Insurer Must Defend Class Action Claiming Manager Pockets Apartment Security Deposits
The Eleventh Circuit says an apartment management company's insurer must defend it in a lawsuit alleging the landlord improperly keeps security deposits after tenants move out.
July 30, 2020 at 06:28 PM
5 minute read
The original version of this story was published on Daily Report
A federal appeals court ruled an insurer must defend a putative class action claiming an apartment management company systematically withholds security deposits after tenants move out and fails to provide a timely list of claimed damages as required by state law.
The complaint was filed in Decatur, Georgia, in 2017 against ECI Management, which oversees 26 apartment complexes in six Southern states. ECI has a "company-wide policy of withholding all or some of the security deposits of its departing tenants in violation of Georgia law," the complaint said.
Landlords have three business days to deliver a list of damage to justify holding onto the deposits. The timing is crucial because Georgia law gives tenants only five days after leaving to "assemble their own evidence and dispute the accuracy of the list."
That suit was filed on behalf of Nichon Roberson, a former tenant of the Columns at Lake Ridge Apartments, who claimed Atlanta-based ECI withheld $60 from her security deposit "due to a rug left in the apartment and a bag of trash under the sink."
The lawsuit was filed by Bondurant Mixson & Elmore partners Michael Terry and Naveen Ramachandrappa in Atlanta, Decatur solo Shimson Wexler and Bryant Lamar and Angus Dwyer of Kansas City, Missouri's Spencer Fane.
ECI notified its insurer, AEGIS Electric & Gas International Services Ltd., which carried a $1 million policy for the company. AEGIS denied coverage via email.
"The only ground for denying coverage, cited in the email, was that 'the Lawsuit's allegations and relief demanded … concern 'the gaining in fact of personal profit or advantage to which the Insured is not legally entitled,' as well as a dispute regarding ECI's fee,' " said the U.S. Court of Appeals for the Eleventh Circuit.
In a declaratory judgment action in U.S. District Court for Georgia's Northern District filed by Paul L. Fields Jr. and Crighton Allen of Carlton Fields, AEGIS sought a ruling that it had no duty to defend or indemnify ECI for the suit.
ECI, represented by David Carpenter, Diffley and Kristin Ramsay of Alston & Bird, argued that any withheld funds or damages were the result of honest error and coverage was thus not excluded.
Judge Leigh Martin May agree with AEGIS, ruling covered losses excluded the treble damages Roberson sought or "any disgorgement, return, withdrawal, restitution or reduction of any sums which are or were in the possession or control of any Insured," among other things.
On Thursday, in an opinion written by Senior Judge Frank Hull with the concurrence of Judge Barbara Lagoa and a partial concurrence by Judge Charles Wilson, the panel reversed May's ruling.
While the policy's carve-out for money damages and "disgorgement" may ultimately come into play, Hull wrote they do not justify denying coverage.
"The parties do not appear to dispute that if Roberson were to receive an award 'in the amount of three times the sum improperly withheld,' the policy's treble-damages carve-out would apply, at least as to the full multiplied amount," Hull wrote.
But a treble damages award "is a factual question — it turns on whether ECI's conduct was intentional," Hull said. "If ECI establishes that any wrongful withholding of the security deposit 'was not intentional' and 'occurred in spite of the existence of procedures reasonably designed to avoid such errors,' Roberson would be entitled only to "the sum erroneously withheld."
Hull added, "For now, it is sufficient for us to say that, under the terms of the policy, AEGIS maintains its duty to defend ECI in the underlying state court lawsuit."
In a partial dissent, Wilson said he agreed with the majority opinion "save for two points. First, the majority punts on whether the disgorgement carve-out bars coverage."
Wilson said he would argue the carve-out allowed landlords to duck paying damages and pay restitution only.
"If, on a sunny afternoon, you loaned your friend a pair of sunglasses and asked her to return them tomorrow, you would expect your friend to return that pair of sunglasses," Wilson wrote. "You would not expect your friend to hand you a different, yet identical pair of sunglasses, because that would be a replacement pair, not a returned pair."
"Georgia law recognizes a similar distinction — a distinction that the majority erases," he said. "It holds today that [the security deposit law] compels a landlord to 'return' an erroneously withheld security deposit, but the law does no such thing; it applies when the landlord does not return the security deposit. Then it makes the landlord liable for statutory damages in the amount of the withheld security deposit, allowing the tenant to replace the missing deposit with any of the landlord's assets."
Given that distinction, he said, "I would hold that the return carve-out does not bar coverage for Roberson's claim."
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