Deiter v. XL Specialty Ins. Co.

• Decision Date: 21 September 2020
• Docket Number: 3:20-CV-03009-RAL
• Parties: Larry DEITER, Director of Insurance of the State of South Dakota, as Liquidator of Reliamax Surety Company in Liquidation, Plaintiff, v. XL SPECIALTY INSURANCE CO., Defendant.
• Court: U.S. District Court — District of South Dakota

488 F.Supp.3d 881

Larry DEITER, Director of Insurance of the State of South Dakota, as Liquidator of Reliamax Surety Company in Liquidation, Plaintiff,

v.XL SPECIALTY INSURANCE CO., Defendant.

3:20-CV-03009-RAL

United States District Court, D. South Dakota, Central Division.

Signed September 21, 2020

Steven W. Sanford, Cadwell Sanford Deibert & Garry, LLP, Sioux Falls, SD, Frank A. Marnell, South Dakota Division of Insurance, Pierre, SD, for Plaintiff.

Edwin E. Evans, Mark W. Haigh, Evans Haigh & Hinton LLP, Sioux Falls, SD, Jason C. Reichlyn, Pro Hac Vice, Thomas Judge, Pro Hac Vice, Dykema Gossett PLLC, Washington, DC, for Defendant.

OPINION AND ORDER DENYING ABSTENTION AND GRANTING IN PART DISMISSAL

ROBERTO A. LANGE, CHIEF JUDGE

Plaintiff Larry Dieter, Director of Insurance for the State of South Dakota, and as Liquidator of Reliamax Surety Company in Liquidation (the Liquidator), filed a complaint against Defendant XL Specialty Insurance Company (XL Specialty) in state court. Doc. 1-1. Based on the existence of federal diversity jurisdiction under 28 U.S.C. § 1332, XL Specialty removed the action to this Court. Doc. 1. XL Specialty then filed a motion to dismiss under Rule 12(b)(6) of the Federal Rules of Civil Procedure, contending that the complaint failed to state a claim upon which relief may be granted. Doc. 7. The Liquidator opposed dismissal and filed a motion to remand on the basis of Burford abstention. Docs. 9, 10. This Court held a hearing on both pending motions. For the reasons explained below, this Court denies the motion to remand based on Burford abstention and grants in part the motion to dismiss.

I. Facts Alleged in Complaint and from Materials Attached to Complaint

In ruling on a Rule 12(b)(6) motion to dismiss, courts are to "accept the plaintiff's specific factual allegations as true but are not required to accept a plaintiff's legal conclusions." Brown v. Medtronic, Inc., 628 F.3d 451, 459 (8th Cir. 2010). "Further, documents attached to or incorporated within a complaint are considered part of the pleadings, and courts may look to such documents ‘for all purposes,’ Fed. R. Civ. P. 10(c), including to determine whether a plaintiff has stated a plausible claim." Id. See also Dittmer Props., L.P. v. FDIC, 708 F.3d 1011, 1021 (8th Cir. 2013) (noting that "courts are not strictly limited to the four corners of a complaint" and may consider "exhibits attached to the complaint whose authenticity is unquestioned" (internal quotation marks and citations omitted)). Thus, this Court draws the facts¹ from the Liquidator's complaint, which is quite terse, and from the attached exhibits to the Liquidator's complaint, which are extensive. Doc. 1-1 at 2–109.

The Liquidator is court appointed pursuant to S.D.C.L. § 58-29B-42 under an order of liquidation of Reliamax Surety Company (RSC). Doc. 1-1 at ¶¶ 1–2. Under S.D.C.L. § 58-29B-42, the Liquidator "shall be vested by operation of law with the title to all property, contracts, and rights of action ... of the insurer ordered liquidated [here RSC] ... as of the entry of the final order of liquidation." Doc. 1-1 at ¶ 3; S.D.C.L. § 58-29B-42. Another statute lists the powers of the Liquidator, which includes the powers to: "(13) Prosecute any action which may exist on behalf of the creditors, members, policyholders, or shareholders of the insurer against any officer of the insurer, or any other person; ... (19) Exercise and enforce all the rights, remedies, and powers of any creditor, shareholder, policyholder, or member...." S.D.C.L. § 58-29B-49. Doc. 1-1 at ¶ 4.

The insolvent insurer RSC is and was a wholly-owned subsidiary of ReliaMax Holding Company (RHC), a Delaware corporation; RSC has several other sister companies that likewise are subsidiaries of RHC. Doc. 1-1 at ¶ 5. Before entry of the liquidation order, RHC procured and was party to, for itself and for the benefit of its subsidiaries including RSC, two insurance policies providing directors and officers liability insurance coverage. Doc. 1-1 at ¶¶ 6, 13–71, 73–96. The primary policy for directors and officers liability insurance coverage for the policy period of July 1, 2017 through July 1, 2018 was with Pioneer Special Risk Insurance Services, Inc. (Pioneer). Doc. 1-1 at ¶¶ 7, 13–72. Defendant XL Specialty issued a policy for excess insurance coverage for directors and officers with the policy period of July 1, 2017 through July 1, 2018. Doc. 1-1 at ¶¶ 8, 73–93. The Liquidator's petition for liquidation of RSC was filed in the final month of the policy period on or about June 12, 2018. Doc. 1-1 at ¶ 11. The order of liquidation entered on June 27, 2018, just days before the end of the policy period in the XL Specialty policy. Doc. 1-1 at 8–11.

The XL Specialty policy provides a $2 million limit of liability above the $3 million underlying insurance coverage with Pioneer. The XL Specialty policy is clear that it is a claims-made policy and only applies to claims first made during the policy period. Doc. 1-1 at 73, 91. The XL Specialty policy incorporates the terms and conditions of the underlying Pioneer policy and defines the "Insured" as "those persons or organizations designated as insureds in the Underlying Insurance." Doc. 1-1 at 91. The underlying Pioneer policy in turn is issued to RHC, Doc. 1-1 at 13, and defines the insured "Company" to include "the Parent Company" and "any Subsidiary." Doc. 1-1 at 17. "Insureds" in the Pioneer policy is defined to mean the Company and the Insured Persons. Doc. 1-1 at 20. In turn, "Insured Persons" are defined in the underlying Pioneer policy to include "all persons who were, now, are, or shall be directors, officers, or the risk managers of the Company." Doc. 1-1 at 19. Finally, with regard to pertinent definitional provisions in the underlying Pioneer policy, "Wrongful Act" is defined to mean "any actual or alleged act, error, omission, misstatement, misleading statement, neglect or breach of duty ... by any of the Insured Persons, while acting in their capacity as such, or any matter claimed against any of the Insured Persons solely by reason of serving in such capacity." Doc. 1-1 at 24. The underlying Pioneer policy does exclude any claim "by, on behalf of, or at the direction of the Company, an Insured Person in any capacity, or by past, present, or future security holder, partner, or member of the Company, except and to the extent that: ... 2. Such Claim is brought in the event of the appointment of a trustee, examiner, receiver, liquidator, conservator, rehabilitator, or similar official." Doc. 1-1 at 25 (emphasis added).

On November 1, 2018, the Liquidator sent to XL Specialty and Pioneer a letter characterized as a notice of claim. In the letter, the Liquidator stated:

Numerous Wrongful Acts by the Officers and Directors of [RHC] are being investigated. The most significant Wrongful Act of the Officers and Directors of [RHC] was their continuous advances from [RSC] of more than $21 million, without the means of repayment.

Doc. 1-1 at 98. The Liquidator's letter continued:

This immediate claim is to recover these Wrongful advances paid in an amount in excess of $21 million. A claim has been filed under the Primary Policy, and given the size of the claim, it will exhaust the $3 million available policy limit.

Doc. 1-1 at 98–99.

XL Specialty's policy was a claims-made policy through July 1, 2018, but the Liquidator in the complaint cites S.D.C.L. § 58-29B-56, which provides in relevant part:

If by any agreement, a period of limitation is fixed ... for filing any claim, proof of a claim, proof of loss, demand, notice, or the like ..., and where in any case the period had not expired at the date of the filing of the petition, the liquidator may, for the benefit of the estate, take any such action or do any such act, required of or permitted to the insurer, within a period of one-hundred-eighty days subsequent to the entry of any order for liquidation, or within such further period as is shown to the satisfaction of the court not to be unduly prejudicial to the other party.

Doc. 1-1 at ¶ 10 (quoting S.D.C.L. § 58-29B-56 ). The November 1, 2018 letter was within 180 days of both the Liquidator's petition of June 12, 2018, and the order for liquidation of June 27, 2018. Doc. 1-1 at ¶¶ 11–12.

The Liquidator's complaint neither references nor attaches any response from XL Specialty, but the Liquidator's next letter (dated October 21, 2019) to XL Specialty implies that XL Specialty took issue with the timeliness of the November of 2018 notice and whether the coverage period of the XL Specialty policy had lapsed. That subsequent letter from the Liquidator is dated October 21, 2019. Doc. 1-1 at 101–109. In that October of 2019 letter, the Liquidator asserts that the timeliness of its initial notice of claim from November of 2018 references certain policy provisions and South Dakota statutes under which the Liquidator believed there should be coverage, and provided a more involved summary of what the Liquidator claimed to be wrongful conduct of directors and officers of RHC and RSC. Doc. 1-1 at 101–109. The wrongful conduct alleged in the Liquidator's October of 2019 letter included bonus compensation authorized by the board of directors of RHC to RSC's chief executive officer of $540,674 during a time of RSC's insolvency; using funds of RSC to finance startup ventures by officers of RHC and thereby robbing RSC of cash; concealment by RSC's chief executive officer of certain business opportunities to protect his ownership stake from dilution thereby frustrating critical efforts to raise capital to replace monies wrongfully taken from RSC; misleading and erroneous accounting management resulting in a later adjustment of RSC's financial statements by a negative $38 million; abuse of intra-organization borrowing power, relating to the prior notice of some $20 million borrowed from RSC by RHC without the capability to repay; and a claimed manipulation of certain loan...