National Union Fire Ins. Co. v. U.S. Liquids, Inc.
| Decision Date | 25 April 2003 |
| Docket Number | No. H-01-1980.,H-01-1980. |
| Citation | 271 F.Supp.2d 926 |
| Parties | NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, Plaintiff, v. U.S. LIQUIDS, INC., Michael P. Lawlor, W. Gregory Orr, Earl J. Blackwell, Gary J. Vanrooyan, William A. Rothrock IV, Alfred Tyler II, James E. McEneaney, Jr., John N. Hatsopolos, Roger A. Ramsey, Defendants. |
| Court | U.S. District Court — Southern District of Texas |
Roger L. McCleary, Megan Gabel, Pamela C. Hicks, Beirne, Maynard & Parsons, Houston, TX, for plaintiff.
John Bryant Thomas, Fred Knapp, Jr., Hicks Thomas et al., Mark K. Glasser, King & Spalding, Houston, TX, for defendants.
ORDER ADOPTING MEMORANDUM AND RECOMMENDATION
The Court has reviewed the Magistrate Judge's Memorandum and Recommendation and the objections thereto and is of the opinion that said Memorandum and Recommendation should be adopted by this Court.
It is, therefore, ORDERED that the United States Magistrate Judge's Memorandum and Recommendation is hereby ADOPTED by this Court.
Pending before the court1 are Plaintiff's Motion for Summary Judgment and Defendants' Motion for Partial Summary Judgment. Also pending is Plaintiff's Motion to Strike Portions of the Affidavit of Gary J. Van Rooyan.2 The court has considered the motions, all relevant filings, and the applicable law. For the reasons set forth below, the court RECOMMENDS that Plaintiff's motion be GRANTED and Defendants' motion be DENIED.
Additionally, because the court relies on no improper statements in the affidavit, Plaintiff's Motion to Strike Portions of the Affidavit of Gary J. Van Rooyan is DENIED.
The dispute between the parties in this case concerns insurance coverage. Plaintiff, the insurer, brought this action against Defendants, the insured, seeking a declaration that Plaintiff is not obligated to defend or to indemnify Defendants in a consolidated class securities and shareholder derivative action filed against Defendants in federal court. Defendants counterclaimed for declaratory judgment and breach of contract.
The consolidated lawsuit combines several securities actions brought by shareholders of U.S. Liquids, Inc., ("USL") and a shareholders' derivative suit brought on behalf of USL.3 According to the securities complaint, the individual shareholders who comprise the plaintiff class either purchased the USL common stock between May 1998 and August 1999 at artificially inflated prices or acquired USL common stock in a March 1999 secondary public offering in reliance on materially false and misleading statements presented in USL documents filed with the Securities Exchange Commission ("SEC").
USL is a provider of intograted liquid waste management services, including collection, processing, recovery, and disposal. In 1997, USL announced its plan to become a leading national provider in the liquid waste disposal industry "by expanding through acquisitions, emphasizing continued internal growth and improving its existing operations."4 The shareholders allege that USL began a campaign of rapid acquisition of smaller companies without regard to or disclosure of those companies' improper waste disposal practices. Although USL represented otherwise, it failed to implement regulatory controls in the companies it purchased.
One of the forty-one waste-management businesses that USL acquired between November 1996 and October 1999 was City Environmental, Inc. ("City Environmental"). Almost exactly one year into USL's ownership of City Environmental, the Federal Bureau of Investigations ("FBI") began an investigation of the Detroit plant based on confidential information from an employee who reported that USL knowingly discharged liquid hazardous waste into Detroit's sewer system and illegally transported and disposed of hazardous waste. Based on the detailed reports of illegal activity from five cooperating witnesses and a search of the Detroit facility, federal authorities closed a portion of the Detroit plant.
These events signaled the start of a cleanup process at the Detroit plant, a criminal investigation of USL, a revelation of illegal practices that had been actively concealed from investors and the public, and a six-day suspension of trading (followed by a decline in stock value). For the prior year, USL stock consistently enjoyed "buy" and "strong buy" recommendations from securities analysts. After the August 1999 events, market analysts downgraded the rating of USL stock and stock value plummeted $10.75 per share. In a January 31, 2000, press release, USL announced that 1999 earnings would be substantially reduced due to the closing and cleanup costs at the Detroit facility.
The shareholders accuse USL of misrepresenting or omitting material facts in various SEC Registration Statements, Prospectuses, public documents, presentations, and press releases generated from May 1998 to August 1999. In sum, the shareholders complain that certain statements made during the period May 1998 to August 1999 were materially false and misleading in that:
1. "USL was not in compliance with applicable regulations;"
2. "the companies acquired by USL were not properly investigated by USL prior to their acquisitions, or, if they were, the illegal activities occurring at the companies ... were ignored;"
3. "`specified handling procedures and guidelines for regulated wastes' were either illegal as written, or thwarted and not followed by USL employees at the direction of USL management;"
4. "USL employees were not properly trained in waste management procedures;"
5. "USL's proclaimed increased profitability resulted," not from "a well-planned expansion strategy," but from illegally charging customers for waste disposal services that it never actually performed, thereby inflating reported revenues and understating operating expenses;
6. USL's illegal dumping activities at the Detroit facility subjected it to substantial expenditures to become compliant with federal and state laws, including cleanup costs and fines;
7. USL's revenues were materially overstated due to the illegal dumping of liquid hazardous waste into the public sewer systems and the falsification of documents and water and soil samples that were submitted to federal and state regulatory officials;
8. USL presented financial results in a manner which violated the Generally Accepted Accounting Principles.5
The derivative complaint presents a similar factual account of USL's illegal activities. In that action, the plaintiffs accuse USL's board of directors and several top officers of:
(i) breach of fiduciary duty in misappropriating and misusing internal, proprietary, non-public, material, adverse corporate information to personally profit by inflating USL's earnings and generating ill-gotten bonuses which were tied to earnings; (ii) failing to properly oversee or implement federal or state laws prohibiting improper waste disposal as well as USL's own policies and rules restricting the misuse of internal corporation information for such purposes; (iii) causing USL to be sued for, and to be exposed to, liability for violations of the anti-fraud provisions of the Federal Securities Laws, Federal and State environmental laws by making or allowing to be made a series of false and misleading statements to the securities markets about USL's business, financial results, governmental compliance and prospects for earnings growth; (iv) illegally dumping toxic waste into America's water supply and (v) falsifying tests to deceive the government.6
The complaint charges the board of directors and officers with intentional and negligent breach of fiduciary duties in causing USL to violate federal securities and environmental laws, to falsify compliance with state and federal law, and to inflate earnings by engaging in illegal toxic waste disposal.
Defendants purchased a Directors, Officers and Corporate Liability Insurance Policy ("Policy") from Plaintiff. The Policy included a "Securities Plus II" endorsement to cover securities claims:
(1) brought by any person or entity alleging, arising out of, based upon or attributable to, in part or in whole, the purchase or sale, or offer or solicitation of an offer to purchase or sell, any securities of the Company; or
(2) brought by a securities holder of the Company, whether directly, by class action, or derivatively on the behalf of the Company, or otherwise, alleging any Wrongful Act of an Insured."7
In one of several exclusions, the Policy denied coverage for any loss in connection with a claim:
(1) alleging, arising out of, based upon, attributable to, or in any way involving, directly or indirectly:
including but not limited to a Claim alleging damage to the Company or its securities holders.
Pollutants include (but are not limited to) any solid, liquid, gaseous or thermal irritant or contaminant, including smoke, vapor, soot, fumes, acids, alkalis, chemicals and waste. Waste includes (but is not limited to) materials to be recycled, reconditioned or reclaimed.8
The policy provided for the advancement of defense costs, according to the terms of the Policy, prior to the final disposition of a claim.9 The definition of the Policy term "Loss" covered "damages, judgments, settlements and Defense Costs."10
Defendants made demand on Plaintiff to defend the underlying federal lawsuit, contending that the claims raised in the consolidated complaint and the derivative complaint fall within the scope of coverage provided by the Policy. Plaintiff declined to defend Defendants, maintaining that the claims came under...
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