Document 45-2
Filed 07/21/2005
Page 1 of 33
IN TEE UNITED STATESDISTRICT COIJRT FOR THE DISTRICT OF COLORADO (OES) Civil ActionNo. 04-M-725 and THE QUZNO'S MASTERLLC,a Colorado limitedliability oompany, in as of THE QUIZNO'SHOLDINGCOMPANY, Nevada a corporation, assignee andsuccessor to TheQuizoo's ioterest Corlolatioo,a Colorado aorporation,
Plaintifls,
WESTCHESTER INSURANCE FIRE COMPANY, NewYork corporationand a , ROYAL INDEMNITYCOMPAI.IY, Delaware corporatioo, a
Defendants.
DEF'ENDANT WESTCEESTER COMPANY'SBRIEF IN SUPPORT tr'IREINSURANCE OF MOTION FOR SUMMARYJUDGMENTON ALL CLAIMS FOR RELIEF submits Defendant Westchester Insuance by Firc Compaly('Wstchester"), its counsel, in this Briefin support ofits Motionfor Summ Jnd.gment to aIIclaimsfor rliefasserted as ary limitedliability company, The and theComplaint filed by TheQuizno's Master LLC, a Colorado in to HoldingCompany, Nevada a corporation, assignee andsuccessol interst of as Quizno's TheQuizno's (collectivel, "Quizno's'). Corporafion, Cololado a colporaiion L SIJMMARYOF ARGIMENT ('D&O") insuers This case about is to atternpt baveits Directo$& Officars Quizno's paythamouots whichQuizno's lvhen by its triedto short-change formershareholdrs it bought proceeding thernout aspartof a "goingprivate"hansaction, After losingin anappraisal
4810-5492-6335_l
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 2 of 33
as was amount thefair valueof their an Quizno's forcedto payits formershareholde$ additional principaloflaw dratpa,'ment offair valuefor stockyouacquite stock. It is a fundamental the to constihrtes "loss"for purposes insurance. lossexists no of No bgcause paymsnt in shareholders merely matches valueof fhestocklecived theunderling tansaction. dte (collectively, E. majorsharehotders, Richard Schadn Richard SchadD F. and Quizno's 'the Schadens'), beenattcmpting acquire thepublid owned for sharcs a paltry$8.00 had all to price per sharc since1998.Theattsrnpt buy-out shareholders aninadequate in the for to the to is $8.00area the'lmongfirl" actuponwhichtheoriginalclaimpresented theodginalD&O insurer, Royal,wasbasod.TheSchadens u.rongirl actin late2000,and repeated samc that process out through two-step a obtained complcte and merger conholof Quizno's, bought th per rernaining shareholders $8.50 shargsubject theappraisal dghtsof dissenting for to shareholders. and unjusdy Two suitswerefiled against that a Quizno's eging Quizno's tlrc Schadens profitedsinscthsqueeze-out to inadequate cofipensation mrger drctendr and offsl provided theshareholders. addition, In initiatedanapFaisalaction dteminewhatthefair to Quiano's valueofthe shares ftom Westchester. u'as, Quizno's sought for ofdreseactions coverage each because thrcsuitswere all to nothing ftom Westchester Quizro'sis entitled recover prdicated (the was upona claimofrestoring bsnefits whiohQuizno's notentided underpriced to stock).By settlingtheunderpriced it stockclaims, r.vas Quizno's ,ot damaged; mcely paid othsr equivalent valuefor thestockit acquircd.Since underlying suitssought damages no the thantherestoration ofbnefitsto wh.icb there alsono was Quizro'8wasnot er iddto retain,
48t0.5492.61]6.1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 3 of 33
coverage thedefensg for incurred ftose suits. in costs policyis because Theprincipalreason thereis no coverage there under Westchester the wasno inswable a loss. Unlikesomeone hashadtheirhouse who bumdown,or faces liability in tort for iqjuringanotler,hereQuizno's to simplywasrequired paythefair valueofthe stockit acquted. It suffered loss. Any recovery no wouldconstitute double a ftom Westchester recovery Manycases uphold sinceQuizno's obtained stockofthe formershareholdos. also the this basicprincipleofinsurance law. ofbringinganappraisal action. that the Quizno'salsoclaims it is ertidedto recover costs First,thepolicydoes providecoverage anylitigationthatQuizno's initiates.Second, an not fo! appraisal action, a matter of as oflaw, does involveeitherallegations detonninations not or 'lvrongful acts"and,therefore, not covered is under policy. the policyfor anyofQuizno'sclaims Moreover, thereis no coverage under Wastchester's prccludes (whedrcr because exprcssly it covered coverage claims for noticd a geviousinsurer to provided in or not). Quizno's to Company a'Notice ofCircumstance" RoyalInderDnity price February 999identiS/ing attempt obtain stockat aninadequate asthealleged 1 the to the inadequate wrcngfulact. Thatsame at wrcngfulact- theeffortto buyout shareholdersthesame pdceofabout$8.00 share wasrepeated 2000andledto thc three per in lawsuits issue.The in "arisingout repetition ofthe same causing same act, is the drlatened damagc, clearlyconduct of' thesame course conduct.Forsimilarreasons, if coverage existundsr did of even policiesfor Quizno's Westchester's only claims, claims wouldconstitute a singleclaim Quizno's since theyallege intenelated wrongfirlacts.
[email protected]
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 4 of 33
Finally,Westchesta in cannot liableto Quizno's acting badfaith. Forthereasons be for stated above within,Westchestq notbreach insurance was and conhact since covelage no did the available dteclaims in for acted assefis. Additionally, Westchester rcasonably Quizno's investigating, considering, ultimately dcnyiog claims. and Quizno's Based theforegoing, on Westchester no coverage Quimo'sfor thc undedying to ows judgnentin its favor. claimsthatarethesubject to ofthis litigationandis entided summary
.
STATEMENT OF UNDISPUTED MATERIAL FACTS A. Notice ofcircumstance Reported under ttre Royal Policv L The Quizno's Corporation('Quizno's') is a corporationorganizedunderthe laws
ofthe StateofColorado with its pdncipal placeofbusinessin Denver,Colorado. Stipulated Factsin Trial ManagemerfOrder (.TMO) (Exh. A-1 hercto),p. 6. 2. Beforeits mergerwith Firenze,Quizno's wasa public companywhoseshares
were registered with the Securities Exchange Comrnission Aadedon the NASDAQ and and SmallCap Market.TMO, Ex}. A-1. p. 6. 3. Royal lndemnity Company('Royal") issuedDirectorsandOficers Liability and
indannity policy for CompanyReimbursement Coverage Policy No. HP 606493,a claims-made the period ftom February24, 1998 until February I 999,which was extended throughJune24, 24, 1999. Royal Policy, Decl. ofMeyers in SupportofQuizno's Motion for Partial Summary
4810,5492.6336.1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 5 of 33
("Meyers'),! Exh. A. Judgment
4.
F. Director, Vice At thetimeRoyalissued policy,Richard Schaden, its Quizno's
and President Secretary, his sonRichard Schaden, and Chaiman,President and E. Quiano's "the CEO, (collectively, Schadens") already owned majorityofQuizno'sstock. Stock a Repurchase Exh.A-2, p. 5. Plan" 5. OnDecanber 1998, as 29, duringtheRolal policyperiod, Schadens, the
individuals, made proposal Quiano's a to BoardofDirectors buyall outstanding to shares of per not by between $7.84and$8.20 share. SAC, l]21; Quiano's owned themfor anamount Letter,Meyers, Exh.D. 6. Shortlythsreafter, Janu8ry 1999, on sent 5, Quizno's a lefterto Royalnofiryingit
ofpotentialclaimsarising going-private Exh from theproposed hansaction. SAC,fl 23;Meyers,
7.
the 5, Royal,in a lettrdated Febuary3, 1999, refused consider January 1999 to
giv lettera 'hotic of a circumstanca whichmaysubsequeltly riseto a claimunderthenotice provisions ofthe policy." Royallatter,Exh.A-3. 8. to On February 1999, 11, again attempted prcvideRoyalwith "a notice Quizno's
Paul of claim,"but this timereferred a writtentbrcatoflitigationby a shareholder named to Eisner whoasserted the'lroposedpriceis substantially thanthesharas worth." less ar that
yUponthe Motionfor court's request, identified Quizno's in Westchester file exhibits will
SummaryJudg[r9nt andrefred to hercinund[ separat to cover. Reference ihesedocuments insteadof attachingthsrn asexhibits is an attsrnptto avoidumecessarilyfiling additionalcopies of documents alreadyfiled with the court.
4810-549-6336.1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 6 of 33
Meyers, Exh.F, G. 9. Afterhaving refused consider January 1999lettq a "noticeof to the 5,
circumstance," Royalnonetheless letteras'hotice of a agreed consider February 1999 the 11, to circumstance give whichmaysubsequently riseto a claim." Royalfurtheragreed ifa claim that "arises of' suchcircumstance, will be deemed made "it subsequsntly out fust duringthe [Royal] policyperiod." Royalletter,Meyers, Exh.H. 10. OnJune 1999, Acquisition Company, 23, thrcugh newlyformed the Schaden
purchase whichtheSchadens owned, Schadens the their offerwith a revised amended tender priceof $8.00 share.2000Tender per offer,Meyers, Exh.I atp. I l. B, The Westchester Policy 11. On Jwe 24, 1999, the several rnonths afterRoyalaccepted Noticeof
Circumstance, PolicyNo. DON 648267 obtained Managsment a Protection Insurance Quizno's from Westchester. is a claims-made This policythatFovidedDirectols, OfficrsandCompany Securities liability coverage until June 2000. SAC, 24, through tbree ftom 24, clauses June 1999 ,1Jlll4-16. 12, providing Westchester policies issued subsequent similarcoverag#for the
periods 24, 24, June 2000thrcughJune 2001under 24, PolicyNo. DOX 648318 ftom June and 2001 untilJuly3I,2002 Policy DON648451. Policy under No. SAC, 14;Westahester No. tl DON648451, Meyqs,Exh.B.
21hepolicies provided rot identical ofa endo$emant coverage theaddition singtc with
germane thb matter. to
4810-5492-5336.1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 7 of 33
13.
TheWestchester Polict'l contained sub-limit Endorsement 6, whichapplied No. a
to mattcrs describd in thJanuary 1999 only 5, noticeletterto Royal, nottheFehuary11, but 1999 noticletterto Royal. Westchester Policy,Meyers, Exh.B. 14. obligation to pay"loss" is TheWestchester Policyprovides Westchcster's that
which"doesnot include. . . matters uninsurabletnder thelaw." Ibid. 15. Section Limit ofliability andRetention, ofthe Westchster Policyprovides, 5,
". . . all Claimsarising of thesame out Wrongful anda1lhterelatedWrongfulActsof the Act Insureds be daerned Claim,andsuchClaimshallbe deemed be first made thdate on shall one io ofthe earliest suchClaims fi(st mad of is regaldless ofwhethersuchdateis before agoinst them, or dudngthePolicyPeriod.All Ioss resulting a from a single Claimshallbe deemed single r,ass;'!/Ibid. 16. Exclusion of theWestchestcr A.1 shallnotbe Policyprovides "theInsurer that
liablefor Ioss on account anyClaimmade out of against Inswed any based upon,arising oq or attributable anyfact,circumstance situation to of whichhasbeen subject anytritten notice the or givenunderanypolicyofwhich 0risPolicyis a renewal rcplacanent." IDrd or C. Ouizno'sGoins Privrte Tra$action and Litisatiotr 17 . its offr OnAugust9, 1999,theSchaden Acquisition Company withdrelv tender
g Forpurposes Policy''shallreferjointly to PolicyNos. ofthis brief,the"Westchester DON648267, DOX648318, DON648451. and lThe Westahester policydefines Intenelated Wrongfrrl Actsas"all WrongfirlActsthat haveasa comrnon nexus fact,ciroumstance, ot of tansaction, cause series situatioqevent, eI rclatedfacts,circumstanaes, evsnts Westchester Policy,Meyo$,Exh.B, hansactiots causes." or (emphasis added). $ 2, Definitions
4810-549-6336.1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 8 of 33
committec.SAC, because aouldnotreach rnutually price special it a agreeable with theQuiano's Tsnder Otrer, Meyers, I atp. 11. Exh. u 25;2000 18. progam authorized share a rcpurchase However, October 1999, board on 1, the
Septernber 2000,for 30, andQuizno's acquired 144,055 shares theopen on market before purposes (thercby the ofincreasing furtherincreasing liquiditydueto low tading volume percentage TMO,Exh.A-1, p. 5; 2000 ownership Schadens' ofQuizno'soutstanding shares). Tender Offer,Meyem, Exh.I at p. 1I . 19. Tucker pu$uant therecornmendation advisor, ofits OnNovember 2000, 13, to
per TMO,Exh.A-1,p. 5; SAC,'1126. Anthont Quizno's made tender a offerfor $8.00 share. 20. to intended vote TheNoveB$er13,2000teDder that offeralsonoted thSchadens
51.6% approximately their shares favorofthe second-step in theyowned merger, that,since and merger votes forcathesqueeze-out to of drcissued outstanding and shares, hadtherequisite they Exh.I atp. 17. overanydissenters' objections. 2000Tendr Offer,Meyers, 2l. ??9,055 sold OnDecernber 2000,afterover150shareholders approximately 11,
pu$uantto thetender 27-28. shares offer'sterms, tender the offerxpired.SAC,'lJlJ 22. '1o OaMay21,2001,the all Schadens anofferto Quizno's ac4uire the made
per outstanding in shares ofQuizno'scommon stock. . . for $8.00 share ordrto cffctthe scond transaction."TMO,Exh.A-1, p. 5; step 23. provided themerger which Thesqueze-out for ofQuiano'sinto Firenze, merger
wasowned theSchadens, wholly by whereby wouldbedreswriivingcorporatiort Quizno's owned theSchadens. by ProxyStatement, Exh,J atp. 4 and5. Meyers,
4810-5492-6336.r
l0
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 9 of 33
24.
who squeeze-out merger,thoseminority shareholders hadnot Under the proposed
participatedin Quizno's selftender offer were offered$8.50per share.TMO, Exh. A-1, p. 7; Proxy Statement, Meyers,Exh. J at p. 4 25. The SpecialCommitteeofthe Boardboth obtaineda faimcssopinion asto the
merger. offering price from TuckerAnthony and,on June21, 2001,approved squeeze-out the Proxy Statement, Meye$, Exh. J at pp. 12-13. 26. On Novenber 5, 2001,Quizno'sissuednoticeto stockholdqsofthe proposed
FireMe squeeze-out mergeranda November30, 2001specialshareholders meeting. TMO, Exh. A-1, p. 5; NoticeofMeeting,Exh.A-4. 27. puportedly on behalfofall On Novembsr 13, 2001,Edwad Sebesta,
shareholders, ofthe boardof broughta legal actionagaiostQuizno'sandsevenmembers directorsl to preventthe Firerue mergerandto obtaio compensatory damages.SAC, '!f3I . 28. Among otherthings,the Sebesta complurll alleged that Quizno's andits directors
by of Fofited or benefittdfrom th going private hansactionat the expense sharcholders obtainingQuizno's 'tuithout payinga fair price to Quizno'spublic stockholders."Sebesta Compl., Meye6, Exh. K at lJ 7. 29, case Quimo's admittedin its filings in the SeDesla that the Seratt4 claim was
solely aboutundervaluation ofthe tenderoffer: claimsto be a shareholder Sebesta who thinks $8.50is not enough. His complaintis essentially aboutmoney:he thinks the fair value
lTl\e Sebesta Co\trt drsmissed claimsagainstfour of thesedirectors-BradGriffin, Mark a Bromberg,Eric Lawrenc,andJohnTodd Seforc the remainingpartiesreachd settlement.
4810-5492-6136.1
1l
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 10 of 33
price that ofhis Quizno's stockis greaterthanthe $8.50per share the SpeaialComsfttee ofQuizno's Board,andthe Special Committee'sprofessional advisors, determined wasfair. Opposition TRO, Exh.A-17,pp. l-2. to 30. in Quizno's acknowledged a gourtfiling that the rcasonthe cout deniedSebesta's of a 'clear measure
'faintiffhad applicationfor a ternporary restrainingorderwasbecause
damages' namely,the differencebetweenthe costor benefit offered,$8.50per sharc,versusthe fair marketvalueof the shares." Motion to ConsolidateExh. A-5, fl 16, 31. IrI suppot of its motion for consolidation with the apFaisal action,Quizno's
madefirdrer admissions the Screrta litigation was simply aboutwhetherQuizno's paid that fonner shareholdenenoughfor their stock: seek Quizno's former shareholders moremoneyfor their shares, Only the legal theoriesC/.r.ployed attempt extractadditional to to payrnent diffrs. ReplyBrief,Exh.,4-6,p. 3, fti 1. 32. On December 2001,following appoval ofa majority ofshareholders, 2l,
Quizno's andFirenzecampletcdflleir mrger,with Quizno's asthe surviying company. TMO, Exh.A-1, p. 7. 33. Thereafter, accordance in with the ColoradoBusiness CorpomtionAct C CBCA),
Quizno's filed a Foceding seekhgjudicial apFaisal ofthe shales,TheQuimo's Cotp. !. Ililliam S.Fagan, et al. (the"appraisallitigation'), caseNo. 02-CV-2598in District Court for the City and CountyofDenver, Colorado. AppraisalCompl., Exh. A-7. 34. h the appraisal litigation, defendartdissentqs,holding apgoximately 400,000
4810-549-6336_l
12
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 11 of 33
far shares, contended thefair valueof Quiano's that stockwasat least$61pershare, rnorethan theforced mergo price. Post-trial BriaqExh.A-8,p. 34. 35. wereonlyabout that claims has furtheradmissions thedisssrters' Quinzo's made
paymeqt theirshares its brief for consolidation inadeqDate actionv/ith the for in ofthe appraisal
Sebesta a/clionl
Here,thetransaction dispute iderticalin bothcases. in is relief. TheCourthasdenied Sebesta's for request injunctive in Litigationis Therefore, onlyquestion the remaining theScbesta to whether Sebesta theputative and class entided compensatory are plaintiffin theSebesta Litigationbelieves $8.50 that damages. The pershare not fair valuefor his shares. theDissenters Rights is Irl Litigation, dissenthg is the also shareholders claimthat$8.50 s inadequate compgnsation. Motionto Consolidate, A-5, p. 6,tl'lJ Exh. 3-4 36. parties theSeresla actionentred On Octobo15,2003, to and Quizno's theother
into a stipulation settlenent common stock of whereby sharcs Quizno's of holdslsof 316,197 pegged plus wouldreceive immediate incremental award an award of$1.00pershare, a furttrer to thejudicialappraisal Exh.T at'll1ll-3. ofQuizno'sshares. Stipulation, Meyers, 3'7 . On January 2004,thecout ruledin theappraisal 8, action thefair valueof that
defendants' pu that shares $32.50 sharel,finding among was otherthings, therelationship between TuckcrAnthony, Schadens, theTucker the valuation expertwas and Anthony EAlthough plaintiffsjointly sought consolidate two bothQuizno's theSeresra and to the actions, coultultimately ofthe appraisal aation's the denied such on reliefbased theopposition
dissenteN.
_
z/The per Exh. courtlaterreducd amount $24.00 share.FinalJudgmeni, A-9, p. this to
4810-5492-6336.r
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 12 of 33
'lnceshrous,"andthercforcnot 38.
credible. Order,Exh. A-18, p.6-7.
Thc court io the appraisal that actionfirfter deterrnined CBCA Section113-302
rquiredQuizno's to pay aostsandattomeysfeesupon an express finding that Quizno'shad actedin bad faith. Order,Exh. A- 18,p. 7. 39, Tlte Nickersonaction which namedQuizno'sandcsltain ofits directo$ and
olficers asdefendants, puported to be broughton behalfofa classof shareholders who participatedin the tnderoffer. NickersonCompl.,Meyers,Exh. V at !n 5-11, 14. 40, Tlte Nickersonalleg;atrons mirored thosemadein the ^terarlaactioq narnelythat
the price paid for shars wasinadequate.NickersonCompl.,Meyefs,Exh. V at ulJ2, 29-37, 53. 41, "representing l0 per share"into an escrow to $ Quizno's agreed pay $7,540,550.00
accountaspart of a setdement plaintiffs. Notice of Setdement, Meyers,Exh. viith theNi,c&ersoz
cc.
Westchester'sResoonse Ouizno's Claims to 42, by datedAugust28, 2001,of a Quizno's notified Westchester corespondence
Form l3D filed by shareholder Sandstone Ventures,LLC statingthat it would vote againstthe pursuant CBCAprocdures merger thatit wasintending dsmand and pqmsnt for its shares to to goveming Meyers, Exh.L. dissenlr's dghts. SAq T 331 2001NoticeofCircumstance, 43. OnNovember 2001, 14, ACEofthefilingoftheSebesra notified Quizno's
lawsuit. Notice ofClaim,Exh.A-10. 44. On December 2001,Quizno's 27, oflettersfiom a notifiedACE ofits recEipt
number shareholders of indicating theirintentto assert dissente$' rightsanddemand additional
4610-5492{lt6.l
t4
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 13 of 33
payment theirstockpursua to theCBCA. Noticeto ACE,MeyeN, for Exh.N. 45. 4, Westahestr issued initial reservation ofrights lettq on January 2002,and iis
supplemented it onFebruary Lette$, Exh.A-11,A-12, 5,2002 Marah and 19,2002. Reservation A-13. 46. D\de'f, interalia, In respect theSersta Westchester rcsel.'ed righ16 to action,
were Exclusions A.7, andA.12;Endorsement 6; andtheassertion theclarms A.l, that No. uninsurable amatteroflavl. 16id as 4'l23, view on Westchestcr's thattheSetesla Quizno's January 2002disputed
litigationarose ofthe January 1999 out out 5, letter,claiming "theLitigationarises ofa that differenttransaction theproposed Ny than hansaction in descdbed our Janu 5,1999leltaL" Meyers letter,Meyos,Exh.Q. 48. Westchester deqied dissentef,s' actiDn, it merely as coverage ofthe Quizno's
soug[tthe establishrnqrt a fair pricfor thescurities issue, did not allege at of and Quizno's acted wrongfully.Reservation Ltter, Exh.A-12. 49. Westchester received noticeby conespondence January 2004ofthe dated 23,
compleirlin ltrilliamH. Nickerson TheQuimo'sCorporatioq, al,CaseNq 04-CV-0455, v, et filed in theDistrictCourtfor theCity andCoufltyofDnver,State ofColorado.SAC,fl 52; Meyers, Exh.W. 50. OnMarch10,April 5, andApril 21,2004,Westchester informed Quiaro'sftat
theNickerson aalionrelatdbaakto theSebesta ofrights, action, tho reservations adoptod same anddenied request retainnewdefense Letferc, to Reservation ExhsA-14, counsel. Quizno's
4810-5492-6336.1 t)
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 14 of 33
A-15andA-16. 51. After reaching Niclreruo,sttlement, the filed Qui.ano's thegesentactionagainst
fees Westchester Royalfor indernnification setdement amounts recovery defense and of and of andcosts.SAC. L LEGAL ARGUMEIYT The,gerestc Nr'cf?rf,on of and ActionsSoushtOnlv the Dlssorgemnt Undeservd Benefits:RestitutionIs Not a "Losrt No coverage the exists lheSebesta Nickersoractions for ar'd because plaintiffsthere sought recovered and was rstitution amounts whichQuizno's not legallyentitled. of to l. TheDisgoryement nl-goltan GainIs Urinsuruble of
Thepublicpolicyprecluding in insuranc& for coverage ill-gottengainis well-grounded principleofinsurance themoralhazard v. law. For exanrple, Bankofthe West Suwior Court in ofcontrd Costa County,2Ca|.Ath for'tnfair competition" 1254, insuedsought an covrage injuriesthal atose ofthe insured's Court out activitics.TheCalifomiaSupreme advertising denied suchcoverage that coaldexist,explaining allowinga '\fiongdoerto fansferthecost that of disgorgment aninsurer to wouldeliminate incentive obeying law . . . the for the the wrongdosr wouldretaintheproceeds ofhis illegalacts, mslelyshiftinghis lossto aninsurer." principle precludes Id. at 1269.This same seeking restitutionary relief. coverage actions for Accordingly, and courts haveconsistently thatclaimsfor restitution disgorgernent held arenot insurable losses undo a D&O Policy. See, Inc, Level3 Coumunicatiotls, v. Fed.Ifis.Co,, 272F.3d908,910(7ft Cir. 2001)Gtating "losswithinthemeaning aninsuauce cpntract that of
4810-5492-6335.1
l6
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 15 of 33
Inc, does include restoration anill-gottengadtrt'); PacificRetailProperties, v. Gulf not the Pan of x5 Ins.Co.,20O4WL2958479 (S.D.Cal. that oflaw restoration 2004)(concluding "asa matter yigila t Ins, Co,v. CreditSuisse of an 'ill-gottengain'is not insurable'); First Bo$ton Corp., 782N.Y.S.2d19,20 (2004)(affuming theinsured that couldnotrecover sttlenent the amouots whichrepresented that disgorgement fundsimgoperlyobtainexl, of stating dte'tisk ofbeing directd retumimproperly to of Restitution ill-gottenfi:ndsdoes acquired fundsis not insurable. 'damages' a '[oss'asthose not constitute Reliance tems areused insuancepolic|'es.'); in or GroupHoldings, v. Nat'l UnionFire Ins. Co.of Pittsburgh, 594N.Y.S.2d 24 (1993) Inc. Pa., 20, (stating "it is well established onemaynotinsuleagainst risk ofbeingordered to that {nt the retummoney property hasbeen damages or that Such orde6do not award wrcngfullyacquired. policies."). astllat telm is used insurance in Restitution been has described follows: as gain Rcstitution measures rcmedy thedefendrmt's andseeks by the "to prevent the to foicedisgorgement ofthat gainin order defendant's unjustenrichment," Restitution, whichsks prvent to rutjustenrichment ofthe defendant, differsin principlefrom damages, whichmeasure remedy theplaintiffs lossandseek by the to prcyidecompen.sation thatloss. Earthlnfo, t. Inc. for Hydrosphere Resource Consultants, 1nc.,900 113, (Colo. P.2d 118 1995) ominedj. [cirations is Therationale findingthatrestitution disgorgsmert wrinsurable multifor and a(e facated.Courts acquired havereasoned (1) aninsured is forced retumwrongfirtly dnt to who firndsto whichit wasnot entitled thefiIst place not suffered loss;(2) shiftinglhe costof has a in disgoryenent aninsurer to unjustlyorichesinsureds; (3) shiftingthecostof disgorgemcnt and to aninsurer wouldeliminate incentive obwinethelaw. for the t7 4810-5492-6336.1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 16 of 33
Itr Local 705Internqtional Brotherhood Teansters of Health& Webre Funl v FiveStat Managers, LLC,735N.E.2d679(2000), courtheldthataninsuled not suffqeda loss the has whenit is merolyretuming dle fundsto whichit wasnot entitled thefirst place.Thre, in inswedsought declaration it wasentitled coverage a suitallging theiosued a that that to for hadimproperly tansferred fimdstom a sister fimdinto its ownfimd. Thelocal 705cout found thesolebasis was ofthe settlement theunderlfngmatter thclaimthattheinsured in was requircd retummoney hadno dghtto possess thefiIst place."Sucha payment hardly to it can in be tsrmed loss. Nor aansuch payment a create deprivation moresothananyborower can a any be saidto suffaerdsprivation a frombeingrequired repay irdebtednss." an Local 705,735 to N.E.2dat683.'"Theplainandodinarymeaningof'loss'cannotbeignored. [Theinsued] 'simplycannotlosethattowhichitwasnotlegallyentitled."'Id.at684(citingTownof (E.D.N.Y. Btookhaven CNA Cos'l988 WL23555 not a v. lh.s. 1988). "An insueddoes suslain covered by restoring its rightfulowners whichtheinsued,having dght thereto, loss to no that hasitadvqtendyacquird'" Id. d,683(cit;J'l9Nortex &Gqs Corp.v. HarborIns. Co.,456 Oil (1970)). s.w.2d489, 493-94 Conseco, v. NationalUnion Inc, Conpany Pittsburgh, sybania, of Pen Fire Insltrance (lnd. No.49D130202CP000348, WL 3196144'7 Cn.g.Dec. 31,2002) 2002 involved allegations insuedsmade that regarding Conseco's matrial misstatenents and/or omissioru financialcondition, stockandreaping thercby artificiallyinflatingthepriceofthe company's The that cannot $2.3billion in proceeds based themisrepresentatiotrs. cout stated insurance on be used unjusdyenrich to insureds thatinsuedsarenot allowed profit ftom their to and
4810-54925336.I
l8
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 17 of 33
"insruance wrongdoing tkough insuratce.Conseco,2002 31961447 46-7.As such, at WL oannot used payaninsule-d amounts insured be to wrongfullyacquircs is forcedto and for an retum,or to paythecorporate obligations ofan insured."14 at +6. publicpoliayto allowa Cozseco heldthatit wouldbeufieasonable against thus and of D&O policyto indcmnifu insured ftom an undera claimseeking disgorgement thecompany pricapaidto thecompany wasinflated theportionofthe share that because of misrepresentations. also,FederalTradeComm'n Febre,128F.3d530,537(7thCir. See v, 1997) is that"asanequitable rendy,disgorgennt mant place&c decived to Gtating position wouldhaveoccupied thesellernotinduced to enter him consumer lhe same in had he into thetansaction by the ftom [and]prevents defendant beingunjustlyenriched his fraud.'); Sr "as (holding a matter (C.D.nl. PaulMercury Co.\,.Foste\268F.Supp.2d Ins. 1044 2003) 1035, ofprinciplerestitutionary the reliel thatis reliefintrded divest insuedofthe netbenefitof to anunlawfi aator 'threstorution anill-gottengail!' is uninsuable because protection suah of would'insurea thief against costto him of disgorging proceeds ofthe tlteft."'). the the Corseco that furtherstated "asa matter law.tlle factthatdirecto$andofficelsare of the narned dfendarts a case as in scking does restitutionary damages not chaDge re.stitutionary 11 character ofthe settlement . , IDthis case is undisputed noneofthe Section settlement . it that pqmentmustreFesent i11waspaidby theindividualPlaintiffs.By definition settlement the gotten gainofConseco was No retumed those to whopaidConseco, 'I-oss,'thercfore, suffeted aI*s. by Conseco theSection 1 portionof tlle settlenent."Conseco,2002WL3196]'447 for I Courts havespecifically thatseftlenents inqeascd fo1 merger consideration held
4810-54925336.1
t9
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 18 of 33
constituteuninsnrable rstitution. SeeLevel3,272F.3d908; seealso Pan Pacifrc. Level3 axose out ofa claim that an acquiringcorporationandoneof its directolsfraudulendyinduced plaintiffs to sell shares their companyat an unfairly low price. Sincethe acquiredcompany in c.ould be rcconstitutcdandretumedto the shareholdas, plaintiffs soughtto recoverdre not the allegedshortfall in the monetaryvalueoftheir shares.The defendants sottledthe casefor $11.8 million. Level 3 inderrurifiedthe directordefendant the full amountofthe settlement and for defense costsand soughtto recoverthat amountfrom its D&O carder. The Savcr h Circuit held "loss within that Ivel 3's D&O insurerwasnot requiredto indemniryth defendants because the meaningof an insurance contmctdosnot inaludcth restoration anyill-gotten gain." of Level3,272F.3dat910. The cout in revel 3 firther noted that: the the [the plaintiffs] were seeking diffoence between valueofthe stock at the time oftrial andthe price theyhadreceivedfor the stockfiom Lvel 3. That is the standard in damages a securitiesftaud case.But it is rcstitutionary in chalacte/ . . .lt se&s lo dqrive the defendant the oet benefit ofthe unlawful act,the of value ofthe unlawfully obtainedstockminus the costto tle defendant ofobtaining the stock.. . . How the claim orjudgrnent or settlement wordedis irrelevant. An insuredinars no lots vrithm is the mesningof the insutatrcecontractby beingcompelledto return plopefty that it had stolen,evanifa morepolite word thah "stolen" used is to charactaize the clnimfor thepropefiy's return. 272F.3dat 911(emphasis added). Notably, it Level 3, a directorwasa setdingdeferdantin the underlyingactiou asin Cozseco, Seventh the wasrestitutionaryand Circuit still formdthat the natureofthe settlement "all thercforeuninsued. Th cowt stated, that plaintiffs in the undadyingsuit obtainedwasthe amountthey recoivedin settlement their claim against of Level 3, andthat amountwaspart of tvel 3's garn hom its ollicers'misbehavior." 272F.3datg|l.
4810-s4y2.6336_l
20
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 19 of 33
2.
TheInsareds Not Incw a LossanderthePolicy Did
arc Llke Local 705,Conseco, Ievel 3, rhe a(d seltlements clearly nd Sebesta Nickerson payment restitutionary. Thatis, thesettlernenis each based Quizno's in ofinadequate are on in consideration plaintiffsfor theirshares, reflected thetie-inofthe settlement amount to as by theSebesta in setdement thejudicial appraisal theshares theappraisal to actionandthe of settleme[t distribution theNickerson ii action. Evenwhere, in theprcsent as are oasg, settlement agreernents "drawnin sucha wayasto obscwe wouldbe paid whowasliablefor whatamounts, simplyrecite[]thatcrtrain and amounts by the 'setttingdeGndants' hadagreed contribute," couflswill examine surrounding the who 10 payments restitutionary payrnents factsto determine solelyon whether made settlqnent are behalfofthe 3,272F.3d at9l1. corporati Reliance,594N.Y.S.2d see Level on. al23; also kr Reliahce, of trc\mderlyingaction resultd partialrestitution disgorgement and in Reliance's greenmaiF/ profits,rather behalf. thana palmentof damages 0redirector's on papers Althoughthesettlement the obscured wasliablefor whatamounts, courtconcludcd who theCEOdefandant him, incurred damages indemnified andthus, no liability for whichReliance Reliance at25. incurred lossasdefined theD&Opolicy.Reliance,594N.Y.S.2d no by 'lnadeno tender In reaching conclusion, courtnoted theCEOhimselfhad its the that offer,did notbuy or sellany[]stock, fromanyofthe tansactions, and made prcfit whatever no pe$onallyor asa director officerin theresuponwhichtheoonstuctive hadno interest tust or
vA geenmailer creates threatofa corporate the takeovq by puchasing a significant amouotofthe company'sstock. He then sellsthe shares when its back to the company executives, fearoftheirjobs,agree buylllrr.olut.Relia ce,lSSN.Y.S.2dat22. in to
4810-5492-6336.1
21
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 20 of 33
aI26- Ttrc wasimposed ftom whichpartialrestitution made."Relis ce,594N.Y-5.2d and was Reliauce cowt notd that"[u]ndertheconstruction by and urged Reliance Steinbeg [its CEO,] if anofficeror director sued couldmakefirll was together thecorporation, corporation with the purportedly behalfofits on or partialrestitution funds ofthe embezzled ftaudulently or obtained makeclaimagainst its ofncr,adopt rasolution indemnifuing of6cer,andthensucrrssfully a the of D&O insurer thefirll amount disgorgement for ofthe setdement. Suely thecorporation's property loss." 1d at 24. such wouldnotberecognized aninsurable as wrongfullyacquired to Notably,thecourtstated "onemaynotinsure the $at agaiost dsk ofbeingordrcd retum do damages money property hasbeen or that wrongfirlly such acquired because orders not award polioies."14 at 24. asthattednis used insuance ir or the Here,regardless was ofwhetherthehsureds'conduat ftaudulent whethr l[sureds did engaged intentional in wongdoing, beoause Insureds not suffer the covemge not available is a loss,but weremerelyrequired retumfundsto whichtheywerenot entitled.In otherwords, to and to no lossexisted because setdements for money did notbelong thelnsweds, the were that thatmoneysimplyhadto beretumed its rightii owne$. Conseco, v. NstionalUnion Inc. to Fire Insurance .y at Compa of Pittshtgh, Pennsylvaniq, supra,2002 31961447 *11. Put WL anotierway,the,te6es wrd, required and ta Nickerson st',tlemerfs merely Quizno's ths Schadens to paythetruevaluefol thecompany's of a shares, constihrting pa),rnent "coryolate thus to incurred dreordinary (1Did.) essentially seeks obligations in ofbusiness." course Quizno's for compel Westchester payQuizno's ofdoingbusiness, rather thanFovide covemge an to cost inswable loss,
4810-5492-6,36.\
22
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 21 of 33
McGahey's Findings of Judge ofFact, Conclusion LawandOrderfor EntryofJudgment shares in theApFaisalActionmakes clear Quizno's theSchadns and wongfirlly obtained that hansactions. ftom theminorityshareholders paying thana fair prioein drepdvatization by less For example, Mccaheystated: Judge per Whatwerpatina to ofregularity mighthaveattached the$8.50 share valuation completely is obviated thebiasandmotivation by valuation demonstated thefomulatingofthe Tuaker Anthony in who for Quizno's or moreaccurately theSchadens were for pursuing cash mergr. this out
:1. it *
Whilethese loans to as weretechnically made Quizno's a personal corporation, fimctionally tley loans made fuchard io were Schaden his groupto fundthis cash mergsr. and out Order, Exn.A-18,pp.5-6. 3. TheNatwe of theSefrlemen Disgoryeme of nlgotten Gain Is
br PanPacifrcRetqilPrcperties, v, GulflwuranceCompany,2004 2958419 WL Inc. (S.D.Cal. claims 2004),thecoDrt examined the whethsr coverage existed where onlyremaining fiduciaryduticsowedto &tthetimeofsettlement rclated allegfijo'J,s defendants to brached that prcceeds the thecompany's shareholders.9/ theparties Thcrc, disputed whether setdelrtent
z la Pan Pacific,plahn{fs in the underlyingactionallegedthat defendants failed to disclose:(1) that superiorofers hadbeenmadeto acquircthe compans (2) the exchange ratio wasunfairly 1oq (3) the Boardhadnot negotiatd highestpossibleprice for the acquired the company'sshareholders; (4) the factualandanalyticalbasesfor the exchange ratio offeredby and the acquiringcompany. Similarly, here,the Sebesra actionallegedthat dreboardfailed to cansideran altemativeoffer of$10.63 per sharcandfailed to plovidc infomation to public stockholders wasnecessary themto makean infomed decisionregardingthe faimess that for andadeqtacyof tbe oonsideration wasbeing offered. drat
4810-5492-6336.1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 22 of 33
represented paid increased merger Plaintiffs consideration solelyon behalfofthe corporation. argued thesettlement asto wrongfulacts-breach fiduciary that was duties-covqed underthe of policyandrpresented a qovered ofbreachof fiduciarydutyclaims loss. Despite existenae the whichheldthepossibility that ofnon-restibttiooary the damages, Par Pacfc aourtconcluded the settlemsnt reFesented nothing morethanincreased merger consideration. the ln addressing whether setdemelrt the constituted increased merger considemtiorL Pa, Pacfc courtlooked ofthe parties and beyond labels settling the the used examined neture ths settlement. courtdeternined thesettlernent The constituted incraased merger consideration that (l) because; thedamages with fund associated thesettlsrnent itself weredistibutedon a pcrshaxe (2) basis; theallegations thecomplaint company in foculsed thefactthattheacquiring on hadnotpaida sufficient and amount theshals for ofth acquired aompany (3) plaintiffsin the actionsought received that and increased merger consideration thetheory thepdcepaidfor on theshares wfairb low aIIddid notreflectthetue valueof theshares. suclt,thecourt was As concluded thesettlernent, that was dishibuted a per-share basis, a bump-up was and on lestitutionary nature notinsured.PanPacifc,2004WL2958479 at*ll-12. in and Precisely same the analysis applies theSebesta Nicklsotsettlenents. The to and Se6esla actioninvolved(1) a settlement Fovidedfor thedistibutionof indenlental that pqmentson a per share in ofQuizno'sshaxes the basis cofielated thjudicial apFaisal that with 'that purohase pice apgaisalaction, allegations centered thefactthatthe$8.50 share (2) psl on wasinadequate increased merger compensation, (3) plaintiffswhosought received and and considoration thetheory thepdcepaidfor theshares unfairlylow anddid not rcflect on that was
4ato-5492-6336,1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 23 of 33
thetruevalueofthe sharas, espeaally-as PanPacfc-in light of superior offers. with Similady,theNrc&ersoz ofthe Sebesta actioo(except that action minoredtheallegations it focused theinadequacy on ofthe $8.00 rather thanthesqueeze-out tender offerpricepershare meryer consideration) theNicftersoz value($I 0) and setdement basd a pcr share on was (754,055). multipliedby thetotalnumber shares issues of at Furtler,theNoticeofSetdernelt paid states the"seftlement that in consideration in addition the$8.00 is to already by Quizno's theTender ofthe settlements Offer." Noticeofsettlemetrt, Meyels, Exh.CC. Thus,drenature andtheirsunounding mrgsr factsclearlyindicate thesettlemurts that represIlt incrased consideration, restihttionary nahtre, theteforc, in PaaPacifc, arclllotcovered, are in arrd, as A fodiori, it is clear thesetdements not for thepalmentofany lossby either that arc or and the it that Quizno's anyofthe directo$or officers.Rather, appears Quizno's its owners, Schadens, liablefor andpaidthesetdement were cost amount partofthe transaction andthat as theotherdfuectoN officersnarned thc lawsuits not andwrenotlegallyobligated to and in did contdbute thapayment to ofincreasd regesentd thesettlments. by mergEr considemtion TheSchadens thesoleowners Quiano's thetimeof thesettlEments were of at and bcnefitted theircompany's ftom puchase ofits stock a lowprice.UMFtlll3l,35,40. for Therefore, if theSchadens even couldcompel to themfor thecostof Quizlro's indernniry purchasing company, indemnification the disgorgement the of sucb wouldbe for theSchaden's ill-gottengaintlteyreceived through hansactions thsrefore, the uninsurable. and, With rcgard theotherdirectors of6cers, coverage to and no wouldbetriggercd because these individuals wernotlegallyobligated paythesettlements, Quizno's to and wouldnotbe
4810-3492-6336.1
25
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 24 of 33
pemittedto indemnify requircd even or themfor pa),mnts whichtheywernot legally for obligated, fact,noneof these In action upol which individuals wereeven partyto theappraisal a partiallybases present Compl, Reliance,Ierel thc claim. See Appraisal Exh.A-7. T1l.e Quizno's 3, urd Conseco deasions makeclear Quizno's all to that should be allowed obtaiocoverage not fol its payment ofincaeased merger consideration merely adopting resolution by a indemnifying its officersanddircctors setlements whichtheywerenotliableto makeanypa)'nent.A for for contrary conclusion for would,in essence, the coverage uninsurable eviscerate ruleprecluding payments. restitutionary owed,and Furtheamore, payment notonetheQuizto's directors the was dterefore, indemnification ofth directors couldnot change character thepaymeft. the of B. The Appraisa!Actior Is Not InsurableBec&use Does Constltutea Claim for it Not Wrongful Acts Covsrage available is under Policyonlyfor "WroogfulActs." Meyrs, the Exlt.B, "Wrongfirl MPDO00I(4-99)p. l. Section defines IlI Acts" as"1. anyeror, misstatemert misleading statement, omission, act, or committed or negleat, breach dutyactually alleged1y or of atternpted anyofthe Insured by or, Persons theircapacity such, in anOutside in as or Position wift respect hsudngClause by theCompany, 2, anymatter to the C, or claimed against Insured Persons solelyby theirserving suchcapacity in anOutside in Position."Meyos,Exh.B, or (a-99)p.3. Plaintiffshave MPDOOOl Shareholders oontend[ed] opined since"Dissenting that thatQuizno's coomiftederIorsandoDrissiol)' yalujngthekshares, Dissenting in the Shareholders haveasserted thus clairns 'WrongfirlActs' asthattermis defined.Meyers, for Exh.Q, p. 1. While dissenting shareholders have made suchcontentions, those allegations may areimmaterial anappraisal to action.
48ro-s4n4136l 26
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 25 of 33
The natureofand solereasonfor an appraisal actionis ajudicial detemination asto what a fair price would be for shareholders exercisingdissenter's rights. Findingsof Fact, Conclusions ofLaw, Exh. A-18, pp,2-5. Suchactionsarecteatures ofstahrteand,asa matter of law, do not involve or seekrecoveryfor any actualor allegedwrongdong, (bid.) Sectioo362 the DelawareGCL was construdit Cede& Co v. Technicolo4Inc., 542 A.2d 1182, 1189(1988)to meanthat statutoryapFaisalis simply a detemination of value (i'..,thestah ory appraisal limited to the palanentoffair valueofthc shares...by surviving the is or resulting corporation'...Adetennination fair value doesnot involve an inquiry into claimsof of wrongdoingin the merget'). Cedewas citedwith apFoval recentlyin Szalocziv. John R. Behrmann Reyocable Zrrrt,90 P.3d835,841(Colo.2004). Altematively, evenif the appraisal to ofwrongJirl actionwerc deemd be thc defense acts,the reliefobtained by the shareholders insurable"loss" for the same doesnot constitute poirted out in dre previoussection. rcasons C. Coverase for Ouizno's Claims Is Precluded sinceThev Arfue out of Circumstances Which Were ttre Subject of the Earlier Written Notice l. ExclasionA.1 Prccludes Quiztto's Claims Because They were Prcviauslythe Subjectol lllritten Notice to Rolal
E:
27
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 26 of 33
policyreplaced Royalpolicy. TheRoyalpolicyended June 23, TheWestchester on the 1999, theWestchester policybogan nextday, Duringthependency theRoyalpolicy, anrt of the involving I lettergiving'Noticeof Circumstanc" Quiao's sentRoyala February l, 1999 potential this claimsdescribed PaulEisner's in letterof January 1999.Amory othelthings, 4, letterstated:
The termsof th prospective buyout aregrosslyunfair to the pfice is shareholders who arenot part of the buyout Theproposed sl.tbstati@llylesstha thesharesore worth. . . . Participationby any dirccto$ involved in the lweragedbuyout in anyvote, evento establishthe spocialcoumittee, is aonflict ofintcrst sincetl,ose directors would be roting to considera proposol in tehichthey were to ot mightpewonally proft, . , . Suahlitigation would likely include derivativeactionsfor breachof fiduciary duty for useof insiderinformation andconflict of interestaswell [sic] a derivative actionwould include disgorgement offees basedoll conflict of mtEresL Meyers,Exh. F, G, (ernphasis added). In response, Royal accepted Notice througha letter daledFebruary25, 1999. this Thankyou for your February11, 1999letter andits enclosures. This will confim that Royal shall accqf this informationasnotice of a circumstance give which may subsequently rise to a claim pursuantto the Notice provisiolL Section4. Conditions(GX2). 1, the eventa claim ^ subsequently madeand arisesout ofsuch circumstances in referenced lour letter, it will be deemed f.rst nade during 12124/98 2/241991 policy peiod referenced to the above. Ro}?l Letter, Meyers,Exh. H (ernphasis added). ExclusionNo. 1 in the Westch$ter policy exactlytracksthis wording. It providesthat anyclaimwhichis"arisingoutof..,any...circumstance...whichhasbeenthesubjectofany wdtten notice given underanypolicy'' is excluded underthe policy. The questionis whetherthe
4810-5492-6336, t
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 27 of 33
Sebesta Nickarsoz arLd set claims"ariseoutof anycircumstance" fofih in thatnotice. Sebesta, Nicketson, appraisal on that utd actionaresimilarlybased theallegation plofitedAomthebuyout puttliclytraded at and shares an ofdre remaining Quizno's theSchadens price. Thesame of conduct, thesame insufficient in tlpe results, present boththenotice is with policydoes provide for letterandin tlle ultimatelawsuits.As such, westchesto not coverage the these out claimssince theyare"rnade any upoll,arising of, or attributable against Insured based to anyfact,ciroumstance situation th or whichhasbeen subject anywrittennoticegiven of underanypolicyofwhich this Policyis a renewal replacament." or letter 5, Plaintiffsmayargue thecircumstances actually relate backto a January 1999 that provisions sentto Royal, in thereby triggering reduced the deductible limits andincreased and Endorscment 6 ofthe Westchester fails No. Policy. Thisargument because Quizno's both RoyalhaveafErmatively lett{is not a 'hotice of takenfte position theJanuary 1999 5, that circumstance."lq 3, Royalrejected January 1999 in letterasa "noticeofqircumstance" its February the 5, the 1999correspondence. has RoyalI-ettr, Exh,A-3. Quizno's alsotaken positionthatit considers "the Litigationarises of a diffrent transaction that than out transaction theproposed ' described our January 1999 in 2. 5, letter." Letter, Meyers, Exh.Q,page Royal(andQuizno's) to considered February 1999 the letterfrom Quizno's Royalto 11, by be a valid 'hotice of circumstance." wrongfulactsdescdbed thatnotic- theattempt in The I Westchester that not assefis argument thealtemative. this in Ifthe Courtdoes agree coverage excluded, Westchester is that No. altematively contends Endorsement 6 wouldbe then applicable co-insurance Royal. as with 48\0-54924336.1 29
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 28 of 33
theSchaden's buy outthepublicshareholders$8.00 shate arethesame thatunderlie to acts at a theSebesnard. Nickersorlawsuits. Thecriticaltestfor theapplicability ofExclusion I is whefierthesubsequent No. litigatiol "arises of' thecircumstances out in I described theFebruary 1, 1999tetterto RoFl. TheFifth Circuitin.Icwis Christian Ps.,197 Coll.v. Nat'l UnionFirc Ins. Co.ofPittsburgh, F-3d742,747 (5thCir. 1999) n.5 within an foundthatthewords"arisingoutof," whenused policy,are"broad, general, comprehensive insurance to terms."As such, theyareinterpreted and (1) mean: originating fto4 (2) havingits originin; (3) growing of; and(4) flov/ingfrom. out plan grew Clearlythe Schaden's to succssfi squeeze thepublicshareholders outofthese ly out lepeated effortsincluding in and actions outofthe aise those 1999.Here,theSeDarla Nickerson factthatQuizno's action undervalued shares, its issuein theappraisal whichwasthesame ruline.
In the Alltmdtite, Quizno's ClaimsAgainst Westchestet ConstitutaOnly a SWa Claim urrdet the Po6cy Even if Quizno's could somehow demonstatethat its alaimswerenot the subjectof notice to Royal, the Sebesta, Nickerson,and. that appraisal actions-assuming any covarage exists-would constituteonly oneclaim for interrelated wrongful actsunderthe Westchster policy. in prtinentpad, section5 of the Westchestr Policy, entitled Limit of Liability and Retention,provides: . . . all Claims arisingout of the sameWroogfiI Act andall htenelated Wrcngfirl Acts of the Insuledsshallbe deemed one Claim, and suchClaim shallbe deemed be first madeon the date to ofthe earliestof suchClaimsis fiIst madeagainstthern,rgardless ofwhether suchdateis beforeor dwing the Policy Poiod. All
4810-5492,6i36-l 30
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 29 of 33
Lossresulting from a single a Claimshallbe deemed singleIrss Statement Undisputd MaterialFeats, of infra, 15, Al&rou{t&re Nickerson actionseks additional paid offer, consideration to investors participated thefirst-step who in 2000tender paymsnt shareholders regard thesecond-step whiletheSe6esta to actionseeks additional to with 2001squeeze-out merger, Quizno's two werepartofa common by owndesqiptioqthese events schqne pdvatize to bank had used same the investment and Quizno's.Indeed, Quizno's even lendsrs thetransactions. for In theNovember the offeras 2001Foxy statment, described 2000tender Quizno's "Step1" andthesqueeze.out plan merger "Step2" ofthe Schadens' to privatize as Quizno's. Proxystatement, bodl Meyers, Exh.J. Further, ,lr'lcfterrol, dre complaint discusss theSebesta actionandapFaisalactionandwasapparently asa rsultofthosetwo actions.Specifically, filed camplaint offerwas,in theNickerson that that alleges Quizno's failedto disclose the2000tender faat,thefirst stepofaplan to privatize ownership. recognition In under Schadens' the Quizno's as named same the defcndants thc ofthis continuous chainof events, Nicteruon complaint the Sersta complaint.ry Nickerson Complain!Meyers, Exh.V. polioies Quiano's claims policies-the that Boththe2001-2002 2003-2004 and respectiv "lntenelated triggered coverage rheSebesta Nickersoractions, for respectively-define arLd ggy WrongfulActs" as"all Wrongfirl Aatsthathave a collunon as nxus fact,circumstance, ol situation, event, circumstances, events fansactions transaction, cause series or ofrclatedfacts, liThe Sebesta Mr. complaint alsoinitially named BradA. Gdffin. However, Griffin had wasdismissed prejudice several months before the witlr followingajoint monon Apil 2002, n parties reached settlement. a
4E10-549-6336.1
31
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 30 of 33
causes." (emphasis Westchester Policy,Meyers, Exh.B, | 2, Definitions added); also.9ezeca see Ins. Co.v. Kemper Co.,2004WL 1145830 (S.D.N.Y. Ins. that made 2004)(concluding claims policiesalleging underseparate logicallyconneoted andcircumstancs faats demonstrated a factual nexus sufEcient jusdrythconclusion thetwa claimsarose to that fromintenelatcd wrongfirlactsandthattheclaimwasnotfir'stmade the under latterpolicyperiod). Thus, Exclusion 1 in the2003-2004 policywouldpreclude A. for action covaage theNrc&ersor "facts,circumstances, situatiols"asthenotifioations th bgcausg axose ofthe same it out of aDd Seresla appraisal and policy. actions urderthe2001-2002 ln addition, prior noticeexolusion It the opemtes preclude to coverage. povidesthatthe Insurer shallnotbe liablefor losson aacount against iruured"based any upon, ofany claimmade arising of or attributable anyfact,circumstance situation out of to or whichhasbeen subjeot the anywrittennoticegivenunderanypolicyofwhich this Policyis a renewal replacernent." or Westchester Policy,Meyers, Exh.B, MPDO00I(4-99)p. 3. Forthercasons stated above, the Sebesta Nickersor! utd, actions aros of common out facts.circumstancs. situations. and Accordingly, }r'ic&ersoz policy the claimwouldbe excluded ftom coverage underthe2003-2004 sinceQuizno's already givennoticeofthe samc had under facts, circumstaflces, situations and -2002Dolicv. fte 2001
WestchesterCannot Be Liable for Bad Faith sinceit Did Not Breach the Insurance Contracts Black le$er law providesthat no heach ofthe duty of goodfaith andfair dealingcan exist in tha absance a breachof conhact. Since,for the reasons of statedabove,Quiz4o's was not entidadto coveBgeunderthc Westchester car insuance policies,Westchester not be liable
4810-5492-6336.t
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 31 of 33
to Quizno's badfaith. See, Lamb GEICO for Ins. P.3d148,751 e.g., v. Genetsl Co.,17 Q0O2) (findingno badfaithwhere policyexclusion precluded coverage thsrewasno breach and of y. insuranc conhact); odson American Go 89 415 Standard Co.of lfisconsin, P,3d4O9, lrc. "An insuro'sliabiliry for badfaifl breach inswance (2004)Gtating, contract depends of on whether conduct apFopriate its was Waller TruckIns,Exch. 11 v. under ciraumstances"); the , Cal.4th1, 36 0995) (a breach caonot ofthe impliedcovenant ofgoodfaith andfair dealing exist abseot underllng breach conhac$. an of Futther, Policyexisted even ifthis couddetermines coverage that under westchester the for Quizno's Courtof claims, Westchester should beliablefor badfaith. TheSuprerne still not Colorado aonfirmed thegenuine has to claimssuchas that dispute doctrine applies third-party ln Group,Timble, Farmers Group,Inc. Timble,691 v. P.2d1138(1984). Farmers Qu'izno's. aninsured, policywhenTrimble'ssondrovetheinsured reported claimunderanautomobile a gomptly invstigated vehicleontoa residential seriously 1ot, injudnga thirdparty. Farmers Trimble'smail andmaileda letterthatsame act" that monthindicating an"intcntional exclusion in thepolicymayresultin denialof coverage, agring defend Trimbleundera reservation but to ofrights in theinterim. Within a fewmonths, third partyoffered scttlethemattetfor to thc policylimits,but Famersrefused, failingto notiff Trimbleofthe offerandits declination. also Ir examining potential the liability ofan insurer badfaith,theFarz er's Groupcntrrt for "Ihe question stated, ofwhetheraninsursr breached duties goodfaithandfair dealing its of has with its insured oneofrcasonableness thecircumstances. relevant inquiryis is The under whether factspleaded the the showtheabsence anyreasonable for denying claim.. . . Ult of basis
4at0-54924336.1
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 32 of 33
is the affirmative act ofthe insurerin uffeasonablyrefrrsingto pay a claim andfailing to act in goodfaith, andnot the conditionof nonpayrnent, forms the basisfor liability in tort." that Farmers Group,Inc. v. T mble,supra,69l P.2dat 1142. by Here, Quizno's admitsthat Westchester actedreasonably reservingits rights and while Westchester enteringinto a temporaryfunding agreement provide for Quizro's defense to further investigatedandexamined could exist undarthe Policy. SeeQuizno's whethercoverage Motion for Paiial Surnrnary Judgnen! t]!i26, 30; Meyers,Exh. P, S. Only after concluding for the reasons statedabove,that no covelage denycoverage.Accordingly, existed,did Westchester Westchester may not be liable to Quizno's for bad faith. See,e.g.,Davis r,. Mid-CenturyIns. Co.,311F.3d 1250,1252(lf coverage inswer'slitigationof. . . legitimate Cir.2002)(stating
disputecannotaonstitutebad faith because finsurer's]position in the litigation wasreasonable'); Thompson ShelterMut. 1ns.,875F.2d 1460,146200ft Cir.1989)(holding no breachofgood v faith duty occurswhen insurerlitigatesa legitimatcoverage disputebasedon a reasonable policy provision). intrpretationof an insurance
4810-5492{1361
34
Case 1:04-cv-00725-RPM
Document 45-2
Filed 07/21/2005
Page 33 of 33
rv.
CONCLUSION cover"loss", not the retum ofbenefits Quizno's inswancepolicies with Westchester which is rminsurable restibrtion. Furthermore, noticeof facts,circumstances, and/or bcause policy incepted, situationsgiving rise to theseclaimswasgiven to Royal beforethe Westchester Exclusion A.l alsoprecludes coverage.Quizno'sbad faith claim is similarly unviable since Westchester actedreasonably did not breachits obligationsunderthe inswancecontract and sinceno coverage existedfor Quizno's claims. Thus,for the reasons forth above, set Westchesterrespectfi.ilyrequests this coufi grantsummaryjudgment Westchester's in that favor. DATED:
By
4M
LEWIS BRISBOISBISGAARD & SMITH LLP R. GaylordSmith EmestSlome R. Antho[y Mo]a 550West C. Street Suite 800 SanDiego,CA 92101 (619) 233-1006 Westchestr Attomels for Defendant Fire Insuance Company
4El0-5492-6316.1
35
United States Free Forms
Canada Free Forms
United Kingdom Free Forms
Australia Free Forms