Bilyeu v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA

• Decision Date: 30 September 2015
• Docket Number: No. 50,049–CA.,50,049–CA.
• Citation: 184 So.3d 69
• Parties: Woody D. BILYEU, Mary H. Bilyeu and Patrick B. Shelton, Plaintiff–Appellants v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Federal Insurance Company, Directech Southwest, Inc. and Directech Delaware, Inc., Defendant–Appellees.
• Court: Court of Appeal of Louisiana — District of US

184 So.3d 69

Woody D. BILYEU, Mary H. Bilyeu and Patrick B. Shelton, Plaintiff–Appellants

v.NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Federal Insurance Company, Directech Southwest, Inc. and Directech Delaware, Inc., Defendant–Appellees.

No. 50,049–CA.

Court of Appeal of Louisiana, Second Circuit.

Sept. 30, 2015.

Rehearing Denied Nov. 12, 2015.

Stamey & Miller, LLC, by J. Mark Miller, for Appellants.

Leake & Andersson, LLP, by George D. Fagan, Alex P. Tilling, New Orleans, LA, for Appellee Nat'l Union Fire Ins.

Barrasso Usdin Kupperman Freeman & Sarver, LLC, by John W. Joyce, Erika A. Therio, Steven W. Usdin, New Orleans, LA, for Appellee Federal Insurance Co.Faircloth Law Group, LLC, by Barbara Bell Melton, Alexandria, LA, for DirecTech Southwest, Inc.

Before BROWN, MOORE and GARRETT, JJ.

MOORE, J.

The plaintiffs, Woody Bilyeu, Mary Bilyeu and Patrick Shelton, appeal a summary judgment that rejected their claims for insurance coverage and defense against National Union Fire Insurance Company of Pittsburgh ("National Union") and Federal Insurance Company ("Federal"). The plaintiffs also appeal a ruling that denied their motion to amend their petition to "amplify" their claims against National Union and Federal, as well as to join other defendants. We affirm.

Factual Background

The Bilyeus were owners of Comm–Craft Inc., a company founded in 1984 to install satellite dishes. By 2003, the Bilyeus and Shelton were directors of Comm–Craft and of another satellite dish company, DirecTECH Inc. ("DT"), and trustees of these companies' Employee Stock Ownership Plans ("ESOPs"). In July 2004, the Bilyeus sold their interest in DT and Comm–Craft, and the latter changed its name to DirecTECH Southwest ("DTSW"). In 2005, Shelton resigned from DTSW.

Before they divested, however, the plaintiffs sold their shares in the companies' ESOPs back to the ESOPs, in three transactions, December 31, 2003 (to the DT ESOP), March 19, 2004 (to the Comm–Craft ESOP) and July 29, 2004 (to the DTSW ESOP). As trustees of the ESOPs, the plaintiffs essentially approved the transactions—and sales prices—with themselves. They maintained that after these sales, they had no further involvement with the companies or with the ESOPs.

The new company, DTSW, and the remaining company, DT, were rolled into a parent company, DirecTECH Holding Co. ("DTHC"), in June 2005. As of that date, DTSW and DT became wholly owned subsidiaries of DTHC.

At this time, June 2005, DTHC purchased—apparently for the first time—insurance policies from National Union to cover the directors of its own, and of its subsidiaries', ESOPs. DTHC bought two types of policies, Employee Benefit Plan Fiduciary Liability ("Fiduciary") policies and Directors & Officers Liability ("D & O") policies. The first National Union Fiduciary policy had a policy period of July 15, 2005, to October 5, 2006, and its first D & O policy covered October 5, 2005, to October 5, 2006. Subsequent National Union policies provided coverage through December 31, 2008. National Union issued a total of six policies to DTHC.

DTHC also purchased excess coverage from Federal, starting with a Fiduciary policy effective October 5, 2006, to December 31, 2007, and Fiduciary and D & O policies effective from December 31, 2007, to December 31, 2008. Federal issued a total of three policies to DTHC.

These nine policies are, of course, long and complex, but all exclude coverage for acts occurring before the effective dates of the policies. Also, all policies are "claims made and reported" policies, requiring the insured to report any claim to the insured during the policy period.

On September 6, 2007, Woody Bilyeu received a letter from the U.S. Department of Labor ("DOL") stating that DOL was conducting an investigation of the pre-acquisition ESOPs "to determine whether any person has violated" any provision of ERISA. Attached was a subpoena seeking documents related to the finances of Comm–Craft, DT and their respective ESOPs. DOL sent a similar letter to Shelton on September 21, 2007. In April 2008, DOL asked all three plaintiffs to sign tolling agreements, essentially waiving the statute of limitations while DOL continued its investigation. All three plaintiffs signed. DOL ultimately sued the plaintiffs for ERISA violations, alleging that they sold their ESOP shares back to the ESOPs at grossly inflated prices.¹

The plaintiffs formally demanded coverage from National Union on April 23, 2008, four months after the end of the 2006–07 policy period. National Union initially denied the claims, stating in May 2008 that the Comm–Craft and DT ESOPs were not covered plans under the D & O policy, and in July 2008 that there had been no claims made against the plaintiffs at that time. The plaintiffs also made a demand on Federal, which refused coverage on grounds that the primary policies had not been exhausted.

Procedural History

The plaintiffs filed this suit for declaratory judgment in January 2009 against National Union and Federal. They sought a declaration of their rights under the policies, with an order that the defendants provide coverage and a defense to DOL's lawsuit. By amended petition filed two weeks later, the plaintiffs added DTHC, DTSW and another subsidiary as defendants.²

Federal had the case removed to U.S. District Court in February 2009, and it remained there until remanded in January 2011. Discovery was ambitious. For example, the plaintiffs sought an extension of time to respond to National Union's request for production, alleging that it would exceed 500,000 pages. Nevertheless, the plaintiffs also sought to compel additional discovery from National Union and Federal.

In September 2011, Federal filed the instant motion for summary judgment on grounds that its liability as the excess carrier was not activated until the plaintiffs exhausted their primary coverage; that the named insureds in all its policies were DTHC and its ESOP, but none of the plaintiffs were ever officers or directors of those entities; and that even though the plaintiffs were officers or directors of acquired companies, coverage did not begin until the rollup, on July 31, 2004.

In June 2012, National Union filed its own motion for summary judgment on grounds that its policies excluded acts occurring before their effective dates, in 2005; and that the plaintiffs did not comply with the claims-made provision, as they received notice of the claim when they got the DOL letters and records subpoenas, in September 2007, but did not report it to National Union until April 2008, in a different policy period.

In response, the plaintiffs argued that the policies were ambiguous. For example, one Fidelity policy applied to a "plan," but nowhere defined the term "plan." Seizing on this alleged ambiguity, the plaintiffs pursued a prodigious course of discovery, seeking all "underwriting materials" of National Union, Federal, their reinsurer, their brokers and agents, and details about all these entities' computer software. (The district court granted most of the plaintiffs' discovery requests.) They deposed numerous insurance agents and brokers, apparently in an effort to show that even if the policies excluded the plaintiffs or the three ESOP transactions, some of the brokers or agents had actually intended to cover them. The plaintiffs alleged that documents once existed to show that DTHC had requested policy provisions to cover the contested ESOP sales, but National Union intentionally or negligently destroyed them. The plaintiffs retained a forensics expert, a Dr. Johnette Hassell, who opined in a report that although National Union's parent company, AIG, had a records retention policy, it was either ignored or inadequately managed, it lacked a policy for retaining email, and when requested, the underwriters simply failed to search for responsive documents. The plaintiffs urged that with the ambiguities in the policies, the mountain of underwriting materials, and the suspicion of spoliation, summary judgment was simply not appropriate.

The court held a hearing, limited to argument, on July 3, 2013. National Union focused on two arguments: (1) the policies were "claims made and reported" policies, the relevant policy period was 2006–07, and the plaintiffs failed to report the claims within that period, and (2) the policies excluded claims of which the insured had notice prior to the policy term, and the plaintiffs knew about the DOL claims before the effective date. It added that any argument that the plaintiffs "should have had different coverage" was irrelevant. Federal adopted these arguments.

The plaintiffs argued that the policies were ambiguous, and that the DOL letters and record subpoenas did not constitute notice under any policy. Mostly, however, they argued that National Union never produced all the discovery it once had. Counsel described numerous discovery items, including an AIG underwriter who wrote of a "problem" with the policy and said in deposition that D & O policies "automatically" covered all acts occurring before the continuity date, and another underwriter who "wanted to add" certain endorsements to certain policies, but failed to do so.

In April 2014, the court issued reasons for judgment, finding that the policies covered only those wrongful acts that occurred after the date the policies were issued, and that the DOL letters and subpoenas constituted a "claim made" which the plaintiffs did not report within the policy period. The court stated that it would grant summary judgment as prayed for.

Two days later, the plaintiffs advised the court that certain discovery had not yet been completed. After a phone conference, the court rescinded its ruling and gave the parties 30 more days to finish discovery. The parties complied, filing their remaining discovery.

On May 14, 2014, the plaintiffs sought leave of court to file a third supplemental and amending petition, to join two insurance brokers as defendants (alleging they failed...