Scottsdale Ins. Co. v. McGrath
| Decision Date | 19 July 2021 |
| Docket Number | 19-cv-07477 (LJL) |
| Parties | SCOTTSDALE INSURANCE COMPANY, Plaintiff, v. Patrick MCGRATH, AH DB Kithcen Investors LLC, and Castlegrace Equity Investors, LLC, Defendants. Patrick McGrath, Third-Party Plaintiff, v. Craveable Hospitality Group f/k/a Watershed Ventures, LLC, Third-Party Defendant. |
| Court | U.S. District Court — Southern District of New York |
Juan Luis Garcia, Alexis J. Rogoski, Skarzynsk Marick Black LLP, New York, NY, for Plaintiff.
Kamanta Clintessia Kettle, Luke McGrath, Dunnington, Bartholow & Miller LLP, New York, NY, for Defendants.
Plaintiff Scottsdale Insurance Company ("Scottsdale") moves, pursuant to Federal Rule of Civil Procedure 56, for partial summary judgment to dismiss the second counterclaim by Defendant Patrick McGrath ("McGrath") asserting a claim of bad faith liability for Scottsdale's denial of coverage and and refusal to settle. See Dkt. No. 63 at 5. Scottsdale also seeks dismissal of the prayer in the counterclaims for consequential and punitive damages exceeding the applicable policy limits. Id.
For the following reasons, the motion is granted.
The following facts, which are drawn from the parties’ Rule 56.1 statements on this motion and on the prior motion for summary judgment, are undisputed, unless otherwise indicated. Familiarity with this Court's prior opinion and order, Scottsdale Ins. Co. v. McGrath , 506 F. Supp. 3d 216 (S.D.N.Y. 2020), is assumed.
Scottsdale is the insurer on Business and Management Indemnity Policy number EKS3172343, Dkt. No. 1-1 (the "Watershed Policy"), issued to an entity called Watershed Ventures, LLC ("Watershed"). The Watershed Policy affords, subject to its terms, conditions, and exclusions, Directors and Officers and Company Coverage ("D&O Coverage"). The Watershed Policy extends D&O coverage to Watershed and, as relevant here, any Subsidiary of Watershed, defined as "[a]ny entity of which more than fifty percent of the outstanding securities representing the present right to vote for the election of such entity's directors or managers are owned by the Parent Company, directly or indirectly, if such entity (i) was so owned on or prior to the inception date of this Policy; or (ii) becomes so owned after the inception date of this Policy." Id. , General Terms and Conditions § B(11). It also defines as an Insured the "Directors and Officers," which it defines to include "a duly elected or appointed director, officer, or similar executive of [Watershed or a Subsidiary] or any member of the management board of [Watershed or a Subsidiary]." Id. , D&O Coverage § B(4).
Watershed is the parent corporation of a limited liability corporation named Rocky Aspen Management 2014, LLC ("RAM 204"). RAM 204 is a member of a limited liability corporation, Rocky Aspen, LLC ("Rocky Aspen"). Rocky Aspen was formed as a joint venture with AH DB Kitchen Investors LLC ("AH DB"), a Delaware limited liability company. AH DB's sole member is Aristone Hospitality LLC ("Aristone"). In turn, McGrath, is the sole member of Aristone.
Rocky Aspen was formed on or about April 24, 2013 to open and operate a "full service, first class, upscale, cocktail lounge" and "full service, high quality, fine dining, restaurant, maintaining standards consistent with other restaurants of Watershed Ventures LLC" in Aspen, Colorado. Dkt. No. 47-1 § 2.2. McGrath was appointed by AH DB to be its designated co-manager of Rocky Aspen, removable (as a general matter) only by the appointing member and "responsible for the day-to-day operational decision making of [Rocky Aspen]." Dkt. No. 38-1 § 3.2(a). RAM 204 appointed McGrath's co-manager. Pursuant to the Rocky Aspen's operating agreement, AH DB and RAM 204 each owned half of the company in the form of fifty percent of the voting units and fifty percent of the economic units. See Scottsdale Ins. Co. , 506 F. Supp. 3d at 219. Also pursuant to the operating agreement, AH DB was to make financial capital contributions to Rocky Aspen, while RAM 204 contributed in kind a license to use the Watershed brand and conceptual design. Id.
The operating agreement contained a provision pursuant to which, if AH DB failed to meet its funding obligations by the applicable deadline of March 25, 2015, AH DB would "immediately forfeit 100% of its Voting Units without being paid any consideration therefor," Dkt. No. 38-1 § 5.2, and RAM 204 would acquire an option (the "Watershed Option") to purchase 9,000 additional economic units and 9,000 additional voting units, id. § 2.7.
AH DB failed to meet its funding obligations by the applicable deadline of March 25, 2015. In May 2015, in order to fund certain opening costs for Rocky Aspen, McGrath secured a $3.2 million loan from Hanford Holdings, Inc. ("Hanford"). Dkt. No. 69 ¶ 27. On January 5, 2016, RAM 204 exercised the "Watershed Option" and removed McGrath as co-manager of Rocky Aspen. Scottsdale Ins. Co. , 506 F. Supp. 3d at 220.
On or about March 11, 2016, Rocky Aspen—then solely managed by RAM 204—filed for Chapter 7 bankruptcy. Dkt. No. 46 ¶ 11.
The Bankruptcy Proceedings led to claims being asserted against McGrath personally. On April 16, 2016, Watershed filed a claim against McGrath in the Rocky Aspen Bankruptcy Proceeding ("Bankruptcy Claim"). Dkt. No. 69 ¶ 37. On June 8, 2016, RAM 204 filed claims against Hanford arising out of the default ("Hanford Litigation"). Dkt. No. 68 ¶ 14. Hanford answered and asserted counterclaims and third-party claims against, inter alia, Watershed, Aristone, AH DB, Castlegrace, and McGrath. Id. ¶ 15; Dkt. No. 69 ¶ 41. On July 8, 2016, Hanford demanded payment from McGrath of a guaranty issued in connection with the loan. Dkt. No. 69 ¶ 40.
On November 9, 2016, Watershed provided Scottsdale a notice of a claim under the Policy in connection with the Hanford Litigation. Id. ¶ 44; Dkt. No. 69-11. Scottsdale responded two months later, on January 5, 2017, that RAM 204, McGrath, AH DB, Castlegrace, and Aristone were not Insureds under the Policy. Dkt. No. 69 ¶ 46; Dkt. No. 69-12. Scottsdale did not send McGrath a copy of the Watershed policy. Dkt. No. 69 ¶ 48.
On June 7, 2019, Rocky Aspen's Trustee in Bankruptcy asserted an avoidance claim against McGrath ("Trustee Litigation"). Id. ¶ 50. The Trustee offered to settle the claim for $1.4 million. Id. His demands and claims related to the Bankruptcy Claim filed on April 16, 2016, and the Hanford claims filed on July 27, 2016. Id . On June 7, 2019, the same day it was received, McGrath tendered the Trustee's demand to Scottsdale. See Dkt. No. 69-14 at 6. On June 10, 2019 a representative of Scottsdale emailed counsel for McGrath stating Id. at 5-6. Counsel for Mcgrath responded on June 13, 2019 arguing that McGrath was an Insured because Rocky Aspen was a "Subsidiary" of Watershed as defined in the Watershed Policy and that McGrath was insured as a director of Rocky Aspen. Id. at 4; Dkt. No. 69-15. On the evening of July 12, 2019 at 7:09 PM, counsel for McGrath emailed a representative of Scottsdale that the "deadline for a response to the Trustee's settlement demand was today" and stating that since McGrath's June 13, 2019 communication arguing that McGrath was an Insured under the policy, "we have not heard back from you." Dkt. No. 69-14 at 4-5. The email concluded "On Monday [July 15, 2019] I will need to contact the Trustee and I would like clarity on your position before I do—one way or the other." Id . On July 15, 2019 at 9:34 p.m. a representative of Scottsdale responded Id. at 4; see Dkt. No. 14-9.1
On August 9, 2019, Scottsdale commenced this action seeking, among other things, declaratory judgments that McGrath was not an Insured under the Watershed Policy (Count I), that the Trustee's demand against McGrath did not allege Wrongful Acts under the Watershed Policy and that accordingly there was no coverage for a Claim under the Watershed Policy (Count II), that there was no coverage for a Claim under the Watershed Policy because a subsidiary exclusion under the Watershed Policy applied (Count III), and that untimely notice of a Claim was provided (Count IV). The previous summary judgment motion before this Court addressed the question whether McGrath was a Director and Officer under the Watershed Policy and therefore entitled to coverage as an Insured by virtue of his position as a Member of Rocky Aspen before he was removed on January 5, 2016.
In the prior summary judgment opinion, the Court concluded that Rocky Aspen was a Subsidiary under the Watershed Policy and that McGrath was a Director and Officer, and therefore an Insured, after AH DB defaulted and the Watershed Option became available. See Scottsdale Ins. Co. , 506 F. Supp. 3d at 223-24. In so doing, it rejected Scottsdale's argument that a different provision of the Watershed Policy that defined a Subsidiary to include a "joint venture" whose operating agreement gave Watershed sole control of management—and pursuant to which McGrath would not be an Insured—should control over and above the definition that made Rocky Aspen a Subsidiary because Watershed owned more than fifty percent of its outstanding securities representing the right to vote. It also rejected Scottsdale's argument that Rocky Aspen only became a subsidiary of Watershed when RAM 204 exercised the Watershed Option on January 5, 2016—at which time it simultaneously removed McGrath as a director. Id. at 223. It concluded that Watershed became the owner of a majority of the voting...
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