65 at PageID 1690.) The Court agrees with Hanover and finds that Defendants misconstrue the facts.
The Court first addresses Defendants' statement that Hanover made its initial payments to Defendants before receiving the admittedly falsified documentation. The evidence is to the contrary. Hanover has provided both affidavits and electronic mail that either directly state and/or strongly suggest it received the falsified documents and sworn proof of loss prior to evaluating the Defendants' claims and prior to making its initial partial payments to Defendants in February and March of 2016. (
Having found that Hanover made its initial payments after receiving the falsified documents, the Court finds that the public interest supports enjoining Defendants from depleting funds secured by fraudulent misrepresentations. The Court therefore finds that preventing Brown from selling or encumbering his $1.2 million home pending the resolution of this case is supported by public interest.
In sum, the Court finds that each of the preliminary injunction factors supports the requested injunctive relief. Accordingly, the Court turns to the issue of security bond.
As stated above, "[t]he Court may issue a preliminary injunction or a temporary restraining order only if the movant gives security in an amount that the court considers proper to pay the costs and damages sustained by any party found to have been wrongfully enjoined or restrained." Fed. R. Civ. P. 65(c). The amount of an injunction bond is within the sound discretion of the district court.
At the January 6, 2017 motion hearing, the parties opined as to the appropriate security bond for the requested injunctive relief. Defendants requested a bond between $800,000.00 and $1.2 million, whereas Hanover requested a $120,000.00 bond.
The Court determines that a $400,000.00 security bond is appropriate in this case. The Court finds that, in light of evidence that approximately 260 pieces of equipment existed at the time of the fire, a $400,000.00 security bond is proper to pay the costs and damages sustained by Brown, if he is found to have been wrongfully enjoined or restrained.
For the reasons stated above, the Court GRANTS Hanover's Motion for Preliminary Injunction. Defendant Brown is hereby ENJOINED from selling or otherwise encumbering his $1.2 million home until resolution of this case or with leave of the Court. Hanover shall post a $400,000.00 security bond. Upon the posting of the bond, this injunction shall be RECORDED as to the applicable property located at 1668 Pisgah Road, Cordova, Tennessee (ECF No. 61 at PageID 973) with the Shelby County Register of Deeds.
The Court calculated the existence of the approximate 260 pieces of equipment by adding the items listed in Table 1 (reparable items), Table 2 (items not worth restoring), and Table 3 (undamaged items). (ECF No. 61-16 at PageIDs 1341-42, 1354-61.)
