185 F.3d 875 (10th Cir. 1999), 97-6437, Stauth v. National Union Fire Ins. Co. of Pittsburgh

Docket Nº:97-6437, 97-6438.
Citation:185 F.3d 875
Party Name:Robert E. STAUTH, Harry L. Winn, Kevin J. Twomey, Donald N. Eyler, R. Randolph Devening, James E. Stuard, Fleming Companies, Inc., Plaintiffs-Appellees, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, Defendant-Appellant, Federal Insurance Company, Defendant. Robert E. STAUTH, Harry L. Winn, Kevin J. Twomey, Donald N. Eyler, R. Randolph Dev
Case Date:June 24, 1999
Court:United States Courts of Appeals, Court of Appeals for the Tenth Circuit
 
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Page 875

185 F.3d 875 (10th Cir. 1999)

Robert E. STAUTH, Harry L. Winn, Kevin J. Twomey, Donald N. Eyler, R. Randolph Devening, James E. Stuard, Fleming Companies, Inc., Plaintiffs-Appellees,

v.

NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, Defendant-Appellant,

Federal Insurance Company, Defendant.

Robert E. STAUTH, Harry L. Winn, Kevin J. Twomey, Donald N. Eyler, R. Randolph Devening, James E. Stuard, Fleming Companies, Inc. Plaintiffs-Appellees,

v.

FEDERAL INSURANCE COMPANY, Defendant-Appellant,

National Union Fire Insurance Company of Pittsburgh, Defendant.

Nos. 97-6437, 97-6438.

United States Court of Appeals, Tenth Circuit

June 24, 1999

Editorial Note:

This opinion appears in the Federal reporter in a table titled "Table of Decisions Without Reported Opinions". (See FI CTA10 Rule 36.3 regarding use of unpublished opinions)

Before ANDERSON and BRORBY, Circuit Judges, and CAMPBELL, [**] District Judge.

ORDER AND JUDGMENT [*]

This is a diversity declaratory judgment action seeking a determination as to two insurance coverage questions: (1) whether it is the 1993, rather than the 1996, directors and officers liability policy issued by Federal Insurance Company that will cover any loss resulting from two securities class actions filed in 1996 against the plaintiffs; and (2) whether and on what basis any potential loss resulting from the 1996 class action lawsuits can, at this time, be allocated between the insured plaintiff directors and officers and the uninsured plaintiff corporation.

The dispositive issue on the first question is whether the 1996 securities actions are "causally connected" (a term used in the 1993 insurance policy) to a 1993 pricing action brought by a customer against Fleming Companies, Inc. and one of its officers. If so, any loss arising from the 1996 actions must be aggregated with the loss suffered from the 1993 action, and the limits of coverage under the 1993 policy will apply. We conclude that, for coverage purposes, the 1996 class actions are not causally connected to the 1993 pricing action, and that coverage under the 1996 policy applies. We therefore affirm the district court's summary judgment in favor of the plaintiffs on this issue.

The substantive issue presented by the second question is whether the district court erred in determining how any potential loss from the 1996 class action lawsuits should be allocated between insured and uninsured plaintiffs. However, for the reasons stated below, we conclude as an initial matter that the district court prematurely decided the issue. Accordingly, we vacate the district court's grant of summary judgment on this issue.

BACKGROUND

I. Factual Background

A. The Insurance Policies

In 1993, as it had for the past several years, Fleming, a wholesale distributor of food and related products, purchased an annual directors and officers (D & O) liability policy from Federal Insurance Company. Under the terms of the policy, the directors and officers were covered, but the corporation itself was not. Federal promised to pay for "all Loss ... which [any] Insured Person becomes legally obligated to pay on account of any claims made against him ... during the Policy Period ... for a Wrongful Act" committed before or during the policy period. Appellant's App. at 6. This clause was entitled the "Executive Liability Coverage" clause. Id. Federal also promised to reimburse Fleming, even though Fleming was not directly insured, for any indemnification payments it made to insured directors and officers for liability incurred for wrongful acts. This clause was known as the "Executive Indemnification Clause." Id. The total yearly limit on the Federal D & O policy was $25,000,000.

Fleming purchased excess insurance coverage from National Union Fire Insurance Company. The policies issued by National Union were "follow-form" policies that adopted the "terms and conditions" in the underlying Federal policy; thus, coverage under the National Union policies is determined by looking to the language of the Federal policy. See Appellant's App. at 66. The National Union policy had a yearly limit of $25,000,000. In 1993, then, Fleming had $50,000,000 worth of D & O insurance coverage.

In 1996, in addition to renewing the Federal and National Union policies, 1 Fleming purchased an additional $10,000,000 of D & O insurance from Executive Risk Indemnity, Inc. ("ERII"). 2 This policy also appears to be a follow-form policy, whose terms and conditions are dictated by the underlying Federal policy. Thus, in 1996, Fleming had $60,000,000 worth of D & O insurance coverage.

B. The David's Litigation

In August 1993, David's Supermarkets, Inc., a customer of Fleming, filed a lawsuit against Fleming and James E. Stuard, who was then an Executive Vice-President of Fleming, in Texas state court (the "David's Litigation"). Between 1989 and September 1992, David's and Fleming had operated under a "cost-plus" contract, under which Fleming agreed to sell food and related products to David's at Fleming's cost plus an agreed-upon markup. The David's lawsuit contained four causes of action. First, David's alleged that Fleming and Stuard had breached the cost-plus contract with David's, by allegedly inflating the "cost" of the food products through "paper transfers between various Fleming offices" and by failing to pass on to David's the benefit of " 'rebates' and promotional discounts obtained from some manufacturers." Appellants' App. Tab J, at 4. Second, David's alleged that Fleming and Stuard "committed misrepresentation and fraud" against David's at the time it entered into the cost-plus contract, because Fleming and Stuard allegedly "had already formed an intention to overcharge David's." Id. at 6. Third, David's alleged that Fleming, Stuard, "and other unnamed parties entered into a ... conspiracy to defraud David's." Id. Finally, David's alleged that Fleming and Stuard had violated the Texas Deceptive Trade Practices Act.

The complaint, which was amended four times (largely to increase the amount of damages sought), alleged no wrongdoing on the part of any Fleming officer or director other than Stuard, the Executive Vice-President who negotiated the agreement with David's. Also, the complaint alleged no wrongdoing on the part of Fleming, Stuard, or anyone else against any party other than David's. Furthermore, the complaint alleged no wrongdoing by anyone after September 1992. See id. at 3.

The case went to trial, and in March 1996, David's procured a $207 million verdict against Fleming. The Texas court entered judgment in the case, but the judgment was later vacated, and the case was subsequently settled for $19.9 million. 3 See Affidavit of Mary D. Manesis in Support of Federal Br., Ex. A at 1 n. 1; Appellants' App. Tab K, at 65. There is no dispute that this settlement was covered under the 1993 Federal policy, and Federal paid a substantial portion of the claim, leaving just over $10 million of unexhausted coverage under the 1993 Federal policy, and just over $35 million in total 1993 D & O coverage. Appellants' App. at 436, 503.

C. The Class Actions

Soon after the verdict in the David's Litigation, between March and June 1996, Fleming stockholders and noteholders filed ten different class action lawsuits against Fleming and various officers and directors (the "Class Actions"). These class actions were eventually consolidated into two separate actions, one by shareholders and one by noteholders. The noteholders' class action was filed on behalf of all persons who purchased one of two types of Fleming notes between December 8, 1994 and March 15, 1996. The plaintiffs chose December 8, 1994 because that was the date on which Fleming filed a registration statement with the Securities and Exchange Commission (SEC) which, because it contained no mention of the then-pending David's Litigation, was allegedly "materially false and misleading respecting Fleming's exposure to contingent liabilities." Appellants' App. Tab L, at 2. The plaintiffs chose March 15, 1996 because that was the day after the verdict in the David's Litigation was finally handed down, and on which the company's potential liability in the David's Litigation finally became public knowledge. The noteholders' class action alleges that the price of the Fleming notes was artificially inflated by Fleming's failure to disclose, in the registration statement and in subsequent SEC filings, the existence of the David's Litigation and the potential liability that lawsuit represented to the company.

The noteholders' class action names as defendants the following parties: Fleming; Fleming officers and directors Robert E. Stauth, Harry L. Winn, Donald N. Eyler, and Kevin J. Twomey; and underwriters Merrill Lynch & Co. and J.P. Morgan Securities, Inc. The suit alleges that these defendants violated § 11 of the Securities Act, and §§ 10 and 20(a) of the Exchange Act, by failing to disclose the existence of the David's Litigation. The suit does not allege wrongdoing on the part of any other person or corporation, including Stuard, and does not seek redress for any wrongdoing prior to December 8, 1994. Also, the suit does not allege any wrongdoing on the part of the named defendants other than their failure to disclose the existence of the David's Litigation in the documents filed with the SEC.

The shareholders' class action was filed on behalf of all persons or corporations that purchased Fleming common stock between November 15, 1993 and March 14, 1996. The plaintiffs in this lawsuit chose those particular dates because November 15, 1993 was the date on which Fleming's first post-David's Litigation SEC Form 10-Q was filed, see Appellants' App. Tab K, at 26, and because March 14, 1996 was the...

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