XL Specialty Ins. Co. v. Lakian

• Decision Date: 20 March 2017
• Docket Number: 14 Civ. 5225 (KMW)
• Citation: 243 F.Supp.3d 434
• Parties: XL SPECIALTY INSURANCE COMPANY, Plaintiff, v. John R. LAKIAN, Diane W. Lamm, and Kobre & Kim LLP, Defendants, and Eiseman Levine Lehrhaupt & Kakoyiannis, P.C., Brief Carmen & Kleiman, LLP, Merrill Communications, LLC, Knox, LLC d/b/a Knox, LLC of New York, DJW Advisors, LLC, and Pangea Capital Management, LLC, Intervening Defendants. Kobre & Kim LLP, Counterclaim Plaintiff, v. XL Specialty Insurance Company, Counterclaim Defendant.
• Court: U.S. District Court — Southern District of New York

243 F.Supp.3d 434

XL SPECIALTY INSURANCE COMPANY, Plaintiff,

v.John R. LAKIAN, Diane W. Lamm, and Kobre & Kim LLP, Defendants,andEiseman Levine Lehrhaupt & Kakoyiannis, P.C., Brief Carmen & Kleiman, LLP, Merrill Communications, LLC, Knox, LLC d/b/a Knox, LLC of New York, DJW Advisors, LLC, and Pangea Capital Management, LLC, Intervening Defendants.

Kobre & Kim LLP, Counterclaim Plaintiff,

v.XL Specialty Insurance Company, Counterclaim Defendant.

14 Civ. 5225 (KMW)

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

Signed March 20, 2017

David H. Topol, Leland Howard Jones, IV, Wiley, Rein LLP, Washington, DC, John H. Eickmeyer, Jonathan Alan Wexler, Vedder, Price, Kaufman & Kammholz, P.C., New York, NY, for Plaintiff.

Brian Jonathan Osias, Richard Alan Beran, McCarter & English, LLP, Newark, NJ, Jonathan David Cogan, Kobre & Kim LLP, New York, NY, for Defendants.

MEMORANDUM OPINION & ORDER

KIMBA W. WOOD, United States District Judge

This is an interpleader action brought by Plaintiff XL Specialty Insurance Company ("XL") to resolve competing claims to the remaining $1,372,596.10 (the "Interpleaded Funds") of a $3 million financial services liability policy (the "Policy") purchased by non-party Capital L Group, LLC ("Capital L"), which provided insurance for Capital L's CEO, Defendant John R. Lakian, and its COO, Defendant Diane W. Lamm, with certain exceptions. XL interpleaded as defendants Lakian, Lamm, and Kobre & Kim LLP ("Kobre & Kim"). On January 15, 2015, the Honorable Analisa Torres granted motions to intervene by Eiseman Levine Lehrhaupt & Kakoyiannis, P.C. ("Eiseman"), Brief Carmen & Kleiman ("Brief Carmen"), and Merrill Communications LLC ("Merrill"), and denied motions to intervene from Knox, LLC d/b/a Knox, LLC of New York ("Knox") and DJW Advisors, LLC ("DJW"). ECF No. 68. On March 19, 2015, XL, Lakian, Lamm, Kobre & Kim, Eiseman, Brief Carmen, and Merrill filed a settlement agreement (the "Settlement Agreement"), ECF No. 87, which Judge Torres ordered on April 24, 2015, ECF No. 100. Following a decision by the Second Circuit Court of Appeals, Judge Torres vacated the order denying Knox and DJW's motion to intervene and the final judgment implementing the Settlement Agreement, and instead granted Knox and DJW's motion to intervene and a motion to intervene by Pangea Capital Management, LLC ("Pangea"). ECF No. 122. The case was transferred to the undersigned on November 11, 2016.

Before the Court are motions for summary judgment¹ filed by (1) Kobre & Kim, Eiseman, Brief Carmen, and Merrill (the "K & K" motion), (2) Knox and DJW (the "Knox" motion), and (3) Pangea. ECF Nos. 138, 143, 145.² Knox and Pangea each claim that they are entitled to the Interpleaded Funds; K & K moves to dismiss Knox's, DJW's, and Pangea's claims to the Interpleaded Funds, and moves for a judgment in accordance with the terms of the Settlement Agreement. For the reasons set forth below the Knox and Pangea motions are DENIED, and the K & K motion is GRANTED.

I. BACKGROUND³

1. The Policy

This interpleader action arises from an insurance policy, Financial Services Liability Policy Number ELU1236303–11, issued by XL to Capital L for the period of November 11, 2011, to November 11, 2012. K & K 56.1 Stmt. ¶ 1, ECF No. 137; Hansen Decl. Ex. 1 ("Policy"), Fin. Servs. Liab. Policy Decls. Items 1–3, ECF No. 140–1. The Policy provided for a maximum aggregate limit of liability of $3 million, of which $1,372,596.10 remains. K & K 56.1 Stmt. ¶ 11. That remainder, the Interpleaded Funds, was deposited with the Court on July 28, 2014, pursuant to Local Civil Rule 67.1 and as required by 28 U.S.C. § 1335. K & K 56.1 Stmt. ¶ 12; Dkt. Entry, July 31, 2014, Receipt No. 465401101200.

The Policy provides that "[t]he Insurer shall pay on behalf of the Insured Persons Loss resulting from Claims first made against the Insured Persons during the Policy Period ... for Wrongful Acts." K & K 56.1 Stmt. ¶ 3; Policy, Inv. Advisers Mgmt. Liab. Coverage Part § 1(A). The Policy also provides that "[t]he Insurer shall pay on behalf of the Adviser Loss which the Adviser is required or is permitted to pay ... resulting from Claims first made against the Adviser ... for Wrongful Acts." Policy, Inv. Advisers Mgmt. Liab. Coverage Part § 1(B).

The Policy defines "Insured Persons" as including "any past, present or future director, officer, or member of the Board of Managers of" Capital L. K & K 56.1 Stmt. ¶ 6; Policy, Inv. Advisers Mgmt. Liab. Coverage Part § II(D)(1). The Policy defines a "Loss" as including "damages, judgments, settlements or other amounts (including punitive, exemplary or multiplied damages where insurable by law) in excess of the Retention that the Insured is obligated to pay, and Defense Expenses, whether incurred by the Insurer or the Insured." K & K 56.1 Stmt. ¶ 5; Policy, Endorsement No. 6. The Policy defines a "Claim" as including, among other things, "any civil proceeding in a court of law or equity, or arbitration." K & K 56.1 Stmt. ¶ 10; Policy, Gen. Terms & Conditions, § 1(B)(2). The Policy defines a "Wrongful Act" as "any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty," and must arise, for an Insured Person, "solely by reason of his or her status as [an Insured Person]." K & K 56.1 Stmt. ¶ 7; Policy, Inv. Advisers Mgmt. Liab. Coverage Part § II(F)(1), (2).

The Policy states that "[i]t shall be the duty of the Insured to defend any Claim under this Policy." K & K 56.1 Stmt. ¶ 8; Policy, Gen. Terms & Conditions § II(B)(1). Further, "No Insured may incur any Defense Expenses or admit any liability for, make any settlement offer with respect to, or settle any Claim without the Insurer's consent, such consent not to be unreasonably withheld." K & K 56.1 Stmt. ¶ 9; Policy, Gen. Terms & Conditions § II(B)(2). "As a condition precedent to any right to payment under this Policy, the Insured shall give written notice to the Insurer of any Claim as soon as practicable after it is first made." Id. § II(C)(1).

The Policy excludes Loss in connection with any Claim that was "brought about or contributed to in fact by any: (1) intentionally dishonest, fraudulent or criminal act or omission or any willful violation of any statute, rule or law; or (2) profit or remuneration gained by any Insured to which Insured is not legally entitled." Id. § III(A). Once the limit of liability is reached, "all obligations of the Insurer under this Policy will be completely fulfilled and exhausted, and the Insurer will have no further obligations of any kind whatsoever under this Policy." Id. § II(J).

2. The Knox Action

In May 2012, Knox and DJW filed a complaint against Capital L, Lakian, Lamm, and JRL Investment Group, Inc. (not a party here) (the "Knox Action"). K & K 56.1 Stmt. ¶ 13; see Knox LLC, et al. v. Capital L Group, LLC, et al. , No. 651880/2012 (N.Y. Sup. Ct.). The complaint included allegations that Lakian and Lamm fraudulently induced Knox and DJW to invest over $2 million in Capital L and that they breached their fiduciary duties by misusing the investments for personal benefit. Knox 56.1 Stmt. ¶ 4, ECF No. 144. Lakian and Lamm initially retained Kobre & Kim to defend them. Compl. ¶ 39, ECF No. 2. When Kobre & Kim withdrew, Lakian hired Eiseman, and Lamm hired Brief Carmen. Id. ¶ 41. The Knox Action constitutes a "Claim" under the Policy, K & K 56.1 Stmt. ¶ 19, and on June 20, 2012, XL acknowledged coverage under the Policy for Lakian and Lamm. Knox 56.1 Stmt. ¶ 5; Compl. ¶ 38.

Despite being served with a copy of the complaint and, later, an amended complaint, Capital L failed to appear in the Knox Action. K & K 56.1 Stmt. ¶¶ 14–16. On January 3, 2013, XL's counsel sent a letter (the "January 2013 Letter") to Capital L's insurance broker that acknowledged that Knox and DJW had filed a motion for default judgment against Capital L, noted that Capital L had a duty to defend under the Policy, and requested information as to whom to contact at Capital L. Knox 56.1 Stmt. ¶ 8; Halpern Aff. Ex. F at 4, ECF No. 148–7. Knox and DJW's motion for a default judgment against Capital L was granted in July 2013. K & K 56.1 Stmt. ¶ 17; Knox , No. 651880/2012, Doc. No. 63 (N.Y. Sup. Ct. July 23, 2013). Default judgments against Capital L in favor of Knox and DJW totaling over $2.5 million were filed in the New York County Clerk's Office in March 2014. K & K 56.1 Stmt. ¶ 18; Knox 56.1 Stmt. ¶ 11.

Lakian and Lamm were charged, in February 2015, in a five-count criminal indictment that alleged conspiracy to commit securities fraud, wire fraud, and bank fraud, and two counts of securities fraud. Knox 56.1 Stmt. ¶¶ 18–19. Lakian and Lamm pled guilty to the two securities fraud counts in February 2016. Knox 56.1 Stmt. ¶ 20; Halpern Aff. Exs. M, N.

The parties disagree about whether (1) XL acknowledged coverage under the Policy for Capital L, (2) Capital L sought or obtained XL's consent before defaulting, and (3) XL was ever served with a copy of the default judgment against Capital L. K & K 56.1 Stmt. ¶¶ 20–22; Knox Resp. to K & K 56.1 Stmt. ¶¶ 20–22 (denying all three paragraphs); Pangea Resp. to K & K 56.1 Stmt. ¶¶ 20–22 (admitting all three paragraphs).

3. The Branigan Action

In addition to his role as a member of Capital L's Board of Managers, Lakian served as a managing member of Pangea from approximately 2009 to 2011. K & K 56.1 Stmt. ¶ 23. In June 2012, Pangea and one of Pangea's managing members, Mark Branigan, filed a complaint against Lakian and Lamm, among others, in New York State Supreme Court (the "Branigan Action"). K & K 56.1 Stmt. ¶ 24; see Spatola Decl. Ex. 3 ("Branigan Compl."), ECF No. 142–3. The allegations in the Branigan Action "concern[ed] the fiduciary obligations owed by the managers of Pangea to each other, and to Pangea, itself, and Lakian's abuse of that position of trust to perpetrate a fraud upon Branigan, Pangea, and its investors," with the assistance of Lamm. K & K 56.1 Stmt. ¶ 25 (internal quotation marks omitted); ...