Free Motion for Partial Summary Judgment - 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 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 present Their Motion for Partial Summary Judgment on three related issues of law pursuant to Fed.R.Civ.P. 56 as follows: INTRODUCTION Quizno's is an insured who has been placed in an impossible position by its former insurance carriers. In their effort to avoid coverage for Quizno's losses resulting from several lawsuits, the former insurance carriers are taking diametrically opposed positions with respect to the proper interpretation of the same terms in their respective policies. Quizno's is hereby submitting the dispute for this Court to decide which interpretation is correct. Either way, Quizno's is entitled to coverage, but the amount of coverage and the carrier providing that

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coverage is contingent upon resolution of this legal issue. This is the first legal issue Quizno's requests the Court decide. Royal Indemnity Company ("Royal") asserts that it is not obligated to provide any coverage to Quizno's with respect to any of the three lawsuits for which Quizno's seeks coverage. Royal basis its no coverage position on its interpretation of what constitutes a "claim . . . [that] arises out of circumstance[s] referenced in" notice of potential claim letters from Quizno's in early 1999. Royal maintains that the underlying Sebesta, Dissenters and Nickerson Actions (the "Actions") all arise out of different circumstances than those referenced in the notice letters from Quizno's. Accordingly, Royal maintains that the claims against Quizno's in the Actions, which were made after the expiration of its policy, do not relate to the notice Quizno's provided before the expiration of the policy, thereby negating coverage. Royal has filed a motion for summary judgment in this regard. Westchester Fire Insurance Company ("Westchester") takes the exact opposite position. Westchester has consistently represented to Quizno's that the facts and circumstances underlying the exact same notice of potential claim letters are the same as the facts and circumstances giving rise to the exact same Actions. With respect to the Sebesta Action, Westchester maintains that the Endorsement 6 to one of its policies, which provides that the limits of liability are reduced and retention increased with respect to a claim that arises out of the same circumstances as those referenced in the Quizno's notice of potential claim letters to Royal, reduces its coverage obligations significantly. On this basis, Westchester insisted that Quizno's seek coverage from Royal given that its position necessarily means that Royal is obligated to provide coverage under its policy.

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The second legal issue Quizno's requests the Court decide is very closely related to the first. Westchester also claims that the facts and circumstances giving rise to the Nickerson Action are the same as the facts and circumstances underlying the Sebesta Action. Therefore, Westchester invokes Exclusion A(1) of its policy in effect when the plaintiffs in Nickerson filed the action, which excludes coverage for a claim that arises out of any fact which has been the subject of a written notice given under any policy of which [its] Policy is a renewal or replacement. Westchester asserts that the claims in Nickerson relate back to the Sebesta matter and, therefore, Sebesta and Nickerson are one claim under the first policy and subject to one limit of liability and one retention. Depending on which carrier is correct with respect to these two related issues will dictate the amount of coverage provided by the two insurance carriers. If Royal is correct, then it has no coverage obligation whatsoever and Westchester is obligated to cover Quizno's losses with respect to Sebesta at the original limits of liability and retention ($4 million and $50,000) and for Nickerson under the policy in effect when Nickerson filed his complaint with new limits of liability and retention ($4 million and $100,000). Conversely, if Westchester is correct, then its coverage obligation for Quizno's losses in Sebesta and Nickerson is limited to a $2,500,000 limit on single policy, with retention in the amount of $250,000, but Royal is obligated under its policy.
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The Defendants have asserted in their affirmative defenses that certain exclusions and conditions avoid coverage. To the extent not raised in this Motion, Quizno's leaves for another day resolution of the Defendants' reliance on these other exclusions.

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It is also possible that this Court would interpret the policies such that both insurance carriers are correct in part. The Court could find that the circumstances giving rise to the Sebesta claims are the same as the circumstances underlying the notice letters but that different circumstances gave rise to the Nickerson claims. In that event, Westchester and Royal both are liable for coverage with respect to Sebesta and only Westchester is liable (under its later policy) with respect to Nickerson. The third legal issue Quizno's is presenting to the Court relates to an exclusion Westchester asserts applies with respect to both Sebesta and Nickerson. Westchester maintains that an exclusion in its policies (referred to as Exclusion A(7)) excludes coverage. Westchester's position is incorrect as a matter of law based on the clear language of the policy and the undisputed facts. Therefore, Quizno's requests that this Court also enter summary judgment with respect to Westchester's claim that Exclusion A(7) applies to bar coverage. STATEMENT OF UNDISPUTED MATERIAL FACTS A. The Policies. 1. Royal agreed to provide insurance to The Quizno's Corporation pursuant to a

Directors and Officers Liability and Company Reimbursement Policy, Policy No. RHP606493, effective from February 24, 1998 through June 24, 1999 ("Royal Policy") A true and correct copy of the Royal Policy is attached to the Meyers' Decl. at Exhibit A. The Meyers' Declaration is attached hereto at Exhibit 1. 2. Pursuant to the Royal Policy, Royal agreed to cover losses arising from claims

made during the Policy period against Quizno's and Quizno's officers and directors for alleged wrongful acts. The Royal Policy defined certain terms in pertinent part as follows:

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a. "Claim" means written or oral demand for money or services received by an Insured Person that any person or entity intends to hold any Insured Person responsible for a Wrongful Act... b. "Loss" means any amount for settlement, damages or judgment, including Defense Expenses, in excess of the applicable retention and not exceeding the limit of liability, as listed on the Declarations Page, which an Insured Person is legally obligated to pay as a result of a Claim. . . . . c. "Wrongful Act" means any actual or alleged error, omission, misstatement, misleading statement, neglect or breach of duty by an Insured Person solely in their capacity as an Insured Person acting on behalf of the Insured Organization. d. "Securities Claim" means a Claim which is a civil judicial proceeding, including any appeal therefrom, against an Insured Person in which such Insured Person may be subjected to a binding adjudication of liability for damages or other relief, provided such proceeding, in whole or in part, (i) alleges a violation of the Securities Act of 1933, the Securities Exchange Act of 1934, the securities laws of any state, or any rules or regulations promulgated thereunder, and (ii) alleges a Wrongful Act in connection with the purchase or sale of, or offer to purchase or sell, any securities issued by the Insured Organization, whether such purchase, sale or offer occurs with respect to the Insured Organization's issuance of securities or in the after-market. Royal Policy, §2(B),(F),(I) and Endorsements 6 and 8 (emphasis in original). 3. The Royal Policy provided for coverage up to $4,000,000 with a retention of

$75,000 (the retention for a securities claim changed from $75,000 to $150,000 by an endorsement dated February 24, 1999). Royal Policy, Declaration pages. 4. provides: (2) If during the Policy Period, an Insured Person or the Insured Organization first becomes aware of any circumstance which may reasonably be expected to give rise to a Claim against any Insured Person and, as soon as practicable thereafter, before the expiration date or any earlier cancellation date of the policy, gives to Royal
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Section 4(G)(2) of the Royal policy, entitled "Notice of Claim or Circumstance,"

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Specialty Underwriting, Inc. on behalf of the Insurer written notice via certified mail at the address shown on the Declarations Page of such circumstance along with full particulars of the specific alleged Wrongful Act, then any Claim subsequently made against an Insured Person arising out of such circumstances will be deemed first made during the Policy Period. Royal Policy, Endorsement No. 6, p. 5. 5. Beginning effective June 24, 1999, Westchester agreed to provide directors and

officers insurance to The Quizno's Corporation (sometimes hereinafter referred to as "TQC"). Westchester provided this insurance to The Quizno's Corporation and its successors pursuant to the following management protection insurance policies: a. An initial policy was issued that was effective June 24, 1999 through June

24, 2000; Policy No. DOX648318 (effective June 24, 2000 through June 24, 2001)(issued to TQC); b. Policy No. DON648451 (effective June 24, 2001 through July 31, 2002)

(issued to TQC); Policy No. DONG21635662001 (effective July 31, 2002 through July 31, 2003) (issued to TQC); and c. Policy No. DONG21635662002 (effective July 31, 2003 through July 31,

2004)(issued to The Quizno's Holding Company). d. True and correct copies of Policy No. DON648451 and Policy No.

DONG21635662002 are attached to the Meyers' Decl. at Exhibits B and C, respectively. Hereinafter, the various Westchester policies are singularly referred to as "Westchester Policy" and collectively referred to as the "Westchester Policies." 6. Pursuant to the Westchester Policies, Westchester agreed to cover losses arising

from claims made during the respective policy period against Quizno's officers and directors for

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wrongful acts and also losses sustained by Quizno's arising out of a security claim made during the policy period. 7. Specifically, the directors, officers and company securities coverage part provided

three different "insuring clause[s]." Insuring clauses A and B required Westchester to pay losses on behalf of officers and directors if they are not indemnified by Quizno's, and on behalf of Quizno's if Quizno's indemnifies them, when the insured persons become legally obligated to pay by reason of a claim first made against them during the policy period. Insuring clause C required Westchester to pay on behalf of Quizno's losses for which Quizno's became legally obligated to pay by reason of a "Securities Claim" first made against Quizno's during the Policy period. Westchester Policies, Declaration pages. 8. The Policy defined certain terms in pertinent part as follows: Loss means the amount which the Insureds become legally obligated to pay on account of each Claim and for all Claims in the Policy Period and the Discovery Period, if exercised, made against them for Wrongful Acts for which coverage applies, including, but not limited to, damages, judgments, any award of pre-judgment and post-judgment interest, settlements and Defense Costs. . . . Claim means: 1. a written demand against any Insured for monetary damages or other relief, 2. a civil proceeding against any Insured commenced by the service of a complaint or similar pleading. ... Securities Claim means any Claim which in whole or in part is: 1. brought by one or more Securities holders of the Company, in their capacity as such, or

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2. based upon, arising out of or attributable to the purchase or sale of, or offer to purchase or sell, any Securities issued by the Company, whether such purchase, sale or offer involves a transaction with the Company or occurs in the open market (including without limitation any such Claim brought by the Securities and Exchange Commission or any other claimant). ... Wrongful Act means: 1. any error, misstatement, misleading statement, act, omission, neglect, or breach of duty actually or allegedly committed or attempted by any of the Insured Persons in their capacity as such, or in an Outside Position or, with respect to Insuring Clause C, by the Company, or 2. any matter claimed against the Insured Persons solely by reason of their serving in such capacity or in an Outside Position. Westchester Policies DON648451 and DONG21635662002, § III. 9. Westchester Policy No. DON648451 (in effect when the Sebesta claim was made)

("Sebesta Westchester Policy") provided a limit of liability of $4,000,000 and a retention of $50,000 for each securities claim and $100,000 for each claim that was not a securities claim. See Declarations pages of policy DON 648451. 10. However, pursuant to an Endorsement No. 6 to the Westchester Policy No.

DON648451, the parties agreed that claims which "in whole or in part arise[] out of the facts, circumstances and situation described in [a] notice letter" sent by Quizno's to Royal in early 1999, the limit of liability was lowered to $2.5 million and the retention for such claims raised to $250,000. See Endorsement 6. 11. The Westchester Policy No. DONG21635662002 (in effect when the Nickerson

claim was made) ("Nickerson Westchester Policy") provided for a limit of liability of $ 4 million

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and a retention of $100,000 for securities claims and other claims. See Declarations pages of policy DON G21635662 002. B. Three Different Corporate Actions.

1.
12.

December 1998 Schadens' Offer to Purchase Shares.

In December 1998, Richard E. Schaden and Richard F. Schaden (the "Schadens"),

the two majority shareholders of The Quizno's Corporation, made a proposal to the board of directors to purchase all of the outstanding shares of The Quizno's Corporation. Meyers' Decl. ¶ 5. 13. The Schadens communicated their proposal in a letter dated December 29, 1998.

The Schadens offered to purchase the shares at a price between $7.84 and 8.20 per share through a company they would form. A true and correct copy of the December 29, 1998 letter is attached to the Meyers' Decl. at Exhibit D. 14. By letter dated January 5, 1999, The Quizno's Corporation notified Royal of this

proposal, which The Quizno's Corporation described as a circumstance that would reasonably be expected to give rise to a claim, as defined in the Royal Policy at Section 4.G(2). A true and correct copy of the January 5, 1999 letter (with the enclosures describing the Schadens' offer) is attached to the Meyers' Decl. at Exhibit E. 15. By letter dated January 4, 1999 a minority shareholder notified The Quizno's

Corporation, among other things, that he contemplated taking legal action if the board of directors, or a special committee thereof, chose to go forward with the proposed buy-out. A true and correct copy of the January 4, 1998 letter is attached to Meyers' Decl. at Exhibit F.

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16.

Accordingly, by letter dated February 11, 1999 The Quizno's Corporation notified

Royal of this letter, which The Quizno's Corporation indicated established that the proposed buyout was circumstance that it reasonably expected would give rise to a claim, as defined in the Royal Policy at Section 4.G(2). A true and correct copy of the February 11, 1999 letter is attached to the Meyers' Decl. at Exhibit G. The January 4, 1999 letter and the February 11, 1999 letter with the attachments provided with those letters are collectively referred to as the "Notice Letters"). 17. By letter dated February 25, 1999, Royal acknowledged that the information in

the February 11, 1999 letter and enclosure constituted "notice of a circumstance which may subsequently give rise to a claim pursuant to the Notice provision, Section 4. Conditions (G)(2)" of the Royal Policy. Thus, Royal agreed 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." A true and correct copy of the February 25, 1999 letter is attached to the Meyers' Decl. at Exhibit H. 18. The Schadens subsequently withdrew the proposal they had made in December

1998. Meyers' Decl. ¶ 10.

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19.

Fall of 2000 Tender Offer.

On November 13, 2000, The Quizno's Corporation announced that it had

commenced a voluntary tender offer ("Tender Offer") whereby it agreed to purchase the outstanding shares of its common stock at a price of $8 per share. A true and correct copy of the Offering Memorandum setting forth the terms of the tender offer, among other things, is attached to the Meyers' Decl at Exhibit I.

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20.

The Tender Offer expired on December 11, 2000 and The Quizno's Corporation

accepted the tendered shares and paid $8.00 per share for them. Meyers' Decl. ¶ 12. 21. In excess of 150 shareholders, representing approximately 779,055 shares,

responded to the Tender Offer and sold their shares to The Quizno's Corporation pursuant to the terms of the Tender Offer. Meyers' Decl. ¶ 13.

3.
22.

December 2001 Merger.

The Quizno's Corporation merged with Firenze Corp. on December 21, 2001 (the

"Merger"), after a special committee of the board of directors recommended and a majority of The Quizno's Corporation's shareholders voted to approve the merger. The Quizno's Corporation was the surviving company and was then a private company owned by the Schadens. In connection with the Merger, The Quizno's Corporation paid its minority shareholders $8.50 per share and all shareholders tendered their shares to Quizno's. The Proxy Statement (with merger agreement attached) which describe and set forth the terms of the merger, among other things, are attached to the Meyers' Decl. at Exhibit J. C. Lawsuits Against Quizno's. The Sebesta Action 23. On or about November 13, 2001, a minority shareholder, Edward Sebesta

("Sebesta"), brought an action against The Quizno's Corporation and seven members of the board of directors in the District Court, City and County of Denver, Colorado (the "Sebesta Action"). Sebesta purported to bring the claim as a class action on behalf of all existing shareholders of Quizno's (except the named Defendants). He sought, among other things, an injunction preventing Quizno's from merging with Firenze Corporation ("Firenze") and compensatory

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damages. The Court denied the request for injunctive relief. Sebesta claimed, among other things, that the members of the board of directors breached their fiduciary duties in approving and recommending the Merger and not insuring that the proxy materials contained certain disclosures regarding an offer from another shareholder to purchase The Quizno's Corporation shares . A true and correct copy of the Complaint is attached to the Meyers' Decl. at Exhibit K. 24. Quizno's provided notice of the Sebesta Action to Westchester and requested
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coverage under the Westchester Policy by letters dated August 28, 2001, November 23, 2001, December 27, 2001 and others. True and correct copies of these letters are attached to the Meyers Decl. at Exhibits L, M and N, respectively. 25. Quizno's agreed to indemnify the members of the board of directors named in

Sebesta with respect to their losses associated 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. 26. By letter dated January 4, 2002 Westchester acknowledged receipt of the notice of

the Sebesta Action and agreed to cover defense costs associated with that action under a reservation of rights. A true and correct copy of Westchester's January 4, 2002 letter is attached to the Meyers' Decl. at P.
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The Quizno's Corporation also commenced an appraisal proceeding pursuant to the Colorado Dissenter's Rights statute (C.R.S. §7-113-101 et seq.) naming the minority shareholders who perfected their dissenters rights and made claims against Quizno's for the "fair value" of their shares and their attorneys' fees and costs ("Dissenters Action"). While Quizno's seeks coverage with respect to the Dissenters Action, there are issues of fact relating to those claims precluding summary judgment. Therefore, this motion does not relate the facts and circumstances of the Dissenters Action.

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27.

However, Westchester took the position that the claims advanced in the Sebesta

Action arose out of the same facts and circumstances as those set forth in the 1999 Notice Letters to Royal. Accordingly, Westchester took the position that Endorsement No. 6 of the Westchester Policy No. DON648451 applied. Westchester also requested that Quizno's provide notice to Royal of these claims. January 4, 2002 letter attached to Meyers' Decl. at Exhibit P. 28. Pursuant to correspondence dated January 23, 2002, Quizno's provided notice to

Royal of the Sebesta Action and requested coverage. A true and correct copy of the January 23, 2002 letter is attached to the Meyers' Decl. at Exhibit Q. 29. By correspondence dated April 10, 2002, Royal indicated that it denied any

coverage under the Royal Policy with respect to losses, including defense costs, sustained by Quizno's in connection with the Sebesta Action. A true and correct copy of the Royal April 10, 2002 letter is attached to the Meyers' Decl. at Exhibit R. See also, Royal Motion for Summary Judgment. 30. Westchester agreed to advance certain defense costs associated with the Sebesta

Action. Westchester also initially agreed to advance a certain portion of the defense costs associated with the Dissenters Action. As such, the parties entered into an Interim Funding Agreement pursuant to which Westchester paid just under $300,000 (after applying a $250,000 retention) of Quizno's defense costs associated with the Sebesta Action and the Dissenter's Action. Westchester made these payments in December 2002 and February 2003. Those are the only amounts Westchester has paid. Meyers' Decl. ¶ 21. A true and correct copy of the Interim Funding Agreement is attached hereto at Exhibit S.

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31.

Quizno's and counsel for the purported class reached a settlement agreement in

the Sebesta Action and the Court, by Order dated April 2, 2004, approved that settlement agreement. A true and correct copy of the parties' Stipulation of Settlement and Notice of Proposed Settlement and Final Hearing, as filed in the Sebesta Action, are attached to the Meyers' Decl. at Exhibit T. A true and correct copy of the Court's Order is attached to the Meyers' Decl. at Exhibit U. 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. The Nickerson Action 33. On or about January 20, 2004, William Nickerson filed an action against Quizno's

and five members of its Board of Directors alleging that Quizno's and its directors breached fiduciary duties to shareholders in connection with the Fall of 2000 Tender Offer by failing to disclose alleged material information in the Tender Offer materials ("Nickerson Action"). A true and correct copy of the complaint in the Nickerson Action is attached to the Meyers' Decl. at Exhibit V. 34. By correspondence dated January 23, 2004 and January 27, 2004, Quizno's

provided notice to Westchester of the Nickerson Action and requested coverage under the Westchester policy then in effect (the Nickerson Westchester Policy). True and correct copies of the January 23, 2004 and January 27, 2004 letters are attached to the Meyers' Decl. at Exhibits W and X, respectively.

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35.

Quizno's tendered the Nickerson Action to Royal on February 20, 2005. See

Statement of Undisputed Material Facts in Royal's Motion for Summary Judgment, ¶ 55. 36. By correspondence dated March 12, 2004, Royal denied coverage with respect to

the Nickerson action. A true and correct copy of the March 12, 2004 letter is attached to the Meyers' Decl. at Exhibit Y. 37. By correspondence dated March 10, 2004, April 5, 2004 and April 21, 2004,

Westchester, through counsel, indicated that Westchester is denying coverage with respect to the Nickerson action. True and correct copies of the March 10, 2004, April 5, 2004 and April 21, 2004 letters are attached to the Meyers' Decl. at Exhibits Z, AA and BB, respectively. 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. 39. Westchester based its no coverage position in part on Exclusion A(1) of the policy

then in effect, Policy No. DONG21635662002. Westchester informed Quizno's it took the position that "[t]he [Nickerson] Complaint arises out of the same facts and circumstances and alleges the same Wrongful Acts as the ...Sebesta Action..." Because Quizno's had provided notice under the prior Westchester policy of the Sebesta action and requested coverage with respect to that action, Westchester maintained that "the Nickerson matter relates back to the Sebesta matter pursuant to Clause 6 of the 2001-02 Policy and coverage will be afforded under the 2001-02 Policy...and a single Retention shall apply to these related matters pursuant to Clause 5 of the 2001-02 Policy." A true and correct copy of the March 10, 2004 correspondence is attached to Meyer's Decl. at Exhibit Z.

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40.

Westchester subsequently informed Quizno's that it was denying coverage for all

cases on the basis that Exclusion A(7), which limits coverage with respect to claims against an Insured when the Insured received profit, remuneration or financial advantage to which the Insured was not legally entitled. Correspondence dated April 5, 2004, attached to Meyers' Decl. at Exhibit AA. 41. Quizno's and counsel for the Class have reached a settlement with respect to the

Nickerson Action. That settlement was approved by the Court. A true and correct copy of the parties' Stipulation of Settlement is attached to the Meyers' Decl. at Exhibit CC. A true and correct copy of the Court's Order is attached to the Meyers' Declaration at Exhibit DD. 42. 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. ¶ 31. LEGAL ARGUMENT Quizno's seeks a ruling from this Court on three legal issues relating to the interpretation of the insurance policies at issue. The first question is whether the claims made against The Quizno's Corporation and members of its board of directors in the Sebesta Action and/or the Nickerson Action arise out of the same circumstances as referenced in the Notice Letters. The second question is whether the claims made against The Quizno's Corporation and members of its board of directors in the Nickerson Action arise out of the same facts, circumstance or situation as the claims made in the Sebesta Action.

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Third, Quizno's requests that this Court interpret the clear and unambiguous language of Exclusion A(7) in the Westchester policies. As a matter of law, the position taken by Westchester that Exclusion A(7) precludes coverage is wrong. By entering partial summary judgment and rendering legal rulings on the interpretation of these three policies, the parties will be able to more effectively and efficiently conduct discovery in this matter and assess their relative positions. The remaining issues for trial or further motions practice will include: (1) whether Quizno's losses associated with the Dissenters Action are covered; (2) whether other exclusions and affirmative defenses raised by the Defendant(s) are applicable; (3) the amount of Quizno's damages, i.e., covered losses; and (4) Quizno's bad faith claims. A. Summary Judgment Standard. As is well settled, "summary judgment is appropriate when the pleadings, depositions, answers to interrogatories and admissions on file, together with affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(c). It is appropriate for a court to enter partial summary judgment on a part of a plaintiff's claims through the summary judgment process. Fed. R. Civ. P. 56(a). B. Insurance Contract Interpretation The question of whether a claim is covered is one of contract interpretation. Heckla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1090 (Colo. 1991). Accordingly, general rules of contract interpretation govern whether a claim is covered by the insurance contract. Id. The interpretation of a contract is a question of law. Coors v. Security Life of Denver Ins. Co.,

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2003 WL 22019815 (Colo. App.) When terms of a contract are clear and unambiguous, the court is to enforce that contract as written. Randall & Black, Inc. v. Metro Wastewater Reclamation District, 77 P.3d 804 (Colo. App. 2003). The same or similar terms in insurance contracts are to be interpreted as having the same meaning. See Zemelman v. Equity Mutual Ins. Co., 935 S.W.2d 673, 677 (Mo. App. 1996) (finding that similar language in different insurance policies should be interpreted to mean the same thing); McCorkle v. State Farm Ins. Co., 270 Cal. Rptr. 492, 495 (Cal. App. 1990) (same); 1989 WL 121851*3 (Ed. Pa) (same). See also, Bituminous Casualty Corp. v. Maxey, 110 S.W.3d 203, 214 (Tx. App. 2003) (interpreting similar language within insurance policy as having same meaning). While courts apply general principles of contract interpretation, courts utilize additional interpretative tools in the context of insurance coverage. See Tepe v. Blue Cross and Blue Shield of Colorado, 893 P.2d 1323, 1327-28 (Colo. App. 1994). All ambiguities are resolved in favor of the insured. Id. When an insurance carrier seeks to restrict coverage, the policy must contain a clear expression of the limitation and, absent such a clear expression or if the policy provisions are inconsistent or ambiguous, "the insurance contract must be construed in favor of coverage and against limitations." Id. citing State Farm Mutual Automobile Ins. Co. v. Nissen, 851 P.2d 165 (Colo. 1993) and Lister v. American United Life Ins. Co., 797 P.2d 832 (Colo. App. 1990). The court is to liberally construe the insurance policy "to provide the broadest possible coverage" and to effectuate coverage for what a reasonable insured would have expected to have been covered when it entered into the policy. Id. See also, Compass Insurance Co. v. City of Littleton, 984 P.2d 606, 617 (Colo. 1999) (holding that court is to interpret undefined terms

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according to the understanding of the average purchaser of insurance and the insured's reasonable expectation concerning coverage). Here, Quizno's reasonably expected that any claims made against it and the members of its board of directors in connection with a going-private transaction would be covered up to at least $4,000,000 (minus any applicable retention). When it switched insurance carriers for its directors and officers' coverage in June 1999, it negotiated to make sure the change could not reduce its coverage. It agreed that in the event a claim that arose out of the same facts as those it communicated Royal in the early 1999 Notice Letters -- the December 1998 proposal from the Schadens to purchase all of the outstanding shares and take the company private--was made during the term of Westchester's new policy, Westchester's coverage would be reduced. But it knew that Royal would be obligated to provide coverage with respect to such a claim, so its total coverage would not be reduced ­ in fact it would be increased. In contravention of Quizno's reasonable expectations, the Defendant insurance carriers have played off each other to avoid or greatly reduce coverage rather than preserve or increase it as was intended. Because the terms of the policies at issue are substantively the same, a ruling in Royal's favor on its motion for summary judgment cannot be made in a vacuum. Royal's motion necessarily requires adjudication of the opposite position taken by Westchester. This Motion is intended to bring that issue before the Court at the same time the Court considers Royal's arguments. Simply put, it would be unfair and inconsistent to interpret the exact same substantive terms in the policies differently so that Royal owed no coverage and Westchester could reduce its coverage by applying Endorsement 6 of its first policy and Exclusion A(1) of its later policy.

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See Zemelman v. Equity Mutual Ins. Co., 935 S.W.2d 673, 677 (Mo. App. 1996) (finding that similar language in different insurance policies should be interpreted to mean the same thing); McCorkle v. State Farm Ins. Co., 270 Cal. Rptr. 492, 495 (Cal. App. 1990) (same); 1989 WL 121851*3 (Ed. Pa) (same). See also, Bituminous Casualty Corp. v. Maxey, 110 S.W.3d 203, 214 (Tx. App. 2003) (interpreting similar language within insurance policy as having same meaning). C. There Is No Dispute that the Claims from the Sebesta and Nickerson Actions Are Claims for Wrongful Acts as those Terms Are Defined in the Policies. Neither Royal nor Westchester have denied coverage of losses stemming from the Sebesta Action or Nickerson Action on the basis that the claims made against The Quizno's Corporation and the members of the board of directors are not claims for wrongful acts. Indeed, the plaintiffs in both actions assert Claims for Wrongful Acts and Quizno's has incurred Losses as those terms are defined in the respective policies. See e.g., Safeway Stores, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 64 F.3d 1282 (9th Cir. 1995) (holding that costs associated with shareholder class action lawsuit alleging breach of fiduciary duty against board of directors in response to approving leverage buyout were covered under company's director's and officer's policy); Nordstrom, Inc. v. Chubb & Son, Inc., 54 F.3d 1424 (9th Cir. 1995) (holding that shareholder securities fraud lawsuit alleging corporation and board members made misrepresentations and failed to disclose certain information in SEC filings were covered by directors and officer's policy); Raychem Corporation v. Federal Insurance Co., 853 F.Supp. 1170 (N.D. Cal. 1994) (finding coverage under directors and officer's policy for security fraud claims); Lynott v. National Union Fire Ins. Co. of Pittsburgh, PA, 871 P.2d 146 (Wash. 1994) (finding that claims against directors alleging wrongful acts and omissions with respect to sale of stock were covered by company's directors and officer's policy).

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D.

The Defendant Insurance Carriers Are Taking Opposition Positions with respect to the Interpretation of the Same Terms. Quizno's is stuck with two insurance carriers pointing the finger at each other and

interpreting the same terms differently in order to avoid or reduce their respective coverage obligations (and necessarily increase the other's coverage). Thus, it is necessary for the Court to provide the correct interpretation of the disputed terms.

1.

Royal's Interpretation.

The Royal policy was a claims made policy and that policy (as extended) expired June 24, 1999. Thus, only claims made against Quizno's prior to June 24, 1999 would generally be covered under the Royal policy. However, the Royal policy specifically permitted coverage for claims made after the expiration of the policy if the insured provided notice of "any circumstance which may reasonably be expected to give rise to a claim" before the policy expired. The Royal policy provided that if the insured provides notice of such a circumstance "then any Claim subsequently made against an Insured Person arising out of such circumstance will be deemed first made during the Policy." Royal Policy, § 4(G)(2). Quizno's provided notice to Royal by letters dated January 5, 1999 and February 11, 1999 of a circumstance which, as Royal agreed, reasonably could be expected to have given rise to a claim against Quizno's. That circumstance was a proposal by the Schadens in December 1998 that they purchase all of the outstanding shares for a purchase price ranging from $7.84 to $8.20. The end result would be that The Quizno's Corporation would be privately held. By correspondence dated February 25, 1999, Royal admitted that "[i]n the event a claim is subsequently made and arises out of such circumstances referenced in your letter, it will be deemed first made during the policy period referenced above."

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The facts are undisputed with respect to what circumstances were referenced in the Notice Letters. The Schadens had proposed to purchase the outstanding shares of the company and, Paul Eisner, minority shareholder, had threatened litigation to the extent the board of directors approved an agreement within the purchase price range offered by the Schadens. Eisner threatened to bring claims against the board, or a special committee thereof, for breach of fiduciary duty. This Court has the Royal policy, the December 29, 1998 correspondence setting forth the terms of the Schadens' offer, the January 4, 1999 letter from Paul Eisner, the January 5 and February 11, 1999 letters from The Quizno's Corporation, and the February 25, 1999 letter from Royal, all of which are authentic without dispute. See Royal's Motion for Summary Judgment. Royal claims the circumstances from which the Sebesta Action arose are different than those described in the 1999 Notice Letters. The facts from which the Sebesta Action arose are also undisputed. Almost exactly three years after the Schadens' December 1998 proposal, in December 2001, The Quizno's Corporation merged with a company owned by the Schadens, Firenze Corporation, with Quizno's the surviving entity now privately held. Sebesta, a minority shareholder, sued seeking to enjoin the merger and, after the court denied the requested injunction, seeking damages. Sebesta alleged, among other things, that the members of the board of directors breached their fiduciary duties in approving and recommending the Merger and not insuring that the proxy materials contained certain disclosures regarding an offer from a thirdparty shareholder to purchase Quizno's shares. This Court has the Proxy Statement filed with the SEC (with the Merger Agreement), the complaint filed by Sebesta, the parties' Stipulation and Notice of Proposed Settlement and Final

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Hearing and the court order approving the class action settlement. These documents, public records, are authentic without dispute and provide this Court with the undisputed facts as to the circumstances giving rise to the Sebesta claim and Quizno's losses. This issue is ripe for summary judgment. Compare Stauth v. National Union Fire Ins. Co. of Pittsburgh, 185 F.3d 875, 1999 WL 420401 *6-7 (10th Cir.) (court affirms trial court's award of summary judgment to insured and rules that lawsuits during different policy periods not subject to single policy based on comparison of pleadings in underlying cases. Court suggests evidence of basis of settlement (like as is set forth in court's order approving the settlements here) would have been helpful). Royal also maintains that the circumstances from which the claims in Nickerson arose are different than those referenced in the 1999 Notice Letters. The facts also are undisputed as to the facts and circumstances giving rise to the Nickerson Action. This Court has the SEC filed tender offer Offering Memorandum, the Nickerson complaint, the parties' Stipulation of Settlement and the order approving the class action settlement, all of which are public records and with respect to which there is no dispute as to authenticity. By interpreting the policy language, the documents describing the circumstances set forth with respect to the Schadens' proposal, and the documents showing the circumstances giving rise to the Sebesta claims and the Nickerson claims; this Court can, as a matter of law, determine if Royal's position is correct.
3 4 4 3

We cite to this unpublished opinion pursuant to Tenth Circuit Rule 36.3.

Quizno's has always maintained that the facts underlying the Dissenters Action and the Sebesta Action ­ the December 2001 merger with Firenze Corporation -- are the same and, therefore, constitute a single
(footnote continued to next page)

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2.

Westchester's Position.

When Westchester agreed to provide insurance to Quizno's starting on June 24, 1999 (immediately after the expiration of the Royal policy), it agreed to supply coverage, albeit reduced, to the extent a claim was made against Quizno's that "arises out of the facts, circumstances and situations described in the [Notice Letter]." Therefore, to the extent a claim was made against Quizno's arising out of the same facts described in the Notice Letter, Westchester would provide coverage and Royal would provide coverage. See Westchester Policy, Endorsement 6. Again, the circumstances described and underlying the Notice Letter and those giving rise to and alleged in the Sebesta Action and the Nickerson Action are undisputed. Nonetheless, Westchester takes the opposite position from Royal in that Westchester argues that those facts and circumstances are the same as the facts and circumstances from which the claims in Sebesta Action arose. See correspondence dated January 4, 2002 (attached to Meyers' Decl. P). Westchester also takes the position that the facts and circumstances from which the Sebesta Action arose are the same facts and circumstances from which the claims in the Nickerson Action arose. Therefore, Westchester maintains the claim in Nickerson was "based upon, arising out of, or attributable to [a] fact, circumstance or situation" with respect to which Quizno's provided written notice to Westchester when it provided notice of the Sebesta Action.

(footnote continued from previous page)

claim under the Royal and/or Westchester policy. Therefore, the Court's decision with respect to Sebesta is necessarily the same with respect to the Dissenters Action.

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According to Westchester, Exclusion A(1) of its policy in effect when Nickerson was filed, excludes coverage under that policy.

3.

Who Is Correct?

Because the circumstances described in the Notice Letters and the circumstances underlying the claims made in the Sebesta Action are undisputed, and because the interpretation of contract is a matter of law when the contract is unambiguous, this issue is ripe for summary judgment. The language used in the three policies is substantively the same. The issue relating to § (4)(G)(2) of the Royal policy and Endorsement 6 of the Westchester policy is identical: did the claims made in Sebesta and/or Nickerson arise out of the same facts, circumstances and situations described in the Notice Letters? If so, both Westchester and Royal owe coverage, but Westchester's coverage is reduced. If not, Royal does not owe coverage and Westchester does at the full policy limits. The Royal policy provides: (2) If during the Policy Period, an Insured Person or the Insured Organization first becomes aware of any circumstance which may reasonably be expected to give rise to a Claim against any Insured Person and, as soon as practicable thereafter, before the expiration date or any earlier cancellation date of the policy, gives to Royal Specialty Underwriting, Inc. on behalf of the Insurer written notice via certified mail at the address shown on the Declarations Page of such circumstance along with full particulars of the specific alleged Wrongful Act, then any Claim subsequently made against an Insured Person arising out of such circumstances will be deemed first made during the Policy Period. Royal Policy, 54(G)(2). While the Westchester policy provides: Exclusion A.1 shall not apply with respect to the January 5 1999 notice letter ("Notice Letter") by the Company to Royal Insurance Company under Royal's Management Assurance Policy No. HP 606493 relating to potential claims in connection with, among

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other things, a proposed tender offer by The Schaden Acquisition Company of the Company's outstanding shares of common stock. Solely with respect to any coverage under this Coverage Part for any Claim(s) which in whole or in part arises out of the facts, circumstances and situations described in the Notice Letter, the applicable Limit of Liability and Retention under this Coverage Part are [reduced and increased, respectively]. Westchester Policy, June 24, 2001 Endorsement No. 6. The issue relating to Westchester's agreement that Endorsement A(1) from its subsequent policy bars coverage is substantively the same: did the claims made in the Nickerson Action arise out of, or are they based upon or attributable to a fact, circumstance or situation underlying the Sebesta Action: The Insurer shall not be liable for Loss on account of any Claim made against any Insured . . . based upon, arising out of, or attributable to any fact, circumstance or situation which has been the subject of any written notice given under any policy of which this Policy is renewal or replacement. Westchester Policy in effect from 7/31/03 to 7/31/04 , Exclusions, p. 3. As explained above, this Court has all the evidence (undisputed) to resolve this dispute over the proper interpretation of these substantially identical terms. Quizno's requests the Court do so. E. Exclusion A(7) Does Not Apply. Quizno's also requests that this Court provide summary judgment on one other interpretation issue. Westchester asserts that Exclusion A(7) find both its policies exclude coverage. Exclusion A(7) provides that: The Insurer shall not be liable for Loss on account of any Claim made against any Insured: ***
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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. Exclusion A(7) by its express terms does not bar coverage with respect to claims indemnified by Quizno's. In both the Sebesta Action and the Nickerson Action, the plaintiffs alleged that the members of the board of directors had breached fiduciary duties. With respect to Sebesta, the plaintiffs alleged, among other things, that the board breached its fiduciary duties by approving the merger in December 2001 and not adequately disclosing an offer from a third party. In Nickerson, the plaintiff alleged Quizno's breached its fiduciary duty by failing to disclose material information with respect to the voluntary tender offer in the Fall of 2000. The defense costs and the settlement amounts were incurred by the members of the board of directors and indemnified by Quizno's. See UMF ¶¶ 25 and 30. Thus, Exclusion A(7) by its own terms does not bar coverage. Also, even if not indemnified, the alleged damages in Sebesta and Nickerson Actions would not qualify under Exclusion A(7). The Plaintiffs in those actions sought damages from the board members for the alleged breach of fiduciary duty, not for an alleged improper financial advantage gained by the corporation. And, as insureds (as defined by the Policy) who did not receive any financial advantage, let alone an improper one, the board members cannot be barred by Exclusion A(7). CONCLUSION WHEREFORE, Quizno's respectfully requests that this Court enter an order finding that:

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1.

The circumstances giving rise to the Sebesta Action (and the Dissenters Action)

and the Nickerson Action are the same as the circumstances described in Quizno's early 1999 notice letters and, therefore, deny Royal's Motion for Summary Judgment; or 2. The circumstances underlying the Sebesta Action (and the Dissenters Action) and

the Nickerson Action are different than the circumstances described in Quizno's early 1999 notice letters thereby granting Royal's Motion for Summary Judgment and simultaneously rejecting Westchester's legal argument that Endorsement 6 on its first policy applies; or 3. The circumstances underlying the Sebesta Action (and the Dissenters Action) are

the same as the circumstances described in Quizno's early 1999 Notice Letters and the circumstances underlying the Nickerson Action are different than the circumstances described in Quizno's 1999 Notice Letters thereby granting in part and denying in part Royal's Motion for Summary Judgment and simultaneously rejecting Westchester's legal argument that Endorsement 6 on its first policy applies; and 4. The facts and circumstances underlying the Sebesta Action are different than the

facts and circumstances underlying the Nickerson Action thereby rejecting Westchester's argument that Exclusion A(1) of its subsequent policy applies. In addition, Quizno's respectfully requests that this Court enter an order ruling that Exclusion A(7) of Westchester's Policies does not apply to bar coverage in this case.

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Dated this 1st day of July 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 July 1, 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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