Morden v. XL Specialty Ins.

Citation903 F.3d 1145
Decision Date10 September 2018
Docket NumberNo. 17-4029, No. 17-4038,17-4029
Parties James MORDEN ; Jenalyn Morden; Wade Morden, Plaintiffs-Appellants/Cross-Appellees, v. XL SPECIALTY INSURANCE, Defendant-Appellee/Cross-Appellant. James Morden ; Jenalyn Morden; Wade Morden, Plaintiffs-Appellees, v. XL Specialty Insurance, Defendant-Appellant.
CourtUnited States Courts of Appeals. United States Court of Appeals (10th Circuit)

Erik A. Olson, Marshall Olson & Hull, P.C., Salt Lake City, Utah, for Plaintiffs-Appellants/Cross-Appellees.

David M. Gische, Clyde & Co US LLP, Washington, D.C. (Jennifer Mathis, Troutman Sanders LLP, San Francisco, CA on the briefs) for Defendant-Appellee/Cross-Appellant.

Before BRISCOE, HARTZ, and PHILLIPS, Circuit Judges.

HARTZ, Circuit Judge.

This appeal concerns an assigned claim on a liability-insurance policy. Belsen Getty, LLC, a registered investment adviser owned by Terry Deru, obtained a claims-made financial-services-liability policy (the Policy) from XL Specialty Insurance Company covering Belsen Getty and its advisers for the period from October 9, 2010, to October 9, 2011. Under the policy, XL had no duty to defend. During the policy period James, Jenalyn, and Wade Morden brought claims against Belsen Getty and Deru alleging improper and misleading investment advice, but XL denied coverage. XL asserted that the Mordens’ claims and claims brought by the Securities and Exchange Commission (SEC) before the policy period concerned "Interrelated Wrongful Acts," as defined by the Policy, and that the Policy therefore required treating the two claims as one claim made before the policy period.

Belsen Getty and Deru then settled with the Mordens, assigning their rights against XL; and the Mordens sued XL in the United States District Court for the District of Utah, raising the assigned claims that XL breached its covenant of good faith and fair dealing and its fiduciary duties to Belsen Getty and Deru in denying coverage under the Policy. XL counterclaimed that the Policy’s Interrelated Wrongful Acts provision precluded coverage. The Mordens moved for partial summary judgment on the counterclaim and on several of XL’s affirmative defenses, and XL moved for summary judgment under the Interrelated Wrongful Acts provision and for failure to prove bad faith or breach of fiduciary duty. Pertinent to this appeal, the district court denied XL’s counterclaim but granted it summary judgment anyway for lack of evidence supporting the bad-faith and fiduciary-duty claims. The court also denied the Mordens’ motion to amend their complaint to add a breach-of-contract claim.

The Mordens appeal the summary judgment against them on their bad-faith and fiduciary-duty claims and the denial of their motion to amend their complaint to add a breach-of-contract claim. XL cross-appeals the summary judgment against it on its counterclaim that the Policy’s Interrelated Wrongful Acts provision bars all the Mordens’ claims. Exercising jurisdiction under 28 U.S.C. § 1291, we reverse the denial of XL’s motion for summary judgment on its counterclaim. This reversal undermines the Mordens’ challenges to the summary judgment against them and the denial of their motion to amend. We therefore affirm the summary judgment against the Mordens on their claims and the denial of their motion to amend.

I. BACKGROUND

We first describe the misconduct of Deru and Belsen Getty alleged by the SEC and the Mordens and then summarize the SEC proceedings and the Mordens’ lawsuit against the two before turning to the relevant provisions of the Policy and the Mordens’ claims against XL.

A. Alleged Misconduct by Belsen Getty

Belsen Getty, through Deru and other advisers, counseled clients regarding their investments. Sometimes it recommended the clients buy certain investments. Sometimes, exercising discretionary trading authority granted by clients, it made investments before getting client approval, although clients later received statements showing the investments and could inquire about the propriety of the investments at that time. The misconduct alleged against Belsen Getty and Deru involved client investments in four ventures from 2005 to 2009. The investments and the ventures were quite varied in nature. But the allegations against Belsen Getty and Deru with respect to the investments share common threads. Clients were promised too much, not warned of risks, and not informed of conflicts of interest of their advisers, who had undisclosed stakes in the ventures. The ventures were Nine Mile Software, Inc. (Nine Mile); Axxess Funding Group, LLC (Axxess); ProFire Energy, Inc. (ProFire); and Vermillion Holdings, LTD (Vermillion). We discuss in turn the allegations regarding each venture.

1. Nine Mile

In 2006, Deru, his son Damon (who was a Belsen Getty adviser), and Andrew Limpert (another Belsen Getty adviser) founded Nine Mile, a software company. Damon was its CEO and Limpert was the chairman of its board of directors. In 2007 the company issued 1,882,000 shares of restricted stock, three quarters of which was owned by the three men. Later that year Nine Mile commenced an initial public offering of its common stock, issuing 714,288 shares at $ 0.70 a share. Nine Mile was illiquid at the time. Yet more than 90% of the stock was sold to Belsen Getty clients, as Deru and Limpert recommended the stock or purchased it using their discretionary trading authority over investor accounts. Deru ignored the preferences of risk-averse clients and invested their money without disclosing the risk, and he promised quick profits. He did not disclose to investors that Belsen Getty’s discretionary trading authority over client accounts gave it control over the great majority of the shares after the offering.

After the initial offering Deru manipulated the market in Nine Mile stock by using his discretionary trading authority over client accounts to repeatedly buy and sell Nine Mile stock (still without informing clients of the risks or of his conflict of interest). This inflated the stock price by creating phony trading volume and making it appear that there was considerable investor interest.

2. Axxess

In 2005, Deru, Limpert, and Damon formed Axxess, a firm that loaned money secured by real estate. They raised money for the firm from Belsen Getty clients in private offerings in 2005 and 2007–08, exercising their discretionary authority over client accounts and recommending the investment to clients. The private placement memoranda for the offerings said that Deru, Limpert, and Damon would manage the company and vote on decisions, and noted that all of them had extensive education and experience qualifying them for these posts. They also represented that compensation for the three would come from only a management fee and a share of profits. Contrary to these representations, however, Deru managed the company himself without input from the other two men, and he used his position to his family’s financial advantage. He paid his high-school-educated son $300,000 in 2007–08 (about 10% of what was raised in the private offerings) to do very little work (which should have been performed by the three founders anyway); and he loaned himself $500,000 of company funds without informing the members of the LLC or obtaining the required unanimous consent.

3. ProFire

In 2008 Deru and Limpert bought restricted stock in a public shell company through a private sale. After a merger they renamed the company ProFire, and Limpert became the firm’s chief financial officer. Belsen Getty controlled most of the unrestricted stock in the company. In 2009, Deru sold restricted ProFire stock, including some of his personal shares, to Belsen Getty clients, either touting the investment as providing a quick return or using his discretionary authority over client accounts to make the purchase for the client without prior consent. He did not disclose that unrestricted ProFire stock was available in the open market, that the stock he sold was not freely tradable, or that he had a significant interest in the company.

4. Vermillion

In March 2009 Deru advised the Mordens to be prudent with their investments. The next month he began pitching to them an investment in the Vermillion gold-mine project in Mexico. He persuaded them to eventually lend Vermillion $1 million by emphasizing that the loan was not risky and would be quickly repaid because the mine operation "was ready to go." Aplt. App., Vol. 1 at A114. He claimed Vermillion had the rights to an operational gold-processing plant that would be able to generate a positive cash flow after the first year, that the operation was run by experienced personnel, that all the necessary permits had been obtained, and that extensive testing on samples indicated that the mine had profitable amounts of gold in it. But after investing, the Mordens learned that Deru had significantly misrepresented the project’s readiness. The required permits had not been obtained; Vermillion did not own the mining concessions; and the mining plant and necessary equipment still needed to be moved to the site. Although Deru told the Mordens that he had invested in the mine, he failed to disclose that Vermillion had no rights to the mine, which was actually owned by a Mexican company that was 99% owned by Deru, or that the plant purchased by Vermillion was transferred to Deru’s company.

B. The SEC Investigation

In February 2009, before the policy period, the SEC sent letters to Nine Mile, Belsen Getty, Deru, Damon, and Limpert saying that the SEC staff "intends to recommend that the [SEC] bring ... civil injunctive action[s] against [each of them], alleging that [they] violated" various securities laws. Aplt. App., Vol. 2 at A377–A86. Although the investigation may initially have been limited to conduct relating to Nine Mile, the investigation broadened. The SEC issued a formal order of investigation on September 24, 2009 (which was given to Deru no later than August 17, 2010) stating that from at least May 2007, Belsen Getty and its...

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