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Michael J. Dobson, et al. v. Twin City Fire Insurance Company

December 12, 2011

MICHAEL J. DOBSON, ET AL.
v.
TWIN CITY FIRE INSURANCE COMPANY,



The opinion of the court was delivered by: Honorable David O. Carter, Judge

CIVIL MINUTES - GENERAL

THE HONORABLE DAVID O. CARTER, JUDGE

Julie Barrera Not Present Courtroom Clerk Court Reporter

ATTORNEYS PRESENT FOR PLAINTIFFS: ATTORNEYS PRESENT FOR DEFENDANTS:

NONE PRESENT NONE PRESENT

PROCEEDING (IN CHAMBERS): ORDER (1) GRANTING IN PART AND DENYING IN PART

DEFENDANTS' MOTION TO DISMISS; (2) DENYING DEFENDANTS' MOTION TO BIFURCATE; AND (3) DENYING DEFENDANTS' MOTION FOR PROTECTIVE ORDER

Before the Court is (1) Defendants' Motion to Dismiss the third and sixth causes of action from the First Amended Complaint ("FAC") (Dkt. 48), (2) Defendants' Motion to Bifurcate (Dkt. 49), and (3) Defendants' Motion for Protective Order (Dkt. 58). The Court finds this matter appropriate for decision without oral argument. Fed. R. Civ. P. 78; Local Rule 7-15. After considering the moving, opposing and replying papers thereon, and for the reasons stated below, the Court hereby (1) GRANTS IN PART and DENIES IN PART the Motion to Dismiss [48], (2) DENIES the Motion to Bifurcate [49], and (3) DENIES the Motion for Protective Order [58].

I. BACKGROUND

Plaintiffs Michael J. Dobson, Richard D. Teasta, and Allen F. Braun (collectively, the "Insureds") are the former officers of EZ Lube, LLC ("EZ Lube"). The Insureds allege they are covered under a Director and Officers insurance policy ("D&O Policy") effective from April 22, 2009, to November 13, 2015, ("Policy Period") and underwritten by Defendant Twin City Fire Insurance Company ("Twin City") and its parent company Hartford Financial Services Group, Inc., ("Hartford") (collectively, "Defendants"). Pursuant to the D&O Policy, the Insureds are allegedly covered in their capacity as directors and officers of EZ Lube provides for a $10,000,000 aggregate limit of liability.

The Insureds allege that, under to the D&O Policy, they are covered for "[l]oss on behalf of the Insured Persons resulting from an Insured Person Claim first made against the Insured persons during the Policy Period . . . for a Wrongful Act by the Insured Persons . . . ." They also allege that the D&O Policy defines "loss" as "the amount that the Insureds are legally liable to pay solely as a result of a Claim . . . including Defense Costs, compensatory damages, settlement amounts, pre- and post-judgment interests, costs awarded pursuant to judgments . . . ."

On December 9, 2008, EZ Lube filed a voluntary petition under Chapter 11 Bankruptcy. The Joint Plan of Reorganization confirmed by the Bankruptcy Court allegedly established a Plan of EZ Lube and Xpress Lube-Tech, Inc. (the "Plan") for the benefit of the unsecured creditors of the Debtors (the "Committee"). On August 6, 2010, Invotex, Inc., ("Invotex") as trustee for the Plan trust, filed a Complaint (the "Invotex Complaint"), SACV 10-1189 DOC, ("Invotex Action") alleging claims arising from a transaction involving EZ Lube that occurred in December 2005 ("LBO Transaction"). In the Invotex Complaint, Invotex alleges that the Insureds, as former officers and directors of EZ Lube, breached their fiduciary duties instructing and consummating the LBO Transaction and received fraudulent transfers. Pursuant to the Invotex Complaint, Invotex seeks to avoid and recover approximately $42 million in transfers made to the Insureds and, pursuant to the breach of fiduciary duty claim, $38,827,968 from the Insureds as jointly and severally liable defendants.

The Insureds allege that because they were officers and directors of EZ Lube during the relevant time period, they are covered by the D&O Policy in relation to the Invotex Action and thus Defendants have a duty to reimburse the defense fees and costs as incurred, as well a duty to indemnify them against future loss. Defendants, however, allegedly denied coverage under the D&O Policy on many different grounds.

After Defendants filed their first motion to dismiss, denied by the Court on April 14, 2011, the Insureds filed a motion for leave to join Plaintiff Ironshore Indemnity, Inc. ("Ironshore"), which Defendants did not oppose. After Defendants refused to defend the Insureds, the Insureds turned to Ironshore for coverage in the Invotex action. Ironshore had previously issued EZ Lube an excess D&O policy with limits of $5,000,000, excess of the underlying Twin City Policy. (FAC, Ex. W, p. 321.) Ironshore ultimately settled the Invotex action and the Insureds subsequently assigned their bad faith and breach of contract claims against Defendants to Ironshore. The Court granted leave to join Ironshore as a Plaintiff.

On September 19, 2011, shortly after Ironshore was joined, the Plaintiffs filed their FAC. The FAC asserts claims for: (1) breach of contract (duty to reimburse defense costs); (2) breach of contract (duty to indemnify); (3) tortious breach of the implied covenant of good faith and fair dealing; (4) subrogation; (5) declaratory relief and judgment; and, (6) negligent infliction of emotional distress.*fn1 On September 30, 2011, Defendants filed the instant Motion to ...


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