Eleventh Circuit Limits Court’s Consideration of Motion to Dismiss To the Complaint

In Twin City Fire Insurance Co. v. Hartman, Simons & Wood, LLP, 2015 U.S. App. LEXIS 6092 (11th Cir. Apr. 15, 2015), the U.S Court of Appeals for the Eleventh Circuit reversed a lower court ruling and held that a professional liability insurer was not barred from recovering some, or all, of a $10 million settlement it paid on behalf of its insured due to the affirmative defenses of waiver and voluntary payment. Twin City Fire Insurance Company (Twin City) issued two consecutive professional liability insurance policies to Hartman, Simons & Wood, LLP (HSW), one for the December 31, 2008 to December 31, 2009 policy period and the other for the December 31, 2009 to December 31, 2010 policy period. Each of the policies had a limit of $10 million. In 2010, HSW was involved a real estate and contractual guaranty transaction that went awry. In particular, certain actions taken by HSW allegedly had the inadvertent effect of releasing several entities from a plethora of monetary obligations they owed to the Bank of North Georgia, HSW’s client. The bank was then sued in state court by those entities that sought a declaration confirming the release of their obligations to the bank. The bank subsequently demanded indemnification from HSW for any losses they might incur in the state court action. Nearly three years later, in 2013, the bank offered to settle its malpractice claims against HSW for $10 million. Twin City paid the settlement to the bank pursuant to a reservation of rights to recover amounts attributable to uncovered claims. Twin City quickly filed an action seeking a declaration that it had no coverage obligations under the insurance policies, and that it was entitled to recoup some or all of the payment from the settlement. HSW moved to dismiss the complaint, arguing: “(1) Twin City failed to properly reserve its right to seek recoupment and that right therefore had been waived; (2) Twin City’s settlement with the Bank was a ‘voluntary payment’; and (3) Twin City had no contractual right to seek allocation or recoupment of the settlement payment.” The district court agreed with HSW, and dismissed Twin City’s complaint. The district court opined that Twin City had waived its right to allocation and recoupment by failing to reserve its rights before agreeing to pay the policy limits. Alternatively, the concluded that Georgia’s voluntary payment doctrine required the dismissal of the complaint. Twin City appealed. The Eleventh Circuit reversed and remanded the case. It rejected the contention that Twin City waived its rights by failing to reserve them until nearly three years after Twin City allegedly became aware of the bank’s claim against HSW. The Court noted that the lower court’s ruling necessarily rested on a factual determination that Twin City had not tried to reserve its rights prior to doing so when it paid the $10 million settlement amount in April 2013, and further, that HSW was prejudiced as a result of Twin City’s delay in reserving its rights. Put otherwise, the district court had wrongly made these factual inferences at the motion to dismiss stage. The court similarly held that the district court’s reliance on the voluntary payment doctrine at the motion to dismiss stage was improper. The voluntary payment doctrine was another affirmative defense that could only justify a complaint’s dismissal under a Rule 12(b)(6) motion if the complaint shows on its face that the defense applies. Instead, in applying the defense, the district court wrongfully relied on factual findings that had “no mooring in the bare face of the complaint.”

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