The question of whether or not a subsequent claim is interrelated with a prior claim — and therefore deemed first made at the time the earlier claim was filed – is a recurring D&O insurance coverage issue. If the later claim is to be deemed first made at the time of the prior lawsuit, then the later claim is not covered under the claims made D&O insurance policy in force at the time the later claim arose.
In a November 7, 2014 opinion (here), District of Maryland Judge George Jerrod Hazel examined these recurring issues and determined that a 2010 action to enforce a judgment was interrelated with the 2006 adversary proceeding in which the judgment had been entered and therefore that the later action was not covered under the D&O policy in force at the time it was filed.
In 2002, Haymount Limited Partnership (HLP) retained International Benefits Group (IBG) to help HLP obtain financing for a real estate development project. HLP ultimately obtained financing but refused to pay IBG the finder’s fee IBG contended it was due. IBG claimed that HLP’s refusal to pay the finder’s fee forced IBG into bankruptcy. In 2006, IBG’s bankruptcy trustee filed an adversary proceeding in the District of New Jersey (the 2006 Adversary Proceeding) against HLP; its two general partners (Westminster and Haymount); Edward J. Miller, Jr., president of Haymount and Chairman of W.C. and A.N. Miller; and John A. Clark, vice president of Wesminter and president of the John A. Clark Company.
The trustee’s complaint in the 2006 Adversary Proceeding alleged conspiracy to deny IBG its finder’s fee; breach of contract; unjust enrichment; and tortious interference. On January 8, 2010, a judgment of $4.4 million was entered in the 2006 Adversary Proceeding against HLP and the others in favor of the Trustee.
On October 29, 2010, the Trustee filed a second action (the 2010 Action) in the District of New Jersey against several of the same defendants as had been named in the 2006 Adversary Proceeding, including HLP, Edward Miller and John Clark. The first paragraph of the 2010 Action stated that the suit was an “ancillary and adversary proceeding to recover and collect” the $4.4 million judgment entered the 2006 Adversary Proceeding. The complaint in the 2010 Action describes a number of actions the defendants allegedly took to transfer HLP’s assets in order to make them unavailable to satisfy the $4.4 million judgment. The complaint in the 2010 Action asserted claims against the defendants for fraudulent transfer, fraudulent conveyance, common law and statutory conspiracy, creditor fraud, and aiding and abetting.
In November 2010, W.C. and A.N. Miller Development Co. submitted notice of the 2010 Action to its D&O insurer, seeking to have the insurer pay its defense costs incurred in defending the 2010 Action. The carrier denied coverage for the claim, based on its assertion that the 2010 Action and the 2006 Adversary Proceeding involved interrelated wrongful acts and therefore that the 2010 Action is deemed under the policy to have been first made at the time the 2006 Action was filed. The insurance carrier argued that because the 2010 Action was deemed made in 2006, it was not first made during the coverage period of its claims made policy and therefore was not covered under the policy
Miller filed an action as against its D&O insurance carrier alleging that the insurer had breached its duties under the policy and seeking to recover the costs it incurred in defending the 2010 Action. The insurance carrier filed a motion for judgment on the pleadings and Miller filed a motion for summary judgment.
The D&O insurance policy provided that all “Interrelated Wrongful Acts” were considered one “Claim” for purposes of coverage. The Policy stated that “more than one Claim involving … Interrelated Wrongful Acts shall be considered one Claim which shall be deemed first made on … the date on which the earliest such Claim was first made.” The Policy defined “Interrelated Wrongful Acts” as “any Wrongful Acts which are logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.”
The November 7 Opinion
In his November 7 opinion, Judge Hazel granted the carrier’s motion for judgment on the pleadings and denied Miller’s motion for summary judgment, holding that the 2006 Adversary Proceeding and the 2010 Action involve Interrelated Wrongful Acts therefore that under the policy the two are deemed one Claim first made at the time the first action was filed. Because the subsequent lawsuit was deemed first made four years prior to the inception of the D&O insurance policy the 2010 Action is not covered under the policy.
In reaching this conclusion, Judge Hazel rejected two arguments on which Miller sought to rely. First, he rejected Miller’s argument that because coverage under the D&O insurer’s policy for the 2006 Adversary Proceeding would have been precluded under the policy’s contract exclusion, it could be treated with the 2010 Action as a single Claim. Judge Hazel said the policy does not require a Claim to be covered in order for it to be treated the basis of an Interrelated Wrongful Act and therefore to be the basis of a single Claim. Judge Hazel also rejected Miller’s argument that the 2006 proceeding in bankruptcy was not a Claim within the meaning of the policy, finding that the 2006 Adversary Proceeding met the policy’s definition of the term Claim.
Judge Hazel went on to reject Miller’s argument that at most the two actions involve a “common motive” (that is, the defendants’ purported desire to avoid paying the finder’s fee), rather than a “common scheme.” Judge Hazel concluded that the two actions did arise out of a “common scheme” that “was directed at a specific entity (IBG), that involved a single contract (the fee agreement), that arose out of the same real-estate transaction (the Haymount Project) and that sought a single outcome (precluding IBG’s monetary recovery for its involvement in the Haymount Project).” Thus, Judge Hazel concluded, the two actins “shared a common nexus – namely, an alleged scheme involving the same claimant, the same fee commission, the same contract, and the same real estate transaction.”
Judge Hazel also found that the two actions were “logically or causally” connected, as It was “entirely logical” that the bankruptcy Trustee would file an action to recover damages associated with the alleged actions taken to avoid payment of the judgment entered in the 2006 Adversary Proceeding, noting that if the defendants in the 2006 Adversary Proceeding had satisfied the judgment, the 2010 Action would not have been filed.
Miller had tried to argue that there were important differences between the two actions, contending that the two lawsuits arose during different time periods, included different legal claims and involved a number of different parties. Judge Hazel said that these differences — “as well as any other differences” — were “irrelevant” to the question of whether the two actions involved Interrelated Wrongful Acts. Judge Hazel said that “the relevant focus is not on any number of differences” between the two actions, but instead “the relevant focus is on the similarities between the two.” Indeed, he added “so long as a single fact, circumstance, situation, transaction, or event logically or causally connects” the two actions, they would be deemed Interrelated Wrongful Acts.
Because the 2010 Action expressly related to efforts by the bankruptcy Trustee to enforce or to collect upon the judgment the Trustee had obtained in the 2006 Adversary Proceeding, it was always going to be difficult for Miller to establish that the two actions were not “logically or causally connected by reason of any common fact, circumstance, situation, transaction or event.” Indeed, because the complaint in the 2010 Action stated on its face that it was “an ancillary and adversary proceeding to recover and collect” on the judgment entered in the 2006 Adversary Proceeding, there would seem to be little basis on which to contend that the two actions were not “logically or causally connected” by a common fact, circumstance or situation.
But while the outcome here may not necessarily be surprising, there are some noteworthy aspects of Judge Hazel’s ruling. First, his observation that any differences between the two actions are irrelevant is striking. While the differences between the 2006 Adversary Proceeding and the 2010 Action may well not have been determinative here, that is a long way from saying that consideration of the differences between two actions would never be relevant.
Second, Judge Hazel’s reading of the Policy’s definition of the term Interrelated Wrongful Acts is quite broad; his emphasis that two actions would involve Interrelated Wrongful Acts “so long as even a single fact, circumstance, situation, transaction, or event logically or causally connects” the two underscores how broadly the policy’s definition of Interrelated Wrongful Acts could sweep. The breadth of this reading suggests that points of overlap between two actions could be very peripheral or even remote and still be sufficient to connect the two as interrelated. The breadth of this expansive reading seemingly raises the possibility that coverage for entire categories of litigation could be precluded simply because there may have been an earlier lawsuit filed.
My concern in this regard is based in part on Judge Hazel’s suggestion that any differences between two actions are irrelevant, and that all that matters are the similarities between the two. While I understand that a party seeking to establish that differences between two actions matter has the burden of showing the significance of the differences (particularly with respect to the question of whether the two actions share a common factual nexus), it seems to me to be too much to suggest the differences between two action are never relevant.
I find it interesting that Judge Hazel gave the definition of Interrelated Wrongful Act here such an expansive reading even though the definition lacked the wording sometimes found in similar definitions in other D&O insurance policies; that is, while the definition in this case provided that alleged wrongful acts are interrelated if they are connected “by reason of” a common fact or circumstance, other policies’ definitions provide further that the alleged wrongful acts are interrelated if they are “based upon, arising out of or in any way relating to” a common fact or circumstance. Judge Hazel gave the policy wording here an expansive meaning notwithstanding the absence of this broader definitional wording.
As I noted at the outset of this discussion, the interrelatedness analysis in this case arguably was fairly straightforward. The reason I have nevertheless dwelt on these issues at length is because all too often interrelatedness issues can be vexatious and even confounding, as I noted at length in a prior post. My concern is that the sweep of Judge Hazel’s generalizations about the interrelatedness issues – particularly his statement that any differences between two actions are irrelevant to the interrelatedness analysis –could be read in a way that could cause problems in other cases where the lines of analysis may not be as straightforward as they arguably were here.