Federal Insurance Company v. Tyco International
| Decision Date | 21 March 2006 |
| Docket Number | No. 04-CV-9086(KMK).,04-CV-9086(KMK). |
| Parties | FEDERAL INSURANCE COMPANY, Interpleader Plaintiff, v. TYCO INTERNATIONAL LTD., L. Dennis Kozlowski, Mark A. Belnick, Mark H. Swartz, Frank E. Walsh, Jr., and John Does 1-50, Interpleader Defendants. L. Dennis Kozlowski and Mark H. Swartz, Third-Party Plaintiffs, v. Twin City Fire Insurance Company, Third-Party Defendant. Mark A. Belnick, Third-Party Plaintiff, v. Twin City Fire Insurance Company, Third-Party Defendant. |
| Court | U.S. District Court — Southern District of New York |
Paul B. Sweeney, David J. Hensler, David Newmann, Michael Steinberg, Hogan & Hartson, L.L.P., New York, New York and Washington, D.C., for Interpleader Plaintiff Federal Insurance Company.
Nicholas J. Zoogman, John P. Winsbro, Dickstein, Shapiro Morin & Oshinsky LLP, New York, New York, for Interpleader Defendant and Third-Party Plaintiff Mark A. Belnick.
Jean M. Farrell, Jeffrey E. Glen, Anderson Kill & Olick, P.C., New York, New York, for Interpleader Defendant and Third-Party Plaintiff L. Dennis Kozlowski.
Milton Thrum, Stacy Steinberg, Molod Spitz & DeSantis, P.C., New York, New York, for Interpleader Defendant and Third-Party Plaintiff Mark H. Swartz.
Kathleen Donohue, Charles D. Donohue, Jennifer A. Klear, Douglas M. Mangel, Brian A. Coleman, Alison M. Jarandeh, Drinker Biddle & Reath LLP, New York, New York and Washington, D.C., for Third-Party Defendant Twin City Fire Insurance Company.
Third-Party Defendant Twin City Fire Insurance Company ("Twin City") removed the present action, Federal Insurance Co. v. Tyco et al., Index No. 04/601416 (N.Y.Sup.Ct.2004) ("Interpleader Action") from state court. Third-Party Plaintiffs Mark A. Belnick ("Belnick"), L. Dennis Kozlowski ("Kozlowski"), Mark H. Swartz ("Swartz"), and Frank E. Walsh, Jr. ("Walsh") move to remand this case back to state court. Specifically, Third-Party Plaintiffs maintain that: (1) Twin City's removal of the Interpleader Action was improper because third-party defendants may not remove under 28 U.S.C. § 1441(a); and (2) the Court does not have original jurisdiction over the Interpleader Action pursuant to the interpleader statute, 28 U.S.C. § 1335, because Federal Insurance Company ("Federal") has not deposited the amount in controversy into the registry of the court. Third-Party Plaintiffs also seek attorneys' fees pursuant to 28 U.S.C. § 1447(c).
Twin City opposes the motion, arguing that: (1) the remand motion is untimely; (2) Twin City, even as a third-party defendant, may remove this case under § 1441(a); and (3) because Twin City was fraudulently joined, a proper realignment supports both Twin City's right to remove and federal jurisdiction over this case.
For the reasons stated herein, the Motion to Remand is GRANTED, but the Motion for Attorneys' Fees is DENIED.
This action arises from insurance coverage disputes between Interpleader Plaintiff Federal and Third-Party Defendant Twin City and their insured, Interpleader Defendants/Third-Party Plaintiffs Belnick, Kozlowski, Swartz, and Walsh.1
Belnick is the former Executive Vice President and Chief Corporate Counsel of Tyco International Ltd. ("Tyco") and is alleged to be a New York resident.2 (Interpleader Compl. ¶ 5) Kozlowski is the former CEO and Chairman of Tyco, and also a resident of Florida. Swartz is the former Executive Vice President and CFO of Tyco and a resident of Florida, while Walsh is a former Tyco Director and a resident of New Jersey. Tyco is incorporated under the laws of Bermuda, and maintains executive offices in New York.
Beginning in or around late 2000, allegations arose that Tyco engaged in questionable accounting practices. After these allegations arose, Tyco issued restatements of its earnings for fiscal year 1999 and the first half of fiscal year 2000. A criminal investigation resulted in indictments of Kozlowski, Walsh, Swartz, and Belnick, who were then prosecuted by the New York County District Attorney's Office. This was soon followed by civil actions initiated by the Securities and Exchange Commission against these same four individuals, and an avalanche of ERISA and shareholder lawsuits in New York and around the country against Tyco and several of its directors and officers ("Underlying Actions"). See Federal Ins. Co. v. Tyco Int'l Ltd., 2 Misc.3d 1006(A), 2004 WL 583829, at *1 (N.Y.Sup.Ct. Mar. 5, 2004).
The first criminal trial resulted in an acquittal for Belnick and a hung jury for Kozlowski and Swartz.3 The second criminal trial resulted in the conviction of Kozlowski and Swartz, who, in September 2005, were sentenced to eight and one-third to twenty-five years' imprisonment, and were ordered to pay approximately $170 million in fines and restitution. (Letter from Nicholas J. Zoogman to the Court, Oct. 21, 2005)
Interpleader Plaintiff Federal is an insurance company organized under the laws of Indiana with its principal place of business in New Jersey. Third-Party Defendant Twin City is an insurance company also incorporated and existing under the laws of Indiana, with its principal place of business in Connecticut. Twin City also does business in New York.
Before its legal troubles began, Tyco purchased certain primary and excess directors and officers ("D & O") liability insurance policies that provided coverage to Tyco and its officers and directors. Pursuant to Executive Protection Policy, No. 8121-34-42 ("Federal Policy"), Federal is the primary carrier of a policy sold to Tyco for the period March 15, 2001 to March 15, 2003, which provides $25 million in coverage after the satisfaction by Tyco of a $10 million retention. (Zoogman Aff. ¶ 10, Oct. 12, 2004 (hereinafter "Zoogman Aff."); Zoogman Aff. Ex. 4)4 The Federal Policy provides that it will pay on behalf of each insured all "Loss" for which an insured person "is not indemnified by the Insured Organization and which the Insured Person becomes legally obligated to pay on account of any Claim first made against him." (Zoogman Aff. ¶ 16; Zoogman Aff. Ex. 4, Executive Liab. & Indem. 3) The Federal Policy defines "Loss" to include, inter alia, "Defense Costs," which, in turn, is defined to include "reasonable costs, charges, fees (including but not limited to attorneys' fees and expert fees) and expenses . . . incurred in defending or investigating Claims and the premium for appeal, attachment or similar bonds." (Zoogman Aff. ¶ 16; Zoogman Aff. Ex. 4, Executive Liab. & Indem. 10)
In addition, Tyco purchased excess coverage through several other carriers that ultimately provided over $200 million in coverage in excess of the coverage provided by the Federal Policy. Twin City is the first excess carrier. The Twin City Excess Financial Products Insurance Policy No. NDA 0144927-01 ("Twin City Policy"), like the other excess policies, contains a "follow-form" provision stating:
This policy is subject to the same warranties, terms, conditions, definitions, exclusions and endorsements (except as regards the premium, the amount and limits of liability, and duty to defend and except as otherwise provided herein) as are contained in or as may be added to the policy of the Primary Insurer, together with all the warranties, terms, conditions, exclusions and limitations contained in or added by the endorsement to any Underlying Excess Policy(ies).
(Zoogman Aff. Ex. 3, Excess Fin. Prod. Ins. Policy III.A) (emphasis added) The Twin City Policy initially covered the period between March 15, 2001 and March 15, 2002. This period was extended by Endorsement Number Six to March 15, 2003, after which the policy apparently was amended again to account for the recent allegations of wrongdoing against Tyco's directors and officers. (Zoogman Aff. Ex. 3, Endorsement Nos. 6, 7; Twin City Opp'n Mem. 3) For example, Endorsement Numbers Nine and Ten reduce Twin City's liability to $12.5 million from $25 million, with the remaining $12.5 million to be self-insured by Tyco, except where Tyco is prohibited by Bermuda law to indemnify its own directors and officers. Most importantly, Endorsement Number Eleven amends the Twin City Policy to explicitly exclude coverage for Swartz, Kozlowski, Belnick, and Walsh. Not surprisingly, it is this provision that has drawn the bulk of the Third-Party Plaintiffs' fire.
The procedural history of this dispute is a long and winding road. The journey began in 2003 when Kozlowski notified Federal of the Underlying Actions pending against him and demanded that Federal provide him with legal representation or pay his defense costs. On February 13, 2003, Federal responded by rescinding its policy and returned the premiums on the ground that Kozlowski had made material misrepresentations in his insurance application. Federal also responded by commencing an action in the New York Supreme Court, Federal Insurance Co. v. Tyco et al., Index. No. 6000507/03 (N.Y.Sup.Ct.) ("Rescission Action"), seeking a declaration that the Federal Policy was rescinded and void ab initio, or, in the alternative, that certain exclusions bar some of the insured from coverage. See Fed. Ins. Co. v. Tyco Int'l, 2 Misc.3d 1006(A), 2004 WL 583829 (N.Y.Sup.2004). Federal initially named Tyco and numerous other Tyco directors and officers as defendants, but Federal amended its complaint to name only Kozlowski, Swartz, Belnick, and Walsh as defendants. Belnick settled the action with Federal, with Federal ultimately agreeing to fund the cost of his defense. As a result, he was dismissed without prejudice.
The remaining defendants (Kozlowski, Swartz, and Walsh) counterclaimed, and Kozlowski brought a motion for partial summary judgment seeking a declaration that Federal was required to defend him, or pay his defense costs on an on-going...
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