AMER. HOME ASSUR. v. DYKEMA, GOSSETT, SPENCER, ETC.

• Decision Date: 27 November 1985
• Docket Number: No. 82 C 5418.,82 C 5418.
• Citation: 625 F. Supp. 1052
• Parties: AMERICAN HOME ASSURANCE COMPANY, Plaintiff, v. DYKEMA, GOSSETT, SPENCER, GOODNOW & TRIGG, a partnership, and Northbrook Excess and Surplus Insurance Company, Defendants. DYKEMA, GOSSETT, SPENCER, GOODNOW & TRIGG and Northbrook Excess and Surplus Insurance Co., Counterplaintiffs, v. AMERICAN HOME ASSURANCE COMPANY, Counterdefendant.
• Court: U.S. District Court — Northern District of Illinois

625 F. Supp. 1052

AMERICAN HOME ASSURANCE COMPANY, Plaintiff, v. DYKEMA, GOSSETT, SPENCER, GOODNOW & TRIGG, a partnership, and Northbrook Excess and Surplus Insurance Company, Defendants.

DYKEMA, GOSSETT, SPENCER, GOODNOW & TRIGG and Northbrook Excess and Surplus Insurance Co., Counterplaintiffs, v. AMERICAN HOME ASSURANCE COMPANY, Counterdefendant.

No. 82 C 5418.

United States District Court, N.D. Illinois, E.D.

August 20, 1985.

Supplemental Opinion and Judgment Order November 27, 1985.

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

COPYRIGHT MATERIAL OMITTED

Gerard B. Gallagher, Michael J. Pavlisin, Oak Brook, Ill., John F. Horvath; David F. Pardys, Conklin & Adler, Chicago, Ill., for plaintiff.

Arthur L. Klein, Timothy J. Nalepka, Eugene J. Kelley, Jr., Paige Comstock Cunningham, Miryam R. Rees, Richard L. Rosen, Arnstein, Gluck, Lehr, Barron & Milligan, Chicago, Ill., for defendants.

MEMORANDUM OPINION AND ORDER

HOLDERMAN, District Judge:

American Home Assurance Company ("American Home") brought this action for declaratory judgment in order to have the Court determine (1) to what extent Dykema, Gossett, Spencer, Goodnow & Trigg ("Dykema"), a Michigan law firm once insured by American Home, is entitled to insurance coverage for certain claims made against it; and (2) to what extent should payments made on behalf of Dykema to settle those claims be apportioned between American Home and Northbrook Excess and Surplus Insurance Company ("Northbrook"), another insurer of Dykema. Dykema and Northbrook counterclaimed, seeking, inter alia, a declaration that American Home was obligated to pay the full amount necessary to satisfy the claims. Before the Court are the parties' cross-motions for summary judgment. Summary judgment is appropriate, of course, only if the pleadings, depositions, answers to interrogatories and admissions on file, together with the affidavits show that there is no genuine issue as to any material fact. Fed.R.Civ.P. 56(c). For the reasons stated below, American Home's motion for summary judgment is denied. Summary judgment for Dykema and Northbrook is granted in part and denied in part.

I. Undisputed Facts¹

A. The Barker lawsuit.

On March 27, 1977, the Michigan Baptist Convention (the "Convention") retained Dykema as counsel. More than two years later in May of 1979, the Convention was sued in this Court by a class of purchasers of note certificates sold and offered for sale by an organization known as the Michigan Baptist Foundation (the "Foundation"). This case was entitled Barker, et al. v. Farrell, et al., No. 79 C 2047 (the "Barker lawsuit"). Six months later in November of 1979, Dykema itself was served as a party defendant in the Barker lawsuit. The first amended class action complaint alleged that since 1977 Dykema had represented the Convention and another entity, American Baptist Churches of Michigan. Dykema's representation, the complaint alleged, included "certain activities with respect to the affairs of the Foundation including matters pertaining to its offer and sale of Note Certificates." (first amended class action complaint, ¶ 23). The complaint charged Dykema, among many others, with violation of the federal securities law, common law fraud and violation of Florida securities laws. Finally, the first amended complaint specified generally that each count arose from "defendants' unlawful acts in connection with the sale ... of more than $3 million in unsecured note certificates issued by the Foundation during the years 1976, 1977 and 1978." (first amended class action complaint, ¶ 1.)

There were two subsequent amendments to the Barker complaint. The third (and last) amended complaint, by then captioned Barker, et al. v. Lee County Bank, et al., was filed in April of 1980. This document was a highly detailed document charging the defendants with unlawful acts in connection with the public sale of more than $7 million in mortgage bonds and notes issued by the Foundation during the period of 1974-1978. Dykema's participation in the bond and note offerings was specified in paragraphs 66 through 82 of the third amended complaint. That document charged Dykema with knowing participation in conduct which resulted in the unlawful sale of securities. Dykema was also alleged to have prevented material facts from becoming known by the purchasers of the securities. Specifically, paragraph 67 alleged that shortly after being retained by the Convention in March of 1977, Dykema became aware of the grave financial condition of the Foundation and the fact that, among other things, the Foundation had not made legally-required disclosures in connection with the sale of certain note certificates, mortgage bonds and life lease contracts. Subsequent paragraphs alleged actions taken by Ronald Rose, a partner at Dykema, in April, May, June, July and early August of 1977. Finally, in paragraph 82, the third amended complaint alleged that "even as late as the spring of 1978, when the Foundation's future was hopeless, attorney Ronald Rose urged and advised that the sale of the Note Certificates be continued."

The third amended complaint set forth eight causes of action, five of which were directed at Dykema. Count I alleged that Dykema aided and abetted violations of § 10(b) of the Securities Exchange Act and Rule 10b-5 promulgated thereunder; Count II alleged that Dykema's conduct constituted common law fraud and deceit; Count III alleged that Dykema was guilty of reckless or negligent misrepresentation; Count IV alleged that Dykema was guilty of professional or fiduciary recklessness or negligence; and Count VI alleged that Dykema violated Florida securities laws.

B. The Insurance Companies.

On August 19, 1976, American Home issued a professional liability insurance policy to Dykema. The policy was countersigned in Michigan by American Home's agent. The relevant portions of American Home's policy are discussed at length below. Originally, the American Home policy provided professional liability insurance up to a limit of $1,000,000. An endorsement dated January 12, 1977 raised the policy limit to $2,000,000. Dykema was responsible for a $100,000 deductible applicable to the policy. American Home's policy expired on August 19, 1977.

Two years later on August 19, 1979, Northbrook issued a professional liability insurance policy to Dykema. The specific provisions of Northbrook's policy at issue in this lawsuit are also discussed below.

When Dykema was served with the Barker first amended class action complaint in November of 1979, it immediately notified American Home and Northbrook. It is unclear from the record what action, if any, Northbrook took in response to Dykema's notice. By letter dated December 6, 1979 American Home, however, acknowledged Dykema's notice. American Home informed Dykema that it had assigned the law firm of Hinshaw, Culbertson, Moelmann, Hoban & Fuller to represent Dykema in the Barker lawsuit and to fully protect Dykema's interest. Six days later, American Home reassigned the case to Karon, Morrison & Savikas, Ltd. ("Karon"). The last paragraph of the December 6, 1979 letter provided as follows:

If through discovery and/or other procedures it becomes apparent that there are claims made against your firm which are not covered by your policies of insurance the American Home Assurance Company reserves its rights to set forth at a future time those claims and/or judgment rendered against you which are not covered by your insurance policy.

As a result of American Home's assumption of Dykema's defense of the Barker lawsuit, Dykema did not retain separate legal counsel. Dykema satisfied the $100,000 deductible obligation and otherwise fully complied with all provisions of the American Home policy.

C. Settlement Opportunities.

Sometime prior to June 24, 1980, the Barker plaintiff class offered to settle with all of the Michigan defendants, including Dykema, for $750,000. Karon reported the settlement offer to American Home and recommended a contribution from Dykema to the proposed settlement pool of approximately $100,000. American Home, however, refused to grant settlement authority at that figure but suggested possible authority of $75,000. The Barker plaintiffs' counsel flatly rejected the $75,000 figure and told Karon that it would no longer entertain settlement discussions with Dykema. In its report to American Home after these initial settlement discussions, Karon noted: "If Dykema could have escaped entanglement in this complex lawsuit for a contribution of one-third of its anticipated cost of defense it would have represented a clear victory for the firm."

Approximately five months later, however, the Barker plaintiffs did again offer to settle with Dykema, this time for the sum of $475,000. In November of 1980, Karon once again conveyed the settlement offer to American Home and sought settlement authorization up to the sum of $250,000. American Home once again refused to grant authority to settle for any sum greater than $75,000.

D. American Home Questions Coverage.

In February of 1982, Karon learned that American Home had retained another law firm, Conklin and Adler, Ltd. to review Karon's file on the Barker lawsuit. (Conklin and Adler represents American Home in this action.) Conklin and Adler indicated to Karon that it might recommend that further efforts be made to settle the Barker lawsuit.

Neither American Home nor Conklin and Adler informed Dykema at this time that any question of Dykema's coverage under the American Home policy had arisen. Apparently, however, it had, for in January of 1982, Conklin and Adler wrote to American Home stating that "a serious question of policy period" had arisen from their initial review of the Barker lawsuit. (Conklin and Adler admitted, however, that it had never examined the policy issued to Dykema and that its comments were based on its "understanding of the general form which such policies take.")...