Capital v. Liberty Specialty Mkts.
| Decision Date | 03 May 2023 |
| Docket Number | 22 Civ. 7912 (KPF) |
| Parties | CRYSKNIFE CAPITAL, Plaintiff and Counter-Defendant, v. LIBERTY SPECIALTY MARKETS and CERTAIN UNDERWRITERS AT LLOYD'S, SPECIFICALLY LIBERTY SYNDICATE 4472, Defendants and Counter-Claimants. |
| Court | U.S. District Court — Southern District of New York |
A federal court found nonparty Sean McDevitt liable for breaching a guaranty he signed in connection with a transaction between nonparty KLS Diversified Master Fund L.P. (“KLS”) and his former company, nonparty Sensei, Inc. (“Sensei”). This action is about whether Sensei's insurance covers McDevitt's liability in that underlying action. Insurer-defendants Liberty Specialty Markets (“Liberty”) and Certain Underwriters at Lloyd's, Specifically Liberty Syndicate 4472 (“Lloyd's,” and together with Liberty “Defendants”), now move for judgment on the pleadings, contending that certain exclusions in the relevant insurance policy foreclose coverage. Crysknife Capital (“Plaintiff”), as assignee of McDevitt's rights under that insurance policy, cross-moves for summary judgment, contending that (i) coverage has been established (ii) no exclusions apply; and (iii) Defendants are liable for the full amount of the judgment in the underlying litigation, notwithstanding the policy's limits, because Defendants acted in bad faith. Because Plaintiff has established that there are no genuine disputes of material fact that coverage exists and that no exclusions apply, but has failed to show bad faith, Plaintiff's motion for summary judgment is granted in part and denied in part, and Defendants' motion for judgment on the pleadings is denied.
BACKGROUND[1]
The following facts are drawn from Judge Liman's thorough Summary Judgment Decision, published on December 15, 2020, granting summary judgment in favor of KLS. (See generally Summary Judgment Decision). The Court summarizes only the portions of the Summary Judgment Decision that are relevant to the instant coverage dispute.
At some point in 2014, McDevitt became majority owner and CEO of Sensei. (Summary Judgment Decision 1). Approximately two years later, he became Chairman of the company. (Id.). Due to various financial difficulties, Sensei entered into negotiations with KLS to obtain financing. (Id. at 2). Those negotiations culminated in KLS buying a $3.33 million promissory note from Sensei for a purchase price of $2 million. (Id.; Pl. 56.1 ¶ 1). The terms of the note bound Sensei to, among other things, apprise KLS promptly of any “legal actions pending or threatened in writing against” Sensei, and timely file “all required tax returns and reports and timely pay” all taxes owed by Sensei. (Summary Judgment Decision 4-5). All principal and unpaid accrued interest under the note would become due and payable if certain “Events of Default” occurred, including a failure to timely pay on the note or a default in performance of the aforementioned promises. (Id. at 5-6).
As part of this transaction, McDevitt executed a conditional guaranty, which was signed in his personal capacity. (Summary Judgment Decision 2-3; Pl. 56.1 ¶ 4). The conditional guaranty made McDevitt personally liable on the note if any one of six “Recourse Events” occurred. (Summary Judgment Decision 6-7). Those Recourse Events included:
(Id. at 7). The conditional guaranty noted that McDevitt would “obtain substantial direct and indirect benefits from the issuance of the Note.” (Id. at 8).
Sensei failed to pay the principal on the note that was owed to KLS on the note's January 9, 2019 due date. (Summary Judgment Decision 22). KLS then filed suit for breach of guaranty against McDevitt on April 26, 2019, seeking to hold him personally liable for the amount due on the note. (Id. at 23). In its motion for summary judgment, KLS argued that McDevitt and/or Sensei triggered three of the guaranty's Recourse Events. First, McDevitt or Sensei triggered Recourse Event (a) by making willful misrepresentations or omissions of material fact by failing to disclose legal arrangements with the law firm Porter Wright Morris & Arthur LLP (“Porter Wright”), a finder's agreement with Jonathan Schwartz, and litigation related to those agreements, and by making willful or intentional misrepresentations about an offer in compromise process to settle certain tax liabilities. (Id. at 32). Second, McDevitt or Sensei triggered Recourse Event (c) by failing to disclose threatened litigation ultimately brought related to the Porter Wright and Schwartz agreements and by failing to timely file and pay taxes. (Id.). And third, McDevitt or Sensei triggered Recourse Event (f) by incurring taxes, penalties, or interest that materially affected Sensei and that was caused by or known to McDevitt. (Id.).
As relevant to the instant dispute, Judge Liman first found that McDevitt triggered Recourse Event (a) because of the threatened and pending litigation brought against Sensei and McDevitt related to legal agreements with Porter Wright. (Summary Judgment Decision 36).[2] Porter Wright threatened a lawsuit against Sensei on November 25, 2015, due to unpaid legal bills, via an email to McDevitt. (Id. at 36-37). Porter Wright eventually sued McDevitt and Sensei in April 2017 to collect $160,000. (Id.). McDevitt did not disclose Porter Wright's threat to sue to KLS at the time of the note transaction, nor did he apprise KLS at any point during 2017 of the fact that a lawsuit had been filed. (Id. at 37). Judge Liman found that McDevitt's conduct in connection with the Porter Wright litigation triggered Recourse Event (a) in two ways. First, “Sensei's failure to disclose Porter Wright's threatened lawsuit at the time of the Transaction . . . rendered misleading the representation that” except for certain disclosed agreements, “there is no [a]ction pending or ... currently threatened” against Sensei or any of its officers. (Id. (internal quotation marks and citations omitted)). Second, Judge Liman found that McDevitt's failure to disclose the litigation was “intentional or willful.” (Id. at 38). Judge Liman noted that McDevitt offered no explanation for failing to disclose the threat of litigation, particularly since Porter Wright's email in this regard was unambiguous. (Id.). Because Sensei disclosed certain threatened litigations implicating lower amounts to KLS, Judge Liman reached “the ineluctable conclusion that McDevitt's failure to disclose the much larger sum as to which Porter Wright was threatening suit was intentional and willful.” (Id.; see also id. at 36 (“McDevitt made willful and intentional misrepresentations or omissions of material fact in connection with the failure to disclose the threatened and pending Porter Wright [l]itigation[.]”)).[3]
Later in the Summary Judgment Decision, Judge Liman found that Recourse Event (c) was triggered by McDevitt's conduct associated with Sensei's failure to timely file and pay taxes. (Summary Judgment Decision 54).[4] Under the note, Sensei was to “timely file and pay its taxes.” (Id. at 55). However, Sensei - through McDevitt - filed its first quarter 2018 taxes one month after the deadline, and even then did not pay the full amount due. (Id.). Further, Sensei did not pay state taxes between January 1, 2018, and May 25, 2018. (Id. at 55-56). Judge Liman found that McDevitt could not avoid liability under the guaranty by “attempt[ing] to later reduce [tax] liabilities through the [offer in compromise] process or by personal payments,” or by appealing to KLS's decision to pay off the full amount of the tax liabilities. (Id. at 56).
Based on his findings that McDevitt's conduct triggered the above-discussed Recourse Events (and others not relevant to the instant case), Judge Liman granted KLS's motion for summary judgment against McDevitt. (Summary Judgment Decision 60). Together with interest, the judgment entered by Judge Liman is valued at $5,469,186.79 as of the time that Plaintiff commenced the instant action. (Pl. 56.1 ¶ 9).
McDevitt appealed Judge Liman's Summary Judgment Decision to the Second Circuit. (Pl. 56.1 ¶ 10). On July 13, 2022, the Second Circuit affirmed Judge Liman's judgment in a summary order. (See generally Second Circuit Decision). The Second Circuit began its analysis by noting that “[a]ny one Recourse Event is sufficient to establish McDevitt's liability and therefore to affirm the judgment of the district court.” (Id. at 4). The Circuit then affirmed the Summary Judgment Decision on one basis: “that Sensei's failure to file and pay taxes on time triggered Recourse Event [(c)], which requires a material breach of the material terms of the Note ... directly or indirectly caused by [McDevitt].” (Id. (internal quotation marks and citation omitted); see also id. at 4 n.3 (...
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