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

1 T. Michael Daggett (#002784) Christian C.M. Beams (#019672) 2 STINSON MORRISON HECKER LLP 1850 North Central Avenue, Suite 2100 3 Phoenix, Arizona 85004-4584 4 (602) 279-1600 Fax: (602) 240-6925 5 E-mail: [email protected] 6 Attorneys for Plaintiffs 7 8 9 10 11 12 13 14 15 16 v. 17 CAROLINA CASUALTY INSURANCE COMPANY, a Florida 18 corporation 19 20 21 Pursuant to Rule 56, Fed.R.Civ.P., Plaintiffs hereby submit their Reply in Summary Defendant(s). UNITED STATES DISTRICT COURT DISTRICT OF ARIZONA ALANCO TECHNOLOGIES, INC., an Arizona corporation; TECHNOLOGY SYSTEMS INTERNATIONAL, INC., f/k/a/ TSI ACQUISITION CORPORATION, an Arizona corporation; ROBERT R. KAUFFMAN and ELIZABETH KAUFFMAN, husband and wife; GREG E. OESTER and LINDA OESTER, husband and wife, Plaintiff(s), ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) ) No. CV-04-0789-PHX-DGC PLAINTIFFS' REPLY IN SUPPORT OF THEIR MOTION FOR SUMMARY JUDGMENT ON REMAINING ISSUES (Assigned to the Honorable David G. Campbell)

22 Support of their Motion for Summary Judgment on Remaining Issues.

23 judgment must be found in favor of Plaintiffs because Carolina's Response raises no 24 genuine issue of material fact and Plaintiffs are entitled to judgment as a matter of law. 25 26
DB02/776261 0004/7059929.1

Case 2:04-cv-00789-DGC

Document 96

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1 I. 2

INTRODUCTION. Rule 56(e) requires Carolina (or any adverse party), in responding to a Motion

3 for Summary Judgment, to "set forth specific facts showing that there is a genuine issue 4 for trial. If [Carolina] does not so respond, summary judgment, if appropriate, shall be 5 entered against [it]." The opposing party may not simply rest on allegations or denials 6 of its pleading, it must, as Judge Tielborg recently phrased it, "produce some significant 7 probative evidence tending to contradict the moving party's allegations and thereby 8 creating a material question of fact." Peters v. Shamrock Foods Co., 2006 WL 141620, 9 at *2, CV03-02578-PHX-JAT (D. Ariz. Jan. 17, 2006) (emphasis added) (citing 10 Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 256-57, 106 S.Ct. 2505, 2513-14 11 (1986)). Carolina simply does not do so, choosing instead to grouse about non-

12 disclosure of documents supporting facts of which it was well aware and has no realistic 13 dispute. 14 Plaintiffs' Motion seeks summary judgment on two issues: 1) that Carolina has

15 no remaining defenses to liability, and 2) on the amount of damages that Plaintiffs have 16 suffered as a result of Carolina's refusal to reimburse Plaintiffs' costs incurred in 17 defending the claims made in the underlying action. 18 Carolina's response to the first issue is that it indeed has "identified the precise

19 defenses which it presently relies upon." Carolina misses the point ­ Plaintiffs perfectly 20 understand what Carolina has pled. Carolina then goes on to discuss two of these 21 defenses, a "no Loss argument" and the applicability of a "fraud exclusion" in the 22 policy itself. However, in order to defeat summary judgment, Carolina's Response 23 must, at a minimum, set forth some evidence on which Carolina relies in making such a 24 defense. Carolina had not done so at any point in this litigation, nor does it do so in its 25 Response. This is obviously because no such evidence exists. 2 26
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As to the damages issue, Carolina's Response is equally devoid of any facts showing an issue for trial. Instead of raising factual issues, as it must, Carolina relies on this silly notion that it has been ambushed by documents it says it never received and implies it never knew existed. It makes meritless arguments (more fully set forth in its Motion to Strike) that statements made in affidavits of the affiants' personal knowledge are somehow not facts at all, but rather legal opinions. It does this for a simple reason: it cannot in good faith refute the factual statements being made! All in all, Carolina's Response fails to do what it must: provide significant probative evidence showing a need for a trial in this case. As such, summary judgment must be granted in favor of Plaintiffs on both issues. CAROLINA'S RESPONSE DOES NOTHING TO DISPUTE THAT IT HAS NO REMAINING SUSTAINABLE DEFENSES. Carolina's Response does not dispute that in defending this case, it relied solely on the now-rejected Insured vs. Insured ("IvI") exclusion defense, nor does it dispute that it did not litigate (or conduct discovery to support) any of the nineteen other affirmative defenses it pled in its Answer. Months before the discovery cutoff deadline, in an effort to confirm that Carolina did not intend to raise any other defense, Plaintiffs submitted very narrow interrogatories to Carolina requesting all factual and legal support for each defense that it pled. Carolina's discovery responses did not provide or refer to any factual support whatsoever for these defenses. Instead, it provided a general reference to previous pleadings, letters, and briefs, all of which do not reveal facts which support any of its pled defenses. See Exhibit I to Plaintiffs' Motion for Summary Judgment. The discovery cutoff deadline passed without any formal or informal discovery into the applicability of any of these defenses, and Carolina never supplemented these responses. 3
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11 II. 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26

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Thus, Plaintiffs moved for summary judgment seeking a judicial determination of the obvious ­ Carolina had no remaining applicable defenses. In its Response, despite its duties under Rule 56, Carolina provided no factual support for these defenses. Instead, it extensively quoted a letter sent to Plaintiffs before this lawsuit was filed. As will be shown below, the two defenses Carolina does see fit to mention in its Response are not applicable to the issues presented by Plaintiffs' Motion. Before addressing these two defenses, it makes sense to review Carolina's duties under its Policy. For applicable claims (like the one at issue in this case), Carolina is required to pay 1) the costs of defending a covered claim, and 2) any resultant judgment. Plaintiffs' Statement of Facts in Support of their Motion for Summary Judgment, ¶ 21. All parties have understood from the outset that this coverage litigation sought a costs of defense reimbursement and that a claim for a resultant judgment. Since such a judgment has not been rendered, a claim for the latter could not be ripe in any event. Carolina blurs these two distinct requirements under the Policy. A. The "no Loss argument."

Carolina argues that because rescission was, at one time, one of the potential

17 remedies sought in the underlying case, it is under no present obligation to provide the 18 costs of defense for all of the claims made in that nine-count complaint. This is 19 nonsensical and ignores applicable Arizona law. 20 As the Court is well aware from previous briefing, matters of insurance contract

21 interpretation in Arizona are questions of law for the Court. See Univ. Mechanical 22 Contractors of Ariz., Inc. v. Puritan Ins. Co., 723 P.2d 648, 650 (Ariz. 1986). With 23 regard to this interpretation, the case law is clear: "the terms of an insurance contract 24 are to be strictly construed in favor of the insured and against the insurer." Lincoln 25 Technical Institute of Ariz., Inc. v. Federal Ins. Co., 927 F.Supp. 376, 379 (D. Ariz. 4 26
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1994) (citations omitted). This is based on the notion that it is the insurance company, not the insured, that is responsible for the wording of its policy. See C.H. Leavell & Co. v. Fireman's Fund Ins. Co., 372 F.2d 784, 789 (9th Cir. 1967) (citations omitted). Finally, and most importantly to the Court's analysis, this includes, in the costs of defense scenario, the requirement that an insurance company cover an entire litigation even though only some of the claims therein are covered under the policy. See Aetna Cas. & Surety Co. v. PPG Industries, Inc., 554 F.Supp. 290, 296 (D. Ariz. 1983 (citations omitted). Here, it is undisputed that there were multiple claims in the original lawsuit, including a single claim for rescission. Under Arizona law, because there were covered claims in addition to uncovered claims, Carolina was required to tender costs of defense of the entire lawsuit. This defense, therefore, has no bearing on the costs of defense question.1 B. The Fraud Exclusion. The same logic applies to this defense as well. No party disputes that fraud is

16 one of the claims made in the underlying litigation, and that the possibility exists (albeit 17 very minor) that a resultant judgment could be made on the fraud claim only. However, 18 no party disputes that there are other claims made that are, without question, covered 19 under the policy, including breach of contract, breach of fiduciary duty, and breach of 20 the covenant of good faith and fair dealing. Interpreting Carolina's own policy under 21 Arizona law, Carolina was and is required to cover the costs of defense of all of the 22 23 24 25 26
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Plaintiffs certainly concede that had rescission been an awarded remedy in the underlying case, this argument may well have applied at that point. However, such a scenario is impossible given TSIN's voluntary waiver of its claim for rescission. See Exhibit B to Plaintiffs' Response to Carolina's Motion for Summary Judgment.

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claims made in the underlying lawsuit because some of them are covered under the policy. Moreover, as a matter of law, Carolina has the obligation to come forth with facts to support this defense, Carolina's Response provides none, and discovery has closed. In fact, as discovery was coming to a close, there was no effort whatsoever on the part of Carolina to develop these facts. See November 19, 2005 Letter from Daniel Tranen to T. Michael Daggett, raising a concern only about potential damages related to an issue Plaintiffs had conceded to be not covered under the Policy ­ no other concerns about allegedly faulty discovery responses, disclosures, or necessary depositions were raised. This letter is attached hereto as Exhibit A. Per Rule 56, this defense is

inapplicable as a matter of law. C. Conclusion.

Since the beginning of this lawsuit, Carolina has litigated one (and only one)

14 defense that could, as a matter of definition, allow it to potentially avoid performing its 15 contractual obligation to pay the costs of defending the claims in the underlying lawsuit: 16 the IvI exclusion. This is because with that defense, the Court must analyze the caption 17 of the lawsuit itself. It is a black or white issue; either the case was brought by an 18 insured against an insured, or it was not. As the Court appropriately held, the facts of 19 this case clearly establish that Carolina's reliance on this exclusion was misplaced. 20 The "no Loss argument" and fraud exclusion, on the other hand, involve only

21 certain counts in a multi-count complaint, which pleads covered claims as well. 22 Therefore, as a matter of Arizona law, neither of these two additional defenses have any 23 applicability here. As such, the Court must find that Carolina has no remaining

24 defenses in this case and appropriately grant summary judgment in Plaintiffs' favor on 25 this issue. 26
Case 2:04-cv-00789-DGC Document 96

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1 III. 2 3

CAROLINA RAISES NO FACTUAL ISSUE WITH REGARD TO PLAINTIFFS' ALLEGED DAMAGES. A. Exhibits not previously produced.

Instead of responding to Plaintiffs Motion on this issue with "significant

4 probative evidence" to raise a question of fact necessitating a trial in this case, perhaps 5 because it is unable to raise such questions, Carolina resorts to cries of ambush, hidden 6 time entries, and inappropriate affidavits. None of these have any merit whatsoever, 7 and this is not just because there is no reference ­ none ­ to any alleged prejudice or 8 harm, even if these allegations were true, or any argument made that these documents 9 are relevant to the substantive issues in this case. In any event, Carolina's efforts 10 amount to little more than straw-grasping in the hope that, despite being unsuccessful on 11 liability issues, it can still find some way to avoid paying the damages that it caused. 12 As an initial matter, it bears noting that the exhibits that Carolina argues the

13 Court should strike were included by Plaintiffs, in nearly every case, to provide support 14 for background facts. For example, Plaintiffs provided background facts (not relevant to 15 the coverage issues in this case) such as the date on which TSIN filed its bankruptcy 16 petition,2 the fact that an emergency action was filed by TSIN's former Board of 17 Directors after the shareholders elected a new Board, and various minute entries from 18 the underlying case and TSIN bankruptcy matter.3 Moreover, none of these exhibits 19 were offered to support any fact not also within the personal knowledge of two 20 individuals who have submitted affidavits ­ T. Michael Daggett and Steven P. Oman. 21 Carolina's arguments, therefore, get them nowhere. 22 23
2

24 25 26

Carolina's plea of ignorance of this bankruptcy petition (Exhibit F to Plaintiffs' Motion) is especially ridiculous given that the same document was attached to its Motion for Summary Judgment as Exhibit 9! 3 Each of the exhibits about which Carolina complains in its Motion to Strike are addressed in detail in Plaintiffs' Response thereto, incorporated herein by this reference.

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Carolina makes the meritless contention that Plaintiffs "refused" to disclose this information despite being its specific request. This is disingenuous. Carolina made vague and overbroad requests for information not relevant to this case, and Plaintiffs appropriately objected. Carolina clearly agreed with these objections, because it made no effort whatsoever to revise their requests or, for that matter, devote a single letter to challenging Plaintiffs' objections ­ a tacit acknowledgement that it did not believe there was a need to do any additional discovery in this case. See also Tranen letter (Exhibit A). Carolina's Response also makes no statement as to how these documents are relevant to the narrow issues in this coverage action. Moreover, and vital to this analysis, is the fact that Carolina makes no statement ­ anywhere ­ that it has been somehow prejudiced or harmed by Plaintiffs' failure to disclose these irrelevant materials. Rule 37(c)(1), under which Carolina argues that these exhibits must be stricken, does not permit striking exhibits under this basis if the failure is "harmless." The Court cannot find harm where none is argued and cannot therefore exclude them under Rule 37(c). The simple fact is that none of the facts to which these exhibits are attached in

17 support were a secret to anyone. Carolina does not dispute any of these facts. Again, in 18 evaluating Carolina's Response, the Court must determine the extent to which Carolina 19 has raised any "significant probative evidence" that raises a factual issue that 20 necessitates a trial. It has raised nothing. As such, summary judgment must be granted 21 in Plaintiffs' favor on this issue. 22 23 24 25 26
Case 2:04-cv-00789-DGC Document 96

B.

Necessary involvement in TSIN Bankruptcy, Nevada litigation, and Slander lawsuit.

At the outset, it should be noted that while the slander lawsuit was clearly reasonable and necessary to defend the claims made in the underlying action, Plaintiffs 8
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have conceded that the costs incurred in the slander lawsuit are not recoverable. See Plaintiffs' Response to Carolina's Motion for Summary Judgment, at 8. As to the issue of coverage for the TSIN Bankruptcy and Nevada litigation, Carolina makes two basic arguments: First, Carolina assumes that the Court will exclude the evidence about which it has raised questions, and then argues that Plaintiffs are then left with no evidence to support its claim for coverage for costs related to these matters. Response, at 5. For the various reasons set forth above, as well as in Plaintiffs' Response to Carolina's Motion to Strike, there is no justification to exclude this material which again supports only background facts that, themselves, Carolina's Response does not dispute! Carolina only makes this argument because it, in reality, can raise no dispute as to the factual assertions that were made. Second, it argues that even if the Court (as it should) does not exclude these exhibits, other policy terms bar coverage. This ignores, rather than addresses, facts with which the Court has been presented and must consider in rendering a decision on this issue. Both Messrs. Oman and Daggett have testified based on their personal

17 knowledge that the work performed in the TSIN Bankruptcy proceedings and Nevada 18 litigation was reasonable and necessary to defending the claims made in the underlying 19 litigation. See Oman Affidavit, ¶9; Daggett Affidavit, ¶ 21. Such involvement was 20 therefore part of the same "claim" as the work performed in the underlying litigation 21 itself. Again, Carolina does not question the accuracy of these facts, just the way in 22 which they were presented (an argument it assumes has failed for purposes of this 23 analysis). 24 25 26
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Because the work performed in these matters was reasonable and necessary to defending the claims in the underlying litigation, thus making these costs covered under the same claim as the underlying litigation itself, the fact that Plaintiffs' involvement in the TSIN bankruptcy, slander lawsuit, and Nevada litigation occurred after the policy period expired is of no significance. Just as work performed in the underlying litigation itself after the expiration of the policy period would be covered (Carolina certainly raises no issue in this regard), so too is all other work that was reasonable and necessary in defending these claims. The same logic applies to the application of a retention. As Carolina makes clear (Response, at 6), only one retention applies to each claim. Plaintiffs have made only one claim. Carolina does not dispute (nor can it) the factual assertion that work

performed in the TSIN Bankruptcy and Nevada litigation was part of the same claim as that performed in the underlying litigation itself. Therefore, only one retention amount must apply. Finally, it argues that Plaintiffs are "only afforded direct coverage for its liabilities for a securities claim." This misrepresents its own policy, which specifically

17 provides for coverage for both securities and non-securities claims. See Exhibit J to 18 Plaintiffs' Statement of Facts in Support of its Motion for Summary Judgment. 19 Moreover, again, because the work performed in these matters was part of the same 20 claim as the underlying litigation itself, this argument is nonsensical. 21 Simply put, Carolina has gone to great lengths to present arguments that facts it

22 does not dispute should be stricken because the Exhibits supporting them were not 23 produced. It does not dispute the underlying facts themselves! It also makes no

24 statement whatsoever that this non-disclosure involved materials actually relevant to the 25 26
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substantive issues in this case, nor that it prejudiced them in any way. For this reason, as a matter of law, Carolina's arguments cannot succeed. Plaintiffs Response to Carolina's Motion for Summary Judgment sets out the specific calculation of the covered costs which the Court must order Carolina to reimburse Plaintiffs. This calculation is provided again here, for the Court's convenience: $ $ 20,000.00 618,642.41 (Greenberg Traurig, post 7/31/03) (Stinson Morrison Hecker, post 7/31/03, not including Slander lawsuit or duplicate entry) (Oman, post 7/31/03, not including Slander lawsuit) (Total) (minus applicable retention) [TOTAL RECOVERABLE]

$

84,587.89

$ 713,230.30 $ (100,000.00) $ 613,230.30

14 IV. 15

CONCLUSION. For the foregoing reasons, the Court must grant summary judgment in Plaintiffs'

16 favor that 1) Carolina has no remaining defenses, and 2) for damages in the amount of 17 $613,230.20. 18 19 20 21 22 23 24 25 26
Case 2:04-cv-00789-DGC Document 96

RESPECTFULLY SUBMITTED this 6th day of March, 2006. STINSON MORRISON HECKER LLP

By: /s/ Christian C.M. Beams T. Michael Daggett Christian C. M. Beams 1850 N. Central Avenue, Suite 2100 Phoenix, Arizona 85004-4584 Attorneys for Plaintiff Alanco Technologies, Inc. 11
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ORIGINAL electronically filed this 6th day of March, 2006: Clerk of the Court Sandra Day O'Connor U.S. Courthouse 401 West Washington Street Phoenix, Arizona 85003 Copy of the foregoing hand-delivered this 7th day of March, 2006, to: Honorable David Campbell Sandra Day O'Connor U.S. Courthouse 401 W. Washington Street Phoenix, AZ 85003 /s/ Julie Greenwood

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