Admiral Ins. Co. v. Arrowood Indem. Co.

• Decision Date: 30 March 2012
• Docket Number: Civil Action No. 3:11–CV–0450–L.
• Citation: 471 B.R. 687
• Parties: ADMIRAL INSURANCE COMPANY, INC. and Monitor Liability Managers, Inc., Appellants, v. ARROWOOD INDEMNITY COMPANY, formerly known as Royal Indemnity Company, Appellee.
• Court: U.S. District Court — Northern District of Texas

471 B.R. 687

ADMIRAL INSURANCE COMPANY, INC. and Monitor Liability Managers, Inc., Appellants,

v.ARROWOOD INDEMNITY COMPANY, formerly known as Royal Indemnity Company, Appellee.

Civil Action No. 3:11–CV–0450–L.

United States District Court,

N.D. Texas,

Dallas Division.

March 30, 2012.

David M. Bryant, Jr., Cox Smith Matthews Incorporated, Everett Lindell New, Dallas, TX, for Appellants.

Mark J. Chevallier, McGuire Craddock & Strother PC, Dallas, TX, Anthony L. Miscioscia, Gale White, White & Williams LLP, Philadelphia, PA, for Appellee.

MEMORANDUM OPINION AND ORDER

SAM A. LINDSAY, District Judge.

Before the court are the appeal of Admiral Insurance Company, Inc. and Monitor Liability Managers, Inc., filed April 4, 2011; and the cross-appeal of Arrowood Indemnity Company, filed May 5, 2011.¹ After consideration of the briefs, replies, record on appeal, and the applicable law, the court affirms in part and reverses in part the judgment of the bankruptcy court entered on October 25, 2010.

I. Factual and Procedural Background

The bankruptcy court, in its April 30, 2010 findings, adopted the stipulated facts set forth in the parties' joint Proposed Pretrial Order, filed November 23, 2009. The court recites many of the facts here, as they are necessary for clarity and understanding of this opinion.

The Cool Partners, Inc. d/b/a Coollink Broadcast Network (the “Debtor” or “Cool Partners”) was a privately held Texas corporation originally established in 1998. The Debtor's business involved owning, developing, and marketing internet applications and also serving as an internet service provider. The Debtor raised approximately $20 million in capital through securities sales to investors. On January 22, 2002, the Debtor filed a voluntary bankruptcy petition under Chapter 7, Case No. 02–30446–HDH–7, (the “Bankruptcy Case”). Robert Yaquinto (“the Trustee”) was the trustee in bankruptcy for the Debtor at all relevant times.

Prior to the bankruptcy, the Debtor had obtained director and officer liability insurance policies (“D & O Insurance”) from two insurers: Admiral Insurance Company, Inc. (“Admiral”) and Arrowood Indemnity Company, Inc., formerly known as Royal Indemnity Company (“Royal”). Admiral and Monitor Liability Managers, Inc. (“Monitor”) are sister companies, both owned by a common parent, W.R. Berkley. The policy purchased from Admiral (the “Admiral Policy”) covered a period from January 10, 2000, to January 24, 2002. The Admiral Policy provided primary, claims-made D & O insurance, subject to a $5 million aggregate limit. Payment of defense costs eroded the Admiral Policy limits. The Debtor purchased from Royal an Excess Directors and Officers Liability and Company Reimbursement Policy for the policy period from May 9, 2000, to January 24, 2002 (the “Royal Policy”). The Royal Policy provided excess, claims-made D & O coverage in excess of the $5 million Admiral Policy. The Royal Policy had a $5 million aggregate limit of liability each policy year, in excess of the $5 million Primary and Underlying Excess Limit of Liability, as set forth in the Schedule of Underlying Insurance, which listed the Admiral Policy, No. 6251421.

Prior to the filing of the Bankruptcy Case, the Debtor and certain of its directors and officers were named as defendants in various lawsuits by investors. The investors believed that they had been defrauded and their purchases should be rescinded. The Debtor and its directors and officers (the “Insureds”) sought coverage under the Admiral and Royal policies for several investor lawsuits (“Underlying Lawsuits”) against them for fraud and rescission. One of the Underlying Lawsuits brought against the Debtor and certain of its directors and officers was the “Rosenthal Action” ( Rosenthal, et al. v. Cool Partners, Inc., et al., Cause No. 02–00984–E, County Court at Law No. 4, Dallas County, Texas), which involved, inter alia, a securities fraud suit filed in Texas state court against the Debtor and a number of its directors and officers. The claimants in the Rosenthal Action alleged, inter alia,causes of action arising out of the Rosenthal defendants' alleged fraud, misrepresentation, and negligence in connection with the Rosenthal defendants' efforts to have the Rosenthal claimants invest in the Debtor and subsequently maintain those investments. The Pegasus Action ( Yaquinto, Trustee v. Richard Millman, et al., Cause No. 02–30446–HDH, Chapter 7 Adversary No. 04–03049–HDH, Bankr.N.D. Tex.) was not related to any transactions between the Rosenthal claimants and the Debtor.

Admiral denied coverage for the Underlying Lawsuits, and on February 14, 2002, it filed an Original Complaint and Request for Declaratory Judgment (the “Admiral Declaratory Judgment Action”) in an action styled Admiral Ins. Co. v. Christian Briggs, et al., No. 3:02–cv–0310, in the United States District Court for the Northern District of Texas, Dallas Division. Admiral asserted that the Admiral Policy should be rescinded because of misrepresentations the Debtor allegedly made in the Policy applications. Under the Admiral Policy's reservation-of-rights clause, Admiral provided a defense for the Insureds in the Underlying Lawsuits, and hired six sets of defense counsel to defend these suits against the officers and directors. Royal also denied coverage under the Royal Policy on grounds similar to those asserted by Admiral.

On January 21, 2004, the Trustee filed a Complaint for Declaratory Judgment against Admiral as an adversary proceeding in the Bankruptcy Case, alleging that Admiral had refused to defend or indemnify Cool Partners with respect to the “CB Parkway Action” and two other cases, the “Barnidge Action” and the “Fiorentino Action” (the “Trustee v. Admiral Declaratory Judgment Action” ). The Admiral Declaratory Judgment Action and the Trustee v. Admiral Declaratory Action were consolidated as an adversary proceeding in the Bankruptcy Case (“Consolidated Admiral Coverage Litigation”). On January 20, 2004, the Trustee filed a Complaint for Declaratory Judgment against Royal ( “Trustee v. Royal Declaratory Judgment Action” ) as an adversary proceeding in the Bankruptcy Case. The Trustee's complaint alleged, inter alia, that counsel for Royal sent the Trustee a letter purporting to rescind coverage under the Royal Policy and declaring the Royal Policy “null and void.” The Trustee sought a declaratory judgment that the Royal Policy was in effect and obligated Royal to defend and indemnify the Trustee for covered claims.

The Trustee, Admiral, and Royal, among others, attended a mediation in April 2004. At the April 2004 mediation, there were discussions between Admiral and Royal of a scenario in which Admiral would tender its policy limits (to demonstrate that Admiral had “exhausted” its $5 million limit) but would receive a right to recoup part of the policy limits. Royal rejected any such settlement and advised that such a scenario would not result in exhaustion of the policy limits and that such “deal” would not trigger Royal's policy. The cases did not settle at the April 2004 mediation.

In July 2005, Geoff Harper, counsel for the Trustee, informed Admiral that his formal demand to settle was $6.2 million, but that he thought he could get his clients to settle for $3.75 million. This demand was never communicated to Royal. At this point, the Admiral policy still had at least $3 million left on its limits. Further, in August 2005, Mr. Harper discussed with Admiral a global settlement, which involved a complete release to the officers and directors in exchange for policy limits. Admiral rejected the offer and never reported it to Royal.

Mr. Harper sent letters to both Admiral and Royal requesting their remaining policylimits in full settlement of the Plaintiff's claims. Later they attended a second mediation in Dallas, Texas, on September 30, 2005, with mediator Hesha Abrams. Additionally, as of September 30, 2005, some of the attorneys representing the directors and officers in the Underlying Lawsuits had outstanding invoices that had not been paid (the “Incurred Fees”).

At the mediation, the mediator adviser Royal that Admiral had settled with the Trustee and with the Rosenthal Plaintiffs for a total payment of $3,591,078.17, which represented the difference between the $1,408,921.83 in defense and indemnity costs paid by Admiral prior to September 30 and the Admiral Policy limits of $5 million. The mediator advised Royal that the outstanding unpaid legal fees incurred by defense counsel prior to September 30, totaling approximately $1 million in unpaid invoices and $600,000 in work in progress, were the responsibility of Royal. Geoff Harper made similar, and inaccurate, representations to Royal. For Royal, the litigation against its insured was “quite dangerous, costly and immediate”; therefore, Royal entered into a “high/low” settlement agreement with the Trustee on October 10, 2005, based on the outcome of a summary judgment motion. R. 000021, ¶ 32.

The Admiral Settlement Agreement and Policy Release (the “Admiral Settlement Agreement”) with the Trustee was entered into on November 30, 2005, and a copy of the Admiral Settlement Agreement was attached to the Motion to Approve the Admiral Settlement. A copy of the Pegasus Settlement Agreement was attached to the Motion to Approve the Pegasus Settlement. The Royal Settlement with the Trustee was entered into in early December 2005, and a copy of the Royal Settlement Agreement was attached to the Motion to Approve the Royal Settlement. On December 8, 2005, the Motions to approve the Royal, Admiral, and Pegasus Settlement Agreements, with attached agreements, were publicly filed in the Bankruptcy Case, in that order.

Attorneys for Royal were served with and reviewed a copy of the Admiral Settlement Agreement with the Trustee within a few days after the Admiral Settlement was filed in the Bankruptcy Case on December 8, 2005. Royal had requested a copy of...