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Allied World National Assurance Company, A New Hampshire Corporation, and v. "S.K. Foods Mp Sk Pm Corp.

April 13, 2011

ALLIED WORLD NATIONAL ASSURANCE COMPANY, A NEW HAMPSHIRE CORPORATION, AND
ALLIED WORLD ASSURANCE COMPANY (U.S.) INC., A DELAWARE CORPORATION, PLAINTIFFS,
v.
"S.K. FOODS MP SK PM CORP., A CALIFORNIA CORP.,"
SK FOODS, L.P., A CORPORATION AKA FREDERICK SCOTT SALYER, AN CALIFORNIA LIMITED PARTNERSHIP, INDIVIDUAL,
BLACKSTONE RANCH, A CALIFORNIA CORPORATION AKA CORP." LISA CRIST, AN "BLACKSTONE RANCH CALIF 'S'
INDIVIDUAL, MARK MCCORMICK, AN INDIVIDUAL, ET AL.,
DEFENDANTS.



The opinion of the court was delivered by: Oliver W. Wanger United States District Judge

Further Scheduling

Ctrm. 3 Conference: 7/15/11 8:15

ORDER AFTER SCHEDULING CONFERENCE

I. Date of Scheduling Conference. April 13, 2011.

II. Appearances Of Counsel.

Troutman Sanders LLP by Kevin F. Kieffer, Esq., appeared on behalf of Plaintiffs.

Law Offices of David C. Winton by David C. Winton, Esq., appeared on behalf of Defendants Frederick Scott Salyer, SK PM Corp. aka "S.K. Foods PM Corp.," Blackstone Ranch aka "Blackstone Ranch Calif 'S' Corp.," Scott Salyer, individually and as Trustee, Scott Salyer Revocable Trust, Robert Pruett, Trustee for the Caroline Gazelle Salyer 1999 Irrevocable Trust, erroneously sued as the Caroline Gazelle Salyer Irrevocable Trust, Robert Pruett Trustee for the Caroline Gazelle Salyer 2007 Irrevocable Trust, also erroneously sued as the Caroline Gazelle Salyer Irrevocable Trust; Robert Pruett Trustee for the Stefanie Ann Salyer 1999 Irrevocable Trust erroneously sued as the Stefanie Ann Salyer Irrevocable Trust, Robert Pruett Trustee for the Stefanie Ann Salyer 2007 Irrevocable Trust, erroneously sued as the Stefanie Ann Salyer Irrevocable Trust; SS Farms, LLC, a California limited liability company, SARS LLC, a California limited liability company, CSSS LP, a California limited partnership fictitiously doing business as Central Valley Shippers; SK Foods LLC, a Nevada limited liability company; S.K. Foods PM Corp., a legal entity of unknown legal capacity, SKF Aviation, LLC, a California limited liability company, SSC Farming, LLC, a California limited liability company, SSC Farms I, LLC, a California limited liability company; SSC Farms II, LLC, a California limited liability company; SSC Farms III, LLC, a California limited liability company; SK Farm Services, LLC, a California limited liability company; SK Frozen Foods, LLC, a California limited liability company, Carmel Wine Merchants LLC, a California limited liability company, Salyer American Fresh Foods is in receivership and therefore Mr. Winton does not represent that entity, nor does any other attorney represent that entity in this lawsuit. It is adverse though it is a named Defendant. Four Salyer American Cooling entities have reached a settlement with Plaintiffs and it is the expectation of the parties that those entities will be dismissed from the lawsuit.

Schnader Harrison Segal & Lewis LLP by Kathryn Richter, Esq., appeared on behalf of Defendant Bradley D. Sharp, Chapter

11 Trustee for SK Foods LP and RHM Industrial/Specialty Foods, Inc. dba Colusa County Canning Company (collectively referred to as debtors).

III. Summary of Pleadings.

A. Plaintiffs' Complaint.

1. Plaintiffs have filed this action to obtain a judicial determination and declaration regarding the parties' rights and obligations with respect to two insurance policies. Defendants are insureds under For Private Companies Policy No. C011427/001 issued by Allied World to S.K. Foods PM Corp. for the February 19, 2009 to August 17, 2009 Policy Period (the "Primary Policy"). Through this action, Allied World seeks to rescind certain specified coverage provisions of the Primary Policy due to, among other things, misrepresentations and concealment of material facts made by Defendants during the underwriting process.

2. Defendants also sought excess coverage from AWAC under Excess Directors & Officers Liability Insurance Following Form Policy No. C011818/001, which was to be issued to S.K. Foods PM Corp. for the April 8, 2009 to February 19, 2010 Policy Period (the "Excess Policy"). Plaintiffs allege that the Defendants never paid the requisite premium for the Excess Policy. AWAC seeks a declaration that the Excess Policy was never effectively issued or delivered as a result of the Defendants' non-payment of premium, and is inoperative. AWAC alternatively seeks to rescind certain specified coverage provisions of the Excess Policy due to, among other things, the misrepresentations and concealment of material facts made by Defendants during the underwriting process.

3. Plaintiffs allege that in connection with the underwriting of the Primary and Excess Policies, Defendants, through their insurance broker, provided Plaintiffs with financial statements for the group of related agricultural entities that were to be insured under the policies (collectively referred to as "SK Foods Group"). Defendants also made certain representations, including that SK Foods Group was in good financial health and had strong revenues and profits for the periods subsequent to those for which they provided financial statements, that certain credit agreements necessary to SK Foods Group's operations that were set to expire would be extended, and that Defendants did not anticipate a reorganization or sale of more than 10% of the assets of any SK Foods Group entities. Plaintiffs allege that these representations were false, and that the financial statements submitted to Plaintiffs were inaccurate and unreliable.

4. At the time that negotiations concerning the Primary and Excess Policies were ongoing, the entities comprising SK Foods Group were experiencing significant financial difficulties, and many were either insolvent or on the brink of insolvency. Plaintiffs are informed and believe that Defendants were aware that the joint credit facilities for two of SK Foods Group's major constituents, SK Foods, L.P. ("SK Foods") and RHM Industrial/Specialty Foods, Inc. ("RHM"), would not be extended. Plaintiffs are also informed and believe that Defendants anticipated that it would be necessary for Salyer American Fresh Foods, Inc. ("SAFF"), SK Foods, and RHM to reorganize, through bankruptcy or otherwise, and sell substantially all of their assets in order to satisfy debts owed by these companies.

5. Had Plaintiffs known the truth regarding SK Foods Group's financial condition, they would not have issued the Primary Policy, or agreed to issue the Excess Policy upon payment of the requisite premium. Accordingly, pursuant to the terms of the policies, the California Insurance Code, including Insurance Code Sections 331, 359, 447 and 650, and the California Civil Code, including Civil Code Section 1691, Plaintiffs seek a judgment of rescission declaring that certain coverage provisions of the Primary and Excess Policies are void ab initio. If the Primary and Excess Policies are not rescinded as requested, Plaintiffs, in the alternative, seek to have the Primary and Excess Policies reformed.

6. Plaintiffs also seek a declaration that Defendants are liable to Plaintiffs for any payments made by Plaintiffs, including any future payments, to or on behalf of any Insureds, pursuant to Plaintiffs' obligations under any remaining coverage provisions of the Primary or Excess Policies on the grounds that Plaintiffs would not have issued the Primary Policy or agreed to issue the Excess Policy but for Defendants' misrepresentation or concealment of material facts in connection with their application for the Primary and Excess Policies, and that such payments are therefore damages resulting from Defendants' misrepresentations.

B. The Salyer Defendants' Answer and Counterclaim.

1. The Salyer Defendants deny that any misrepresentations were made during the underwriting process an deny that Plaintiffs are entitled to the relief they seek.

2. The Salyer Defendants previously counterclaimed against Plaintiffs for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory relief. On or about January 19, 2011, this Court ordered, pursuant to the parties' stipulation, that the counterclaim filed by the Salyer Defendants was dismissed without prejudice. Pursuant to the parties' stipulation and this Court's Order, the Salyer Defendants may refile their counterclaims up to 90 days prior to the close of discovery.

C. The Trustee's Answer and Counterclaim.

1. The Trustee denies that any misrepresentations were made during the underwriting process and denies that Plaintiffs are entitled to the relief they seek.

2. The Trustee previously counterclaimed against Plaintiffs for breach of contract, breach of the covenant of good faith and fair dealing, and declaratory relief. On or about January 24, 2011, this Court Ordered, pursuant to the parties' stipulation, that the counterclaim filed by the Trustee was dismissed without prejudice. Pursuant to the parties' stipulation and this Court's order, the Trustee may refile its counterclaim up to 90 days prior to the close of discovery.

IV. Orders Re Amendments To Pleadings.

1. The parties do not anticipate amending the pleadings at this time, except for corrections to specify the true names of parties shall be made and IT IS SO ORDERED. The entity Salyer American Fresh Foods is in receivership. No party has appeared. Plaintiff intends to request the entry of default as to that party. The request for entry of default shall be filed within 20 days following the date of this hearing, on or before May 3, 2011.

V. Factual Summary.

A. Admitted Facts Which Are Deemed Proven Without Further Proceedings.

1. Allied World issued For Private Companies Policy No. C011427/001 to S.K. Foods PM Corp. for the February 19, 2009 to August 17, 2010 Policy Period (the "Primary Policy").

2. The Primary Policy was initially issued with a Policy Period of February 19, 2009 to February 19, 2010. However, the Primary Policy was cancelled effective August 17, 2009 by First Insurance Funding Corp. ("First Insurance"), the company that provided the Insureds with financing for the premium of the Primary Policy.

3. Whether that cancellation was effective is not "uncontested."

4. SK Foods Group also sought an excess policy from AWAC, specifically Excess Directors & Officers Liability Insurance Following Form Policy No. C011818/001, which was to be issued to S.K. Foods PM Corp. for the April 8, 2009 to February 19, 2010 Policy Period (the "Excess Policy").

5. As part of the underwriting process for the Primary and Excess Policies, SK Foods Group, through its broker, provided Plaintiffs with an application and other materials, including audited and unaudited financial statements for certain SK Foods Group entities.

6. A representative of the broker, and SK Foods Group executives also met with Plaintiffs' underwriters at which the financial health of SK Foods Group ...


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