JIM D. PAPPAS

Josh Everett, Elam & Burke, Boise, ID, for Plaintiff. Cliff Brown and Bo Davies, Holzer & Edwards, Chartered, Boise, ID, for Defendants PayrollAmerica and Jeremy Gugino, Chapter 7 Trustee.

MEMORANDUM OF DECISION

JIM D. PAPPAS, Bankruptcy Judge.

Introduction

Philadelphia Indemnity Insurance Co. (“PIIC”) insured chapter 7 debtor PayrollAmerica, Inc. (“Debtor”), a payroll processing services company, its officers, directors, and employees (collectively, with Debtor, “Insureds”), under an Accountants Professional Liability Insurance Policy (“the Policy”). Dkt. No. 24–1. Under the Policy, PIIC had a duty to defend the Insureds against claims for negligent acts, errors, or omissions in the performance of professional services. Id. PIIC also had a duty to indemnify the Insureds as to damages resulting from any such claims. Id.

Several of Debtor's former clients sued the Insureds when Debtor did not provide contracted-for services. In response, Debtor filed for chapter 7 bankruptcy protection. PIIC initiated this adversary proceeding to determine its duties under the Policy, and has now moved for summary judgment, seeking a declaration by the Court that it has no duty to defend or indemnify Debtor in those lawsuits, or in any future action based on the same premise. Debtor and its chapter 7 case trustee, Jeremy Gugino (“Trustee”), filed a cross-motion for summary judgment, asking the Court to declare PIIC is indeed obligated to defend and indemnify Debtor in all such actions under the Policy. A hearing on the parties' motions was held August 23, 2011, and the Court took both summary judgment motions, as well as two PIIC motions to strike, under advisement. Having considered the record, the parties' submissions, and applicable law, this Memorandum disposes of all pending motions. Rules 7052, 9014.

Background

I. The Policy.

Under the Policy, which covered the Insureds from May 1, 2008, to May 1, 2009, PIIC has a duty to indemnify the Insureds against damages incurred as a result of any negligent act, error, or omission in the performance of professional services. Dkt. No. 24–1. In addition, the Policy imposes the duty on PIIC to defend the Insureds against covered claims. Id. To assist in understanding the Policy, certain terms as used therein are expressly defined. Id. As relevant here, those definitions include:

I. “CLAIM” MEANS: a demand made upon any INSURED for DAMAGES, including, but not limited to, service of suit or institution of arbitration proceedings against any INSURED.

All CLAIMS arising out of the same act, error or omission, or acts, errors or omissions which are logically or causally connected in any way shall be deemed as a single CLAIM. All such CLAIMS whenever made shall be considered first made on the date on which the earliest CLAIM arising out of such act, error or omission was first made and all such CLAIMS are subject to the same limits of liability and deductible.

* * * *

VI. “INSURED” MEANS:

A. the NAMED INSURED;

B. any PREDECESSOR FIRM OR SUCCESSOR FIRM;

C. any past or present partner, officer, director, stockholder or employee of the NAMED INSURED or entity specified in item VI.B. above, but only as respects PROFESSIONAL SERVICES rendered on behalf of the NAMED INSURED, or any PREDECESSOR FIRM;

D. any accountant or accounting firm while performing PROFESSIONAL SERVICES for, and under contract with the NAMED INSURED, PREDECESSOR FIRM or SUCCESSOR FIRM;

* * * * Id. Finally, the Policy also includes certain exclusions from coverage. Id. Among those exclusions are:

This policy does not apply to any CLAIM or DAMAGES arising out of:

* * * *

E. any dishonest, fraudulent, criminal, malicious or knowingly wrongful or reckless act, error or omission of any INSURED;

F. any actual or alleged violations of state or federal antitrust, price fixing, restraint-of-trade, copyright or deceptive trade practice laws, rules or regulations;

H. any INSURED gaining any personal profit or advantage to which the INSURED was not legally entitled;

M. conversion, misappropriation or improper commingling of client funds held for the benefit of a client;

* * * * Id.

II. History.

Debtor provided payroll processing services, including tax management services, to its clients. Dkt. No. 23. Its tax management services consisted of calculating clients' tax liabilities, withdrawing funds sufficient to pay those liabilities directly from clients' bank accounts, and, when the tax liabilities became due, paying the funds to the appropriate taxing entities. Id. To complete those services, Debtor entered into individual contracts with each of its clients, identifying the services to be provided, and authorizing Debtor to access the clients' bank accounts. Dkt. No. 27.

Many of the transactions between Debtor and its clients were conducted through a regulated interbank transfer system (“ACH system”). See id. Debtor utilized a third party to assist it in processing transactions through the ACH system. During the Policy's coverage period, Debtor began using Data Processing Service of Georgia, Inc. (“DPS”), for that purpose. Id.

Initially, DPS and Debtor's arrangement allowed Debtor to continue clearing all transactions through its own bank accounts, which allowed Debtor to track its clients' funds as they were processed by DPS. Id. Beginning in late 2008, however, DPS informed Debtor that all transactions would be cleared through an account owned solely by DPS. Id. Debtor agreed to this new procedure, and, as a consequence, lost oversight of the transactions completed by DPS. Id.

In early 2009, Debtor announced a sale of its client accounts to another payroll servicing company, Automatic Data Processing (“ADP”). Id. Shortly after that announcement, DPS required Debtor to deposit approximately $1,200,000 into a “reserve fund,” ostensibly to provide DPS a buffer against potential “insufficient funds” transactions as Debtor transferred its clients to ADP. Id. The reserve requirement was later increased to $2,200,000. Id. Debtor used its clients' funds, which had been withdrawn to satisfy upcoming tax obligations, to fund the reserve account. Id. The reserve funds were kept in Debtor's designated DPS clearing account, where they were commingled with other funds. Id.

When Debtor later sought to have DPS credit it the $2,200,000 in reserve funds so that it could pay its clients' first quarter of 2009 tax payments, DPS claimed to have previously provided Debtor $2,200,000 in credits to satisfy prior tax obligations. Dkt. No. 23. As a result, Debtor was unable to satisfy all of its clients' outstanding tax liabilities, and approximately $4,000,000 to $4,800,000 in client taxes liabilities were not paid. Dkt. Nos. 23, 27.

As they began incurring penalties due to the unpaid taxes, several of Debtor's clients sued Debtor. See Dkt. Nos. 23, 27. Debtor filed for chapter 7 bankruptcy on March 30, 2010, as a result of its ongoing financial difficulties. Bankr. No. 10–00800–JDP, Dkt. No. 1.

III. The adversary proceeding.

This adversary proceeding was initiated when PIIC filed a Complaint for Declaratory Relief, in which it sought a determination that it has no duty to defend or indemnify Debtor in any lawsuit against Debtor for failure to pay Debtor's clients' tax obligations. Adv. No. 10–6078–JDP, Dkt. No. 1–3 at 8–22. Trustee was added to the adversary proceeding as a party defendant to represent the interests of Debtor's bankruptcy estate. Dkt. No. 20. PIIC has filed a Motion for Summary Judgment, and Debtor and Trustee have filed a cross Motion for Summary Judgment. A. PIIC's Motion for Summary Judgment.

On May 6, 2011, PIIC moved for summary judgment arguing the Insureds are not covered by the Policy for “any current or future claims.” Dkt. No. 25. The motion was supported by a Memorandum of Points and Authorities, Dkt. No. 26, a Statement of Undisputed Facts, Dkt. No. 27, and the Affidavit of Joshua S. Evett with attached exhibits, Dkt. No. 28. Neither the pleadings, the discovery and disclosure materials, nor the affidavit and exhibits, provide specific facts about some of the allegations in (1) the complaints against Debtor or (2) any judgment or settlement against Debtor.

Debtor and Trustee filed an opposition to PIIC's motion on August 9, 2011. Dkt. No. 32. PIIC replied to that opposition on August 16, 2011. Dkt. No. 39. A hearing was held on PIIC's motion on August 23, 2011. B. Debtor and Trustee's Motion for Summary Judgment.

Debtor and Trustee filed their own motion for summary judgment on May 6, 2011, requesting the Court to decide that PIIC has a duty (1) to defend Debtor in any action relating to its failure to pay clients' tax obligations; (2) to reimburse Debtor for defense costs and fees incurred defending actions that should have been defended by PIIC; and (3) to indemnify Debtor for sums incurred as damages from claims relating to Debtor's failure to pay clients' tax obligations. Dkt. No. 21. Debtor and Trustee's motion is supported by a Memorandum, Dkt. No. 22, a Statement of Undisputed Facts, Dkt. No. 23, and an Affidavit of Debtor and Trustee's attorney, Clifford Brown (“Brown”), with attached exhibits, Dkt. No. 24.

Among the exhibits attached to Brown's affidavit are copies of nine complaints filed against Debtor in various state and federal court actions due to Debtor's non-payment of clients' taxes. Dkt. No. 24–3. The affidavit also included a statement by Brown that he had represented Debtor in various of those and other lawsuits, that PIIC refused to indemnify Debtor in each of those cases, and that the dollar amount of judgments entered against Debtor in those cases was $454,478.98. See Dkt. No. 24. PIIC moved to strike Brown's statements about the cases in which he had represented Debtor, and the judgments associated therewith, asserting they are inadmissable pursuant to Fed.R.Civ.P. 56(c)(4). Dkt. Nos. 33, 34.

Debtor and Trustee's Statement of Undisputed Facts recites general facts about Debtor, its clients, DPS, and the relationship and history of those entities. See Dkt. No. 23. Included among the facts is:

Judgments have been entered against [Debtor] in several cases. The judgments entered against [Debtor] in Idaho cases equal $454,478.98. Discovery responses received from [PIIC] show an additional judgment in the state of Washington totaling $213,888.60. Id. at ¶ 25. Also, Debtor and Trustee made a general assertion that Debtor “tendered the defense of the lawsuits to [PIIC] but [PIIC] has refused to provide a defense or indemnification.” Id. at ¶ 24.

PIIC opposed Debtor and Trustee's Statement of Undisputed Facts. Dkt. No. 35. Specifically, PIIC opposed, as vague, Debtor and Trustee's statement that Debtor had tendered certain, unspecified lawsuits to PIIC to defend those suits. Id. at ¶ 24. PIIC also disputed Debtor and Trustee's statements about judgment awards because they did not support those assertions with evidence. Id. at ¶ 25. PIIC argues the vague and unsupported statements lack the necessary foundation to support admission, and should be excluded. See id. at ¶¶ 24, 25.

PIIC opposed Debtor and Trustee's motion for summary judgment on August 9, 2011. Dkt. No. 36. In apparent response to that opposition, and to PIIC's motion to strike portions of Brown's first affidavit, Brown filed a second affidavit, with exhibits, on August 16, 2011. Dkt. No. 37. In that second affidavit, Brown listed the specific state lawsuits in which he provided representation to Debtor. Id. Brown also attached copies of five different orders granting judgment in favor of Debtor's clients in various state court suits. Dkt. Nos. 37–1, 37–2, 37–3, 37–4, 37–5. In other words, he provided the specificity and evidentiary support PIIC asserted was lacking from Debtor and Trustee's prior filings. PIIC moved to strike Brown's second affidavit, however, on the grounds that it was untimely under the Court's local rules. Dkt. Nos. 40, 41.

IV. The lawsuits.

Several of Debtor's clients sued Debtor to recover the tax obligations and penalties they incurred when Debtor did not complete contracted-for tax management services. PIIC's Statement of Undisputed Facts indicates there have been a total of fifteen lawsuits (ten in Idaho and five in Washington) filed to date. Dkt. No. 27. PIIC did not, however, provide copies of the complaints in those suits, and did not provide evidence regarding the allegations made or causes of action asserted by the plaintiffs in those complaints. PIIC also did not provide the Court with any judgment-related information.

Debtor and Trustee, on the other hand, provided the Court with copies of the complaint for nine lawsuits to support their Motion for Summary Judgment. See Dkt. No. 24–3. They also provided copies of judgments issued in three of those actions, as well as copies of two judgments for which a copy of the complaint was not submitted to the Court. Dkt. Nos. 37–1, 37–2, 37–3, 37–4, 37–5. The information contained in those complaints and judgments is summarized below: A. Viking Bank v. Payroll America, Inc. [sic]

Viking Bank and other plaintiffs (“Viking Bank Plaintiffs”) filed a Second Amended Complaint for Money Damages with the King County, Washington, Superior Court on November 24, 2009. Dkt. No. 24–3 at 45–55. In that complaint, the Viking Bank Plaintiffs generally allege they contracted with Debtor to provide payroll services, including the payment of payroll taxes to certain taxing agencies; Debtor's services were to include the making of payments through the ACH system to taxing authorities; the Viking Bank Plaintiffs authorized Debtor to transfer funds from their accounts to Debtor's bank account to fulfill its contractual obligations; Debtor failed to pay the Viking Bank Plaintiffs' first quarter of 2009 tax liabilities, though sufficient funds to do so had been transferred to Debtor; Debtor contracted with DPS, which required Debtor to place monies into a reserve fund; Debtor transferred the Viking Bank Plaintiffs' funds to the DPS reserve account without seeking or obtaining their authorization; and the Viking Bank Plaintiffs incurred penalties due to Debtor not paying their taxes. Id.

The Viking Bank complaint includes six causes of action: breach of contract; breach of fiduciary duty; conversion; unjust enrichment; fraud; and violation of the Washington Consumer Protection Act. Id. In pleading the breach of fiduciary duty cause of action, the Viking Bank Plaintiffs assert Debtor owed them a fiduciary duty due to its ability to withdraw funds from their bank accounts. Id. The complaint generally alleges Debtor breached that duty by not properly stewarding funds from the Viking Bank Plaintiffs' accounts to the appropriate taxing entities, and that Debtor's breach proximately caused damage to the Viking Bank Plaintiffs. Id. B. Housing Authority of Thurston County v. PayrollAmerica, Inc.

The Housing Authority of Thurston County (“HATC”) filed its complaint with the Thurston County, Washington, Superior Court on September 15, 2009. Dkt. No. 24–3 at 56–61. In that complaint, HATC generally alleges it contracted with Debtor to perform payroll services; it authorized Debtor to access and withdraw funds from its bank accounts; during the first quarter of 2009, Debtor withdrew funds from HATC's account to pay five different tax liabilities; Debtor did not pay any of those liabilities; HATC incurred penalties because of the unpaid taxes; and HATC paid some of the taxes to avoid further penalties. Id.

HATC pleads five causes of action in its complaint, including: breach of contract; breach of fiduciary duty; professional negligence; unlawful conversion; and consumer protection act violation. Id. HATC's breach of fiduciary duty cause of action alleges Debtor owed HATC a duty, which Debtor breached. Id. The complaint later asserts that, through Debtor's various acts and omissions, it proximately caused damages, injury, and harm to HATC. Id. HATC's professional negligence cause of action alleges Debtor was negligent and did not meet the standard of care as a fiduciary, i.e., an accounting services provider or payroll services provider, causing injury to HATC. Id. C. Arrow Rock International, Inc. v. PayrollAmerica, Inc.

Arrow Rock International, Inc., and other plaintiffs (ARI Plaintiffs), filed a complaint with the Fourth Judicial District Court of Idaho on July 20, 2009. Dkt. No. 24–3 at 19–39. Therein, the ARI Plaintiffs generally allege they contracted with Debtor to provide tax filing services; for a fee, Debtor obtained funds from the ARI Plaintiffs, and paid their tax liabilities from those funds; Debtor collected a fee and withdrew funds to pay the ARI Plaintiffs' first quarter of 2009 tax obligations; Debtor never paid those taxes; and the ARI Plaintiffs paid the taxing entities directly to satisfy their tax burdens. Id.

Each of the ARI Plaintiffs pleaded four causes of action: breach of contract; conversion; unjust enrichment; and breach of the implied covenant of good faith and fair dealing. Id. The ARI Plaintiffs allege the covenant of good faith and fair dealing was an implied contractual term. Id. In pressing their causes of action, the ARI Plaintiffs do not allege Debtor breached a duty other than contractual duties, and they do not allege Debtor was negligent in breaching those duties. Id.

The Fourth Judicial District Court of Idaho entered a Second Amended Judgment in favor of the ARI Plaintiffs in this action on January 11, 2010. Dkt. No. 37–3. In that judgment, the ARI Plaintiffs were awarded a combined total of $31,883.96 in damages. Id. The judgment itself does not apportion the damages to any specific cause of action, and Debtor and Trustee did not provide information indicating which of the four pleaded causes of action served as the basis for the damages awarded. D. BluWater Consulting, LLC v. PayrollAmerica, Inc.

BluWater Consulting LLC (“BluWater”) filed its complaint in the Fourth Judicial District Court of Idaho on August 3, 2009. Dkt. No. 24–3 at 1–5. In that complaint, BluWater generally alleges it contracted with Debtor for the payment of quarterly tax obligations; it provided Debtor funds sufficient to pay its first quarter of 2009 taxes; Debtor did not pay those taxes; BluWater received a notice that it would incur penalties due to its non-payment of taxes; and BluWater made payments directly to the taxing entity to prevent the accrual of penalty charges. Id.

BluWater included only one cause of action in its complaint: breach of contract. Id. In its pleading, BluWater alleges simply that Debtor was contractually obligated to pay certain taxes, and that it did not pay those taxes. Id.

The Fourth Judicial District Court of Idaho entered an Order Granting Stipulated Judgment on February 9, 2010. Dkt. No. 37–1. In the Order, BluWater was awarded $58,321.05 in damages and pre-judgment interest against Debtor. Id. E. Radix Construction, Inc. v. PayrollAmerica, Inc.

Radix Construction, Inc. (“Radix”), filed a complaint with the Third Judicial District Court of Idaho on September 21, 2009. Dkt. No. 24–3 at 6–13. In that complaint, Radix generally alleges it contracted with Debtor to pay its payroll and employment taxes; Debtor did not pay Radix's payroll taxes for 2008; Debtor delegated some of its duties under its contract with Radix to DPS without notifying Radix; and Radix incurred penalties, costs, fees, and interest because of the unpaid taxes. Id.

Radix alleges seven causes of action in its complaint, including: breach of contract; conversion; unjust enrichment; breach of fiduciary duty; breach of the implied covenant of good faith and fair dealing; negligence; and “class action.” Id. Under the negligence cause of action, Radix asserts Debtor owed it a duty to act reasonably in meeting its obligations under their contract; Debtor breached that duty by delegating its contractual responsibilities to DPS, and by not ensuring DPS fulfilled its obligations; and Debtor's breach was the proximate cause of damages. Id. F. Resources Online LLC v. PayrollAmerica, Inc.

Resources Online, Inc. (“Resources Online”), filed a complaint with the Fourth Judicial District Court of Idaho on November 23, 2009. Dkt. No. 24–3 at 14–18. The complaint generally alleges Resources Online contracted with Debtor for the payment of its quarterly payroll taxes; Resources Online provided Debtor funds for the payment of its first quarter of 2009 taxes; Debtor did not pay those taxes; Resources Online paid its taxes directly to the taxing entities; and Resources Online incurred penalties because its taxes were not paid on time. Id.

Resources Online alleges only one cause of action: breach of contract. Id. Simply put, the complaint alleges that Debtor had a contractual duty to pay Resources Online's taxes, and Debtor did not pay those taxes. Id.

The Fourth Judicial District Court of Idaho entered an Order Granting Stipulated Judgment against Debtor on February 3, 2010. Dkt. No. 37–2. Resources Online was awarded $49,643.69 in damages and prejudgment interest. Id. G. C.C. Filson Co. v. PayrollAmerica, Inc.

C.C. Filson Co. (“Filson”) filed a complaint with the U.S. District Court for the District of Idaho around November 11, 2009. Dkt. No. 24–3 at 40–44. Therein, Filson generally alleges it contracted with Debtor to obtain quarterly payroll tax filing services; it provided Debtor funds for the payment of its first and second quarter of 2009 tax payments; Debtor did not make those payments; Filson paid Debtor a fee to make those payments; and Filson paid $10,204.96 in penalties to taxing entities because its taxes were not paid. Id.

Filson pleads four causes of action: breach of contract; conversion; unjust enrichment; and negligence. Id. As part of its negligence cause of action, Filson alleges Debtor owed Filson a duty of care; it breached that duty by not performing, or by negligently performing, agreed upon services; and Debtor's breach caused Filson damages. Id. H. Orca Bay Seafoods, Inc. v. PayrollAmerica, Inc.

Orca Bay Seafoods, Inc. (“Orca Bay”), filed a complaint with the King County, Washington, Superior Court on July 7, 2009. Dkt. No. 24–3 at 62–65. Orca Bay generally alleges it contracted with Debtor for the payment of its payroll taxes; it provided Debtor funds to pay its taxes; Debtor did not pay those taxes; Orca Bay was assessed penalties by taxing authorities; and Orca Bay paid the taxes and penalties to avoid further injury to its business. Id.

Orca Bay's complaint includes two causes of action: breach of contract; and violation of the Washington Consumer Protection Act. Id. Those causes of action do not suggest negligence on Debtor's part, and neither is framed in the context of duty, breach, causation, and damages. Id. I. At Home Care LLC v. Payroll America, Inc. [sic]

At Home Care LLC (“At Home Care”) filed a complaint with the King County, Washington, Superior Court on December 1, 2009. Dkt. No. 24–3 at 66–73. The complaint generally alleges At Home Care contracted with Debtor to obtain tax payment services; At Home Care authorized Debtor to withdraw funds from its bank account; At Home Care provided Debtor sufficient funds for the payment of its first quarter of 2009 taxes; Debtor did not pay those taxes, did not notify At Home Care that it had not paid the taxes, and did not return unpaid funds to At Home Care; and At Home Care incurred costs and damages as a result of the unpaid taxes. Id.

At Home Care alleges six causes of action: breach of contract; negligence; conversion; unjust enrichment; breach of fiduciary duties; and violation of the Consumer Protection Act–RCW 19.86 et seq. Id. In its negligence claim, At Home Care alleges Debtor owed it several duties, breached those duties, and the breaches proximately caused At Home Care's damages. Id. In addition, At Home Care's breach of fiduciary duties cause of action alleges Debtor had a duty, which it breached, and the breach caused At Home Care to be damaged. Id. J. The Masonry Center, Inc. v. PayrollAmerica, Inc.

The Court was not provided a copy of the complaint in this action.

However, on March 22, 2010, the Fourth Judicial District Court of Idaho entered a Judgment against Debtor, in which it awarded the following damages: $22,050.61 to Plaintiff The Masonry Center, Inc.; $2,679.34 to Plaintiff Orchard Partners, LLP; $46,999 to Plaintiff Boise Surgical Group, P.S.; and $136,954.78 to Plaintiff Syringa Bank. Dkt. No. 37–4. The judgment does not indicate the legal basis for the awarded damages, and the Court has not been provided any other information indicating the basis for those awards. K. HSI Corporation v. PayrollAmerica, Inc.

The Court was not provided a copy of the complaint in this case.

On January 27, 2010, the Fourth Judicial District Court of Idaho issued an Order Granting Stipulated Judgment, in which it awarded the following amounts in damages and pre-judgment interest against Debtor: $19,661.50 to Plaintiff HSI Corporation; $2,736.89 to Plaintiff HSI Accessories, Inc.; $5,346.27 to Plaintiff Metal Products West, Inc.; and $70,305.38 to Plaintiff Home–Style Industries, Inc. Dkt. No. 37–5. The judgment does not indicate the legal basis for the awarded damages, and no other information indicating that basis was provided the Court.

Discussion

I. Summary judgment standard.

Summary judgment is appropriate “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” Rule 7056 (incorporating Fed.R.Civ.P. 56(a)). Where there are cross motions for summary judgment, “each movant has the burden of presenting evidence to support its motion that would allow the [court], if appropriate, to direct a verdict in its favor.” High Tech Gays v. Def. Indus. Sec. Clearance Office, 895 F.2d 563, 574 (9th Cir.1990) (quoting Barhold v. Rodriguez, 863 F.2d 233, 236 (2d Cir.1988)). All facts and reasonable inferences are viewed in the light most favorable to the non-moving party. Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 587, 106 S.Ct. 1348, 89 L.Ed.2d 538 (1986).

II. PIIC's Motion for Summary Judgment.

PIIC's Motion for Summary Judgment argues several different reasons why it should be granted, and generally asks the Court to determine PIIC has no duty under the Policy to defend nor to indemnify Debtor in any past, pending, or future lawsuit brought against Debtor due to its non-payment of clients' taxes. Dkt. Nos. 25, 26. The Court will address each of PIIC's contentions in turn. A. The fact that DPS was not an Insured is not relevant.

First, PIIC asserts it was DPS' conduct, and not Debtor's, that injured Debtor's clients, and PIIC has no duties under the Policy because DPS is not a named Insured. PIIC is correct in its assertion that DPS is not an Insured covered by the Policy. See Dkt. No. 24–1 at 18. At the same time, PIIC did not provide any proof indicating complaints against Debtor are actually complaints against DPS. Rather, the information reviewed by the Court indicates such complaints all include causes of action based on Debtor's, and not DPS', conduct. Because the conduct at issue, at least in the mind of those filing complaints against Debtor, is Debtor's conduct, it is of no moment that DPS was not an Insured under the Policy. Debtor was clearly an Insured, the law suits named Debtor as a defendant, and PIIC's duties to defend and indemnify will be triggered, or not, by Debtor's potential liability for its actions. B. The Court need not, at this time, determine whether Debtor's actions were negligent or intentional in deciding whether PIIC has the duty to defend and indemnify.

Second, PIIC spends considerable time in its briefing arguing that it does not have a duty to defend nor indemnify Debtor because Debtor's acts were not negligent, but were, instead, intentional. In doing so, PIIC invites the Court to draw legal conclusions that are unnecessary and inappropriate at this stage of the litigation in determining PIIC's duties to defend and indemnify Debtor. Rather, to determine those duties, the Court properly looks primarily to the plaintiffs' pleadings in the subject lawsuits, and to any judgment, decision, or order issued against Debtor.

1. Duty to Defend.

Determinations of an insurer's duty to defend in a declaratory judgment action are based on the allegations raised in the underlying complaint. See Millers Mut. Fire Ins. Co. of Texas v. Ed Bailey, Inc., 103 Idaho 377, 647 P.2d 1249, 1252 (1982). To make such a determination, the Court must compare the allegations in the complaint to the terms of the applicable insurance policy. Id. If the allegations “in whole or in part and read broadly, reveal a potential for liability that would be covered” by the insurance policy, the insurer has a duty to defend. Exterovich v. City of Kellogg, 139 Idaho 439, 80 P.3d 1040, 1042 (2003). At the same time, if the allegations within a complaint are not such as would be covered by the terms of an insurance policy, the insurer has no duty to defend. See Intermountain Gas Co. v. Indus. Indemnity Co. of Idaho, 125 Idaho 182, 868 P.2d 510, 516 (1994).

As can be seen, a determination by the Court that Debtor's actions were intentional, and not negligent, would be premature. The Court's determination of whether there is a duty to defend is based upon the “potential for liability,” which, in this case, exists if a particular plaintiff's allegations suggest a negligence cause of action. See Dkt. No. 24–1; Exterovich, 80 P.3d at 1042. While, eventually, it may be determined that Debtor's actions were intentional and not negligent, the Court's analysis, at this point, is limited to information contained within any complaint provided for its review. See Millers Mut. Fire Ins. Co., 647 P.2d at 1252.

PIIC did not provide the Court with copies of any of the complaints in the actions for which it desires a determination that there is no duty to defend Debtor. As noted above, the Court may only measure PIIC's duty to defend by comparing the terms of the Policy to the allegations of the complaints in the subject legal actions. In not providing that evidence, PIIC has not properly supported its Motion for Summary Judgment. See High Tech Gays, 895 F.2d at 574. PIIC's Motion for Summary Judgment concerning its duty to defend will, therefore, be denied.

2. Duty to Indemnify.

A determination of an insurer's duty to indemnify, which requires the Court to analyze the basis for awarded damages, typically also requires the Court to review a copy of the awarding court's judgment, order or decision. See Deluna v. State Farm Fire and Cas. Co., 149 Idaho 81, 233 P.3d 12, 16 (2008) (indicating that an insurer only has a duty to indemnify for sums the insured was “legally obligated to pay as damages” as a result of a covered liability). At the same time, where an insurer has no duty to defend a lawsuit, it also has no duty to indemnify, and the duty to indemnify can be determined in such instances without a review of the judgment's basis. See Hoyle v. Utica Mut. Ins. Co., 137 Idaho 367, 48 P.3d 1256, 1264 (2002) (indicating that the duty to defend is broader than the duty to indemnify, and, where a complaint does not reveal a potential for liability, there is no duty to indemnify). Thus, to determine whether there is a duty to indemnify, the Court must, at least, review the complaint in the subject lawsuit. See id. If the allegations of the complaint do not trigger a duty to defend, the Court can determine there is no duty to indemnify. Id. On the other hand, if an insurer has the duty to defend, the Court must then also review the judgment in a case to determine if there is a duty to indemnify. See id.; Deluna, 233 P.3d at 16.

Here, PIIC did not provide the Court with copies of any complaints or judgments. The Court is, therefore, unable to determine whether PIIC has a duty to indemnify Debtor in any of these actions. PIIC would have the Court simply determine Debtor's conduct is such that it would not be covered by the Policy and there is no duty to indemnify. The Court's role, however, is to compare, against the Policy, the legal basis for which damages have been awarded in a case, and then to determine whether there is a duty to indemnify. Because PIIC did not provide the Court the information necessary to make that determination, PIIC's Motion for Summary Judgment concerning its duty to indemnify will be denied. C. PIIC has not shown that the Policy's exclusions relieve it of the duty to defend and indemnify.

Third, PIIC asserts Debtor's actions trigger several of the Policy's exclusions, and, therefore, it has no duty to defend or indemnify. Yet, just as in determining whether there is a duty to defend or indemnify, the determination of whether an exclusion abrogates a duty to defend requires a case-by-case analysis of the allegations in a complaint. See Kootenai County, 750 P.2d at 89–90 (quoting State of Idaho v. Bunker Hill Co., 647 F.Supp. 1064, 1068 (D.Idaho 1986) (indicating insurers are to evaluate each complaint and determine whether allegations are covered by an insurance policy, or whether, in its estimation, exclusions provide a basis for noncoverage)).

Even if PIIC provided the Court with copies of complaints against Debtor, the insurer has the burden of proving an exclusion excepts an insured's conduct from coverage. Monarch Greenback, LLC v. Monticello Ins. Co., 118 F.Supp.2d 1068,1078 (D.Idaho 1999); Harman v. Nw. Mut. Life Ins., 91 Idaho 719, 429 P.2d 849, 850–51 (1967). Exclusions are to be interpreted strictly and narrowly, so that an exclusion does not defeat the “very object and purpose of the insurance.” Miller v. Farmers Ins. Co. of Idaho, 108 Idaho 896, 702 P.2d 1356, 1359 (1985); see also Unigard Mut. Ins. Co. v. McCarty's, Inc., 756 F.Supp. 1366,1368 (D.Idaho 1988). Had PIIC provided the Court with copies of complaints against Debtor, it would then be required to establish each of the elements of an alleged Policy exclusion, showing Debtor's actions, as plead in a given complaint, demonstrate there is “no potential for liability.” See McMinn v. Peterson, 116 Idaho 541, 777 P.2d 1214, 1217–18 (1989) (finding there was no duty to defend under a particular insurance policy because insurer showed that, due to a policy exclusion, there was no potential for liability under the policy). Because PIIC did not provide the Court with copies of any complaints in support of its Motion, the Court can not analyze Debtor's conduct against the Policy's exclusions as desired by PIIC.

None of the reasons advanced by PIIC as causes to grant its Motion for Summary Judgment are sufficient grounds for the Court to do so, particularly given that PIIC did not provide the Court the information necessary to determine whether PIIC owes a duty to defend or indemnify. PIIC's Motion for Summary Judgment is, therefore, denied.

III. Debtor and Trustee's Motion for Summary Judgment.

Debtor and Trustee filed a Motion for Summary Judgment, seeking a determination that PIIC has a duty to defend and a duty to indemnify Debtor in all past, pending, or future lawsuits against Debtor based on its clients' unpaid taxes. Dkt. Nos. 21, 22. In support of their Motion for Summary Judgment, Debtor and Trustee submitted copies of complaints from nine lawsuits against Debtor. Dkt. No. 24–3. In addition, their attorney, Brown, submitted two affidavits. Dkt. Nos. 24, 37. In the first of those affidavits, Brown made certain statements regarding judgments entered in actions in which he represented Debtor. Dkt. No. 24. With the second affidavit, he submitted copies of judgments obtained in several cases. Dkt. Nos. 37–1, 37–2, 37–3, 37–4, 37–5. PIIC moved to strike the judgment-related statements in Brown's first affidavit, and the entirety of his second affidavit. Dkt. Nos. 33, 40. Because the outcome of those motions bear on Debtor and Trustee's Motion for Summary Judgment, the Court addresses them here. A. PIIC's Motion to Strike Paragraph 3 of Brown's first affidavit.

PIIC moved to strike the third paragraph of Brown's first affidavit, which stated:

I have also represented [Debtor] in numerous state court lawsuits defending against actions brought by its clients arising out of [Debtor's] failure to pay its clients [sic] federal and state payroll taxes after impounding funds for such taxes. In each of those cases, [PIIC] refused to provide defense to [Debtor]. Judgments were entered against [Debtor] in several cases. The total dollar amount of judgments against [Debtor] in Idaho cases in which I represented [Debtor] was $454,478.98. Dkt. No. 24 at ¶ 3. Because Brown did not specify the names of the lawsuits in which he represented Debtor, the cases in which judgments were entered, or any evidence supporting the claimed judgment amounts, PIIC asserts his paragraph 3 statements “lack the necessary foundation for admissibility” as established in Fed.R.Civ.P. 56(c)(4). PIIC therefore requests the entire paragraph be stricken from the record. Dkt. No. 34.

In general, courts have found that, to satisfy the Fed.R.Civ.P. 56(c)(4) foundation standard, facts alleged in an affidavit must be specific, and more than mere conclusions. See Perez v. Volvo Car Corp., 247 F.3d 303, 316–317 (1st Cir.2001) (analyzing affidavits under the standard in former Fed.R.Civ.P. 56(e), and finding that statements must be supported with “particularized factual information”); Bickerstaff v. Vassar Coll., 196 F.3d 435, 452 (2d Cir.1999) (“Statements that are devoid of any specifics, but replete with conclusions, are insufficient to defeat a properly supported motion for summary judgment.”). Brown's statements in paragraph 3 are not specific; they are merely unsupported conclusions. PIIC's motion to strike those statements from the record is, therefore, granted. B. PIIC's Motion to Strike Brown's second affidavit.

Apparently recognizing the potential weaknesses in his first affidavit, Brown submitted a second affidavit to support Debtor and Trustee's Motion for Summary Judgment on August 16, 2011, a mere seven days prior to the hearing on that motion. Dkt. No. 37. In his second affidavit, Brown specifically lists the actions in which he previously represented Debtor, and provides copies of judgments in those cases where damages were awarded. Id. In other words, in the second affidavit Brown supplies the information PIIC contended was lacking from his first affidavit. PIIC moves to strike Brown's second affidavit, however, because it was untimely under the requirements of Local Bankruptcy Rule 7056.1(b). Dkt. Nos. 40, 41.

Local Bankruptcy Rule 7056.1, which governs motions for summary judgment in adversary proceedings, provides:

(b) Submissions and hearings

(1) The motion, supporting affidavits or declarations, a statement of undisputed facts, a notice of hearing, and a supporting brief shall be filed at least twenty-eight (28) days before the time fixed for the hearing.

* * * *

(2) If the opposing party desires to file affidavits or other materials, that party shall do so at least fourteen (14) days before the date of the hearing. The opposing party shall also file a responsive brief, and a statement of disputed and undisputed facts, at least fourteen (14) days prior to the hearing.

* * * *

(3) The moving party may thereafter file a reply brief not less than seven (7) days prior to the hearing.

* * * *

(6) Other than as provided herein, absent an order of the court to the contrary for good cause shown, no other pleadings or documents shall be filed on a summary judgment motion. Under this rule, Debtor and Trustee's deadline for submitting affidavits in support of their Motion for Summary Judgment was, at the latest, twenty-eight days before the August 23, 2011, hearing. While they could submit a reply brief by August 16, 2011, filing an affidavit in support of their Motion on that date did not comply with the local rule.

Local Bankruptcy Rule 7056.1 prescribes the consequence for noncompliance with the filing timing requirements under the rule: “the court may continue the hearing and, after notice and a reasonable time to respond, may impose costs, attorney's fees and sanctions against a party, the party's attorney, or both.” LBR 7056.1(d). At the same time, the Court has considered striking a non-compliant affidavit in its entirety. See Fin. Fed. Credit, Inc v. Water B. Scott & Sons, Inc. (In re Walter B. Scott & Sons, Inc.), 10.3 I.B.C.R. 84, 85 (Bankr.D.Idaho 2010).

In determining the consequences for a failure to follow its local rules, the Court may consider: “(1) the public's interest in expeditious resolution of litigation; (2) the court's need to manage its docket; (3) the risk of prejudice to the [opposing party]; (4) the public policy favoring disposition of cases on their merits; and (5) the availability of less drastic sanctions.” Id. (quoting Ghazali v. Moran, 46 F.3d 52, 53 (9th Cir.1995)). When detrimental reliance or other prejudice has not been demonstrated, the Court has discretion to excuse strict compliance with the local rules. Id. (citing Bell Flavors & Fragrances, Inc. v. Andrew (In re Loretto Winery, Ltd.), 107 B.R. 707, 710 (9th Cir. BAP 1989)).

PIIC asserts it would be prejudiced if the Court allows Brown's second affidavit to stand because “[t]here are additional points PIIC would need to brief, and affidavits PIIC would likely need to submit, to properly respond to the new evidence introduced in the Second Affidavit of Clifford Brown.” Dkt. No. 41 at 5. At the same time, PIIC notes that, if it had the ability to respond to the new evidence, it would point out that none of the judgments attached to Brown's second affidavit were for negligence claims. Id. In other words, PIIC contends the submitted judgments do not trigger a duty to defend or indemnify. Upon review of the judgments, the Court agrees that none expressly indicate the particular cause of action which served as the basis for the damages awards. In other words, Debtor and Trustee have not connected the awarded damages to a cause of action that would be covered by the Policy. See Dkt. Nos. 37–1, 37–2, 37–3, 37–4, 37–5.

While the timing of Brown's second affidavit violated Local Bankruptcy Rule 7056.1, the information provided in that affidavit does not prejudice PIIC because it does nothing to advance Debtor and Trustee's Motion. The Court's other considerations, particularly the public policy favoring disposition of cases on their merits, support the Court excusing strict compliance with the local rule in this case. PIIC's motion to strike Brown's second affidavit is, therefore, denied. C. Duty to defend.

An insurer must assume the defense of a particular claim if, in the claim's complaint, the allegations “in whole or in part and read broadly, reveal a potential for liability that would be covered” by the insurance policy. Exterovich, 80 P.3d at 1042. If there is any doubt as to whether an obligation to defend exists, that doubt must be resolved by the insurer in favor of the insured. Millers Mut. Fire Ins. Co. of Tex., 647 P.2d at 1252.

The responsibility of initially determining whether there is a duty to defend rests with the insurer. See Kootenai Cnty. v. W. Cas. & Sur. Co., 113 Idaho 908, 750 P.2d 87, 89–90 (1988) (quoting Bunker Hill Co., 647 F.Supp. at 1068) (“The proper procedure for the insurer to take is to evaluate the claims and determine whether an arguable potential exists for a claim covered by the policy....”). In making that determination, an insurer must look not only to the pleaded causes of action, but also to the alleged facts. Intermountain Gas Co., 868 P.2d at 513 (quoting Standlee v. St. Paul Fire & Marine Ins. Co., 107 Idaho 899, 693 P.2d 1101, 1103 (1984)). While the facts alleged in a given complaint should be considered, the “facts behind” the complaint should not. Hoyle, 48 P.3d at 1262. Even if the facts behind a particular complaint might indicate a liability covered by an insurance policy, those facts are irrelevant if not alleged within the complaint. Id.

Debtor and Trustee, however, assert that consideration of facts outside of individual complaints is appropriate here because the Policy definition of “claim” includes:

All CLAIMS arising out of the same act, error or omission, or acts, errors or omissions which are logically or causally connected in any way shall be deemed as a single CLAIM. All such CLAIMS whenever made shall be considered first made on the date on which the earliest CLAIM arising out of such act, error or omission was first made and all such CLAIMS are subject to the same limits of liability and deductible. Dkt. No. 24–1. Debtor and Trustee argue the Policy requires the aggregation of all claims leveled against Debtor for its non-payment of clients' taxes because those claims are “logically or causally” connected due to similar fact patterns, and a “review of all allegations, read broadly, should have revealed a potential for liability covered by the Policy thereby triggering its duty to defend against all of these related claims.” Dkt. No. 22 at 11.

Debtor and Trustee, however, misread the standard for determining whether there is a duty to defend. The duty is not triggered by a broad review of all allegations contained in multiple complaints, but, rather, by a broad review of all allegations in each, individual complaint. See Hoyle, 48 P.3d at 1260–61. In particular, reading an allegation of negligence into a complaint where no such allegation has been made would require “look[ing] beyond the words of the complaint to determine if a possibility of coverage exists,” and is inappropriate in determining a duty to defend. See Hoyle, 48 P.3d at 1262; Constr. Mgmt. Sys., Inc. v. Assurance Co. of America, 135 Idaho 680, 23 P.3d 142 (2001). The Court will therefore review each complaint to determine whether PIIC had a duty to defend Debtor in each case.

The Policy is an errors and omissions policy covering damages incurred “by reason of a negligent act, error or omission in the performance of PROFESSIONAL SERVICES.” Dkt. No. 24–1 (capitalization in original). An act or acts amount to negligence when there is “(1) a duty, recognized by law, requiring a defendant to conform to a certain standard of conduct; (2) a breach of that duty; (3) a causal connection between the defendant's conduct and the resulting injuries; and (4) actual loss or damage.” Alegria v. Payonk, 101 Idaho 617, 619 P.2d 135, 137 (1980) (citing Brizendine v. Nampa Meridian Irrigation Distr., 97 Idaho 580, 548 P.2d 80, 83 (1976)). Those elements, if pleaded in a complaint, would trigger PIIC's duty to defend against Debtor's clients' claims.

Clearly, neither negligence, nor any of the elements of a negligence claim, were pleaded in the complaints in Arrow Rock Int'l, Inc. v. PayrollAmerica, Inc.; BluWater Consulting, LLC v. PayrollAmerica, Inc.; Resources Online LLC v. PayrollAmerica, Inc.; and Orca Bay Seafoods, Inc. v. PayrollAmerica, Inc. As a result, PIIC did not have a duty to defend Debtor in those four cases. However, PIIC had a duty to defend Debtor in the following cases:

1. Viking Bank v. Payroll America, Inc. [sic]

The Viking Bank Plaintiffs' complaint contains basic allegations that, if viewed broadly, could state a claim for negligence against Debtor. While those assertions are alleged under a “breach of fiduciary duty” cause of action, the allegations are essentially the same as those in the Idaho case law for negligence. The Viking Bank Plaintiffs allege Debtor owed them a duty, breached that duty, and the breach was the cause of their damages. Because the complaint contains basic negligence allegations, or at least, allegations of fact which, if read broadly, reveals a potential for a negligence allegation, PIIC owed a duty to defend Debtor against the Viking Bank Plaintiffs' claim.

2. Housing Authority of Thurston County v. PayrollAmerica, Inc.

Both the breach of fiduciary duty and the professional negligence causes of action in HATC's complaint triggered a duty on behalf of PIIC to defend Debtor as to those claims. While the breach of fiduciary duty cause of action asserts only that there was a duty and a breach, the complaint's discussion of damages, read broadly, indicates the breach of that duty proximately caused HATC's damages. This collection of allegations is sufficient to show Debtor's potential negligence liability. In addition, the more specific professional negligence cause of action, and supporting allegations, indicate Debtor's liability potentially covered by the Policy. PIIC therefore had a duty to defend Debtor against those claims.

3. Radix Construction, Inc. v. PayrollAmerica, Inc.

Radix specifically alleges Debtor was negligent in its complaint. Under that cause of action, Radix pleaded the classic negligence elements of duty, breach, causation, and damages. PIIC had a duty to defend against this complaint.

4. C.C. Filson Co. v. PayrollAmerica, Inc.

Filson pleaded a negligence cause of action, under which it alleged the classic negligence elements. PIIC had a duty to defend Debtor in this suit.

5. At Home Care LLC v. Payroll America, Inc. [sic]

At Home Care sufficiently pleaded negligence in its negligence and breach of fiduciary duties causes of action to trigger PIIC's duty to defend. D. Duty to indemnify.

The duty to indemnify an insured is a separate, independent duty from the duty to defend. Hoyle, 48 P.3d at 1264; Intermountain Gas Co., 868 P.2d at 513. The duty to defend is much broader, and is invoked by the mere potential that a complaint alleges liabilities covered by an insured's policy. Hoyle, 48 P.3d at 1264. The duty to indemnify, on the other hand, is typically triggered only when a determination has been made that an insurer is obligated under a particular policy to pay damages on a particular claim. See Deluna, 233 P.3d at 16. However, if there is no duty to defend a particular claim, there is also no duty to indemnify, which can be determined even if a claim has not yet been resolved. Hoyle, 48 P.3d at 1264.

Here, PIIC would have no duty to defend, and, therefore, no duty to indemnify Debtor for any damages awarded by the courts in Arrow Rock Int'l, Inc. v. PayrollAmerica, Inc.; BluWater Consulting, LLC v. PayrollAmerica, Inc.; Resources Online LLC v. PayrollAmerica, Inc.; and Orca Bay Seafoods, Inc. v. PayrollAmerica, Inc.

In addition, while the Court was provided copies of judgments for The Masonry Center, Inc. v. PayrollAmerica, Inc, and HSI Corp. v. PayrollAmerica, Inc., it was not provided copies of the complaints in those actions, and neither of the judgments adequately ties the damages awarded against Debtor to any specific causes of action. Because the Court cannot determine whether any damages were awarded for Debtor's alleged negligence, the Court declines to hold, at this summary judgment stage, that PIIC has a duty to indemnify Debtor in either of those cases.

In those actions where copies of the filed complaint have been submitted to this Court, and where those complaints indicate potential negligence claims, the Court would need to review the trial court's judgment, order, or decision to determine the basis for any awarded damages before determining whether PIIC had a duty to indemnify Debtor. The Court has not been given any such information for those cases. Based on the record before it, the Court is unable to make a summary judgment determination of the duty to indemnify in Viking Bank v. Payroll America, Inc. [sic]; Hous. Auth. of Thurston Cnty. v. PayrollAmerica, Inc.; Radix Constr., Inc. v. PayrollAmerica, Inc.; C.C. Filson Co. v. PayrollAmerica, Inc.; and At Home Care LLC v. Payroll America, Inc. [sic].

Conclusion

PIIC did not support its Motion for Summary Judgment with the evidence necessary for the Court to determine whether PIIC has a duty to defend or indemnify in any of the actions brought against Debtor. Debtor and Trustee, however, provided some of that evidence in support of their cross-Motion for Summary Judgment. Via motions to strike, PIIC objected to some of Debtor and Trustee's evidence. The Court grants PIIC's motion to strike paragraph three of Brown's first affidavit, but denies PIIC's motion to strike Brown's second affidavit.

Based upon the undisputed facts, in reviewing Debtor and Trustee's Motion for Summary Judgment, the Court grants a partial summary judgment in their favor, and concludes that PIIC had a duty to defend in Viking Bank v. Payroll America, Inc. [sic]; Hous. Auth. of Thurston Cnty. v. PayrollAmerica, Inc.; Radix Constr., Inc. v. PayrollAmerica, Inc.; C.C. Filson Co. v. PayrollAmerica, Inc.; and At Home Care LLC v. Payroll America, Inc. [sic]. On the other hand, the Court concludes that PIIC did not have a duty to defend in Arrow Rock Int'l, Inc. v. PayrollAmerica, Inc.; BluWater Consulting, LLC v. PayrollAmerica, Inc.; Resources Online LLC v. PayrollAmerica, Inc.; and Orca Bay Seafoods, Inc. v. PayrollAmerica, Inc.

The Court also grants a partial summary judgment to Debtor and Trustee determining PIIC did not have a duty to indemnify Debtor in Arrow Rock Int'l, Inc. v. PayrollAmerica, Inc.; BluWater Consulting, LLC v. PayrollAmerica, Inc.; Resources Online LLC v. PayrollAmerica, Inc.; and Orca Bay Seafoods, Inc. v. PayrollAmerica, Inc. In the remaining actions, where the Court found a duty to defend, but lacks adequate judgment-related information, there is a remaining factual question regarding whether there is a duty to indemnify, and, thus, summary judgment is denied. Summary judgment will also be also denied to Debtor and Trustee as to The Masonry Center, Inc. v. PayrollAmerica, Inc, and HSI Corp. v. PayrollAmerica, Inc. actions, where the Court was not provided sufficient information to determine a duty to defend or indemnify.

A separate order implementing this decision will be entered.