Adams v. American Guarantee & Liability Ins. Co., No. 99-1511

Decision Date01 December 2000
Docket NumberNo. 99-1511
Citation233 F.3d 1242
Parties(10th Cir. 2000) CHARLES F. ADAMS; MARION E. ADAMS; EDWARD YENKINSON; ALAN WATTS; GERTRUDE NICHOLSON; BENJAMIN FRIEDMAN; EDWARD J. LACKNER; ALICE GALLAHER; DONALD GALLAHER; DONALD SAFER; ALAN WATTS PENSION PLAN AND TRUST; EDWARD J. LACKNER INDIVIDUAL RETIREMENT ACCOUNT; CASEWORK SYSTEMS, INC. PROFIT SHARING PLAN AND TRUST, Plaintiffs - Appellants, v. AMERICAN GUARANTEE AND LIABILITY INSURANCE COMPANY, Defendant - Appellee
CourtU.S. Court of Appeals — Tenth Circuit

APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO. (D.C. No. 98-WY-938-CB)

[Copyrighted Material Omitted] Bradley S. Freedberg, Denver, Colorado, forPlaintiffs - Appellants.

Laurence M. McHeffey,McElroy, Deutsch & Mulvaney, Denver, Colorado, for Defendant - Appellee.

Before BRORBY, MCWILLIAMS, and KELLY, Circuit Judges.

KELLY, Circuit Judge.

Plaintiffs-Appellants, various investors in financial transactions dependent on future insurance commissions, appeal from the district court's order granting summary judgment for the Defendant-Appellee, American Guarantee and Liability Insurance Company ("American Guarantee"). Our jurisdiction arises under 28 U.S.C. 1291, and we affirm.

Background

Plaintiffs' claim against American Guarantee arises out of a complicated series of dealings between Plaintiffs and James Patrick Gregory, an insurance agent that American Guarantee insured under an Errors and Omissions ("E&O") Policy. As the parties are familiar with the facts, we will only briefly restate them here.

A. The Financial Transactions

The Plaintiffs are investors in First Capital Network, Inc. First Capital and Gregory's business, Gregory & Associates, Inc., engaged in a series of financial transactions, known as "factoring arrangements," in which First Capital would pay Gregory & Associates 65 to 70 percent of its expected insurance commissions up front, and in return, First Capital would receive the rights to the commissions paid over time. Gregory and his wife, Linda, the majority shareholders of Gregory & Associates, personally guaranteed payment of the commissions to First Capital. First Capital assigned the rights it had purchased from Gregory & Associates to certain of its investors, including the Plaintiffs.

By 1994, the factoring arrangement between Gregory & Associates and First Capital had become less stable. The factoring arrangement began to include not only commissions payable on insurance contracts Gregory & Associates had already obtained, but also commissions on insurance contracts that Gregory & Associates hoped to obtain in the future. When Gregory & Associates failed to obtain these future insurance contracts, the factoring arrangement began to falter and by April 1995, Gregory & Associates could not pay First Capital all the money it was owed. By December 1995, Gregory & Associates ceased making any payments to First Capital. Gregory & Associates still owed Plaintiffs approximately $968,000.

B. The Insurance Policies

Until October 1, 1995, Gregory & Associates had a professional liability insurance policy (an E&O policy) from Employers Reinsurance Corporation ("Employers"). Gregory & Associates never notified Employers of its ongoing financial difficulties because Gregory did not think that the Employers' E&O coverage applied to the factoring arrangements between his company and First Capital. When the Employers' coverage expired, Gregory tried to negotiate a renewal contract over the next several months. Gregory and Employers never reached agreement and the Employers' coverage was not renewed. Gregory finally obtained claims-made E&O coverage from American Guarantee, the defendant in this case, effective May 1, 1996 to January 1, 1997. See Aplt. App. at 2-09 (certificate of insurance).

C. The Litigation

In July 1996, plaintiffs filed a civil suit against Gregory & Associates, Gregory, and Linda Gregory in Arapahoe County court for negligence, breach of warranty, and breach of guaranty. See Aplt. App. at 2-46 (Plaintiffs' original complaint). Gregory did not inform Employers or American Guarantee of the suit due to his belief that the E&O coverage did not apply to the financial transactions at issue in the case. Plaintiffs' lawyer contacted both Employers and American Guarantee in August 1996 to inform them of the suit. See Aplt. App. at 2-44; Aple. Supp. App. at 3-91. Employers denied coverage, stating that Gregory's actions towards Plaintiffs had no relation to the rendering of professional services as an insurance agent. See Aple. Supp. App. at 3-91. American Guarantee contacted Gregory requesting information about the suit. See Aplt. App. at 8-09. Gregory responded by reiterating his belief that Plaintiffs' claims had nothing to do with Gregory's E&O coverage. See Aple. Supp. App. at 3-139. American Guarantee did not tender a defense to Gregory in the Arapahoe County suit.

In October 1996, Pat and Linda Gregory filed for bankruptcy. Soon after, in November 1997, Gregory and the Plaintiffs entered into a Stipulation and Settlement Agreement. See Aple. Supp. App. at 3-141. In return for Plaintiffs agreeing to release Gregory & Associates from all claims asserted in Plaintiff's lawsuit, Gregory and his wife agreed to allow Plaintiffs to proceed against them personally in the civil lawsuit in Arapahoe County court. Plaintiffs also agreed they would not collect any judgment obtained against Gregory in the civil suit from either Gregory or his wife but would proceed only against the E&O policy issued by American Guarantee. Id. at 3-142. In March 1997, Plaintiffs released both Gregory and Gregory & Associates from any and all causes of action for fraud, bad-faith conduct, or for any other non-dischargeable claims under the Bankruptcy Code. In return, Gregory assigned all his rights, if any, under the American Guarantee E&O policy to the Plaintiffs. See Aplt. App. at 2-30.

In line with their agreement, the Plaintiffs continued to proceed only against Gregory personally in the civil lawsuit. In March 1998, after filing a motion for summary judgment, the Plaintiffs obtained a judgment against Gregory in the Arapahoe County District Court. See Aplt. App. at 2-37. Gregory did not actively defend himself but simply sent a letter to the court, reminding the court that the judgment could not be used against him personally but would allow the Plaintiffs to proceed against American Guarantee. See Aple. Supp. App. at 3-173. The court's final judgment in the case expressly stated this limitation. See Aplt. App. at 2-43.

Plaintiffs filed suit against American Guarantee in state court in April 1998. See Aple. Supp. App. at 3-64. American Guarantee removed the case to federal court based on diversity jurisdiction. See Aplt. App. at 3-1. Plaintiffs argued that Gregory had been professionally negligent in his role as an insurance agent and, therefore, that the American Guarantee E&O policy should cover Plaintiffs' losses. American Guarantee defended by arguing (1) the "known loss" doctrine precluded coverage and (2) Gregory did not qualify for coverage because he failed to meet the terms of the insurance contract that required him to maintain continuous and uninterrupted E&O coverage from before the time the acts or omissions giving rise to the suit occurred.

The trial court held that the known loss doctrine did not preclude Gregory from coverage, but granted American Guarantee's motion for summary judgment on the issue that Gregory had let his E&O coverage lapse in violation of his American Guarantee insurance contract. See Aplt. App. at 7-01. On appeal, Plaintiffs argue that the district court misapplied the standard for summary judgment by disregarding Plaintiffs' evidence that Gregory maintained continuous E&O coverage. See Aplt. Br. at 12-14. In addition, Plaintiffs argue that American Guarantee should be estopped from denying coverage as American Guarantee had accepted an October 23, 1996 letter from Gregory as "proof" that he had maintained continuous coverage. Id. at 18-19. Defendant-Appellee American Guarantee asks this court not only to affirm the grant of summary judgment on the basis of Gregory's coverage lapse, but to consider the doctrine of "known loss" as an alternative grounds for affirmance. See Aple. Br. at 17-18. As we find the issue of the sufficiency of Plaintiffs' evidence to be dispositive, we decline to reach the "known loss" issue.

Discussion

Of Plaintiffs' two arguments on appeal, we first address Plaintiffs' argument that the district court misapplied the standard for summary judgment. We review a grant of summary judgment de novo. Equal Employment Opportunity Comm'n v. Horizon/CMS Healthcare Corp., 220 F.3d 1184, 1190 (10th Cir. 2000). Summary judgment is appropriate only if "there is no genuine issue as to any material fact and...the moving party is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(c). A fact is "material" if under the substantive law it could have an effect on the outcome of the lawsuit. Horizon/CMS Healthcare Corp., 220 F.3d at 1190. An issue is "genuine" if "a rational jur[or] could find in favor of the nonmoving party on the evidence presented." Id. In conducting our review, we view the factual record and draw any reasonable inferences therefrom in the light most favorable to the nonmoving party. Adler Wal-Mart Stores, Inc., 144 F.3d 664, 670 (10th Cir. 1998).

The district court granted American Guarantee's motion for summary judgment on the lapse issue. The issue had been raised by American Guarantee in response to a motion for partial summary judgment by Plaintiffs. Aplt. App. at 5-33. American Guarantee bears the burden of showing that no genuine issue of material fact exists. Adler, 144 F.3d at 670. Because it does not bear the ultimate burden of persuasion at trial, however, it does not have to negate the nonmovant's claim, but may meet its burden by "pointing out to the court a...

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