Opinion
No. 653412/2011.
2012-06-28
Courtney DUPREE, Plaintiff, v. SCOTTSDALE INSUR. CO., Defendant.
Id. at Endorsement 17. Id. at § (C)(1)(l). The Continuity Date is May 5, 2009.
SHIRLEY WERNER KORNREICH, J.
This is an action brought by a corporate officer to compel an insurance carrier to pay defense costs in both a criminal prosecution and a civil action, under a director's and officer's policy (D & O Policy). Plaintiff, Courtney DuPree, was the President and Chief Executive Officer (CEO) of GDC Acquisitions, LLC (GDC), a holding company with interests in three subsidiaries, JDC Lighting, LLC, Unalite Electric and Lighting, LLC, and Hudson Bay Environmental Group, LLC. The criminal and civil proceedings have as their genesis August 2008 bank loans by Amalgamated Bank (Amalgamated) to the subsidiary companies.
The loans were guaranteed by GDC and allegedly made by falsifying financial statements and concealing GDC's acquisition of a new subsidiary.
The loans consisted of an $18,500,000 revolving credit note and a $2,500,000 term note.
The new subsidiary, allegedly purchased without the knowledge of Amalgamated prior to May 5, 2009 and allegedly purposefully concealed from the bank, was Image Lighting, LLC. The agreement with Amalgamated prohibited the acquisition within 18 months prior to May 5, 2009.
Mr. DuPree, Thomas Foley, who was outside counsel and, at times, Chief Operating Officer (COO), and Rodney Watts, who was at times the Chief Financial Officer (CFO) and Chief Investment Officer of GDC, were indicted by the United States Attorney's Office for the Eastern District of New York on August 13, 2010, for their roles in the alleged scheme. The criminal investigation, originally, was against the indicted defendants as well as Frank Patello, GDC's Controller and, at times, its CFO. Mr. Patello pled guilty to the charges and testified against Mr. DuPree at trial. Among the charges for which Mr. DuPree and Mr. Watts were indicted were bank fraud and two counts of making false statements to procure the Amalgamated loan. Amalgamated commenced the civil action in August 2010.
GDC was an insured under a business and management indemnity policy, including D & O coverage, issued by Scottsdale Insurance Company (Scottsdale). The policy was a claims-made policy effective from May 19, 2010 to May 19, 2011.
On August 24, 2010, GDC sent a notice of claim to Scottsdale on behalf of the insureds, informing it of the criminal and civil proceedings and demanding indemnification. Mr. DuPree and Mr. Watts were among the insureds. Scottsdale disclaimed coverage based, inter alia, on two policy exclusions: (1) the Application Exclusion, a provision precluding coverage when the insured had knowledge of misrepresentations or omissions in the application for insurance; and (2) the Prior Knowledge Exclusion, a provision precluding coverage when claims are based on wrongful conduct that was known prior to May 5, 2009. The allegedly fraudulent documentation and concealment, which form the basis of the criminal and civil proceedings, are the grounds for the exclusions.
The prior term of the policy began on May 19, 2009.
Mr. DuPree applied to this court for a Temporary Restraining Order (TRO) and Preliminary Injunction (PI) seeking defense costs in the criminal and civil proceedings. In a January 4, 2012 interim order, this court granted the TRO and directed Scottsdale to make interim payments of Mr. DuPree's ongoing legal costs in the criminal proceeding, pending decision on the PI. That decision was affirmed. DuPree v. Scottsdale Insur. Co., ––– AD3d ––––, 2012 N.Y. Slip Op 4839 (1st Dept. June 14, 2012). Between the grant of the TRO and its affirmance, Mr. Dupree was tried and convicted by jury of the relevant charges. He moved to set aside the verdict, and that is sub judice. As a result, he as yet has not been sentenced.
On June 2, 2012, Mr. Watts moved to intervene in this action and sought a preliminary injunction. Mr. Watts' criminal trial is scheduled for August 13, 2012.
II. The Policy
The policy's D & O coverage provides for payment of costs for directors and officers legal obligations arising from a claim made against them for wrongful acts during the policy period, for which they are not indemnified by GDC. D & O Cov. Sec., § A(1) & (2). The policy also provides payment to GDC for its payments to the directors and officers. Id. The aggregate limit of liability is $5,000,000. Id. at Endorsement 30.
Claims encompass civil proceedings seeking money or injunctive relief and criminal proceedings commenced by indictment or the filing of notice of charges. Id. at § B(1)(c) & (d). Wrongful acts encompass omissions, misleading statements, misstatements, “or acts allegedly committed by (a) any of the Directors and Officers, while acting in their capacity as such, or any matter claimed against any Director and Officer solely by reason of his or her serving in such capacity.” Id. at § B(9). Directors and officers are defined as “a duly elected or appointed director, officer, or similar executive of the Company, or any member of the management board of the Company.” Id. at § B(4)(a). Costs are defined as “reasonable and necessary legal costs, charges, fees and expenses incurred by any insureds in defending Claims and the premium for appeal, attachment or similar bonds arising out of covered judgments, but with no obligation to furnish such bonds and only for the amount of such judgment that is up to the applicable Limit of Liability.” Id. at § B(3)(a). Finally, the policy provides: “It shall be the duty of the Insurer and not the Insureds to defend any Claim ... However, the Parent Company shall have the right to select the defense attorney or to consent to the Insurer's choice.” Id. at Endorsement 1.
Exclusions from coverage appear in the policy. Among such exclusions in the body of the policy is loss stemming from a claim “alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving any dishonest, deliberately fraudulent or criminal act of an insured; provided, however this exclusion shall not apply unless and until there is a final judgment against such insured as to such conduct.” Id. at § (C)(1)(f).
Other exclusions include the Application Exclusion. It provides:
In the event the Application,
including materials submitted or required to be submitted therewith, contains any misrepresentation or omission made with the intent to deceive, or contains any misrepresentation or omission which materially affects either the acceptance of the risk or the hazard assumed by the insurer under this Policy, this Policy, including each and all Coverage Sections, shall not afford coverage to the following Insureds for any Claim alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving, any untruthful or inaccurate statements, representations or information: a. any Insured who is a natural person and who knew the facts misrepresented or the omissions, whether or not such individual knew of the Application, such materials, or this Policy:
Application is defined in the General Terms and Conditions of the Policy to include the insurance application, attachments to it and all other information and materials submitted to Scottsdale.
* * * *
with respect to any, statement, representation or information contained in the Application, or in the materials submitted or required to be submitted therewith, and solely with respect to the above exclusion, no knowledge possessed by any Insured who is a natural person shall be imputed to any other Insured who is a natural person. [emphasis added]
Id. at Endorsement 17.
Another Exclusion in the policy is the Prior Knowledge Exclusion. It provides:
Insurer shall not be liable for any Loss under this Coverage Section on account of any Claim alleging, based upon, arising out of, attributable to, directly or indirectly resulting from, in consequence of, or in any way involving, any Wrongful Act, fact, circumstance or situation which any of the Insureds had knowledge of prior to the Continuity Date where such Insureds had reason to believe at the time that such known Wrongful Act could reasonably be expected to give rise to such Claim. [emphasis added]
Id. at § (C)(1)(l). The Continuity Date is May 5, 2009.
III. Discussion
The duty of an insurer to defend is broader than its duty to indemnify. Utica First Insur. Co. v. Star–Brite Painting & Paperhanging, 36 AD3d 794, 796 (2d Dept 2007). The duty “arises whenever the allegations contained in the complaint against the insured, liberally construed, potentially fall within the scope of the risks which the insurer has undertaken.” Id. Indeed, “an insurer may be obligated to defend its insured even if, at the conclusion of an underlying action, it is found to have no obligation to indemnify its insured,” since the duty arises whenever there is “a reasonable possibility of coverage.” ‘ Global Constr. Co., LLC v. Essex Ins. Co., 52 AD3d 655, 655–6 (2d Dept 2008); see Savik, Murray & Aurora Constr. Mgt. Co., LLC, v. ITT Hartford Ins. Grp., 86 AD3d 490, 494 (1st Dept), ap dismissed17 NY3d 901 (2011) (insurer has duty to defend even though facts outside four corners of pleadings indicate claim may not be covered); Zurich–American Ins. Cos. v. Atlantic Mut. Insu. Cos., 139 A.D.2d 379, 384 (1st Dept 1988), affd74 N.Y.2d 621 (1989) (duty not contingent on duty to indemnify but rests on whether any facts bring action within protection purchased). As long as an issue resolving coverage remains unresolved, the insurer has a duty to defend the insured. Zurich–American, id. at 385.
Moreover, the law regarding interpretation of exclusionary clauses contained in insurance policies “is highly favorable to insureds.” Pioneer Tower Owners Ass'n. v. State Farm Fire & Cas. Co., 12 NY3d 302, 306 (2009).
“[W]henever an insurer wishes to exclude certain coverage from its policy obligations, it must do so in clear and unmistakable language. Any such exclusions or exceptions from policy coverage must be specific and clear in order to be enforced. They are not to be extended by interpretation or implication, but are to be accorded a strict and narrow construction. Indeed, before an insurance company is permitted to avoid policy coverage, it must satisfy the burden which it bears of establishing that the exclusions or exemptions apply in the particular case, and that they are subject to no other reasonable interpretation.”
Id. at 307 citing to Seaboard Surety Co. v. Gillette Co., 64 N.Y.2d 304, 311 (1984). Hence, policy exclusions must “have a definite and precise meaning, unattended by danger of misconception ... and concerning which there is no reasonable basis for a difference of opinion.” ‘ Id. Any ambiguity will be interpreted in favor of the insured. Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377 (2003); Ins. Co. of Greater N.Y. v. Clermont Armory, LLC, 84 AD3d 1168 (2d Dept), lv denied17 NY3d 714 (2011).
In sum, the insurer bears the burden of proving that the allegations in the underlying claim “cast the pleadings wholly within the exclusion, that the exclusion is not subject to any other reasonable interpretation, and that there is no possible factual or legal basis upon which the insurer might be eventually obligated to indemnify the insured.” Utica, supra, 36 AD3d 796;see Seaboard, supra (exclusion must be in clear and unmistakable language, not extended to interpretation or implication). As noted by the Court of Appeals, precedent requires the New York courts to read exclusions narrowly and in favor of coverage. Pioneer, supra, 12 NY3d 308.
A. DuPree Preliminary Injunction
In keeping with the above legal tenets, the Appellate Division affirmed this court's TRO regarding Mr. Dupree and cited to the seminal case of Federal Ins. Co. v. Kozlowski, 18 AD3d 33 (1st Dept 2005). Dupree, supra * * 2. Specifically, the Appellate Division stated, “Absent a final adjudication that plaintiff's alleged wrongdoing does indeed fall under the policy's exclusions, the policy remains in effect and defendant is required to pay attorneys' fees and defense costs, subject to recoupment in the event it is ultimately determined that the exclusions apply.” Id. at * * 1–2. This holding is binding upon this court. See Carmona v. Mathisson, 92 AD3d 492, 492–3 (1st Dept 2012) (appellate resolution of issue on prior appeal constitutes law of case binding on Supreme Court and precluding parties from relitigating issue).
Mr. Dupree's conviction by the jury is not a final adjudication. NYCPL 1.20(15) (criminal judgment defined as conviction and sentence imposed thereon, completed by imposition and entry of sentence); Johnson v. U.S., 623 F3d 41, 45 (2d Cir2010) (final judgment in criminal case is sentencing), citing to Berman v. U.S., 302 U.S. 211, 212 (1937). Consequently, Mr. DuPree's application for a preliminary injunction declaring that Scottsdale is directed to pay Mr. DuPree's legal costs as they accrue until final adjudication that plaintiff's alleged wrongdoing falls within a policy exclusions, is granted. However, Scottsdale's obligations under the policy do not exceed the policy limit of $5,000,000.
B. Watts' Motion
At oral argument, the court granted Mr. Watts' motion to intervene in this action, without opposition. What remains in Mr. Watts' application, thus, is the same issue adjudicated on Mr. DuPree's preliminary injunction motion. Since Scottsdale has litigated this very issue before the Appellate Division, the law of the case requires Scottsdale to pay Mr. Watts' legal costs until final adjudication that his alleged wrongdoing falls within policy exclusions. See Carmona, supra.
However, even were this not the case, the court would rule in favor of Mr. Watts. As argued by Mr. Watts, the Application Exclusion in the subject D & O policy turns on the very facts at issue in the criminal and civil proceedings—Mr. Watts' knowledge of the alleged misrepresentations and omissions. As such, the issue resolving coverage remains unresolved, and Scottsdale has a duty to defend. See Zurich–American, supra, 139 A.D.2d 385.
In addition, the Knowledge Exclusion turns on the insureds' knowledge of the Wrongful Act giving rise to the criminal and civil proceedings, prior to May 5, 2009, and their reasonable belief that such Wrongful Act would give rise to a claim. This second exclusion may or may not be limited by a severance provision stating that the knowledge possessed by any insured is not to be imputed to any other insured. Similarly, this exclusion and the Application Exclusion may be circumscribed by Section (C)(1)(f) of the policy which limits an exclusion based upon dishonest, deliberately fraudulent or criminal conduct of an insured to final judgment against the insured.
Given that Scottsdale's heavy burden of proving the Knowledge Exclusion covers the proceedings against Mr. Watts, that it is not subject to any other interpretation and that there is no factual or legal basis upon which Scottsdale might have to pay Mr. Watts' defense costs, the exclusion does not bar payment at this time. See Pioneer, supra, 12 NY3d 307; Utica, supra, 36 AD3d 796. Moreover, both Mr. Watts and Mr. DuPree would be irreparably harmed were their ongoing defense costs not paid since the criminal trial of Mr. Watts is to begin in August and the motion to set aside the verdict and sentencing are ongoing in Mr. Dupree's criminal case. The harm to the insurance company is expenditure of money which may or may not be subject to recoupment. Further, a balancing of the equities clearly favors Mr. Watts and Mr. Dupree.Finally, considering both irreparable harm and the equities, Scottsdale is directed to pay the defense costs for Mr. Watts, as they accrue from the date of his application for this preliminary injunction, June 7, 2012, and for Mr. Dupree, from the date of this Court's TRO, January 4, 2012. To hold otherwise and order payment of past defense costs, as movants ask, may well deplete the $5,000,000 limit on the policy and deprive Mr. Watts of counsel for his criminal trial. Indeed, to order full payment of past defense costs on this motion for injunctive relief would decide the ultimate relief on the defense cost issue, rather than preserve the status quo. See Ruiz v. Meloney, 26 AD3d 485 (2d Dept 2006); Morris v. Port Auth. of N.Y. & N.J., 290 A.D.2d 22, 26 (1st Dept 2002); Accordingly, it is
ORDERED that Scottsdale Insurance Company is directed to pay Courtney DuPree's legal expenses in both the criminal and civil proceedings brought against him, as they accrue and subject to recoupment up to the policy limit, until final adjudication that his alleged wrongdoing falls within policy exclusions; and it is further
ORDERED that Mr. Watts' motion to intervene in this proceeding is granted, and he is permitted to intervene in the above-titled action as a party plaintiff; and it is further
ORDERED that Mr. Watts file and serve a summons and complaint within 10 days of this decision, that the caption be amended to add Mr. Watts as a party plaintiff and that defendant answer the summons and complaint within 20 days of service; and it is further
ORDERED that the attorney for the intervener shall serve a copy of this order with notice of entry upon the County Clerk (rm.141B) and upon the Clerk of the Trial Support Office (rm.158), who are directed to amend their records to reflect such change in the caption; and it is further
ORDERED that Scottsdale Insurance Company is directed to pay Rodney Watts' legal expenses in both the criminal and civil proceedings brought against him, as they accrue and subject to recoupment up to the policy limit, until final adjudication that his alleged wrongdoing falls within policy exclusions.