Sharp v. Evanston Ins. (In re C.M. Meiers Co.)
| Decision Date | 28 October 2016 |
| Docket Number | Adv No: 1:14-ap-01042-MT,Case No.: 1:12-bk-10229-MT |
| Court | U.S. Bankruptcy Court — Central District of California |
| Parties | In re: C.M. Meiers Company, Inc. Debtor(s). Bradley D Sharp Plaintiff(s), v. Evanston Insurance Defendant(s). |
FOR PUBLICATION
Date: September 13, 2016
Time: 10:00 a.m.
This Memorandum addresses cross motions for summary judgment in an adversary proceeding seeking to resolve coverage under an errors and omissions policy issued to the debtor in this chapter 11 case. These motions were filed on July 28, 2016. Bradley Sharp v. Evanston Insurance Company, 1:14-bk-01042-MT, ECF No. 135-1, 136.1
I. FINDINGS OF FACT
1. C.M. Meiers Company, Inc. ("C.M. Meiers" or "Debtor"), a commercial and personal insurance firm, was owned and controlled by Herbert Rothman (CEO and 89% owner and director), Rebecca Rothman (officer and director), and Eric Rothman (Vice President, director, and 11% owner)(collectively, the "Rothmans"). Trustee's Statement of Undisputed Facts ("TSUF"), ¶1; In re C.M. Meiers, Case No. 1:12-bk-10229-MT.
2. C.M. Meiers acted as an insurance agent for approximately 18 carriers and as a broker for approximately 162 carriers. Id. at ¶4. In circumstances in which it was acting as broker, C.M. Meiers sold an insurance product and billed the client for the premium; C.M. Meiers delivered the policy to the client, obtained the premium payment from the client and sent the premium, less the commission to the carrier. Id. at ¶5. Where C.M. Meiers acted as agent, it was authorized to issue a binder on behalf of the carrier. Id. at ¶6. Depending on the policy, some of these policies were directly billed by the carrier, which paid C.M. Meiers its commission at a later date, while for others, C.M. Meiers billed the client and collected all premiums due. In such case C.M. Meiers was to deposit the collected funds into C.M. Meiers' trust account (the "Trust Account") to pay the carrier the premium and retain its commission. Id. at ¶7.
3. In any given month, C.M. Meiers would withdraw money from the Trust Account to pay commissions, or to remit client premiums, less commission to carriers. TSUF, ¶14. The Trust Account was "out of trust" by November 2011. Id. at ¶15.
4. On November 3, 2011, the Rothmans paid to the order of C.M. Meiers checks and cashier checks totaling $272,032.40, which was deposited into Trust Account. Id. at ¶16. At the time, it was estimated that C.M. Meiers may have been out of trust by as much as $1.2 million. Id. at ¶18. It is disputed whether the "out of trust" situation was due to the Rothman's intentional wrongdoing or their failure to supervise and administer the business affairs of C.M. Meiers, including their failure to properly account for and audit the Trust Account. Id. at ¶19; Essex's Response to Plaintiff's Statement of Undisputed Facts, ¶19.
5. On January 9, 2012, C.M. Meiers filed for chapter 11 bankruptcy. TSUF, ¶21; In re C.M. Meiers, 1:12-bk-10229-MT, ECF No. 1. Bradley Sharp ("Plaintiff" or "Trustee") was appointed the Chapter 11 Trustee. TSUF, ¶22.
6. As of January 25, 2012, C.M. Meiers had a "net payable" to various insurance companies totaling $1,085,659.14. Id. at ¶23. As of January 25, 2012, the Trust Account had a balance of $11,783.20 and was "out of trust" by an amount in excess of $1 million. Id. at ¶24.
7. On April 5, 2012, BTJ Insurance Services, LLC. ("BTJ") filed an adversary proceeding against the Rothmans asserting (1) common law unfair competition; (2) unfair competition under Business & Professional Code §17200; (3) misappropriation of trade secrets; (4) intentional interference with contractual relations; and (5) intentional interference withprospective economic advantage. BTJ Ins. Servs., LLC. v. Rothman et al., Case No. 1, 1:12-ap-01118-MT, Complaint, ECF No. 1.
8. On April 19, 2012, Trustee filed a complaint-in-intervention against the Rothmans, Adelman, Affinity, and Wen-Er Farms, LLC. ("Wen-Er"). TSUF, ¶37; BTJ Ins. Servs., LLC. v. Rothman et al., Case No. 1:12-ap-01118-MT; Complaint in Intervention for Injunctive Relief, ECF No. 52.
9. On July 10, 2012, Sharp filed a first amended complaint in intervention ("First Amended Complaint"). The First Amended Complaint alleges (1) injunctive relief, (2) breach of fiduciary duty, (3) recovery of fraudulent conveyance under 11 U.S.C. §548(a)(1)(A), §544, and §550 and (4) recovery of fraudulent conveyance under Cal. Civ. Code §3439.04(a)(1), §3439.04(a)(2), and §3439.05. Id. at ECF No. 210.
10. Trustee's allegations in the First Amended Complaint focus on the Rothmans' handling of the Trust Account and improper use of Debtor's assets. It alleges:
11. On November 3, 2011, the Rothmans paid to the order of C.M. Meiers checks and cashier checks totaling $272,032.40, which were deposited in to the Trust Account. Id. at ¶16. By November of 2011, the Trust Account was "out of trust," - the cause of which is disputed. Id. at ¶18, 19. Trustee asserts that this situation was caused by the Rothmans' failure as directors and officers to supervise and administer the business affairs. Id. at ¶19. As of January 25, 2012, C.M. Meiers had an account balance of $11,783.20 and was "out of trust" by an amount in excess of $1 million. Id. at ¶24.
12. The Rothmans were insured by Scottsdale Insurance Company ("Scottsdale") for the policy period between October 27, 2011 to October 27, 2012 under the "Business and Management Indemnity Policy, Policy No. EKS3050577" (the "Scottsdale Policy") with a $1 million limit per claim. Trustee's Request for Judicial Notice, Ex. 5.
13. On May 29, 2012, the Rothmans tendered the complaint to Scottsdale. Essex's Statement of Undisputed Facts ("ESUF"), ¶22.
14. On June 28, 2012, Scottsdale denied coverage. Id. at ¶23. During July and August of 2012, the Rothmans, through their counsel Lawrence Jacobson, contested Scottsdale's coverage declination. Id. at ¶24.
15. Jacobson shared with Trustee's counsel the communications exchanged with Scottsdale regarding insurance coverage. Id. at ¶25.
16. For the period between June 1, 2011 through June 1, 2012, the Rothmans were also insured by Essex Insurance Company ("Essex") under the "Insurance Agents and Brokers Errors and Omissions Liability Insurance Policy AB35140-00 (the "Essex Policy") with a $5 million limit per claim and subject to a $25,000 deductible. TSUF, ¶26, 27.
17. Markel Services, Incorporated ("MSI") is a separate entity solely owned by Essex; it is responsible for claims management. Id. at ¶30. Glenn Fischer is a Claims Manager of MSI, with previous experience at the American Bar Association. Id. at ¶31, 34. He is an attorney, licensed to practice in Illinois. Id. at ¶33.
18. On August 20, 2012, the Rothmans tendered the First Amended Complaint and the Rothmans' defense to Essex. Id. at 39. The claim was initially assigned to Cathy Daly, a claims adjuster for MSI. TSUF, ¶40. Daly is not an attorney. Id. Daly reviewed Jacobson's letter tendering defense of the Trustee's complaint, a review of the policy, a review of the allegations of the First Amended Complaint, and had a brief conversation with Jacobson, and a conversation with Fischer. Id. at ¶42. While the extent of Daly's review of the policy and the complaint is disputed, it is undisputed that she did not conduct any legal research regarding the claim. Id. at ¶36, 43. Daly retained Waxler, Carner, Brodsky, LLP ("WCB") as outside coverage counsel on the matter. ESUF, ¶55. Andy Waxler and colleagues of WCB communicated with the Rothmans' counsel. Id. at ¶56.
19. On October 4, 2012, WCB submitted a coverage letter (the "October 4, 2012 Letter") stating that the Trustee's lawsuit against the Rothmans does not fall within the Essex Policy's language. TSUF, ¶45. It is disputed whether Essex reserved its rights to review coverage upon further investigation. Id. at ¶47.
20. On the same day, in an email, the Rothmans' counsel shared Essex's coverage declination with Trustee's counsel. ESUF, ¶30.
21. On or about August 24, 2013, Essex, by its claims examiner, Emily Lukes, received a copy of the Trustee's First Amended Complaint from Trustee's counsel, Larry Gabriel. TSUF, ¶49.
22. On September 11, 2013, Gabriel wrote to Waxler a letter (the "September 11, 2013 Letter") requesting Essex to reconsider its coverage decision. Id. at ¶50.
23. On September 13, 2013, Gabriel again wrote to Waxler a letter (the "September 13, 2013 Letter"), with argument and support for why Essex's coverage position was unjustified as amatter of law, including a reference to a Maryland court decision - Utica Mut. Ins. Co. v. Miller, 130 Md. App. 373 (2000)("Utica"). Id. at ¶51.
24. Fischer did not read Utica; But Fischer was not the only claim personnel involved on this matter; Essex also retained WCB to address this issue. Id. at ¶53.
25. Herbert Rothman consulted Jason White of Swett & Crawford, an insurance intermediary,...
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