Little River Landing LLC v. Allstate Vehicle and Prop. Ins. Co.

Opinion

COURT OF CHANCERY

OF THE

STATE OF DELAWARE

SELENA E. MOLINA Leonard L. Williams Justice Center MASTER IN CHANCERY 500 N. King Street, Suite 11400 Wilmington, Delaware 19801-3734

Final Report: August 31, 2021 Date Submitted: May 24, 2021

Richard E. Berl, Jr., Esquire Arthur D. Kuhl, Esquire Hudson, Jones, Jaywork & Fisher, LLC Reger Rizzo & Darnall LLP Dartmouth Business Center Brandywine Plaza West 34382 Carpenter’s Way, Suite 3 1521 Concord Pike, Suite 305 Lewes, Delaware 19958 Wilmington, DE 19803

Re: Little River Landing LLC v. Allstate Vehicle and Prop. Ins. Co., C.A. No. 2021-0012-SEM

Dear Counsel:

The plaintiff seeks reformation of an insurance policy and related relief. The

plaintiff argues it contracted with an insurance company to insure the plaintiff

against damage to certain real property but, after there was a fire at the property, the

insurer denied the plaintiff’s claim for damages. The plaintiff then learned it was

not the named insured on the written policy. The plaintiff argues it was left off the

written policy due to a mutual mistake and, as such, seeks reformation of the policy.

The insurer moved to dismiss, arguing that the plaintiff failed to state a reasonably

conceivable claim for reformation. For the following reasons, I recommend that the

motion to dismiss be denied. This is my final report.

C.A. No. 2021-0012-SEM August 31, 2021 Page 2

I. Background1

Little River Landing LLC (“Little River”) is a Delaware limited liability

company located in Frederica, Delaware whose sole member is Love A. Mbuntcha

(the “Member”). 2 In April of 2019, Little River purchased real property located at

108 Omni Road in Dover, Delaware (the “Property”). 3 Intending to resell the

Property, Little River obtained “builders risk insurance” from American Zurich

Insurance Company and undertook and completed certain renovations on the

Property.4 The Property was then listed for sale with Olson Realty. 5

Thereafter, Little River decided to replace the “builders risk insurance” policy

with a “more traditional hazard insurance policy.” 6 In October or November of

2019, the Member’s husband was contacted by Helena Haileselassie (the “Agent”),

a representative of Allstate Vehicle and Property Insurance Company (“Allstate”).7

After that initial call, the Agent spoke with the Member and discussed the benefits

1 Unless otherwise noted, the facts recited herein are taken from the Complaint. Docket Item (“D.I.”) 1. 2 D.I. 1 ¶ 1.

3 Id. ¶ 3.

4 Id. ¶ 3.

5 Id. ¶ 4.

6 Id. ¶ 5.

7 Id. ¶¶ 5-6.

C.A. No. 2021-0012-SEM August 31, 2021 Page 3

of bundling coverage of the Property with certain automobiles, the Member’s

personal residence, and another investment property.8 During the discussion, the

Agent viewed photographs of the Property on the Olson Realty website and the

Member explained to the Agent that the Property had been purchased for resale and

was currently vacant.9 Thereafter, Little River believes Allstate sent a representative

to personally inspect the Property and the investment property.10

After the inspection, the Member received a letter from Allstate raising

concerns about insuring the investment property.11 The Member spoke with Michael

Roache, who represented himself as the Agent’s boss and owner of the insurance

agency, and the parties ultimately agreed to remove the automobiles and investment

property from the bundle.12 Allstate agreed to insure the Property and the Member’s

personal residence in exchange for a specified premium. 13 Neither Mr. Roache nor

the Agent asked Little River or the Member to complete an application or sign any

8 Id. ¶ 6.

9 Id. ¶ 7.

10 Id. ¶ 8.

11 Id. ¶ 9.

12 See id. ¶ 9.

13 Id. ¶ 10.

C.A. No. 2021-0012-SEM August 31, 2021 Page 4

documentation related to the policy.14 A written policy was, nonetheless, issued

effective November 5, 2019.15 Unbeknownst to Little River, the written policy

reflects the named insured and owner of the Property as the Member and the

Member’s husband, rather than Little River. 16

On or about February 15, 2020, a fire of undetermined origin occurred at the

Property, damaging the renovated improvement. 17 The Member submitted a claim

to Allstate, which inspected the Property and denied the claim “[s]hortly

thereafter[.]”18 On July 21, 2020, the Delaware Department of Insurance (“DOI”)

confirmed “Allstate had denied the claim because the [P]roperty was vacant at the

time of the fire.”19 The DOI representative also informed the Member that the Agent

was not “a properly licensed agent for Allstate.”20

14 Id. ¶ 11.

15 Id. ¶ 12. Thereafter, monthly premium payments of $197.89 were paid through automatic deductions from the Member’s bank account. Id. 16 Id. ¶ 13.

17 Id. ¶ 15. Little River alleges total damages of $241,900.00. Id. ¶ 19. This reflects the costs for demolition and reconstruction of the improvement on the Property. Id. 18 Id. ¶ 16.

19 Id. ¶ 17.

20 Id.

C.A. No. 2021-0012-SEM August 31, 2021 Page 5

Little River initially sued Allstate in the Delaware Superior Court.21 After

Allstate moved to dismiss, Little River requested leave to transfer the matter to this

Court to pursue reformation, a purely equitable claim. 22 The Superior Court granted

the transfer without ruling on Allstate’s motion to dismiss. 23

On January 7, 2021, Little River filed a Verified Complaint in this Court

pleading six claims: (1) reformation, (2) declaratory judgment, (3) breach of

contract, (4) promissory estoppel, (5) fraud, and (6) breach of the implied covenant

of good faith and fair dealing (the “Complaint”).24 Allstate moved to dismiss the

Complaint under Court of Chancery Rule 12(b)(6), arguing that Little River failed

to state a cognizable claim for reformation (the “Motion”). 25 The Motion was fully

briefed and oral argument was held on May 24, 2021.26

21 Little River Landing LLC v. Allstate Insurance, C.A. No. S20C-09-018 MHC (Del. Super.) (“Superior Court Action”). I find I may take judicial notice of the Superior Court Action. See Aequitas Sols., Inc. v. Anderson, 2012 WL 2903324, at *3 n.17 (Del. Ch. Jun. 25, 2012) (taking judicial notice of a pleading filed in a related action). 22 Superior Court Action D.I. 7.

23 Superior Court Action D.I. 9, 11.

24 D.I. 1.

25 D.I. 4.

26 See D.I. 8, 10, 12.

C.A. No. 2021-0012-SEM August 31, 2021 Page 6

II. Analysis

Allstate seeks dismissal under Court of Chancery Rule 12(b)(6) for failure to

state a claim. Allstate contends (1) Little River is not insured under the policy and

thus has no standing to seek reformation; (2) because the named insured, the

Member, does not have an insurable interest, the policy is unenforceable as a matter

of law and not subject to reformation; and (3) Little River is not seeking merely

reformation but rather a new commercial policy naming a new corporate owner. 27

The standard of review is settled:

(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are “well-pleaded” if they give the opposing party notice of the claim; (iii) the Court must draw all reasonable inferences in favor of the non-moving party; and ([iv]) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof. 28

Allstate’s primary argument for dismissal is standing. Little River bears the

burden of demonstrating it has standing to bring its claims. 29 Delaware courts

27 D.I. 5.

28 Savor, Inc. v. FMR Corp., 812 A.2d 894, 896-97 (Del. 2002) (citations and quotation marks omitted). “[W]here, as here, the issue of standing is so closely related to the merits, a motion to dismiss based on lack of standing is properly considered under Rule 12(b)(6) rather than Rule 12(b)(1).” Appriva S’holder Litig. Co., LLC v. EV3, Inc., 937 A.2d 1275, 1285–86 (Del. 2007). 29 See Dover Hist. Soc. v. City of Dover Planning Com’n, 838 A.2d 1103, 1109 (Del. 2003) (“The party invoking the jurisdiction of a court bears the burden of establishing the elements of standing.”).

C.A. No. 2021-0012-SEM August 31, 2021 Page 7

generally follow the federal standing analysis requiring (1) an injury in fact, (2) that

is causally connected to the challenge action(s), and (3) is redressable by a favorable

decision.30 Standing may also be applied “as a matter of self-restraint to avoid the

rendering of advisory opinions at the behest of parties who are ‘mere

intermeddlers.’” 31 “At the pleading stage, general allegations of injury are sufficient

to withstand a motion to dismiss because it is presume[d] that general allegations

embrace those specific facts that are necessary to support the claim.” 32

Allstate argues that Little River is a mere intermeddler due to the basic

principle that “[n]on-parties to a contract—even third party beneficiaries—lack

standing to seek reformation.”33 But Little River alleges that it did contract with

Allstate, through the Member as its agent, and Little River is not named in the policy

due to a mutual mistake. Under the well-pled facts, Little River has pled a

cognizable claim that it is a party to the policy, not a third-party beneficiary or mere

intermeddler. 34

30 Burkhart v. Genworth Fin., Inc., 250 A.3d 842, 852 (Del. Ch. 2020).

31 Stuart Kingston, Inc. v. Robinson, 596 A.2d 1378, 1382 (Del. 1991).

32 Burkhart v. Genworth Fin., Inc., 250 A.3d at 852 (citations and quotation marks omitted) (alteration in original). 33 In re Pantalone, 2011 WL 6357794, at *2 (Del. Ch. Dec. 9, 2011) (citations omitted).

34 Cf. In re Pantalone, 2011 WL 6357794, at *1-*2 (finding the petitioner did not have standing to seek reformation of a mortgage when he was “not a party to the mortgage or the loan it secured” and he “has no interest in the underlying property”); Gonzalez-

C.A. No. 2021-0012-SEM August 31, 2021 Page 8

Turning to the three factors in the federal standing analysis, I find Little River

has adequately pled an injury to the Property, which it owns, and that injury is

connected to the challenged action—Allstate denying coverage. The issue that gives

me pause is whether the injury is redressable. Allstate argues it is not because the

underlying policy is unenforceable under 18 Del. C. § 2706, which provides: “No

contract of insurance of property . . . shall be enforceable as to the insurance except

for the benefit of persons having an insurable interest in the things insured as at the

time of the loss.”35 Per Allstate, because the named insured on the policy (the

Member) does not have an insurable interest, the policy is not enforceable and it

cannot be reformed. I disagree that this presents a basis on which to dismiss.

Little River has plead a cognizable claim that both parties intended Little

River to be the named insured under the policy and it was through a mutual mistake

that Little River was not so named. If Little River succeeds on this claim, the policy

Rodriquez v. Soto, 2021 WL 1030179, at *5-*6 (Del. Super. Mar. 15, 2021) (finding a former employee did not have standing to reform a contract to which he “was not the contracting party” and for which he “made no decisions regarding the coverage he now wishes to reform”); Harner v. Westfield Ins. Co., 2018 WL 6721765, at *3 (Del. Super. Dec. 12, 2018) (“A policy purchased through a corporation or an LLC is the company’s insurance policy, and the individual conducting the transaction is an agent for the business entity.”) (emphasis in original). 35 18 Del. C. § 2706(a).

C.A. No. 2021-0012-SEM August 31, 2021 Page 9

could be reformed nunc pro tunc to reflect the parties’ shared intent at that time of

contracting.36

Finally, Allstate argues that reformation cannot be used to create “a new

contract with new parties.”37 In theory, I agree. Reformation works to cure an error

that occurred in memorializing the parties’ prior agreement. If the parties did not

agree to insure Little River for damage to the Property, reformation cannot create

such an obligation. But Little River adequately pled that the parties had a prior

understanding and the written policy mistakenly named the Member and the

Member’s husband, instead of Little River. 38

36 See Colvocoresses v. W. S. Wasserman Co., 28 A.2d 588, 589 (Del. Ch. 1942) (“The very purpose of reformation by a Court of Equity is to make an erroneous instrument express correctly the real agreement between the parties[.]). In so holding, I recognize the important policy considerations underlying the insurable interest requirement. See Nationwide Mut. Ins. Co. v. Goerlitz, 2001 WL 845703, at *4 (Del. Super. Jun. 29, 2001) (explaining the policy behind insurable interest requirements, including “to protect against societal waste and to avoid the danger in allowing persons without an insurable interest to purchase insurance, because those persons might then intentionally destroy lives or property”) (citations omitted). But, here, Little River has pled a cognizable claim that Little River was the owner of the Property and the intended insured. If there was such a mutual mistake, reformation may cure. But, if Little River cannot prove this mistake and prior understanding by clear and convincing evidence, the reformation claim would fail on the merits. Cf. In re TIBCO Software Inc. S’holders Litig., 2015 WL 6155894, at *13 (Del. Ch. Oct. 20, 2015). 37 D.I. 10 p.3.

38 See, e.g., D.I. 1 ¶¶ 21-23, 29.

C.A. No. 2021-0012-SEM August 31, 2021 Page 10

Viewing the factual averments in Little River’s favor, I find Little River has

pled a reasonably conceivable claim for reformation. To prevail on its reformation

claim, Little River will ultimately need to demonstrate, through clear and convincing

evidence, “the parties came to a specific prior understanding that differed materially

from the written agreement.” 39 Time—and further fact finding—will tell if the

written policy should be reformed; at this stage, Little River’s claims should survive.

III. Conclusion

For the foregoing reasons, I find that Little River has pled a reasonably

conceivable claim for reformation. Whether Little River will ultimately succeed

remains to be seen. I recommend the Motion be denied. This is my final report in

this matter and exceptions may be filed under Court of Chancery Rule 144.

Respectfully,

/s/ Selena E. Molina

Master in Chancery

39 Cerberus Intern., Ltd. v. Apollo Mgmt., L.P., 794 A.2d 1141, 1152 (Del. 2002).