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

July 5, 2012

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



The opinion of the court was delivered by: David O. Carter United States District Judge

O

ORDER:

1)GRANTING DEFENDANTS' MOTION FOR SUMMARY JUDGMENT [Dkt. 111]

2)DENYING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT [Dkt. 116]

Before the Court are two motions: (1) Motion for Summary Judgment (Dkt. 111) filed by Defendants Twin City Fire Insurance Company and The Hartford Financial Services Group Inc.; and (2) Partial Motion for Summary Judgment As to Duty to Advance Defense Costs (Dkt. 116) filed by Plaintiffs Ironshore Indemnity Inc., Allen Braun, Michael J. Dobson, and Richard D. Teasta. For the foregoing reasons, the Court GRANTS Insurer Defendants summary judgment as to all claims (Dkt. 111) and DENIES Plaintiffs' partial motion for summary judgment (Dkt. 116).

I.Background

As the Court noted in a prior order, the parties' failure to properly record documents on the electronic docket or to properly file or lodge chambers copies has made locating the relevant documents in this case extremely difficult. See May 22, 2012, Minute Order (Dkt. 141). Nonetheless, after a Herculean effort, the Court concludes that the following facts are undisputed unless otherwise stated.

a.The Parties and the Second Amended Complaint ("SAC")

Plaintiffs Allen Braun, Michael J. Dobson, and Richard D. Teasta ("Individual Insured Plaintiffs") are insureds of Plaintiff Ironshore Indemnity Inc. ("Insurer Plaintiff") (collectively, "Plaintiffs"). On December 27, 2011, Plaintiffs filed their Second Amended Complaint ("SAC"), which is the operative pleading in this case, against Defendants Twin City Fire Insurance Company and The Hartford Financial Services Group Inc. (collectively, "Insurer Defendants").

The gravamen of the Plaintiffs' claims is that an insurance policy required Insurer Defendants to pay settlement costs and defense costs to Individual Insured Plaintiffs in underlying litigation and, when Insurer Defendants failed to do so, Insurer Plaintiff paid instead. Insurer Plaintiff brings as assignee of the Individual Plaintiffs a First Claim for breach of contract for failure to pay defense costs (SAC ¶¶ 104-09) and Second Claim for breach of contract for failure to indemnify (SAC ¶¶ 110-15). Insurer Plaintiff also brings a Fourth Claim for Subrogation (SAC ¶¶ 127-28). All Plaintiffs bring a Third Claim for breach of the implied covenant of good faith and fair dealing (SAC ¶¶ 116-26) and Fifth Claim for declaratory relief as to the rights and responsibilities of the parties (SAC ¶¶ 129-32).*fn1

b.The Policy

Defendant Twin City Fire Insurance Company issued an insurance policy, Private Choice Encore!! Policy, No. 00 BK 0256868-09 ("Policy"), to the company EZ Lube LLC for the Policy Period of April 22, 2009 to September 22, 2010. Pl. Ironshore's Statement of Genuine Dispute (Dkt. 139) at ¶ 1. This Policy contained the following relevant language.

i.Covered Claim

The Policy states: "Insurer shall pay Loss on behalf of the Insured Persons resulting from an Insured Person Claim first made against the Insured Person during the Policy Period . . . for a Wrongful Act by the Insured Persons . . . ." See Defs.' Response (Dkt. 129) at ¶ 18. "Loss means the amount the Insureds are legally obligated to pay solely as a result of a Claim covered by this [Policy], including Defense Costs . . . settlement amounts . . . ." See Defs.' Response (Dkt. 129) at ¶ 24. The Policy defines "Defense costs" as "reasonable and necessary legal fees and expenses incurred in the investigation, defense or appeal of a Claim." Id. at ¶ 25.

ii.Allocation Provision

The part of the Policy referred to by both parties as the "Allocation Provision" states: "[w]hen Insureds . . . incur an amount consisting of both Loss that is covered by this Policy and also loss that is not covered by this Policy because such Claim includes both covered and uncovered matters or covered and uncovered parties, then Loss shall be allocated between covered Loss and non-covered loss based upon the relative legal exposure of all parties to such matters." Pl. Ironshore's Statement of Genuine Dispute (Dkt. 139) at ¶ 7.

iii.No-Voluntary-Payment Provision

The part of the Policy referred to by this Court as the "no-voluntary-payment provision" states: "Insureds shall not . . . enter into any settlement agreement . . . or incur any Defense Costs regarding any Claim without the prior written consent of the Insurer, such consent not to be unreasonably withheld. The Insurer shall not be liable for any . . . settlement . . . or Defense Costs to which it has not consented." Pl. Ironshore's Statement of Genuine Dispute (Dkt. 139) at ¶ 3.

c.EZ Lube Bankruptcy and Creditors' Committee letter

EZ Lube filed for reorganization pursuant to Chapter 11 of the Bankruptcy Code on December 9, 2008, in an action entitled In Re EZ Lube, LLC et al., Debtors, bearing Chapter 11 Case No. 08-13256 (hereafter the "Bankruptcy Action"). Defs. Response (Dkt. 129) at ¶ 1. The Official Committee of Unsecured Creditors ("Creditors Committee") filed a motion in the Bankruptcy Action to pursue claims on behalf of the debtor's estate. Id. at ¶ 2. On November 5, 2009, counsel for Individual Insured Plaintiffs forwarded to Insurer Defendants a letter from the Creditors Committee demanding $9.5 million that the Individual Insured Plaintiffs acquired in fraudulent transfers; the letter is one of multiple Exhibit Ks attached to one of multiple Sturmer Declarations. The specific Exhibit K identified at oral argument states that the Individual Insured Plaintiffs "received cash and benefits aggregating at least $62 million in the LBO transaction" and that the Creditors Committee is "offer[ing] to settle all of the claims against the Defendants relating to the 2005 LBO for the sum of $9.5 million." Sturmer Decl. (Dkt. 118-1) Ex. K.

d.Underlying Invotex Action

On August 6, 2010, the Creditor Committee's trustee, Invotex Inc., sued Individual Plaintiffs Allen Braun, Michael J. Dobson, and Richard D. Teasta in Invotex Inc. v. EZL-I Investments Inc. et al. See Economou Decl. (Dkt. 114) Ex 3 (Invotex Complaint); Defs. Response (Dkt. 129) at ¶ 23; Invotex Compl. (CV 10-1189 Dkt. 1). The Invotex Complaint contained eleven Claims. See Economou Decl. (Dkt. 114) Ex 3 at 1. The first ten Claims are for various acts of fraud. See id. at 22 (Count I "Actual Fraud"), 25 ( Count II "Constructive Fraud"), 27 (Count III "Actual Fraud"), 29 (Count VI "Constructive Fraud"), 31 (Count V "Actual Fraud"), 33 (Count VI "Constructive Fraud"), 34 (Count VII "Actual Fraud"), 36 (Count VIII "Constructive Fraud"), 38 (Count IX "Actual Fraud"), 39 (Count X "Constructive Fraud").

The Prayer for Relief in the Invotex Complaint states that these ten Claims collectively seek "to recover the $26,668,831 payment . . . made to" Individual Insured Plaintiffs and "to recover the payment" of additional millions of dollars and property "fraudulently . . . transferred" to Individual Insured Plaintiffs. See Economou Decl. (Dkt. 114) Ex 3 at 45-46 (Counts I and II seek "to recover the $26,668,831 payment . . . made to" Individual Insured Plaintiffs and Counts II, IV, V, VI, VII, VIII, IX, and X seek "to recover the payment" of additional millions of dollars and property "fraudulently . . . transferred" to Individual Insured Plaintiffs).

The eleventh Claim is styled as "breach of fiduciary duty." See id. at ¶¶ 272-95. This breach of fiduciary Claim alleges that the Individual Insured Plaintiffs: (1) engaged in the LBO transaction "for their own pecuniary gain"; (2) "caus[ed] EZ Lube to cancel and forgive loans due and owing from [the Insureds] personally"; (3) "accept[ed] fraudulent transfers"; and (4) "caus[ed] EZ Lube to pay a pre-payment penalty of nearly $1.4 million for no reason whatsoever."*fn2 Id. at ¶¶ 65, 277, 285-88. The Prayer for Relief in the Invotex Complaint states that this eleventh Claim seeks "an amount . . . based on the harm to the Debtors' unsecured creditors as a result of [the Individual Insured Plaintiffs'] breaches of fiduciary duties." Id. at 46:10-12 (Prayer for Relief for Count XI).

e.Insurer Defendants and Individual Insured Plaintiffs' Correspondence Regarding the Underlying Invotex Action

In August 2010, the Individual Insured Plaintiffs gave "notice of the Invotex Action" to Insurer Defendants. Pl. Ironshore's Statement of Genuine Dispute (Dkt. 139) at ¶ 31. On October 5, 2010, Insurer Defendants advised the Individual Insured Plaintiffs by letter that the Underlying Invotex Action was not covered by the Policy. Id. at ¶ 31. However, after reserving its rights, Insurer Defendants agreed to "advance ten percent (10%) of the reasonable covered Defense Costs" and "subject to the satisfaction of the retention," which was $75,000. Id.

After the October 5, 2010, discussion, the Insurer Defendants and Individual Insured Plaintiffs exchanged numerous letters. Id. at ¶ 36. On January 27, 2011-five days before filing the present case against Insurer Defendants-the Individual Insured Plaintiffs requested that the Insurer Defendants "immediately reimburse 55% of defense costs going forward" and "agree to fund 55% of a $4.6 million settlement demand made by [the third-party complainant] in the Invotex matter." See Economou Decl. (Dkt. 114) Ex 39 at 1; Compl. (Dkt. 1) (filed February 2, 2011).*fn3

On May 26, 2011, shortly after this Court denied a motion to dismiss, the Insurer Defendants and Individual Insured Plaintiffs had a meeting in which the Insurer Defendants offered to contribute $750,000 toward any settlement of the Underlying Invotex Action. Pl. Ironshore's Statement of Genuine Dispute (Dkt. 139) at ¶ 45; April 14, 2011, Minute Order (Dkt. 27). At that meeting, the Insurer Defendants also requested to be kept apprised of the settlement negotiations and asked for copies of all invoices. Pl. Ironshore's Statement of Genuine Dispute (Dkt. 139) at ¶ 45.

After the meeting on May 26, 2011, weeks passed without an update from the Individual Insured Plaintiffs, even though Insurer Defendants reached out to them on several occasions in order to obtain a status report. Id. at ¶ 47.

On July 14, 2011, the Individual Insured Plaintiffs settled the Underlying Invotex Action for $3.5 million. Id. at ¶ 51. None of the Plaintiffs notified Insurer Defendants of the settlement in advance nor requested or received the Insurer Defendants' consent to the settlement. Id. at ¶ 54.

f.Absence of Evidence that Individual Insured Plaintiffs Incurred Defense Costs

Plaintiffs' only evidence of something that could possibly be construed as defense costs in the Invotex Action is: (1) Insurer Plaintiff's own memorandum ("May 2011 Memorandum") to Lewis Miller, who is the Individual Insured Plaintiffs' attorney, summarizing various invoices by firm name or date; and (2) testimony by the Individual Insured Plaintiffs giving their "best estimate" as to the amounts they paid to defend the Invotex Action. See Sturmer Decl. (Dkt. 120-1) Ex FF at 397 (memorandum dated May 31, 2011); Sturmer Decl. (Dkt. 135-4) Exs. G at (Dobson Depo. 107:8-12, 126:22-127:12), H (Teasta Depo. 43:19-44:5).

As discussed in this Order, the Court concludes that this evidence is inadmissible.

g.Insurer Plaintiff Pays Individual Insured Plaintiffs

On May 31, 2011, Insurer Plaintiff transmitted a check for $409,358.94 to Lewis Miller, who is an attorney for Individual Insured Plaintiffs. See Defs.' Response (Dkt. 129) at ΒΆ 83; Sturmer Decl. (Dkt. 120-1) Ex FF at 397. Insurer Plaintiff had previously issued to EZ Lube LLC the Policy 00J0H0902001, which is a Side-A Directors and Officers Liability Insurance Policy and for ...


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