Biltmore Associates v. Twin City Fire Ins. Co.

• Decision Date: 10 July 2009
• Docket Number: No. 06-16417.,No. 07-16036.,06-16417.,07-16036.
• Citation: 572 F.3d 663
• Parties: BILTMORE ASSOCIATES, LLC, as Trustee of the Visitalk Creditors Trust, Plaintiff-Appellant, v. TWIN CITY FIRE INSURANCE COMPANY, an Indiana corporation; Great American Insurance Company, a New York corporation; Carolina Casualty Insurance Company; Old Republic Insurance Company, a Pennsylvania corporation; North American Specialty Insurance Company, a New Hampshire corporation, Defendants-Appellees. Biltmore Associates, LLC, as Trustee of the Visitalk Creditors Trust, Plaintiff-Appellant, v. Twin City Fire Insurance Company, an Indiana corporation; Great American Insurance Company, a New York corporation; Carolina Casualty Insurance Company; Old Republic Insurance Company, a Pennsylvania corporation; North American Specialty Insurance Company, a New Hampshire corporation, Defendants-Appellees.
• Court: U.S. Court of Appeals — Ninth Circuit

572 F.3d 663

BILTMORE ASSOCIATES, LLC, as Trustee of the Visitalk Creditors Trust, Plaintiff-Appellant, v. TWIN CITY FIRE INSURANCE COMPANY, an Indiana corporation; Great American Insurance Company, a New York corporation; Carolina Casualty Insurance Company; Old Republic Insurance Company, a Pennsylvania corporation; North American Specialty Insurance Company, a New Hampshire corporation, Defendants-Appellees.

Biltmore Associates, LLC, as Trustee of the Visitalk Creditors Trust, Plaintiff-Appellant, v. Twin City Fire Insurance Company, an Indiana corporation; Great American Insurance Company, a New York corporation; Carolina Casualty Insurance

Company; Old Republic Insurance Company, a Pennsylvania corporation; North American Specialty Insurance Company, a New Hampshire corporation, Defendants-Appellees.

No. 06-16417.

No. 07-16036.

United States Court of Appeals, Ninth Circuit.

Argued and Submitted May 15, 2008.

Filed July 10, 2009.

Andrew S. Jacob, Shughart Thompson & Kilroy, P.C., Phoenix, AZ, for the appellant.

Michael F. Perlis, Stroock & Stroock & Lavan LLP, Los Angeles, CA, for appellee, Twin City Fire Insurance Company.

E.J. Kotalik, Jr., Peshkin & Kotalik, P.C., Phoenix, AZ, for appellee, Old Republic Insurance Company.

Mark G. Worischeck (briefed), J. Steven Sparks, Sanders & Parks, P.C., Phoenix, AZ; James K. Thurston, Wilson, Elser, Moskowitz, Edelman & Dicker LLP, Chicago,

IL, for appellee, Carolina Casualty Insurance Company.

Greg S. Comol (briefed), Lewis Brisbois Bisgaard & Smith LLP, Phoenix, AZ, for appellee Great American Insurance Company.

Gena L. Sluga (briefed), Harper Christian Dichter Graif, PC, Phoenix, AZ, for appellee North American Specialty Insurance Company.

Appeal from the United States District Court for the District of Arizona, Frederick J. Martone, District Judge, Presiding. D.C. No. CV-05-04220-FJM.

Before ANDREW J. KLEINFELD and N. RANDY SMITH, Circuit Judges, and RICHARD MILLS,^* District Judge.

KLEINFELD, Circuit Judge:

This is an insurance coverage dispute arising in the context of bankruptcy. It turns on the insured versus insured exclusion. We also resolve an associated attorneys' fees dispute.

I. Facts.

The district court dismissed the case for failure to state a claim on which relief could be granted, under Rule 12(b)(6). The complaint was supplemented by attachment of the insurance policies at issue to the defendants' motions.¹ The complaint and the insurance policies control the outcome. Visitalk, an Arizona corporation, purchased directors and officers liability insurance from Reliance Insurance Company and Twin City Fire Insurance Company.² A corporation frequently agrees to protect and indemnify its directors and officers against claims made against them, such as in shareholders' derivative suits, on account of their work for the company. The policies in this case named Visitalk.com, Inc., and its directors and officers as insureds, and promised to pay losses that Visitalk and the directors and officers became liable to pay as a result of covered claims:

I. INSURING AGREEMENTS

This policy affords the following coverages:

(A) DIRECTORS' AND OFFICERS' LIABILITY

Except for Loss which the Insurer pays pursuant to Insuring Agreement (B) of this Policy, the Insurer will pay on behalf of the Directors and Officers Loss which the Directors and Officers shall become legally obligated to pay as a result of a Claim first made during the Policy Period or the Discovery Period, if applicable, against the Directors and Officers for a Wrongful Act which takes place during or prior to the Policy Period;

(B) COMPANY REIMBURSEMENT

The Insurer will pay on behalf of the Company Loss for which the Company has, to the extent permitted or required by law, indemnified the Directors and Officers, and which the Directors and Officers have become legally obligated to pay as a result of a Claim first made during the Policy Period or Discovery Period, if applicable, against the Directors and Officers for a Wrongful Act which takes place during or prior to the Policy Period. ...

The policies excluded from this coverage various claims, such as personal injury, defamation, and, central to this case, claims brought by Visitalk itself against its own officers or directors. There is an exception to this exclusion for stockholder derivative actions and claims by former officers and directors for wrongful termination, discrimination or sexual harassment:

V. EXCLUSIONS

The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors and Officers ...:

(D) brought or maintained by or on behalf of an Insured in any capacity or by an security holder of the company except:

(1) a Claim, including, but not limited to, a security holder class or derivative action that is instigated and continued totally independent of, and totally without the solicitation of, or assistance of, or active participation of, or intervention of an Insured;

(2) an Employment Practice Claim³ by a former Director or a present or former Officer;

(3) a claim for contribution or indemnity if the Claim directly results from another Claim that is otherwise covered under this Policy; or

(4) a claim by any employee(s) of the Company described in IV.(D)(2) of the Policy.

This case turns on the exclusion from coverage quoted above, commonly called the "insured versus insured" exclusion. Basically, if Visitalk sues its directors or officers itself, they have no liability coverage. Some covered claims, such as shareholders' derivative actions, are excepted from the exclusion, even though they are at least in theory on behalf of the corporation. But the exception to the exclusion only applies if the claims are "instigated and continued totally independent of" the corporation.

The exclusion was put at issue when, after two years in business, Visitalk filed a chapter 11 bankruptcy petition. Visitalk, as "debtor and debtor in possession," sued some of its recently discharged officers and directors for breaches of their fiduciary duties. The attorney representing Visitalk as debtor in possession told the insurers that officers and directors of Visitalk had looted the company. He asserted that they had charged grossly excessive amounts as expenses for inappropriate things, such as "personal expenses, strippers, lavish trips, and gifts" of no value to the company, and failed to institute appropriate financial controls to prevent this sort of thing. He claimed that the directors and officers purchased unnecessary software and usurped corporate opportunities. He also claimed that the directors had paid one officer more than a million dollars to cover up the inappropriate issuance of warrants to other officers to purchase Visitalk's common stock. The insurers declined to cover the claims.

This case arises out of a variation on what insurance litigators often call the "confession of judgment, assignment of rights, covenant not to execute" technique. Sometimes when a liability insurer denies coverage and declines to defend, the injured party sues the insured tortfeasor, and they agree on a confession of judgment, assignment of rights, and covenant not to execute. That way the insured party obtains protection from having to pay anything, and the injured party steps into the insured's shoes in order to sue the liability insurer. The injured party may be able to get more than the policy limits from the insurer, if he prevails on coverage, because damages for bad faith denial of coverage and punitive damages are in the nature of tort damages, not limited by the insurance contract.

Visitalk filed a chapter 11 reorganization plan which assigned its claims against the directors and officers to a trust established for its creditors (the "Visitalk Creditors Trust") and named Biltmore as trustee. Biltmore and four directors and officers against whom Visitalk had asserted claims then agreed to settle Visitalk's claims for about $175 million. The four directors and officers assigned to the creditors' trust their rights against the liability insurers. The complaint does not say whether the confession of judgment and assignment of rights was coupled with the typical covenant not to execute against the settling directors and officers personally. But the existence of such a covenant does not matter here. Basically, Visitalk sued its directors and officers for breach of their fiduciary duties, the directors and officers liability insurers refused coverage under the insured versus insured exclusion, Visitalk assigned the claims to its creditors' trust, and Biltmore, as trustee, then settled with four directors and officers for a confession of judgment of $175 million and an assignment of whatever claims the directors and officers had against the insurers.

Biltmore, as trustee for the creditors' committee, then sued the insurance companies on the basis of these claims.⁴ The district court dismissed the case because the complaint failed to set forth sufficient facts to show that the named defendant, Twin City, had obligated itself as successor to Reliance to cover the Reliance policy period, and failed to allege sufficient facts to show that the underlying claims were made within the Twin City policy period. The district court also relied in part on a local rule governing motions practice. The district court awarded attorneys' fees to the insurers and against Biltmore personally, under Arizona's statute adopting the English rule for contract cases.⁵ Biltmore timely appeals both decisions.⁶

We affirm the dismissal of the complaint, but on different grounds (also urged in district court and fully briefed here), that the insured versus insured exclusion applies. We do not decide whether the district court's grounds for dismissal were correct. We remand the award of attorneys' fees to clarify that Biltmore is not personally liable, because it was acting as representative of the trust and was...