CapWealth Advisors, LLC v. Twin City Fire Ins. Co.
| Decision Date | 29 March 2023 |
| Docket Number | 3:21-cv-00036 |
| Parties | CAPWEALTH ADVISORS, LLC, Plaintiff, v. TWIN CITY FIRE INSURANCE COMPANY, Defendant. |
| Court | U.S. District Court — Middle District of Tennessee |
Pending before the Court is Defendant's motion for summary judgment (Doc. No. 42, the “Motion,”), supported by an accompanying memorandum (Doc. No. 43). Plaintiff filed a response (Doc. No. 46), and Defendant filed a reply (Doc No. 52). For the reasons stated herein, Defendant's motion is granted.
This is a dispute over Defendant Twin City Fire Insurance Company's denial of insurance coverage for Plaintiff CapWealth Advisors LLC's request for coverage stemming from an investigation and enforcement action by the Securities and Exchange Commission (“SEC”). This case is one of those relatively rare ones in which the facts material to resolve the pending Motion are not in dispute. Instead, the disagreement among the parties is over the interpretation of the insurance policy at issue.
Plaintiff CapWealth Advisors LLC (“CapWealth”) is an investment advisor registered with the SEC. (Doc. No. 47 at 1). CapWealth Investment Services (“CWIS”) is CapWealth's former affiliated introducing broker.[1] (Id. at 2). Timothy Pagliara is CapWealth's founder, chairman, and investment officer, as well as an investment advisor representative of CapWealth. (Id. at 1). Timothy Murphy also is an investment advisor representative of CapWealth. (Id. at 2).[2] From at least June 2015 to June 2018, Pagliara and Murphy were also registered representatives of CWIS. (Id.).
Until its closure in 2018, CWIS placed orders for shares of mutual funds on behalf of CapWealth's clients. (Id.). To the extent that any of the mutual funds whose shares were purchased on behalf of CapWealth's clients were subject to fees pursuant to Rule 12b-1 of the Investment Company Act of 1940,[3] CWIS received those fees (from the mutual fund(s)). (Id. at 3). Pagliara and Murphy, as representatives of CWIS, received a portion of any 12b-1 fees (paid by mutual funds but indirectly ultimately incurred by CapWealth clients who purchased and retained shares of such mutual funds) and received by CWIS. (Id.).
On January 14, 2020, the SEC sent a letter to Pagliara and Phoebe Venable, CapWealth's Chief Executive Officer (“CEO”), advising them that it was investigating a possible violation of securities laws. (Id.). On the same day, the SEC sent a letter to CapWealth requesting the production of documents relevant to the investigation; the request specifically referenced 12b-1 fees. (Id. at 5-6).
On January 28, 2020, the SEC issued a formal investigative order in the SEC investigation. (Id. at 6). Several months later, on May 13, 2020, the SEC issued a separate Wells Notice[4] to each of CapWealth, Pagliara, and Murphy respectively. (Id. at 7). Each of the Wells Notices informed the respective recipient that the SEC had recommended that the Commission (i.e. the SEC) file an enforcement action against them. (Id. at 7-8). As to Pagliara and Murphy, their respective Wells Notices stated in part:
The facts that we believe support charges against you include, among others: (1) failing to fully and fairly disclose to advisory clients of CapWealth Advisors, LLC your mutual fund share class selection practices and the conflicts of interest created by the 12b-1 fees incurred by advisory clients' accounts; and (2) failing to obtain best execution for advisory clients in their mutual fund share class investments.
(Id. at 8 (quoting Doc. Nos. 42-10, 42-11)). On December 11, 2020, the SEC filed a complaint against CapWealth, Pagliara, and Murphy. (Id. at 9). The SEC complaint alleges that from June 2015 through June 2018, CapWealth, Pagliara, and Murphy “purchased, recommended, or held for advisory clients mutual fund share classes that charged fees pursuant to 12b-1 under the Investment Company Act of 1940 (“12b-1 fees”), even though lower-cost share classes of the same funds were available.” (Doc. No. 42-14 at 2-3). It goes onto explain that allegedly “CapWealth's affiliated broker-dealer [CWIS] received 12b-1 fees from these investments and shared portions of the fees with Pagliara and Murphy, who were registered representatives of the broker-dealer.” (Id. at 3). According to the SEC complaint, CapWealth, Pagliara, and Murphy failed to disclose “adequately the material conflicts of interests with respect to the 12b-1 fees Pagliara and Murphy received, through CapWealth's affiliated broker-dealer [CWIS], from their advisory clients' investments in mutual funds.” (Id.). According to the complaint, this prevented the advisory clients from providing informed consent as to the conflicts. (Id.). More specifically, “Defendants failed to disclose the economic incentive underlying their share class selections for clients such that the clients could decide whether or not to consent to a conflict that would result in them paying more for their mutual fund investments.” (Id. at 15).
Defendant Twin City Fire Insurance Company (“Twin City”) issued a Hartford Asset Management Choice Policy (Doc. No. 42-15, “Policy”) to CapWealth for the period of August 14, 2019 to September 23, 2020. (Doc. No. 47 at 13). Pagliara and Murphy were also insured under the Policy.[5] (Id. at 17). Specifically, the Policy provides Investment Adviser Professional Liability, Investment Adviser Management Liability, and Network Security Liability coverage. (Id.). The Policy provides coverage for certain claims, which the policy defines to include “any” “administrative or regulatory proceeding[s] against, or investigation of any Insured commenced by” “the filing of a notice of charges, formal investigation or Wells Notice naming such Insured.”[6](Id. at 13-14 (quoting Doc. No. 42-15 at 55)). The Policy, by way of endorsement, contains a Specific Entity Exclusion (the “Exclusion”). (Id.). The Exclusion states that Twin City “shall not pay any Loss for any Claim”:
by or against, or based upon, arising from, or in any way related to any of the following entity(ies), including, but not limited to, any, subsidiary, trustee, receiver, assignee, director, officer, employee, shareholder, or beneficiary thereof: CapWealth Investment Services, LLC [CWIS].
(Doc. No. 42-15at 38). On May 15, 2020, counsel for CapWealth, Pagliara, and Murphy sent a letter to Twin City notifying Twin City of a request for coverage that had arisen under the Policy due to the SEC investigation and enforcement action and related receipts of the Wells Notices. (Doc. No. 47 at 17). Over the course of several months in 2020, Twin City notified CapWealth and Pagliara that the Policy did not provide coverage for the Wells Notices and SEC investigation and enforcement action due to the Specific Entity Exclusion.[7] (Id. at 21-22).
On December 16, 2020, CapWealth filed a complaint in the Chancery Court for Davidson County, Tennessee, alleging that Twin City breached the Policy when it denied CapWealth's request for coverage with respect to the SEC enforcement action. (Doc. No. 1-1). Twin City removed the action to this Court on January 15, 2021. (Doc. No. 1).
Twin City has moved for summary judgment on all counts.[8] (Doc. No. 42). CapWealth filed a timely response. (Doc. No. 46). Therefore, the pending motion for summary judgment is now ripe for resolution.
Summary judgment is appropriate where there is no genuine issue as to any material fact and the movant is entitled to judgment as a matter of law. Fed.R.Civ.P. 56(c). “By its very terms this standard provides that the mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 247-48 (1986). In other words, even if genuine, a factual dispute that is irrelevant or unnecessary under applicable law is of no value in defeating a motion for summary judgment. See id. at 248. On the other hand, “summary judgment will not lie if the dispute about a material fact is ‘genuine[.]'” Id.
A fact is “material” within the meaning of Rule 56(c) “if its proof or disproof might affect the outcome of the suit under the governing substantive law.” Reeves v. Swift Transp. Co., 446 F.3d 637, 640 (6th Cir. 2006) (citing Anderson, 477 U.S. at 248) abrogated on other grounds by Young v. Utd. Parcel Serv., 575 U.S. 206 (2015). A genuine dispute of material fact exists if the evidence is such that a reasonable jury could return a verdict for the non-moving party. Harris v. Klare, 902 F.3d 630, 634-35 (6th Cir. 2018). The party bringing the summary judgment motion has the initial burden of identifying portions of the record that demonstrate the absence of a genuine dispute over material facts. Pittman v. Experian Info. Sols., Inc., 901 F.3d 619, 627-28 (6th Cir. 2018) (quoting Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986)). Alternatively, the moving party may meet its initial burden by otherwise “show[ing]”-even without citing materials of record-that the nonmovant “cannot produce admissible evidence to support a material fact (for example, the existence of an element of a nonmovant plaintiff's claim).” Fed.R.Civ.P. 56(c)(1)(B). If the summary judgment movant meets its initial burden, then in response the nonmoving party must set forth specific facts showing that there is a genuine issue for trial. Pittman, 901 F.3d at 628.[9] Importantly, “[s]ummary judgment for a defendant [that has met its initial burden as the...
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