Schwartz v. Liberty Mut. Ins. Co.

• Decision Date: 19 August 2008
• Docket Number: Docket No. 07-2794-cv.,Docket No. 07-2818-cv.
• Citation: 539 F.3d 135
• Parties: Bernard L. SCHWARTZ, Plaintiff-Counter-Defendant-Appellee, Twin City Fire Insurance Company, Defendant-Cross-Defendant-Counter-Claimant-Appellee, Royal Indemnity Company, Defendant-Cross-Defendant, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Cross-Claimant-Appellant, North American Specialty Insurance Company, Defendant-Counter-Claimant-Cross-Claimant-Appellant.
• Court: U.S. Court of Appeals — Second Circuit

539 F.3d 135

Bernard L. SCHWARTZ, Plaintiff-Counter-Defendant-Appellee, Twin City Fire Insurance Company, Defendant-Cross-Defendant-Counter-Claimant-Appellee, Royal Indemnity Company, Defendant-Cross-Defendant, v. LIBERTY MUTUAL INSURANCE COMPANY, Defendant-Cross-Claimant-Appellant, North American Specialty Insurance Company, Defendant-Counter-Claimant-Cross-Claimant-Appellant.

Docket No. 07-2794-cv.

Docket No. 07-2818-cv.

United States Court of Appeals, Second Circuit.

Argued: June 13, 2008.

Decided: August 19, 2008.

Edward M. Spiro, Morvillo, Abramowitz, Grand, Iason, Anello & Bohrer, P.C., New York, N.Y. (Elkan Ambramowitz, Thomas M. Keane, Sarah J. North, on the brief), for Plaintiff-Counter-Defendant-Appellee Bernard L. Schwartz.

Catherine E. Stetson, Hogan & Hartson L.L.P., Washington, DC (William J. Bowman, Paul A. Werner, Hogan & Hartson LLP, Ira G. Greenberg, John F. McCarrick, Edwards Angell Palmer & Dodge LLP, on the brief), for Defendant-Cross-Defendant-Counter-Claimant-Appellee Twin City Fire Insurance Company.

David J. Margules, Bouchard Margules & Friedlander, P.A., Wilmington, DE (Sean M. Brennecke, of counsel, Joshua Dratel, Law Offices of Joshua Dratel, New York, NY, on the brief), for Defendant-Cross-Claimant-Appellant Liberty Mutual Insurance Company.

Peter A. Stroili, D'Amato & Lynch, New York, N.Y. (Robert E. Kushner, on the brief), for Defendant-Counter-Claimant-Cross-Claimant-Appellant North American Specialty Insurance Company.

Before: JACOBS, Chief Judge, POOLER, Circuit Judge, RESTANI,^* Judge.

DENNIS JACOBS, Chief Judge:

The day before he was to testify as a defendant in a securities class action, Bernard L. Schwartz agreed to a $20 million settlement. He later brought suit in the United States District Court for the Southern District of New York (Castel, J.) against the four companies that covered him for directors and officers liability. He sued the primary insurer, Twin City Fire Insurance Company, for bad faith refusal to settle and breach of contract, and he sued three excess insurers, Royal Indemnity Company, Liberty Mutual Insurance Company, and North American Specialty Insurance Company, for breach of contract. Liberty and North American, pleading equitable subrogation, asserted cross-claims for bad faith against Twin City. Twin City and Royal settled with Schwartz in the course of this litigation.

Liberty and North American appeal from an amended judgment, entered after a jury trial, in favor of Schwartz and Twin City. See Schwartz v. Twin City Fire Ins. Co., 492 F.Supp.2d 308 (S.D.N.Y.2007). The issues on appeal are whether the jury's verdict in favor of Schwartz was supported by sufficient evidence; whether Schwartz's entitlement to prejudgment interest (under California law) runs from the date he paid the $20 million or from the date the underlying layers of coverage were exhausted; and whether the cross-claims against Twin City are governed by New York law (which requires a showing of "gross disregard") or by California law (which does not). For the reasons that follow, we affirm.

BACKGROUND

Schwartz was chief executive officer of Globalstar Telecommunications Ltd., a now-defunct public company in the satellite telephone business. In that capacity, he was covered by $50 million in directors and officers liability insurance. The primary layer of $10 million was written by Twin City; Royal, Liberty and North American, the first three excess carriers, each provided $5 million in coverage. The remaining layers of coverage were not implicated.

In 2001, after Globalstar revealed that its satellite technology had fizzled, a securities class action was filed against Schwartz, Globalstar, and Loral Space & Communications, Ltd. (a Globalstar investor also under Schwartz's control), alleging violations of sections 10(b) and 20(a) of the Securities Exchange Act of 1934 (the "Globalstar Litigation"). Globalstar timely notified its insurers of the litigation. With Twin City's approval, Schwartz retained Francis Menton to defend him.

After Globalstar and Loral filed for bankruptcy in 2002, the Globalstar Litigation proceeded against Schwartz alone.

Over the following two years, Menton worked with Twin City, Royal, Liberty and North American to negotiate a settlement with the Globalstar Litigation plaintiffs. Counsel to Liberty and North American (the "Excess Insurers") participated in negotiations at which the plaintiffs offered to settle for $15 million, but warned that the demand would rise to $20 or $25 million once trial began. Twin City's counter-offers never rose above $5 million. Settlement was not achieved.

Trial of the Globalstar Litigation began on July 6, 2005. Counsel for the Excess Insurers were in the courtroom monitoring all of the proceedings.

After two weeks of testimony, the only remaining defense witnesses were Schwartz and his damages expert. Facing the prospect of a jury verdict in the hundreds of millions of dollars, Schwartz decided to settle the case. At 10:04 p.m. on Sunday, July 17, 2005, Menton wrote to the four insurers seeking their consent to settle for $20 million.² Menton offered to discuss the settlement that night or early the following morning.

On Monday, July 18, 2005, the district court approved the $20 million settlement and discharged the jury. In the course of that day and the following week, all the insurers refused consent.

Twin City refused consent on the stated ground that the plaintiffs' evidence was too weak to merit more than "the $5 million average settlement for shareholder class action lawsuits settled in 2004."

Royal likewise declined to consent.

Liberty acknowledged receiving an email from Menton on Saturday, July 16, relaying plaintiffs' $20 million demand, but said it was unaware of Menton's request for consent to settle until Monday morning. Liberty could not "understand why it would be reasonable to settle at $20 million, particularly in light of the positive developments at trial"; in any event, its obligations had not been triggered because the underlying layers of coverage had not yet been exhausted.

North American's position was that the litigation "should have been settled for an amount at or below $15 million"; that an opportunity to do so had been "squandered" through "no fault of North American's"; that, having "observed the trial closely," North American had seen nothing "that would justify a $5 million increase in the plaintiffs' demand"; that it was "not included in the negotiations of the last 5 days," or "kept apprised of these negotiations in any material way"; and that in any event any demand on it "would appear to be premature," given that the underlying layers of coverage (Twin City, Liberty and Royal) had not paid out their limits.

On August 24, 2005, Schwartz wrote a personal check to the Globalstar plaintiffs for $20 million.

Schwartz then filed this lawsuit, alleging two causes of action: breach of contract against Twin City, Royal, Liberty and North American; and a bad faith claim against Twin City. Liberty and North American, as subrogees, brought bad-faith cross-claims against Twin City. See Commercial Union Assurance Cos. v. Safeway Stores, Inc., 26 Cal.3d 912, 918, 164 Cal. Rptr. 709, 610 P.2d 1038 (1980) (explaining that under equitable subrogation, an excess carrier "stands in the shoes of the insured and should be permitted to assert all claims against the primary carrier which the insured himself could have asserted").

Before the coverage suit went to trial, Twin City and Royal settled with Schwartz by paying their policy limits ($10 million and $5 million, respectively).

On the remaining claims, the jury awarded Schwartz $5 million against Liberty and $4,085,723.11 against North American (the full amounts sought); and on the bad-faith cross-claims against Twin City, the jury awarded Liberty $2 million and awarded North American $3 million. The district court entered judgment on January 29, 2007.

After post-trial briefing, the district court denied the Excess Insurers' motions for judgment as a matter of law (or, alternatively, a new trial), but amended the judgment in two significant ways. As to the claim against the Excess Insurers, the court awarded Schwartz prejudgment interest measured from the date Schwartz paid the $20 million settlement. As to the bad-faith cross-claims against Twin City, the court decided a choice of law issue that was raised by the jury's finding (in response to a special interrogatory) that Twin City had not acted in "gross disregard" of Schwartz's interests. "Gross disregard" is a requisite finding under New York law, but not under the law of California. The court ruled that New York law applied, and amended the judgment accordingly to dismiss the bad-faith cross-claims.

DISCUSSION

Liberty and North American challenge the amended judgment on three fronts. First, they seek judgment as a matter of law on the breach of contract claims based on Schwartz's failure to obtain their consent to settle the Globalstar Litigation. Second, they contend that prejudgment interest (on those claims) should run from the date the underlying layers of insurance were exhausted, as opposed to the date Schwartz paid the $20 million settlement. Third, they argue that California law (rather than New York law) applies to their cross-claims against Twin City.

I

We review de novo the Excess Insurers' challenge to the denial of their motions for judgment as a matter of law, "viewing the evidence, as the district court was required to, in the light most favorable to the nonmoving party." Sanders v. N.Y. City Human Res. Admin., 361 F.3d 749, 755 (2d Cir.2004).

Several facts and propositions relevant to Schwartz's claims of breach against the Excess Insurers are not in dispute. First, it is undisputed that California law applies to those claims. Schwartz v. Twin City Fire Ins. Co., 492 F.Supp.2d 308, 318 (S.D.N.Y.2007). Second, it is undisputed that the coverage...