J.P. Morgan Sec. Inc. v. Vigilant Ins. Co.
| Decision Date | 23 November 2021 |
| Docket Number | 61 |
| Parties | J.P. MORGAN SECURITIES INC., et al., Appellants, v. VIGILANT INSURANCE COMPANY, et al., Respondents. |
| Court | New York Court of Appeals Court of Appeals |
Proskauer Rose LLP, New York City (Steven E. Obus, Seth B. Schafler, Francis D. Landrey and Matthew J. Morris of counsel), for appellants.
Holwell Shuster & Goldberg LLP, New York City (Daniel M. Sullivan, James M. McGuire and Gregory Dubinsky of counsel), and DLA Piper LLP (US), New York City (Joseph G. Finnerty III, Megan Shea Harwick, Eric S. Connuck and Marc A. Silverman of counsel), for Vigilant Insurance Company and another, respondents, and Kaufman, Borgeest & Ryan LLP, New York City (Scott A. Schechter, Andrew E. Oldis and Matthew Mawby of counsel), for Liberty Mutual Insurance Company, respondent.
Clyde & Co US LLP, New York City (Edward J. Kirk, Gabriela Richeimer and Scott Schwartz of counsel), for Certain Underwriters at Lloyd's London, respondent, and BatesCarey LLP, Chicago, Illinois (Kristi S. Nolley, R. Patrick Bedell and Lindsey D. Dean of the Illinois bar, admitted pro hac vice, of counsel), and Landman Corsi Ballaine & Ford P.C., New York City (William Ballaine of counsel), for American Alternative Insurance Corporation, respondent.
Faegre Drinker Biddle & Reath LLP, New York City (Marsha J. Indych of counsel), for Travelers Indemnity Company, respondent.
Selendy & Gay PLLC, New York City (Caitlin J. Halligan and Shomik Ghosh of counsel), for National Union Fire Insurance Company of Pittsburgh, Pa., respondent.
Covington & Burling LLP, Washington, D.C. (Mitchell F. Dolin of the District of Columbia bar, admitted pro hac vice, and Dustin Cho of counsel) and New York City (Jordan S. Joachim of counsel), for Securities Industry and Financial Markets Association, amicus curiae.
Dewey Pegno & Kramarsky LLP, New York City (Thomas E.L. Dewey and Christopher P. DeNicola of counsel), for James Corcoran and others, amici curiae.
This appeal involves a dispute between the insured securities broker-dealers and certain excess insurers concerning the availability of coverage under a "wrongful act" liability policy for funds the insureds "disgorged" as part of a settlement with the Securities and Exchange Commission. We conclude that the settlement payment in question was not excluded from insurance coverage as a "penalt[y] imposed by law" under the policies at issue and therefore reverse.
In 2000, The Bear Stearns Companies purchased a primary insurance policy from defendant Vigilant Insurance Company providing coverage for "wrongful acts" of the Companies and its subsidiaries. The Bear Stearns Companies also purchased various excess insurance policies from defendants Travelers Indemnity Company, Federal Insurance Company, National Union Fire Insurance Company of Pittsburgh, Pa., Liberty Mutual Insurance Company, Certain Underwriters at Lloyd's London, and American Alternative Insurance Corporation or their predecessor entities that followed form to the policy issued by Vigilant. As relevant here, the policies provided coverage for "loss" that Bear Stearns became liable to pay in connection with any civil proceeding or governmental investigation into violations of laws or regulations, defining "loss" as including various types of damages—including compensatory and punitive damages ("where insurable by law")—but not "fines or penalties imposed by law."
In 2003, the Securities and Exchange Commission (SEC) and other regulatory agencies began investigating Bear, Stearns & Co. Inc. and Bear, Stearns Securities Corporation—securities broker-dealers that processed and cleared trades for clients (collectively, Bear Stearns). The investigation concerned allegations that, between 1999 and 2003, Bear Stearns had facilitated late trading and deceptive market timing practices1 by its customers in connection with the purchase and sale of shares of mutual funds. Bear Stearns notified the Insurers of the pending investigation, but the Insurers effectively disclaimed coverage ( 151 A.D.3d 632, 633, 58 N.Y.S.3d 38 [1st Dept. 2017] ). Eventually, the SEC informed Bear Stearns that it intended to commence a civil action or administrative proceeding charging violations of federal securities laws and that it would seek, among other things, $720 million in monetary sanctions. Although Bear Stearns disputed the proposed charges, in early 2006 it settled with the SEC.
Pursuant to the settlement order, the SEC censured Bear Stearns and ordered it to cease and desist from any future securities law violations. Among other "findings," the administrative settlement order stated that Bear Stearns "facilitated late trading" and "the deceptive market timing activity" of certain clients. "[W]ithout admitting or denying the findings" and "[s]olely for the purpose of these proceedings," Bear Stearns agreed to a $160 million "disgorgement" payment and a $90 million payment for "civil money penalties." Both payments were to be deposited in a "Fair Fund" to compensate mutual fund investors allegedly harmed by the improper trading practices (see 15 USC § 7246 ). Further, "[t]o preserve the deterrent effect of the civil penalty," the settlement order directed that the $90 million payment—but not the disgorgement payment—was ineligible to offset any sums owed by Bear Stearns to private litigants injured by the trading practices. Bear Stearns was also required to treat the $90 million payment as a penalty for tax purposes. Following the settlement, Bear Stearns transferred the $160 million disgorgement and $90 million penalty payments to the SEC. Bear Stearns also eventually settled a series of class actions brought on behalf of injured private investors based on similar late trading and market timing allegations.
Plaintiffs, Bear Stearns’ successor companies,2 subsequently commenced this action alleging that the Insurers had breached the insurance contracts and seeking a declaration of coverage for the disgorgement payment, private settlement, and various other defense costs and expenses. The Insurers moved to dismiss the complaint arguing, among other things, that the disgorgement component of the SEC settlement was not insurable as a matter of public policy. Supreme Court denied the motions to dismiss, but the Appellate Division reversed and granted the motions ( 91 A.D.3d 226, 936 N.Y.S.2d 102 [1st Dept. 2011] ). On Bear Stearns’ appeal, we reinstated the complaint, concluding that the Insurers were not entitled to dismissal because the disgorgement payment, allegedly "calculated in large measure on the profits of others," was not clearly uninsurable as a matter of public policy ( 21 N.Y.3d 324, 336, 970 N.Y.S.2d 733, 992 N.E.2d 1076 [2013] ).
Following additional motion practice, Bear Stearns moved for summary judgment, seeking dismissal of the Insurers’ various defenses to coverage and arguing that $140 million of the disgorgement payment represented disgorgement of its clients’ gains, as compared with Bear Stearns’ own revenue, and was an insurable "loss" under the policies.3 In support of this argument, Bear Stearns proffered evidence from the SEC settlement negotiations that $140 million of the disgorgement payment reflected an estimate of the profits gained by Bear Stearns’ clients as a result of the late trading and deceptive market timing practices. The Insurers opposed and cross-moved for summary judgment, arguing that the $140 million did not represent client gains and relying on various policy exclusions and public policy-based arguments against indemnification. Supreme Court denied the Insurers’ motions and granted summary judgment to Bear Stearns, concluding that the disgorgement of $140 million in client gains constituted an insurable loss ( 57 Misc. 3d 171, 179-183, 51 N.Y.S.3d 369 [Sup. Ct., N.Y. County 2017] ). Supreme Court subsequently amended its order to award Bear Stearns prejudgment interest (2017 N.Y. Slip Op. 31690[U], 2017 WL 3448370, *5 [Sup. Ct., N.Y. County 2017]) and entered judgment in Bear Stearns’ favor. The Insurers appealed.
The Appellate Division, among other things, reversed, denied Bear Stearns’ motion for summary judgment, and granted the Insurers’ motions for summary judgment declaring that Bear Stearns was not entitled to coverage for the SEC disgorgement payment (166 A.D.3d 1, 84 N.Y.S.3d 436 [1st Dept. 2018] ). Relying on the intervening decision of the United States Supreme Court in Kokesh v. SEC, 581 U.S. ––––, ––––, 137 S. Ct. 1635, 1639, 198 L.Ed.2d 86 (2017), the Appellate Division determined that the relevant portion of the disgorgement payment was a "penalty" and, as such, was not an insurable loss under the language of the policies ( 166 A.D.3d at 8, 84 N.Y.S.3d 436 ). On remand, Supreme Court dismissed the amended complaint as to certain excess insurers and severed the remaining claims as to defendant insurers Vigilant, Travelers, and Federal. We granted Bear Stearns’ motion for leave to appeal as against four of the excess insurers, bringing up for review the prior nonfinal Appellate Division order (34 N.Y.3d 1196, 1197, 146 N.E.3d 529 [2020] ).4
Bear Stearns argues that the $140 million disgorgement for which it seeks coverage was derived from estimates of client gain and investor harm and, therefore, the Insurers failed to meet their burden of establishing that the payment was not a covered loss because it was a "penalty imposed by law." We agree that the payment is not a "penalty" within the meaning of the policy.
Whether the $140 million SEC-ordered disgorgement constitutes a "penalt[y] imposed by law" such that it is not recoverable as a "loss" under the relevant insurance policies is a question of contract interpretation. As we have often stated, insurance contracts are subject to the general rules of contract interpretation. Like other agreements, insurance contracts are typically " ‘enforced as written’ "; absent a violation of public policy, " ‘parti...
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