Alstrin v. St. Paul Mercury Ins. Co., CIV.A. 98-683-RRM.

• Decision Date: 16 January 2002
• Docket Number: No. CIV.A. 98-683-RRM.,CIV.A. 98-683-RRM.
• Citation: 179 F.Supp.2d 376
• Parties: J. Christopher ALSTRIN, Melvin Pearl Bruce Taylor, Jeffrey Taylor, and Sidney Taylor, Plaintiffs, v. ST. PAUL MERCURY INSURANCE COMPANY, Continental Casualty Company, Reliance Acceptance Group, Inc., National Union Fire Insurance Company of Pittsburgh, PA, Lori Cole, Howard Silverman, William Race, Ross Mangano, Dean Griffith, Solway Firestone,, Reliance Insurance Company David T. Allen, not individually, but as the Estate Representative, Shirley Cole, not individually, but as the Independent Executor of the Estate of Irwin Cole, James Dolph, and Thomas Barlow, Defendants.
• Court: U.S. District Court — District of Delaware

179 F.Supp.2d 376

J. Christopher ALSTRIN, Melvin Pearl Bruce Taylor, Jeffrey Taylor, and Sidney Taylor, Plaintiffs, v. ST. PAUL MERCURY INSURANCE COMPANY, Continental Casualty Company, Reliance Acceptance Group, Inc., National Union Fire Insurance Company of Pittsburgh, PA, Lori Cole, Howard Silverman, William Race, Ross Mangano, Dean Griffith, Solway Firestone,, Reliance Insurance Company David T. Allen, not individually, but as the Estate Representative, Shirley Cole, not individually, but as the Independent Executor of the Estate of Irwin Cole, James Dolph, and Thomas Barlow, Defendants.

No. CIV.A. 98-683-RRM.

United States District Court, D. Delaware.

January 16, 2002.

Vernon Proctor, Esquire, The Bayard Firm, Wilmington, DE, for plaintiffs J. Christopher Alstrin, Bruce Taylor, Jeffrey Taylor, Sidney Taylor, and Melvin Pearl.

Jonah Orlofsky, Esquire, Law Officers of Jonah Orlofsky, Chicago IL, for plaintiffs Christopher Alstrin, Bruce Taylor, Jeffrey Taylor, and Sidney Taylor.

David Bradford, Esquire, David Sanders, Esquire, and David Layden, Esquire, Jenner & Block, Chicago, IL, for plaintiff Melvin Pearl.

Andre G. Bouchard, Esquire, Bouchard Margules & Friedlander, Wilmington, DE, David A. Boyar, Esquire and Michael McDermott, Esquire, D'Amato & Lynch, New York City, for defendant National Union Fire Ins. Co. of Pittsburgh, PA.

MEMORANDUM OPINION

MCKELVIE, District Judge.

This is a dispute over directors and officers insurance coverage for liabilities in connection with a securities class action lawsuit and related bankruptcy adversary proceedings. The plaintiffs in this insurance coverage dispute, J. Christopher Alstrin, Melvin Pearl, Jeffrey Taylor, Bruce Taylor, and Sidney Taylor (collectively, "the D & O plaintiffs") are former officers and directors of the Cole Taylor Financial Group, Inc.. They are also among the defendants in a securities class action and in related adversary proceedings brought by the Estate Representative of the company, which is now a Chapter 11 Debtor. The D & O plaintiffs have asserted claims for directors and officers liability insurance ("D & O insurance") coverage against defendants, St. Paul Mercury Insurance Company ("St.Paul"), Continental Casualty Company ("Continental"), Reliance Insurance Company ("Reliance"), and National Union Fire Insurance Company of Pittsburgh, PA ("National Union") under D & O insurance policies issued by those entities.

St. Paul issued a primary $10 million D & O insurance policy to the directors and officers of Cole Taylor Financial Group, Inc. that was in effect from July 31, 1996 through July 31, 1997. Continental and Reliance each issued $10 million excess policies above the St. Paul primary coverage to the Cole Taylor Financial Group. National Union issued an overlapping $30 million policy to the Cole Taylor Financial Group that was in effect from February 12, 1997 through February 12, 2003. The National Union policy provides separate D & O coverage for both the Cole Taylor Financial Group and the Reliance Acceptance Group. According to plaintiffs' counsel, tentative settlements have been reached with St. Paul, Continental, and Reliance. This opinion addresses certain defenses asserted by National Union to deny coverage for the claims interposed by the D & O plaintiffs.

The D & O plaintiffs seek summary judgment on Counts V and VI of their Second Amended Adversary Proceeding Complaint. Together, these counts seek a declaration that the claims asserted against the plaintiffs by both the shareholder class and the Estate Representative are covered by the National Union policy, and that the policy provides $30 million of excess insurance over any insurance monies collected from St. Paul, Continental, and Reliance. The D & O plaintiffs also seek summary judgment on Separate Defenses 6, 7, 8, 9, 10, 11, 12, and 13 of National Union's answer. Those affirmative defenses set forth the nine insurance policy exclusions that National Union relies upon to deny coverage.

This is the court's decision on plaintiffs' motion for partial summary judgment.

I. BACKGROUND AND PROCEDURAL HISTORY

A. The Securities Class Action and Bankruptcy Adversary Proceedings

While the background and procedural history of the securities lawsuit is more comprehensively set forth in the court's two earlier opinions, In re Reliance Sec. Litig., 91 F.Supp.2d 706 (D.Del.2000) (denying defendants' motions to dismiss plaintiffs' claims for breach of fiduciary duties and claims for securities fraud under §§ 10(b), 14(a), and 20(a) of the Exchange Act) and In re Reliance Sec. Litig., 135 F.Supp.2d 480 (D.Del.2001) (granting in part and denying in part certain defendant's motions for summary judgment), for the purposes of this opinion, the court will briefly review the facts necessary to give context to the insurance dispute that is the subject of this opinion.

The underlying securities litigation arose out of the corporate restructuring and subsequent bankruptcy of Reliance Acceptance Group, Inc. ("RAG") in 1997 and 1998. RAG is a Delaware corporation, and was formerly known as Cole Taylor Financial Group, Inc. ("CTFG"). The plaintiffs in the securities action (collectively, "the Graham Plaintiffs") are former shareholders of RAG. The defendants in the securities action (collectively, "the Graham Defendants") are former officers, directors, accountants, financial advisors, and subsidiaries of RAG, and other entities formed in the corporate restructuring.

In 1981, Irwin Cole and Sidney Taylor formed CTFG as a holding company for a group of commercial banking institutions. CTFG remained a private corporation until 1994 when the company made an initial public offering of its stock. The Cole and Taylor families remained CTFG's largest shareholders, each owning approximately 25% of the company's outstanding stock. By the early 1990s, Jeffrey Taylor, Bruce Taylor, and Sidney Taylor (collectively, the "Taylor Family") served respectively as the CTFG's CEO, President, and Chairman of the Executive Committee. By the time the events at issue occurred, both Irwin Cole and his daughter, Lori Cole, (collectively, the "Cole Family") were directors of CTFG, but had no day-to-day role in its operations. In 1997, at the time of the corporate restructuring, CTFG operated as a holding company for three wholly owned subsidiaries: Cole Taylor Bank, a regional commercial lender based in Chicago, Illinois, with a record of sustained profitability but slow growth; CT Mortgage Company, Inc., a mortgage company that provided subprime residential real estate loans; and Reliance Acceptance Corporation ("RAC"), a rapidly growing finance company specializing in subprime auto loans based in San Antonio, Texas.

RAC commenced operations in January 1993. It purchased and serviced sales finance contracts in connection with the sale of automobiles. Principally, RAC purchased subprime loans, loans in which the borrowers had substandard or nonexistent credit histories. RAC bought the loans at a discount from the car dealers. RAC implemented expedited procedures for authorizing loans, including a program to process loans within one hour. This program was popular with automobile dealers, who could arrange financing for a buyer before he or she left the parking lot. Under this program, RAC expanded its loan portfolio rapidly. From 1993 to 1996, RAC's gross finance receivables grew nearly twenty-fold, from $24.4 million to $429 million. Throughout this period of expansion, the CTFG's annual net income grew from $198,000 in 1993 to $9.6 million in 1995. CTFG's stock price rose from approximately $18 per share in 1995 to a high of approximately $31 in the Fall of 1996.

It was alleged in the securities lawsuit, however, that beneath this rosy growth story lay vast economic troubles. CTFG's Board of Directors allegedly received a 1995 report issued by the Federal Reserve Bank stating that RAC's loan portfolio was deteriorating. The Federal Reserve Bank reported that it had reviewed five of RAC's branch offices, rating four of them "marginal" and the fifth "unsatisfactory." The report disclosed, moreover, that RAC had an approximately 83% staff turnover annually. CTFG's directors also allegedly received a December 1995 internal audit report that two-thirds of RAC's 36 branch offices were underwriting loans based on incomplete and inaccurate credit investigations. A July 1996 internal report revealed that 55% of RAC's branches were failing to properly investigate credit applications. According to the Graham Plaintiffs, the loss rate for RAC's loans increased annually, from 4.5% in 1993 to 25.3% in 1996. During this same time period, the Graham Plaintiffs allege, RAC's loan loss reserves dropped from 6.18% of its total loans in 1993 to 4.08% by 1996. According to the allegations in the class action complaint, during this period CTFG issued a series of allegedly false and misleading financial statements which inflated the assets and earnings of its subsidiary, RAC, by understating the reserves needed to properly account for uncollectible loans.

On February 12, 1997, after a vote of the shareholders, CTFG spun off Cole Taylor Bank and CT Mortgage Company and retained control of RAC. This transaction is referred to by the parties as "the split-off transaction." As a result of this transaction, the class plaintiffs allege, the Taylor defendants took the valuable Cole Taylor Bank and Mortgage Company private, leaving the CTFG shareholders with ownership of the virtually worthless subprime auto loan subsidiary, RAC. Two days later, CTFG, which amended its Certificate of Incorporation to change its name to RAG after the close of the split-off transaction, issued a press release announcing that "it would make significant provisions for credit losses for the fourth quarter of 1996." On February 9, 1998, less than a year later, after a string of announcements revealing escalating losses and worsening financial...