AMCO Insurance Company v. Ralph W. Mello

07/23/2018

IN THE COURT OF APPEALS OF TENNESSEE

AT NASHVILLE

May 23, 2018 Session

AMCO INSURANCE COMPANY v. RALPH W. MELLO, ET AL.

Appeal from the Chancery Court for Williamson County

No. 43604 Joseph Woodruff, Judge

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No. M2017-01904-COA-R3-CV

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This appeal involves a dispute between an insurance company and its insured regarding

the application of exclusion clauses in a homeowners’ insurance policy and a personal

umbrella liability policy. After malicious prosecution and abuse of process claims were

filed against the insured in Alabama by a law firm, the insurance company accepted the

defense under a reservation of rights and filed the present action seeking a declaration

that it is not required to provide coverage for the damages complained of in the Alabama

lawsuit. Following a bench trial held on stipulated facts, the trial court determined that

the insured was, in fact, entitled to certain coverage. We reverse.

Tenn. R. App. P. 3 Appeal as of Right; Judgment of the Chancery Court Reversed

and Remanded

ARNOLD B. GOLDIN, J., delivered the opinion of the Court, in which J. STEVEN

STAFFORD, P.J., W.S., and KENNY ARMSTRONG, J., joined.

Parks T. Chastain and Cory R. Miller, Nashville, Tennessee, for the appellant, AMCO

Insurance Company.

Ralph W. Mello, Nashville, Tennessee, pro se.

OPINION

BACKGROUND AND PROCEDURAL HISTORY

The Appellee Ralph Mello (“Mr. Mello”) is a licensed Tennessee attorney. Over

twenty years ago, in 1994, he undertook legal representation of one Scott Pogue (“Mr.

Pogue”) pursuant to a contingent fee agreement entered into between Mr. Pogue and Mr.

Mello.1 Mr. Mello was retained by Mr. Pogue in order to file a False Claims Act case on

Mr. Pogue’s behalf, and a lawsuit was subsequently filed in the United States District

Court for the Middle District of Tennessee. Over the course of his representation of Mr.

Pogue, Mr. Mello billed in excess of 1,734 hours to the case.

In 2002, the firm of Hare, Wynn, Newell & Newton, LLP (“Hare, Wynn”) was

brought into the case to help with litigation. At that time, it was agreed that Mr. Mello

would no longer be involved with the case. To replace the previous fee agreement that he

had with Mr. Pogue, Mr. Mello entered into a new agreement on June 25, 2002. This

new fee agreement, to which Hare, Wynn was a party, provided that Mr. Mello was

entitled to statutory fees as well as a contingency fee equal to 7.5% of Mr. Pogue’s total

recovery.

In 2005, Mr. Pogue agreed to settle a portion of his False Claims Act case, and he

received a portion of that settlement as a relator’s share. Following this partial

settlement, Mr. Mello brought an action to determine the rights of the parties under the

June 25, 2002 fee agreement. Hare, Wynn intervened in the action, and the matter was

ultimately decided via arbitration.2 The decision rendered at arbitration left Mr. Mello

entitled to 7.5% of Mr. Pogue’s relator’s share of the partial settlement. In addition to

claiming an interest in Mr. Pogue’s relator’s share, however, Mr. Mello also claimed an

interest in the potential recovery for the remaining False Claims Act case. He filed an

attorney’s lien on Mr. Pogue’s cause of action and share of any recovery that remained.

On February 22, 2007, Mr. Pogue filed for bankruptcy protection in the United

States Bankruptcy Court for the Northern District of Alabama. As a result of the

bankruptcy action, all of Mr. Pogue’s rights in the False Claims Act case were transferred

to James G. Henderson as liquidation trustee.

Before Mr. Henderson was actually appointed as liquidation trustee, Hare, Wynn

had negotiated a settlement of the remaining claims in the False Claims Act case. The

settlement, which was completed on March 31, 2009, provided for a relator’s share of

$8,120,000.00. The proceeds from the settlement were paid to the liquidation trustee.

Mr. Mello took umbrage at this settlement process. Displeased with the fact that

the settlement funds were deposited with the trustee, Mr. Mello claimed that Hare, Wynn

had intentionally made no provisions in the settlement agreement for the recognition or

satisfaction of his statutory attorney’s lien, equitable lien, or of the assignment he

1

This contingent fee agreement provided that if Mr. Pogue prevailed in his lawsuit, Mr. Mello

would be entitled to 20% of any amount recovered. A contingent fee agreement is one in which the

attorney and client agree to a specific fee based on a successful recovery by the client. The attorney

agrees that if there is not a successful recovery by the client, the attorney is not entitled to a fee.

2

The June 25, 2002 fee agreement contained an arbitration clause.

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received in the June 25, 2002 fee agreement. He requested that the bankruptcy court

order the liquidation trustee to disburse his portion of the contingent fee, and on March 2,

2010, he filed a complaint against Hare, Wynn in the Williamson County Chancery

Court. In his chancery court action, Mr. Mello alleged that Hare, Wynn breached duties

and converted funds due to him when it failed to pay him his 7.5% contingency fee from

the additional recovery. In addition to seeking to recover the amount of his fee, Mr.

Mello sought punitive damages against Hare, Wynn. Upon the filing of that action, the

case was removed to the United States District Court for the Middle District of

Tennessee. It was then transferred to the United States District Court for the Northern

District of Alabama, where it was docketed as an adversarial proceeding in connection

with Mr. Pogue’s bankruptcy action. The bankruptcy court subsequently dismissed Mr.

Mello’s claims in November 2010.

In March 2012, Mr. Mello filed another lawsuit in the chancery court asserting

similar allegations against Hare, Wynn; on April 24, 2012, the action was removed to the

United States District Court for the Middle District of Tennessee. While this latest

lawsuit was pending, the bankruptcy court ordered the bankruptcy trustee to disburse to

Mr. Mello the full amount of his contingency fee. The fee was paid to Mr. Mello.

Although Mr. Mello’s latest action was eventually transferred to the United States

District Court for the Northern District of Alabama, it was dismissed with prejudice in

January 2013.

As a result of the litigation that had been brought against it, Hare, Wynn filed a

lawsuit against Mr. Mello in the Circuit Court for Jefferson County, Alabama. The

firm’s complaint asserted causes of action for malicious prosecution and abuse of

process. It was specifically alleged that Mr. Mello’s March 2012 lawsuit was “filed with

malice.” Further, Hare, Wynn alleged that Mr. Mello’s lawsuit was filed for an ulterior

purpose, namely to force it to distribute fees prior to receiving an order from the

bankruptcy court.

As is relevant herein, Mr. Mello tendered the Hare, Wynn complaint to his insurer,

AMCO Insurance Company (“AMCO”). He requested that coverage and a defense be

provided pursuant to both his homeowners’ policy and his personal umbrella liability

policy. Although AMCO appointed defense counsel in Alabama on behalf of Mr. Mello,

it accepted the defense under a reservation of rights.3

3

A reservation of rights is necessary for insurers who do not intend to waive their contractual

rights to contest coverage:

The general rule supported by the great weight of authority is that if a liability

insuror, with knowledge of a ground of forfeiture or noncoverage under the policy,

assumes and conducts the defense of an action brought against the insured, without

disclaiming liability and giving notice of its reservation of rights, it is thereafter

precluded in an action upon the policy from setting up such ground of forfeiture or

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According to AMCO, neither the homeowners’ policy nor the personal umbrella

policy issued to Mr. Mello provided coverage for the injuries and damages complained of

in the Hare, Wynn complaint. Seeking judicial sanction for this position, AMCO

commenced the present litigation by filing an action for declaratory judgment in the

Williamson County Chancery Court. In its complaint, AMCO contended that because the

injuries complained of by Hare, Wynn arose out of the business pursuits of Mr. Mello, no

coverage was available under his contracts of insurance. In support of this position,

AMCO noted that the homeowners’ policy contained an exclusion stating that personal

injury coverage did not apply to injuries “arising out of the ‘business’ pursuits of an

‘insured.’” Moreover, the umbrella policy provided that coverage did not apply to

“‘bodily injury’, ‘personal injury’ or ‘property damage’ arising out of or in connection

with a ‘business’ engaged in by an ‘insured.’” In the view of AMCO, the injuries

complained of by Hare, Wynn arose out of Mr. Mello’s business pursuits inasmuch as the

injuries complained of were those arising out of Mr. Mello’s attempt to collect his

attorney’s fees.

The litigation below ultimately culminated with a trial being held on stipulated

facts. Subsequently, on August 25, 2017, the trial court entered its “Memorandum and

Order.” Therein, the trial court held that there was no coverage under Mr. Mello’s

insurance policies with regard to the abuse of process claim filed against him by Hare,

Wynn. However, the court did find that coverage existed with regard to Hare, Wynn’s

malicious prosecution claim. In reaching this conclusion, the trial court expressly

rejected AMCO’s argument that a “business pursuit” exclusion applied. This appeal

followed.

ISSUES PRESENTED

Although AMCO’s appellate brief identifies three issues for our review, the raised

issues all speak to the same concern: whether the trial court erred in holding that the

damages claimed by Hare, Wynn in its suit against Mr. Mello did not arise out of, or were

not connected with, Mr. Mello’s business pursuits.

STANDARD OF REVIEW

A trial court’s factual findings are reviewed de novo upon the record with a

presumption of correctness. Ramsay v. Custer, 387 S.W.3d 566, 568 (Tenn. Ct. App.

2012) (citation omitted). Issues related to the scope of coverage and an insurer’s duty to

defend present questions of law. Standard Fire Ins. Co. v. Chester O’Donley & Assocs.,

noncoverage.

Maryland Cas. Co. v. Gordon, 371 S.W.2d 460, 464 (Tenn. Ct. App. 1963) (quoting 29A Am. Jur.

Insurance § 1465).

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Inc., 972 S.W.2d 1, 6 (Tenn. Ct. App. 1998) (citations omitted). Questions of law are

reviewed de novo with no presumption of correctness. Walker v. Nationwide Ins. Co.,

813 S.W.2d 135, 140 (Tenn. Ct. App. 1990) (citations omitted).

DISCUSSION

This appeal concerns what insurance coverage, if any, exists with respect to the

claims filed against Mr. Mello in Alabama by the Hare, Wynn law firm. “Issues

involving an insurance policy’s coverage and an insurance company’s duty to defend

require ‘the interpretation of the insurance policy in light of claims asserted against the

insured.’” Sulphuric Acid Trading Co., Inc. v. Greenwich Ins. Co., 211 S.W.3d 243, 248

(Tenn. Ct. App. 2006) (quoting Allstate Ins. Co. v. Jordan, 16 S.W.3d 777, 779 (Tenn.

Ct. App. 1999)). As noted previously, the complaint filed by Hare, Wynn asserted causes

of action for malicious prosecution and abuse of process. It alleged, among other things,

that Mr. Mello had sued Hare, Wynn without probable cause and that he had attempted to

“force” Hare, Wynn to distribute fees to him prior to receiving an order from the

bankruptcy court despite the fact that the funds at issue were part of the bankruptcy estate

and were paid to the bankruptcy trustee. Although there does not appear to be any

dispute on appeal that Mr. Mello’s insurance policies do not provide coverage for Hare,

Wynn’s abuse of process claim, there is vigorous disagreement concerning whether Mr.

Mello is covered under his policies in light of the asserted malicious prosecution claim.

Whereas AMCO contends in its appellate brief that it is absolved of any duty to defend or

indemnify Mr. Mello, Mr. Mello argues that the trial court’s decision as to his insurance

coverage should be affirmed.

“In construing insurance policies, the words chosen to express the parties’

intentions should be given their usual, natural and ordinary meaning.” State Farm Fire &

Cas. Co. v. Sparks, No. W2006-01036-COA-R3-CV, 2007 WL 4277454, at *5 (Tenn. Ct.

App. Dec. 7, 2007) (citation omitted). Indeed, as this Court has noted:

Contracts of insurance, like other contracts, are to be construed according to

the sense and meaning of the terms which the parties have used, and if they

are clear and unambiguous, their terms are to be taken and understood in

their plain, ordinary, and popular sense. The rule of strict construction does

not authorize a perversion of language, or the exercise of inventive powers

for the purpose of creating an ambiguity where none exists, nor does it

authorize the court to make a new contract for the parties or disregard the

evidence (intention) as expressed, or to refine away terms of a contract

expressed with sufficient clearness to convey the plain meaning of the

parties and embodying requirements[.]

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Ballard v. N. Am. Life & Cas. Co., 667 S.W.2d 79, 82 (Tenn. Ct. App. 1983) (quoting

Guardian Life Ins. Co. of Am. v. Richardson, 129 S.W.2d 1107, 1115-116 (Tenn. Ct.

App. 1939)).

As a general matter, both of Mr. Mello’s policies with AMCO do provide

coverage for malicious prosecution claims. The homeowners’ policy provides such

“personal injury” coverage through “Premier Homeowners Endorsement 12601.”

Moreover, the umbrella policy specifically provides coverage for “malicious prosecution”

and other identified “personal injury” for which an insured becomes legally liable. While

AMCO does not dispute that such provisions exist, it nonetheless argues that coverage is

not available due to exclusions that are present in both policies.

As AMCO notes, the endorsement in the homeowners’ policy contains an

exclusion specifying that “personal injury” coverage does not apply to “injury arising out

of the ‘business’ pursuits of an ‘insured.’” Similarly, the umbrella policy contains an

exclusion which denies coverage for “‘bodily injury’, ‘personal injury’ or ‘property

damage’ arising out of or in connection with a ‘business’ engaged in by an ‘insured.’”

The definition of “business” under both policies is nearly identical.4 Under the

homeowners’ policy, “business” means:

a. A trade, profession or occupation engaged in on a full-time, part-time or

occasional basis; or

b. Any other activity engaged in for money or other compensation, except

the following:

1) Volunteer activities for which no money is received other than payment

for expenses incurred to perform the activity;

2) Providing home day care services for which no compensation is

received, other than the mutual exchange of such services; or

3) The rendering of home day care services to a relative of an “insured”.

Under the umbrella policy, “business” means:

1. A trade, profession or occupation engaged in on a full-time or

occasional basis; or

2. Any other activity engaged in for money or other compensation, except

the following:

4

The trial court’s order stated that the policies provided identical definitions of “business,” and in

support thereof, the order referenced the policies that were attached as exhibits to AMCO’s complaint for

declaratory judgment. Although the definitions are virtually identical, the referenced exhibits reveal

minor differences.

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a. Volunteer activities for which no money is received other than payment

for expenses incurred to perform the activity;

b. Providing home day care services for which no compensation is

received, other than the mutual exchange of such services; or

c. The rendering of home day care services to a relative of an “insured”.

Here, the dispute is simply whether Hare, Wynn’s claimed damages for malicious

prosecution fall under one of the exclusions mentioned above. Namely, do the claimed

damages arise out of Mr. Mello’s “‘business’ pursuits” or in connection with a “business”

engaged by him? Answering this type of question has not always been an easy task for

courts in previous cases. See Robinson v. Utica Mut. Ins. Co., 585 S.W.2d 593, 595

(Tenn. 1979) (noting that courts encountering “business pursuit” exclusions have found

the language difficult of application).

To test whether a “pursuit” is a “business,” courts have typically looked to two

elements: (1) continuity and (2) profit motive. Allstate Ins. Co. v. Godsey, No. 03A01-

9107CV243, 1991 WL 261873, at *3 (Tenn. Ct. App. Dec. 13, 1991). As to the first

element, courts consider whether something is a customary engagement or a stated

occupation. Id. Differentiating between a business pursuit and non-business pursuit is

significant because it distinguishes between those risks that the insurer intended to cover

and those risks which were intended to be excluded. The whole purpose of a business

pursuits exclusion is to “delete coverage which is not essential to the purchasers of the

policy and which would normally require specialized underwriting and rating.” Sparks,

2007 WL 4277454, at *12; see also Allstate Ins. Co. v. Hallman, 159 S.W.3d 640, 645

(Tex. 2005) (“[A]s numerous courts have recognized, the purpose of the business pursuits

exclusion is to lower homeowners insurance premiums by removing coverage for

activities that are not typically associated with the operation and maintenance of one’s

home.”). Of course, to determine whether coverage exists, we look to the particular facts

of the case and interpret the insurance policies in conjunction with these facts. Mid-

Century Ins. Co. v. Williams, 174 S.W.3d 230, 240 (Tenn. Ct. App. 2005) (“We are

required to interpret the contract to determine whether it applies to the facts of this

case[.]”).

In its Alabama action against Mr. Mello, Hare, Wynn sought damages as a result

of the litigation Mr. Mello brought against the firm. Therefore, the central question

before us is whether Mr. Mello’s litigation efforts constituted a business pursuit. If that

question can be answered in the affirmative, then the exclusions at issue are applicable,

and no coverage is available to Mr. Mello.

In reaching the conclusion that coverage was available to Mr. Mello relative to

Hare, Wynn’s malicious prosecution claim, the trial court determined that Mr. Mello’s

litigation against Hare, Wynn did not satisfy the “profit motive” or “continuity” elements

necessary to establish a “business pursuit.” In the view of the trial court, Mr. Mello was

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not seeking “profit,” but was seeking damages based on Hare Wynn’s failure to distribute

his contractual interest in the relator’s share. Moreover, the trial court pointed out that,

while collecting attorney’s fees is a regular engagement of law practices, Mr. Mello no

longer practices as a private attorney.5

Respectfully, we are of the opinion that the trial court’s determination on these

matters was in error. The injuries complained of by Hare, Wynn clearly arose out of Mr.

Mello’s “business pursuits”/“business” so as to trigger the applicability of the exclusions

relied upon by AMCO.6 As outlined by Hare, Wynn’s complaint: (1) Mr. Pogue retained

Mr. Mello for legal representation; (2) pursuant to the June 25, 2002 contingency fee

agreement, Mr. Mello was entitled to 7.5% of any recovery; (3) Mr. Pogue filed for

bankruptcy in 2007; (4) when Hare, Wynn negotiated a final settlement of Mr. Pogue’s

lawsuit, settlement proceeds were paid to Hare, Wynn’s trust account and then to the

bankruptcy trustee; (5) Mr. Mello was displeased that the settlement funds had been

deposited with the bankruptcy trustee; (6) Mr. Mello subsequently filed suit against Hare,

Wynn asking, among other things, that he be awarded the amount of his fee; and (7)

following the dismissal of this lawsuit, Mr. Mello filed another lawsuit asserting identical

allegations against Hare, Wynn.7 Based on these facts chronicled in the complaint, it is

clear that Mr. Mello’s litigation against the firm was in furtherance of his attempt to

collect the amount of his attorney’s fees relative to his representation of Mr. Pogue. We

are of the opinion that Mr. Mello’s efforts in this regard squarely qualify as a “business”

matter or “business pursuit” within the meaning of his insurance policies. There was a

clear profit motive inasmuch as Mr. Mello’s litigation attempted to collect attorney’s fees

earned in his private practice of law.

Regarding the “continuity” element necessary to establish a business pursuit,

although the trial court recognized that “collecting attorney’s fees is a regular

engagement of law practices in Tennessee,”8 it found that the “continuity” element was

5

The trial court’s order reflects that Mr. Mello now practices law as in-house counsel for a

corporation.

6

Again, whereas Mr. Mello’s homeowners’ policy excluded coverage for certain injuries “arising

out of the ‘business’ pursuits of an ‘insured,’” the umbrella policy excluded coverage for certain injuries

“arising out of or in connection with a ‘business’ engaged in by an ‘insured.’”

7

Hare, Wynn’s complaint specifically stated that Mr. Mello’s actions in filing his March 2012

lawsuit were intended to “force Hare, Wynn to disburse fees prior to receiving any Order from the

Bankruptcy Court.”

8

Even if the pursuit of attorney’s fees was itself not considered to constitute a “customary

engagement” of Mr. Mello’s, that does not in our view prevent the establishment of the “continuity”

element to the extent that the activity was in furtherance of a regular business interest. See Cambridge

Mut. Fire Ins. Co. v. Sakon, 31 A.3d 849, 856 (Conn. App. Ct. 2011) (noting that although the specific

activity of bringing a lawsuit may not fall within the ordinary scope of the insured’s business, the material

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not established due to the fact that Mr. Mello no longer practices as a private attorney.

We are of the opinion that this particular consideration is not dispositive of the issue

before us. As AMCO has observed, Mr. Mello’s efforts to secure the amount of his

attorney’s fees are somewhat analogous to the business pursuits engaged in by the

insured in Still v. Great Northern Insurance Co., 254 F. App’x 125 (3d Cir. 2007), and as

such, we will briefly refer to that case as a helpful illustration. In Still, the insured

founded a limited liability company and later served as its President, CEO, and Chairman

of the Board. Id. at 126. A number of years after the company was founded, however, a

dispute arose concerning the insured’s employment and investments. Id. After the

insured was terminated and the company issued additional shares to dilute his interest in

the company, the insured commenced a suit in federal court alleging that the company’s

actions had violated the terms of several agreements. Id. Following the adjudication of

this lawsuit in favor of the company, the insured filed a second action against the

company in state court. Id. This was followed by the company’s assertion of a

counterclaim alleging that the prior federal action constituted wrongful use of civil

process. Id. Believing that his homeowners’ insurance policy provided coverage for

malicious prosecution claims such as the counterclaim asserted by the company, the

insured requested coverage for a defense. Id. His insurer denied coverage, however, on

the basis that the underlying insurance policy precluded coverage for liability arising

from “business pursuits.” Id. The insured thereafter filed a complaint in federal court

seeking a declaratory judgment that his insurer was required to defend the counterclaim,

but the trial court entered judgment in favor of the insurer. Id. When the trial court’s

judgment was affirmed on appeal, the appellate court determined that the asserted

counterclaim fell within the scope of the insurance policy’s “business pursuits” exclusion,

reasoning as follows: “[T]here can be no doubt that [the company’s] counterclaim ‘arose

from’ [the insured’s] business with [the company], as the basis of the counterclaim was

the federal suit that [the insured] pursued against [the company] to secure his

employment and investment rights in the company.” Id. at 127-28 (citations omitted).

Likewise, here, the malicious prosecution claim asserted by Hare, Wynn arose out

of Mr. Mello’s “business,” as the basis of the malicious prosecution claim was the

litigation that Mr. Mello pursued against Hare, Wynn to vindicate rights stemming from

his private practice of law. Accordingly, we are of the opinion that the trial court erred in

failing to conclude that the “business”/“business pursuits” exclusions from Mr. Mello’s

policies applied in this case. As neither the homeowners’ policy nor umbrella policy

provide coverage for the claims asserted against Mr. Mello in Alabama, we respectfully

reverse the judgment of the trial court.

inquiry in regard to the continuity element is whether the insured is alleged to have acted in furtherance of

his business interests by bringing the lawsuit).

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CONCLUSION

For the foregoing reasons, the judgment of the trial court is reversed, and the case

is remanded to the trial court to enter a judgment in accordance with this Court’s Opinion

and for such other matters as may be necessary and consistent with this Opinion.

_________________________________

ARNOLD B. GOLDIN, JUDGE

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