Verizon Commc'ns Inc. v. Nat'l Union Fire Ins. Co. of Pittsburgh

• Decision Date: 23 February 2021
• Docket Number: C.A. No. N18C-08-086 EMD CCLD
• Parties: VERIZON COMMUNICATIONS INC., NYNEX LLC, VERIZON NEW ENGLAND INC., and VERIZON INFORMATION TECHNOLOGIES LLC, Plaintiffs, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, XL SPECIALTY INSURANCE COMPANY, NATIONAL SPECIALITY INSURANCE COMPANY, U.S. SPECIALITY INSURANCE COMPANY, AXIS INSURANCE COMPANY, and ST. PAUL MERCURY INSURANCE COMPANY, Defendants.
• Court: Delaware Superior Court

VERIZON COMMUNICATIONS INC., NYNEX LLC, VERIZON NEW ENGLAND INC., and VERIZON INFORMATION TECHNOLOGIES LLC, Plaintiffs, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, XL SPECIALTY INSURANCE COMPANY,NATIONAL SPECIALITY INSURANCE COMPANY, U.S. SPECIALITY INSURANCE COMPANY, AXIS INSURANCE COMPANY,and ST. PAUL MERCURY INSURANCE COMPANY, Defendants.

C.A. No. N18C-08-086 EMD CCLD

SUPERIOR COURT OF THE STATE OF DELAWARE

Submitted: November 16, 2020

February 23, 2021

Upon Plaintiffs' Motion for Partial Summary Judgment on Defense Costs

GRANTED

Upon Defendants' Motion for Judgment on the Pleadings

DENIED

Jennifer C. Wasson, Esquire, Carla M. Jones, Esquire, Potter Anderson & Corroon LLP, Wilmington, Delaware, Robin L. Cohen, Esquire, Keith McKenna, Esquire, Cohen Ziffer Frenchman & McKenna LLP, New York, New York, Attorneys for Plaintiffs Verizon Communications, Inc., NYNEX, LLC, Verizon New England, Inc., and Verizon Technologies, LLC.

Kurt M. Heyman, Esquire, Aaron M. Nelson, Esquire, Heyman Enerio Gattuso & Hirzel LLP, Wilmington, Delaware, Lisa C. Solbakken, Esquire, Deana Davidian, Esquire, Arkin Solbakken LLP, New York, New York, Attorneys for Defendant National Union Fire Insurance Company of Pittsburgh, Pa. Bruce E. Jameson, Esquire, John G. Day, Esquire, Prickett, Jones & Elliott, P.A., Wilmington, Delaware, Alexis J. Rogoski, Esquire, Tammy Yuen, Esquire, Skarzynski Marick & Black, LLC, New York, New York, Attorneys for Defendant XL Specialty Insurance Company.

Robert J. Katzenstein, Esquire, Eve H. Ormerod, Esquire, Smith Katzenstein & Jenkins LLP, Wilmington, Delaware, Michael P. Duffy, Esquire, Scarlett M. Rajbanshi, Esquire, Peabody & Arnold LLP, Boston, Massachusetts, Attorneys for Defendant National Specialty Insurance Company.

John C. Phillips, Jr., Esquire, David A. Bilson, Esquire, Phillips, McLaughlin & Hall, P.A., Wilmington, Delaware, Joseph A. Bailey III, Esquire, Gabriela Richeimer, Esquire, Clyde & Co US LLP, Washington, D.C., Attorneys for Defendant U.S. Specialty Insurance Company.

Robert J. Katzenstein, Esquire, Eve H. Ormerod, Esquire, Smith Katzenstein & Jenkins LLP, Wilmington, Delaware, Michael R. Goodstein, Esquire, Bailey Cavalieri LLC, Columbus, Ohio, Attorneys for Defendant AXIS Insurance Company.

Robert J. Katzenstein, Esquire, Eve H. Ormerod, Esquire, Smith Katzenstein & Jenkins LLP, Wilmington, Delaware, Thomas J. Judge, Esquire, Jason C. Reichlyn, Esquire, Dykema Gossett, PLLC, Washington, D.C., Attorneys for Defendant St. Paul Mercury Insurance Company.

DAVIS, J.

I. INTRODUCTION

This insurance coverage dispute case is assigned to the Complex Commercial Litigation Division of this Court. Plaintiffs Verizon Communications Inc. ("Verizon"), NYNEX, LLC, Verizon New England, Inc., and Verizon Technologies, LLC (collectively, the "Insureds") allege Defendants National Union Fire Insurance Company of Pittsburgh, Pa. ("National Union"); XL Specialty Insurance Company, National Specialty Insurance Company ("National Specialty"), U.S. Specialty Insurance Company ("US Specialty"), AXIS Insurance Company ("Axis"), and St. Paul Mercury Insurance Company ("St. Paul Mercury") (collectively, the "Insurers"), wrongfully denied them coverage for expenses incurred from a fraudulent transfer lawsuit prosecuted by a bankruptcy trustee (the "FairPoint Action"). On August 10, 2018, the Insureds filed a complaint (the "Complaint"),¹ alleging that the Insurers breached their insurance policies when they failed to honor the indemnification and defense obligations of the policies, and for declaratory relief for indemnification and defense costs.

On September 21, 2018, the Insurers moved to dismiss or, alternatively, to stay this action.² On April 26, 2019, the Court denied the motion.³

On March 6, 2020, the Insureds moved (the "Insureds Motion") for partial summary judgment on the issue of indemnification and defense costs related to the FairPoint Action.⁴ On March 9, 2020, the Insurers moved (the "Insurers Motion") for judgment on the pleadings as to coverage relating to the FairPoint Action.⁵ The parties fully briefed the Insureds Motion and the Insurers Motion. On November 16, 2020, the Court held a hearing on the motions.⁶ After hearing from the parties, the Court took the Insureds Motion and the Insurers Motion under advisement.

For the reasons set forth below, the Court will GRANT the Insureds Motion and DENY the Insurers Motion.

II. BACKGROUND

A. THE INSURANCE POLICIES

Two insurance policies (collectively, the "Policies") are relevant to this dispute: (i) a primary policy sold by National Union for the Policy Period of October 31, 2009 to October 31, 2010 (the "Verizon Policy);⁷ and (ii) a primary policy sold by National Union for the Policy Period of March 31, 2008 to March 31, 2014 (the "FairPoint Policy").⁸ U.S. Specialty, Axis, and St. Paul Mercury issued the Insureds excess coverage that follows form to the primary Verizon Policy.⁹ XL Specialty and National Specialty issued the Insureds excess coverage that follows form to the primary FairPoint Policy.¹⁰ The Policies are virtually identical. The Policies were negotiated, in part, to reduce the Insureds' exposure to liabilities arising from transactions (described below) executed by and between Verizon, FairPoint Communications, Inc. ("FairPoint"), and Northern New England Spinco Inc. ("Spinco").¹¹

1. Definition of a "Securities Claim."

Central to the Motions is the definition of a "Securities Claim." The Policies define a Securities Claim to include "a Claim," except for administrative or regulatory proceedings maintained against or investigations of an "Organization," "made against any Insured" -

(1) alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including but not limited to the purchase or sale or offer or solicitation of an offer to purchase or sell securities) which is:

(a) brought by any person or entity alleging, arising out of, based upon or attributable to the purchase or sale or offer or solicitation of an offer to purchase or sell any securities of an Organization; or

(b) brought by a security holder of an Organization with respect to such security holder's interest in securities of such Organization; or

(2) brought derivatively on the behalf of an Organization by a security holder of such Organization.¹²

2. Relevant Coverage Definitions.

The Policies define "Insured" to include an "Organization, but only with respect to a Securities Claim."¹³ The Verizon Policy defines "Organization" to include Verizon and its subsidiaries that exist "on or before" the Policy Period.¹⁴ The FairPoint Policy defines "Organization" to include Verizon, FairPoint, and their subsidiaries that exist "on or before" the Policy Period.¹⁵ The Policies define "Loss" to include damages, settlements, judgments and "Defense Costs."¹⁶ And the Policies define "Defense Costs" to include "reasonable and necessary fees, costs and expenses . . . resulting solely from the investigation, adjustment, defense and/or appeal of a Claim against any Insured[.]"¹⁷

3. Bankruptcy-Related Terms.

The Policies exclude Loss incurred from a Claim brought inter-Organizationally. The Policies state that the Insurers "shall not be liable . . . for Loss in connection with any Claim made against any Insured: which is brought by or on behalf of an Organization[;]" or "which is brought by any security holder . . . of an Organization, whether directly or derivatively, unless the security holder's . . . Claim is instigated and continued totally independent of . . . any Organization."¹⁸ The Policies also state that this exclusion does not apply "in any bankruptcy proceeding by or against an Organization" or "any Claim brought by the . . . trustee . . . of such Organization."¹⁹

Consistent with the carve-out for bankruptcy, the Policies declare that "[b]ankruptcy or insolvency of any Organization . . . shall not relieve the Insurer[s] of any of [their] obligations" under the Policies.²⁰

B. THE TRANSACTION

On March 31, 2008, Verizon executed a tax-free merger and asset sale using the "reverse Morris trust" technique (the "Transaction").²¹ The Transaction involved Verizon, Spinco and FairPoint, and took several steps.²² Verizon formed Spinco, a wholly-owned subsidiary.²³ Verizon sold Spinco a telecommunications portfolio FairPoint sought to acquire.²⁴ In exchange, Spinco issued corporate debt notes to Verizon.²⁵ Verizon divested Spinco by spinning out its stock to Verizon's stockholders.²⁶ Spinco and FairPoint merged.²⁷ FairPoint survived.²⁸ Spinco's stock was cancelled and converted to "new" FairPoint stock.²⁹ FairPoint's outstanding equity split post-closing comprised a stake for both Verizon-Spinco and pre-merger FairPoint stockholders.³⁰

FairPoint operated as an independent company.³¹ FairPoint's balance sheet now contained: (i) the assets Spinco had purchased; (ii) joint liabilities FairPoint incurred with Spinco from drawing on a revolving credit facility to capitalize the new company; and (iii) liabilities on Spinco's own notes that it used to finance the initial transfer with Verizon.³² Verizon sold those Spinco notes to investment banks.³³ The investment banks in turn sold the notes to third-party buyers on the secondary market.³⁴

The Transaction left FairPoint with considerable debt as it attempted to expand its business in the New England market. The Transaction also meant that Verizon had eliminated underperforming landlines and paid off its own lenders with the proceeds from FairPoint's debts.

C. THE FAIRPOINT ACTION

FairPoint was unable to service the syndicated debt and the Spinco notes. On October 26, 2009, FairPoint filed a Chapter 11 petition under the federal Bankruptcy Code.³⁵ FairPoint confirmed a plan of reorganization that created a trust with an appointed trustee (the "Trustee") empowered to pursue litigation.³⁶ The Trustee was "a successor to [FairPoint] and a representative of [its] estate[.]"³⁷ The...