Perdue Farms, Inc. v. Travelers Cas.

• Decision Date: 16 May 2006
• Docket Number: No. 04-2208.,04-2208.
• Citation: 448 F.3d 252
• Parties: PERDUE FARMS, INCORPORATED; Retirement Benefits Committee of the Perdue Savings Plan, formerly known as The Perdue Supplemental Retirement Plan, Plaintiffs-Appellees, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA; Reliance Insurance Company, Defendants-Appellants.
• Court: U.S. Court of Appeals — Fourth Circuit

Page 252

448 F.3d 252

PERDUE FARMS, INCORPORATED; Retirement Benefits Committee of the Perdue Savings Plan, formerly known as The Perdue Supplemental Retirement Plan, Plaintiffs-Appellees, v. TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA; Reliance Insurance Company, Defendants-Appellants.

No. 04-2208.

United States Court of Appeals, Fourth Circuit.

Argued: March 17, 2006.

Decided: May 16, 2006.

COPYRIGHT MATERIAL OMITTED

ARGUED:

John Carney Hayes, Jr., Nixon Peabody, L.L.P., Washington, D.C., for Appellants. Stephen Richard Mysliwiec, DLA Piper Rudnick Gray Cary US, L.L.P., Washington, D.C., for Appellees.

ON BRIEF:

Leslie Paul Machado, Kevin M. Colmey, Nixon Peabody, L.L.P., Washington, D.C., for Appellants. Victoria A. Bruno, DLA Piper Rudnick Gray Cary US, L.L.P., Washington, D.C.; Glen K. Allen, DLA Piper Rudnick Gray Cary US, L.L.P., Baltimore, Maryland, for Appellees.

Before WILKINSON, MICHAEL, and MOTZ, Circuit Judges.

Affirmed in part, reversed in part, and remanded by published opinion. Judge WILKINSON wrote the opinion, in which Judge MICHAEL and Judge MOTZ joined.

OPINION

WILKINSON, Circuit Judge:

In this case an insurer issued its insured a policy that covered claims based on violations of the Employee Retirement Income Security Act of 1974 (ERISA), 29 U.S.C.A. § 1001 et seq. (West 2005), but that did not apply to claims for violations of wage and hour laws. The insurer defended the insured in a class action suit seeking relief under both ERISA and wage and hour statutes, but refused to indemnify the insured for the subsequent $10 million settlement. The insurer contended that the settlement was based predominately, if not completely, on non-covered wage and hour claims. In the ensuing coverage suit, the district court held that the insured was entitled to indemnification for the settlement, and that the insurer could not obtain a partial reimbursement of defense costs.

We hold that the district court properly denied the insurer reimbursement for defense costs, but that a remand is necessary on settlement indemnification because the district court conflated the duty to defend and the duty to indemnify under Maryland law. On remand, aside from limited amounts paid to class action plaintiffs asserting only covered ERISA claims, the district court must determine how apportionment between covered ERISA claims and non-covered wage and hour claims should proceed. We therefore affirm in part, reverse in part, and remand for further proceedings.

I.

Plaintiffs in this case are Perdue Farms, Inc., a Maryland corporation that operates poultry processing facilities in numerous states, and the Retirement Benefits Committee of the Perdue Savings Plan (collectively "Perdue"). Defendant Travelers Casualty and Surety Company issued Perdue a $10 million Pension and Welfare Fund Fiduciary Responsibility Insurance Policy, effective October 1999 to October 2000.¹ The policy covered damages to third parties arising out of any "Wrongful Act," defined as "a breach of fiduciary duty by the Insured in the discharge of duties as respects the Trust or Employee Benefit Plan." The parties agree that the policy covers claims for relief under ERISA, but that it does not extend to claims for violations of wage and hour laws. Under the policy, Travelers had "the right and duty" to defend Perdue in any suit seeking relief for a "Wrongful Act," "even if any of the allegations of the claim are groundless, false or fraudulent."

In December 1999, Leona Trotter and several other current and former Perdue employees filed suit against Perdue in federal court, challenging as unlawful Perdue's compensation and record-keeping practices. According to the district court:

[T]he plaintiffs in the underlying suit (the Trotter plaintiffs) alleged that Perdue's statutory violations stemmed from its practices of: (1) not paying hourly chicken-processing line workers for time spent putting on, taking off, and cleaning protective sanitary clothing and equipment; (2) not paying some chicken-processing line workers for some work after the line card for their department had been clocked out; (3) not keeping a record of hours worked but not paid for, preventing some employees from becoming eligible for retirement benefits; and (4) not contributing to the [Perdue Supplemental Retirement] Plan two percent of the pay that employees would have earned if they had been paid for the work time reference[d] in (1) and (2) above.

The Trotter plaintiffs' amended nine-count complaint alleged three counts under ERISA, one count under the Fair Labor Standards Act (FLSA), 29 U.S.C.A. § 201 et seq. (West 2005), and five counts under the wage and hour laws of Delaware, Kentucky, Maryland, North Carolina, and South Carolina.

Perdue notified Travelers of the Trotter suit shortly after it was filed. Travelers thereafter determined that the ERISA claims created a potentiality of coverage that triggered its duty to defend Perdue. Travelers did, however, reserve its rights to refuse to pay any settlement or judgment, to decline to defend non-covered wage and hour claims, and to seek reimbursement for defense costs expended on non-covered claims.² During the next several years, Travelers paid for Perdue's defense. At the present time, it has spent over $4.4 million defending Perdue in the Trotter matter.

On August 16, 2001, the Trotter litigation was certified as a class action. See Trotter v. Perdue Farms, Inc., No. CIV. A.99-893-RRM, 2001 WL 1002448, at *2-3 (D.Del. Aug.16, 2001). The class was defined as "[a]ll persons who at any time from December 16, 1993, to the present have worked or continue to work as nonexempt hourly production employees of Perdue Farms, Inc. in any one or more of the chicken processing facilities operated by Perdue, and who were or are participating in the Perdue Supplemental Retirement Plan." Id. at *2. Additional subclasses were also certified, including one for each state whose wage and hour laws were allegedly violated. Id. at *3. Membership in these subclasses did not require participation in Perdue's Supplemental Retirement Plan. Id. Collectively, the primary class and state subclasses requested (1) backpay, overtime pay, and liquidated damages under the FLSA and state wage and hour laws; (2) ERISA plan contributions, injunctive relief, and "back pay incidental to such injunctive relief" under ERISA, see 29 U.S.C. §§ 1132(a)(3), 1140 (2000); and (3) attorneys' fees.

In June 2002, Perdue settled with the Trotter plaintiffs for $10 million and limited injunctive relief. Neither party admitted the validity of the other side's claims or defenses, but the Trotter plaintiffs did withdraw any allegation that Perdue engaged in willful misconduct. The settlement agreement did not indicate how much of the $10 million was attributable to covered ERISA claims. However, relying on findings by the magistrate judge overseeing the Trotter settlement, the district court determined, and the parties do not dispute, that approximately $3 million was assigned to the Trotter plaintiffs' class counsel for fees and costs, $775,092 compensated plaintiffs asserting only wage and hour claims, and $907,954.32 was distributed to plaintiffs asserting only ERISA claims. The remainder was remitted to plaintiffs asserting both ERISA and wage and hour claims.

Perdue requested that Travelers indemnify it for the Trotter settlement. Travelers refused, contending that the settlement was based primarily, if not entirely, upon non-covered wage and hour claims. Perdue thereafter filed suit in Maryland state court, and Travelers removed the case to federal court. Perdue sought as indemnification for the Trotter settlement $9,428,841, plus prejudgment interest. This figure includes the entirety of the Trotter settlement, except the $775,092 paid to those Trotter plaintiffs asserting only wage and hour claims and $98,515 in attorneys' fees related solely to those claims. Perdue conceded that these sums were unrelated to any ERISA claims, and therefore not covered by the insurance policy. The $9,428,841 figure also includes Perdue's additional expenditures of $248,994 in settlement costs and $53,455 in legal services. Travelers filed a counterclaim seeking reimbursement from Perdue of that portion of the approximately $4.4 million in defense costs attributable to non-covered wage and hour claims. Both parties moved for summary judgment.

The district court held that Travelers could not obtain reimbursement for defense costs, and that Perdue was entitled to indemnification for the Trotter settlement. With respect to indemnification, Travelers argued in the court below that ERISA does not contain a remedy for backpay and that the thrust of the Trotter plaintiffs' allegations amounted to claims for violations of wage and hour laws, not ERISA. The district court disagreed, reasoning that Travelers was required to compensate Perdue for the Trotter settlement because Perdue was "potentially liable" under ERISA. According to the district court, Perdue faced potential liability for this covered claim because the Supreme Court had yet to determine whether backpay constitutes an appropriate remedy under ERISA, and because the record provided a sufficient factual basis to conclude that the Trotter settlement was based, at least in part, on potential ERISA liability. The district court further held that Travelers was liable for the entire amount Perdue requested because the non-covered wage and hour claims were "reasonably related" to the covered ERISA ones.³ With respect to Travelers's counterclaim for defense costs, the district court held that no such right of partial reimbursement existed under Maryland law. Travelers appeals.

II.

This case involves two separate concepts in the law of insurance: the duty to defend and the duty to indemnify. We begin with a brief discussion of these duties and their differences, and then proceed to Travelers's request for defense costs and...