Seidel v. Houston Cas. Co.

• Decision Date: 07 March 2005
• Docket Number: No. 04 Civ. 3612(GEL).,04 Civ. 3612(GEL).
• Citation: 375 F.Supp.2d 211
• Parties: Deborah SEIDEL, Andre Sassoon, and Daniel Berringer, Plaintiffs, v. HOUSTON CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — Southern District of New York

Page 211

375 F.Supp.2d 211

Deborah SEIDEL, Andre Sassoon, and Daniel Berringer, Plaintiffs, v. HOUSTON CASUALTY COMPANY, Defendant.

No. 04 Civ. 3612(GEL).

United States District Court, S.D. New York.

March 7, 2005.

COPYRIGHT MATERIAL OMITTED

Sheldon H. Elsen, Ashley U. Menendez, Orans, Elsen & Lupert LLP, New York, NY, for Plaintiffs, of counsel.

Wallace A. Christensen, Carmen R. Kelley, Prashant K. Khetan, Ross, Dixon & Bell L.L.P., Washington, DC, for Defendant, of counsel.

OPINION AND ORDER

LYNCH, District Judge.

In this action on an insurance contract, plaintiffs, the president, chief financial officer, and chairman of Sloan's Auction Galleries, Ltd. ("Sloan's"), successfully defended a suit brought by an unpaid consignor, and sought payment for their defense costs under a directors and officers ("D & O") liability insurance policy purchased from defendant Houston Casualty Company ("Houston"). After paying $65,560 to the plaintiffs for defense costs, defendant refused further coverage, relying on the policy's "Errors and Omissions Exclusion (with Management Carveback)." Consequently, plaintiffs brought this suit against Houston for breach of contract and a declaratory judgment that Houston is liable for defense costs incurred (and any future payments) in the underlying suit. Plaintiffs move for partial summary judgment as to liability; defendant cross-moves for the same, and also seeks recovery of the 565,560 "that it mistakenly paid for [plaintiffs'] defense costs." (D.Mem.2.) Plaintiffs' motion will be granted; defendant's motion will be denied.

BACKGROUND

The relevant facts are essentially undisputed.¹ Plaintiffs Deborah Seidel, Daniel Berringer, and Andre Sassoon, were respectively the president. CFO, and chairman of Sloan's, a Maryland auction house. Sloan's had purchased a D & O liability insurance policy — entitled "Directors, Officers and Private Organization Liability Insurance Policy" ("Policy") (Elsen Aff. Ex. 1) — from defendant Houston.² In December 2002, Sloan's filed for Chapter 11 bankruptcy. (Compl.¶¶ 10-11.)³

I. The Underlying Lawsuit

In January 2002, Frederick Martin entered into a consignment contract with Sloan's to auction his inventory of antiques.⁴ (Martin Compl., Elsen Aff. Ex. 2; D.R. 56.1 Counterstmt No. 12.) On February 21, 2002, Sloan's auctioned 760 Martin's antiques, at prices below Martin's expectations. (Martin Third Am. Compl., Elsen Aff. Ex. 5, ¶¶ 43-44.) Martin demanded that Sloan's auction no more of his goods and that Sloan's forward to him the gross proceeds of the auction's completed sales. (Id. ¶¶ 44-46.) Although Sloan's did not pay the $66,338 it owed Martin, Sloan's eventually tendered a partial payment of $2000, which Martin refused. (Id. ¶¶ 45-50.)

On July 22, 2002, Martin filed a lawsuit in Maryland state court against Sloan's, Seidel, and Berringer, alleging that Sloan's had violated various provisions of the contract and that plaintiffs had misused the proceeds of auction sales to pay corporate operating expenses rather than consignors like himself. (Martin Compl.; Martin First Am. Compl., Elsen Aff. Ex. 3; Martin Second Am. Compl., Elsen Aff. Ex. 4; Martin Third Am. Compl.) Martin brought claims against Sloan's for breach of contract;⁵ and against Seidel and Berringer among others, for breach of fiduciary duty, constructive fraud, conversion, deceit/fraud, racketeering, and conspiracy to defraud. Martin alleged that when Sloan's contracted with him, plaintiffs were aware that, despite Sloan's delinquency in paying its consignors, Sloan's agents represented to Martin that Sloan's would forward the auction's proceeds to him within thirty-five days of the sale. According to the third amended complaint, "Sloan's annual revenues were insufficient to simultaneously: (a) meet its operating expenses; and (b) pay in a timely manner, if at all, consignors the net proceeds of auction sales to which they were entitled." Instead, "[d]espite [Martin's] repeated demands .... proceeds due to [Martin] were converted and used to pay other consignors, as well as the salaries of the employees at Sloan's, including [Seidel and Berringer]." Martin amended his complaint on three occasions after plaintiffs (and other defendants) moved to dismiss, and, in his third (and final) amended complaint, added claims against Sassoon.⁶

Martin's lawsuit was dismissed pursuant to plaintiffs' summary judgment motions. On July 12, 2004, the Circuit Court for Montgomery County, Maryland, entered final judgment against Martin, and on the same day, Martin noticed an appeal.

II. The Insurance Policy

The Policy, in relevant part, states that "[t]he insurer will pay to or on behalf of the Insured Persons Loss arising from Claims first made against them during the Policy Period or Discovery Period (if applicable) for Wrongful Acts."⁷ The Policy defines "Insured Person" as "any past, present or future director, officer, managing member, manager or Employee of the Insured Organization." "Loss" is defined as "[d]efense [c]osts and any damages, settlements, judgments, back pay awards and front pay awards or other amounts (including punitive or exemplary damages and the multiplied portion of any multiplied damage award, if and where insurable by law) that an Insured is legally obligated to pay as a result of any Claim." A "claim" is defined, in relevant part, as "any civil proceeding commenced by service of a complaint or similar pleading." A "[w]rongful [a]ct" includes "(2) any other actual or alleged act, error, misstatement, misleading statement, omission or breach of duty (a) by the Insured Organization, or (b) by an Insured Person in his or her capacity as a director, officer, member, manager or Employee of the Insured Organization or in an Outside Capacity; or (3) any matter claimed against an Insured Person solely by reason of his or her service (a) as a director, officer, member, manager or Employee of the Insured Organization, or (b) in an Outside Capacity."

Endorsement Number 2 to the Policy includes the "Errors and Omissions Exclusion (with Management Carveback)," which states:

(1) No coverage will be available under this Policy for Loss, including Defense Costs, from Claims for any actual or alleged act, error, omission, misstatement, misleading statement, or breach of duty in connection with the rendering of, or actual or alleged failure to render, any services for others for a fee or commission or on any other compensated basis by any person or entity otherwise entitled to coverage under this Policy.

(2) Paragraph (1) is not intended, however, nor shall it be construed, to apply to Loss, including Defense Costs, in connection with any Claim against an Insured Person who is a director or officer of the Insured Organization to the extent that such Claim is for a Wrongful Act by such Insured Person who is a director or officer of the Insured Organization in connection with the management or supervision of any division. Subsidiary or group of the Insured Organization offering any of the aforementioned services.

III. Plaintiffs' Request for, and Defendant's Denial of, Coverage

On August 27, 2002, at the outset of Martin's lawsuit, plaintiffs sought payment of their defense costs for the Martin lawsuit under Houston's D & O policy. (D.R. 56.1 Counterstmt No. 16; Answer ¶ 32; see P. 56.1 Stmt No. 16.) Correspondence between plaintiffs' counsel and defendant followed.

On October 15, 2002, Jennifer L. MacLelland, a claims attorney for Houston,⁸ provided plaintiffs with "preliminary coverage analysis," stating that the policy did not appear to cover plaintiffs' defense costs, while "reserv[ing] all rights and defenses available to it under the policy." (Letter from Jennifer L. MacLelland, to Gerald W. Heller, dated October 15, 2002, D. Opp'n Ex. A.) "In the first half of 2003," plaintiffs' counsel submitted to Houston various requests for payment and invoices. (P. Mem. 5; Compl. ¶ 32; Answer ¶ 32.) Although the record is unclear as to the events that led up to Houston's apparent (and temporary) change of heart with regard to the Policy's coverage of plaintiffs claim,⁹ on May 7, 2003, plaintiffs' counsel wrote to Houston, attaching an invoice for work performed in April 2003, confirming Houston's "approv[al] of this firm [and another lawyer], as discussed during this morning's telephone call." (Letter from Matthew D. Griffin to Jennifer L. MacLelland, dated May 7, 2003, Elsen Reply Aff. Ex 10.) On June 24, 2003, MacLelland e-mailed plaintiffs' counsel, confirming that she had "received and reviewed" plaintiffs' counsel's invoices, and requesting a litigation plan and budget. (E-mail from Jennifer L. MacLelland to Matthew D. Griffin, dated June 24, 2003, Elsen Reply Aff. Ex 11.) On June 27, 2003, plaintiffs' counsel provided Houston with the requested litigation plan and estimated budget. (Letter from Orans, Elsen & Lupert LLP to Jennifer L. MacLelland, dated June 27, 2003, Elsen Reply Aff. Ex. 12.) In July 2003, Houston reimbursed plaintiffs for $65,000. (P. 56.1 Stmt. No. 17; Letter from Sheldon H. Elsen to Jennifer L. MacLelland, dated April 5, 2004, Elsen Aff. Ex. 7, at 1; Compl. ¶ 34; Answer ¶ 34.)¹⁰

On September 23, 2003, plaintiffs' counsel sent Houston another invoice for its legal fees. (Compl.¶ 45.) But in an October 9, 2003, letter, Evelyn Williams, acting on behalf of MacLelland, denied coverage under the Policy pursuant to the Errors and Omissions Exclusion. (Letter from Evelyn V. Williams to Sheldon H. Elsen, dated October 9, 2003, D. Opp'n Ex. B.) On November 25, 2003, plaintiffs' counsel wrote to MacLelland contesting Houston's notice that it would deny coverage. (Compl.¶ 51.) In the same month, plaintiffs' counsel called MacLelland to request that payment of plaintiffs' legal fees and disbursements be resumed, on an as-incurred basis, as the Policy required. (Id. ¶ 52.) In January and February, 2004, plaintiffs' counsel wrote to MacLelland on two occasions,...