Opinion
Case No. 20-cv-1065-JES-JEH
2023-04-28
TWIN CITY FIRE INSURANCE COMPANY, Plaintiff, v. ALCAST COMPANY, et al., Defendants.
Daniel Tranen, Wilson Elser Moskowitz Edelman & Dicker LLP, St. Louis, MO, Michael John Duffy, Jennifer S. Stegmaier, Wilson Elser Moskowitz Edelman & Dicker LLP, Chicago, IL, for Plaintiffs. Amanda Rauh-Bieri, Neil Joseph Marchand, David Andrew Portinga, Miller Johnson, Grand Rapids, MI, for Defendant Alcast Company. Neil Joseph Marchand, Miller Johnson, Grand Rapids, MI, for Defendants Stephen Wessels, Brian Holt.
Daniel Tranen, Wilson Elser Moskowitz Edelman & Dicker LLP, St. Louis, MO, Michael John Duffy, Jennifer S. Stegmaier, Wilson Elser Moskowitz Edelman & Dicker LLP, Chicago, IL, for Plaintiffs. Amanda Rauh-Bieri, Neil Joseph Marchand, David Andrew Portinga, Miller Johnson, Grand Rapids, MI, for Defendant Alcast Company. Neil Joseph Marchand, Miller Johnson, Grand Rapids, MI, for Defendants Stephen Wessels, Brian Holt. MEMORANDUM OF DECISION JAMES E. SHADID, UNITED STATES DISTRICT JUDGE
Plaintiff, Twin City Fire Insurance Company, ("Twin City") has filed a request for a declaratory ruling that it has no obligation to indemnify or defend its insured, Alcast Company ("Alcast"). The controversy arises from a bankruptcy proceeding, Sarah L. Little, Chapter 7 Trustee for Pacific Steel Casting Co., LLC, v. Speyside Fund, LLC, et al., ("Pacific Steel"), No. 19-04057 (N.D. Cal), in which Alcast is named as one of 14 defendants, and has tendered its defense to Twin City.
On November 29, 2022, the Court conducted a bench trial with Attorneys Daniel Tranen and Michael Duffy appearing for Twin City. Vullnet Kolari, a claims adjuster for Twin City/Hartford was present and testified at trial. Attorneys David Portinga, Neil Marchand and Amanda Rauh-Bieri represented Defendant, Alcast. Alcast President Steve Wessels was also present and testified. The parties subsequently submitted post-trial briefs (Doc. 90 and 91) and responded to the brief filed by the other. (Doc. 93 and 94).
The Court hereby enters it Memorandum of Decision pursuant to Fed. R. Civ. P. 52(a)(1) which governs non-jury matters and provides that the Court's "findings and conclusions may be stated on the record after the close of the evidence or may appear in an opinion or a memorandum of decision filed by the court." After hearing the trial evidence and reviewing the parties' briefing, the Court hereby denies Court Twin City's motion for a declaratory ruling in its entirety. The Court hereby:
1. Reaffirms its summary judgment finding that Twin City has a duty to defend Alcast in the underlying adversary proceeding;
2. Reaffirms Twin City's obligation to pay 100% of the "loss," the costs of defense, which directly benefitted Alcast;
3. Reaffirms that Twin City is obligated to pay an allocated portion of those defense costs which benefitted both Alcast and other Defendants not insured by Twin City;
4. Reaffirms that Twin City is not obligated to pay defense costs which inured only to the benefit of non-insureds;
5. Denies that the policy Contract Exclusion applies to exclude coverage;
6. Finds that Alcast has met its burden of proof that Twin City is obligated to pay 39.71 % as its allocated share of those defense costs which benefitted Alcast along with other Defendants. See policy provision (Trial Ex. 10 at 8); and
7. Finds that Twin City has an obligation to indemnify Alcast in the underlying adversary proceeding up to the policy limits in the event that
any remains after payment of the attorney's fees.
I. BACKGROUND
On December 13, 2021, the Court entered an order on Twin City's motion for partial summary judgment and Alcast's motion for judgment on the pleadings, narrowing the issues. (Doc. 78). The Court determined that Twin City was obligated to pay Alcast's costs of defense, the legal fees incurred by Jenner & Block, which represented Alcast and 12 other Defendants in the adversary bankruptcy proceeding. The Court found Twin City would be liable for the attorney's fees which directly benefitted Alcast only, and those which benefitted Alcast and other Defendants, but not those which benefitted only other Defendants.
The Court also determined that Alcast had the burden of establishing how to allocate those attorney's fees incurred for the benefit of both Alcast and the other 13 Defendants. In addition, the Court determined there remained a trial issue of fact as to Twin City's duty to indemnify Alcast in the adversary proceeding. Although, the Court's December 13, 2021 order ruled that Twin City had a duty to defend, the Court allowed evidence going to this issue, to preserve the record on appeal.
A. Pacific Steel Adversary Proceedings
On June 19, 2014, the original Pacific Steel Casting Company, "Old Pacific Steel," was in bankruptcy in the U.S. Bankruptcy Court for the Northern District of California, Case No. 14-41045-RLE. On that date, Old Pacific Steel ("OPS") entered into an Asset Purchase Agreement ("APA") with Speyside Fund. (Trial Ex. 2 at Ex.1) Under the terms of the leveraged buyout, Speyside would purchase the OPS assets and liabilities, including liability for ERISA pension fund payments. (Doc 1-1 at ¶ 47). The new entity, "New Pacific Steel," was owned by Speyside Fund, Alcast, and individual Defendants Krishnan Venkatesan, Jeffrey Stone, and Eric Wiklendt. In August 2014, Speyside registered New Pacific Steel ("NPS"), with the California Secretary of State and assigned the assets and liabilities from OPS to NPS (Doc. 1-1 at ¶ 52).
Speyside Fund, itself, was owned by Speyside Equity, TD Trust, PD Trust, Robert C. Sylvester, Jeffrey Stone, and RataxasCo.
On August 15, 2014, Speyside Fund; Alcast, by President Steve Wessels; and the three individual owners Venkatesan, Stone and Wiklendt, who respectively served as the President, Manager and Member of NPS, entered into an Operating Agreement ("OA") as to the management of the OPS assets. (Trial Ex. 9). Speyside and Alcast each made a capital contribution of $1.225 Million. Speyside Fund, of which Venkatesan, Stone, Wiklendt, and Kevin Daugherty were partners, held a 41.65% interest in NPS; Alcast had a 41.65% ownership interest and Defendants Sylvester, RataxasCo and Speyside Equity had a membership interest. (Trial Ex. 9 at 34). Defendant Johnson was the Vice President of NPS, with Holt and Wessels acting as NPS managers. Holt was also an officer of Alcast while Wessels was Alcast's President.
While the Trustee identified Speyside's ownership interest in NPS as 39.7%, there was uncontroverted trial testimony from Steven Wessels that Speyside and Alcast each have an identical 41.65% ownership interest.
New Pacific Steel eventually sought bankruptcy protection, and, on November 4, 2019, the Bankruptcy Trustee filed a 13 Count adversary proceeding against 13 Defendants, naming Speyside Fund, Alcast, Venkatesan, Stone and Wiklendt, as "Owner Defendants." The Trustee also named Rataxasco, LLC; Speyside Equity, LLC; Kevin Daugherty, in his Trustee Capacity; and Robert C. Sylvester as both additional Owner Defendants and "Subsequent Transferee Defendants." Defendants Jeffrey Stone, Jerry Johnson, Brian Holt, Steve Wessels, and Kevin Daugherty were named as the "Management Defendants"; and UHY, LLP, as the "Accountants." The Trustee asserted, in part, that in 2014-2016 and again in 2018, the Management Defendants caused NPS to make preferential and illegal distributions to the Owner and Subsequent Transferee Defendants. (Doc. 1-1 at 2-3). The Trustee alleged that these actions "looted" the assets of OPS, which had previously been a "going concern," impoverishing it. The Trustee alleged that although NPS assumed various OPS liabilities, including that for ERISA union pension plan payments, it was left undercapitalized and these obligations were not met, leaving these amounts due and owing. (Doc. 1-1 at 4).
On June 3, 2020, the Bankruptcy Trustee filed a 14 Count Amended Complaint, asserting claims against the same Defendants for illegal distributions, breach of fiduciary duty, aiding and abetting breach of fiduciary duty, equitable subordination, avoidance of fraudulent and/or preferential transfers, recovery of avoided transfers, declaratory relief, and claim disallowance. (Trial Ex. 2). Counts 1, and 5-13, were directed against Alcast and the other Owner Defendants, generally realleging the two periods of allegedly illegal distributions which left NPS undercapitalized and unable to pay the pension fund liability; improper transfer of intellectual property, and dissipation of NPS assets. Id. In addition, the amended complaint contained a new Count 14, directed against Alcast and the other Owner Defendants, alleging that the Owner Defendants aided and abetted the Management Defendants' breach of fiduciary duty. The amended complaint reasserted that Alcast had received a total of $3,964,968 in illegal distributions. In addition, Count 14 asserted all the Owner Defendants were liable for "no less than $40 Million" for having allegedly aided and abetted the Management Defendants' breach of fiduciary duty. Id. at 53. The $40 million was unallocated and it was not clear whether this amount was asserted as to each Defendant or the Count 14 Defendants as a whole.
On January 17, 2020, Jenner & Block ("Jenner"), entered its appearance in the adversary proceeding on behalf of 13 Defendants, all except UHY. Jenner subsequently filed a motion for summary judgment which met with much success. On September 8, 2022, the Bankruptcy Court dismissed Speyside and the Count 14 claim for "at least $40,000,000 in compensatory damages." (Trial Ex. 12). The Trustee's request for leave to file an Interlocutory Appeal was denied. Twin City asserts that the $40 million is no longer at issue, while Alcast argues that the rulings could be overturned on appeal, so it still has potential exposure for the $40 million. (Trial Tr. 89 at 6).
B. The Trial Court's December 13 , 2021 Order
As previously noted, on December 13, 2021, this Court issued an order denying Alcast's Motion for Judgment on the Pleadings (Doc. 47) and Twin City's Motion for Partial Summary Judgment (Doc. 63). The Court granted Twin City's additional Motion for Partial Summary Judgment (Doc. 64), dismissing Defendants Holt and Wessels.
In the Order, the Court considered Twin City's liability for the Jenner fees where some of the work had inured not just to the benefit of Alcast, but to the benefit of some or all of the other Jenner-represented Defendants. The Court, referring to the relevant policy provision, found that the work done on behalf of Alcast and others was to be allocated between covered and non-covered loss. See policy provision below:
XI. ALLOCATION
Where Insureds who are afforded coverage for a Claim incur an amount consisting of both Loss that is covered by this Policy and also loss that is not covered by this Policy such Claim includes both covered and uncovered matters, then coverage shall apply as follows:
(A) with respect to a covered Claim for which the Insurer has the duty to defend:
(1) 100% of the Insured's Defense Costs shall be allocated to covered Loss; and
(2) All other Loss shall be allocated between covered Loss and non-covered loss based upon the relative legal exposure of all parties to such matters.
(Doc. 63 at 4); (Trial Ex. 10 at 8). The Court determined that Twin City owed 100% of the defense costs attributed to Alcast alone, none of the defense costs which benefitted only other Defendants, and an allocated share of those costs with benefitted Alcast in combination with others. Such Loss was to be allocated "based upon the relative legal exposure of all parties" as provided in the insurance contract. The Court identified the issue as determining how to allocate, finding that the burden of establishing the allocation was on Alcast. (Doc. 78 at 14).
(B) with respect to a covered Claim for which the Insurer does not have the duty to defend, all Loss shall be allocated between covered Loss and non-covered loss based upon the relative legal exposure of the parties to all such matters.
In its Order, the Court considered Twin City's combined reply where it asserted two policy exclusions. (Doc. 77). In the first, Twin City claimed that it was only required to cover "Loss" sustained by its insured, not "Loss" sustained by others. See (Trial Ex. 10 Directors, Officers and Entity Liability Coverage at 1):
If Entity Liability Coverage is included in ITEM 5 of the Declarations, the Insurer shall pay Loss on behalf of an Insured Entity resulting from an Entity Claim first made against such Insured Entity during the Policy Period or Extended Reporting Period, if applicable, for a Wrongful Act by an Insured Entity.The Policy defines "Loss" to include "Defense Costs" and "Damages." (Trial Ex. 10 at 2).
Twin City asserts that here, Alcast seeks payment of attorney's fees, not directly incurred by it, but incurred by parties who are not covered insureds. In its briefing, Twin City asserted that:
Alcast has taken the position that, since it is 1 of 13 parties being represented by Jenner & Block in the Underlying Lawsuit, Alcast is responsible for, and it has incurred, 100% of the fees and expenses expended for this joint defense. Exhibit B, pp. 51-52. However, Alcast has admitted that all of the other non-insured parties being defended by Jenner & Block have also incurred 100% of the same fees and expenses. Id. In other words, Alcast has admitted each party represented by Jenner & Block including Speyside Fund, LLC, a non-insured entity, and even Mr. Wessels himself, have incurred 100% of the fees and expenses associated with the joint defense of all them by Jenner & Block. Id. Alcast has also admitted that none of the other 12 defendants in the Underlying Lawsuit are "Insureds" under the Policy, yet they have incurred 100% of the Jenner Invoices. Id., pp. 43-46. As a result, all of the fees and expenses for which Alcast is seeking payment are fees and expenses that have all been
incurred (100%) by parties who are not covered insureds.(Doc. 77 at 20). The Court denied this argument, finding that under the contract terms Twin City was obligated to cover defense costs which inured to the benefit of Alcast, even if it also inured to the benefit of others, subject to an allocation or apportionment of these costs. See infra (Trial Ex. 10 at 8 (A)(2)).
The second policy exclusion cited by Twin City is the "Contract Exclusion." Twin City asserted that there was no coverage under the policy as Alcast's liability arise from contract, a specific exclusion. Twin City claims that under the terms of the APA, Speyside assumed liability for the OPS pension liabilities and Alcast subsequently assumed this liability under the terms of the OA.
The Contract Exclusion provides as follows:
EXCLUSIONS APPLICABLE TO INSURING AGREEMENT (C)(Trial Ex. 12 Directors, Officers and Entity Liability Coverage at 8). Twin City stated in it motion that although that it had asserted the Contract Exclusion in the complaint and again in its Reply, Alcast had neither responded nor denied. The Court pointed this out in its December 13, 2021 order, but nonetheless found "the issue of the contract exclusion has not been sufficiently addressed by the parties, such that the Court can resolve the issue on the present record." (Doc. 78 at 16).
(A) The insurer shall not pay Loss under insuring agreement (C) in connection with any Claim based upon, arising from, or in any way related to any actual or alleged:
(1) Liability under any contract or agreement, provided that this exclusion shall not apply to the extent that liability would have been incurred in the absence of such contract or agreement. However, this exclusion shall not apply to the portion of Loss directly resulting from: (i) a civil proceeding brought by a security holder of an Insured Entity, in their capacity as such, that is brought and maintained without the solicitation, assistance, or active part dissipation of any Insured Entity or Manager; or (ii) a Derivative Action or a Derivative Demand;
II. TRIAL
Prior to trial, the parties submitted a Joint Proposed Pre-Trial Order (Doc. 86) in which they identified the following issues:
(1) whether Twin City has a duty to defend Alcast in Pacific Steel; and
(2) the percentage of defense costs in Pacific Steel which should be allocated to covered Loss under the insurance policy.
While Twin City's complaint has also requested a finding as to its obligation to indemnify Alcast, this was not argued at trial for the practical reason that the attorney's fees alone would almost certainly exhaust the combined indemnity and defense policy limits of $2,000,000.00. See Portinga Opening Statement (Trial Tr. 89 at 11-12), noting the approximately $7,000,000 in legal fees and stating "[a]nd as of right now, the total loss is defense cost only. That will be the amount owed by Twin City up to the policy limits[.]" and "once you get above 28 percent or so, you hit the cap. You hit $2 million." In other words, if Twin City is found to have responsibility for 28% or more of the total legal fees, this will exhaust the policy limits and there will be no reserve from which to indemnify.
In the final pretrial order, the parties also stated, "to the extent that it is necessary to preserve their respective rights to appeal, the parties each dispute some of the issues resolved by the summary judgment opinion." (Doc. 82 at 3). As a result, the parties put on evidence at trial, and argued in their briefing, the issue of whether Twin City had a duty to defend Alcast in the adversary proceeding. The Court has largely not recounted these arguments in this order, due to its prior ruling.
A. EVIDENCE
At all relevant times, Twin City insured Alcast under Private Choice Premier Policy number 36 KB 0296823-19 which has a $2M Entity Liability Coverage. The Policy defined "Loss" to include both defense costs and damages. (Trial Ex. 10). There was evidence at trial that through July 28, 2022, Jenner had amassed almost $7,000,000 in attorneys' fees. (Trial. Ex. 6). The parties agreed that, depending on the Court's order as to the allocation, the policy limits could be exhausted by the defense costs alone.
1. Alcast's Case
Due to the Court's prior ruling, Alcast limited its evidence to the issue of the allocation, not presenting evidence as to the underlying duty to defend.
Wessels Testimony
Steven Wessels, President of Alcast and named as an Owner Defendant, testified for Defendant on direct examination by Mr. Marchand. Wessels testified that Alcast had been served with the bankruptcy adversary complaint in November 2019. Prior to this, Alcast had hired the Miller Johnson firm to respond to inquiries related to the adversary proceeding. At an unidentified point, Wessels and Jeffrey Stone of Speyside agreed that, as they represented the two entity Owner Defendants, as opposed to the individual Owner Defendants, they would split the attorney's fees on a 50/50 basis based on each entity's approximate 47% NPS ownership interest.
In November 2019, Wessels was served with the complaint in the adversary proceeding and forwarded it to Twin City. Wessels testified that he received an immediate response from Vullnet Kolari, Hartford Claims Consultant, and was told that the matter was under consideration. Some weeks later, on February 14, 2020, Kolari directed a letter to Wessels informing Wessels that Hartford Financial Products was handling the matter on behalf of Twin City and would defend Alcast under a reservation of rights. (Trial Ex 11). The letter stated, in part:
[I]n sum, Twin City agrees to provide Alcast with a defense in the Adversary Proceeding, subject to the reservation of rights detailed above . . . . Twin City will reimburse the reasonable cost of Alcast's choice of defense counsel to represent it in the Adversary Proceeding. Said counsel must be competent to handle the matter and be free of any conflict of interest. The undersigned will be in contact with Alcast to discuss its retention of defense counsel and payment of any fees.Id. at 15. Wessels testified that the letter did not restrict Alcast's choice of counsel, nor did it assert that defense costs would be paid on an allocated basis.
Wessels testified that Miller Johnson, which represented both Alcast and Speyside, reviewed the Jenner bills as they came in and submitted them for payment out of an escrow account funded by Alcast and Speyside. Wessels testified that Twin City did not make any payment on the attorney's fees for approximately 17 or 18 months. At that time, Twin City reimbursed Alcast approximately $50,000 in attorney's fees when, by then, the fees totaled several million dollars, amounts which had been paid by Alcast and Speyside.
Wessels explained that the Miller Johnson firm asked Jenner Attorney and Partner, Todd Toral, to separate out those charges which were not attributable to Alcast. Toral did so, and Miller Johnson used the revised figures to populate a spreadsheet. At trial, and over Defendant's objection, Wessels testified as to a summary created from the spreadsheet. The document, A Summary of Jenner's Invoices Submitted to Twin City for Payment, showed as of July 28, 2022, there were total attorney's fees of 6,994,778.43 with $6,644,048.43 attributable to Alcast. (Trial Ex. 6). Upon cross examination, Wessels admitted that he, personally, had only reviewed a "couple" of the Jenner bills and could not testify as to the accuracy of the figures.
Wessels was asked on direct examination as to his belief regarding Twin City's liability for the attorney's fees. He testified that he believed Twin City had 100% liability for all attorneys' fees, whether or not incurred on Alcast's behalf. He testified that each of the Defendants represented by Jenner was responsible for the entirety of the defense costs and, in the event the other Defendants were unable to pay, Alcast would be responsible for all of the fees. Wessels acknowledged, however, that the Court had found differently in its earlier order. With this in mind, he testified that Alcast was seeking a declaratory judgment that Twin City was liable for 38 or 39% "of all of our legal fees that we accrued in damages and losses." (Doc. 89 at 72).
Mr. Tranen undertook the cross examination of Wessels, asking him how the Jenner invoices were administratively handled. Wessels testified that Jenner addressed the invoices to Speyside. He was not aware of any Jenner invoices going directly to Alcast and was unsure as to whether it was Speyside which forwarded the invoices to Miller Johnson.
Attorney Tranen also questioned the witness as to the APA between OPS and Speyside. Wessels testified that Alcast might have reviewed it, and that he and Stone had discussions about it, but that Alcast was not a party to the agreement. Wessels testified that he was not sure whether anyone at Alcast had reviewed the APA. He testified that Alcast was not responsible for Speyside Fund's decision to sign and did not have a "side agreement" with Speyside as to the APA. (Trial Tr. 95-96).
As noted, Speyside, Jeffrey Stone, on behalf of Speyside, Alcast, Krishnan Venkatesan, Jeffrey Stone, and Eric Wiklendt entered into an OA for the operation of NPS. Wessels testified that when he signed the OA on behalf of Alcast, he was aware that Alcast and the other Owner Defendants would have responsibility for the liabilities Speyside had assumed under the APA. This included the pension liability, also referred to as one of the "withdrawal liabilities." The withdrawal liabilities would become due and owing on the happening of certain delineated events, one of which was NPS failing within five years of the purchase of OPS, an event which came to pass.
Attorney Tranen also questioned the witness as to the two periods of the allegedly illegal distributions. Wessels testified that he did not make the decision to issue the first set of distributions and could not recall who did. He indicated that it likely, however, it was someone associated with either NPS or Speyside.
Toral's Testimony
Todd Toral is a partner at Jenner and lead counsel representing 13 of the Defendants in the NPS adversary proceedings. Toral's testimony was submitted through de bene esse deposition testimony. Attorney Marchand conducted the direct examination, questioning the Witness about the Jenner bills. Toral testified that Alcast had signed the Jenner engagement letter and that he had many interactions with Alcast President Wessels, including presenting him for deposition. Toral confirmed that he reviewed bills sent to the client group, to identify those entries allocable to Alcast. Toral reviewed A Summary of Jenner's Invoices Submitted to Twin City for Payment, (Tr. Ex. #6), explaining that the column headed Strike Out Total reflected $170,264.50 in billing entries which were stricken as not allocable to Alcast. The remaining amounts reflected the work which benefitted Alcast in conjunction with the other Defendants. He testified that the Jenner bills were submitted to Speyside which would, in turn, seek contribution from the other Jenner-represented Defendants. Speyside was made the responsible party for administrative purposes, as Toral "did not want to chase thirteen separate Defendants" to collect fees. (Toral Dep. at 42).
Toral testified as to the allegedly illegal distributions taken by Alcast and Speyside in 2018. He explained that these "distributions" were actually repayments of loans made to NPS in which Speyside, at least, had the position of a secured creditor. When the witness was asked whether the distributions were made "pursuant" to the OA, he testified that the OA provided the "mechanism" for the distributions. (Toral Dep. at 60-61). Toral also opined that the Trustee would have difficulty establishing that the distributions were unlawful as these amounts represented the repayment of loans by the Owner Defendants. Toral testified that for the Trustee to prevail, she would have to establish that the subordinated debt owed by NPS to the Owner Defendants was actually "equity," so as to establish fraud in the distribution. (Toral Dep. at 91).
On cross examination, Attorney Tranen asked Toral whether Alcast's liability was limited to the allegedly illegal distributions and pension fund withdrawal liability. He answered that there were other alleged withdrawal liabilities beyond the pension fund liabilities. Furthermore, the Trustee's allegations of undercapitalization went beyond these issues, calling into question:
[A]ccounting treatment in terms of new balance, the opening balance sheet, the accounting treatment of the inventory . . . identifying and isolating the correct accounting treatment under GAP for purposes of its first audited financials. And then as well as tax issues that are related to - to certainly profit, loss, tax distributions, etc. were sort of all part of the factual makeup on an allegation about being under-capitalized.(Toral Dep. at 80).
Toral testified there was the further issue of the Trustee's claim that the Owner Defendants had illegally transferred intellectual property from NPS to other foundries in which they had an interest. When asked whether Alcast, specifically, had liability for such transfers, Toral declined to answer, citing attorney-client privilege. (Toral Dep. at 88).
Toral noted that Jenner's motion for partial summary judgment in the adversary proceedings had met with significant success. He asserted that the dismissal of the Count 14 allegations amounted to a "gutting of the case on the withdrawal liability theory that was their primary engine of the case." (Toral Dep. at 92). On redirect, Toral testified that the claims in the underlying adversary proceedings were in tort: claims of actual fraud, and constructive fraud as to the allegedly fraudulent conveyances; and indirect tort claims for aiding and abetting the Management Defendants. He testified, further, that each Owner Defendant would be jointly and severally liable for any damages. (Toral Dep. at 127).
2. Twin City's Case
Plaintiff, without objection, placed into evidence the August 18, 2022 and September 8, 2022 Summary Judgment Orders entered in the bankruptcy proceeding. (Trial Ex. 12, 13). Mr. Tranen asserted, without objection, that the under the terms of the orders, Count 14 was dismissed in its entirety.
Testimony of Mr. Kolari
Attorney Duffy called Vullnet Kolari, Hartford claims examiner, as a witness on behalf of Twin City. On direct examination, Kolari testified that Alcast was not assigned defense counsel as there were "significant coverage issues," and it was anticipated that Twin City would file a declaratory judgment action. As a result, it was deemed to be in Alcast's best interests that it secure its own counsel. This limited questioning regarding the Jenner bills is reproduced here in total:
Q. So do you recall when you received any bills from any of the Jenner & Block invoices or any of the other invoices that might have been incurred with respect to the underlining Pacific Steel litigation?
A. If my memory serves me correctly, the first time we received any bills with respect to this matter was during the initial disclosures in this litigation. It was months later. I don't recall the exact date.
Q. Did Twin City ever approve of any sort of arrangement to pay the Jenner & Block invoices between Speyside and Alcast?
A. At the outset, no.
Kolari's offered no further testimony. Mr. Portinga declined cross examination and Mr. Duffy rested, concluding the evidence.
3. Questioning by the Court
At the conclusion, the Court questioned the import of Kolari's February 14, 2020 letter agreeing to defend subject to a reservation of rights. (Trial Ex. 11). Mr. Duffy responded on behalf of Twin City, "we're not admitting a duty to defend, but we're saying we'll pay defense costs pursuant to a reservation of rights. In other words, by doing this we're not prejudicing our position that there is no coverage at all. And that's, I think, what the letter does." (Trial Tr. 89 at 135). This precipitated the following exchange:
THE COURT: "[i]f Alcast had simply hired Jenner & Block to represent Alcast and nobody else, didn't enter into this agreement, would Twin City's position be different?"(Trial Tr. 89 at 135).
MR. DUFFY: In terms of whether or not we would pay those costs?
THE COURT: Right.
MR. DUFFY: Well, I think if they were reasonable, given what was needed to be accomplished for Alcast in this case, yes.
THE COURT: Okay.
MR. TRANEN: I mean, if they were just defending Alcast, and it was 100 percent defense's costs; meaning, it wasn't for — it wasn't be incurred by others, then I think neither the argument about defense's costs or the allocation would come into play because you wouldn't drop down to B. It would be 100 percent defense costs.
MR. PORTINGA: Very briefly. I just think that the Court's question really
puts the — your finger right on the issue, which is that if Alcast had hired Jones Day as only their lawyer, and that lawyer had gone to every deposition, every hearing with every piece of paper produced in discovery in duplicated efforts, we wouldn't be here today.(Trial Tr. 89 at 137).
An apparent reference to this policy provision: "(B) with respect to a covered Claim for which the Insurer does not have the duty to defend, all Loss shall be allocated between covered Loss and non-covered loss based upon the relative legal exposure of the parties to all such matters." This provision is not in issue here as the Court previously characterized it as "anticipat[ing] a scenario where Twin City does not have a duty to defend but may nevertheless be liable for indemnification. In that scenario, the insured's liability is subject to allocation." (Doc. 78 at 14).
III. FINDINGS AND CONCLUSIONS
The parties have submitted posttrial briefing to which the other has responded. At trial, Twin City reasserted that it is not liable for Alcast's costs of defense as they do not constitute "Loss" under the policy as they were allegedly incurred by Speyside, or Speyside and the other Defendants, which are not insured under the policy. The Court dismissed this argument in the December 13, 2021 Order (Doc. 78), finding that Twin City was responsible for 100% of the fees which benefited Alcast alone and none of the fees which benefited only the co-defendants. Fees for the benefit of both Alcast and its co-defendants were "to be apportioned based on the relative legal exposure of all 'parties to such matters.' " Id. at 14. The Court reaffirms its prior finding that Twin City is liable for the Jenner fees incurred within the indicated parameters. The Court will go on to discuss whether the Contract Exclusion takes Alcast outside the policy coverage, as this was not addressed in the prior order.
A. THE CONTRACT EXCLUSION
Twin City asserts that the policy Contract Exclusion relieves it of any duty to defend. It claims that the illegal distribution claims in the adversary proceeding, although pled in tort, actually arise from contractual liability. This is allegedly liability which Alcast assumed through its OA with Speyside. The Trustee pled that, while Speyside and OPS were the only parties to the APA, Speyside acted on behalf of the Owner Defendants when it pledged that NPS would honor and satisfy OPS's Withdrawal Liabilities." (Trial Ex. 2 at ¶ 174). See adversary proceeding amended complaint:
See Policy at Sec. V. (A)(1) applying an exclusion to "liability under any contract or agreement . . ."
174. As a material term of the APA, Speyside Fund, as an agent of and on behalf of the Owner Defendants, pledged that New Pacific Steel would honor and satisfy Old Pacific Steel's Withdrawal Liabilities. Nevertheless, the Management Defendants at the instruction of the Owner Defendants never accounted for, honored, or satisfied these obligations on an ongoing basis from the inception of the APA and throughout the operation of New Pacific Steel.
While Alcast admits that this accurately reflects the allegation, it does not admit to its truth. See Wessels testimony. (Trial Tr. at 108-10). Mr. Wessels also testified, without admitting as to its truth, that the Trustee claimed that under the APA, if NPS withdrew from the pension plan or failed within five years of the closing of the leveraged buyout, these amounts would become immediately due and owing by NPS. Twin City asserts that the claims in the adversary proceeding arise from these contractual obligations and, if it were not for these contractual obligations, the Trustee could not proceed against Alcast. Alcast argues otherwise, that the illegal distribution claims are pled in tort, under which the Trustee may proceed without any reliance on contract. (Doc. 94 at 8).
Twin City asserts that the Contract Exclusion applicable to claims "based upon, arising from, or in any way related to any actual or alleged . . . liability under any contract or agreement . . ." is "incredibly broad" and applicable to tort claims if they arise from contract liability. (Doc. 91 at 13). Alcast responds that the illegal distribution claims do not arise from the OA as the damages which the Trustee seeks against each Owner Defendant do not correspond to their respective ownership interests under the OA. The Trustee, in fact, referenced the OA only in the Count 1 illegal distribution claim and did not file a copy of the OA with the amended complaint.
Id. citing Twin City Fire Ins. Co. v. Vonachen Servs., 567 F. Supp. 3d 979, 1001 (C.D. Ill. 2021) (finding Contract Exclusion language " 'incredibly broad, suggesting only a minimal connection is necessary' for the exclusion to apply."
As the insurer, Twin City has the burden to prove that the Contract Exclusion applies. Twin City Fire Ins. Co. v. Vonachen Services, Inc., 567 F. Supp. 3d 979, 995 (C.D. Ill. 2021) (citing Am. Bankers Ins. Co. of Fla. v. Shockley, 3 F.4th 322, 330 (7th Cir. 2021). "A decision to excuse an insurer's duty to defend based on an exclusionary clause in the contract 'must be clear and free from doubt.' " Id. (citing Zurich Am. Ins. Co. v. Ocwen Fin. Corp., 990 F.3d 1073, 1078 (7th Cir. 2021). Exclusions are construed against the insurer and reasonable disagreement as to the applicability of an exclusion must be resolved in favor of the insured. Id. In addition, "[t]he factual allegations of the complaint, rather than the legal theories, determine a duty to defend." Lyons v. State Farm Fire and Cas. Co., 349 Ill.App.3d 404, 285 Ill.Dec. 231, 811 N.E.2d 718, 722 (5th Dist. 2004).
Twin City cites the Vonachen case which was before this same Court. There, Plaintiff Twin City filed a declaratory judgment asserting that it did not have a duty to defend its insured, Vonachen Services, for claims made by Vonachen employees under the Illinois Biometric Information Privacy Act ("BIPA"), 740 ILCS 14/1 et seq. The policy at issue there had prefatory language exempting coverage for invasion of privacy claims, essentially identical to the prefatory language in the Contract Exclusion at issue here. The provision there exempted coverage for claims "based upon, arising from, or in any way related to any actual or alleged . . . invasion of privacy" Id. at 1001.
The Vonachen plaintiff asserted that the exclusion should not apply as under Illinois law, "procedural BIPA violations" were not invasions of privacy. Id. at 999. The Court there found the exclusion should be broadly construed, and in that case, excluded coverage of that claim. In making this determination, the Court conducted a "but-for" analysis. The Court found that the complaints "invoke[d] BIPA violations" and plaintiffs' injuries would not have occurred but for the unconsented collection of their data. Id. at 1001 (emphasis added). The Vonachen case did not concern the contract exclusion at issue here and was cited to suggest that the contract exclusion, should be as broadly applied as in the privacy exclusion.
Twin City cites a series of other cases to support a broad interpretation of the Contract Exclusion. In RSUI Indemnity Co. v. McDonough District Hospital, No. 16-04177, 2017 WL 4319117, (C.D. Ill. Sept. 28, 2017), the court upheld a similar policy exclusion based on claims "[a]lleging, arising out of, based upon or attributable to, in whole or in part, any liability under or pursuant to any contract or agreement, whether oral, written, express or implied, including the liability of others assumed by an Insured, unless such Insured would have been liable in the absence of such contract or agreement . . ." Id. at *2. There, however, the plaintiff had pled claims for conspiracy to breach a contract and intentional interference with a contract, clearly contract based claims. Id. at *4.
In another cited case, W. World Ins. Co. v. Frieden, No. 16-04038, 2018 WL 9880231 (C.D. Ill. July 18, 2018), the court considered a declaratory judgment action where the insured had been sued under a property management agreement for conversion, breach of fiduciary duty, breach of contract, accounting, breach of the covenant of good faith and fair dealing, embezzlement, and breach of the Illinois Real Estate License Act ("RELA"). The court found that several exclusions applied to defeat coverage. The first was that the insurance contract defined "loss" as damages arising from an insured's wrongful act. Id. at *2. The court found there was no covered "loss" where the requested relief requested was that the insured return money he "was not entitled to keep." Id. at *7 (finding "[d]isgorgement of profits is not an insured loss under the Policy" and "restoration of an ill-gotten gain' is not a 'loss' within the meaning of an insurance contract.") Id. at *21. The claim was also excluded by the theft, comingling of funds, and contract exclusions, with the court specifically finding "the claims are all premised on duties under a property management contract . . ." There, the plaintiffs in underlying cases had asserted a breach of the property management agreement, while the Trustee here has not similarly asserted a breach of contract.
Twin City also cites Altom Transp., Inc. v. Westchester Fire Ins. Co., 823 F.3d 416 (7th Cir. 2016), another case not directly on point. There, the court upheld a policy contract exclusion where the complaint had alleged the breach of a lease agreement. ("We can think of no reason why that lease agreement is not a "contract" as the policy uses the term . . ."). Id. at 421. In the cited cases, the plaintiffs either pled a breach of contract or pled claims directly arising from a contract violation. In the NPS litigation, however, the Trustee has pled tort claims and it is not readily apparent that the claims arise out of a contract violation. See Twin City's brief asserting that Alcast's liability in the adversary proceeding is "based on or attributable to [these two] contract[s] . . ." (Doc. 91 at 23).
To support that the Count 14 allegations are subject to the Contract Exclusion, Twin City cites cases where a contract exclusion was applied in a breach of fiduciary duty claim. In Russell v. Liberty Ins. Underwriters, 950 F.3d 997 (8th Cir. 2020), the three owner-shareholders of a company entered into an agreement characterized by the court as the "Stock Agreement." Under the terms, the company agreed to purchase life insurance policies on each of the three shareholders. In the event of death, the company would use the insurance proceeds to buy the deceased shareholder's stock from his personal representative. One of the three, Daniel, died, but the company kept the life insurance proceeds and did not buy Daniel's shares. Daniel's widow, Elizabeth, filed state court claims of conversion and breach of fiduciary duty; and judgment entered against the company. When the company sought indemnification from its insurer, the insurer denied coverage and removed the case to federal court.
Once in federal court, the insurer asserted a contract exclusion, citing the company's agreement to purchase the shares of a deceased owner. The court found that the exclusion applied, due to "the company's broken promise to pay Daniel's life-insurance proceeds to Elizabeth . . ." Id. at *10. There, although Elizabeth had alleged tort claims, the written agreement was considered the source of the owners' duty. In other words, if not for the Stock Agreement, the company would have had no obligation to purchase insurance to create a fund and use the proceeds to buy Elizabeth's shares. Here however, Twin City has failed to establish that, absent the APA or OA, Alcast would have no potential liability in the adversary proceeding.
Another case, Office Depot, Inc. v. AIG Spec. Ins. Co., 829 F. App'x 263 (9th Cir. 2020), involved an underlying False Claims Act case against Office Deport. Office Depot filed a declaratory action against its insurer, disputing the insurer's efforts to assert a contract exclusion. In that case, however, Office Depot had made contrary admissions in the record. Id. at 264 ("In Office Depot's own words '[t]he heart of this suit is the contention that Office Depot overcharged California government entities under the terms of particular contracts.' Office Depot's in-house counsel testified that 'the claims are related to [Office Depot's] performance or nonperformance under [Office Depot's] government contracts . . .' " There is no such admission here.
The Court, similarly, does not find illuminating TriPacific Capital Advisors, LLC v. Fed. Ins. Co., 2022 WL 423409 (C.D. Cal. Jan. 28, 2022). There, the court considered a contract exclusion in a dispute asserting a breach of fiduciary duty. The insurer asserted that the controversy was subject to the exclusion as it arose from an employment contract. The insured employer claimed the fiduciary duty did not arise from an employment contract, but through the employee's ownership interest in a joint venture. The court found "the only two potential sources [of the fiduciary duty] are either the alleged oral agreement in the summer of 2015 or the 2016 Employment Agreement . . . Absent the agreement with [employee] that allegedly created the fiduciary duty, there would be no liability that existed. Id. (citing Office Depot, Inc. v. AIG Spec. Ins. Co., No. 15-2416, 2019 WL 4570011 at *5 (C.D. Cal. June 21, 2019), aff'd, 829 F. App'x 263 (9th Cir. 2020) (applying a contract exclusion where claims could not have been raised "absent the underlying contracts"). Here, Twin City has failed to establish that the Trustee's tort claims could not have been raised, absent a contractual source of duty.
For its part, Alcast asserts that all of its potential liability arises from tort, citing the previously identified trial testimony of Toral and Wessels. The witnesses each characterized the amended complaint as pleading in tort; with Toral additionally testifying to a possible equitable subordination theory. (Trial Tr. at 128). Alcast asserts that this is supported by the allegations of the amended complaint itself which, at paragraph 174, references the APA in relation to the Owner Defendants' "tortious conduct with respect to allege ERISA withdrawal liabilities," not claiming that contract liability arose under the APA. (Doc. 90 at 21). Alcast also notes, while Speyside Fund was a party to the APA, Alcast was not. (Trial Tr. at 96).
Twin City has two arguments in response. The first is that the Trustee has asserted that Speyside acted on behalf of Alcast and the other Owner Defendants when it entered into the APA. There was not trial testimony in support, however, as Wessels testified that Alcast was not directly involved in the agreement between Twin City and OPS; and did not believe Alcast reviewed the APA prior to the other two signing it.
Twin City offers the second argument, that the APA applies to Alcast as the Contract Exclusion excludes liability under any contract, not just a contract to which the insured is a party. (Doc. 93 at 11). The Court need not further consider this, however, as the Contract Exclusion, itself, provides that it will not apply if liability "would have been incurred in the absence of such contract or agreement." See OneBeacon America Insurance Co. v. City of Zion, 119 F. Supp. 3d 821 (N.D. Ill. 2015) (finding that policy contract exclusion which applied to the city defendant did not apply to the individual defendants where the court could not "conclusively determine that [the] alleged wrongful acts would not have arisen but for breach of Contract . . ."
The Court finds that Twin City has failed to establish that the Trustee would have had no recourse against Alcast, absent the APA. In other words, Twin City has not proven that, if not for the APA, the Trustee could not have brought claims for the alleged dissipation of NPS assets. Clearly, the Trustee had other recourse as she asserted fraud claims, without reliance on the APA. The fact that there was an APA in effect does not establish that any liability Alcast might have for "aiding and abetting" arose from that agreement, rather than independently of it. That is, the injuries alleged would not have occurred "but-for" a violation of the APA. Vonachen, 567 F. Supp. 3d at 995. As a result, even if the APA were imputed to Alcast as Twin City suggests, it would not preclude coverage.
Twin City also asserts that Alcast is liable under the OA, to which it admittedly was a party. Alcast responds that the OA is only mentioned in Count I paragraph 119, and that Toral's testimony characterized the alleged illegal distribution as claims for fraudulent conveyance, and actual and constructive fraud. Alcast asserts that the alleged fraud could have been, and was pled, without reliance on a contract theory. Here, again, the Court does not find but-for causation, that but-for a violation of the OA, the injuries alleged by the Trustee would not have occurred. Id.
Alcast also claims that under Bradley Hotel Corp. v. Aspen Specialty Ins. Co., 19 F.4th 1002, 1006-07 (7th Cir. 2021), Twin City must "conclusively demonstrate" that the Contract Exclusion applies to all alleged theories of recovery. That as long as "one theory of recovery" potentially falls within the Policy's coverage, "Twin City has a duty to defend the entire case against Alcast." (Doc. 94 at 7) (citing id. at 1006-97).
Alcast asserts that eight of the nine counts against it allege the illegal distributions, under tort and equity theories; and the Count 14 claim for aiding and abetting also sounds in tort. Alcast asserts that the amended complaint does not allege a breach of contract, and any reference to the APA "is only tangentially related" to the tort claims. (Doc. 94 at 14). Even if it were otherwise, and the OA reference in Count I or the APA reference in Count 14 were found to trigger the Contract Exclusion, it would not relieve Twin City of the duty to defend, as long as any claim remained outside of the exclusion. See Bradley, 19 F.4th 1002, 1006-07; Lexington Ins. Co. v. Chicago Flameproof & Wood Specialties Corp., 950 F.3d 976, 980 (7th Cir. 2020) ("[a]n insurer must defend an insured even if only one theory of recovery in the underlying complaint[ ] is within the potential coverage of the policy.").
Alcast argues that the Court should not adopt Twin City's "nearly limitless interpretation" of the Contract Exclusion's "arising out of" language. Alcast argues that such an interpretation would swallow whole the applicable D&O coverage as "the mere presence of a contract connected in any way to the insured entity's business dealings" would be enough to exclude coverage. (Doc. 94 at 15) (citing Illinois Farmers Ins. Co. v. Keyser, 353 Ill.Dec. 713, 956 N.E.2d 575, 578 (Ill. App. Ct. 2011) ("declin[ing] to adopt an interpretation that would lead to illusory coverage"). The Court agrees, Twin City has failed to establish that Alcast's potential liability in the adversary proceeding arises only from the OA or APA and the Trustee could not have asserted the fraud and dissipation claims had they not been in effect.
As noted, "[e]xclusions are construed against the insurer and reasonable disagreement as to the applicability of an exclusion must be resolved in favor of the insured." Vonachen, 567 F. Supp. 3d at 995). In addition, exclusions are to be "read narrowly" and only enforced where the application of the exclusion is "free and clear from doubt." Bradley, 19 F.4th at 1006-07. The Court finds that Twin City advocates an overbroad interpretation of the Contract Exclusion. D&O coverage is intended to indemnify companies for the negligence and tortious acts of its officials. In any corporate litigation, there will likely be some tangentially related contract which, under Twin City's argument, would serve to defeat the bargained-for coverage, no matter what theory was pled in the complaint. To find otherwise would, as Alcast suggests, amount to illusory coverage. As a result, the Court will go on to consider how these defense costs are to be allocated.
THE ALLOCATION
The Court determined at summary judgment that Twin City is liable for Alcast's defense costs which, due to Jenner's representation of multiple Defendants, must be allocated "based upon the relative legal exposure of all parties." The Court also found that Alcast has the burden of proving the apportionment. (Doc. 78 at 12).
Twin City notes that while the policy provides for an allocation between covered and uncovered loss, it does not define "the relative legal exposure of all parties." Twin City advocates defining the term as "the [proportionate] amount of [legal] liability or other [legal] risk to which a person is subject." (Doc. 91 at 35) (citing Commer. Capital Bankcorp, Inc. v. St. Paul Mercury Ins. Co., 419 F. Supp. 2d 1173, 1183 n.7 (C.D. Cal. 2006). Twin City asserts that "legal exposure" and "legal liability or risk" are synonymous terms, requiring that the Court apportion defense costs by comparing Alcast's legal exposure to that of the other 13 non-insured Defendants.
Twin City asserts that Alcast's relative legal exposure has varied at times throughout the litigation. Twin City harkens back to the initial complaint which did not have the Count 14 $40 million claim against Alcast but which asserted $40 million against five other Defendants. Twin City asserts that Alcast's legal exposure at that time was no more than 7.295%. That is, Alcast's exposure for the allegedly illegal distributions of $3,964,968 divided by $54,348,177 (the $14,410,199 in illegal distributions attributed to the other Defendants plus the $40 million). See below:
$3,964,968 / $54,348,177 = 7.295%
Twin City suggests two different potentials figures for Alcast's legal exposure from June 4, 2020, when the amended complaint added the Count 14 claim, through August 18, 2022, when the claim was dismissed in the adversary proceeding. In the first, Twin city argues that Alcast does not have liability under Count 14 as the potential liability is to Speyside. Twin City asserts that, while Alcast received the distributions, it did not encourage the Management Defendants to authorize them. (Doc. 93 at 21). Twin City argues that in such a case, the relative exposure would remain at 7.295%. If Alcast were found to have potential liability under Count 14, the relative exposure would increase to 12.55%. This figure is arrived at by dividing the $40 million liability evenly among the fourteen Defendants for a total of $2,857,143 potential liability each as to Count 14. (Doc. 91 at 42-44).
$3,964,968 + $2,857,143 / $54,348,177 = 12.55%
Twin City asserts, however, that after Counts 2, 7, 8, 9, 11 and 14 were dismissed in the adversary proceeding, the $40 million and the initial distributions of $10,748,177 are no longer at issue. The issue of the second distribution remains, with Alcast potentially liable for $159,250 and the other Defendants potentially liable for $3,600,000. Twin City asserts that Alcast's relative legal exposure from August 18, 2022 onward, is 4.42%.
$159,250 / $3,600,000 = 4.42%
In support of its scheme to truncate the defense costs, Twin City cites one case, Level 3 Communications, Inc. v. Federal Ins. Co., 168 F.3d 956 (7th Cir. 1999), which the Court does not find particularly instructive. There, Pompliano, a former director of a corporation's subsidiary, joined as a plaintiff in a securities fraud suit against the corporation. As Pompliano was an insured under the defendant corporation's policy, the "Insured versus Insured" exclusion applied. The court found the insurer was not obligated to pay over Pompliano's share of the settlement as it was an uncovered loss, subject to the policy exclusion. See id. at 960 ("A matter could be uncovered . . . because it excluded a particular type of claimant."). As a result, the settlement was to be allocated without including Pompliano's proportionate share. The case does not, as Twin City suggests, support truncating liability at different points in the litigation. Twin City does not cite any cases to support this novel approach and there was no trial testimony supporting it.
Twin City also disputes that Alcast's share of the legal bills should be based on Alcast's 41.65% ownership share in NPS. Twin City cites Toral's testimony to support that the Trustee's claims against the Owner Defendants are not based on their proportionate ownership share in NPS. (Toral Dep. at 93-95). However, reviewing the testimony, it appears that Toral did not provide a definitive answer.
Q. We can agree that Alcast's liability isn't close to 40%, or potential liability, based upon the claims by the trustee, isn't close to 40% of that 3,600,000, right?Id. at 94.
A. I do not-I do not know where that 40% figure comes from. I was not consulted about that. It is not something that I am aware of. So it's a hypothetical that I don't think I'm able to answer.
Q. All right. Is there anything-any allegation that you've seen assocs - by the Trustee that the 40 million is allocated by-or the 40 million -plus obligation should be allocated by ownership interest in the Operating Agreement?Id. at 95.
A. I haven't seen that allocation by the Trustee.
Twin City further disputes the economy of Alcast's decision to being co-represented by Jenner along with the 12 other Defendants. Twin City asserts that Speyside and Jeffrey Stone are the real focus in the adversary proceeding, and Alcast defense costs "reasonably would have been a fraction of those incurred by the remaining defendants." (Doc. 93 at 18). Twin City asserts that "Alcast has nothing to do with these allegations of wrongful conduct" citing the various allegations of the Trustee's amended complaint. (Doc. 91 at 40). Alcast, at a minimum, received the distributions, the second of which remains in issue. These distributions allegedly caused NPS to be undercapitalized and unable to pay the Withdrawal Liabilities, among others. When Mr. Toral was asked about this during his testimony, he cited attorney client privilege and declined to answer. There remains an issue, therefore, as to the extent of Alcast's potential liability compared to that of Speyside and Stone.
Alcast disputes Twin City's interpretation of "relative legal exposure." Alcast asserts that exposure is a forward-looking term to be applied prospectively, based on the allegations of the amended complaint which, under the relation back doctrine, is the operative pleading. It is Alcast's position that, despite the dismissal of various counts against it in the adversary proceeding, it continues to have "exposure" under the other dismissed claims until a final judgment is rendered in the adversary proceeding. See (Doc. 90 at 28) (citing Toral Dep. at 92-93) ("[B]ased on the threats that have been made to me and that I'm aware of, the Trustee will appeal the whole thing.").
See Fed. R. Civ. P. 15(c)(1)(B) ("An amendment to a pleading relates back to the date of the original pleading when . . . the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out—or attempted to be set out—in the original pleading[.]")
Alcast asserts, that to determine its relative legal exposure, one must look to the damages sought in the amended complaint, damages which potentially include the $40 million. Alcast proposes dividing its exposure by the total exposure of all Defendants, multiplied by the defense costs. Alcast suggests that the total exposure of all Defendants is $54,410,199; the Owner Defendants' total alleged illegal distributions of $14,410,199, and "no less than $40,000,000" alleged in Count 14.
While Alcast asserts that the total illegal distribution exposure of all Defendants as $14,410,199, Twin City identifies it as $14,348,177. The Court believes that the latter figure is correct but, for purposes of this order has used the figures provided by each party. See amended complaint (Doc. 22-3 at 150, 152).
It suggests that its own exposure would vary determining whether the entire $40 million is attributable to it, as it is unallocated in the amended complaint and subject to joint and several liability. (Toral Dep. at 17). If held liable for the entire $40 million, Alcast's legal exposure would be the amount of the allegedly unlawful distributions, $3,964,968 plus the $40 million, for a total exposure of $43,964,968.
$3,964,968 + $40,000,000 / $54,410,199 = 80.80%
If Alcast's Count 14 legal exposure was based on its 41.65% ownership interest in NPS, the total potentially attributable to it would be $16,660,000. This, when added to the $3,964,968 in the alleged illegal distributions amounts to $20,624,968.
$20,624,968 / $54,410,199 = 37.91%While Alcast asserts alternatively that Twin City is liable for either 80.80% or 37.91% of the Jenner fees, it claims that this is of little consequence where there is only $2 million in coverage and Alcast had incurred over $6.6 million in defense costs through June 2022, with costs continuing to mount.
As Twin City asserts, this appears to be a case of first impression as to the manner in which to allocate defense costs when multiple non-insured Defendants and an insured Defendant are represented by the same counsel. (Doc. 91 at 30). The Court notes that in the Level 3 Communications case cited by Twin City, the Seventh Circuit discussed the plaintiffs' settlement where Pompliano, one of the settling plaintiffs, was precluded under the insurer vs. insurer exclusion. The Seventh Circuit ordered that Pompliano's share of the settlement be carved back, stating "and we assume (a matter on which the record is strangely silent) that [the plaintiffs] shared in the settlement in proportion to their shareholdings. Pompliano had 16 percent of the shares and so presumably received 16 percent of the settlement . . ." 168 F.3d at 960. While not directly on point, this is some indication that where there is to be an apportionment between parties who have an ownership interest in an entity, it is reasonable to structure the apportionment on the percentage of that ownership.
IV. CONCLUSION
Here, the Court finds that Alcast has met its burden of proof to establish that the attorney's fees incurred by it and by other non-insured Defendants which inured to its benefit, are to be allocated based on Alcast's ownership interest in NPS. It is uncontested that Alcast has a 41.65% ownership interest and, therefore, has a relative legal exposure of a 37.91%.
IT IS THEREFORE ORDERED:
Plaintiff Twin City's Complaint for Declaratory Judgment (Doc. 1), is DENIED. The Court finds that the policy Contract Exclusion cited by Twin City does not apply to defeat coverage for this claim. The Court has previously found that the attorney's fees in this case are a covered "loss", and that Twin City has a duty to defend Alcast and pay 100% of the attorney's fees incurred on behalf of Alcast only; and to pay the attorney's fees incurred for the benefit of Alcast and others. The Court finds that the policy requires an allocation where a matter involves both covered and non-covered loss. It finds that Twin City must pay 37.91% of the attorney's fees which inure to the benefit of Alcast and others and must indemnify Alcast if any coverage remains after payment of defense costs.