PENDERGEST-HOLT, STANDFORD, LOPEZ v. Underwriters

• Decision Date: 26 January 2010
• Docket Number: Civil Action No. H-09-3712.
• Citation: 681 F. Supp.2d 816
• Parties: Laura PENDERGEST-HOLT, R. ALLEN STANDFORD, GILBERTO LOPEZ, Jr., and Mark Kuhrt, Plaintiffs, v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON and Arch Specialty Insurance Companys, Defendants.
• Court: U.S. District Court — Southern District of Texas

681 F. Supp.2d 816

Laura PENDERGEST-HOLT, R. ALLEN STANDFORD, GILBERTO LOPEZ, Jr., and Mark Kuhrt, Plaintiffs, v. CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON and Arch Specialty Insurance Companys, Defendants.

Civil Action No. H-09-3712.

United States District Court, S.D. Texas, Houston Division.

January 26, 2010.

Lee Howard Shidlofsky, Alan M. Cohen, Douglas Paul Skelley, Visser Shidlofsky LLP, Austin, TX, Kenneth E. Broughton, Jr., Haynes & Boone LLP, Henry James Fasthoff, IV, Stumpf Farrimond PC, Houston, TX, for Plaintiffs.

Daniel McNeel Lane, Jr., Akin Gump et. al., San Antonio, TX, for Defendants.

ORDER

DAVID HITTNER, District Judge.

Pending before the Court is Plaintiffs' Request for Emergency Preliminary Injunction and Defendants' Motion to Dismiss Plaintiffs' Second Amended Complaint. Having considered the motions, submissions, and oral argument presented at a hearing on December 17, 2009, the Court determines the motion to dismiss should be denied and the application for preliminary injunction should be granted.

BACKGROUND

On February 17, 2009, the United States Securities and Exchange Commission ("SEC") initiated a civil action ("SEC Action") in the United States District Court for the Northern District of Texas against Robert Allen Stanford ("Stanford"), Chairman of the Board of Directors of Stanford International Bank, Ltd. ("SIBL"); Laura Pendergest-Holt ("Holt"), Chief Investment Officer of Stanford Financial Group ("SFG"); James Davis ("Davis"), Chief Financial Officer of SIBL and SFG; and three Stanford entities—SIBL, Stanford Group Company ("SGC"), and Stanford Capital Management ("SCM") (collectively "Stanford Entities"). See Sec. & Exch. Comm'n v. Stanford Int'l Bank, Ltd., et al., No. 3:09-CV-298 (N.D. Tex. filed Feb. 17, 2009). On January 4, 2009, the Northern District Court granted the SEC's request to add Mark Kuhrt ("Kuhrt"), Global Controller for Stanford Financial Group Global Management, and Gilberto Lopez ("Lopez"), Chief Accounting Officer of SFG, as additional defendants in the SEC Action. The SEC alleges Stanford, Holt, Davis, Kuhrt, and Lopez—plaintiffs in this civil case, and, therefore, hereinafter referred to as "Plaintiffs"—through their positions in the Stanford Entities, orchestrated a multi-billion dollar ponzi scheme in which they, inter alia, conspired to deceive investors and sold sham certificates of deposits ("CDs").

On the same day, the Northern District Court appointed a receiver ("Receiver") and seized all assets in the possession of the individuals and entities named in the SEC Action. See Sec. & Exch. Comm'n v. Stanford Int'l Bank, Ltd., et al., No. 3:09-CV-298 (N.D.Tex. Feb. 17, 2009) (order appointing receiver). The order compels the Receiver to take "all acts necessary to conserve, hold, manage, and preserve the value of the Receivership Estate, in order to prevent any irreparable loss, damage, and injury to the Estate." Id. Consequently, since February 17, 2009, all the assets of the SEC Action defendants and the related Stanford Entities have been frozen.

Shortly after the commencement of the SEC Action, Plaintiffs made claims against a directors and officers insurance policy ("D & O Policy") and an associated "follow form" excess policy ("Excess Policy") (collectively, "Policies") issued by Defendants Certain Underwriters at Lloyd's of London and Arch Specialty Insurance Company ("Underwriters") to SFG and SGC and certain other Stanford affiliated companies. Through their claims against the Policies, Plaintiffs sought to secure payment of their attorneys' fees and costs associated with defending themselves against the charges levied against them in the SEC Action.

On February 26, 2009, the United States of America ("Government") charged Holt with obstruction of an agency of the United States, namely the SEC. Holt subsequently filed additional notices of claims to Underwriters under the Policies on February 27, 2009 and March 4, 2009, identifying the criminal charges against her and seeking defense costs pursuant to the Policies.

On May 1, 2009, and again on June 1, 2009, Underwriters, through its retained counsel, issued a complete reservation of rights for each claim noticed and agreed to pay defense costs to Stanford and Holt. In those reservation-of-rights letters, Underwriters stated, "Although we Underwriters have not yet made a final determination of coverage, Underwriters will consent to your client's request to incur Costs, Charges and Expenses in defense of the criminal proceeding pursuant to Article VI, Section B of the D & O Policy, subject to a complete reservation of all rights."

On June 18, 2009, a federal grand jury in the Southern District of Texas, returned a twenty-one count indictment against each of the Plaintiffs and Leroy King (collectively, "Criminal Defendants") in United States of America v. Robert Allen Stanford, Laura Pendergest-Holt, Gilberto Lopez, Mark Kuhrt and Leroy King, Criminal Action No. H-09-342 (S.D. Tex. filed June 18, 2009) (the "Criminal Action").¹ That case is currently pending in this Court, and the trial is set to commence in January 2011. The indictment alleges the Criminal Defendants, in controlling the Stanford Entities, conspired to commit and did commit mail fraud and wire fraud, conspired to commit securities fraud and money laundering, and conspired to obstruct and did obstruct an SEC investigation.

Also on June 18, 2009, the Government separately charged Davis by information with mail fraud, conspiracy to commit mail, wire and securities fraud, and conspiracy to obstruct an SEC investigation. See United States v. James M. Davis, Criminal Action No. H-09-335, 2009 WL 1717146 (S.D. Tex. filed June 18, 2009). Davis reached a plea agreement with the Government and pleaded guilty to all three charges in the information on August 27, 2009. He is currently awaiting sentencing. As part of his plea agreement, and during his allocution at his re-arraignment, Davis made a variety of statements implicating Plaintiffs in a wide range of alleged illegal activity.

On August 24, 2009, the Criminal Defendants moved the Court, in the Criminal Action, to exercise ancillary jurisdiction and order Underwriters to pay defense fees under the Policies. On September 14, 2009—eighteen days after Davis pleaded guilty—Underwriters responded to the Criminal Defendants' motion and represented to the Court that "if Judge Godbey rules that the insurance policy proceeds are not receivership assets, Underwriters presently intend to reimburse Movants' reasonable and necessary attorneys' fees and costs, subject to a complete reservation of rights."

On October 9, 2009, United States District Judge for the Northern District of Texas, The Honorable David Godbey, upon a request for clarification by Holt, issued an order stating that payment of defense costs and expenses by Underwriters under the Policies, even if those proceeds were properly considered assets of the receivership estate, is permissible because "the potential harm to the directors and officers if denied coverage is not speculative but real and immediate." See Sec. & Exch. Comm'n v. Stanford Int'l Bank, Ltd., et al., No. 3:09-CV-298 (N.D.Tex. Oct. 9, 2009) (order clarifying status of insurance proceeds). Subsequently, on October 30, 2009, Underwriters issued to Lopez a reservation-of-rights letter similar to its May 1, 2009 and June 1, 2009 letters to Stanford and Holt in which Underwriters agreed to incur costs subject to it rights under the Policies.

On November 16, 2009, Underwriters issued denial letters to each of the Plaintiffs acknowledging payments to Plaintiffs' criminal defense counsel through August 27, 2009—the very date upon which Davis pleaded guilty to the criminal charges alleged against him—but retroactively declining to extend coverage for costs, charges, or expenses incurred in defending against the SEC Action and the Criminal Action after that date. Although Underwriters acknowledge having paid some policy proceeds to some of the Plaintiffs' criminal defense attorneys, the amount of those payments and to whom exactly the payments were made is not clear entirely. Nevertheless, Underwriters since has refused to pay any claims made by the Plaintiffs against the Policies.²

On November 17, 2009, Plaintiffs filed this declaratory judgment action against Underwriters. Plaintiffs seek an order from this Court directing Underwriters to pay Plaintiffs' defense costs in the underlying Criminal Action and the SEC Action pending a final adjudication in those cases. Plaintiffs contend that Underwriters' retroactive denial of coverage is contrary to the terms of the Policies and to Texas law and thus amounts to a breach of the Policies.

On December 17, 2009, the Court held an oral hearing on Plaintiffs' application for preliminary injunction. All parties were present and represented by counsel. The Court heard argument and admitted evidence.³ Specifically, Plaintiffs seek an order from this Court requiring Underwriters to withdraw its retroactive denial of coverage and compelling Underwriters to pay all reasonable and necessary defense costs and expenses incurred in the SEC Action and Criminal Action until such time as the Court rules on the merits in this case. Thus, the Court now must determine whether Plaintiffs have met the burden of establishing the requirements to warrant enjoining Underwriters from withdrawing payments under the Policies. In effect, the Court must determine whether it should order Underwriters to pay to Plaintiffs their attorneys' fees and costs incurred in conducting their defense in the SEC Action and the Criminal Action pending a resolution of the insurance contract dispute at issue in this case.⁴

STANDARD OF REVIEW

A plaintiff seeking a preliminary injunction must establish: (1) a substantial likelihood of prevailing on the merits; (2) a substantial threat of irreparable injury if the injunction is not granted; (3) the...