Opinion
CIVIL ACTION NO. 02-CV-12174-PBS
April 28, 2004
MEMORANDUM ORDER
I. INTRODUCTION
Plaintiff Michael D'Amelio seeks a declaratory judgment against Defendants Federal Insurance Company and Chubb Custom Insurance Company with respect to the coverage provided by two insurance policies purchased in connection with the sale of his majority-owned company. Moving for partial summary judgment on Counts I and V, D'Amelio contends that the Directors and Officers ("DO") policy provides coverage for the amounts he paid in settlement of litigation brought against him by the buyer of the company. Cross-moving for partial summary judgment, Defendants argue there is no coverage because D'Amelio was sued in his capacity as a selling stockholder, not in his capacity as a director. In addition, Defendants contest the amount of loss. After hearing, the Court ALLOWS Plaintiff's motion for partial summary judgment with respect to the issue of coverage of the DO policy and DENIES Plaintiff's motion with respect to the issue of loss sustained by Plaintiff as a result of the distribution of the escrow fund in settlement of the litigation. The Court ALLOWS Defendants' motion for partial summary judgment on the issue of the MountainView property.
II. FACTUAL BACKGROUND
The following facts are undisputed, except where otherwise noted.
A. The Sale of TACC
From 1991 to 1999, D'Amelio served as President and Chief Executive Officer of TACC International Corporation ("TACC"), a sealant and adhesives company. He was also the majority shareholder. On September 17, 1998, TACC entered into a Stock Purchase and Sale Agreement ("SPSA") with Illinois Tool Works, Inc. and its wholly-owned subsidiary ITW Finance II, LLC (collectively, "ITW"), under which ITW purchased all of TACC's stock. The SPSA defines "Sellers" as "the persons identified on the signature pages hereto as the selling stockholders (the 'Sellers')." (Ex. D at 1.) D'Amelio signed the SPSA three times: on behalf of himself, on behalf of TACC, and on behalf of Jezebel Management Corporation, a corporation wholly owned by D'Amelio, which was the record owner of shares beneficially owned by D'Amelio. (Id. at 35, 37.)
Unless otherwise noted, Plaintiff's exhibits are ordered alphabetically while Defendants' exhibits are numbered.
Article II of the SPSA provided: "As an inducement to the Buyer to enter into this Agreement and to consummate the transactions contemplated hereby, the Company and the Sellers hereby represent and warrant to the Buyer as follows. . . ." (Id. at 5). The representations and warranties included, for example, guarantees that the audited financial statements as of June 30, 1997 and the unaudited financial statements as of June 30, 1998 were "true and complete" (§ 2.06); "The Company and each Subsidiary has good title to all of its assets, including the assets reflected on its balance sheet" (§ 2.22); and "all of the accounts receivable . . . shall be good and collectible and represent amounts due for bona fide sales of products actually made and services actually performed." (§ 2.24.)
The SPSA included an Escrow Agreement, which (1) secured the representations and warranties made by the Sellers, and (2) funded an earn-out provision securing TACC's obligation to meet financial targets for the period from July 1, 1998 to June 30, 1999. (See id. at §§ 1.03, 6.05.) Under that agreement, $4 million of the $130 million purchase price was placed in escrow. Section 6.02 of the SPSA provides:
Indemnification of Buyer: The Sellers hereby agree severally on a pro rata basis, and not jointly and severally, to indemnify and hold harmless the Buyer from and against any and all costs, losses, liabilities, damages, deficiencies and expenses, including, but not limited to, reasonable attorneys' fees and expenses actually incurred by the Buyer . . . arising directly out of any breach or failure to fully perform or observe any representation, warranty, covenant, or agreement of the Company contained in this Agreement. . . .
The Escrow Agreement provided in relevant part:
1.5 Claims for Indemnified Losses. The Escrow Agent shall pay promptly to ITW from the Escrow Amount the amount of all claims for Indemnified Losses . . . to the extent such amount is determined to be payable to ITW pursuant to Section 2 or 3 below.
1.6 Distribution of Escrow. The balance of the Escrow Fund, including any accrued interest, dividends or other income after satisfaction of the Indemnified Loss Claims, as herein provided, shall be distributed to the Stockholders as follows:
(i) The Escrow Agent shall deliver all or a portion of the Escrow Amount, as the case may be, to ITW upon the failure of the Company to achieve for the period of July 1, 1998 to June 30, 1999, (i) minimum EBITDA of $18,700.00 and (ii) minimum EBITA of $16,400,000, as determined in accordance with Section 1.03 of the Purchase Agreement. In connection with the foregoing, the Stockholders and ITW agree that for every One Dollar ($1.00) by which EBITA fails to meet $16,400,000, as determined in accordance with Section 1.03 of the Purchase Agreement, Four Dollars ($4.00) shall be paid to ITW out of the Escrow Amount. . . .B. The Insurance Policies
In connection with the sale of TACC to ITW, D'Amelio purchased two insurance policies from Defendants: a Representations and Warranties Policy ("RW Policy") bound on October 30, 1998 and a Directors and Officers Policy ("DO Policy") bound the following month. Although the policies were negotiated and purchased subsequent to the execution of the SPSA, the effective date of both policies was the same as the date of the SPSA: September 17, 1998.
The RW Policy, by its terms, provides coverage only for representations and warranties identified in the SPSA. It defines a "Wrongful Act" as:
any error, misstatement, misleading statement, act or omission, neglect or breach of any duty committed or attempted, or allegedly committed or attempted by any: (a) Insured Person in their capacity as shareholder, employee, director or officer of any Insured Organization; or (b) Insured Organization but solely in connection with the Representations and Warranties identified in the Declarations [identified in the SPSA].
(Ex. 3 at 8.)
Executive Liability Coverage Insuring Clause 1 of the DO Policy provides:
The Company shall pay on behalf of each of the Insured Persons all Loss . . . which the Insured Person becomes legally obligated to pay on account of any Claim first made against him, individually or otherwise . . . for a Wrongful Act committed, attempted, or allegedly committed or attempted by such Insured Person before or during the Policy Period.
(Ex. 2 at 3.)
The DO Policy defines "Loss" as "the total amount which any Insured Person becomes legally obligated to pay on account of each Claim . . . including, but not limited to, damages, judgments, settlements, costs, and Defense Costs." (Id. at 10.)
The DO Policy defines "Wrongful Act" as:
any error, misstatement, misleading statement, act, omission, neglect or breach of duty committed, attempted, or allegedly committed or attempted, by an Insured Person, individually or otherwise, in his Insured Capacity, or any other matter claimed against him solely by reason of his serving in such Insured Capacity.
(Id. at 11.)
Insured Capacity means "the position or capacity designated in Item 6 of the Declarations for this coverage section held by any Insured Person." Id. at 10. Item 6 includes "[a]ny person who has been, now is, or shall become a duly elected director or a duly elected or appointed officer of the Insured Organization." Id. at 1.
Two endorsements to the RW Policy outline the connection between the RW Policy and the DO Policy. By endorsement to the policy, the RW Policy was made excess to the DO policy. Endorsement 1 provides, in relevant part:
(1) This policy shall apply excess of the limits of liability set forth in [the DO Policy].
(2) The Limit of Liability and Deductible provision is amended by deleting the last paragraph in its entirety and replacing it with the following:
The Company's liability under this policy shall apply only to that part of Loss which is excess of the Deductible Amount set forth in the Declarations. Amounts paid for covered loss pursuant to the [DO Policy] shall be taken into account to determine whether the Deductible Amount for this policy has been exhausted.
(Ex. 3 at Endorsement 1).
An additional endorsement to the RW Policy provided that payments under the DO policy would reduce the RW Policy's $2.4 million deductible. Endorsement 2 to the RW Policy provides:
If any Loss covered by this policy is also covered under any other current policies, then this policy, subject to its limitations, conditions, provisions and other terms shall cover such Loss on a primary basis except that if any Loss covered by this policy is also covered by the Underlying Policy, then this policy, subject to its limitations, conditions, provisions and other terms, shall apply to the extent that the amount of such Loss is in excess of the amount of any payment from the [DO Policy].C. ITW Litigation
On September 17, 1999, ITW sent a demand letter to the Escrow Agent claiming that it was entitled to the $4 million escrow fund because of breaches of various representations set forth in the SPSA by the Sellers. In April 2000, D'Amelio and other TACC officers and stockholders brought suit against ITW seeking: (1) a declaration that ITW was not entitled to the escrow funds, and (2) a declaration that they had not breached any of the representations and warranties set forth in the SPSA. ITW filed a counterclaim against D'Amelio and others, alleging, among other things, that the Stockholders and TACC directors and officers, including D'Amelio, had misrepresented material information concerning TACC. (Ex. C at ¶¶ 41-49.)
On October 31, 2002, D'Amelio and ITW, and others, including other former TACC stockholders and MountainView Realty Corporation, a company owned 80% by D'Amelio's mother and 20% by D'Amelio, entered into a Settlement Agreement and Mutual General Release (the "Settlement Agreement"). (See Ex. GG at 1). The parties designated the term "Shareholders" to refer to several parties, including D'Amelio. (Id.) Under the Settlement Agreement, the Shareholders agreed to pay ITW a sum of $10.5 million. (¶ 2(a).) That payment had two components: (1) the Shareholders delivered to ITW a wire transfer in the amount of $5,707,472.24, and (2) the entire escrow amount plus interest, totaling $4,733,442.72. (¶ 2(c)). The Settlement Agreement was in consideration for the agreement of ITW to release all claims against the shareholders, (Id. at ¶ 2(d)), and specified in relevant part:
the Shareholders and ITW Finance shall, pursuant to Section 2.4 of the Escrow Agreement, deliver written notice to the Escrow Agent . . . stating that the Escrow Agent must immediately (i) deliver to ITW a payment in the amount of the September 30 Escrow Balance. . . .
(§ 2(d).) Section 2.4 of the Escrow Agreement, entitled "Mutual Resolution," provided in relevant part:
To the extent the amount of such Indemnified Loss Claim is finally resolved, ITW and the Stockholders' Representative shall sign a written statement setting forth such amount and submit such statement to the Escrow Agent. ITW shall then be entitled to receive payment of such amount from the Escrow Fund. The balance of the Escrow Fund shall be retained by the Escrow Agent until the earliest of (i) the Escrow Agent's receipt of a further statement signed by the Stockholder's Representative and ITW, or (ii) and Award relating to such disputed amount, or (iii) the termination of the Escrow pursuant to Section 2.3 hereof, or (iv) a distribution pursuant to Section 1.06 [sic] hereof.
D'Amelio contributed $6,847,050, or 65.21% of the total $10.5 million payment to ITW. D'Amelio's share of the payment was determined based on his percent ownership of stock in TACC when TACC was sold to ITW. (Ex. 42.)
The Settlement Agreement also provided for the sale to ITW of certain property that had been leased from MountainView Realty Corporation to TACC. At the time of the TACC-ITW transaction in 1998, MountainView owned the Rockland, Massachusetts TACC facility. MountainView leased that property to TACC, both before and after TACC was acquired by ITW. After the inception of the litigation between ITW and the former TACC shareholders, MountainView sued ITW to evict ITW from the facility. As part of the Settlement Agreement, ITW purchased the Rockland property from MountainView for $2.75 million. (Ex. GG at 3.)
Section 3(e) of the Settlement Agreement provided:
ITW acknowledges that MountainView Realty values the total consideration for its conveyance of the Premises as aforesaid (including cash and non-cash consideration) to be Three Million Five Hundred Thousand Dollars ($3,500,000) based on a market appraisal of the Premises performed by John E. Kline, MAI dated as of July 17, 1998.
At the time of the settlement, D'Amelio sought Chubb's written consent to settle. Chubb agreed "not to raise lack of written consent as a defense" and had no objection to D'Amelio's moving forward with the settlement. (Ex. HH.)
By letter dated November 6, 2002, D'Amelio sought reimbursement of settlement and defense costs totaling $12,228,699, pursuant to the RW and DO Policies. (Ex. 42.) This amount included, among other things, D'Amelio's portion of the cash amount paid to ITW, including the escrow amount, and the $750,000 difference between the Rockland property's appraised value and actual sale price. Defendants have denied D'Amelio's requests for reimbursement.
III. DISCUSSION
A. Standard of Review
"Summary judgment is appropriate when 'the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law.'" Barbour v. Dynamics Research Corp., 63 F.3d 32, 36 (1st Cir. 1995) (quoting Fed.R.Civ.P. 56(c)). "To succeed [in a motion for summary judgment], the moving party must show that there is an absence of evidence to support the nonmoving party's position." Rogers v. Fair, 902 F.2d 140, 143 (1st Cir. 1990); see also Celotex Corp. v. Catrett, 477 U.S. 317, 325 (1986).
"Once the moving party has properly supported its motion for summary judgment, the burden shifts to the non-moving party, who 'may not rest on mere allegations or denials of his pleading, but must set forth specific facts showing there is a genuine issue for trial.'" Barbour, 63 F.3d at 37 (quoting Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256 (1986)). "There must be 'sufficient evidence favoring the nonmoving party for a jury to return a verdict for that party. If the evidence is merely colorable or is not significantly probative, summary judgment may be granted.'" Rogers, 902 F.2d at 143 (quotingAnderson, 477 U.S. at 249-50) (citations and footnote inAnderson omitted). The Court must "view the facts in the light most favorable to the non-moving party, drawing all reasonable inferences in that party's favor." Barbour, 63 F.3d at 36. B. Duty to Indemnify
Plaintiff argues that under the plain language of the DO Policy, D'Amelio is entitled to coverage in his insured capacity as an officer of TACC because he allegedly performed a "Wrongful Act." Specifically, D'Amelio signed the SPSA in multiple capacities, not just as a stockholder, but also in his individual capacity and as President of TACC, and accordingly, any misstatements in the representations and warranties section of the SPSA are "wrongful acts" by an "insured person, individually or otherwise, in his insured capacity" in the DO policy. To buttress his interpretation of the policy language, D'Amelio points to the parties' designation of the RW policy as "excess" insurance over the coverage provided by the DO policy, which in plaintiff's view necessarily reflects a shared understanding that he signed the SPSA in an insured capacity. Plaintiff queries: why else would the RW policy, which covers only misstatements in the SPSA, be set up as an excess policy? Because the two contracts are part of the same transaction and one cross-references the other, Plaintiff urges the Court construe them to give reasonable meaning to both policies' provisions. See Fenoglio v. Augat, Inc., 50 F. Supp.2d 46, 56-57 (D. Mass. 1999), aff'd, 254 F.3d 368 (1st Cir. 2001) ("Separate instruments in the same transaction may be read together when, for example, the instruments are executed simultaneously, cross-reference one another, affect the same subject matters and parties, and have interdependent provisions.").
Conceding that D'Amelio signed the SPSA in an insured capacity, Defendants respond that D'Amelio's losses are not covered under the DO Policy because ITW's counterclaims with respect to the SPSA were asserted against D'Amelio solely in his capacity as a shareholder of TACC, not in his capacity as TACC's President. According to Defendants, the trigger for coverage under the DO Policy is not whether misdeeds may have been committed by the Insured in his capacity as a director or officer, or even whether ITW could have sued D'Amelio as President, but rather, whether ITW's actual claims in the litigation giving rise to the Loss were asserted against him in that insured capacity.
The issue, then, is whether Defendants' obligation to indemnify an insured officer under a DO policy hinges on the formal capacity in which he was sued by a third party. Under Massachusetts law, the pleadings play a role in the analysis of an insurer's obligations but they are not dispositive either in the context of a duty to defend or a duty to indemnify. With respect to the former, an insurer's obligation to defend its insured is measured by the allegations of the underlying complaint. "[I]f the allegations in the complaint are 'reasonably susceptible' of an interpretation that they state or adumbrate a claim covered by the policy terms, the insurer must undertake the defense." Sterilite Corp. v. Continental Cas. Co., 458 N.E.2d 338, 340, 17 Mass. App. Ct. 316, 318 (1983). "Otherwise stated, the process is one of envisaging what kinds of losses may be proved as lying within the range of allegations of the complaint and then seeing whether any such loss fits the expectation of protective insurance reasonably generated by the terms of the policy." Id. at 341. See also Winnacunnet Coop. Sch. Dist. v. Nat'l Union Fire Ins. Co., 84 F.3d 32, 35-36 (1st Cir. 1996) ("A court may inquire into the underlying facts to avoid permitting the pleading strategies, whims and vagaries of third party claimants to control the rights of parties to an insurance contract."); Lee v. Aetna Cas. Sur. Co., 178 F.2d 750, 752 (2d Cir. 1949) (Hand, J.) (remarking on "plasticity of modern pleading" and holding that where "the complaint comprehends an injury which may be within the policy . . . the promise to defend includes it").
The duty to indemnify is not circumscribed by the formal nature of the pleadings. Rather, "the duty to indemnify depends upon the facts established at trial and the theory under which judgment is actually entered in the case." Home Ins. Co. v. St. Paul Fire Marine Ins. Co., 229 F.3d 56, 66 (1st Cir. 2000). Where the litigation is settled prior to trial, "the duty to indemnify must be determined in the basis of the settlement . . . Travelers Ins. Co. v. Waltham Indus. Labs. Corp., 883 F.2d 1092, 1099 (1st Cir. 1989) (stating that whether insurer had duty to indemnify depends on whether any portion of the settlement was made in compensation for acts that fall within insurer's coverage).
The crucial issue is not how a third party (in this case, ITW) worded its claim, but rather whether ITW's theory of litigation, and the eventual settlement, encompassed allegedly wrongful conduct by D'Amelio in his insured capacity, as defined in the DO Policy. That D'Amelio acted as a selling shareholder does not defeat coverage. "[W]here it is official conduct that is complained of . . . the fact that directors are also stockholders is 'immaterial.'" Raychem Corp. v. Federal Ins. Co., 853 F. Supp. 1170, 1184 (N.D. Cal. 1994) (citing Nodaway Valley Bank v. Continental Gas. Co., 715 F. Supp. 1458, 1466 (W.D. Mo. 1989)) (finding coverage where corporation's officers were acting in their capacity as officers and directors). Cf. Beck v. American Cas. Co., 1990 WL 598573, at *14-*15 (W.D. Tex., Apr. 12, 1990) (finding insurer had no duty to pay settlement where underlying complaint alleged misrepresentations in agreement specifically executed by directors in their capacity as shareholders); Olson v. Federal Ins. Co., 219 Cal.App.3d 252, 261-62 (1990) (insurer was not obligated to indemnify plaintiff where "allegations were directed toward plaintiff's asserted interference with [a separate corporation] as part owner [of that corporation] rather than acts undertaken as a director of Olson Farms") (emphasis in original).
A review of ITW's claims and the ultimate settlement reveals that the claims were based on alleged misconduct by TACC management, including D'Amelio in his insured capacity, as well as by shareholders. ITW alleged in its counterclaim that "TACC's management ignored ITW's requests for information and misrepresented material aspects of TACC's financial condition." (Ex. C at ¶ 17.) D'Amelio (specifically named) "knew or should have known, that TACC could not use certain rework material" (¶ 41) and "had a duty to reserve on TACC's financial statements the anticipated costs of this waste disposal and reduce the value of TACC's inventory accordingly." (¶ 45.) ITW further alleged that D'Amelio and others had a duty under Section 2.06 of the SPSA to show these expenses on TACC's financial statements, or, alternatively, pursuant to Section 2.27 "to disclose to ITW Finance that they had not properly accounted for the unusable rework material." (¶ 46.) The amended counterclaims alleged: "As of 1997 and possibly earlier, D'Amelio and Bero [TACC's Chief Financial Officer] knew, or should have known, that certain rework and other material, carried on the books as inventory, constituted or soon would become hazardous waste required by law to be removed from TACC's premises in a timely fashion." (Ex. T at ¶ 46.) The amended counterclaims, which included a count for fraud and for violation of Mass. Gen. Laws ch. 93A, also alleged that TACC and its stockholders intentionally misrepresented accounts receivable. (¶¶ 54-58.)
Defendants make much of the fact that the counterclaim collectively refers to defendants as stockholders. (¶ 12.) This emphasis is overblown. The original counterclaim against D'Amelio specifically identifies him as an "individual" who was at all relevant times President and a stockholder of TACC (Ex. C at ¶ 2.) D'Amelio was sued individually for fraud and violations of Chapter 93A, not just for breach of contract. The underlying conduct alleged by ITW necessarily implicated D'Amelio in his official capacity. Thus, the fact that the complaint uses the collective term "Stockholders" or "Sellers" is not controlling.
Accordingly, based on the allegations in the amended counterclaim and the SPSA, the Court concludes that the basis for the Settlement Agreement and Mutual General Release encompassed D'Amelio's acts in his insured capacity.
C. Loss
D'Amelio seeks summary judgment of his assertion that the escrow funds paid to ITW in settlement of the underlying litigation constitute "Loss" under the insurance policies. This issue turns out to be more complicated than it appears at first blush.
Defendants contend D'Amelio was never legally entitled to any portion of the $4 million escrow, or at least that a factual question remains as to D'Amelio's entitlement to this fund pending a determination of whether TACC met the specified earnings targets. Defendants assert that, pursuant to Sections 1.5 and 1.6 of the Escrow Agreement, D'Amelio and the other sellers were entitled to receive funds from the Escrow Agent only if: (1) funds remained in the escrow account after the Escrow Agent paid ITW for any indemnified loss claims, and (2) TACC achieved a specified minimum level of earnings within the first fiscal year after ITW's acquisition. By definition, Defendants maintain, Plaintiff could not have sustained a loss on funds because his right to those funds was contingent. Therefore, distribution of those funds to ITW pursuant to a settlement agreement does not constitute a loss under the policies.
Plaintiff maintains that he became legally obligated to pay ITW the escrow amount, among other amounts, by signing the Settlement Agreement. The Settlement Agreement explicitly provided: "In further consideration for the agreement of ITW hereunder to release all claims against the Shareholders on the terms set forth in this Agreement, the Shareholders and ITW Finance pursuant to Section 2.4 of the Escrow Agreement shall . . . deliver written notice to the Escrow Agent . . . stating that the Escrow Agent must immediately (i) deliver to ITW a payment in amount of the September 30 Escrow Balance . . ." (Ex. GG at ¶ 2(d).)
Resolution of this dispute depends on the labyrinthine interplay between the SPSA, the Escrow Agreement, and the Settlement Agreement. Article VI of the SPSA governs the circumstances for indemnification of loss incurred by the buyer arising out of a breach of a representation or warranty. (Ex. D at § 6.02.) To secure the seller's obligation under the representations and warranties, the sellers established an escrow of $4,000,000. (§§ 1.03(a)(i), 6.05.) The escrow also secured the obligation to meet certain minimum earnings. (§ 1.03(a)(ii).) Section 1.6 of the Escrow Agreement specifies that only after satisfaction of the indemnified loss claim pursuant to Section 1.5 can the Escrow Agent distribute the "balance of the escrow" pursuant to Section 1.6 for, among other things, failure to meet earning targets.
D'Amelio was legally obligated under the settlement to forfeit his contingent right to the escrow account. However, based on the plain language of the Escrow Agreement, the value of that contingent right may have been zero because it is undisputed that the earning targets have not been met. TACC argues that it met the earning targets because of payments under a business interruption insurance policy. The record is inadequate to resolve this dispute. Accordingly, summary judgment on this issue is DENIED.
3. MountainView Property
D'Amelio also claims he is entitled to reimbursement of the $750,000 difference between the premises' appraised value as provided in the Settlement Agreement, and their actual sale price.
While D'Amelio contends he owes MountainView the $750,000, he has produced insufficient evidence that he is legally obligated to pay that amount to MountainView or any other person. He has not executed a note or any other writing. At most, he proffers his deposition testimony that "either myself personally or Jezebel Management will owe MountainView Realty that $750,000 because myself and Jezebel were the settling parties in the ITW lawsuit and that's the reason that MountainView had to be sold under market value." (Dep. Tr. 174). Jezebel is not insured under the policy. Moreover, this vague statement, standing alone, is insufficient to demonstrate a legal obligation of the insured. See Jordan-Milton Machinery, Inc. v. F/V Teresa Marie, II, 978 F.2d 32, 35 (1st Cir. 1992) (citing Restatement (Second) of Contracts § 33 (1981)) (holding oral statement "We can do this deal" too vague and uncertain to constitute and enforceable contract); Bell v. B.F. Goodrich Co., 359 Mass. 763, 270 N.E.2d 926 (1971).