Coregis Ins. Co. v. American Health Found.

• Decision Date: 01 August 1999
• Docket Number: Docket No. 99-9300
• Citation: 241 F.3d 123
• Parties: (2nd Cir. 2001) COREGIS INSURANCE COMPANY, Defendant-Appellant, v. AMERICAN HEALTH FOUNDATION, INC., AHF/CONNECTICUT MANAGEMENT, INC., AHF/HARTFORD, INC., AHF/WINDSOR, INC., AHF/HOME OFFICE, INC., JOHN M. HAEMMERLE, WILLIAM BAXTER, THOMAS DYBICK, Plaintiffs-Appellees
• Court: U.S. Court of Appeals — Second Circuit

Page 123

241 F.3d 123 (2nd Cir. 2001)

COREGIS INSURANCE COMPANY, Defendant-Appellant, v. AMERICAN HEALTH FOUNDATION, INC., AHF/CONNECTICUT MANAGEMENT, INC., AHF/HARTFORD, INC., AHF/WINDSOR, INC., AHF/HOME OFFICE, INC., JOHN M. HAEMMERLE, WILLIAM BAXTER, THOMAS DYBICK, Plaintiffs-Appellees.

Docket No. 99-9300

August Term, 1999

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

Argued: July 13, 2000

Decided: February 14, 2001

Appeal from a judgment granting plaintiffs' motion for summary judgment, denying defendant's motion for summary judgment, and holding that the "insolvency exclusion" in plaintiffs' liability insurance policy did not exclude coverage for certain lawsuits brought against plaintiffs.

We reverse, finding that, as a matter of law, the policy excludes coverage for the lawsuits at issue.

JEFFREY A. GOLDWATER, Bollinger, Ruberry & Garvey, Chicago, IL (Bryan G. Schumann, Daniel V. Marsalli, Bollinger, Ruberry & Garvey, Chicago, IL, of counsel, Christopher L. Brigham, Updike, Kelly & Spellacy, P.C., New Haven, CT), for defendant-appellant.

F. TIMOTHY McNAMARA, Hartford, CT, for plaintiffs-appellees.

Before: WALKER, Chief Judge,¹ POOLER, and SOTOMAYOR, Circuit Judges.

SOTOMAYOR, Circuit Judge:

Defendant-appellant Coregis Insurance Company ("Coregis") appeals from a judgment of the United States District Court for the District of Connecticut (Peter C. Dorsey, Senior Judge) granting summary judgment to plaintiffs and denying summary judgment to defendants on the sole disputed issue of Coregis' right to disclaim coverage under plaintiffs' non-profit organization liability insurance policy (the "Policy") pursuant to the Policy's "insolvency exclusion." Plaintiffs AHF/Hartford, Inc. and AHF/Windsor, Inc. are non-profit companies that operate, manage and administer nursing homes in Connecticut (the "Companies"). The Companies and certain of their directors, officers, and affiliates brought this action seeking to have Coregis defend and indemnify them in connection with two lawsuits charging that plaintiffs failed to repay certain loans allegedly obtained through fraudulent misrepresentations about the financial health of the Companies (the "Lawsuits"). Because we find that a claim for coverage for the Lawsuits is a claim "[a]rising out of, based upon or related to" the "insolvency" or "financial impairment" of the Companies within the meaning of the policy exclusion at issue, we reverse the district court's order and judgment and remand with instructions to enter summary judgment in favor of Coregis.

BACKGROUND

A. The Lawsuits

The Lawsuits both allege that, in January 1992, the Companies received the proceeds of health care facilities revenue bonds issued by the Connecticut Development Authority pursuant to certain loan agreements.² In 1994, the Companies applied to the State of Connecticut Health and Educational Facilities Authority ("CHEFA") to refinance these loans. CHEFA refinanced the loans by, among other things, issuing new bonds (the "CHEFA Loan"). The Lawsuits claim that the Companies' applications to refinance the loans contained certain financial misrepresentations, discussed more fully below, upon which CHEFA relied to its detriment in making the CHEFA Loan.

In or before 1997, the Companies are alleged to have begun experiencing "severe financial problems," resulting in a cash flow that "was insufficient to service the debt on the CHEFA loan." On or about May 8, 1997, upon the motion of the State of Connecticut Commissioner of Public Health, the Connecticut Superior Court ordered the appointment of a receiver for AHF/Hartford pursuant to a Connecticut statute providing for such appointment where a nursing home "has sustained a serious financial loss or failure which jeopardizes the health, safety and welfare of the patients or there is a reasonable likelihood of such loss or failure." Conn. Gen. Stat. §19a-543(3). The court subsequently appointed that receiver and on July 22, 1997, issued a similar order appointing the same individual as receiver for AHF/Windsor.

The Lawsuits were filed on December 5, 1997, alleging that plaintiffs supplied false information in the Companies' CHEFA Loan applications and falsely warranted in associated documents that such information was accurate. One lawsuit was brought by CHEFA (the "CHEFA Action") against all plaintiffs and the other by the receiver appointed for the Companies, E. Cortright Phillips, against all plaintiffs except the Companies (the "Receiver Action").

The complaints in both actions allege that, in connection with the Companies' CHEFA Loan application, the Companies hired a certified public accounting firm "to compile forecasted financial statements for the five years ending December 31, 1994 through December 31, 1998 for the AHF/Hartford and AHF/Windsor nursing homes and to issue a forecast report." The accounting firm prepared this forecast report allegedly relying on representation letters from the Companies and their officers that purported to demonstrate the Companies' "ability to meet operating expenses and to service the debt owed to CHEFA" (the "Representation Letters"). The Representation Letters provided data on "(i) rental income; (ii) operating expenses; (iii) occupancy rates; and [sic] (iv) patient income; and (v) patient mix" and a five-year projection of taxable income, cash flow from operations, and other information.

The Lawsuits charge that plaintiffs "knew or should have known that the information provided by them to the accounting firm and to CHEFA with regard to the projected operating results of the [Companies'] nursing homes lacked any reasonable factual basis." The complaints further allege that at the December 6, 1994 closing for the CHEFA Loan transaction, plaintiffs provided CHEFA with unaudited financial results for the AHF/Hartford nursing homes that showed $2 million more in revenue than the audited results released seven months later. The scope of the Companies' financial problems was allegedly revealed in full, however, when the Companies' nursing homes subsequently "suffered virtual financial failure" and never performed "in accordance with the representations provided by the defendants to CHEFA."

Based on the above, the CHEFA Action asserts claims of negligence against all plaintiffs, breach of contract against the Companies for violating the warranties of accuracy in the loan agreements they signed in 1994, and deceptive business acts and practices against all plaintiffs. In the Receiver Action, the receiver, standing in the shoes of the Companies, alleges negligence, breach of duty of care, and unfair or deceptive business acts against the Companies' officers, directors, and affiliates, claiming that "[b]ut for the . . . misrepresentations, [the Companies] would not have committed themselves to the debt restructure which was executed on December 6, 1994, but would have instead pursued alternative means of restructure which means would not have led [the Companies] to sustain the current financial loss or failure."

B. The Policy and the Insolvency Exclusion

Coregis issued the Policy effective January 1, 1997 insuring all plaintiffs. After the Lawsuits were filed, plaintiffs claim that they forwarded copies of the complaints to Coregis requesting that Coregis defend and indemnify them. By letter dated December 23, 1997, Coregis' law firm rejected their request, stating that "[t]he CHEFA Action and the receiver's action are barred from coverage by the Insolvency Exclusion . . . . Additionally, the insolvency exclusion precludes coverage for any claim made by or on behalf of any federal, state or local governmental agency or office."

The Policy's insolvency exclusion (the "Provision") states:

INSOLVENCY EXCLUSION

In consideration of the premium charged, it is further understood and agreed that the Insurer shall not incur any obligation under the terms and conditions of this policy for, or on account of, any claim:

1. Arising out of, based upon or related to:

A. The insolvency of the company named in the Declarations;

B. A financial impairment of the company named in the Declarations; or

C. Any action, ruling or intervention of any federal, state or local governmental agency or office;

2. Made by, or on behalf of, any federal, state or local governmental agency or office.

The Policy does not define the terms "arising out of," "based upon," or "related to."

C. The District Court's Ruling

Plaintiffs filed this action against Coregis on June 15, 1998 seeking a declaratory judgment of coverage. Subsequently, both sides moved for summary judgment on what they agreed was the sole dispositive issue - the interpretation of the Provision. Coregis claimed, inter alia, that the Lawsuits would not have been brought but for the insolvency of the Companies, and that consequently the Lawsuits arise out of, are based upon, or are related to the insolvency and/or financial impairment of the Companies within the meaning of Clauses 1(A) or 1(B) of the Provision.³ Plaintiffs contended that, because the claims against them were based on alleged misrepresentations made prior to the occurrence of the Companies' financial failure, such claims could have been brought whether or not the Companies became insolvent and thus did not come within the scope of the Provision.

By order entered on September 21, 1999, the district court agreed with the plaintiffs, granted their motion, and denied defendant's motion. The court held that the Provision did not exclude coverage for the Lawsuits, whether interpreted under Connecticut or Ohio law,⁴ because

the clause concerns claims arising directly from, or based on pending actions premised upon, plaintiffs' insolvency. The claims alleged against plaintiffs were viable whether or not plaintiffs encountered financial difficulties. Though AHF/Hartford's and AHF/Windsor's receiverships prompted the complaints, the claims alleged are not claims for insolvency (such as...