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Category: Fees & Insurance Policy

Chancery Court: Railroad Operator’s Attorney Fees Must Be Covered

November 27, 2020

A recent Law 360 story by Rose Krebs, “Railroad Operator’s Fees Must Be Covered Chancery Says,” reports that a Delaware vice chancellor ruled that American Rail Partners LLC must cover legal expenses incurred by a railroad ownership company that it sued over unjust enrichment claims, saying an agreement in place "unambiguously" provides that expenses be covered.  In a 24-page memorandum opinion, Vice Chancellor Paul A. Fioravanti Jr. said fee advancement provisions of American Rail Partners' limited liability agreement are "quite broad" and unambiguous.

"For purposes of this action, there is no dispute that the plaintiffs are covered persons under the broad advancement and indemnification provisions of the company's limited liability company agreement," the opinion said.  International Rail Partners LLC, its manager Gary O. Marino and Boca Equity Partners LP sued American Rail for the advancement of fees earlier this year, asserting that their LLC agreement entitles them to "mandatory advancement and indemnification" related to a suit filed in the First State's Superior Court in February.

Boca Equity is the sole owner and only member of International Rail, according to court filings. International Rail is one of two members of American Rail, the opinion said.  Despite the "broad scope" of the advancement provisions, American Rail had argued it should not be required to advance legal fees because the LLC agreement "does not provide indemnification for claims between the company and any covered person — what it calls 'first-party claims,'" the suit said.

American Rail argued that "an indemnification or advancement provision may only cover first-party claims if it expressly says so," the opinion said.  The vice chancellor, however, said that argument was "not based upon a plain reading" of the agreement, and there is a "strong public policy in favor of indemnification and advancement" in Delaware.  That policy aims to assure key corporate officers that they will not have to shoulder the risk of paying legal expenses for claims related to the performance of their duties, the opinion said.

In April, Vice Chancellor Fioravanti refused to toss the suit, saying questions remained about fee advancement provisions agreed to by the parties. The vice chancellor said he couldn't conclude as a "matter of law" that American Rail offered the only "reasonable" interpretation of the applicable limited liability agreement.  Although Vice Chancellor Fioravanti identified certain shortcomings with how the complaint was pled, including a failure to invoke certain advancement provisions that were later referenced in briefings, he said there was not enough cause to toss the Chancery Court suit.

Judge Tosses Suit Seeking Coverage of Defense Fees

November 23, 2020

A recent Law 360 story by Rachel O’Brien, “Judge Nixes Suit For Crypto Co. Investor’s $728K Atty Fees,” reports that a New York federal judge tossed a lawsuit by an alleged pump-and-dump scheme mastermind asking for his attorney fees to be paid by a cryptocurrency company involved in the alleged scheme, ordering the man to pay the company's fees instead.  While Barry Honig and his business GRQ Consultants Inc. point to indemnification clauses in agreements with Riot Blockchain as proof that his legal fees should be paid, U.S. District Judge Naomi Reice Buchwald said the clauses say the opposite.

Honig, at one time the largest shareholder in Riot Blockchain, spearheaded a $27 million pump-and-dump scheme involving 10 individuals and 10 associated corporate entities, the U.S. Securities and Exchange Commission alleged in September 2018.  Honig and others, including former Teva Pharmaceutical Industries Ltd. chairman Phillip Frost and Riot Blockchain CEO John O'Rourke, manipulated stock prices in three microcap companies and left investors holding "virtually worthless shares," the SEC said.

In July 2019, Honig settled the SEC claims without admitted any wrongdoing, submitting to an injunction barring him from future violations of federal securities laws, a penny stock ban and further restrictions.  Honig was named in several other suits, including in five shareholder derivative actions which alleged Riot, its directors and officers and Honig violated securities laws, and that Honig bought stock from Riot to gain "control" over the company so he could violate the securities laws.

A February 2018 class action from shareholder Creighton Takata in New Jersey federal court alleged that Honig's purchase of securities was part of a "fraudulent scheme consisting of misrepresentations, omissions, and actions that deceived the investing public in violation of securities laws."  He called those allegations "a house of cards" in his October 2019 motion to dismiss, which was granted in April because the shareholders didn't show how the defendants violated anti-fraud provisions of federal securities law, the judge said then.

In the case tossed, Honig had argued that the security purchase agreements he entered into with Riot in 2017 to buy convertible promissory notes and common stock purchase warrants guaranteed that if Honig was a defendant in a lawsuit, Riot would pay his legal fees.  The indemnification clauses in the agreements, Honig argued in the April suit, meant Riot must pay the $728,000 attorney fees he incurred fighting securities fraud allegations by the SEC and in class actions.

Riot argued that Honig's claim fails because Riot isn't obligated to pay when the litigation is connected with actions "based upon ... any violations by [Honig] of securities laws or any conduct by [Honig] which constitutes fraud, gross negligence, willful misconduct or malfeasance by [Honig]."  But Honig said the carveout in the indemnification clause only applies to actual securities violations, and since some of the lawsuits are ongoing, he's entitled to advancement of legal costs.

Judge Reice Buchwald agreed with Riot that "the allegations of the underlying action — not the merits of the action — govern Riot's obligations."  Since it's the nature of the allegations that trigger the obligation to indemnify, the clauses clearly side with Riot, Judge Reice Buchwald said.  "If there were any ambiguity, which there is not, about when the obligation to indemnify is determined (and thus whether allegations or merits control), the next sentence of Section 4.8 confirms the court's conclusion," she said.  She pointed to the section that states if an action is brought wherein the indemnity clause might be implemented, Honig must notify Riot in writing and Riot "shall have the right to assume the defense thereof with counsel of its own choosing reasonably acceptable to [Honig]."

"The logic of Section 4.8's structure is apparent," the judge said.  "The first sentence informs the parties as to whether indemnification is required.  If and when those conditions are satisfied, Honig would notify Riot, which then has the option to assume the defense.  The provision presupposes that the parties can determine, prior to that notice, whether an obligation to indemnify exists."

Judge Reice Buchwald also granted Riot's motion that Honig pay its reasonable attorney fees for this action.  Scott Carlton of Paul Hastings LLP, counsel for Riot Blockchain, told Law360 in a statement, "We are pleased with the court's careful consideration in this matter, including the awarding of attorneys' fees for Riot Blockchain as the prevailing party."

Insurers Refuse to Pay $18M in Defense Fees in Experian Class Actions

November 19, 2020

A recent Law 360 story by Joanne Faulkner, “Insurers Deny Liability in Experian’s $18M Legal Fees Suit,” reports that two insurers have told a London judge they are entitled to refuse to pay Experian's $18 million claim for coverage of its U.S. legal fees in a pair of class actions over errant credit reporting because the litigation stems from deliberate data erasure by staff at the company.  Zurich Insurance PLC and a subsidiary of SCOR said Experian's policy excludes "deliberate acts" such as those that allegedly form the basis of two major class action suits in the U.S., a newly public Nov. 13 defense said, after the company sued to claw back litigation fees.

The claims made against Experian — which said it has racked up millions of dollars in liabilities and legal costs defending the suits — were for statutory damages according to the U.S. Fair Credit Reporting Act.  If Experian is liable, it is the result of a "wilful (or reckless) failure on the part of an employee or employees … to comply with the FCRA," the defense said. 

Experian says in its October High Court suit that it paid a class of more than 100,000 payday loan customers $24 million to settle a lawsuit in January brought by lead plaintiff Demeta Reyes.  A $5 million deal was reached with consumers in the so-called Smith action.  The customers said they were harmed by inaccurate reporting of their credit history.  The insurers said that Experian's alleged liability in the Reyes action arises out of the deleting of loan records —  particularly those held by an entity called Delbert Services Corp.  In the Smith action, it is connected to the re-reporting of records relating to loans held by CashCall Inc.  Experian directors were involved in the decision-making in both incidents, the insurers said.

From April 2015 through April 2016, Experian held a complex multitiered insurance "tower" consisting of a primary policy from XL Specialty Insurance Co. and several layers of excess coverage, Experian says.  Zurich and SCOR unit General Security Indemnity Co. of Arizona are each liable for half of a $20 million excess policy, which kicked in once the underlying coverage was depleted, Experian says.  So far the insurers have only paid out a slice of the $20 million excess that Experian says it is entitled to, the company alleges.

Experian is also seeking a declaration from the court that the insurers will cover financial penalties that Experian may have to pay as a result of investigations into a 2015 cyberattack.  The two insurers said that coverage is provided for regulatory fines and penalties, but Experian must prove that any sanction is "lawfully insurable."

Experian says it has run up costs of more than $32 million defending two major related class suits.  Thousands of consumers successfully argued that Experian's failure to delete certain negative information in their consumer credit reports caused them harm.

Experian says it should be able to recover $18 million in legal costs from the insurers under its third-party liability and first-party insurance policies.  The suit also name-checks an action brought by Carolyn Clark alleging the company violated the FCRA, which ended up costing Experian more than $21 million. The company says it could be entitled to an indemnity of $14.3 million from the insurers to cover the costs from that case.

Sinclair Oil Seeks Coverage of Defense Fees in Wyoming High Court

October 30, 2020

A recent Law 360 story by Jeff SIstrunk, “Oil Co. Can Pursue Atty Fees From Insurer, Wyo. Justices Told,” reports that a Sinclair Oil Corp. unit urged the Wyoming Supreme Court to hold that the state's law applies to its property policy with Infrassure Ltd. and other insurers, which would permit the company to pursue attorney fees from Infrassure in a dispute over coverage for a 2014 petroleum refinery fire. 

During a 45-minute video conference, attorney for Sinclair Wyoming Refining Co., Marc J. Ayers of Bradley Arant Boult Cummings LLP, told the Wyoming justices that the $250 million policy that Infrassure and its co-insurers issued to Sinclair, its parent companies and more than 30 affiliates around the country was effectively "delivered" in the Cowboy State, such that the state's law applies to the policy.  The case came to the state high court in May via a certified question from the Tenth Circuit, which is reviewing a federal judge's January 2018 decision dismissing Sinclair's claim for attorney fees against Infrassure under Wyoming law.

The lower court judge, U.S. District Judge Nancy D. Freudenthal, had concluded that the energy company's fee bid was not viable because there was no evidence that the property policy was delivered or "issued for delivery" in Wyoming, as required under Section 26-15-101 of the state's insurance code.  Instead, the district judge found, available evidence indicates the policy was either delivered in London — where Infrassure and its 17 co-insurers operate — or Utah, where Sinclair Wyoming's overall parent company is based.  The Salt Lake City address of the parent company, The Sinclair Companies, was the only one listed in the policy, according to court filings.

However, Ayers emphasized during the hearing that the policy contains language providing that, for each of the separate insured businesses, coverage "shall apply in the same manner, and to the same extent, as if individual policies had been issued to each such insured party."  For legal purposes, that language can be interpreted to say that all the insureds — including Sinclair — "got a separate policy," Ayers said.  At a minimum, he argued, this establishes "constructive delivery" of the policy in Wyoming, which does not require the delivery of a physical copy of the policy to the insured.

Ayers further asserted that, before the Wyoming Legislature enacted the state insurance laws at issue, both legal precedent and insurance law treatises supported the notion that policies can be constructively delivered.  "If anything is to be assumed about the Legislature's use of the terms 'delivered' and 'delivery,' it would be that this industry-acknowledged meaning is incorporated into that," he said.

However, Infrassure's counsel, Guyon H. Knight of McDermott Will & Emery LLP, countered that Sinclair Wyoming's arguments flout the "plain language" meanings of "delivery" and "issued for delivery" as they appear in the Wyoming statutes.  Applying the common dictionary definitions of those terms, it is clear that they refer to the actual location where a physical copy of a policy is delivered, he contended.

Knight highlighted the fact that only the Salt Lake City address of Sinclair Wyoming's parent company is listed in the policy.  In addition, he noted that the policy granted the parent company the sole authority and responsibility to "negotiate terms and coverage limits, negotiate payments, and act on behalf of all insureds."

"For every single one of those companies, the person that gets to deal with the insurers is The Sinclair Companies.  And where do they do that? In Utah, not Wyoming," Knight said.  Knight warned that a ruling adopting Sinclair Wyoming's position could result in a "scattered approach" where many different states' laws could apply to the policy for different claims, depending on where a given insured is located.  "The policy expressly covers risks located all over the place," he said.  "That is why a delivery-focused approach really makes sense, because it cuts out the prospect — which is what Sinclair admits has to happen — of multiple states' insurance codes covering a policy." 

The coverage dispute stems from a September 2013 fire and explosion in a hydrotreater unit at Sinclair Wyoming's petroleum refinery.  As a result of the incident, Sinclair Wyoming claimed it suffered more than $50 million in property damage and $100 million in business income and expense losses.  Infrassure had contracted to cover a 7.5% share of Sinclair's $250 million property insurance program.  After months of negotiations after the explosion, Sinclair submitted three proofs of loss totaling $60 million to Infrassure and 17 of its other insurers between September 2014 and June 2015, according to court documents.

All of the insurers but Infrassure paid the full sums requested by Sinclair, although Infrassure agreed to shell out $2.1 million based on its own estimate of the total value of the refinery owner's losses, court documents indicated.  Sinclair initially sued Infrassure in October 2015 in Wyoming federal court, asserting claims for breach of contract, anticipatory breach of contract and first-party bad faith.  Ultimately, while the case was pending, Infrassure requested appraisal of Sinclair's losses, and a three-member appraisal panel in 2018 issued an award directing the insurer to pay an additional $4.5 million.

The case yielded two separate appeals to the Tenth Circuit: Sinclair's instant appeal of the January 2018 decision dismissing its claim for attorney fees and Infrassure's appeal of the judgment confirming the appraisal award.

Article: When Do Insureds’ Legal Fees Constitute Defense Expenses?

September 11, 2020

A recent Law.com article by David Kroeger and Catherine Doyle of Jenner & Block LLP, “When Do Insureds’ Legal Fees Constitute Defense Expenses?, reports on attorney fees and expenses in underlying insurance coverage litigation.  This article was posted with permission.  The article reads:

When is a defendant actually a plaintiff, and when are a defendant's legal expenses not defense expenses?  While the intuitive answer may begin with the case caption and a review of the defendant's legal bills, some courts may not stop the analysis there.

In Turner v. XL Specialty Insurance Co., the U.S. District Court for the Western District of Oklahoma recently determined that none of the legal expenses incurred by a named defendant counted as defense expenses, at least where the nominal defendant to a declaratory judgment claim purportedly stood in the same posture as the plaintiff and sought the same relief via affirmative counterclaims, cross-claims and third-party claims.  The decision was appealed to the U.S. Court of Appeals for the Tenth Circuit, and policyholders and insurance law practitioners would do well to monitor how far insurers may try to extend this argument in the future.

The federal district court in Turner v. XL Specialty reached the surprising conclusion that legal fees and costs incurred while defending against a declaratory judgment claim did not constitute covered defense expenses for purposes of a directors and officers insurance policy.  The factual scenario in Turner was detailed, complex and most certainly drove the court's unique conclusion.

The story began with American Energy Partners LP, a company founded in 2013 by oil and gas businessman Aubrey McClendon, which Forbes magazine once described as America's most reckless billionaire.  The plaintiff, Ryan Turner, served for a period as an executive of both AELP and an AELP affiliate.

While in that role, McClendon, Turner and two other AELP executives, Scott Mueller and Thomas Blalock, entered into an equity and co-investment agreement that reflected their profit-sharing agreements relating to the AELP business as well as new businesses that were not yet formed.

Under the equity and co-investment agreement, McClendon owned a 76% interest in the profit from new domestic businesses; Turner owned a 12% interest, and Mueller and Blalock each owned a 6% interest.  The individuals allegedly entered into the equity and co-investment agreement as a result of their membership in AELP's executive management team.

Shortly after signing the equity and co-investment agreement two additional AELP affiliates, SCOOP Energy Company LLC and Scoop Energy Holdings LLC (collectively referred to as SCOOP), were founded.  The parties to the equity and co-investment agreement agreed that it should apply to the sale of any SCOOP assets, and an amendment was prepared to explicitly include SCOOP within the equity and co-investment agreement.

Before the amendment could be executed, McClendon died in a single-vehicle accident on March 2, 2016, the day after he was indicted by a federal grand jury.  All surviving parties to the equity and co-investment agreement nevertheless agreed that a definitive and enforceable agreement with respect to the SCOOP assets had already been reached.

After McClendon's death, Blalock was appointed special administrator for McClendon's estate with authority to continue the AELP business.  Blalock thereafter sought an order permitting the estate to distribute the proceeds from the sale of the SCOOP assets according to the percentage interests set forth in the equity and co-investment agreement, but Blalock withdrew the application after one of McClendon's other creditors opposed it.

On the same day as that withdrawal, Mueller filed a lawsuit naming SCOOP, Blalock in both his individual capacity and as the personal representative of McClendon's estate, and Turner as defendants.

The only relief sought against Turner was a declaration of the rights and liabilities of the parties, including a determination that each of the members of AELP's executive management team was entitled to his respective share of profits from the sale of the SCOOP assets.  Turner's answer either admitted, or did not dispute, the allegations in Mueller's petition.  Turner also filed his own affirmative counterclaims, cross-claims and third-party claims seeking the same relief as Mueller.

Turner thereafter sought coverage for his legal expenses from XL Specialty under AELP's company and management liability policy.  Per the policy, XL Specialty was obligated to pay "on behalf of the Insured Person Loss resulting from a Claim first made against the Insured Person during the Policy Period ... for a Wrongful Act."

"Wrongful act" was in turn defined as a "matter asserted against, or investigated or inquired with respect to, an Insured Person by reason of his or her status as an Insured Person."

XL Specialty denied Turner's claim, asserting that Turner was sued by reason of his status as an equity holder in various businesses, rather than his status as an insured person, and therefore no claim was asserted against him for a wrongful act as defined under the policy.  XL Specialty also asserted that the policy did not provide coverage for Turner's prosecution of his affirmative claims.  After receiving XL Specialty's denial, Turner settled the litigation over the SCOOP assets and filed suit against his insurer for breach of contract and bad faith.

Applying Oklahoma law, the federal district court agreed with XL Specialty and concluded that there was no coverage because Turner was not named as a defendant in the Mueller lawsuit by reason of his status as an insured person.  In so doing, the court rejected Turner's argument that it was significant that the policy's definition of "wrongful act" used the term "status" in place of the more commonly found term, "capacity."

The court found those two terms to be interchangeable, and then concluded that Turner was involved in the action solely because of his status or capacity as an individual equity holder under the ECOIA, and not in his capacity as a former executive of AELP.

But the court did not end its analysis after finding that there was no wrongful act asserted against Turner. It instead continued, and found (given the initial part of its ruling, arguably in dicta) that Turner did not incur defense expenses in the Mueller lawsuit, and therefore had suffered no loss.

The XL Specialty policy defined loss as "damages, judgments, payments, settlements, relief or other amounts ... and Defense Expenses."  The term "defense expenses" was defined as "reasonable legal fees and expenses incurred in the investigation and defense of any Claim."

In explaining its conclusion, the court first noted that the XL Specialty policy did not define the term "defense," and found persuasive a definition of that term from Black's Law Dictionary:

 A defendant's stated reason why the plaintiff or prosecutor has no valid case ... that which is alleged by a party proceeded against in an action or suit, as a reason why the plaintiff should not recover or establish that which he seeks by his complaint or petition.

Viewing the situation from this prism, the court concluded that Turner's legal expenses were incurred for purposes other than demonstrating why Mueller had no valid case or should not recover the relief he sought.  The court further concluded that the declaratory judgment claim — the sole claim asserted against Turner in the Mueller lawsuit — did not place Turner in a defensive posture: "Rather, it appears that Mr.Mueller asserted the claim for the benefit of himself and Mr. Turner."

Indeed, the court found significant that Turner's answer did not dispute any of Mueller's material facts, nor did it dispute or oppose any of Mueller's requested relief. Instead, both Mueller and Turner, in his affirmative claims, requested entry of the same relief. Thus:

While Mr. Turner was nominally pleaded as a "defendant" in the Mueller lawsuit, the pleadings demonstrate clearly that he stood in the same posture as Mr. Mueller … Accordingly, the legal expenses Mr. Turner incurred are not "Defense Expenses," and as such they are not covered "Loss" under the insurance policy at issue here.

Notably, the court also rejected Turner's argument that at least some of the costs for which he sought recovery had to have been incurred in connection with the defense of the Mueller lawsuit, no matter how "defense" was defined.  Had the court accepted that argument, Turner arguably would have been able to invoke a very pro-policyholder allocation provision entitling him to coverage for the full amount of his legal expenses:

If a Claim covered in whole or in part under the Policy results in both Loss covered under this Policy, and loss not covered by this Policy, because such a Claim includes both covered and uncovered matters ... the Insureds and the Insurer shall allocate 100% of such amounts to covered Loss.

The court thus granted summary judgment in favor of XL Specialty on both Turner's breach of contract claim and bad faith claim, and denied Turner's motion for partial summary judgment on the breach of contract claim.  Turner appealed the decision to the Tenth Circuit.

While the Turner decision was no doubt heavily influenced by the district court's perception of the specific parties and facts before it, the path it traveled ought to give rise to at least some level of concern.

Policyholders, insureds and many others commonly think of defense costs as being synonymous with the attorney fees and expenses that they have to pay counsel who represent them when they get sued; they do not parse that term so finely as to include within the concept only those costs incurred to specifically oppose allegations made or relief sought by the plaintiff.

Turner did not file the Mueller lawsuit, but upon being served with the petition he had to retain counsel and incur defense costs.  It seems highly, if not extraordinarily, unlikely that a party in Turner's position would not have incurred at least some measure of defense expenses — even under the narrow definition of that term the district court read into the policy.  Indeed, Turner presumably incurred legal fees to have his counsel prepare the answer that the court cited repeatedly in its opinion, and answers are a classic example of a defense expenditure.

By interpreting the policy in a manner that allowed it to recharacterize a uniquely situated defendant as effectively being a plaintiff, the court overlooked these issues and may have unintentionally opened the door to future arguments that other, less similarly situated, insureds should be denied coverage for some or all of their defense costs on the same logic.  It is common for plaintiffs and defendants to jointly request court approval of a securities class action or derivative settlement; those defendants are incurring defense costs in so doing.

Similarly, individual defendants to a securities class or derivative action may, for strategic reasons, want to agree with the plaintiffs in placing blame on other individual defendants; they, too, are incurring defense costs in all meaningful senses of the term. Yet the analysis used in Turner could be argued to require a contrary result.  For these reasons, it will be important for policyholders to monitor Turner as it makes its way through the Tenth Circuit.  In the interim, Turner may well produce an increased focus on the definition of "defense costs" in a D&O or similar policy.

Many definitions of that term define "defense costs" by reference to "defense" of or "defending" a claim, without much further elaboration. Other definitions also add the concept of "investigation" or "investigating," like the definition at issue in Turner.  And yet others include additional concepts, such as "opposing," that arguably make the result in Turner more difficult to justify, because they make more clear that "defense" and "defending" must mean something different than "opposing."  These differences in language could become very important, depending on the outcome at the Tenth Circuit.

David M. Kroeger is a partner at Jenner & Block LLP and co-chair of the firm's insurance recovery and counseling practice and its reinsurance practice.  Catherine L. Doyle is an associate at the firm.