Opinion
No. X04 CV 02 0103527 S
September 8, 2006
MEMORANDUM OF DECISION
The plaintiff Southridge Capital Management, LLC ("Southridge"), is a private investment advisory firm based in Ridgefield, CT. It provides financial advisory services to funds that provide investment capital primarily to small and micro-cap companies. The plaintiff Navigator Management, Ltd ("Navigator"), is a corporation with a principal place of business in the British Virgin Isles. Navigator has been a director of various funding vehicles, called "Special Purpose Vehicles," which have directly provided capital to small, publicly traded companies. The plaintiff David Sims, a resident of the British Virgin Isles, has been a director and officer of Navigator.
Southridge has aided in the provision of capital to publicly held companies. Several of those companies have brought legal actions against Southridge and various allied entities; they claim, in general, that the investment practices resulted in the investment vehicles' recovering a great portion of the common stock of the companies, to the extent that, at least in some instances, the SPV's had the ability to control of the companies. In the instances alleged in the underlying complaints, the Special Purpose Vehicles ("SPV's") provided capital to the companies under a reasonably complex and allegedly onerous arrangement. As at least part of the consideration for the lending, the SPV received shares of stock, or the rights to receive stock in some form, in the companies receiving the investment. The number of shares which the SPV's were entitled to receive in the future was inversely proportional to the price of the stock, so that the amount of dollar compensation was fixed rather than the number of shares. The "underlying actions" allege that Southridge or an ally would manipulate the price of the company downward, by, for example, short selling and/or flooding the market with shares received as compensation. In thinly capitalized companies, relatively few shares on the market will create a relatively great variation in price of the shares. When the price was depressed, the SPV's would ultimately be entitled to a proportionately greater number of shares. Five such legal actions provide the background for the allegations of the present case.
When one "sells short," one profits when the price of shares goes down. One borrows a certain number of shares, classically from a broker, and promises to pay back the same number of shares at a specified time in the future. One sells the shares. One later buys on the market the number of shares needed to pay back the broker. If the price per share has gone down, then one's cost to buy on the market the requisite number of shares is less than the amount generated by the initial sale of the shares. There is additionally a fee to pay the broker for the loan of the shares.
The defendant has referred to this method of financing as "death spiral financing." The method has been discussed in various articles, including several Wall Street Journal presentations. I express no opinion, nor need I, as to whether this sort of financing is rapacious. Though there may at times be draconian results, there also is likely to be considerable risk to the lender and a concomitant need for protection. Gratuitous profiteering at the expense of the debtor, however, may in some circumstances be appropriately actionable.
Meanwhile, Southridge had taken steps to insure itself. It procured an investment company and directors and officers liability policy from Reliance National Insurance Company ("Reliance") with an effective date of October 15, 1999. Reliance soon encountered financial difficulties and Twin City Fire Insurance Company ("Twin City"), one of The Hartford companies, assumed the policy as of July 6, 2000. Southridge has requested coverage under the Twin City policy for, at this point, the costs of defense of five of the underlying actions. Twin City has denied coverage for four of the actions and, under a reservation of rights, has advanced a portion of the defense costs with respect to the fifth. Each of the actions will be discussed in greater detail, infra. In this case, both sides seek declarations as to coverage and the resolution of ancillary claims.
In its third amended complaint, Southridge seeks a declaratory judgment as to coverage. It also alleges breach of contract, unjust enrichment, breach of covenants of fair dealing, and violations of the Connecticut Unfair Trade Practices Act ("CUTPA") and Connecticut Unfair Insurance Practices Act ("CUIPA"). Twin City has denied several of the allegations and has filed defenses and counterclaims seeking declaratory judgments in several actions and reimbursement of amounts it has paid to defend one of the actions.
The underlying actions may be described, for present purposes, as follows. More detail will be added during discussions of the specific claims. Southridge does not claim coverage of any kind for the first relevant underlying action, which is relevant only because it forms the basis for one of Twin City's positions on coverage. The case is Restaurant Teams International, Inc. v. Dominion Capital Fund, Ltd., No. 1:99 CV4138 (S.D.N.Y., transferred from E.D.Texas) (" RTIN"). The plaintiff corporation alleged that it issued debentures convertible to common stock to Dominion Capital Fund and Sovereign Partners Limited Partnership, named insureds under the Reliance/Twin City policy. The plaintiff alleged that contrary to earlier promises, the defendants sold short, depressing the price of the stock and profiting thereby. None of the plaintiffs seeking coverage in the instant action were defendants in RTIN, though they were entities related to plaintiffs currently seeking coverage. RTIN was filed in November 1998, and was voluntarily dismissed by the plaintiff therein in May 1999. The action was disclosed by Southridge on its application for the Reliance policy. One of Twin City's claims, to be addressed later, is that RTIN has a common nexus or is interrelated with the subsequent claims for which coverage is sought, and because of the features in common with this prior action, the subsequent actions are excluded from coverage.
The factual recitations regarding the underlying actions are not disputed, although there perhaps is a difference of opinion as to whether the complaints allege investment activity and advice on the part of insureds sufficient to invoke coverage.
The first claim for which coverage is sought is Nanopierce Technologies v. Southridge Capital Management, LLC, 1:02 CV767 (S.D.N.Y.). Nanopierce was first filed in the United States District Court in Colorado in April 2001, and served on May 21, 2001. It was transferred to the Southern District of New York and then voluntarily dismissed in July 2001. In the same month, on July 27, 2001, the action was filed in state court, where it is still pending. Notice of the action was provided to Twin City on September 21, 2001. Nanopierce claims that Harvest Court, LLC, in conjunction with Southridge, provided funding in return for stock, then contrary to promise manipulated the price downward, thereby profiting and gaining the ability to acquire more Nanopierce stock at lower prices. Twin City argues that there is no coverage for Nanopierce, among other reasons, because the notice of the state court action, although timely if viewed out of context, was late because pursuant to policy provisions the date of the claim is governed by the date of the first notice of the first action to the insured.
The second underlying action for which coverage is sought is Internet Law Library v. Southridge Capital Management, LLC, 1:01 CV6600 (S.D.N.Y) (" ILL"). ILL was initially filed in the United States District Court for the Southern District of Texas in January 2001. It was transferred to the Southern District of New York. It alleged that Southridge and related entities, particularly Cootes Drive, LLC, an SPV, drove the price of the stock down by "fraudulent" short selling. Navigator and Sims, plaintiffs in the instant action, were named as defendants in ILL on August 12, 2001. Southridge formally provided notice of ILL to Twin City on February 19, 2002. ILL was dismissed on December 8, 2005; although defense costs are considerable, the defendants in ILL paid no damages. The third and fourth cases for which coverage is sought are closely related to ILL. Brewer v. Southridge Capital Management, LLC, 1:02 CV138 (S.D.N.Y.) (" Brewer"), was brought by shareholders of ILL in the Southern District of Texas on August 24, 2001, and was transferred to the Southern District of New York. The allegations of Brewer are substantially similar to those of ILL. Brewer was reported to Twin City on September 21, 2001. Navigator and Sims were named as defendants on August 12, 2002 and notice of claims against them was provided to Twin City on October 11, 2002. Brewer was dismissed on December 8, 2005, without the payment of damages, though again defense costs were incurred.
Hoaglund v. Southridge Capital Management, LLC, 1:02 CV3967 (S.D.N.Y.) (" Hoaglund") was brought by directors of ILL on August 7, 2001. Notice was provided to Twin City on September 21, 2001. Hoaglund is substantially similar to ILL. Navigator and Sims were not named as parties in Hoaglund. Again, Hoaglund was dismissed on December 8, 2005, without the payment of damages. Both Brewer and Hoaglund are timely noticed unless the effective date of claim relates back to ILL.
The final case for which coverage is sought is Hyperdynamics Corp. v. J.P. Carey Securities, Inc., No. 2001 CV 44988 (Georgia Superior Court, 2001). This action was filed on November 5, 2001, and apparently served on December 10, 2001. It was reported to Twin City on January 18, 2002. Hyperdynamics claimed that SPV's related to Southridge provided funding to the plaintiff in exchange for convertible preferred stock. By short selling, it was alleged, the defendants gained "immense profits" at the expense of Hyperdynamics. Southridge was one of the named defendants. Twin City has made some payments toward the defense of Hyperdynamics under a reservation of rights, but seeks summary judgment in this action on the ground that it, along with all the others, relates back to RTIN and that notice in if RTIN was not provided in a timely manner.
An SPV, Wellington, LLC, sued Hyperdynamics Corp. in Delaware Chancery Court in August 2001. That case has been dismissed and Wellington's claim was asserted as a counterclaim in the Hyperdynamics action.
Additionally, as will be addressed below, Twin City claims that the allegations of the complaints in the underlying actions do not allege that insureds engaged in activities covered by the policy.
Finally, at least one action, similar in some ways, has been filed subsequent to the effective date of the policy and Twin City seeks a declaration that there is no coverage for this action, on the ground either that the claim was made after the policy period or that the date of claim effectively relates back to the RTIN matter: either way, the case would not be within the coverage of the claims-made policy in issue. This case is First Empire Corporation v. Canouse, No. 1:04 CV 02596 (N.D.Ga. 2004) ("Lecstar"). Southridge has not responded to contention, and it would appear that no claim is made for coverage under the Twin City policy.
The policy in question is relatively straightforward and both sides claim that it is clear and unambiguous. As stated above, it is a claim-made policy rather than an occurrence-based policy. The distinction is critical. In any event, the policy and the application for the policy include a number of provisions relevant to the parties' positions on coverage.
The application for the Reliance policy is dated October 7, 1999, and it includes Question 15: "Has any claim or suit been brought against the Applicant [Southridge] or any of its Trustees, Partners, Officers, Directors or Employees?" Southridge answered in the affirmative, and listed several cases including RTIN. The application provided:
Pertaining to Questions 15 and 16, it is agreed that if the Undersigned or any Insured proposed for this insurance has knowledge of any such fact or circumstance or if such pending or prior claim or suit exists, then any claim or suit arising therefrom shall be excluded from coverage under the proposed policy.
The application is a part of the policy. Pursuant to the Declarations page:
This Declarations page, together with the completed and signed application and the Investment Adviser and Investment Company Professional Liability Insurance Policy, shall constitute the contract between (1) the NAMED INSURED(S) and (2) the DIRECTORS and/or OFFICERS and [the insurer].
Several provisions in the body of the policy are applicable. The insuring agreement states in Section I.C.:
The Company shall pay on behalf of an INSURED all LOSS resulting from a CLAIM first made against an INSURED during the POLICY PERIOD and reported in writing to the Company as soon as practicable, but no later than sixty (60) days after said CLAIM is first made, provided always that said CLAIM arises from the actual or alleged rendering of or failure to render PROFESSIONAL SERVICES by an INSURED or by any other person for whose actions a NAMED INSURED is legally liable, provided further that said PROFESSIONAL SERVICES occur or are alleged to occur during or prior to the POLICY PERIOD, and after the Retroactive Date, if any, indicated in Item 2. of the Declarations.
Several definitions in the policy are relevant. Section II.A. defines a "claim" as:
CLAIM means 1) any judicial or administrative proceeding that is filed against an INSURED and/or DIRECTORS and/or OFFICERS in any state or federal court or administrative agency and in which such INSURED and/or DIRECTORS and/or OFFICERS could be subject to a binding adjudication of liability for LOSS arising from a WRONGFUL ACT and/or the rendering of or failure to render PROFESSIONAL SERVICES, or 2) a written demand from one (1) or more parties alleging that an INSURED and/or DIRECTORS and/or OFFICERS should have liability to such parties for LOSS arising from a WRONGFUL ACT and/or the rendering of or failure to render PROFESSIONAL SERVICES.
A CLAIM shall be deemed to have been first made on the date that a summons or similar document is first served upon any INSURED and/or DIRECTORS and/or OFFICERS or on the date that any INSURED and/or DIRECTORS and/or OFFICERS first received a written demand as outlined above, whichever date first occurs.
Section II.L. defines "Wrongful Act":
WRONGFUL ACT shall mean any actual or allege error or misstatement or misleading statement or act or omission or neglect or breach of duty by the DIRECTORS and/or OFFICERS in the discharge of their duties, individually or collectively, or any matter claimed against them solely by reason of their being DIRECTORS and/or OFFICERS of a NAMED INSURED.
Section II.K. defines "professional services":
PROFESSIONAL SERVICES means the rendering of financial, economic and/or investment advice and/or investment management services in the capacity of an INVESTMENT ADVISER and/or services rendered in connection with the operation of an INVESTMENT COMPANY.
Sections II.F. and II.G., respectively, define "investment adviser" and "investment." company':
INVESTMENT ADVISER means an INSURED who is a registered Investment Adviser as defined in the Investment Advisers Act of 1940 and for compensation, engages in the business of rendering financial, economic, and/or investment management services pursuant to a written contract defining the scope of such advice and/or services and the compensation to be paid therefor.
INVESTMENT COMPANY means a NAMED INSURED engaged in the operations of an INVESTMENT COMPANY as defined in the Investment Company Act of 1940.
The parties agreed to several exclusions. Section III.D. excludes:
any WRONGFUL ACT and/or the rendering of or failure to render PROFESSIONAL SERVICES arising prior to the policy inception date as indicated in Item 2. of the Declarations or the inception date of any prior policy of which this policy is a renewal or subsequent renewal of such policy, if on or before such date an INSURED and/or DIRECTOR and/or OFFICER knew or could have reasonably foreseen that such WRONGFUL ACT and/or the rendering of or failure to render PROFESSIONAL SERVICES could lead to a CLAIM.
Endorsement No. 2 added an exclusion numbered as III.L. Also excluded from coverage are:
any litigation, CLAIMS, demands, arbitration, legal or quasi-legal proceedings, decrees, or judgments against the INSURED(S), occurring prior to, or pending as of October 15, 1999, of which the INSURED(S) had received notice or otherwise had knowledge as of such date;
any subsequent litigation, CLAIMS, demands, arbitration, legal or quasi-legal proceedings, decrees, or judgments against the INSURED(S) arising from, or based on substantially the same matters as alleged in the pleadings of such prior or pending litigation, CLAIMS, demands, causes of action, legal or quasi-legal proceedings, decrees, or judgments against the INSURED(S); or
any act(s) of the INSURED(S) which gave rise to such prior or pending litigation, CLAIMS, demands, legal or quasi-legal proceedings, decrees, or judgments against the INSURED(S).
The "Notice of Claim" section of the policy provides, in section VIII.B.:
If during the POLICY PERIOD . . . written notice of a CLAIM has been given to the Company pursuant to the terms and conditions of this policy, then any subsequent CLAIMS made against an INSURED and/or DIRECTOR and/or OFFICER and reported to the Company alleging, based upon, arising out of, attributable to, or in any manner relating to the facts and/or circumstances alleged in such noticed initial CLAIM, shall be considered all one (1) CLAIM reported at the time the initial CLAIM was reported to the Company. The LIMIT OF LIABILITY available at the time such initial CLAIM was reported shall be the LIMIT OF LIABILITY applicable to such subsequent CLAIMS.
Finally, for present purposes, the section of the policy devoted to limits of liability provides, at IV.B.:
Any CLAIMS based upon, arising out of, attributable to, in connection with, or in any manner relating to interrelated and/or related WRONGFUL ACTS and/or the rendering of or failure to render PROFESSIONAL SERVICES shall be considered a single CLAIM. All such related CLAIMS shall be deemed first made within the POLICY PERIOD or the EXTENDED REPORTING PERIOD in which the earliest of such CLAIMS was first made and reported to the Company, and the aggregate Limit of Liability then in effect shall be applicable to all such related CLAIMS.
The term interrelated and/or related WRONGFUL ACTS and/or the rendering of or failure to render PROFESSIONAL SERVICES, shall mean those WRONGFUL ACTS and/or the rendering of or failure to render PROFESSIONAL SERVICES which have as a common nexus any fact, circumstance, situation, event, transaction, or series of facts, circumstances, situations, events and/or transactions. Such interrelated and/or related WRONGFUL ACTS and/or the rendering of or failure to render PROFESSIONAL SERVICES whenever occurring shall be considered as one (1) WRONGFUL ACT and/or the rendering of or failure to render PROFESSIONAL SERVICES.
It is on the confluence of the underlying actions and the provisions of the policy that both sides seek summary judgment as to certain claims. The plaintiffs seek summary judgment in their favor as to Twin City's special defenses alleging that plaintiffs provided late notice of the underlying actions to Twin City and as to Twin City's counterclaim and defenses which are grounded on the "relatedness" between the underlying actions and RTIN. Twin City seeks summary judgment in its favor as to all counts of the plaintiffs' third amended complaint.
Summary judgment "shall be rendered forthwith if the pleadings, affidavits and any other proof submitted show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." LaFlamme v. Dallessio, 261 Conn. 247, 250 (2002); Practice Book § 17-49. The party moving for summary judgment bears the burden of proving the absence of a genuine dispute as to any material fact; and the party opposing such a motion must provide an evidentiary foundation to demonstrate the existence of a genuine issue of material fact. "Equally well settled is that the trial court does not sit as the trier of fact when ruling on a motion for summary judgment . . . [T]he trial court's function is not to decide issues of material fact, but rather to determine whether any such issues exist." (Citations omitted; internal quotation marks omitted.) Field v. Kearns, 43 Conn.App. 265, 269-70, cert. denied, 239 Conn. 942 (1996). "To satisfy his burden the movant must make a showing that it is quite clear what the truth is, and that excludes any real doubt as to the existence of any genuine issue of material fact." Witt v. St. Vincent's Medical Center, 252 Conn. 363, 373 n. 7 (2000); D.H.R. Construction Company v. Donnelly, 180 Conn. 430, 434 (1980). In deciding a motion for summary judgment, the trial court must view the evidence in the light most favorable to the nonmoving party. The test is whether a party would be entitled to a directed verdict on the same facts. Sherwood v. Danbury Hospital, 252 Conn. 193, 201 (2001); Serrano v. Burns, 248 Conn. 419, 424 (1999); Forte v. Citicorp Mortgage, Inc., 66 Conn.App. 475 (2000). In Connecticut, "[a] trial court should direct a verdict for a defendant if, viewing the evidence in the light most favorable to the plaintiff, [the trier of fact] could not reasonably and legally reach any other conclusion than that the defendant is entitled to prevail." (Internal quotation marks omitted.) Colombo v. Stop Shop Supermarket Co., 67 Conn.App. 62, 64 (2001), cert. denied, 259 Conn. 912 (2002).
I. Twin City's position that there is no coverage because all of the cases for which coverage is sought are deemed to be a single claim and relate back to RTINTwin City urges that summary judgment should enter in its favor as to all counts of the plaintiffs' complaint for several reasons. One is its position that all five of the underlying actions for which coverage is sought relate back to the RTIN, which was brought prior to any policy period under the Reliance or the Twin City policies. Twin City urges that there are three grounds for finding that each of the claims relates back to RTIN: the application clause, the prior and pending litigation exclusion, and section IV.B. of the policy.
Delaware law controls the interpretation and application of the policy. The policy so provides and the parties agree. Delaware law is consistent with the national consensus of black letter law regarding interpretations of insurance contracts. Policies are regarded as any contracts between parties. The interpretation and construction of an insurance contract is a matter of law; see Aetna Cas. Sur. Co. v. Kenner, 570 A.2d 1172 (Del. 1990); and language which is clear and unambiguous should be given its ordinary meaning. See ABB Flakt, Inc. v. Nat'l. Union Fire Ins. Co. of Pittsburgh, Pa., 731 A.2d. 811, 816 (Del. 1999). If language is clear and unambiguous, one ought not go beyond the text to discover its meaning. O'Brien v. Progressive Northern Ins. Co., 785 A.2d 281, 288-89 (Del. 2001). If language is ambiguous, it will be construed against the insurer, who drafted the language. Id. But language is not ambiguous simply because parties suggest different meanings or because there is a split of authority among jurisdictions regarding application of the language. Rather, language is ambiguous only if there are two or more reasonable meanings and the language is objectively unclear. Id. A policy is to be construed by considering all of the terms together, and no term is to be rendered meaningless. Id., 286-87. No Delaware authority governing the precise questions at issue here has been brought to my attention. I will, then, turn to authority in other jurisdictions, bearing in mind the general Delaware prescriptions, in an effort to resolve the issues as Delaware courts would most likely resolve them.
Twin City's first position on the RTIN issue is that the underlying cases relate back to the RTIN matter such that all of the cases are deemed to be one claim, which claim is not covered because it does not fall within the time period of Reliance — or Twin City — coverage, because of language in section IV.B. of the policy. It will be recalled that section IV.B. provides that:
Any CLAIMS based upon, arising out of, attributable to, in connection with, or in any manner relating to interrelated and/or related WRONGFUL ACTS and/or the rendering of or failure to render PROFESSIONAL SERVICES shall be considered a single CLAIM. All such related CLAIMS shall be deemed first made within the POLICY PERIOD or the EXTENDED REPORTING PERIOD in which the earliest of such CLAIMS was first made and reported to the Company, and the aggregate Limit of Liability then in effect shall be applicable to all such related CLAIMS.
Twin City argues that the five claims for which coverage is sought are all connected with each other and with RTIN such that they are to "be considered a single claim," and all are deemed to be first made when the first ( RTIN) was made. Because RTIN was brought well before the coverage period, the argument goes, none are covered by the policy. Twin City seeks to bolster its argument by reference to the further provisions of IV. B., which, as stated above, rather broadly define the concepts of related and interrelated claims: those "which have as a common nexus any fact, circumstance, situation, event transaction, or series of facts, circumstances, situations, events and/or transactions."
Other cases have applied similar language, with results which vary with the circumstances of the case. In Continental Cas. Co. v. Wendt, 205 F.3d 1258 (1st Cir. 2000), cases brought by different plaintiffs which alleged damages arising from Wendt's promotion of K.D. Trinh notes were deemed to have arisen from "the same or related acts." Because all of the actions arose from the same wrongful acts or acts which were causally connected, i.e., the promotion of the notes, they were considered one transaction. Similarly, in Gateway Group Advantage, Inc. v. McCarthy, 300 F.Sup.2d 236 (D.Mass. 2003), different actions arising out of the same scheme to promote and market insurance franchises were held to be "related wrongful acts" which had a "common nucleus of fact." They thus were all deemed to be brought when the first of the actions was brought, which was before the policy period in this case. There was, then, no separate coverage.
Southridge argues, with some reason, that section IV.B. does not address the issue raised here, because by its terms it is concerned with limits of liability rather than notices of claim. There is some persuasiveness to this argument, but several of the relevant cases don't appear to find the distinction critical. See, e.g., United States v. A.C. Strip, 868 F.2d 181 (6th Cir. 1989); Lehigh Valley Health Network v. Executive Risk Indemnity, Inc., 2001 WL 21505 (E.D.Pa. 2001). Because of the view I take of this case I need not decide whether the language of IV.B. necessarily is limited to narrowing coverage to one limit of liability (that applicable to the "first" claim), and presumably one retention, or whether the language may be applied somewhat more expansively to bar coverage of later claims altogether.
Slightly different circumstances have yielded different results. In Lehigh Valley Health Network v. Executive Risk Indemnity, Inc., 2001 WL 21505 (E.D.Pa. 2001), the United States District Court for the Eastern District of Pennsylvania held that an insurer was not entitled to disclaim coverage for a second claim which had some connection with a first claim made prior to its policy period. In the first claim, a Dr. Toonder sued the plaintiff and sought relief, inter alia, of having a Dr. Angelico considered for a slot at the plaintiff hospital. In the second claim, Dr. Angelico, having had a request for privileges declined, sued the hospital on a variety of theories, including conspiracy. Though the claims indeed had some connection, the court held that the facts that the actions were brought by different plaintiffs on different theories were sufficient to create two different claims for coverage purposes. And in Brown v. Nat'l. Union Ins. Co. of Pittsburgh, Pa., 2004 WL 292158 (D.Minn. 2004), the United States District Court for the district of Minnesota considered whether a number of actions brought against the plaintiff Brown, a broker, alleging inappropriate investment advice, alleged acts which were "interrelated wrongful acts," which were defined in turn as those arising from "the same, related or common nexus of facts [regardless of whether there were different claimants, insureds or causes of action]." Reading "related" to mean logically and/or causally related, the court reasoned that a connection cannot be overly attenuated and factors such as time, place, opportunity, pattern and "most importantly," method or modus operandi must be considered. Id. Here, the court found that there was a genuine issue as to whether the claims were based on "interrelated wrongful acts," despite the insurer's claim that only one method was used by the broker.
The insurer in this instance was relying on a prior and pending litigation exclusion. The language regarding relatedness is, however, similar.
There are even different results in situations where class actions are amended to include new plaintiffs or new claims: are the amended claims "new" actions such that different policy periods and/or different limits of liability are triggered? Compare WFS Financial, Inc. v. Progressive Cas. Ins. Co., No. ED CV 04-976-VAP (C.D.Cal. 2004) (second class action, involving plaintiff's credit policies which allowed discretionary non-risk finance charges which had the effect of penalizing minorities, was "interrelated" to first class action alleging same policy, even though the plaintiffs in the underlying class actions were different and the actions were in different states, such that all were deemed a single claim), with Checkrite, Ltd v. Illinois Nat'l. Ins. Co., 95 F.Sup.2d 180 (S.D.N.Y. 2000) (where an amended complaint added new claimants and new claims to a pre-existing class action, such that a "new" claim was presented).
It is likely impossible to reconcile all of the results, in the above cases and others, such that each is consistent with a single set of principles. Nonetheless, courts have analyzed the "relatedness" of claims, in situations where policy language is similar if not identical to that here, in an effort to make the process as objective as possible. The above cases consider, among many other factors, whether the parties are the same, whether the claims all arise from the same transaction(s), whether the "wrongful acts" are contemporaneous, and, as stressed by Twin City, whether there is a common scheme or plan. The courts recognize that some degree of relatedness is going to exist among almost any claims brought against an insured, especially in the field of directors' and officers' liability insurance, and there clearly have to be boundaries of some sort.
An analysis of the claims in RTIN, as compared to the claims for which coverage is sought, shows that very few similarities are shared. There are different claimants, and RTIN was apparently withdrawn before claimed wrongful acts in other cases were allegedly committed. Not only are the plaintiffs different, but the defendants in RTIN are different from the defendants in subsequent claims. It is true that the general natures of the claimed transgressions are similar, but the specific details are not: the financing and other features varied from transaction to transaction. Unlike, for example, the situation in Gateway Group and WFS Financial, where there was a single specific plan which was implemented in different places, there were a series of different plans underlying the actions in these underlying cases. Each company was financed separately. I do not believe that the underlying actions are all related closely enough to RTIN such that they should all be deemed to be a single claim, and Twin City's claim that coverage is barred by IV.B. is rejected.
Similarly, Twin City claims that RTIN, prior or pending litigation which in fact was disclosed to Reliance in the initial application, bars coverage of the "underlying cases" because those cases fit the exclusory language of ". . . arising from, or based on substantially the same matters as alleged in the pleadings of such prior or pending litigation . . ." See Exclusion III.L. of the policy. The analysis and case law recited above compels the same result — though without the complication that section IV. B. might be considered only with respect to limits of liability. In Lehigh Valley Health Network, supra, for example, the insurer for the second policy period relied in part on a similar prior and pending litigation exclusion. The court considered whether the second claim was "related to" prior litigation, and, using an analysis similar to that used in consideration of the "limit of liability" language, decided that there must be some limit to what was considered "related" and held that the exclusion did not bar coverage. Having examined the language of the exclusion and the claims asserted in RTIN and the underlying actions for which coverage is sought, I conclude that coverage is not barred by the exclusion.
The final leg of Twin City's claim that the pre-existence of RTIN effectively bars coverage of the underlying actions is the application for the policy. The application, deemed to be a part of the policy, provides that "if the Undersigned or any Insured proposed for this insurance has knowledge of any such fact or circumstance or if such pending or prior claim or suit exists, then any claim or suit arising therefrom shall be excluded from coverage under the proposed policy." (Emphasis added.) RTIN had been disclosed as a prior claim or suit. Twin City claims that because of the similarity of the underlying actions to RTIN, and the allegations in the underlying actions regarding the multiplicity of alleged similar transgressions on the part of Southridge and its affiliates, the underlying actions "arise from" RTIN. For reasons stated above, I find that the other claims did not "arise from" RTIN. This claim is more narrow than those above: a claim that a claim is "related," as that term is defined in the policy, includes as a subset those claims that "arise from" the former. I do not find that coverage is barred by the language of the application. Twin City's claim, then, that summary judgment ought to be wanted in its favor because all of the claims relate back to RTIN is denied and the plaintiff's motion is granted insofar as the RTIN action is concerned.
II. Twin City's position that no prejudice needs to be shown by an insurer in the context of a claims-made policy if notice is late.
It may be well to consider the issue of prejudice before discussing the issue of whether notice in fact was late. Though the question of prejudice does not by itself determine whether or not coverage exists as to one or more of the underlying actions, it does permeate the discussion of whether a claim is covered in the context of a claims-made policy.
Delaware law, of course, controls. The Delaware Supreme Court has held that an insurer may not deny coverage because of late notice in the absence of prejudice in the context of an occurrence-based policy; State Farm Mut. Auto. Ins. Co. v. Johnson, 320 A.2d 345 (Del. 1974); and such is the universal or nearly universal approach. The Delaware Supreme Court has not directly decided the issue in the context of claims-made policies. A trial court has held that claims-based policies are different however, and prejudice is irrelevant in that context. In Homsey Architects, Inc. v. Harry David Zutz Ins., Inc., 2000 Del.Super. LEXIS 240, Judge Herlihy reviewed a situation in which a claims-made policy covered claims received by the insured within the policy period and reported in writing to the company no later than sixty days after the expiration of the policy period. Although the claim was orally reported to the agent, it was not reported to the company in writing within the designated time. The court held there was no coverage. It recognized that the Delaware Supreme Court had noted that claims-made policies provided a different sort of coverage than occurrence-based policies; Hoechst Celanese Corp. v. Certain Underwriters at Lloyd's, 656 A.2d 1094 (Del. 1995); and that the great majority of cases hold that prejudice is immaterial in claims-made policies. Homsey, supra, *37 n. 49. Homsey discussed in some depth the recent Massachusetts and New Jersey cases in which claims-made policies were discussed, and concluded that the rather strict interpretation of claims-made policies was consistent with the goal of providing more predictable and more inexpensive insurance. Based on Homsey and its analysis of the law, I believe that Delaware law is that prejudice is immaterial in the consideration of late notice when applying a claims-made policy.
The conclusion is bolstered by a consideration of case law from other jurisdictions. Pizzini v. American Int'l. Specialty Lines Ins. Co., 210 F. Sup.2d 658 (E.D.Pa. 2002), held that the repo RTINg requirement was clear and unambiguous; it was part of the bargain of a claims-made policy. The Pizzini court reviewed the status of the law and found that only two cases held that an insurer had to show prejudice in order to avoid coverage when there was late notice in a claims-made environment, and those cases arose in jurisdictions where statutes provided that insurers could not avoid coverage because of late notice unless they were prejudiced thereby. Similarly, SingleEntry.com v. St. Paul Fire Marine Ins. Co., 117 Fed.Appx. 933 (5th Cir. 2004) held that the insurer did not need to show prejudice where the policy required notice "as soon as practicable" and the claim was reported nine months after the insured received notice. It was notice that triggered coverage, and the bargain was clear. See also United States v. A.C. Strip, 868 F.2d 181, 185-86 (6th Cir. 1989); Janjer Enterprises, Inc. v. Executive Risk Indemnity, Inc., 97 Fed.Appx. 410, 2000 WL 1011004 (4th Cir. 2004). A thoughtful analysis of Connecticut law, with the same result reached, appears in Cabrera v. United Coastal Ins. Co., 2005 WL 1971216, 39 Conn. L. Rptr. 822 (Shapiro, J.). The consensus is that prejudice is not required because the insuring agreement is straightforward and provides certain underwriting and other advantages to the company by virtue of a speedy repo RTINg requirement; courts ought not rewrite the contract, which is entered into by relatively sophisticated business people.
Southridge argues that even if the weight of case law holds that prejudice is immaterial on the facts presented in those cases, prejudice is still required if the claim is reported within the policy period even if not within the designated repo RTINg period. I disagree. First, there is no case which I have read which draws such a distinction in its holding. Second, there are cases in which prejudice was found to be immaterial where notice of claim was provided within the policy period. See, e.g., Janjer Enterprises, supra; SingleEntry.com, supra. Third, the gravamen of the case law is that the contract should be enforced as written where the language is clear. I find that in a claims-made policy such as the one at hand, notice not satisfying the coverage clause does not create coverage, regardless of prejudice to the insurer.
III. Analysis of notice in each of the underlying cases and determination of coverage. 1. Nanopierce.
I first consider the Nanopierce action. It will be recalled that the Nanopierce action was first filed in federal court and notice was not provided within 60 days of notice to the insured. The federal action was voluntarily dismissed and a second state action was filed contemporaneously with the dismissal of the federal action. The state court action is virtually identical to the prior federal action except for jurisdiction.
In each of the cases notice to the insured is the service of the complaint. If there was any preceding written demand in any of the actions, it has not been submitted with the motion materials.
I hold that there is no coverage for the second action because of late notice. The policy provides in section VIII.B., "Notice of Claim":
If during the POLICY PERIOD . . . written notice of a CLAIM has been given to the Company pursuant to the terms and conditions of this policy, then any subsequent CLAIMS made against an INSURED and/or DIRECTOR and/or OFFICER and reported to the Company alleging, based upon, arising out of, attributable to, or in any manner relating to the facts and/or circumstances alleged in such noticed initial CLAIM, shall be considered all one (1) CLAIM reported at the time the initial CLAIM was reported to the Company. The LIMIT OF LIABILITY available at the time such initial CLAIM was reported shall be the LIMIT OF LIABILITY applicable to such subsequent CLAIMS.
It is difficult to imagine how the second Nanopierce claim could not be "alleging, based upon, arising out of, attributable to, or in any manner relating to the facts and or circumstances alleged in" the first Nanopierce action. It is the same case. An analogous but more attenuated situation occurred in Janjer, supra. There, an employee filed an EEOC complaint against the insured that was not reported within the policy period, which provided that notice was to be reported to the insurer "as soon as practicable" but in no event later than sixty days after the claim was received by the insured. Shortly after receiving a right to sue letter from the commission, the insured notified the insurer of the claim. The second notice would have been timely, viewed in a vacuum. The state claim was held to relate back to the federal claim under the language of the policy; because notice of the second claim was late, coverage was permissibly denied. The same result was reached in United States v. A.C. Strip, 868 F.2d 181 (6th Cir. 1989). An attorney, Strip, was acting as receiver for a mining company and was sued for violations of mining regulations. He did not report the claim in a timely manner to his insurer. Subsequently his law firm was served; that claim was reported timely according to the terms of the policy. There nonetheless was no coverage for the law firm, because under policy language which provided that two or more claims arising out of a single act or related acts were to be treated as a single claim, which in turn was considered first made during the policy period in which the earliest claim occurred, the second claim related back to the first. See also Pizzini, supra; Informix, supra; WFS Financial, Inc., supra.
I conclude, then, that there is no coverage under the policy for the Nanopierce claim.
2. Internet Law Library.
This claim was clearly reported late. As will be recalled, the complaint was served either in late January or early February 2001. It was not formally reported to Twin City until a year later, on February 19, 2002. Southridge argues that it "constructively" provided notice in September 2001, when it provided notice of the related Brewer and Hoaglund actions. Either way, the claim was reported late under the terms of the policy. As indicated above, I have previously held that prejudice is immaterial, and there is no difference in the result if the claim is reported within the policy period, if it is also late under language in the coverage clause. There is no coverage for ILL, then, unless coverage can be bootstrapped though coverage in Brewer and/or Hoaglund.
3. Brewer and Hoaglund.
These cases are considered together because they present similar issues. Brewer was brought by shareholders of ILL and Hoaglund by directors. The allegations are similar to the allegations in ILL and they refer to the same events involving the financing of ILL and alleged manipulation by Southridge and related entities. Each of these actions was reported in a timely manner under the terms of the policy if viewed as individual entities. The complaint in Brewer was served on August 24, 2001, and Hoaglund on August 7, 2001. Notice of both was provided to Twin City on September 21, 2001, well within the sixty-day deadline.
If Brewer and Hoaglund relate back to ILL under the terms of section VIII.B. of the policy, however, they are not covered because there is no coverage for ILL. The language of VIII.B. has been quoted twice and need not be repeated at length here. Pursuant to the language, briefly, the claims by directors and shareholders are deemed to be a single claim with the claim by the ILL itself if they are deemed to be "alleging, based upon, arising out of, attributable to, or in any manner relating to the facts and/or circumstances alleged in such noticed initial CLAIM."
I hold that the later cases are to be deemed a single claim for notice purposes under the language of the policy. Though the later cases have been brought by different parties, they nonetheless arise out of the same "wrongful act(s)" or provision of professional services. It is not at all unusual for later claims to be deemed part of prior claims even if brought by different parties. For example, in Pizzini, supra, a group of investors sued one Shellington, the insured, for losses arising out of investments in oil well leases. This action was late under the terms of the policy. A second action was brought by a second group of investors. This claim was on the surface timely reported, but the court held that it was deemed "first made" at the time of the first action, because it arose from the same set of wrongful acts (the oil well leasing program). Id., at 210 F. Sup.2d 669-70. See also Informix Corp., supra (an amended class action relates back to the first, despite the addition of new plaintiffs); WFS Financial, Inc., supra (coverage for second class action denied where first class action alleged same underlying credit policy, despite the difference in parties).
To the extent that Southridge relies on Andy Warhol Foundation v. Federal Insurance, 189 F.3d 208 (2d Cir. 1999), its reliance is misplaced. There, the photographer who took a picture of President Kennedy's assassination sued the Warhol Foundation for copyright infringement. A demand letter by the photographer's attorney stated that Time, Inc., whose magazine Life had lawfully published the photograph in copyrighted material, agreed with its position. The foundation did not supply proper notice of the photographer's demand, and notice to the insurer after suit was brought was late under the policy. Time's later action was not barred, however, even though it arose from the same wrongful act. The policy language was entirely different from the language in this case, as there was no definition of "claim" and none of the language relied on by Twin City in this action. The Second Circuit simply relied on common law definitions of "claim" in resolving the case.
Southridge also claims that because Navigator and Sims were added as defendants in the ILL action during its course, and because Navigator and Sims were defendants in the Brewer action for which superficially timely notice was provided, then Navigator and Sims are entitled to coverage. Because they are separate insureds, they ought not be bound by ILL's having provided late notice, the argument goes. Southridge cites cases such as Stiegler v. Insurance Company of North America, 384 A.2d. 398 (Del. 1978), for the proposition that an innocent insured, in this case a wife of an arsonist, ought not be deemed to have forfeited coverage because of the felonious activity of another insured, in this case her husband.
Twin City disputes the proposition that Sims, as a director of a director (Navigator) of the named insured (Southridge), is not an insured under the policy. I need not decide the issue.
While superficially attractive, the argument loses force in the context of the policy language operative here. Similar policy language has resulted in denials of coverage where "new" insureds have submitted timely claims, but where their claims are related to "wrongful acts" brought earlier and in an untimely manner. It is not a forfeiture of coverage otherwise available; rather, there is no coverage to begin with under the terms of the policy. See United States v. A.C. Strip, supra (law firm denied coverage where lawyer provided late notice); Informix Corp., supra (defendants in second, separate class action denied coverage, even where one insured was a defendant in both actions, where late notice was provided regarding first action).
Southridge also claims that Twin City waived coverage of Sims and Navigator because it failed timely to disclaim coverage on notice grounds when the claims were submitted. The claim is neither factually nor legally sound. Factually, Twin City did respond by reserving all previously asserted positions as to coverage, and notice had been previously contested. General reservations of positions regarding coverage do not constitute waivers of defenses as to coverage, because waiver requires the intentional relinquishment of a known right. See Pizzini, supra, 674 (letter by insurer reserving "all rights and defenses" sufficient to avoid waiver). Legally, waiver of a forfeiture defense cannot create coverage where otherwise none exists. Pizzini, supra; MaRTIN v. Colonial Ins. Co. of California, 644 F. Sup. 349, 352 (D.Del. 1986).
There is no coverage, then, for Brewer and Hoaglund. The questions regarding allocation of defense costs, extensively briefed by the parties, need not be addressed.
4. Hyperdynamics.
This claim was reported in a timely manner and it is sufficiently distinct from RTIN so that it does not relate back to the prior claim. I have found that there is not a master scheme sufficiently distinct and defined such that all of the actions are really one large claim.
The remaining question, however, is whether the claim alleges the provision of professional services such that the claim falls within the definitions of the policy. It will be recalled that the policy provides coverage for claims for losses arising out of the activities of the insured as an "investment advisor" or an "investment company" as defined by federal statute. Pursuant to 15 U.S.C. § 80b-2a(11), an investment adviser is a person who, for compensation, engages in the business of, among other things, advising others, either directly or through publication, as to the value of securities or the advisability of investing in, purchasing, or selling securities.
The Hyperdynamics complaint alleges a broad civil conspiracy and fraudulent conduct on the part of "investors," the SPV's, Southridge, and others. The complaint may be broadly read to allege that Southridge advised the SPV's; see, inter alia, ¶ 96 of the complaint, in which it is alleged that Southridge induced action on the part of the SPV's regarding their investment; and perhaps that they indirectly provided advice to Hyperdynamics. Though the issue is not entirely free from doubt, there is at least a genuine issue of material fact as to whether the activity alleged is covered. If investment advice was provided by an insured to an SPV, who in turn injured Hyperdynamics, coverage would presumably be afforded. Harad v. Aetna Cas. Sur. Co., 839 F.2d 979, 983-84 (3d Cir. 1988). In any event, Twin City's motion for summary judgment as to coverage for Hyperdynamics is denied, and Southridge's position as to Twin City's defenses regarding notice, as applied to Hyperdynamics is sustained.
V. Remaining issues and Conclusion.
The remaining issues may be discussed briefly, in the course of summarizing the disposition of the motions. As to Twin City's motion for summary judgment:
1. The motion for judgment as to Southridge's first count, for a declaratory judgment on coverage, is granted in Twin City's favor with respect to all the underlying actions except Hyperdynamics.
2. The same result adheres to the second count which alleges breach of contract.
3. Judgment may enter in favor of Twin City as to the third count alleging unjust enrichment. A breach of contract claim is available regarding Hyperdynamics, and in any event I do not find that a benefit has been bestowed upon Twin City by Southridge such that equity requires payment in return.
4. I find that the factual inquiry has not been foreclosed as to the fourth and fifth counts of Southridge's complaint in regard to coverage for Hyperdynamics. I leave open for now, then, the issues of breach of covenant of good faith and fair dealing and recovery pursuant to CUTPA and CUIPA as to Hyperdynamics.
Regarding Southridge's motion for summary judgment:
1. As to Twin City's counterclaims, judgment is granted in favor of Southridge as to Twin City's claim that there is no coverage for Hyperdynamics and that Southridge should thereby pay back the amounts already paid. Judgment is granted in favor of Southridge on Twin City's action for a declaratory judgment of no coverage as to Hyperdynamics. Judgment is granted in favor of Twin City as to coverage for Lecstar.
"So far as I can tell, no claim has been made by Southridge that Lecstar is covered.
2. Southridge's motion for summary judgment regarding Twin City's defenses of late notice is denied, except as to Hyperdynamics.
Judgment shall enter accordingly.