Opinion
Civil Action No. 01-10122-RWZ.
March 14, 2002
MEMORANDUM OF DECISION
M4 Environmental, LP, ("M4") was a corporate partnership formed in 1994 for the purpose of conducting business in the environmental remediation industry. Plaintiffs Albert Narath, William F. Ballhaus and John Manuel were members of the board of directors of M4 Environmental Management, Inc. ("M4 Management"), the general partner of M4. After M4 and M4 Management declared bankruptcy in 1997, their Chapter 11 Trustee filed suit against the plaintiffs for breach of fiduciary duties owed to equity holders and creditors of M4. In this action, the plaintiffs seek insurance coverage under a General Partners Liability ("GPL") policy issued to them by Executive Risk Indemnity Inc. ("Executive Risk") for claims brought against them by the Trustee of M4 and M4 Management.
Stephen S. Gray serves as the bankruptcy trustee for M4, M4 Management, Molten Metal Technology, Inc. ("MMT"), and MMT Federal Holdings, Inc. ("MMT Federal"), whose bankruptcy proceedings are being jointly administered as Cases. Nos. 97-12385-CJK through 97-21389 before Judge Carol Kenner in the United States Bankruptcy Court for the District of Massachusetts.
Executive Risk argues that coverage is unavailable to the plaintiffs because it is barred by various exclusions in the GPL policy. Specifically, the policy does not cover (1) claims brought by one insured party against another insured party, or (2) claims which were the subject of pending litigation or prior notice. Executive Risk contends that the claims for which the plaintiffs seek coverage fit into both excluded categories. The parties have filed cross-motions for summary judgment.
I. Background
M4 was formed in 1994 as a joint venture between MMT Federal Holdings, Inc. ("MMT Federal") and the Martin Marietta Corporation ("Martin Marietta") for the purpose of developing and marketing technologies for the environmental remediation industry. When Martin Marietta later merged with Lockheed Corporation, the surviving company, Lockheed Martin Corporation ("LMC"), inherited Martin Marietta's partnership interest in M4.
MMT Federal was a subsidiary of Molten Metal Technology, Inc. ("MMT").
In 1996 the partnership was restructured to include one general partner, M4 Management (1%), and two limited partners, MMT Federal (49.5%) and a subsidiary of LMC (49.5%). As the general partner of M4, M4 Management was responsible for all of M4's obligations and liabilities. MMT Federal and the LMC subsidiary each appointed four people to the board of M4 Management. The plaintiffs, all high-level executives at LMC, were three of LMC's four appointees to the board of M4 Management.
By early 1997, M4 was insolvent. The partnership was once again restructured on June 16, 1997, and significant profitable assets of M4 were transferred to LMC. M4 ultimately filed for Chapter 11 protection on December 3, 1999. M4's Chapter 11 Trustee later filed suit against the plaintiffs (the "Trustee Action") alleging that their involvement in M4's restructuring, which resulted in a favorable asset transfer to LMC, constituted a breach of their fiduciary duties to the shareholders and creditors of M4.
Executive Risk issued a GPL policy to M4 on June 17, 1997, providing liability coverage to M4's general partners (including M4 Management and its directors) from that date until June 17, 2000. Plaintiffs seek coverage under this policy.
II. Cross-Motions for Summary Judgment on Policy Coverage
The "insured v. insured," "prior litigation" and "prior notice" exclusions of the GPL policy at issue are virtually identical to those in a directors and officers ("D O") liability policy offered by Executive Risk which is the subject of another matter before this court, Peter A. Lewis v. Executive Risk Indemnity, Inc., No. 00-CV-11093. Lewis, like this case, arose out of the bankruptcy of MMT, which in turn caused the bankruptcies of MMT Federal, M4 and M4 Management. While the two cases involve different facts, they raise the same questions of law regarding coverage for claims by the trustee under the exclusions in the Executive Risk policies. This decision therefore echos the ruling in Lewis.
A. "Insured v. Insured" Exclusion
In the Executive Risk GPL policy, the "insured v. insured" exclusion states that the policy does not cover Claims brought "by or on behalf of, or in the name or right of, the Partnership or any Insured." Executive Risk argues that the "insured v. insured" exclusion bars coverage because the Trustee Action is brought "by, or on behalf of" M4, the insured partnership. The plaintiffs respond that the Trustee Action is brought on behalf of the shareholders and creditors, not M4.
In the Executive Risk policy, "Claims" is defined, in relevant part, as "any civil proceeding in a court of law or equity."
As in Lewis, the identity of the party bringing suit is the determining factor here in deciding whether coverage is barred by the "insured v. insured" exclusion. The trustee has indicated that he represents the shareholders and creditors of M4, and they will surely benefit from the action. M4, by contrast, has been insolvent for almost five years and exists largely for the purpose of retrieving and liquidating assets for the benefit of creditors and, potentially, shareholders. There is no question that M4's Chapter 11 trustee is an adverse party with respect to the plaintiffs. As I described in Lewis, courts have generally found "insured v. insured" exclusions inapplicable where, as here, one "insured" is the trustee or receiver of an insolvent institution bringing claims against the management of that institution. See Pintlar Corp. v. Fidelity and Cas. Co. of New York, 205 B.R. 945 (Bankr.D.Idaho 1997), aff'd, Cigna Ins. Co. v. Gulf USA Corp., 1997 WL 1878757 (D.Idaho 1997). See also, American Cas. Co. of Reading, Pennsylvania v. Sentry Sav. Bank, 867 F. Supp. 50 (D.Mass. 1994). This is largely because the parties are adverse, and the purpose of the exclusion — to prevent collusion between insured parties — is defeated. The reasoning in these decisions applies with equal force to this case. Accordingly, the "insured v. insured" exclusion is inapplicable to the Trustee Action, and plaintiff's motion for partial summary judgment on this issue is allowed; defendant's is denied.
Because the "insured v. insured" exclusion does not apply here, it is unnecessary to address whether the trustee's claims on behalf of shareholders are exempt from the "insured v. insured" exclusion altogether pursuant to the GPL's special provision for derivative suits.
B. "Pending Litigation" and "Prior Notice" Exclusions
At the time the summary judgment briefs were filed, the defendants moved for an extension of discovery in order to respond to the plaintiffs' motion for partial summary judgment on this issue. Plaintiffs did not oppose, and the extension was granted. The parties have since filed, and I have allowed, several motions to further extend discovery including, most recently, a joint motion to extend the discovery schedule until July 8, 2002. This motion is granted, and I will defer ruling on the applicability of the "pending litigation" and "prior notice" exclusions until that time.