354 F.3d 568 (6th Cir. 2004), 01-6493, Combs v. International Ins. Co.

Docket Nº:01-6493
Citation:354 F.3d 568
Party Name:Combs v. International Ins. Co.
Case Date:January 06, 2004
Court:United States Courts of Appeals, Court of Appeals for the Sixth Circuit

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354 F.3d 568 (6th Cir. 2004)

Brownell COMBS, II, Administrator C.T.A. of the Estate of Leslie Combs, II, Deceased, Plaintiff-Appellant,



No. 01-6493.

United States Court of Appeals, Sixth Circuit

January 6, 2004

Argued June 11, 2003.

Rehearing Denied Jan. 27, 2004.

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John H. Dwyer, Jr. (argued and briefed), Lawrence L. Pedley (briefed), Pedley, Zielke & Gordinier, Louisville, KY, for Appellant.

Louis G. Corsi (argued and briefed), Eileen H. de Callies (briefed), Landman, Corsi, Ballaine & Ford, New York, NY, David R. Monohan (briefed), Woodward, Hobson & Fulton, Louisville, KY, for Appellee.

Before KEITH, BATCHELDER, and CLAY, Circuit Judges.

CLAY, J., delivered the opinion of the court, in which KEITH, J., joined. BATCHELDER, J., concurred in Part IV only.


CLAY, Circuit Judge.

Plaintiff, Brownell Combs, II, Administrator C.T.A. of the Estate of Leslie Combs, II, deceased, appeals an order granting Defendant, International Insurance Company, summary judgment against Plaintiff's action in diversity, brought pursuant to 28 U.S.C. § 1332, alleging breach of a directors and officers liability insurance contract, breach of the implied contractual duty of good faith and fair dealing, and bad faith denial of Defendant's duty to defend under the insurance policy. For the reasons set forth below, we AFFIRM the district court.


Decedent founded Spendthrift Farm ("Spendthrift") in 1937 with 120 acres of land near Lexington, Kentucky. By the early 1980s, the farm encompassed 1800 acres and housed forty-three stallions, including the last two Triple Crown winners. Decedent developed the principal method of stallion management used today.1

By 1981, Decedent was over eighty years old and became interested in planning his estate so that Spendthrift would continue after his death. During the early 1980s, Decedent tried several different methods to broaden Spendthrift's ownership. Initial efforts to take the company public failed when the farm could not locate a suitable investment bank. A 1982 effort to distribute forty percent of the ownership interest in Spendthrift failed because of disputes between Plaintiff2 and potential investors.

Eventually, the farm developed and implemented a private stock placement plan described in a Private Placement Memorandum ("PPM"). The PPM made clear that Decedent and Plaintiff, not Spendthrift,

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retained exclusive control over the private placement:

All sales are subject to the discretion of the Sellers including the right to accept each unit as purchased or none until the entire offering is purchased. Sellers reserve the right, in their absolute discretion, to accept or reject any offer to purchase, and/or to withdraw the offering either partially or in its entirety.

(J.A. at 842.) Furthermore, the lawyers involved in both the private placement (Charles Hembree, Decedent's long-time personal counsel), and the contemplated initial public offering ("IPO") (Frank Wheat of Gibson, Dunn & Crutcher), distinguished between the Combs family and Spendthrift Farm. Wheat took steps "to keep Spendthrift out of this private placement" to "protect Spendthrift against claims that might arise out of the placement." (J.A. at 748.)

Through the PPM, the farm sold blocks of stock to certain investors already involved in the thoroughbred industry, thereby creating a pool of shareholders who could create a board of directors and lead Spendthrift after Decedent's death. Decedent completed the stock sale in 1983. Decedent personally received $17.5 million from the transaction and Plaintiff received another $17.5 million.

The thoroughbred industry, including Spendthrift, prospered during the early 1980s. Later in the decade, however, the industry suffered a downturn from which it did not fully recover until the mid-1990s. Spendthrift's problems in the mid-to-late-eighties upset many of the investors in the private placement.

In January of 1984, Defendant issued excess policy no. 524-029517-1, which provided directors' and officers' liability coverage to Spendthrift for claims made against the farm from November 17, 1983 through November 17, 1986. The policy provided coverage as follows:


If during the policy period any claim or claims are made against the Insured (as hereinafter defined) or any of them for a Wrongful Act (as hereinafter defined) while acting in their individual or collective capacities as Directors or Officers, the Insurer will pay on behalf of the Insureds or any of them, their Executors, Administrators, Assigns 95% of all Loss (as hereinafter defined), which the Insureds or any of them shall become legally obligated to pay in excess of the retentions stated in Item IV(a) and (b) of the Declarations, not exceeding the limit of liability stated in Item III of the Declarations.

(J.A. at 34-35.) The policy defined "Wrongful Act" as "any actual or alleged error or misstatement or breach of duty by the Insureds while acting in their individual or collective capacities, or any matter not excluded by the terms and conditions of this Policy claimed against them solely by reason of their being Directors and Officers of the Company." Id.

In 1986, while the policy was in effect, Fred L. Fredricks sued Decedent, Plaintiff, and other co-defendants "in their individual capacity and as agents and employees of defendant Spendthrift Farm, Inc." (J.A. at 1049.) The Northern District of California consolidated the Fredericks case with seven other cases involving substantially similar claims (hereinafter the consolidated "California Litigation"). Approximately half of the California Litigation plaintiffs sued Spendthrift Farm itself for the alleged misrepresentations of its officers, directors and agents with respect to the private placement. The other half sued only the individual agents of the farm involved in the private placement.

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Regardless, the substance of all the claims focused primarily on representations made in the PPM regarding the farm's financial condition and the value of its assets. Specifically, the plaintiffs in the California Litigation made two allegations: (1) that the PPM relied upon financial statements prepared on a current value basis rather than a cost basis; and (2) that the current value presentation misled the plaintiffs because it failed to include any provision for income taxes, thereby overstating the value of Spendthrift's assets by the amount of tax liability that would result from attempting to realize the assets' full value. According to the plaintiffs, the asset valuations were "substantially inflated and based on unrealistic assumptions about the quality, confirmation and other characteristics of the horses." Id. The plaintiffs sought rescission pursuant to Section 12 of the Securities Act of 1933, 15 U.S.C. § 77, along with damages for the allegedly fraudulent misrepresentations.

In a letter dated November 14, 1986, Paul Renne, Plaintiff's counsel in San Francisco, California, notified Defendant that the plaintiffs filed eight complaints against Defendant. Renne's letter sought reimbursement under the policy and Renne requested that Defendant communicate with him about Decedent's coverage demand.

In Defendant's response, Defendant's New York counsel explained, inter alia, that the wrongful conduct alleged against Decedent did not involve acts solely in his capacity as a director or officer of Spendthrift, but rather conduct in his individual capacity as a shareholder selling his shares in Spendthrift for his personal gain (and Plaintiff's personal gain) of $35 million:

The wrongful conduct alleged against the [Plaintiff and Decedent] in the [California Litigation] arises from the sale of their Spendthrift stock. International has observed from a review of the Private Placement Memorandum dated April 1, 1982 ("PPM"), which was distributed along with a supplement thereto dated July 27, 1983 ("PPM Supplement"), in connection with a "private placement" distribution of shares of Spendthrift by the [Plaintiff and Decedent] that the [Plaintiff and Decedent] offered shares in Spendthrift, in units of twenty at $1.75 million per unit, for a total offering of $35 million. All of the proceeds of the offering went to the [Plaintiff and Decedent], and none of the proceeds went to Spendthrift. The PPM states that [Decedent] is selling the portion of stock for the purpose of estate planning, and that [Plaintiff] is selling his portion of stock for estate planning and to diversify his interests. . . .

As indicated above, the directors and officers of Spendthrift are insured only for loss incurred by them solely in their respective capacities as directors and officers. The wrongful conduct alleged against the [Plaintiff and Decedent] in the [California Litigation] does not involve them solely in their capacity as directors or officers but rather in their capacity as individuals who are selling their shares in Spendthrift for their own personal gain. Accordingly, International declines to afford coverage for any loss incurred by the [Plaintiff and Decedent] in connection with the [California Litigation].

(J.A. at 108-09.) Defendant addressed this letter to Renne, in California, as well as to certain defense counsel (located in California, Ohio, and Kentucky) who had an interest in the Policy because they represented other defendants.

Decedent settled some of the claims against him for $2 million in a court-approved settlement. The trial court dismissed

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numerous other claims. A few issues reached a jury, which returned a verdict in favor of the defendants. In a comprehensive opinion explaining the California Litigation in detail, the Ninth Circuit affirmed. ...

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