In numerous prior posts, I have meditated on the meaning of “relatedness” and what it takes to make two claims sufficiently similar that they should be treated as the same claim. That was the question that a Pennsylvania federal district court addressed in a recent decision in an insurance coverage dispute. As discussed below, on January 27, 2020, Eastern District of Pennsylvania Judge Timothy J. Savage, applying Pennsylvania law, concluded that, despite overlaps, a subsequent shareholder derivative suit was not sufficiently related to another shareholder’s prior demand letter and lawsuit to preclude coverage for the later claim. The court’s decision provides abundant grounds for further ruminations on the meaning of relatedness.
In June 2018, Joseph D’Ascenzo filed a shareholder derivative lawsuit (the D’Ascenzo action) against Unequal Technologies Company (UTC), its CEO and director Robert Vito, and director William Landman. In his multi-count complaint, D’Ascenzo alleged that the defendants had wrongfully barred his efforts to fill an empty third seat on the company’s board by wrongfully disregarding the results of a December 2017 shareholder vote. The complaint contains numerous other allegations, including assertions that the company had disregarded corporate formalities, that Vito had engaged in self-interested transactions, and that Vito had attempted to raise corporate funds using misinformation.
At the time D’Ascenzo filed his lawsuit, UTC was insured under a management liability insurance policy with a policy period of November 2017 through November 2018. The 2017-2018 policy was the latest renewal in a series of insurance policies that first incepted on November 19, 2013.
UTC submitted the D’Ascenzo action to the insurer. The insurer denied coverage for the lawsuit, contending that the lawsuit was interrelated with a February 2015 shareholder demand and a June 2016 shareholder derivative lawsuit, and that that the later lawsuit was by operation of the policy deemed first made at the time of the prior demand and lawsuit, prior to the inception of the then-current policy. The insurer also asserted that the D’Ascenzo lawsuit was based upon alleged Wrongful Acts that allegedly occurred prior to the policy’s past acts date of November 19, 2013.
The author of the prior demand letter and the plaintiff in the prior lawsuit was Landman, the UTC director who was one of the named defendants in the D’Ascenzo lawsuit. The demand letter had alleged that UTC’s business actions were eroding shareholder value, and that Vito had withheld required information, disregarded corporate formalities, and engaged in self-dealing. The demand letter sought the inspection of the company’s books and records and other relief. In the June 2016 derivative suit, Landman sought damages and an injunction barring Vito from concealing the company’s poor performance in the course of company fundraising efforts. The June 2016 lawsuit was settled and dismissed a month after it was filed.
After the insurer denied coverage for the D’Ascenzo action, Vito and Landman each filed lawsuits against the insurer seeking a judicial declaration that the insurer has a duty to defend them in the D’Ascenzo action. The insurer filed a motion for judgment on the pleadings.
The Relevant Policy Provisions
The Policy’s “related acts” provision provides that:
All Claims based on, arising out of, directly or indirectly resulting from, in consequence of, or in any way involving the same or related facts, circumstances, situations, transactions or events, or the same or related series of facts, circumstances, situations, transactions or events, shall be deemed a single Claim for all purposes under this policy … and shall be deemed first made when the earliest of such Claims is first made, regardless of whether such date is before or during the Policy Period.
The Policy’s “prior acts” exclusion provides that:
The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured that alleges, arises out of, is based upon or attributable to, directly or indirectly, in whole or in part, and actual or alleged Wrongful Acts which first occurred prior to November 19, 2013.
The January 27, 2020 Opinion
In his January 27, 2020 opinion, Judge Savage denied the insurer’s motion for judgment on the pleadings, holding that “among the multiple claims asserted in the D’Ascenzo Action are several that are covered by the policy and are not excluded.”
The insurer had argued that there were “multiple overlapping allegations” between the D’Ascenzo action and the prior demand letter and lawsuit. Among other things, the insurer argued that the overlap included allegations that the third board seat improperly had not been filled; that UTC had failed to follow required corporate formalities (such as regular board meetings); that Vito had engaged in self-interested transactions; and that Vito had misrepresented UTC’s financial information to solicit new investors.
In opposing the insurer’s motion, the UTC parties argued that the insurer “glosses over obvious distinctions”; that factual allegations surrounding the December 2017 and January 2019 shareholder meetings formed “the core” of the D’Ascenzo action; and that while the is some “overlap” with the demand letter and prior lawsuit, the “overlapping allegations do not form the basis” for the relief sought.
In considering the insurer’s motion, Judge Savage noted that while there “are similarities” between the D’Ascenzo action and the prior lawsuit, there are “significant differences.” The parties, he noted are different and the relief sought is different. The later lawsuit, while “sounding much like” the earlier suit, is “not the same”; the later lawsuit “goes beyond” the earlier suit, complaining of irregularities in connection with the December 2017 election, which took place after the prior suit was dismissed. The “factual bases” of D’Ascenzo’s action “did not exist before the inception of the policy.” The demand letter is also “significantly different” in that Landman, who made the demand, is a defendant in the later suit.
Judge Savage noted that while one of the counts in the D’Asenzo complaint “may be predicated on facts related to” the demand letter and prior lawsuit, “the other ten counts do not.” The request for relief, Judge Savage said, “does not rely on any of the allegations central to the relief sought” in the demand letter or the prior lawsuit. Rather, the “conduct at the heart” of the “other ten counts” began in 2017 and involved subsequent events. These events “occurred after the acts cited” in the demand letter, and involve “discrete acts” and ‘”claims that did not exist prior to the relevant policy periods.” Accordingly, Judge Savage said, the related claims provision “does not bar the majority of D’Ascenzo’s claims.”
With respect to the prior acts provision, the insurer argued that the D’Ascenzo complaint involves a “scheme to defraud” that began as early as 2008; an alleged failure to observe corporate formalities since 2008; and self-dealing transactions beginning in 2009, as well as actions by Landman beginning after he went on the board on November 7, 2013. The UTC parties, by contrast, argued that the “core” of the D’Ascenzo complaint has to do with the UTC board election and the “overwhelming focus” is on the election.
Judge Savage said that while “some counts in the D’Ascenzo action may be based on conduct occurring before November 19, 2013,” that Count VIII of the complaint is “clearly predicated on specific allegations” beginning before the cut-off date,” and that Count VI “arguably involves pre-November 19, 2013 conduct” the “remaining nine counts are based entirely on events surrounding the 2017 and 2019 elections,” and the pre-November 2013 conduct “was not a necessary ‘but-for’ cause of the election claims.”
While he did not frame his analysis this way, Judge Savage’s consideration of the related claims issue is in essence a meditation on the meaning of relatedness. The insurer argued, the UTC parties conceded, and Judge Savage found that there was indeed “overlap” between the D’Ascenzo action and the demand letter and prior lawsuit. In effect, Judge Savage concluded that there was not enough overlap, or perhaps enough of the right kind of overlap, to make the claims sufficiently related to render them interrelated.
One curious thing about Judge Savage’s conclusion on the relatedness issue is that he seems to have completed his analysis without express reference to the policy’s language on the issue. To be sure, he did, on page 12 of his opinion, recite verbatim the text of the relatedness provision. Otherwise, however, he made literally no reference to the policy language.
Look, these days I am a policyholder-side kind of guy, and I like coverage decisions that favor policyholders, but even I have to concede that the policy language must be the reference point for any coverage issue. In that regard, it undeniably is (or should be) relevant that the policy’s relatedness provision deems as a single Claim all Claims that are “in any way involving the same or related facts, circumstances, situations, transactions or events.”
Judge Savage specifically concluded that at least one of the counts in D’Ascenzo’s complaint is “predicated on facts related” to the demand letter. Even if it is true, as Judge Savage concluded, that the entire rest of the complaint does not rely on overlapping allegations, the fact that one of counts does overlap certainly does seem to suggest that the D’Ascenzo complaint does “in any way involv[e] the same or related facts” as the demand letter and the prior lawsuit.
The “in any way involving” phrasing would seem to preclude any further analysis of whether the “same or related facts” overlap enough, but that kind of analysis is exactly what Judge Savage relied upon in concluding that the subsequent and prior claims were not related for purposes of the provision. In effect, he concluded – notwithstanding and without reference to the policy’s “in any way involving” requirement — that because most of the substantive counts in D’Ascenzo’s complaint did not overlap, the fact that one substantive count did overlap was not determinative.
Judge Savage’s analysis of the prior acts exclusion issues is very much of the same nature. Even though the provision precludes coverage for Loss in connection with any Claim that “alleges, arises out of, is based upon or attributable directly or indirectly, in whole or in part” any actual or alleged wrongful act taking place prior to November 19, 2013, and he expressly concluded that at least two substantive counts in D’Ascenzo’s complaint involve alleged acts prior to the cut-off date, he nevertheless concluded that the prior acts exclusion does not apply because the “core” of the complaint related to alleged acts after that date.
I would say that Judge Savage’s analysis seems inexplicable to me given the policy language, but as I further considered his conclusions it occurred to me that perhaps what is going on here is that Judge Savage has conflated a Capital C Claim with a lower-case c claim. There is only one Capital C Claim in connection with the D’Ascenzo complaint, even though the complaint itself asserts multiple lower case c claims. Indeed, in summarizing his decision, Judge Savage specifically said that “among the multiple claims” in the D’Ascenzo action are “several that are covered by the policy and not excluded.”
However, both the related claims provision and the prior acts exclusion refer to Capital C Claims, not lower case c claims. The fact that there may be some small case c claims in D’Ascenzo’s complaint that are not related or that do not involve prior acts is not determinative; what matters for coverage purposes is whether the Capital C Claim that D’Ascenzo’s complaint represents is related or involves prior acts.
If as I suspect the outcome of Judge Savage’s analysis is the result of his confusion of lower-case c claims with a Capital C Claim, his analysis is both misconceived and flawed and the outcome is contrary to the meaning and intent of the policy.
In the end, and regardless of the outcome, this coverage decision provides fodder for further meditations on the meaning of relatedness. What makes any two things related? What makes any two things unrelated? What degree of similarity is sufficient to make them related? These are the vast and enigmatic concerns that perennially surround the relatedness issue. As I once noted,
“Relatedness” is not self-defining. It is, in fact, a concept that recedes away from you the harder you try to think about it. At a certain level of generalization, everything in the universe is related, all joined together in the all-powerful and all- knowing mind of almighty God. Yet from another perspective, nothing is related, as all of creation consists of nothing more than chaotic, swirling bits of matter randomly spinning away within the cosmic void.
Today’s Word of the Day: In his characterization of the allegations in the D’Ascenzo complaint, Judge Savage wrote “the gravamina of Counts I and VII and Count IX through XI are the December 2017 and January 2019 shareholder meetings and elections.”
The word “gravamina” is the plural of the work “gravamen,” which is a law Latin word that, according to Merriam-Webster, means “the material or significant part of a grievance or complaint.” (Merriam-Webster advises that the plural of “gravamen” is sometimes written as “gravamens.”)
Owing to my legal education, I have been known to use the word “gravamen” from time to time. But I have never used the word “gravamina.” Indeed, prior to reading Judge Savage’s opinion, I don’t think I had previously encountered the word “gravamina.” I also had no idea that the plural of “gravamen” is “gravamina.”
Now I know. My world is enriched by the knowledge.