Quellos Grp. LLC v. Fed. Ins. Co.

Decision Date12 November 2013
Docket NumberNo. 68478–7–I.,68478–7–I.
PartiesQUELLOS GROUP LLC, Appellant/Cross Respondent, v. FEDERAL INSURANCE COMPANY; Indian Harbor Insurance Company, Respondents/Cross Appellants, Steadfast Insurance Company; and Nutmeg Insurance Company, Defendants.
CourtWashington Court of Appeals

OPINION TEXT STARTS HERE

Paul Fogarty, Mary Catherine Przekop, Dearmin Fogarty PLLC, Seattle, WA, Helen K. Michael, Eric M. Gold, Barry J. Fleishman, Kilpatrick Townsend, Washington, DC, for Appellant/Cross–Respondent.

John Donahue Wilson Jr., Alfred E. Donohue, Wilson, Smith, Cochran & Dickerson, Matthew J. Sekits, Jerret E. Sale, Deborah Lynn Carstens, Bullivant Houser Bailey PC, Seattle, WA, Daniel J. Standish, Gary P. Seligman, Wiley Rein LLP, Washington, DC, Janis C. Puracal, Attorney at Law, Portland, OR, Gabriela A. Richeimer, Leslie S. Ahari, Troutman Sanders LLP, McLean, VA, for Respondent/Cross–Appellant.

SCHINDLER, J.

¶ 1 An excess insurance policy provides coverage only after underlying insurance coverage is exhausted. Quellos Group LLC appeals summary judgment dismissal of the lawsuit against excess insurance carriers Federal Insurance Company and Indian Harbor Insurance Company for failure to exhaust the underlying insurance coverage. The Federal policy states coverage “shall attach only after the insurers of the Underlying Insurance shall have paid in legal currency the full amount of the Underlying Limit.” The Indian Harbor policy states coverage “will attach only after all of the Underlying Insurance has been exhausted by the actual payment of loss by the applicable insurers thereunder.” Because the plain and unambiguous language of the excess insurance policies require exhaustion of the underlying liability limits by actual payment by the insurer before excess coverage is triggered, and there is no dispute that the underlying insurers did not pay policy limits, we affirm.

FACTS

¶ 2 Quellos Group LLC was a Seattle-based investment management company. Beginning in 1999, former Chief Executive Officer (CEO) Jeffrey Greenstein and Quellos Director and attorney Charles Wilk, together with other Quellos employees, developed a new tax shelter strategy, the “Personally Optimized Investment Transaction” (POINT). The POINT tax shelter gave wealthy clients the opportunity to offset large capital gains by acquiring securities with built-in losses. Quellos used two offshore shell corporations and a “paper portfolio of over $9 billion in U.S. high tech stocks” to create “fake” capital losses for the POINT transactions. The fee Quellos charged clients was based on the amount of the POINT transaction tax loss.

Using circular transactions and offsetting payments that cancelled each other out, these offshore corporations created a paper portfolio of over $9 billion in U.S. high tech stocks that appeared to suffer price drops and generated the fake capital losses used in the POINT transactions. The fees charged by Quellos depended upon the amount of tax loss generated in each transaction for the taxpayer who bought the shelter; the more money the taxpayer “lost” from the transaction, the more Quellos charged for the scheme.

Quellos recognized the importance of obtaining legal opinions from well regarded law firms on the tax consequences of the POINT tax shelter. Quellos provided false information and documentation to the law firms on the POINT tax shelter in order to obtain favorable legal opinions that supported the POINT strategy.

¶ 3 Between 2000 and 2002, six Quellos clients agreed to use the POINT tax shelter. The first three POINT client transactions took place between April and September 2000. In September 2000, Quellos purchased layers of insurance coverage for investment management claims against its directors and officers.

¶ 4 Quellos purchased a claims-made insurance policy from American International Specialty Lines Insurance Company (AISLIC), an “Investment Management Insurance Policy,” for the period of September 21, 2000 through September 21, 2002, with a liability limit of $20 million. Quellos purchased excess insurance coverage for the period of September 21, 2000 to September 21, 2004 from AISLIC and other carriers.

¶ 5 The next three POINT client transactions occurred in late 2000 and 2001. In total, the POINT transactions protected approximately $2 billion in capital gains from federal taxes and generated approximately $65 million in fees to Quellos.

¶ 6 In 2004, AISLIC issued a claims-made Investment Management Insurance Policy to Quellos with a $10 million liability limit for the period of September 21, 2004 to September 21, 2005. The policy was subject to a $2.5 million self-insured retention. Under the terms of the policy, there is no duty to defend. The AISLIC policy provides coverage to the past, present, or future officers, directors, and employees of Quellos for damages, including defense costs resulting from claims first made during the “Policy Period ... for any Wrongful Act in rendering services as an investment adviser and for other professional services.1

¶ 7 Quellos obtained excess coverage from Federal Insurance Company and second-tier excess coverage from Indian Harbor Insurance Company for the policy period of September 21, 2004 to September 21, 2005. The first-tier Federal policy provided a $10 million liability limit after exhaustion of the AISLIC policy limits. The second-tier Indian Harbor policy provided excess coverage of $20 million after exhaustion of AISLIC and Federal coverage policy limits. The Federal and Indian Harbor policies are subject to and incorporate the terms of the AISLIC primary policy, and do not provide coverage for claims excluded from coverage under the AISLIC policy.

¶ 8 The AISLIC policy provides, in pertinent part:

1. INSURING AGREEMENTS

...

COVERAGE A: INVESTMENT ADVISER PROFESSIONAL LIABILITY—AND CORPORATE REIMBURSEMENT

This policy shall, subject to the limit of liability set forth in Item 3 of the Declarations, pay on behalf of the Insured all sums which the Insured shall become legally obligated to pay as damages resultingfrom any claim or claims first made against the Insured and reported in writing to the Company during the Policy Period or the Extended Reporting Period (if applicable) for any Wrongful Act of the Insured or of any person for whose Wrongful Act the Insured is legally responsible, but only if such Wrongful Act occurs prior to the end of the Policy Period and solely in rendering or failing to render Investment Advisory Services for others for compensation in the course of the Entity Insured's business as an Investment Adviser; and with respect to the Entity Insured including amounts which the Entity Insured is permitted or required to pay as indemnification for such liability of the Individual Insured.

COVERAGE C: DIRECTORS AND OFFICERS LIABILITY AND CORPORATE REIMBURSEMENT

This policy shall, subject to the limit of liability set forth in Item 3 of the Declarations, pay on behalf of the Executive Insured all sums which the Executive Insured shall become legally obligated to pay as damages resulting from any claim or claims first made against the Executive Insured and reported in writing to the Company during the Policy Period or the Extended Reporting Period (if applicable) for any Wrongful Act of the Executive Insured or of any other person for whose Wrongful Act the Executive Insured is legally responsible, but not Wrongful Acts to which Coverage A or Coverage D applies or would apply if it had been effected under this policy, and only if such Wrongful Act occurs prior to the end of the Policy Period; and with respect to the Entity Insured including amounts which the Entity Insured is permitted or required to pay as indemnification for such liability of the Executive Insured. This Coverage C shall not apply to Executive Insureds of the Funds for any Wrongful Act in their capacity as such.2

¶ 9 The AISLIC policy defines “Wrongful Acts” as “any breach of duty, neglect, error, misstatement, misleading statement, omission or other act wrongfully done or attempted by the Insured.” The AISLIC policy expressly excludes from coverage “any claim arising out of, based upon or attributable to the committing in fact of any criminal or deliberate fraudulent act by any Insured, or any knowing or willful violation of any statute by any Insured.” The policy also excludes “any actual or alleged Wrongful Act committed with knowledge that is was a Wrongful Act and “any actual or alleged Wrongful Act occurring prior to the Continuity Date specified in Item 6 of the Declarations, if on or before such Continuity Date any Insured knew of such Wrongful Act or could have reasonably foreseen that such Wrongful Act could lead to a claim.” 3

¶ 10 The Internal Revenue Service (IRS) audited the tax returns of the six Quellos clients who used the POINT tax shelter. In February 2005, the IRS subpoenaed POINT transaction documents from Quellos. The IRS denied the tax benefits claimed by the Quellos clients.

¶ 11 In June 2005, one of the POINT tax shelter clients notified Quellos of the intent to file a lawsuit. In March 2006, Quellos entered into a settlement with the client, and the client agreed to release all claims against Quellos and its directors and officers. In March 2006, another POINT client threatened legal action. In November 2007, Quellos entered into a settlement agreement, and the client released all claims against Quellos and its directors and officers.

¶ 12 In September 2005, the United States Senate Permanent Subcommittee on Investigations of the Committee on Homeland Security and Governmental Affairs (Senate Subcommittee) initiated an investigation and subpoenaed information from Quellos about the POINT tax shelter strategy. Former Quellos CEO Jeffrey Greenstein testified before the Senate Subcommittee.

¶ 13 On August 1, 2006, the Senate Subcommittee issued a report on Tax Haven Abuses: The Enablers. the Tools and Secrecy,

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