Morden v. XL Specialty Insurance, 091018 FED10, 17-4029
|Docket Nº:||17-4029, 17-4038|
|Opinion Judge:||HARTZ, CIRCUIT JUDGE.|
|Party Name:||JAMES MORDEN; JENALYN MORDEN; WADE MORDEN, Plaintiffs - Appellants/Cross-Appellees, v. XL SPECIALTY INSURANCE, Defendant-Appellee/Cross-Appellant. JAMES MORDEN; JENALYN MORDEN; WADE MORDEN, Plaintiffs - Appellees, v. XL SPECIALTY INSURANCE, Defendant-Appellant.|
|Attorney:||Erik A. Olson, Marshall Olson & Hull, P.C., Salt Lake City, Utah, for Plaintiffs-Appellants/Cross-Appellees. David M. Gische, Clyde & Co U.S. LLP, Washington, D.C. (Jennifer Mathis, Troutman Sanders LLP, San Francisco, CA on the briefs) for Defendant-Appellee/Cross-Appellant.|
|Judge Panel:||Before BRISCOE, HARTZ, and PHILLIPS, Circuit Judges.|
|Case Date:||September 10, 2018|
|Court:||United States Courts of Appeals, Court of Appeals for the Tenth Circuit|
Appeal from the United States District Court for the District of Utah (D.C. No. 2:15-CV-00862-RJS)
Erik A. Olson, Marshall Olson & Hull, P.C., Salt Lake City, Utah, for Plaintiffs-Appellants/Cross-Appellees.
David M. Gische, Clyde & Co U.S. LLP, Washington, D.C. (Jennifer Mathis, Troutman Sanders LLP, San Francisco, CA on the briefs) for Defendant-Appellee/Cross-Appellant.
Before BRISCOE, HARTZ, and PHILLIPS, Circuit Judges.
HARTZ, CIRCUIT JUDGE.
This appeal concerns an assigned claim on a liability-insurance policy. Belsen Getty, LLC, a registered investment adviser owned by Terry Deru, obtained a claims-made financial-services-liability policy (the Policy) from XL Specialty Insurance Company covering Belsen Getty and its advisers for the period from October 9, 2010, to October 9, 2011. Under the policy, XL had no duty to defend. During the policy period James, Jenalyn, and Wade Morden brought claims against Belsen Getty and Deru alleging improper and misleading investment advice, but XL denied coverage. XL asserted that the Mordens' claims and claims brought by the Securities and Exchange Commission (SEC) before the policy period concerned "Interrelated Wrongful Acts," as defined by the Policy, and that the Policy therefore required treating the two claims as one claim made before the policy period.
Belsen Getty and Deru then settled with the Mordens, assigning their rights against XL; and the Mordens sued XL in the United States District Court for the District of Utah, raising the assigned claims that XL breached its covenant of good faith and fair dealing and its fiduciary duties to Belsen Getty and Deru in denying coverage under the Policy. XL counterclaimed that the Policy's Interrelated Wrongful Acts provision precluded coverage. The Mordens moved for partial summary judgment on the counterclaim and on several of XL's affirmative defenses, and XL moved for summary judgment under the Interrelated Wrongful Acts provision and for failure to prove bad faith or breach of fiduciary duty. Pertinent to this appeal, the district court denied XL's counterclaim but granted it summary judgment anyway for lack of evidence supporting the bad-faith and fiduciary-duty claims. The court also denied the Mordens' motion to amend their complaint to add a breach-of-contract claim.
The Mordens appeal the summary judgment against them on their bad-faith and fiduciary-duty claims and the denial of their motion to amend their complaint to add a breach-of-contract claim. XL cross-appeals the summary judgment against it on its counterclaim that the Policy's Interrelated Wrongful Acts provision bars all the Mordens' claims. Exercising jurisdiction under 28 U.S.C. § 1291, we reverse the denial of XL's motion for summary judgment on its counterclaim. This reversal undermines the Mordens' challenges to the summary judgment against them and the denial of their motion to amend. We therefore affirm the summary judgment against the Mordens on their claims and the denial of their motion to amend.
We first describe the misconduct of Deru and Belsen Getty alleged by the SEC and the Mordens and then summarize the SEC proceedings and the Mordens' lawsuit against the two before turning to the relevant provisions of the Policy and the Mordens' claims against XL.
A. Alleged Misconduct by Belsen Getty
Belsen Getty, through Deru and other advisers, counseled clients regarding their investments. Sometimes it recommended the clients buy certain investments. Sometimes, exercising discretionary trading authority granted by clients, it made investments before getting client approval, although clients later received statements showing the investments and could inquire about the propriety of the investments at that time. The misconduct alleged against Belsen Getty and Deru involved client investments in four ventures from 2005 to 2009. The investments and the ventures were quite varied in nature. But the allegations against Belsen Getty and Deru with respect to the investments share common threads. Clients were promised too much, not warned of risks, and not informed of conflicts of interest of their advisers, who had undisclosed stakes in the ventures. The ventures were Nine Mile Software, Inc. (Nine Mile); Axxess Funding Group, LLC (Axxess); ProFire Energy, Inc. (ProFire); and Vermillion Holdings, LTD (Vermillion). We discuss in turn the allegations regarding each venture.
1. Nine Mile
In 2006, Deru, his son Damon (who was a Belsen Getty adviser), and Andrew Limpert (another Belsen Getty adviser) founded Nine Mile, a software company. Damon was its CEO and Limpert was the chairman of its board of directors. In 2007 the company issued 1, 882, 000 shares of restricted stock, three quarters of which was owned by the three men. Later that year Nine Mile commenced an initial public offering of its common stock, issuing 714, 288 shares at $ 0.70 a share. Nine Mile was illiquid at the time. Yet more than 90% of the stock was sold to Belsen Getty clients, as Deru and Limpert recommended the stock or purchased it using their discretionary trading authority over investor accounts. Deru ignored the preferences of risk-averse clients and invested their money without disclosing the risk, and he promised quick profits. He did not disclose to investors that Belsen Getty's discretionary trading authority over client accounts gave it control over the great majority of the shares after the offering.
After the initial offering Deru manipulated the market in Nine Mile stock by using his discretionary trading authority over client accounts to repeatedly buy and sell Nine Mile stock (still without informing clients of the risks or of his conflict of interest). This inflated the stock price by creating phony trading volume and making it appear that there was considerable investor interest.
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