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Pringle v. Water Quality Insurance Syndicate

August 6, 2009

JOHN P. PRINGLE, BANKRUPTCY TRUSTEE FOR THE ESTATE OF SAN PEDRO BOAT WORKS, INC., PLAINTIFF,
v.
WATER QUALITY INSURANCE SYNDICATE, AN UNINCORPORATED SYNDICATE ORGANIZED UNDER THE LAWS OF THE STATE OF NEW YORK; ENVIRONMENTAL POLLUTION GROUP, INC., A CORPORATION ORGANIZED UNDER THE LAWS OF THE STATE OF NEW YORK; CERTAIN SOLVENT LLOYD'S UNDERWRITERS THAT SUBSCRIBED TO ENVIRONMENTAL POLLUTION GROUP, INC., POLICY NOS. 01-02001, 02-02001,03-02001, 04-02001, 5-02001 AND 6-02001, UNKNOWN FOREIGN ENTITIES ORGANIZED UNDER THE LAWS OF THE UNITED KINGDOM, DEFENDANTS.



The opinion of the court was delivered by: Dean D. Pregerson United States District Judge

ORDER GRANTING SUMMARY JUDGMENT TO WQIS AND EPG; DENYING PLAINTIFF'S MOTION FOR SUMMARY JUDGMENT

[Motions filed on August 8, 2006, Dkt. No. 72, September 18, 2006, Dkt. No. 97.]

I. BACKGROUND

A. The City Action

From approximately 1984 to 2003, San Pedro Boat Works ("SPBW") operated boatyards at Berths 44 and 57 in the Port of Los Angeles.*fn1

SPBW used copper-nickel sandblast material in its boatyard operations that it knew to "produce . . . slag containing hazardous wastes (i.e., marine paint particles, residue etc.)." (SPBW Reply 3.) Beginning in 1989, the City of Los Angeles (the "City") began investigating SPBW for alleged environmental pollution occurring at Berths 44 and 57. (SGI ¶¶ 6, 30-33.) The City's 1989 investigation led to a June 1990 order requiring SPBW to investigate and remediate any contamination.

In February 1992, SPBW purchased a marine pollution liability insurance policy from Water Quality Insurance Syndicate ("WQIS") with a one-year policy period ("Policy # 8602-01"). (SGI ¶ 34.) This policy covered specific pollution liabilities relating to SPBW's ownership and operation of three vessels -- two drydocks referred to as AFDL 19 and AFDL 27 (collectively, "the drydocks") and a tugboat/towboat referred to as "Cindy M." (SGI ¶¶ 3-5.) The drydocks were located and operated at SPBW's Berth 57 facility within the Port of Los Angeles. (SGI ¶ 5.) SPBW then requested to renew its policy, and WQIS issued a second policy ("Policy # 8602-02"), which expired on February 1, 1994. (SGI ¶¶ 34-35.) From February 1, 1994, through February 1, 2002, SPBW purchased similar marine insurance policies from Environmental Pollution Group, Inc. ("EPG") (collectively the "EPG Policies"). (SGI ¶ 12.) While applying for the WQIS Policies, WQIS contends that SPBW did not disclose certain facts pertaining to the City's investigation into SPBW's potential environmental contamination. WQIS contends that the omitted facts would have been material to its underwriting decisions.

In October 2002, the City sued SPBW for environmental contamination, claiming that hazardous substances generated in the ordinary course of operations had been stored in improper containers at both Berths 44 and 57 (the "City Action"). (SGI ¶ 37.) London Market Insurers Underwriters ("LMI"), SPBW's insurer prior to WQIS, initially funded SPBW's legal fees, but terminated that funding as of October 2006.

B. The Chapter 7 Bankruptcy Proceeding

Two months after the initiation of the City Action, in December 2002, SPBW filed for Chapter 7 bankruptcy protection. (SGI ¶ 38.) As part of its bankruptcy petition, SPBW filed a Schedule B, under penalty of perjury, listing all of its personal property assets. (RJN Ex. C; SGI ¶ 9.) The Schedule B form specifically includes a category named "Interests in Insurance Policies." (Id.) SPBW did not list its right to bring claims against its insurers WQIS and EPG. (SGI ¶ 10.)

In March 2003, SPBW's bankruptcy trustee John Pringle ("Trustee") filed a motion to abandon certain assets of SPBW's bankruptcy estate not listed in the Schedule B form ("non-scheduled assets"). (SGI ¶ 13.) The Bankruptcy Court granted the Trustee's motion on April 25, 2003. (SGI ¶ 14.) The non-scheduled assets abandoned by the Trustee's motion and the Bankruptcy Court's order consisted of dry docks and cranes; and the motion and order did not mention potential insurance claims against WQIS and EPG. (SGI ¶ 13.)

In April 2003, the City filed with the Bankruptcy Court a motion for relief from the automatic stay*fn2 to (1) take possession of Berths 44 and 57 from SPBW and (2) to continue the City Action against SPBW. (SGI ¶ 15.) The Trustee filed a notice of non-opposition and the Bankruptcy Court granted the City's motion. (Id.; RJN Ex. H.) The Bankruptcy Court's order stated, in pertinent part:

"[The City] may enforce its remedies . . . to pursue and prosecute its action . . . including to obtain a final judgment therein against [SPBW] and to collect or enforce such judgment from any applicable insurance policies of [SPBW] and the insurers thereunder provided that the automatic stay shall remain in effect with respect to collection of any such judgment directly from [SPBW]." (RJN Ex. I.)

In September 2003, the Trustee moved to abandon the assets of SPBW's bankruptcy estate listed in the Schedule B form ("scheduled assets") back to SPBW. (SGI ¶ 17.) The scheduled assets consisted of accounts receivable, a truck, a tow boat, office equipment, an insurance refund of $13,556, and SPBW's books and records. (Id.) The Trustee's motion did not mention the potential claims against WQIS or EPG. (Id.; RJN Ex. J.) The Bankruptcy Court ordered SPBW's scheduled assets abandoned in October 2003. (SGI ¶ 18; RJN Ex. K.) Thereafter, the Trustee filed a report stating that SPBW had no scheduled assets of value to the bankruptcy estate. (SGI ¶ 19; RJN Ex. L.) In December 2003, the Bankruptcy Court closed the SPBW bankruptcy proceeding, considering it a "no asset" case. (SGI ¶ 20; RJN Ex. M.) There were no distributions made to SPBW's unsecured creditors. (Id.)

C. The SPBW Action

In March 2003, SPBW tendered a claim for defense and indemnification to WQIS and EPG under the respective insurance policies for claims made against it in the City Action. (SGI ¶ 14.) WQIS allegedly learned during its investigation of the claim that SPBW did not disclose facts pertaining to the City's investigation. WQIS contends that such facts are material to its underwriting decisions and SPBW's failure to disclose it during application entitled WQIS to unilaterally rescind the WQIS Policies. (SGI ¶¶ 15-16.)

After WQIS' unilateral rescission, SPBW sued WQIS in August 2004 alleging breach of contract and related claims ("SPBW Action"). WQIS removed the SPBW Action to federal court and counterclaimed for a declaration that the WQIS policies were properly rescinded and are void, and that WQIS therefore has no obligations to SPBW arising thereunder. EPG was added as an additional defendant in December 2005.

D. Procedural History

On August 8, 2006, SPBW filed a motion for summary judgment against WQIS, claiming that WQIS has a duty to defend SPBW in the underlying City Action and that WQIS's counterclaim for rescission is barred by the applicable statute of limitations. On September 18, 2006, EPG filed a motion for summary judgment claiming that SPBW has no standing in the SPBW Action due to its Chapter 7 bankruptcy.

On October 24, 2006 in a hearing before the Honorable Barry Russell, United States Bankruptcy Judge, counsel for all parties discussed the reopening of the bankruptcy estate for a determination by the Trustee of his stake in the rights at issue. At that hearing, counsel for John Pringle, the former Trustee, noted that he needed time to evaluate the value of the claims and determine if he would administer or abandon the claims. Judge Russell ordered the case reopened and that Mr. Pringle be reappointed as Trustee for a determination of the status of the claims.

On January 19, 2007, in part responding to EPG's motion for summary judgment on the ground of SPBW's lack of standing, the Court sua sponte entered an Order Re: Standing of Plaintiff San Pedro Boat Works To Bring This Action on the issue of whether to delay this case for lack of party-in-interest standing. In its Order, the Court found that SPBW was no longer a real party in interest in this matter. In accordance with Federal Rule of Civil Procedure 17, the Court postponed all proceedings pending the decision of the reopened bankruptcy estate to give reasonable time for the real party in interest, the Trustee, to respond. The Court further found that the Trustee, Pringle, did have standing. On January 29, 2007, the Trustee, John Pringle, automatically substituted for debtor SPBW as plaintiff in the instant action by operation of law under 11 U.S.C. § 323 and Federal Rule 17(a). In December 2007 and January 2008, in light of the Trustee's substitution as Plaintiff and the time that had elapsed since the filing of the cross motions for summary judgment, the Court afforded Pringle, WQIS, and EPG the chance to submit supplemental briefing. On January 28, 2008, the Court granted the City of Los Angeles's motion for leave to intervene in the SPBW lawsuit. On the same day, the Court requested further supplemental briefing from Plaintiff Pringle, Plaintiff-Intervenor City of Los Angeles, and Defendant EPG on the question of whether the language of the EPG Policies precluded relief for SPBW, and whether the Court should reconsider its January 2007 Order finding that Pringle had standing. On April 9, 2008, the Court again requested supplemental briefing from Plaintiff Pringle and Defendant WQIS on the question of whether Defendant WQIS had validly rescinded the WQIS policies. Finally, on May 15, 2008, the Court granted the parties further time to supplement the record based on Plaintiff Pringle's representation that there had not had been sufficient time to conduct discovery in this matter. The parties then stipulated to an extension until October 24, 2008, to file their briefing. On that date, the parties submitted extensive supplemental evidence.

The Court now considers the parties' motions for summary judgment.

II. LEGAL STANDARD

Summary judgment is appropriate where "the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to a judgment as a matter of law."

Fed. R. Civ. P. 56(c). In determining a motion for summary judgment, all reasonable inferences from the evidence must be drawn in favor of the nonmoving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 255 (1986). A genuine issue exists if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party"; and material facts are those "that might affect the outcome of the suit under the governing law." Anderson, 477 U.S. at 248. However, no genuine issue of fact exists "[w]here the record taken as a whole could not ...


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