Biochemics, Inc. v. Axis Reinsurance Co.

• Decision Date: 07 August 2013
• Docket Number: Civil Action No. 13–10691–RWZ.
• Citation: 963 F.Supp.2d 64
• Parties: BIOCHEMICS, INC., and John Masiz v. AXIS REINSURANCE COMPANY, et al.
• Court: U.S. District Court — District of Massachusetts

963 F.Supp.2d 64

BIOCHEMICS, INC., and John Masiz

v.AXIS REINSURANCE COMPANY, et al.

Civil Action No. 13–10691–RWZ.

United States District Court, D. Massachusetts.

Aug. 7, 2013.

Steven L. Schreckinger, Anne Robbins, Anderson & Kreiger, LLP, Cambridge, MA, for Biochemics, Inc., and John Masiz.

William A. Schneider, Morrison Mahoney LLP, Boston, MA, Melinda B. Margolies, Kaufman Borgeest & Ryan LLP, Valhalla, NY, Michael R. Perry, Murphy & King, PC, Boston, MA, for Axis Reinsurance Company, et al.

MEMORANDUM OF DECISION

ZOBEL, District Judge.

In December 2012, the Securities and Exchange Commission (“SEC”) filed an enforcement action against plaintiffs BioChemics, Inc. (“BioChemics”) and John Masiz, alleging they had violated the federal securities laws. Plaintiffs have now sued defendant AXIS Reinsurance Company (“AXIS”),¹ which issued their directors and officers (“D & O”) liability insurance. Plaintiffs claim their D & O insurance policy obligates AXIS to defend them against the pending enforcement action, and against subpoenas issued by the SEC in January and March 2012. AXIS has refused to provide plaintiffs any defense against the subpoenas or against the enforcement action, claiming those matters are not covered under plaintiffs' policy. Plaintiffs have now moved for summary judgment, and AXIS has responded by moving for discovery under Federal Rule of Civil Procedure 56(d).

I. Background

BioChemics is a specialty pharmaceutical company focused on transdermal drug delivery systems, including medicated lotions. Masiz is BioChemics's president and chief executive officer.

In May 2011 and September 2011, the SEC served document subpoenas on BioChemics requesting a broad range of documents regarding the company's operations from 2007 on. Those subpoenas indicated that the SEC had issued a formal order authorizing the pending investigation. At the time, BioChemics held a year-long D & O policy issued by Greenwich Insurance Company, a member of the XL Group. That policy was written on a claims-made basis, meaning it only covered claims made against BioChemics or its officers during the policy period.

In November 2011, when its D & O policy expired, BioChemics did not purchasea new policy from the same insurers; instead, it took out a new policy from AXIS.² The new AXIS policy was also issued on a claims-made basis, covering claims first made between November 13, 2011 and November 13, 2012. Section V.A of the policy, titled “Limits of Liability,” contained the following language:

All Claims, including all D & O Claims ... arising from the same Wrongful Act ... and all Interrelated Wrongful Acts shall be deemed one Claim and such Claim shall be deemed to be first made on the earlier date that: (1) any of the Claims is first made against an Insured under this Policy or any prior policy ....

Docket # 30, Ex. A (Policy), § V.A.³ The same section also stated the basic principle of a claims-made policy: “Coverage under this Policy shall apply only with respect to Claims deemed to have been first made during the Policy Period and reported in writing to the Insurer in accordance with the terms herein.” Id. The policy defined a “Claim” broadly to include, inter alia, any “written demand against any Insured for monetary or nonmonetary relief,” or any “civil, arbitration, administrative or regulatory proceeding against any Insured commenced by ... the filing of a notice of charge, investigative order, or like document.” Id. § III.B.2(a), (b)(ii).

In January 2012, two months after the AXIS policy came into effect, the SEC served deposition subpoenas on Masiz and two other individuals. In March 2012, the SEC served document subpoenas on BioChemics and Masiz. Those subpoenas all issued under the same SEC matter identification and number— In the Matter of BioChemics, Inc. (B–02641)—that the 2011 subpoenas had. The March document subpoena to Masiz also emphasized that Masiz was not required to produce any documents that had already been provided in response to the 2011 subpoenas to Biochemics. See Docket # 30, Ex. G, Subpoena Attachment at 3–4.

BioChemics notified AXIS of the January and March 2012 subpoenas. However, AXIS denied coverage. It took the position that the entire SEC investigation was a single “claim” that was first made in May 2011, when the SEC issued its first document subpoena to BioChemics—before plaintiffs' AXIS policy took effect.

The SEC filed its enforcement action in December 2012, alleging that from 2009 until mid–2012 BioChemics and Masiz had engaged in a fraudulent scheme to sell BioChemics securities by misleading investors about the company's value. Some of the misrepresentations alleged in the SEC complaint took place before the SEC issued its first document subpoena in May 2011. Others, including alleged misrepresentations about a clinical trial of BioChemics's topical ibuprofen product, took place after the May and September 2011 subpoenas had issued.

AXIS has taken the same position with respect to the SEC enforcement action as it did with respect to the 2012 subpoenas: namely, it has refused to defend BioChemics and Masiz, asserting that the enforcement action is part of a single “claim” that was first made when the first SEC subpoena issued in May 2011, before the AXIS policy period began.

Plaintiffs now move for partial summary judgment, insisting that the present record is enough to conclusively determine whether AXIS owes them a duty to defend. In response, AXIS has moved for discovery under Rule 56(d), arguing that it is entitled to examine all the communications between plaintiffs and the SEC to determine whether it has any duty to defend.

II. Analysis

Rule 56(d) applies when a party opposing summary judgment shows that for lack of time or lack of discovery, “it cannot present facts essential to justify its opposition.” Fed.R.Civ.P. 56(d). Under those circumstances, the court may deny the summary judgment motion, defer consideration, provide additional time for discovery, or issue any other appropriate relief. Id. To invoke Rule 56(d), the party must submit a statement that “(i) explains his or her current inability to adduce the facts essential to filing an opposition, (ii) provides a plausible basis for believing that the sought-after facts can be assembled within a reasonable time, and (iii) indicates how those facts would influence the outcome of the pending summary judgment motion.” Nieves–Romero v. United States, 715 F.3d 375, 381 (1st Cir.2013) (quoting Velez v. Awning Windows, Inc., 375 F.3d 35, 40 (1st Cir.2004)).

Here, the parties dispute only whether the facts that AXIS seeks would influence the outcome of plaintiffs' summary judgment motion. Plaintiffs insist that AXIS will owe them a defense no matter what further discovery might reveal; AXIS disagrees.

A. Extrinsic Evidence

Plaintiffs argue their D & O insurance policy establishes on its face that AXIS owes them a duty to defend against the SEC proceedings. The relevant insuring clause of the policy states that AXIS will pay “all Loss on behalf of any Insured arising from any D & O Claim for a Wrongful Act ... first made against such Insured ... during the Policy Period.” Policy § I. Because the defined term “Loss” includes the cost of defending against claims, see id. §§ III.A.2, III.A.7, plaintiffs argue that AXIS must pay for their defense against the 2012 subpoenas and the subsequent SEC enforcement action.

AXIS counters that the 2012 subpoenas and the enforcement action are part of a single, ongoing claim that was “first made” before the policy period began. As described above, the policy provides that “all D & O Claims ... arising from the same Wrongful Act ... and all Interrelated Wrongful Acts shall be deemed one Claim.” Id. § V.A. It defines the term “Interrelated Wrongful Acts” to mean “any and all Wrongful Acts that have as a common nexus any fact, circumstance, situation, event, transaction, cause, or series of causally or logically connected facts, circumstances, situations, events, transactions, or causes.” Id. § III.A.6. AXIS contends that after discovery, it could prove that the “Wrongful Acts” underlying the 2011 subpoenas shared a common nexus with the “Wrongful Acts” underlying the 2012 subpoenas and the enforcement action. If so, AXIS argues, any claims arising from those “Interrelated Wrongful Acts” would be deemed a single “Claim” that arose when the first subpoena was filed—before the policy period began. That would place the entire SEC investigation outside the scope of AXIS's duty to defend under the policy. AXIS therefore seeks discovery of materials related to the plaintiffs' dealings with the SEC, to show that the entire investigation arises from a single set of “Interrelated Wrongful Acts.”

Plaintiffs respond with a line of cases holding that in general, insurers cannot rely on extrinsic evidence to deny their duty to defend. Instead, normally speaking, “the question of the initial duty of a liability insurer to defend third-party actions against the insured is decided by matching the third-party complaint with the policy provisions.” Fed. Ins. Co. v. Raytheon Co., 426 F.3d 491, 496 (1st Cir.2005) (quoting Cont'l Cas. Co. v. Gilbane Bldg. Co., 391 Mass. 143, 461 N.E.2d 209, 212 (1984)). That rule establishes, for instance, that an insurer cannot avoid its duty to defend by claiming that the suit against its insured lacks merit. See Bos. Symphony Orchestra v. Commercial Union Ins. Co., 406 Mass. 7, 545 N.E.2d 1156, 1159 (1989) (“The merits of the claim are, likewise, not a ground upon which an insurer can refuse to defend its insured.... [T]he right to a defense inures even if any of the allegations of the suit are groundless, false, or fraudulent.” (quotation marks omitted)).

Extrapolating from this rule, plaintiffs argue that AXIS can only avoid its duty to defend if the later SEC subpoenas and complaint themselves make clear, within their own four corners, that they arise from...