Carolina Cas. Ins. Co. v. Nanodetex Corp.

• Court: U.S. Court of Appeals — Tenth Circuit
• Writing for the Court: HARTZ
• Citation: Carolina Cas. Ins. Co. v. Nanodetex Corp., 733 F.3d 1018 (10th Cir. 2013)
• Decision Date: 19 August 2013
• Docket Number: No. 12–2110.,12–2110.
• Parties: CAROLINA CASUALTY INSURANCE COMPANY, Plaintiff–Counter–Defendant–Appellee, v. NANODETEX CORPORATION; Alan P. Sylwester; Angelo L. Salamone, Defendant–Counter–Claimants–Appellants, v. Monitor Liability Managers, Inc., Counter–Defendant–Appellee.

733 F.3d 1018

CAROLINA CASUALTY INSURANCE COMPANY, Plaintiff–Counter–Defendant–Appellee,

v.NANODETEX CORPORATION; Alan P. Sylwester; Angelo L. Salamone, Defendant–Counter–Claimants–Appellants,

v.Monitor Liability Managers, Inc., Counter–Defendant–Appellee.

No. 12–2110.

United States Court of Appeals, Tenth Circuit.

Aug. 19, 2013.

Maureen A. Sanders (Duff Westbrook with her on the briefs), Sanders & Westbrook, P.C., Albuquerque, NM, for Defendants–Counter–Claimants–Appellants.

George J. Manos, Lewis, Brisbois, Bigaard & Smith, LLP, Chicago, IL, (Jeffrey A. Goldwater, Darcy Ibach, Robert A. Chaney of Lewis, Brisbois, Bigaard & Smith, LLP, and Michael T. Pottow of Catron, Catron & Pottow, P.A., Santa Fe, NM, with him on the brief), for Plaintiff–Counter–Defendants–Appellees.

Before HARTZ, McKAY, and O'BRIEN, Circuit Judges.

HARTZ, Circuit Judge.

A few years ago the New Mexico Supreme Court recognized a new tort called “malicious abuse of process,” which subsumed the traditional causes of action for malicious prosecution and abuse of process. Nanodetex Corporation and two of its principals (the Insureds) were successfully sued for malicious abuse of process. They then sought indemnification from Carolina Casualty Insurance Company, which covered the Insureds under a management liability policy (the Carolina Policy). Carolina denied the claim, relying on an exclusion in the policy for losses arising from claims for “malicious prosecution.” It sought a declaratory judgment that it was not liable for the damages arising from the malicious-abuse-of-process judgment. On Carolina's motion for summary judgment, the district court agreed with Carolina and also rejected the Insureds' counterclaims. The Insureds appeal.

We reverse the declaratory judgment. We hold that the term malicious prosecution in the exclusion does not encompass all claims of malicious abuse of process, but only claims whose elements are essentially those of the common-law cause of action for malicious prosecution. Because the judgment against the Insureds in the tort case was affirmed on appeal on a claim that was not substantially the same as common-law malicious prosecution, the exclusion in the Carolina Policy does not apply. We reverse the judgment below and remand for reconsideration in light of our ruling on coverage.

I. BACKGROUND

In 2005 Nanodetex sued Sandia Corporation over a dispute about licensing of what is called MicroChemLab technology. The day that Nanodetex announced the suit, it learned information suggesting that Defiant Technologies also had an arrangement with Sandia concerning the technology. Allan Schwartz, a Nanodetex shareholder who had also been one of the company's lawyers, telephoned one of Defiant's principals, Doug Adkins, to propose a merger between Nanodetex and Defiant. When this proposal was refused, Schwartz insinuated that the litigation would keep Defiant from exploiting the technology for years. Soon thereafter, Nanodetex added Defiant and three of its principals as defendants in the suit against Sandia. Citing the Schwartz conversation, Defiant asserted several state-law counterclaims against the Insureds. The counterclaims included malicious abuse of process and tortious interference with prospective business relationships. The Insureds asked Carolina to pay for defending these counterclaims. Carolina agreed to do so, but reserved its right to contest coverage at a later time.

After all other claims in the case had been either settled or disposed of through summary judgment, only Defiant's counterclaims remained for trial. The jury found for Defiant and awarded $1 million in compensatory damages on the malicious-abuse-of-process counterclaim; $1 in nominal damages on the tortious-interference counterclaim; and $1 million in punitive damages. The verdict form did not specify whether the punitive damages were awarded on the malicious-abuse counterclaim or the tortious-interference counterclaim. We affirmed on appeal. See Nanodetex Corp. v. Defiant Techs., 349 Fed.Appx. 312 (10th Cir.2009)

Carolina filed this action in the United States District Court for the District of New Mexico in December 2009, invoking diversity jurisdiction. See28 U.S.C. § 1332(a)(1). It sought a declaratory judgment that the Carolina Policy covered neither the compensatory damages on Defiant's malicious-abuse-of-process counterclaim nor the punitive damages. Carolina relied on Section IV.D.3 of the policy, which states:

The Insurer shall not be liable to make any payment for Loss in connection with a Claim made against any Insured:

....

... for:

....

... invasion of privacy, wrongful entry, eviction, false arrest, false imprisonment, malicious prosecution, libel, slander, mental anguish, humiliation, emotional distress, oral or written publicationof defamatory or disparaging material....

J.App., Vol. I at 44–45 (emphasis added). In light of this provision, Carolina claimed that it had no duty to indemnify the Insureds for Defiant's judgment. The Insureds counterclaimed against Carolina and Monitor Liability Managers, Inc. (the underwriting and claims manager for Carolina) for breach of the insurance contract and the covenant of good faith and fair dealing; breach of fiduciary duty; violation of the New Mexico Unfair Practices Act; and violation of the New Mexico Insurance Code.

Both sides moved for partial summary judgment on whether the Carolina Policy covered the $1 million compensatory-damages award for malicious abuse of process. The district court ruled that the term malicious prosecution in Section IV.D.3 is ambiguous but that “the most reasonable interpretation ... and the one most likely in line with the expectations of the parties” is that the term “includes claims brought for malicious abuse of process, and that such claims are therefore excluded from coverage.” Id. at 366 (Memorandum Opinion & Order at 12, Carolina Cas. Ins. Co. v. Nanodetex Corp., Civ. No. 09–1183 JCH/RHS (D.N.M. July 27, 2011)) (Memorandum I). Alternatively, the court ruled that Defiant's evidence could have satisfied the traditional elements of malicious prosecution in New Mexico in any event. See id. at 366–68 (Memorandum I at 12–14). It awarded partial summary judgment to Carolina. See id. at 368 (Memorandum I at 14).

The district court later granted Carolina's motion for summary judgment on all remaining issues. See id., Vol. II at 754 (Memorandum Opinion & Order at 19, Carolina Cas. Ins. Co., Civ. No. 09–1183 JCH/RHS (D.N.M. July 2, 2012)) (Memorandum II). It ruled that the Carolina Policy did not cover the punitive damages because the evidence clearly indicated that they were awarded for malicious abuse of process rather than for tortious interference, and thus were excluded under Section IV.D.3. See id. at 748–50 (Memorandum II at 13–15). With respect to the Insureds' counterclaims, the court noted that each counterclaim rested on the same theory, bad-faith failure to settle, and it ruled that an insurer's liability for bad-faith failure to settle does not extend to any portion of a judgment arising from a claim that the insurance policy does not cover. See id. at 744–48 (Memorandum II at 9–13). And regardless, the court ruled, the Insureds had failed to show factual support for their allegations of bad faith. See id. at 753–54 (Memorandum II at 18–19). The court concluded that Carolina's liability was limited to the costs of defending the Defiant action plus the $1 in nominal damages on Defiant's tortious-interference counterclaim. See id. at 754 (Memorandum II at 19).

On appeal the Insureds argue (1) that the district court erred in ruling that the Carolina Policy did not cover the damages award for malicious abuse of process; (2) that even if they are wrong on issue (1), the court erred in ruling that the punitive damages were awarded for malicious abuse of process rather than tortious interference and therefore were not covered; (3) that even if they are wrong on issue (1), the court erred in ruling that under New Mexico law an insurer's liability for bad-faith failure to settle cannot extend to judgments on noncovered claims; and (4) that the court erred in granting summary judgment on the counterclaims against Carolina for lack of evidence of bad faith, a ground not raised in Carolina's motion for summary judgment. We agree with the Insureds on the first issue, holding that the malicious-prosecution exclusion in the Carolina Policy did not apply to the malicious-abuse-of-process judgment against the Insureds. The second and third issues are therefore mooted. We also agree with the Insureds on the fourth issue. Accordingly, we reverse the judgment below and remand for further proceedings. We deny the Insureds' motion to certify certain issues to the New Mexico Supreme Court.

II. DISCUSSIONA. Standard of Review

“We review the district court's grant of summary judgment de novo, applying the same standards that the district court should have applied.” Sabourin v. Univ. of Utah, 676 F.3d 950, 957 (10th Cir.2012) (internal quotation marks omitted). “A grant of summary judgment is proper only if the record shows no genuine issue as to any material fact and the moving party is entitled to judgment as a matter of law.” Union Standard Ins. Co. v. Hobbs Rental Corp., 566 F.3d 950, 952 (10th Cir.2009) (internal quotation marks omitted); seeFed.R.Civ.P. 56(c). Because the parties agree that New Mexico law governs the construction of the Carolina Policy, our analysis of the policy will apply New Mexico law. See Union Standard, 566 F.3d at 952 (adopting the parties' shared view of the governing law).

B. Coverage for Malicious Abuse of Process

We begin with the text of the Carolina Policy itself. The clause at issue is found in Part IV, which is titled “Exclusions.” J.App., Vol. I at 44. Part IV provides that “[t]he Insurer shall not be liable to make any payment for Loss in connection with a Claim made against any Insured” arising from a number...