                    NOT RECOMMENDED FOR FULL-TEXT PUBLICATION
                               File Name: 13a0405n.06

                                              No. 11-4416                                 FILED
                                                                                       Apr 24, 2013
                              UNITED STATES COURT OF APPEALS                     DEBORAH S. HUNT, Clerk
                                   FOR THE SIXTH CIRCUIT


MPDS MEMPHIS LTD., dba Emerald Overlook                     )
Apartments,                                                 )
                                                            )        ON APPEAL FROM THE
           Plaintiff-Appellant,                             )        UNITED STATES DISTRICT
                                                            )        COURT FOR THE
v.                                                          )        NORTHERN DISTRICT OF
                                                            )        OHIO
STATE FARM               FIRE     AND     CASUALTY          )
COMPANY,                                                    )                 OPINION
                                                            )
           Defendant-Appellee.                              )


BEFORE: NORRIS, GIBBONS, and DONALD, Circuit Judges.

           ALAN E. NORRIS, Circuit Judge. Plaintiff MPDS Memphis, Ltd. (“MPDS Memphis”)

owns an apartment complex in Cleveland and called Emerald Oaks Apartments (“the Property”).

MPDS Memphis bought an insurance policy from defendant State Farm Fire and Casualty Company

(“State Farm”), which covered both property damage and lost income. On February 29, 2008,

Cleveland suffered a major snow storm during which the Property’s roof collapsed, causing

extensive damage to the building. After much back and forth, State Farm paid MPDS Memphis a

total of $1,088,877.87 for losses covered by the policy.

           Despite this payment, MPDS Memphis and its property manager, Windsor Realty and

Management, Inc.,1 believed that they were entitled to more money and therefore filed suit in the

Cuyahoga County Court of Common Pleas. The complaint alleged breach of contract, breach of the

     1
         Windsor Realty was dismissed below by stipulation and is not party to this appeal.
No. 11-4416
MPDS Memphis Ltd. v. State Farm Fire and Casualty Co.

covenant of good faith, breach of fiduciary duty, negligent misrepresentation, and simple negligence.

State Farm removed the matter to federal court based upon diversity jurisdiction. Thereafter, the

district court granted summary judgment to State Farm on all claims.

                                                   I.

        Cleveland averages nearly sixty inches of snowfall a year. Unfortunately, on February 29,

2008, eighteen inches fell on the city, including on the flat roof of the Property, which collapsed.

According to the declaration of Michael Priore, a fifty-percent owner and managing member of

MPDS Memphis, twenty of the apartments on the upper two floors suffered water damage. In the

end, thirty-seven units were rendered uninhabitable. The Property consists of two buildings: the one

that suffered damage has seventy-two units; the other, forty-eight. MPDS Memphis acquired the

Property in 1999 and replaced the roof at that time. As part of a routine maintenance program, the

roof was aluminum-coated every two years. The last time this occurred was in 2006.

        MPDS Memphis purchased its policy from State Farm in 2004. Before issuing its policy,

State Farm inspected the Property, noting that “[b]oth apartment buildings show excellent

maintenance and upkeep.”

        Among other things, the policy covers losses caused by the “weight of snow, ice or sleet.”

However, it excludes damage “directly or immediately” caused by “deterioration, hidden or latent

defect or any quality in property [sic] that causes it to damage or destroy itself.” With respect to loss

of income, the policy covers “actual loss” for a period of twelve months.

        According to Priore, he contacted his State Farm agent as soon as he learned that the roof was

failing. In response, on March 4, adjusters Kim Clouse and Donna Frederick met Priore at the

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Property. According to Priore, the only way onto the roof was through a hatch accessible by ladder.

He climbed onto the roof but Clouse merely “stuck her head out of the opening and looked at the

roof.” In her declaration, Clouse states that “I . . . observed that the underlying roof sheathing was

rotted in several areas where the ceilings had collapsed.” She explained to Priore that “damage for

rot, deterioration, and mold would not be covered under the Policy.” She followed up that

determination with a letter, dated March 6, denying coverage with reference to that policy provision.

       On March 6, a contractor employed by MPDS Memphis contacted Clouse regarding

emergency repairs. The policy provides for such coverage. In a letter dated March 10, Clouse

reiterated that she did not believe that the policy would cover any damages and denied emergency

coverage. She conceded that “the weather conditions did not allow a thorough inspection to be

completed” but promised that she would reassess the situation “when weather permits.”

       Priore instructed his contractor to lay an emergency tarp over the roof to prevent further water

damage. The contractor also pulled down some leaking ceilings, covered appliances, and attempted

to dry out the floors. The bill for this effort was $50,000. State Farm initially denied coverage but

later paid $18,000 towards it.

       On April 8, Clouse re-inspected the roof and, according to her, “observed that there was no

indication of storm-related damage, missing or blown off roofing materials, or holes in the roof from

debris.” She continued to deny coverage.

       On May 28, 2008, MPDS Memphis faxed Clouse a report prepared by Craig Cohen, an

engineering expert it had retained. The report concluded that heavy snow and ice caused damage

to the roof. After speaking on the telephone with Cohen, Clouse decided that State Farm should hire

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MPDS Memphis Ltd. v. State Farm Fire and Casualty Co.

its own engineering consultant and retained O.C.A. Consultants. A report was then prepared by

engineer Carl Kieffer. The report, dated July 19, concluded that “accumulation of ice and snow on

this roof probably caused an abnormally high level of standing water on this roof,” which leaked into

the building at several areas of flashing. However, “[t]he weight of ice, snow, and water on the roof

joists and supporting walls was not a factor in these roof leaks.” The parties agreed to jointly hire

a roof consultant, Rooftec, Inc. Its report, dated September 24, stated that “the ice storm caused the

existing damage and leaking being experienced with the roof system.” Despite this unequivocal

statement, State Farm requested a supplemental report from Rooftec, which confirmed its earlier

determination.

       Finally, on October 8, Clouse “informed MPDS Memphis that State Farm agreed to pay for

a full roof replacement and all necessary interior repairs.” State Farm issued a check for $190,000

on November 25, 2008. According to Priore, because of these delays and the oncoming winter, the

roof was not replaced until April or May 2009.

       The interior repairs followed the roof replacement. State Farm paid MPDS Memphis

$209,848.34 for internal repairs on March 9, 2009. According to Clouse, MPDS Memphis objected

that this amount was short by $20,000. Priore denies that he gave her any such figure. He recalls

telling Clouse that the amount was “grossly inadequate.” In April 2009, Priore hired an insurance

adjusting firm to evaluate interior damages. Its representative, Larry Sheldon, calculated a cost of

$686,163.06, which was submitted to State Farm on July 9, 2009.

       State Farm hired its own contractor. Jim Mitchell, who had replaced Clouse as the point

person for State Farm, reported that his contractor had assessed the job and, based upon that

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MPDS Memphis Ltd. v. State Farm Fire and Casualty Co.

assessment, State Farm would approve payment of $604,145.23 for interior damages. Meanwhile,

according to Priore, long-term tenants began to leave the Property and the overall occupancy rate was

dropping. For that reason, Priore agreed to the amount offered “as long as State Farm would hold

open some additional items that could be submitted once repairs were completed.” In the end, State

Farm paid an additional $12,199.68 in March 2011 for further repairs. The total amount paid for

building repairs, less deductions, amounted to $825,257.87.

       As mentioned earlier, the policy also provided coverage for lost income. MPDS Memphis

concedes that State Farm paid full lost income coverage for the twelve-month period covered by the

Policy. Because repairs took more than twelve months to complete, however, Priore asked that State

Farm pay for lost income until all repairs were completed. On March 14, 2011, State Farm paid

$131,073.09 for additional lost income. Ultimately, State Farm paid MPDS Memphis $263,650 for

lost income.

                                                 II.

       On appeal, MPDS Memphis contends that the district court erroneously granted summary

judgment on its counts for breach of contract and breach of the covenant of good faith.

       In reviewing these assignments of error, we apply a de novo standard of review. Henderson

v. Walled Lake Consol. Sch. Dist., 469 F.3d 479, 486 (6th Cir. 2006). Summary judgment is

appropriate “if the movant shows that there is no genuine dispute as to any material fact and the

movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Moreover, we view the

evidence in the light most favorable to the non-moving party and draw all reasonable inferences its

favor. Henderson, 469 F.3d at 487.

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MPDS Memphis Ltd. v. State Farm Fire and Casualty Co.

A. Breach of the Covenant of Good Faith

        MPDS Memphis contends that State Farm breached its duty to act in good faith towards its

insured.

        As the district court correctly noted, “an insurer has the duty to act in good faith in the

handling and payment of the claims of its insured. A breach of this duty will give rise to a cause of

action against the insurer.” Hoskins v. Aetna Life Ins. Co., 452 N.E.2d 1315 (Ohio 1983) (syllabus).

However, “the mere fact that an insurer refuses to settle within the policy limits is not, in itself,

conclusive of the insurer’s bad faith and does not give rise to tort liability. In order to recover for

the excess liability, the insured has the burden to show that the refusal to settle was not made in good

faith.” Id. at 1320. Even a negligent determination to deny a claim is not enough to establish bad

faith. Klein v. State Farm Fire & Cas. Co., 250 F. App’x 150, 156-57 (6th Cir. 2007) (citing Hart

v. Republic Mut. Ins. Co., 87 N.E.2d 347, 349 (Ohio 1949)). If an insurer can establish that it acted

with “reasonable justification,” there is no bad faith. Zoppo v. Homestead Ins. Co., 644 N.E.2d 397,

400 (Ohio 1994).

        Applying this standard, the district court concluded that State Farm acted with reasonable

justification in delaying payment under the terms of the policy. Among other things, State Farm sent

an adjuster to the Property within days and, while her inspection was limited, she observed

deterioration and rot to the roof. The following month, she inspected the roof again and confirmed

that “the roof was soft from deterioration and there was no indication of storm-related damage.”

        In support of its decision, the district court looked to Klein, supra, for guidance. In Klein,

the insured made a claim on his homeowner’s policy after his roof was damaged by hail. As in the

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instant case, the adjustor was unable to make a thorough inspection of the roof due to weather

conditions. Nonetheless, he concluded that hail had not damaged the roof and denied coverage. We

affirmed summary judgment for State Farm on plaintiff’s claim of bad faith. In reaching this

decision, we reasoned that State Farm’s reliance upon its adjustor constituted, at most, bad judgment

and “mere negligence, or bad judgment does not amount to a claim for bad faith against an insurer.”

Klein, 250 F. App’x at 157. There are obvious parallels between Klein and the instant case. In

both, State Farm initially relied upon its claim representative.2 Here, however, State Farm went

beyond reliance on its adjustor by hiring its own consultant and then jointly paying for a third

analysis. As the district court recognized, “State Farm reasonably relied on sufficient evidence that

the roof was not covered, and when presented with sufficient evidence that the roof was covered,

agreed to pay.” Likewise, it reasonably delayed payment for interior damage until the roof was

repaired and two bids for the repairs had been received.

       After our own independent review of the record, we agree with the district court’s conclusion

that State Farm is entitled to summary judgment on MPDS Memphis’s breach of the covenant of

good faith claim.

B. Breach of Contract

       In Ohio, a breach of contract claim includes the following elements: “the existence of a

contract, performance by the plaintiff, breach by the defendant, and damage or loss to the plaintiff.”

Doner v. Snapp, 649 N.E.2d 42, 44 (Ohio Ct. App. 1994) (citing 2 Ohio Jury Instructions (1993)).


   2
    Whether or not the claims representative made an accurate assessment of the cause of the
roof collapse is ultimately of little significance in analysis of the good faith issue.

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No. 11-4416
MPDS Memphis Ltd. v. State Farm Fire and Casualty Co.

       The district court concluded that MPDS Memphis failed to fully perform and did not raise

a genuine issue of material fact concerning State Farm’s alleged breach of contract. While the

court’s opinion provides a detailed analysis of the bad faith claim raised by MPDS Memphis, its

discussion of the breach of contract claim fails to address with any specificity the claims advanced

by MPDS Memphis for additional, unpaid compensation due under the policy. The court simply

observes, “Defendant paid significant sums for loss of income and physical damage as per the

contract. Therefore, Plaintiffs have failed to establish a breach of contract.” (Page ID 1294). It is

true that State Farm has paid out a significant sum–$1,088,877.87–under the terms of the policy; that

fact does not, however, preclude further recovery. Because the reasoning of the district court on the

issue of breach of contract is inadequate to enable meaningful appellate review, we are obliged to

remand for further development of the breach of contract claim.

       Before remanding, we address two concerns. The first involves the district court’s

conclusion that MPDS Memphis did not fully perform under the contract because it did not timely

provide documentation to support its claim for lost income. First, as MPDS Memphis concedes,

under the policy it was entitled to compensation for lost income only for the first year after the loss

was incurred. Generously, State Farm continued to pay compensation for lost income beyond that

time because repairs had been delayed. Logically, one cannot fail to fully perform when the duty lies

outside the terms of the contract, as it did here. Regardless, MPDS Memphis has conceded that it

no longer makes any claim for lost income. Plaintiff brief at 57. Hence, the alleged dilatory

response of MPDS Memphis to requests for records related to lost income does not preclude

consideration of the breach of contract claim.

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MPDS Memphis Ltd. v. State Farm Fire and Casualty Co.

        With respect to that claim, State Farm notes that MPDS Memphis accepted $604,145.23 for

interior property damage and “it is undisputed that MPDS Memphis accepted this amount as full

compensation for the interior property repairs.” State Farm brief at 53. This assertion misrepresents

the record. Mr. Priore stated, “I agreed to Mitchell’s proposal of $604,145.23, as long as State Farm

would hold open some additional items that could be submitted once repairs were completed.”

(Page ID 960) (emphasis added). As for the citation to Mr. Sheldon’s deposition, which State Farm

cites for the same proposition, it no more supports State Farm’s position than does Mr. Priore’s

declaration. (Page ID 415).

        In its reply brief to this court and during oral argument, State Farm contends that MPDS

Memphis failed to raise its claims for additional damages below. However, we note that MPDS

Memphis made several claims in its memorandum in opposition to summary judgment, which

included additional compensation related to interior damage, amounts for unpaid emergency repairs,

and supervisory construction costs. Docket #45 (Page ID 937). Plaintiff also raised claims for

consequential damages: the cost of retaining Mr. Sheldon’s firm, attorney’s fees, and expenses

incurred as the result of a loan default, to name a few. These claims, whether ultimately viable or

not, are supported by exhibits, such as Mr. Priore’s sworn declaration and Mr. Sheldon’s deposition

testimony, that arguably raise genuine issues of material fact with respect to these contractual claims.

        On remand, we anticipate that the district court will revisit the question of summary judgment

with respect to breach of contract. We do not hold here that reconsideration is precluded. We

simply find that the record is sufficiently muddled and the district court’s opinion on this issue is too

cursory for us to rule with any confidence. Thus, the district court should afford MPDS Memphis

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an opportunity to present its remaining breach of contract claims and then determine whether these

claims are supported by evidence sufficient to withstand summary judgment. We recognize, of

course, that the viability of certain of those claims, particularly those respecting consequential

damages, will be affected by our holding on the breach of the covenant of good faith claim.

                                               III.

       The judgment of the district court is affirmed with respect to the claim for breach of the

covenant of good faith and reversed with respect to the claim for breach of contract. The judgment

is vacated and the matter remanded for proceedings consistent with this opinion.




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