Opinion
No. 97 Civ. 5525 (MBM).
August 14, 1998
BORIS FELDMAN, ESQ. LLOYD WINAWER, ESQ. Wilson Sonsini Goodrich Rosati, Palo Alto, CA. (Attorneys for Plaintiffs)
ALAN J. JOAQUIN, ESQ. MICHAEL L. GASSMANN, ESQ. Drinker Biddle Reath LLP Washington, DC. (Attorney for Defendant)
GINO ZONGHETTI, ESQ. Kenny Stearns, New York, NY. (Attorney for Defendant).
OPINION AND ORDER
In this diversity action, David Zunenshine, Michael Zunenshine, Howard J. Zunenshine, Frederick W.Z. Lulof, Earl Takefman, and Kenneth Bloom, former directors and officers of SLM International, Inc. ("SLM"), sue Executive Risk Indemnity, Inc. ("ERI"), for breach of an insurance contract. Plaintiffs allege that ERI issued a directors and officers liability policy that requires it to pay a judgment entered against plaintiffs, as well as their legal expenses, in a lawsuit brought against them by former noteholders of SLM. ERI contends that this lawsuit is excluded from coverage by the policy's "pending litigation" and "prior notice" provisions. The parties cross-move for summary judgment pursuant to Fed.R.Civ.P. 56(c). For the reasons stated below, plaintiffs' motion is denied, ERI's motion is granted, and the complaint is dismissed.
I.
The facts relevant to these motions are undisputed: SLM manufactures and markets sporting goods, toys, and fitness products in the United States and Canada. (Compl. ¶ 14) Before it filled for bankruptcy protection in October 1995, plaintiffs managed SLM in the following capacities: David Zunenshine was chairman of the board and a senior executive officer; Michael Zunenshine was a director; Howard J. Zunenshine was co-chief executive officer and a director; Lulof was a director; Takefman was co-chief executive officer and a director; and Bloom was vice-president and chief-financial officer. (Id. ¶¶ 4-9)
A. The Policy
In May 1996, ERI issued a directors and officers liability policy to SLM (the "Policy"). (Id. ¶¶ 11-12) The Policy was a "claims made" insurance policy which provided SLM's directors and officers with $15 million in primary coverage for losses arising from claims made against them during the policy period. (Id. ¶ 12) The policy period was from May 24, 1996, through May 24, 1997. (Id.)
In contrast to an "occurrence" policy, which protects the insured from liability for acts committed during the policy period, a "claims made" policy protects the holder only from claims made during the policy period. See St. Paul Fire Marine Ins. Co. v. Barry, 438 U.S. 531, 538 n. 3 (1978);Windham Solid Waste Management Dist. v. National Cas. Co., No. 97 Civ. 9536, 1998 WL 327886, at *3 (2d Cir. June 22, 1998).
The Policy contains certain exclusions, two of which are implicated here. It provides as follows:
The Underwriter will not pay Loss, including Defense Expenses, for Claims based upon, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving;
(1) any fact, circumstance, situation, transaction, event or Wrongful Act underlying or alleged in any prior and/or pending litigation or administrative or regulatory proceeding as of May 24, 1996; [the "pending litigation exclusion"]
(2) any fact, circumstance, situation, transaction, event or Wrongful Act which, before May 24, 1996, was the subject of any notice given under any policy of directors and officers liability or other similar insurance. [the "prior notice exclusion"]
(Pl. Rule 56.1 Statement Ex. B ¶ III(C)) The Policy defines "Wrongful Act" to mean:
(1) any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty by an Insured Person in his or her capacity as a director or officer of the Company;
(2) any matter asserted against an Insured Person solely by reason of his or her status as a director of the Company; and
(3) any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty by an insured Person in his Outside Capacity.
(Id. ¶ II (M))
B. The Noteholders' Lawsuit
On May 8, 1997, plaintiffs notified ERI that a lawsuit had been filed against them by a group of institutional investors who had purchased $71 million in unsecured notes from SLM in March 1994 (the "Noteholders' Lawsuit"). (Id. Ex. D) The Noteholders' Lawsuit alleged that plaintiffs had negligently misrepresented SLM's financial condition in the months before the notes were sold. (Id. Ex. A ¶ 1) Specifically, the noteholders claimed that plaintiffs had distributed a memorandum concerning the proposed sale in December 1993 which falsely stated that: 1) SLM's net income for the first three quarters of 1993 had increased by 54.3% to $18.0 million (id. ¶ 19); 2) SLM spends only 3-5% of its sales on television advertising (id. ¶ 21); 3. Leither a preliminary injunction issued against SLM, nor the underlying trademark infringement action filed by one of its competitors, had materially affected SLM's financial condition. (Id. ¶ 22). The Noteholders' Lawsuit alleged also that plaintiffs reaffirmed each of these statements in the representations and warranties that were given to the noteholders when the deal closed on March 4, 1994. (Id. ¶ 29-31)
Plaintiffs recently settled the Noteholders' Lawsuit for $12.75 million. Equitable Assurance Life Ins. Soc'y v. Zonenshine, No. 97 Civ. 3159 (S.D.N.Y. consent judgment filed Mar. 12, 1998).
C. The Prior Shareholders' Lawsuit
On May 6, 1994, four of the six plaintiffs in this action were sued by a class of former SLM shareholders alleging certain violations of the federal securities laws (the "Shareholders' Lawsuit"). (Pl. Rule 56.1 Statement Ex. G) The Shareholders' Lawsuit alleged that plaintiffs issued reports, press releases, and made other public statements between July 12, 1993, and November 21, 1994, that contained materially false and misleading information about SLM's financial condition. (Id. ¶¶ 1-3). The allegedly false statements concerned, among other things, SLM's net income for the first three quarters of 1993, the percentage of its sales spent on television advertising, and the effect the trademark infringement action had had on its financial condition. (Id. ¶¶ 40, 56, 59) The complaint alleged also that plaintiffs made these statements, inter alia, to prevent SLM's investment rating from being downgraded before the notes could be sold to the institutional investors in March 1994. (Id. ¶¶ 3, 68, 98)
Michael Zunenshine and Frederick Lulof were not named as defendants in that lawsuit.
In May 1994, plaintiffs notified the Chubb Insurance Company of Canada ("Chubb"), SLM's former directors and officers liability insurer, that the Shareholders' Lawsuit had been filed against them and provided Chubb with a copy of the complaint. (Id. Ex. L) In July 1996, plaintiffs settled the Shareholders' Lawsuit for $2.9 million plus costs and attorney's fees. Kitsos v.Zunenshine, No. 94 Civ. 3327 (S.D.N.Y. order and final judgment filed July 24, 1996).
D. Procedural History
Plaintiffs filed suit against ERI on July 25, 1997, seeking payment of the judgment in the Noteholders' Lawsuit and the legal fees they incurred in defending that action. ERI does not dispute that the Noteholders' Lawsuit is a "claim" as defined by the policy, or that plaintiffs notified it of that claim within the policy period. (ERI Mem. at 6 n. 5) Rather, it argues that the Noteholders' Lawsuit is excluded from coverage by the Policy's "pending litigation" and "prior notice" provisions. Plaintiffs concede that the Shareholders' Lawsuit was pending on May 24, 1996, the beginning of the policy period, and that they had given notice of that lawsuit to Chubb prior to that date. (Pl. Rule 56.1 Statement ¶¶ 9, 11) Nevertheless, they argue that neither the "pending litigation" or "prior notice" exclusions applies here.
II.
Summary judgment is appropriate where "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 a judgment as a matter of law." Fed.R.Civ.P. 56(c). To defeat a motion for summary judgment, the non-movant must set forth specific facts which establish a genuine issue for trial, or demonstrate that the moving party is not entitled to judgment as a matter of law. Fed.R.Civ.P. 56(e); see Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 250 (1986).
Under New York law, which the parties agree governs this action, "`the initial interpretation of a contract is a matter of law for the court to decide.'" K. Bell Assoc, v. Lloyd's Underwriters, 97 F.3d 632, 637 (2d Cir. 1996) (quoting Readco, Inc. v. Marine Midland Bank, 81 F.3d 295, 299 (2d Cir. 1996)). "Included in this initial interpretation is the threshold question of whether the terms of the contract are ambiguous." Alexander Alexander Serv., Inc. v. Certain Underwriters at Lloyd's, London, 136 F.3d 82, 86 (2d Cir. 1998). Contract terms are ambiguous if they suggest "more than one meaning when viewed objectively by a reasonably intelligent person who has examined the context of the entire integrated agreement and who is cognizant of the customs, practices, usages and terminology as generally understood in the particular trade or business." Lightfoot v. Union Carbide Corp., 110 F.3d 898, 906 (2d Cir. 1997).
However, a contrast is not ambiguous "merely because the parties urge different interpretations in the litigation. The court is not required to find the language ambiguous where the interpretation urged by one party would strain the contract language beyond its reasonable and ordinary meaning." Hunt Ltd, v. Lifechultz Fast Freight, Inc., 889 F.2d 1274, 1277 (2d Cir. 1989). When a contract is not ambiguous, the court "should assign the plain and ordinary meaning to each term and interpret the contract without the aid of extrinsic evidence." Alexander, 136 F.3d at 86. It follows that the court should not consider extrinsic evidence regarding the parties' intent unless the contract is ambiguous, in which case disputed issues of fact will usually preclude deciding the case on summary judgment. See Seiden Assocs, v. ANC Holdings, Inc., 959 F.2d 425, 428-29 (2d Cir. 1992).
Furthermore, the insurer bears the burden of proving that the policy's exclusions "clearly and unmistakably" apply to the insured's claims. Village of Sylvan Beach v. Travelers Indem, Co., 55 F.3d 114, 115-16 (2d Cir. 1995). Where, as here, a "pending litigation" or "prior notice" exclusion is at issue, and there has been no judicial determination of liability in the underlying lawsuits, the insurer may rely on the facts as alleged in the complaints to demonstrate that an exclusion applies. See Home Ins. Co. of Ill, (N.H.) v. Spectrum Info. Techs., Inc., 930 F. Supp. 825, (E.D.N.Y. 1996) ("Spectrum"); see also Bensalem Township v. International Surplus Lines Ins. Co., No. 91 Civ. 5315, 1992 WL 142024, at *2 (E.D.Pa. June 15, 1992) (holding that application of "pending litigation" exclusion turns on comparison of facts and circumstances as alleged in complaints), rev'd on other grounds, 38 F.3d 1303 (3d Cir. 1994); cf. Sylvan Beach, 55 F.3d at 116 (holding that insurer had no duty to defend lawsuit where "`the allegations of the complaint cast that pleading solely and entirely within the policy exclusions'") (quoting Technicon Elecs. Corp. v.American Home Assurance Co., 74 N.Y.2d (6, 73, 544 N.Y.S.2d 531, 533 (1989)).
Examination of the Policy's terms, and a comparison of the two lawsuits at issue here, demonstrates that ERI has carried this burden. The Policy's "pending litigation" and "prior notice" exclusions are clear and unambiguous. By their terms, they exclude coverage for claims "arising out of, directly or indirectly resulting from, in consequence of, or in any way involving any fact, circumstance, situation, transaction, event or Wrongful Act" alleged in a pending lawsuit or made the subject of a prior notice given to another insurer. (Pl. Rule 56.1 Statement Ex. B ¶ III(C)) "Wrongful Act" includes "any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty" by a director or officer in his official capacity. (Id. ¶ II(M)) Nothing in the plain language of either exclusion is ambiguous.
Indeed, the district court in Bensalem Township, when called upon to interpret a similarly-worded "pending litigation" exclusion, held that:
The language of the policy exclusion is clear and unambiguous: any claim in any way involving the same fact, circumstance, or situation as is the subject of pending litigation is to be excluded from coverage. By the unambiguous use of words as broad as "fact," "circumstance" or "situation," it is clear that coverage does not depend upon the pleader's art but rather upon "underlying" facts.
1992 WL 142024, at *2. Although only two courts in this Circuit have had occasion to interpret "pending litigation" or "prior notice" exclusions in "claims made" insurance policies governed by New York law, those courts similarly have focused on "whether there was a sufficient factual nexus" between the two lawsuits.Spectrum, 930 F. Supp. at 850; see also David v.American Home Assurance Co., No. 95 Civ. 10290, 1997 WL 160367, at *1 (S.D.N.Y. Apr. 3, 1997) (denying insurer's motion to dismiss based on "pending litigation" and "prior notice" exclusions, inter alia, to permit parties to conduct discovery on the "factual connections among the various lawsuits . . .").
As noted, the Third Circuit reversed the district court's order dismissing Bensalem Township's lawsuit against its directors and officers liability insurer. See 38 F.3d at 1315. However, the Court did so to permit Bensalem Township to conduct discovery on its alternative claim that the insurer changed the language of the "pending litigation" exclusion without its consent when it renewed the policy. See Id. at 1312. Here, by contrast, there is no dispute that SLM was aware of the Policy's terms. It also bears mention that the Third Circuit in Bensalem Township explicitly adopted the district court's reading of the "pending litigation" exclusion, stating that "in our view, the policy unambiguously excludes coverage for claims such as the ones at issue here." Id.
Comparing the Noteholders' and Shareholders' Lawsuits reveals that there is a strong factual nexus between the two. The Noteholders' Lawsuit alleged that plaintiffs misrepresented SLM's financial condition both in December 1993 and in March 1994 by issuing false statements concerning; SLM's net income for the first three quarters of 1993, the percentage of its sales spent on television advertising, and the effect of the trademark infringement action. Similarly, the Shareholders' Lawsuit alleged that four of the same six plaintiffs made virtually identical false statements in reports, press releases, and other public statements issued between July 12, 1993, and November 21, 1994. That lawsuit alleged also that plaintiffs made these statements to prevent SLM's investment rating from being downgraded before the notes could be sold. Because the same "fact[s], circumstance[s], situation[s], transaction[s], [and] event[s]" underlie both the Noteholders' and Shareholders' Lawsuits, plaintiffs' claims are excluded from coverage by the Policy's "pending litigation" and "prior notice" provisions.
Plaintiffs argue that the two lawsuits involved different parties, legal theories, "Wrongful Act[s]," and requests for relief. (Pl. Mem. at 7-8). They stress that the Noteholders' Lawsuit was based on false statements plaintiffs allegedly made to the noteholders in the offering memorandum and at the closing, whereas the Shareholders' Lawsuit arose from false statements plaintiffs allegedly made to the general public. (Id.) However, these small differences are not material given the explicit language of the Policy at issue here.
Nothing in the Policy requires that a claim involve precisely the same parties, legal theories, "Wrongful Act[s]," or requests for relief for the "pending lawsuit" or "prior notice" exclusions to apply. Indeed, both exclusions are phrased in the disjunctive, that is, a claim is excluded if it arises out of "any fact, circumstance, situation, transaction, event or Wrongful Act," alleged in a pending lawsuit or made the subject of a prior notice. (Pl. Rule 56.1 Statement Ex. B ¶ III(C) (emphasis added)). To read the additional terms suggested by plaintiffs into these exclusions would be at the same time to render them virtually meaningless: a claim would be excluded only if it were based on an identical lawsuit or were the subject of an identical prior notice given to another insurer. However, it is axiomatic that a court should not adopt an interpretation of a contract that has "the effect of rendering at least one clause superfluous or meaningless. . . ." Garza v. Marine Transport Lines, Inc., 861 F.2d 23, 27 (2d Cir. 1988).
Finally, this reading of the "pending litigation" and "prior notice" exclusions is consistent with the purpose behind "claims made" insurance, i.e. "to limit [the insurer's] liability to a fixed period of time." United States v. A.C. Strip, 868 F.2d 181, 187 (6th Cir. 1989). This increased certainty permits an insurer to charge lower premiums for this particular species of policy. See Calocerinos Spina Consulting Eng'rs P.C. v.Prudential Reinsurance Co., 856 F. Supp. 775, 777-78 (W.D.N.Y. 1994). To permit an insured to recover for claims arising from the same "fact[s], circumstance[s], situation[s], transaction[s], event[s] or Wrongful Act[s]" alleged in a pending lawsuit or made the subject of a prior notice given to another insurer "would be to grant the insured more coverage than he bargained for and paid for, and to require the insurer to provide coverage for risks not assumed." A.C. Strip, 868 F.2d at 187.
For the above reasons, plaintiffs' motion for summary judgment is denied, ERI's motion is granted, and the complaint is dismissed.
SO ORDERED.