Piper Jaffray v. Nat. Union Fire Ins. Co.
| Decision Date | 18 June 1997 |
| Docket Number | Civil No. 4-96-1143 JRT/RLE. |
| Citation | 967 F.Supp. 1148 |
| Parties | PIPER JAFFRAY COMPANIES, INC.; Piper Jaffray, Inc.; Piper Capital Management, Incorporated; and Piper Funds, Inc., Plaintiffs, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PENNSYLVANIA; Reliance National Indemnity Company; and Executive Re Speciality Insurance Company, Defendants. |
| Court | U.S. District Court — District of Minnesota |
Robert P. Thavis, George F. McGunnigle, Jr., Steven P. Zabel, Leonard, Street & Deinard, Minneapolis, MN, for Plaintiffs.
Bradley M. Jones, Meagher & Geer, Minneapolis, MN, Jeff I. Ross, Zelle & Larson, Minneapolis, MN, Richard P. Mahoney, Mahoney, Dougherty & Mahoney, Minneapolis, MN, David W. Evans, Haight, Brown & Bonesteel, San Francisco, CA, Daniel J. Standish, Ross, Dixon & Masback, Washington, DC, for Defendants.
MEMORANDUM AND ORDER GRANTING IN PART AND DENYING IN PART DEFENDANTS' MOTION TO DISMISS
This declaratory judgment action arises out of a series of lawsuits brought against officers and directors of plaintiffs Piper Jaffray Companies, Inc., and its related subsidiaries (collectively, "Piper"). Through these many subsidiaries, Piper managed the investments of individuals and other entities. In the early 1990's, Piper suffered sharp reverses, resulting in numerous lawsuits brought principally by these investors. At all relevant times, the officers and directors of Piper were covered by a total of four policies issued by defendants National Union Fire Insurance Co., Reliance National Exchange Indemnity Co., Reliance Insurance Co.,1 and Executive Re Specialty Insurance Co. (hereafter, "defendants" or "Insurers"). Two policies (covering different time periods) were issued by National Union; each of the remaining policies provides excess coverage to one of the primary policies. Because the excess policies "follow form" to the underlying policies, the parties agree that the coverage issues presented turn solely on the interpretation of the underlying policies. These underlying policies are identical with respect to the questions presented here.
While the nucleus of facts at the center of each of the thirty-six separate actions brought against Piper's officers is the same, there are key distinctions among them. The parties agree that twenty of these underlying actions involve "mutual funds." In addition, there are eleven actions involving "closed-end funds;" the parties dispute whether these closed-end funds are "mutual funds." Another underlying claim is a class action brought by Piper shareholders for the diminution in value of Piper stock (distinct from the declining values of shares in Piper-managed funds) allegedly caused by the poor performance of Piper's investment activities and management misrepresentations with regard to investments. Four more claims involve Piper's management of individual investors (i.e., those who do not pool their assets with others in a common fund).2
Many of the lawsuits against Piper's officers have either been settled or arbitrated to resolution. Piper asserts that it has paid and will continue to pay sums on the officers' behalf. Unlike most insurance policies, the National Union policy does not provide a duty to defend; the question here is whether the policy ultimately requires the Insurers to indemnify. While the policy initially grants coverage to Piper for reimbursement of such claims, there are three significant limitations to that coverage:
ENDORSEMENT # 8
In consideration of the premium charged, it is hereby understood and agreed that the insurer shall not be liable to make any payment for Loss in connection with any claim or claims made against the Insureds arising out of any of the following:
A. The offering or sale of mutual fund shares or variable annuities or interest in any real estate investment trust, or any diminution of assets in connection with such activities; or
B. The ownership or control or management of any mutual fund or real estate investment trust.
In consideration of the premium charged, it is hereby understood and agreed that the insurer shall not be liable to make any payment for Loss in connection with any claim or claims arising out of, based upon or attributable to the Company's or an Insured's performance of or failure to perform professional services for others for a fee, or any act, error, or omission relating thereto. Provided, however, that the forgoing exclusion shall not be applicable to any derivative or shareholder class action claims against Directors or Officers alleging a failure to supervise those who performed or failed to perform such professional services.
In consideration of the premium charged, it is hereby understood an agreed that the Insurer shall not be liable to make any payment for Loss in connection with any claim or claims made against the Directors or Officers based upon or attributable to the Company's performance of professional services for others in the capacity of Investments Counselor, Mutual Fund Advisor and/or Underwriter/Broker Dealer.
Provided, however, that the forgoing exclusion shall not be applicable to any derivative or shareholder class action claims against Directors or Officers alleging a failure to supervise those who performed or failed to perform such professional services.
(Defs.' App. B Tab 1.)
Relying on these exclusions, the Insurers refused to indemnify Piper. Piper subsequently filed this declaratory judgment action; the Insurers have rejoined with the present motion to dismiss for failure to state a claim. For the reasons states herein, the motion is granted in part and denied in part.
The standard for dismissal under Fed.R.Civ.P. 12(b)(6) is exacting: the pleadings are construed in the light most favorable to the plaintiff, and its allegations taken as true. Vizenor v. Babbitt, 927 F.Supp. 1193, 1197 (D.Minn.1996). Moreover, dismissal is permitted only where "it is clear that no relief could be granted under any set of facts that could be proved consistent with the allegations." Id. (quoting Fusco v. Xerox Corp., 676 F.2d 332, 334 (8th Cir.1982)).
As is increasingly common, defendants have submitted voluminous extra-pleading material to support their motion. This is an unfortunate trend; the Court simply may not at this stage resolve factual disputes on the basis of preemptive (and untested) submissions. Moreover, the need for discovery, as set forth below, precludes the Court from converting this motion for dismissal into one for summary judgment. Therefore, the Court must resist the temptation to peer into Piper's website,3 compare Wall Street Journal listings of fund prices or otherwise consider matter not contemplated by the pleadings. However, the Court may consider extra-pleading material necessarily embraced by the pleadings, such as copies of the underlying complaints, the policies themselves, and all documents they incorporate by reference. Vizenor, 927 F.Supp. at 1198.4 With the scope of the inquiry in mind, we turn to the merits.
Underlying much of the parties' sparring rests this deceptively simple-looking question. Endorsement # 8 precludes coverage for losses attributable to Piper's "mutual fund" activities. Scanning the underlying complaints, the Insurers seize upon the term "mutual fund" and invoke the exclusion to deny coverage. Piper in turn points to the failure of the policy to specify the meaning of the term "mutual fund." From this, Piper argues first that some of the products sold to its customers were, as a matter of law, not mutual funds. Alternatively, Piper argues that the term is ambiguous, and quickly concludes — without pausing to consider extrinsic evidence — that it must win under the rule that ambiguities are construed against the insurer. See Neuman v. State Farm Mut. Auto. Ins. Co., 492 N.W.2d 530, 533 (Minn. 1992). Piper's first argument is wrong; its second is premature.
Mutual funds have exploded in popularity in recent years, a fact which issuers such as Piper have capitalized upon to grow their assets. As this litigation has revealed, there are two distinct products which might be described as mutual funds. The first is an "open-end" or "open" fund. An open fund, after issuing shares, stands ready to redeem them. Thus, while investors may (and here, did) lose money due to the diminution in share value, there is always a willing buyer. "Closed-end" or "closed" funds operate more like corporations offering stock. Once a share is issued to an investor, it trades freely on the stock exchange, and the issuer has no obligation to redeem it. Piper offered both types of funds to investors.
The Court first considers those eleven underlying suits in which only closed fund shares were purchased. Piper argues that closed funds are not mutual funds, pointing to federal laws and regulations which it alleges distinguish the two. However, these rules are but slender reeds which do not support the outcome-determinative weight Piper seeks to rest upon them.
15 U.S.C. § 80a-5(a) states that for purposes of that subchapter
management companies are divided into open-end and closed-end companies, defined as follows: (1) `open-end company' means a management company which is offering for sale or has outstanding any redeemable security of which it is the issuer. (2) `Closed-end company' means any management company other than an open-end company.
The Federal Reserve Board of Governors has promulgated regulations relating to the operations of bank holding companies. 12 C.F.R. § 225.125(c) permits such companies to
act as investment advisers to various types of investment companies, such as `open-end' investment companies (commonly referred to as `mutual funds') and `closed-end' investment companies. Briefly, a mutual fund is an...
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