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Warrentech Automotive, Inc. v. Heritage Warranty Insurance Risk Retention Group

August 12, 2008

WARRENTECH AUTOMOTIVE, INC., PLAINTIFF,
v.
HERITAGE WARRANTY INSURANCE RISK RETENTION GROUP, INC., DEFENDANT,
v.
WARRENTECH CORPORATION, WARRENTECH AUTOMOTIVE OF FLORIDA, INC., VEMECO, INC., HARRIS G. MILLER AND BUTLER FINANCIAL SOLUTIONS, LLC, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Judge George M. Marovich

MEMORANDUM OPINION AND ORDER

Plaintiff Warrentech Automotive, Inc. ("Warrentech Automotive") filed a complaint against Heritage Warranty Insurance Risk Retention Group, Inc. ("Heritage"). Heritage, in turn, filed counterclaims against Warrentech Automotive. In addition, Heritage filed a third-party complaint against defendants Warrentech Corp., Warrentech Automotive of Florida, Inc. ("Warrentech of Florida"), Vemeco, Inc. ("Vemeco"), Harris G. Miller ("Miller") and Butler Financial Solutions, LLC ("Butler"). Butler, in turn, filed counterclaims against Heritage. This case has been consolidated with case number 07 C 6977, which is also pending before this Court, and the parties agreed to file all of their claims in this case for ease.

Before the Court are five motions to dismiss. For the reasons set forth below, the Court grants Heritage's motion to dismiss Warrentech Automotive's claims. The Court grants in part and denies in part Warrentech Automotive's motion to dismiss Heritage's counterclaims. The Court grants in part and denies in part Warrentech Corp., Warrentech Automotive of Florida and Vemeco's motion to dismiss Heritage's third-party claims. The Court grants in part and denies in part Butler and Miller's motion to dismiss Heritage's third-party claims. The Court grants in part and denies in part Heritage's motion to dismiss Butler's counterclaims.

I. Background

The Court takes as true the allegations in each party's pleadings. Because so many parties have filed claims, not all parties agree on all facts. The Court has taken care to point out facts that are alleged by fewer than all of the parties and bases its rulings on the various motions to dismiss only on the allegations made in the relevant claims.

This case arises out of a series of contracts entered into by the parties. The contracts set out the parties' obligations to one another with respect to the sale of vehicle service contracts to individual car buyers. At bottom, this suit is about who must pay the claims made by individuals who purchased the vehicle service contracts ("VSCs"). A VSC is akin to an extended warranty for an automobile. The automobile-purchaser has the option, when purchasing a car, to enter into an agreement whereby the purchaser pays a premium and the obligor agrees to pay for the cost of certain repairs that become necessary during the time period set out in the VSC.

In this case, the VSCs were developed, marketed and administered by plaintiff Warrentech Automotive and third-party defendants Warrentech Automotive of Florida and Vemeco. Third-party defendant Butler is the obligor on the VSCs. Defendant Heritage insures Butler's obligations under the VSCs.

At least three contracts are relevant to the claims in this case. The first relevant contract is the standard-form VSC itself. The VSC says, among other things, "We will pay or reimburse You for reasonable costs to repair or replace any Breakdown of a part listed under Mechanical Coverage." (Emphasis in original.) The VSC defines "We" or "Our" as Butler Financial Solutions, LLC. The VSCs also say, "Our obligations under this Vehicle Service Contract are insured by a policy issued by Heritage Warranty Mutual Insurance Risk Retention Group, Inc. [address omitted] under a motor Vehicle Service Contract reimbursement policy . . . If a covered claim is not paid within sixty (60) days . . . You may file a claim directly with the Insurance Company. Please call 1-800-543-8801 for instructions."

The second relevant contract is the "Administrative Agreement." In 2001, many of the parties to this case signed an Administrative Agreement. The parties who signed the Administrative Agreement as "WARRENTECH" are Warrentech Automotive, Warrentech Automotive of Florida and Vemeco, which (according to Heritage's counterclaim) are all subsidiaries of Warrentech Corp. Heritage and Butler each signed the Administrative Agreement as "COMPANY".

The Administrative Agreement says, among other things, that "WARRENTECH shall serve as COMPANY's administrator of Vehicle Service Contracts which are provided by COMPANY." The Administrative Agreement says that Warrentech develops, markets and administers VSCs and that COMPANY wants to retain Warrentech to market and administer VSCs for it.

According to the Administrative Agreement, the VSCs are actually sold by car dealers. For each VSC sold, a car dealer remits to WARRENTECH some amount (presumably slightly less than the dealer collected). WARRENTECH, in turn, remits a "premium" to COMPANY. In addition to the premium, WARRENTECH is supposed to pay COMPANY $40 for each VSC.

In turn, WARRENTECH settles all claims made under the VSCs. The Administrative Agreement says that "WARRENTECH shall maintain a COMPANY funded controlled disbursement claim payment bank account at Bank One located in Texas. This account shall be used solely for loss transactions specified under the AGREEMENT between COMPANY and WARRENTECH." COMPANY is to pay WARRENTECH $20 for each claim, according to the Administrative Agreement.

The third relevant contract is an insurance agreement (the "Insurance Policy") that Heritage and Butler signed in December 2001. Under the policy, Heritage and Butler agreed, among other things:

[Heritage] will indemnify [Butler] against Loss, subject to the Loss Reserve Fund provision herein, arising out of the reasonable and customary cost of repair or replacement under and in accordance with all the terms of the Service Contracts issued by [Butler] on or after the inception date of this Policy, as follows:

UPON FAILURE OF [BUTLER] TO PERFORM UNDER THE SERVICE CONTRACTS, HERITAGE WARRANTY MUTUAL INSURANCE RISK RETENTION GROUP, INC., SHALL PAY ON BEHALF OF [BUTLER] ANY SUMS [BUTLER] IS LEGALLY OBLIGATED TO PAY OR SHALL PROVIDE THE SERVICE THAT [BUTLER] IS LEGALLY OBLIGATED TO PERFORM ACCORDING TO [BUTLER'S] CONTRACTUAL OBLIGATION UNDER THE SERVICE CONTRACTS ISSUED BY [BUTLER], And HERITAGE WARRANTY MUTUAL INSURANCE RISK RETENTION GROUP, INC. WILL PAY CLAIMS AGAINST THE INSURED FOR RETURN OF THE UNEARNED PURCHASE PRICE OF THE SERVICE CONTRACT.

Coverage hereunder shall be provided on a claims made basis.

Upon failure of [Butler] to pay or provide service on a valid claim within sixty (60) days after proof of loss has been filed with [Butler], coverage hereunder shall be provided directly to the service contract holder claimant. (Insurance Policy at 1-2) (emphasis in original). The Insurance Policy also says Heritage's liability is limited to the loss in excess of any "Loss Reserve Fund" that "may be established from time to time by the Administrator on behalf of [Butler]". The Insurance Policy also makes it clear that Heritage approved the content of the VSCs. (Insurance Policy at 5 ("It is a condition of this insurance that the Service Contract(s) issued by [Butler] are identical to the specimen copy(s) on file with and approved by [Heritage] and will remain unaltered unless [Heritage] is duly notified of any proposed alteration and written consent to such proposed alteration is given by [Heritage].")).

Things seem to have gone off the rails at some point in 2006 or 2007. The parties do not agree on what went wrong. They agree, however, that some individuals who purchased VSCs and who have valid claims are not being paid. Additional facts relevant to particular claims are outlined below.

II. Standard on a Motion to Dismiss

The Court may dismiss a claim pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure if the plaintiff fails "to state a claim upon which relief can be granted." Fed.R.Civ.P. 12(b)(6). In considering a motion to dismiss, the Court accepts as true all well-pleaded factual allegations and draws all reasonable inferences in the plaintiffs' favor. McCullah v. Gadert, 344 F.3d 655, 657 (7th Cir. 2003). Under the notice-pleading requirements of the Federal Rules of Civil Procedure, a complaint must "give the defendant fair notice of what the . . . claim is and the grounds upon which it rests." Bell Atlantic Corp. v. Twombley, 127 S.Ct. 1955, 1964 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). A complaint need not provide detailed factual allegations, but mere conclusions and a "formulaic recitation of the elements of a cause of action" will not suffice. Bell Atlantic, 127 S.Ct. at 1964-1965. A complaint must include enough factual allegations to "raise a right to relief above a speculative level." Bell Atlantic, 127 S.Ct. at 1965. "After Bell Atlantic, it is no longer sufficient for a complaint 'to avoid foreclosing possible bases for relief; it must actually suggest that the plaintiff has a right to relief, by providing allegations that raise a right to relief above the speculative level.'" Tamayo v. Blagojevich, 526 F.3d 1074, 1084 (7th Cir. 2008) (quoting Equal Employment Opportunity Comm'n v. Concentra Health Services, Inc., 496 F.3d 773, 776 (7th Cir. 2007)).

III. Discussion

Court has jurisdiction over this case because the opposing parties on each claim are diverse. Caterpillar Inc. v. Lewis, 519 U.S. 61, 67 n. 1 (1996). It does not matter that a plaintiff and a third-party defendant are co-citizens, so long as there are no claims between them. Id. Here, Warrentech Automotive (a citizen of Texas and Connecticut) sued Heritage (a citizen of South Carolina). Heritage, in turn, sued third-party defendants Warrentech Corp. (a citizen of Texas and Delaware), Vemeco (a citizen of Texas and Delaware), Warrentech Automotive of Florida (a citizen of Texas and Florida), Butler (a citizen of North Carolina and Delaware) and Miller (a citizen of North Carolina). Heritage is diverse with respect to each third-party defendant. Third-party defendant Butler filed a counterclaim against Heritage, with respect to whom it is diverse. The Court has jurisdiction because all of the opposing parties on each claim are diverse, no defendant is a citizen of Illinois and the amount in controversy is greater than $75,000.00. See 28 U.S.C. §§ 1332, 1441(b).

A. Heritage's Motion to Dismiss Warrentech Automotive's Claims

In its original complaint, Warrentech Automotive asserted nine claims against Heritage. Warrentech alleges that Heritage had promised to obtain reinsurance for its obligations but that by May 2006, Warrentech learned from the reinsurance company that it did not have a policy in effect with Heritage. Warrentech alleges that by December 2006, Heritage told Warrentech that if Butler failed to perform as obligor or if Butler declared bankruptcy, then Heritage would consider Warrentech to be the obligor on the VSCs. By April 2007, according to Warrentech's complaint, Heritage agreed to "resume paying all valid claims" for an interim period, subject to a reservation of rights.

Heritage moves to dismiss four of Warrentech Automotive's claims, including Warrentech Automotive's claims for breach of fiduciary duty, fraudulent misrepresentation, negligent misrepresentation and consumer fraud under the Illinois Consumer Fraud and Deceptive Trade Practices Act.

1. Negligent Misrepresentation

In Count VI, Warrentech Automotive asserted a claim for negligent misrepresentation against Heritage. Warrentech Automotive alleges that when it signed the Administrative Agreement, Heritage promised to reinsure its obligations under the Insurance Policy. Warrentech Automotive further alleges that Heritage reinsured its obligations for a while but ultimately commuted its reinsurance policy. Heritage moves to dismiss Count VI on the grounds that a plaintiff cannot recover in tort for economic losses caused by innocent misrepresentations. Moorman Mfg. Co. v. National ...


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