Free Reply to Response to Motion - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Senior District Judge Richard P. Matsch Civil Action No. 04-cv-725-RPM-OES THE QUIZNO'S MASTER LLC, a Colorado limited liability company and THE QUIZNO'S HOLDING COMPANY, a Nevada corporation, as assignee of and successor in interest to THE QUIZNO'S CORPORATION, a Colorado corporation, Plaintiffs, v. WESTCHESTER FIRE INSURANCE COMPANY, a New York corporation and ROYAL INDEMNITY COMPANY, a Delaware corporation, Defendants.

QUIZNO'S REPLY IN SUPPORT OF ITS MOTION FOR PARTIAL SUMMARY JUDGMENT Plaintiffs The Quizno's Master LLC and The Quizno's Holding Company (hereinafter referred to singularly as "Quizno's"), hereby presents its Reply in Support of its Motion for Partial Summary Judgment as follows: I. INTRODUCTION Quizno's reasonably expected that its insurance policies with Defendants would cover the claims in the Nickerson and Sebesta actions. However, despite the fact that the plain language in the policies covers the losses suffered by Quizno's in defending and then settling the two cases, the Defendants have denied coverage. Interpreting the same substantive language in their policies, Defendants have arrived at diametrically opposed interpretations that, if sustained, would result in a denial or significant reduction of owed coverage.

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In its Quizno's Motion for Partial Summary Judgment ("Quizno's Motion" or "Motion"), Quizno's has presented the issue of the proper interpretation of the insurance policies at issue. Quizno's demonstrated, and the Defendants' responses support, the absence of any issues of material fact with respect to the issues raised in Quizno's Motion. Further, Quizno's argued in the alternative by presenting to this Court the two diametrically opposed interpretations of the same basic language in the carriers' policies advanced by the two Defendants in this case. Because the interpretation of an insurance policy is a question of law for the court to decide, Quizno's has satisfied its burden of demonstrating that it is entitled to judgment as a matter of law. The dispute relates to whether notice of potential claim letters sent by Quizno's to Royal in January and February 1999 ("Notice Letters") gave notice to Royal of the subsequently filed Sebesta Action and Nickerson Action. Royal argues that the Notice Letters do not constitute a notice of a potential claim with respect to the Sebesta Action or the Nickerson Action. Westchester takes the same letters and argues that they do constitute a notice of potential claims with respect to the Sebesta Action and the Nickerson Action. Defendants cannot both be right. In this reply, Quizno's asks the Court to interpret and apply the policies to the undisputed facts of this case and to grant partial summary judgment in favor of Quizno's pursuant to Rule 56(d) of the Federal Rules of Civil Procedure. Neither Defendant disputes the authenticity or content of the Notice Letters. Quizno's notified Royal that the two majority shareholders had communicated a proposal to the members of the board of directors that they purchase all of the outstanding shares through a company they would form. Further, a minority shareholder notified The Quizno's Corporation, among other

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things, that he contemplated taking legal action if the board of directors, or a special committee thereof, chose to proceed with the proposed buyout. By letter dated February 25, 1999, Royal acknowledged that the information contained in the Notice Letter qualified as "notice of a circumstance which may subsequently give rise to a claim" and that "in the event a claim is subsequently made and arises out of such circumstance referenced in your letter, it will be deemed first made during the policy period." Quizno's Motion, Statement of Undisputed Material Fact ("SUMF"), ¶¶ 12-17. When Westchester agreed to provide directors and officers insurance coverage to Quizno's in June 1999, the parties addressed the issue raised by Quizno's Notice Letters. In Endorsement 6 of Westchester's policy, the parties agreed that the exclusion that would preclude coverage under the Westchester policy for a claim "based upon, arising out of, or attributable to any fact, circumstance or situation which has been subject of any written notice given under any policy" previously (Exclusion A1) would not be applicable with respect to the Notice Letters. However, the parties also agreed, in the event a claim arising out of the same circumstances as those referenced in the Notice Letters were made during its policy period, Westchester's limit of liability would be reduced and the retention increased. SUMF ¶ 10 (and Exhibit D to Meyers Declaration). Westchester now maintains that the claims in the Sebesta Action arise out of the same circumstances set forth in Quizno's Notice Letters and that the claims in the Nickerson Action also arise out of the same circumstances set forth in Quizno's Notice Letters. See Westchester Motion for Summary Judgment, pp. 27-30. Royal, on the other hand, argues that the claims made against Quizno's in the Sebesta Action and the claims made against Quizno's in the

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Nickerson Action arise out of different circumstances than those set forth in the Notice Letters. See Royal Motion for Summary Judgment. None of the parties claim that there are factual issues in dispute. The parties have agreed to the content of the Notice Letters, the terms in the respective policies, and the documents demonstrating the claims made against Quizno's in the Nickerson Action and the Sebesta Action. As set forth more fully below, Quizno's Motion appropriately argues in the alternative and requests this Court to render a ruling on the legal issue of the proper interpretation of the policy given these undisputed material facts. Most importantly, Quizno's requests that the Court make its legal conclusion regarding the two opposing interpretations in order to avoid inconsistent results that could negate or significantly reduce the owed coverage. Defendants set forth similar meritless arguments in their respective responses. Common to both Defendants' responses to Quizno's Motion is the argument that Quizno's failed to advocate any legal position in its Motion. Royal argues in its response that this Court should both deny Quizno's motion and grant its motion for summary judgment because Quizno's failed to set forth legal arguments. For its part, Westchester also argues that: (i) Quizno's Motion is defective because the relief requested is uncertain and would resolve only part of a claim; and (ii) the profits exclusion in the policy excludes coverage here. This reply addresses the foregoing arguments. II. QUIZNO'S MET ITS BURDEN BECAUSE IT DEMONSTRATED THAT THERE ARE NO ISSUES OF MATERIAL FACT AND PRESENTED ALTERNATIVE ARGUMENTS ON THE LEGAL ISSUE OF THE PROPER INTERPRETATION OF THE INSURANCE POLICY As stated in Quizno's Motion, "[S]ummary judgment is appropriate when the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits, if any,

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show that there is no genuine issue of material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). Thus, to prevail on a motion for summary judgment, a moving party must show (i) that no material issues of fact exist and (ii) that it is entitled to judgment as a matter of law. A. Quizno's Demonstrated There Are No Issues of Material Fact. Neither Royal nor Westchester argues that Quizno's failed to establish that there are no issues of material fact. Indeed, the parties agree that the relevant documents are authentic. These documents include the policies, correspondence, offering memorandum and tender offer materials from the underlying transactions, and the court documents from the underlying lawsuits. B. Quizno's Demonstrated It Is Entitled to Judgment as a Matter of Law 1. Quizno's Presented Legal Argument in the Alternative.

Both Royal and Westchester argue that Quizno's failed to take any position on the proper interpretation of the policies' terms. See Defendant Royal Indemnity Company's Reply in Support of its Motion for Summary Judgment and in Response to Quizno's Motion for Summary Judgment ("Royal Reply"), at 4 (stating Quizno's "made the tactical decision to take no position on the coverage issues"); Defendant Westchester Fire Insurance Company's Opposition to Quizno's Motion for Partial Summary Judgment, at 4 ("Westchester Opposition"), at 2 (stating that "Quizno's fails to offer any argument in support of or against a determination that the matters relate back").

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Defendants are wrong. Quizno's has pleaded in the alternative.1 Because the terms in Defendants' respective policies regarding whether the Notice Letters provided notice under the Royal policy are substantively the same, Quizno's argues either: (i) Westchester and Royal owe coverage, but Westchester's coverage should be reduced, because the claims in Sebesta and/or Nickerson arise out of the same facts and circumstances described in the Notice Letters; or (ii) Royal does not owe coverage and Westchester owes its full policy limits because the claims do not arise out of the same facts and circumstances. See Quizno's Motion, at 25. Both Royal and Westchester object to Quizno's deference to the Court's interpretation and application of the policy, but such deference should not be construed to mean that Quizno's has taken no position. Fundamentally, Defendants object to the way Quizno's framed the issue in its Motion, in which Quizno's presented the Defendants' irreconcilable positions and asked the Court to rule on the legal issue of the proper interpretation of the policies and decide whether the claims made in Sebesta and/or Nickerson arise out of the same facts, circumstances and situations described in the Notice Letters. Quizno's Motion, at 25. Quizno's argues that either the underlying claims arise out of the same facts and circumstances, or alternatively, they do not. Regardless of how the issue is framed, ultimately this Court must decide how the policy terms should be construed and then apply the terms in deciding whether the underlying claims arise out of the same facts and circumstances as those set forth in the Notice Letters. In short, Quizno's has not attempted to shift its burden to the Court; rather, faced with logically inconsistent defenses, Quizno's has deferred to this Court's interpretation of the disputed policy terms.

1

As Royal concedes, "Parties routinely plead alternative claims." Royal Reply, at 4.

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Defendants also fault Quizno's for not citing legal authority to construe the provision in the insurance policies. Royal Reply, at 5-7; Westchester Opposition, at 9. As a preliminary matter, Quizno's cites to seventeen cases in its motion, many of which provide rules of statutory construction for construing the terms of an insurance policy. Additionally, as both Defendants should be aware, there is a dearth of legal authority construing the disputed policy terms in circumstances resembling this case. In their respective motions, the Defendants have cited to a few cases from other jurisdictions construing similar policy terms, and they have argued that such cases prove either that the underlying claims do or do no arise out of the same facts and circumstances as described in the Notice Letters. However, under Colorado law, the terms of an insurance policy are interpreted according to their plain and ordinary usage, Randall & Black, Inc. v. Metro Wastewater Reclamation District, 77 P.3d 804 (Colo.App. 2003), so case law from other jurisdictions like that furnished by Defendants is of limited utility. In sum, Quizno's position is clear: either the Notice Letters gave notice of the subsequent Sebesta Action and/or Nickerson Action, as Westchester maintains, or they did not, as Royal maintains. In either case Quizno's should not be denied coverage where the same substantive term occurs in both policies and ensures coverage from at least one, if not both, of the Defendants.
2

Royal argues that Quizno's argument is essentially that the "policies are ambiguous because it is unclear whose coverage extends over the underlying actions." Royal Response, p. 5 n.4. That is, if both carriers advance a reasonable interpretation, the policies could both be considered ambiguous. Fight Against Coercive Tactics Network, Inc. v. Coregis Ins. Co., 926 F.Supp. 1426, 1430 (D.Colo. 1996) (stating "[p]olicy language is ambiguous where it is reasonably susceptible to more than one meaning.") Of course, under Colorado law, this Court could find both provide coverage if the policies are ambiguous, as all ambiguities are to be construed against the insurance company in favor of coverage. Tepe v. Blue Cross and Blue Shield of Colorado, 843 P.2d 1323, 1327-28 (Colo.App. 1994).
2

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2.

The Resolution of the Correct Interpretation Is a Question of Law for the Court

The interpretation of a clause in an insurance policy is a question of law for the Court. Cary v. Untied of Omaha Life Ins. Co., 108 P.3d at 288 (Colo. 2005). See also, Richard A. Lord, WILLISTON ON CONTRACTS § 49:14 (4th ed. 2004) (in interpreting an insurance policy, "the court begins by examining the language of the contract"; "construction of a contract of insurance is a question of law for the court"). Under the Federal Rules of Civil Procedure, a court adjudicating an insurance dispute must construe the relevant policy language before entering summary judgment. See, e.g., Edison v. Reliable Life Ins., 664 F.2d 1130 (9th Cir. 1981); Exxon v. St. Paul Fire & Marine Ins. Co., 129 F.3d 781 (5th Cir. 1997); see also CMM Cable Rep. Inc. v. Ocean Coast Properties, Inc., 97 F.3d 1504, 1528-29 (1st Cir. 1996) (affirming trial court's grant of summary judgment where disputes were legal in nature and trial court applied correct legal conclusions to facts of case); McKay v. Aircraft Mechanics Fraternal Ass'n ­ Seattle Local 14, 85 Fed.Appx. 605, 606 (9th Cir. 2004) (reversing trial court's grant of summary judgment in light of, among other things, unresolved issues of law). In Edison, the Ninth Circuit Court of Appeals affirmed the district court's grant of summary judgment where the only dispute concerned "the legal effect of the language in the [insurance] policy," which was properly interpreted by the district court. 664 F.2d at 1131-32. Similarly, in Exxon, the Fifth Circuit upheld the district court's grant of summary judgment where the parties' only dispute involved the interpretation of an insurance policy, and the district court properly construed the terms of the policy. 29 F.3d at 786-88 ("What the policy does or does not say is not a factual, but a legal dispute."). Together, these cases stand for the

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proposition that where a dispute exists as to the interpretation of the terms of an insurance policy, summary judgment is not proper unless and until the court interprets and applies such terms. In this case, because the Defendants have advanced different interpretations of the meaning of the relevant policy term, this Court must interpret and apply the term before granting summary judgment to any party. Therefore, it is the court's interpretation of the policy rather than the parties' interpretation that matters. In adjudicating insurance disputes, the role of the court is "to interpret the language of the insurance policy before it." Allstate Ins. Co. v. Jack S, 709 F.Supp. 963, 967 n.1 (D.Nev. 1989). It is not the arguments, allegations, or advocacy of the parties that generates the meaning of an insurance policy term; rather the meaning inheres in the insurance contract itself. See, e.g., Kane v. Royal Ins. Co. of America, 768 P.2d 678, 680 (Colo. 1989) (disagreement between parties about the meaning of a provision in an insurance policy does not create ambiguity in its interpretation). In light of the central role of the court in interpreting insurance policies, where the terms of an insurance policy are unambiguous and no material issues of fact exist, "summary judgment is appropriate because a written contract duly signed and executed speaks for itself and binds the parties without the necessity of extrinsic evidence." In re Corriea, 719 A.2d 1234, 1239. (D.C.App. 1998) (quoting Byrd v. Allstate Ins. Co., 622 A.2d 691, 693 (D.C. 1993) and Holland v. Hannan, 546 A.2d 807, 815 (D.C. 1983)) (emphasis added). Because an insurance policy speaks for itself, Defendants' contention that Quizno's Motion should be denied because it argued in the alternative is incorrect.

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Relying on Adler v. Walmart Stores, Inc., 144 F.3d 664, 672 (10th Cir. 1998), Royal argues that this Court should grant its summary judgment motion because Quizno's failed to present a legal argument to refute to Royal's argument for denial of coverage. Royal Reply, at 2. As an initial matter, Quizno's did present a legal counterargument to Royal's motion, namely, that if the claims in Sebesta and/or Nickerson arise out of the same facts and circumstances described in the Notice Letters, both Westchester and Royal owe coverage. Until the legal issue underlying this counterargument (i.e., the interpretation of the policy term) is addressed, summary judgment cannot be granted in favor of Royal. Additionally, the Adler case is clearly distinguishable. In that case, the plaintiff failed to present facts to support her sexual harassment complaint when the defendant company moved for summary judgment. Id. at 672. The case does not support Royal's argument that a party must advocate its position on an issue of law to sustain its burden. Fundamentally, Royal's argument misses the mark because Royal does not argue that Quizno's failed to shift its burden by producing evidence of material factual disputes. Rather Royal argues that Quizno's failed to advocate one interpretation of the insurance policy term and apply it to the undisputed facts. As Royal discusses in its Reply, the material facts relating to this motion are not in dispute.3 Royal Reply, at 2. Rather, the only issue involves the interpretation of the policy, a legal issue, and its application, which is whether the claims in Sebesta and/or Nickerson arise out of the same facts and circumstances described in the Notice
3

As mentioned in Royal's motion, a disputed issue of fact exists as to whether Royal received any further communication regarding the notice from Paul Eisner or the December 1998 proposal prior to the filing of
(footnote continued to next page)

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Letters. By deferring to the Court's interpretation of the policy, Quizno's is not, as was the case in Adler, shifting the burden of proving that the material facts are not in dispute "from the nonmovant to the District." 144 F.3d 672. As discussed above, regardless of how the issue is framed, the Court must interpret the disputed policy term and determine whether the claims in Sebesta and/or Nickerson arise out of the same facts and circumstances described in the Notice Letters. Quizno's has not increased the burden of the court or lessened its own burden by framing the issues as it has done. 3. Pursuant to Rule 54(d), this Court May Grant Partial Summary Judgment in Favor of Quizno's to Determine Whether the Underlying Claims Arise out of the Same Facts and Circumstances as Described in the Notice Letters

Relying on a number of federal cases from other jurisdictions, Westchester argues that Quizno's Motion should be denied because no authority permits summary judgment on less than a single claim. However, Westchester's analysis is misleading because it focuses exclusively upon Rule 56(a). As the cases cited by Westchester show, upon the denial of a Rule 56(a) summary judgment motion, a court may adjudicate part of a claim pursuant to Rule 56(d). Rule 56(d) states as follows: (d) Case Not Fully Adjudicated on Motion. If on motion under this rule judgment is not rendered upon the whole case or for all relief and a trial is necessary, the court at the hearing of the motion, by examining the pleadings and the evidence before it and by interrogating counsel, shall if practicable ascertain what material facts exist without substantial controversy and what material facts are actually and in good faith controverted. It shall

(footnote continued from previous page)

this lawsuit. Royal Reply, at 2. However, this factual dispute is not material to this Court's ruling on Quizno's Motion.

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thereupon make an order specifying the facts that appear without substantial controversy, including the extent to which the amount of damages or other relief is not in controversy, and directing such further proceedings in the action as are just. Upon the trial of the action the facts so specified shall be deemed established, and the trial shall be conducted accordingly. Fed.R.Civ.P. 56(d). Westchester's cases are clearly distinguishable. They were all decided by courts outside the Tenth Circuit, and with the exception of one unpublished District of Maryland case, they all were decided in 1990 or before. By the year 2000, treatises and case law from this and other jurisdictions reflected the consensus that under Rule 56, a party could seek to resolve part of a claim through a Rule 56 adjudication. For example, in Cook v. Rockwell International Corporation, 181 F.R.D. 473, 486 n.13 (D.Colo. 1998), Judge Kane wrote: I reject Defendants' argument that Plaintiffs' motion is procedurally defective in that, contrary to the dictates of Rule 56, it does not seek to resolve any single claim in the lawsuit in its entirety. Rule 56(a) provides a party may seek summary judgment upon "all or part" of a claim. . . . "[I]t is now well established that a court may 'grant' partial summary 'judgment' that establishes the existence or nonexistence of certain facts, even though no actual judgment is entered on a claim." 11 J. Moore, MOORE'S FEDERAL PRACTICE ¶ 56.40[2] at 56-279 (3d ed. 1998) (footnote omitted). "A partial summary judgment ruling may dispose of only a single issue relevant to a claim.... In availing itself of the ability granted by Rule 56 to issue orders which resolve significant questions, a court can focus the litigation on the true matters in controversy." Id. at 56-280 to 56-281. Accordingly, the United States District Court for the District of Colorado does not follow the dated holding from Westchester's cases from other districts, and a summary judgment determination as to whether the claims in Sebesta and/or Nickerson arise out of the same facts

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and circumstances described in the Notice Letters under this Court's interpretation of the relevant policy language is entirely proper. Contrary to Westchester's position, the cases cited in its brief support the view that a court may dispose of less than an entire claim under Rule 56. For example, in one of the cases cited by Westchester, the Court made a factual finding pursuant to Rule 56(d) that disposed of less than entire claim. Bonda's Veevoederfabriek, Provimi, B.V., v. Provimi, Inc., 425 F.Supp. 1034, 1036 (E.D.Wis. 1977). In Bonda's, the plaintiff argued that the court should enter summary judgment on "part of the royalty claim" under Rule 56(a). After denying the plaintiff's motion under Rule 56(a), the court held that the partial claim was "properly the subject of a Rule 56(d) order specifying that this fact exists without substantial controversy and that upon a trial of the action that fact is deemed established." Id. at 1036. Similarly, Capitol Records, Inc. v. Progress Record Distributing, Inc., 106 F.R.D. 25 (N.D.Ill. 1985), another case cited by Westchester, affirms that Rule 56(d) allows a court to narrow issues following on the heels of an unsuccessful Rule 56(a) motion. Id. at 29-30 (stating that Rule 56(d) allows a court "to frame and narrow the triable issues if the court finds that such an order would be helpful to the progress of the litigation"). In this case, Quizno's seeks a ruling as to whether the claims in Sebesta and/or Nickerson arise out of the same facts and circumstances described in the Notice Letters. To the extent the claims do arise out of the same facts and circumstances, the Notice Letters gave notice of the claim to Royal and Royal is obligated to provide coverage and Westchester's coverage obligation are reduced pursuant to Endorsement 6. Conversely, to the extent the facts and circumstances are different, Westchester's coverage is higher but Royal owes no coverage

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because the Sebesta claims and the Nickerson claims were made during Westchester's subsequent policies. In the event that this Court denies Quizno's Motion under Rule 54(a), Quizno's respectfully requests that this Court decide under Rule 54(d) whether the underlying claims arise out of the same facts and circumstances described in the Notice Letters. The facts underlying this requested ruling are not in dispute. By interpreting and applying the policy language to the undisputed facts, this Court can narrow the triable issues in this case in a way that would be helpful to the progress of the litigation. The crux of this case is whether the Notice Letters from Quizno's to Royal in January and February 1999 constitute a notice of a potential claim that was later asserted in the Sebesta Action and/or the Nickerson Action. Royal says they do not, and Westchester says they do. In response, Quizno's argues in the alternative and asks this Court to resolve the dispute. At this point, both Royal and Westchester have now moved for summary judgment and presented their respective arguments on the exact same issue raised by Quizno's in its Motion. By ruling on those motions, the Court will necessarily resolve the issue. The crucial point is that the respective positions of the two Defendant insurance companies are mutually inconsistent. They are either both partially right and partially wrong, or one is right and the other is wrong. III. THE PROFITS EXCLUSION DOES NOT APPLY Westchester argues against summary judgment in favor of Quizno's on the issue of whether Exclusion A(7) of its policy could apply to bar coverage two ways. First, Westchester argues that the record demonstrates that "Quizno's and its directors retained profits or advantages to which they were not legally entitled" with respect to the claims in Nickerson and Sebesta. Westchester Opposition, at 10 (emphasis added). Second, Westchester submits that

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Quizno's did not meet its burden of demonstrating that it indemnified its directors. Quizno's addresses Westchester's arguments in reverse order because its second argument is easily addressed and dispositive. Quizno's met its burden of demonstrating that it indemnified the individual members of its board of directors with respect to both settlements and defense costs in both Nickerson and Sebesta. There are no issues of material fact, as Westchester offered no facts to dispute this issue. In the Declaration of Patrick Meyers ("Meyers Declaration") , attached to Quizno's Motion, Meyers, the Executive Vice President of Finance and General Counsel, testified that Quizno's agreed to indemnify and did indemnify the individual members of the board of directors with respect to the Sebesta Action and the Nickerson Action. Meyers Declaration, ¶¶ 17, 23, 28 and 30 (referenced in Quizno's SUMF at ¶¶ 25, 32, 38 and 42). He testified that in both cases Quizno's paid the settlement amounts on behalf of the members of the board of directors. Id. Westchester did not dispute that declaration and, therefore, has not established that there is a factual dispute. Rather, Westchester bases its entire response to this issue on an inadvertent error in paragraph numbering. In Quizno's argument, Quizno's mistakenly referenced SUMF ¶¶ 25 and 30 when it meant 25 and 42 (and should also have referenced 32 and 38). Westchester, therefore, quoted paragraph 30, which it correctly assessed as irrelevant to this question and concluded that Quizno's failed to offer sufficient evidence that it indemnified its directors. The accurate paragraphs establish that Quizno's indemnified its directors: 25. Quizno's agreed to indemnify the members of the board of directors named in Sebesta with respect to their losses associated 15

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with the Sebesta Action and pursuant to Indemnification Agreements with each board member. Meyers' Decl. ¶ 17. True and correct copies of the Indemnification Agreements are attached to the Meyers' Decl. at O. 32. Quizno's is paying the settlement amount on behalf of the individually named members of the board of directors pursuant to the Indemnification Agreements. Meyers' Decl. ¶ 23. 38. Quizno's agreed to indemnify the members of the board of directors named in Nickerson with respect to their losses associated with the Nickerson Action pursuant to the Indemnification Agreements with each individual member. Meyers' Decl. ¶ 29. 42. Quizno's is paying the settlement amount on behalf of the individually named members of the board of directors pursuant to 4 the Indemnification Agreements. Meyers' Decl. ¶ 31. Because Quizno's has established there is no dispute that it indemnified its directors it is entitled to judgment as a matter of law on the question of whether Exclusion A(7) applies, because Exclusion A(7) by its express terms does not exclude coverage for losses indemnified by Quizno's: The Insurer shall not be liable for Loss on account of any Claim made against any Insured: *** 7. based upon, arising out of, or attributable to such Insured gaining in fact any profit, remuneration or financial advantage to which such Insured was not legally entitled; but this exclusion shall not apply to Loss indemnified by the Company.

4

The reference to the Meyers Declaration paragraphs supporting the asserted facts were off one number so that SUMF 38 is supported by Meyers Declaration, ¶ 28 and SUMF 42 is supported by ¶ 30.

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As set forth in Quizno's Motion, in both Nickerson and Sebesta the plaintiffs asserted claims against the individual members of the board of directors and in both cases the members of the board of directors incurred legal fees indemnified by Quizno's and were parties obligated on the settlement agreement, which was also indemnified by Quizno's. As such, Exclusion A(7) cannot apply, even if the settlement constituted an ill-gotten gain by Quizno's. That ends the inquiry and Quizno's is entitled to summary judgment on this issue. In addition, the record shows that Quizno's and its board of directors did not gain a profit, remuneration or financial advantage in either the 2000 tender offer or the 2001 merger with Firenze Corp. Westchester argues that Quizno's is not entitled to summary judgment on this issue because it believes the "central issue of the Sebesta and Nickerson actions was Quizno's and the Schadens' retention of unearned profits." Westchester Opposition, at 10. Westchester supports its argument with two out-of-context quotes from filings Quizno's made in Sebesta and partial quotes from two paragraphs in each of the complaints. Westchester's out-of-context partial quotes are insufficient for it to sustain its burden of showing that there is a dispute as to material facts. First, even the out-of-context partial quotes provide no support for the claim that members of the board of directors received a profit, remuneration or financial advantage in either the 2000 tender offer or the 2001 merger. For example, the two quotes from the Nickerson complaint both allege that "Quizno's benefited" and that "Quizno's received a benefit." And, while the reference to paragraph 46 of the Sebesta complaint references a "plan to enrich management," in context, it is clear that Sebesta plaintiffs recognized that the individual members of the board of directors who sat on the special committee had no interest in Firenze

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Corp. (the company merging with Quizno's) or were otherwise in a position to benefit in any way from that merger. Indeed, even Westchester limits the characterization of its quotes to a claim that "the profit that Quizno's and the Schadens received." Westchester Opposition, at 11. Thus, because the plaintiffs in Sebesta and Nickerson included members of the board of directors who it is undisputed did not receive a profit, remuneration or financial advantage, Exclusion A(7) cannot apply to the claims to the extent they were advanced against those members of the board of directors.
5

And, review of the settlement agreements demonstrates that even if Quizno's received a benefit (which is disputed), allocation is not appropriate here. See Safeway Stores, Inc. v. National Union Fire Ins. Co. of PA, 64 F.3d 1282, 1286-90 (9th Cir. 1995) (rejecting insurance company's claim that the settlement and defense costs should be allocated between those incurred by the members of the board of directors and those incurred by the company with respect to breach of fiduciary duty and aiding and abetting breach of fiduciary duty claims brought by minority shareholders in connection with a leveraged buyout because the liability between the defendants was concurrent).

5

Westchester did not support its statement that certain of the individual members of the board were dismissed prior to settlement being reached in the Sebesta Action. To the extent that is true, it does not address the defense costs incurred and indemnified by Quizno's in connection with defense of the claims, nor does it address the fact that the directors were parties to the settlement in the Nickerson Action.

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Second, the isolated quotes Westchester provides do not sufficiently create an issue of fact with respect to the issue of whether Quizno's received a profit, remuneration or financial advantage to which it was not entitled. In opposing the request for injunctive relief in the Sebesta Action, Quizno's appropriately pointed the Court to the fact that to the extent Sebesta's claims had any merit, he had an adequate remedy at law in the form of the damages he was seeking. Therefore, the quote taken from Quizno's Opposition to the Motion for Temporary Restraining Order in no way constitutes an admission that Quizno's received a profit or benefit to which it was not entitled. Likewise, in supporting the motion to consolidate the Sebesta Action with the Appraisal Action, Quizno's correctly pointed out that both lawsuits related to the same transaction (the December 2001 merger). Although Quizno's stated that the Sebesta plaintiffs sought "more money for their shares," Quizno's also emphasized that the legal theories were different. Indeed, the legal theories were so different that the relief sought was different. In the Appraisal Action, pursuant to the Colorado dissenter's rights statute, the minority shareholders sought the difference between the amount Quizno's had paid for their shares and the "fair value" of those shares. Conversely, in the Sebesta Action, Sebesta requested his actual damages arising from the alleged failures to disclose and failure to consider the third party offer to acquire Quizno's shares by the special committee of the members of the board of directors. IV. CONCLUSION For the above stated reasons and those set forth in Quizno's Motion for Summary Judgment, Quizno's requests that this Court enter an order resolving the dispute over the proper interpretation of the policies at issue with respect to whether the Notice Letters constitute

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sufficient notice of the Sebesta claim and the Nickerson claim; rejecting Westchester's argument that the facts and circumstances underlying the Sebesta Action are the same as the facts and circumstances underlying the Nickerson Action; and rejecting Westchester's claim that Exclusion A(7) of the Westchester's policies applies to bar coverage. Dated this 5th day of August 2005 Respectfully submitted,

/s/ Leonard H. MacPhee Leonard H. MacPhee Attorney for Plaintiffs Perkins Coie LLP 1899 Wynkoop Street, Suite 700 Denver, CO 80202 Telephone: (303) 291-2300 Facsimile: (303) 291-2400 Email: [email protected]

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CERTIFICATE OF SERVICE I hereby certify that on August 5, 2005 I electronically filed the foregoing with the Clerk of Court using the CM/ECF system which will send notification of such filing to the following email addresses:


Joseph F. Bermudez [email protected] Laurence Murray McHeffey [email protected] [email protected] R. Anthony Moya [email protected] [email protected] Michael D. Nosler [email protected] [email protected]



Cindy Coles Oliver [email protected] [email protected] R. Gaylord Smith [email protected] [email protected] Hilary Dawn Wells [email protected] [email protected]









and I hereby certify that I have mailed the foregoing to the following non EM/ECF participant via U.S. Mail, postage prepaid: Calvin S. Whang Musick, Peeler, & Garrett, LLP One Wilshire Boulevard, #2000 Los Angeles, CA 90017 /s/ Leonard H. MacPhee Leonard H. MacPhee Attorney for Plaintiffs Perkins Coie LLP 1899 Wynkoop Street, Suite 700 Denver, CO 80202 Telephone: (303) 291-2300 Facsimile: (303) 291-2400 Email: [email protected]

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