Unencumbered Assets v. Great American Ins. Co.

• Decision Date: 16 September 2011
• Docket Number: Case No. 2:04–cv–908.
• Citation: 817 F.Supp.2d 1014
• Parties: The UNENCUMBERED ASSETS, TRUST, Plaintiffs, v. GREAT AMERICAN INSURANCE CO., et al., Defendants.
• Court: U.S. District Court — Southern District of Ohio

817 F.Supp.2d 1014

The UNENCUMBERED ASSETS, TRUST, Plaintiffs,

v.GREAT AMERICAN INSURANCE CO., et al., Defendants.

Case No. 2:04–cv–908.

United States District Court,S.D. Ohio,Eastern Division.

Sept. 16, 2011.

Gene Crawford, United States Attorney's Office Northern District of Ohio Four Seagate, Toledo, OH, for Plaintiffs.

Michael L. Scheier, Brian P. Muething, Keating Muething & Klekamp, Cincinnati, OH, Michael Hiram Carpenter, Katheryn M. Lloyd, Carpenter Lipps & Leland LLP, John Edward Haller, Dale A. Crawford, Shumaker Loop & Kendrick, Javier H. Armengau, Javier H. Armengau LPA, Columbus, OH, Leonard W. Yelsky, Yelsky & Lonardo, Cleveland, OH, for Defendants.

Mary E. Tait, Robert W. Hamilton, Jones Day, Columbus, OH.

OPINION AND ORDER

JAMES L. GRAHAM, District Judge.

This action stems from an insurance dispute over the proceeds of an excess directors and officers (“D & O”) policy purchased by National Century Financial Enterprises, Inc. from Great American Insurance Company. The policy provided coverage of National Century's directors and officers for claims made against them based on “wrongful acts.” The policy also covered National Century itself for claims based on wrongful acts (“entity coverage”).

On one side of the dispute is Great American, which believes no one is eligible for coverage under the D & O policy. On the other side are those claiming that they are entitled to coverage. These parties include: the Unencumbered Assets Trust (“UAT”), which was created in bankruptcy court to pursue legal causes of action belonging to debtor National Century and its subsidiaries; several of National Century's principal executives (the “Principals”), including Lance Poulsen, Donald Ayers, Roger Faulkenberry, and James Dierker; Lance Poulsen's wife, Barbara Poulsen; and National Century's outside directors, Thomas Mendell, Harold Pote, and Eric Wilkinson.

Several dispositive motions are pending before the court. The Principals have moved for summary judgment to require the payment of defense costs on the grounds that they have incurreda loss defending themselves in criminal and civil litigation relating to their wrongful acts at National Century. Both Great American and the UAT oppose the Principals' motions for summary judgment.

Great American has moved for summary judgment against all potential claimants. Its motion relies heavily on the fact that the Principals have been convicted of crimes relating to their roles at National Century. Great American argues that the criminal convictions establish its grounds for denying coverage, namely: (1) rescission of the policy because Poulsen's false representations in the policy application rendered the contract void ab initio, and (2) the policy's “dishonesty exclusion” that excluded from coverage a loss brought about by an insured's deliberately fraudulent actions.

Those seeking coverage argue that the Great American policy contained no provision allowing Great American to rescind the policy as void ab initio and that, in any event, Great American waived its right to rescind. As to the dishonesty exclusion, the Principals argue that the criminal convictions are not final because appellate review of those convictions has not been exhausted. The UAT admits that the Principals engaged in fraudulent conduct but argues that their wrongdoing should not be imputed to National Century for purposes of entity coverage.

For the reasons set forth below, the court denies the Principals' motions for summary and denies summary judgment to Great American as it pertains to its void ab initio argument, but the court grants summary judgment to Great American as to the dishonesty exclusion.

I. Pending Procedural Motions

Before reaching the merits of the overarching motions for summary judgment, several procedural motions must be addressed.

A. Motion for Leave to Amend

Great American has moved for leave to file an amended counterclaim for rescission. The court originally dismissed one of the rescission counterclaims because it failed under Rule 9(b), Fed.R.Civ.P., to allege with particularity the misrepresentations that were allegedly made in certain financial statements that Poulsen submitted with the insurance proposal form. See Unencumbered Assets Trust v. Great American Ins. Co., No. 2:04–cv–908, 2007 WL 2029063 (S.D.Ohio July 10, 2007). The amended counterclaim seeks to cure that pleading defect.

Under Rule 15(a), Fed.R.Civ.P., leave to amend “shall be freely granted when justice so requires.” See Brennan v. Arkay Indus., Inc., 164 F.R.D. 464, 466 (S.D.Ohio 1996). The Principals fail to identify any prejudice to them if the court grants the motion for leave to amend; however, they do oppose the motion on the grounds that the amendment would be futile. While their futility objection is better resolved on the merits of the present dispositive motions, the court will briefly explain why leave should be granted.

Under Rule 9(b) averments of fraud and the circumstances constituting the fraud must be stated with “particularity.” To comply with Rule 9(b), “a plaintiff, at a minimum, must ‘allege the time, place, and content of the alleged misrepresentation on which he or she relied.’ ” Walburn v. Lockheed Martin Corp., 431 F.3d 966, 972 (6th Cir.2005) (quoting Coffey v. Foamex L.P., 2 F.3d 157, 161–62 (6th Cir.1993)). When the court last examined this issue, Great American's claim lacked sufficient particularity. Great American alleged that the proposal form incorporated National Century's three most recent annual audited financial statements and its latest interim financial statement, yet only broadly alleged that the documents contained misrepresentations rather than identifying their actual content.

The court finds that Great American's amended counterclaim is sufficiently specific. The counterclaim now points out that the data in the documents was based on “nearly ten years worth of financial improprieties.” Great American Am. Countercl., ¶ 99. Great American alleges numerous examples supporting the proposition that the documents were fraudulent. The counterclaim explains that the financial documents utterly failed to account for National Century's actual financial status and operations. The amended counterclaim contains no less than seventeen pages of data and events not reflected in the financial documents National Century used in procuring the insurance contract. See id., ¶¶ 14–82.

Although the court need not recount every part of the amended counterclaim, a few examples are particularly helpful. The counterclaim details that the three annual financial statements and the interim statement Poulsen submitted did not reflect the following: that internal National Century communications highlighted the company's collateral shortfalls over the three year period of the false financial reports, including shortfalls of $45,000,000, id. at ¶ 36, over $100,000,000, id. at ¶ 54, “at least” $85,000,000, id. at ¶ 61, and $511,000,000, id. at ¶ 75. The counterclaim also explains that the financial reports failed to reflect that several National Century executives awarded themselves multi-million dollar bonuses, id. at ¶ 82, and failed to report that the executives wrongfully forwarded millions of dollars to subsidiary companies that they owned, id. at ¶¶ 31–33, 39, 40.

Given the particularity with which Great American highlights inconsistencies between the financial reports and National Century's actual financial status during the years in question, the court thus finds that its amended counterclaim satisfies Rule 9(b). Accordingly, Great American's motion for leave to amend is granted (doc. 67).

B. Other Procedural Motions

After Ayers filed a motion for partial summary judgment to require the payment of defense costs, Poulsen moved to join Ayers' motion, and the court now grants Poulsen's motion for joinder (doc. 57). Faulkenberry then moved to intervene in the proceedings to file his own motion for summary judgment; the court also grants this motion to intervene (doc. 62). Dierker filed a motion for the court to consider Federal Rule of Evidence 201 and the doctrine of judicial estoppel as it pertains to the Principals' motions for summary judgment. The court grants this motion (docs. 73, 74) and construes it as Dierker's joinder with the other Principals in their requests for defense costs. In essence, each Principal makes a claim under the Great American policy for coverage relating to the litigation costs they have incurred.

The court also grants the following motions: Great American's motion for leave to file a supplemental memorandum opposing Lance Poulsen's request for costs (doc. 83); Great American's motion for an extension of time to file a reply brief (doc. 105); and the Outside Directors' motion to substitute the Estate of Harold W. Pote for defendant Harold W. Pote (doc. 107). Finally, Lance and Barbara Poulsen's motion to strike Great American's filing of a supplemental exhibit—the government's criminal complaint against Lance Poulsen—is denied as moot (doc. 85).

II. BackgroundA. National Century

Although National Century's bankruptcy and the proceedings that followed are well-documented, a brief review of the events before and after the company's financial collapse is appropriate.

Lance Poulsen and Donald Ayers were two of the original founders of National Century in 1990. They owned a controlling stake in National Century and occupied positions of executive authority at all times. Poulsen served as president, chairman, and director; Ayers was vice chairman, chief operating officer, and director. See In re Nat'l Century Fin. Enterprises, Inc., Inv. Litig., 783 F.Supp.2d 1003, 1007–08 (S.D.Ohio 2011). Barbara Poulsen served as secretary, treasurer, and director. Roger Faulkenberry and James Dierker joined the company after its inception and became executives. Faulkenberry began with National Century in 1994; he served as Director of Securitizations and became...