Free 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 Plaintiff Alanco Technologies, Inc. 7 8 9 10 11 12 13 14 15 16 v. 17 CAROLINA CASUALTY INSURANCE COMPANY, a Florida 18 corporation 19 20 21 22 23 24 25 26
The Motions for Summary Judgment concurrently filed by both parties are essentially cross-motions on the same issue. As such, Plaintiffs hereby incorporate by reference all statements made in its Motion filed on January 13, 2006 and will not reiterate the factual background that is stated therein.
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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 RESPONSE TO DEFENDANT'S MOTION FOR SUMMARY JUDGMENT AND MEMORANDUM OF LAW IN SUPPORT THEREOF (Assigned to the Honorable David G. Campbell (Oral Argument Requested)

Defendant(s).

Pursuant to Rule 56, Fed.R.Civ.P., Plaintiffs hereby submit their Response to Defendant's Motion for Summary Judgment and Memorandum of Law in Support thereof. Defendant's Motion must be denied as a matter of law.1 This Response is

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1 supported by the following Memorandum of Points and Authorities and the 2 accompanying Statement of Facts ("SOF"). 3 4 5 I. 6 INTRODUCTION. At the bottom line, Carolina does not dispute that the damages in this case are, at MEMORANDUM OF POINTS AND AUTHORITIES

7 a minimum, $307,445.06. Carolina's Motion for Summary Judgment filed January 13, 8 2006 ("Motion"), at 15. In fact, given Carolina's acknowledgement that its calculations 9 10 actually higher. 11 12 As well, with the exception of two time entries that Carolina contends are counted some of the same hours twice (see Motion, at 15, n. 8), this baseline number is

13 "duplicative/overstated rates," both which are easily explained below, Carolina does not 14 challenge the reasonableness of the fees that Plaintiffs were forced to incur as a result of 15 its refusal to provide coverage under its policy. Instead, it argues that entire categories 16 of fees, all of which directly relate to the defense of the claims made in the underlying 17 18 Stinson Morrison Hecker fees related to the Slander litigation, the Nevada litigation, and 19 20 the TSIN Bankruptcy proceedings; and 3) all of the fees of Steven P. Oman, P.C. It litigation, should be excluded. These are: 1) fees incurred prior to July 31, 2003; 2)

21 also argues that Plaintiffs' damages are offset by a policy retainer. Finally, it makes two 22 last-ditch arguments to avoid having to cover its insureds' claim, neither of which have 23 any basis in fact or law. 24 25 26
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Simply put, the law rightfully demands that insurance companies protect their

2 insureds, not leave them out in the cold. Carolina chose to do the latter, and took the 3 4 5 6 7 8 9 10 unfounded, and it has no legal basis for its contention that entire categories of fees should be excluded, Carolina's Motion must be denied. II. THE LANGUAGE OF INTERPRETATION. THE CAROLINA POLICY AND ITS risk that the Court would find its actions to be unjustified. The Court has now so found. Because the last-ditch arguments that Carolina's Motion presents either moot or

Section I of the Directors and Officers Policy that Plaintiffs purchased from

11 Carolina ("the Policy") requires Carolina to pay the "Loss" arising from any securities 12 claim against Alanco or claim made against the officers and directors. SOF ¶ 1. 13 14 resultant judgment. SOF ¶ 2. Section III(D) defines "Costs of Defense" as "reasonable 15 16 and necessary fees, costs and expenses . . . resulting solely from the investigation, Section III(I) includes in the definition of "Loss": 1) the costs of defense, and 2) any

17 adjustment, defense and appeal of a Claim against the Insureds. . . ." SOF ¶ 3. Finally, 18 Section I requires these costs of defense be advanced "prior to [the underlying case's] 19 final disposition." SOF ¶ 1. 20 21 22 Puritan Ins. Co., 723 P.2d 648, 650 (Ariz. 1986). However, it is well settled in Arizona 23 24 that, "the terms of an insurance contract are to be strictly construed in favor of the As Carolina correctly notes, matters of insurance contract interpretation are questions of law for the Court. See Univ. Mechanical Contractors of Ariz., Inc. v.

25 insured and against the insurer." Lincoln Technical Institute of Ariz., Inc. v. Federal 3 26
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1 Ins. Co., 927 F.Supp. 376, 379 (D. Ariz. 1994) (citations omitted; emphasis added). 2 The basis for this rule is that the insurance company, not the insured, is responsible for 3 4 5 6 7 Thus, under this authority, the Court must analyze the language of the Carolina policy strictly against Carolina in determining whether Carolina's desire to exclude the wording of the policy itself. C.H. Leavell & Co. v. Fireman's Fund Ins. Co., 372 F.2d 784, 789 (9th Cir. 1967) (citations omitted).

8 specific categories of fees is justified. 9 III. 10 A. 11 12 13 14 15 16 17 With regard to the former, it argues that Invoice No. 9634529 (the December 16, 2004 invoice) overstated the hourly rate of T. Michael Daggett. However, this invoice "Overstated/Duplicative" fees: reasonableness. Carolina's only challenge to CHALLENGED CATEGORIES OF DEFENSE COSTS.

Carolina alleges that a total of $4,555.00 in Stinson Morrison Hecker fees should be excluded because they are "overstated" or "duplicative." Carolina's Statement of Facts ("CSOF"), ¶ 8.

18 reflects the increase in Mr. Daggett's rate made in the ordinary course of Stinson 19 Morrison Hecker's business. SOF ¶ 4. As such, this invoice was not "overstated" and 20 this amount, $4,184.50, must be included in the calculation of recoverable costs. 21 22 23 24 25 26
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With regard to the latter, Carolina notes that Invoice No. 9642252 (February 18, 2002) contains a duplicate entry. Motion, at 7. Upon further review, Plaintiffs will concede that this second, duplicate entry was in error. Thus, the deduction of $370.50

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1 from the costs of defense in this case is appropriate, and this adjustment has been made 2 to Plaintiffs' damages calculation. 3 4 5 6 7 refusal to cover their claim. Instead, it only makes broad arguments that entire Tellingly, Carolina makes no other arguments as to the reasonableness of any particular defense costs that Plaintiffs were forced to incur as a result of Carolina's

categories of fees should be eliminated from consideration; these are not issues of fact,

8 but issues of law for the Court's determination. 9 10 B. Defense costs incurred prior to July 31, 2003.

Carolina argues that the $20,265 that Plaintiffs incurred in connection with work

11 performed by Greenberg Traurig ("Greenberg"), its litigation counsel in the derivative 12 13 claim. Motion, at 8. 14 15 However, as Plaintiffs' Motion for Summary Judgment makes clear, Plaintiffs action, is not recoverable because they were not related to the defense of the covered

16 have already conceded to the reduction of Greenberg's fees to $20,000. This represents 17 only a portion of the time Greenberg billed to Plaintiffs in representing their interests 18 after the lawsuit was amended on July 31, 2003 ­ that is, the Court-determined covered 19 claim ­ but before being replaced by Stinson Morrison Hecker as litigation counsel. All 20 21 Therefore, under any interpretation of the policy language, made strictly in favor of the 22 23 insured per Arizona law, this amount must be included in the calculation of recoverable fees charged by Greenberg for time prior to July 31, 2003 have already been conceded.

24 costs. 25 26
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C.

Defense costs incurred in defending Plaintiffs' interests in related matters.

Carolina argues that none of the Stinson Morrison Hecker fees and costs incurred

4 in three related matters, the TSIN Bankruptcy proceedings, the Nevada lawsuit, and the 5 Slander lawsuit, are recoverable under the policy. Motion, at 8-11. Its reasoning is 6 threefold, arguing that 1) this coverage lawsuit specifically does not seek coverage for 7 these matters; 2) that Plaintiffs failed to give notice of these matters, and 3) that the 8 9 following analyzes these bases with regard to each of these matters. 10 11 12 1. The TSIN Bankruptcy proceedings. SOF ¶ 5. Alanco had no Policy does not cover affirmative claims made by the insured against others. The

TSIN filed Chapter 11 proceedings in 2003.

13 involvement in these proceedings initially.

However, as the proceedings moved

14 forward, it became clear to Plaintiffs' litigation counsel that they presented an avenue 15 with which Alanco could garner significant concessions in the underlying litigation. 16 17 waive rescission as a possible remedy in the underlying case, easily the most important 18 19 20 claim to Plaintiffs in that lawsuit. SOF ¶ 7. This was the predominant reason why Plaintiffs' litigation counsel was involved SOF ¶ 6. As a direct result of this involvement, TSIN ultimately agreed to voluntarily

21 in these proceedings. SOF ¶ 8. These costs were reasonable and necessary to the 22 defense of the covered claim (SOF ¶ 9), and Carolina does not dispute this fact (nor can 23 it). 24 25 26
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Therefore, the costs that were incurred in the TSIN Bankruptcy proceedings are

2 well within the "costs of defense" that Plaintiffs seek in this lawsuit. For the same 3 4 5 6 7 separate claim for reimbursement of these costs. This was simply litigating the same claims in a different forum, the result of which was concession on a key issue. Finally, reason, under no interpretation of the policy language (much less an interpretation strictly favoring the insured2), can one conclude that Plaintiffs had a the duty to make a

8 the TSIN Bankruptcy proceedings were initiated by TSIN, not the Plaintiffs, making its 9 third argument inapplicable to this matter. As such, the fees incurred in the amount of 10 $137,028.04 (see CSOF ¶ 15) must be included as recoverable costs of defense under 11 12 13 14 15 In February, 2005, the TSIN shareholders called an annual meeting for the purpose of electing a new Board of Directors. SOF ¶ 10. On the day this new Board the Policy. 2. The Nevada litigation.

16 was elected, it was charged with conducting an analysis as to whether the prosecution of 17 the underlying litigation should continue. SOF ¶ 11. Once this occurred, the former 18 Board (which had been a strong proponent of the prosecution of the underlying case), 19 20 21 22 23 24 25 26
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sought a determination in Nevada as to which Board controlled the company and the underlying litigation. SOF ¶ 12. As with the work performed in the TSIN Bankrutpcy matter, the determination of this issue would have a controlling effect on the resolution

See Lincoln Technical, 927 F.Supp. at 379.

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1 of the underlying case, and this was the predominant reason for Plaintiffs' involvement 2 in this matter. SOF ¶ 13. 3 4 5 6 7 to that defense. SOF ¶ 14. They are thus covered under any legal interpretation of "costs of defense" provision of the Policy. Given this direct connection, there is no Like in the TSIN Bankruptcy proceedings, the costs incurred in connection with Plaintiffs' active involvement in the Nevada action were reasonable and necessary costs

8 reasonable interpretation of the Policy that would require Plaintiffs to submit a separate 9 claim for the costs incurred in the Nevada lawsuit, nor any logical basis from which the 10 Court could conclude that Plaintiffs do not seek these costs in this case. 11 12 13 14 15 by Plaintiffs is inapplicable. For this reason, the Stinson Morrison Hecker fees incurred in the amount of $18,884.40 (see CSOF ¶ 15) must be included as recoverable costs of Finally, like with the TSIN Bankruptcy proceedings, this action was filed by TSIN, not Plaintiffs. Thus, Carolina's point that the Policy excludes matters initiated

16 defense under the Policy. 17 18 19 20 21 22 23 recoverable under a costs of defense provision as a general matter. See Motion, at 1011. Thus, Plaintiffs hereby recognize this authority and concede the recoverability of 3. The Slander lawsuit.

While the facts clearly dictate that the work performed in this matter was reasonable and necessary to the defense of the underlying case, Carolina's Motion cites authority standing for the proposition that matters initiated by the insured are not

24 these costs ($10,051.68). This amount has been removed from Plaintiffs' damages 25 calculation. 26
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D.

Invoices of Steven P. Oman, P.C.

Steven P. Oman, P.C. ("Oman") served, at all relevant times and through the

3 present, as Alanco's outside general counsel. SOF ¶ 15. Carolina argues, without citing 4 5 for two reasons: 1) he was not "counsel of record" in the underlying case, and 2) he 6 7 8 was an Alanco director. Motion, at 12. No authority is cited because none exists. Although there is little in the way of authority on this issue, one court has a single case in support, that none of Oman's invoices are recoverable under the Policy

9 addressed the issue of whether the time spent by an in-house general counsel could be 10 reimbursed under a fee award. In the patent case of Proctor & Gamble Co. v.

11 Weyerhaeuser Co., 711 F.Supp. 904 (N. D. Ill. 1989), Proctor, the successful plaintiff, 12 13 litigation counsel, Proctor and Gamble sought an additional amount of in-house counsel 14 15 fees. Id. Weyerhaeuser objected, arguing that that such fees should not be permitted. sought recovery of its attorney's fees and costs. Id. at 905. In addition to the fees of its

16 Id. at 906. The court held that "[f]ees for in-house counsel are appropriate where 17 counsel is performing legal work that would otherwise be performed by outside 18 counsel." Id. (citations omitted). Such a claim, however, must be fully documented, 19 which was not the case there. Id. 20 21 counsel" work, rather than hiring someone full-time. As such, the same logic would 22 23 apply, and it has nothing to do with Oman not being counsel of record or being a Many companies, like Alanco, choose to use outside counsel to perform "general

24 director: 1) did Oman perform work that would otherwise have been performed by 25 Plaintiffs' outside litigation counsel, and 2) was this time fully documented? 9 26
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Both of these questions are clearly answered in the affirmative.

Carolina

2 certainly does not suggest otherwise, and with good reason: the Oman billing records 3 4 5 6 7 developing litigation strategy. SOF ¶ 16. His detailed invoices provide full definitively show that he took a vital role in preparing pleadings and discovery, preparing for depositions, reviewing and analyzing relevant documents, and in

documentation of every hour spent on these tasks. Id. Therefore, the Court must reject

8 Carolina's argument that Oman's fees are not recoverable as a general matter. 9 However, there are two subcategories of Oman fees that merit further attention.

10 First, Plaintiffs acknowledge that the Court's ruling with regard to the applicability of 11 12 13 14 15 concede that the $22,541.66 (see CSOF ¶ 11) of Oman's fees fall into this subcategory. Second, for the reasons articulated in Section III (C)(3), supra, Plaintiffs concede that the "Insured vs. Insured" exclusion to the derivative lawsuit likely makes any of Oman's costs incurred prior to July 31, 2003 unrecoverable. As such, Plaintiffs will

16 the Oman fees in connection with the slander lawsuit ($196.00) are not recoverable. 17 Subtracting these amounts from the total Oman fees that Plaintiffs incurred in 18 connection with this matter (see CSOF ¶ 6), the total amount of Oman fees that are 19 20 21 Finally, Carolina devotes a four-line paragraph to the argument that the amount 22 23 of Plaintiffs' damages in this case should be offset by $150,000. Motion, at 12. recoverable are $84,587.89. E. The applicability of the Retention in the Policy.

24 Shockingly, in so doing, it refers to the previous year's declaration page and 25 misrepresents the language of its own Policy! 10 26
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1

Again, the Court is required to interpret the language of the Policy strictly in

2 favor of the Plaintiffs. See Lincoln Technical, 927 F.Supp. at 379. This premise 3 4 5 6 7 8 290, 296 (D. Ariz. 1983) (citations omitted). When the amount of a retention is based on the nature of the particular claims being made, this same logic must apply. Here, the declaration page that the Court has already found to be applicable to includes requiring an insurer to cover an entire litigation when only some of the claims therein are covered. See Aetna Cas. & Surety Co. v. PPG Industries, Inc., 554 F.Supp.

9 this analysis sets a retention of $100,000, not $150,000, for claims other than securities 10 claims. SOF ¶ 17. It is undisputed that the claims in the underlying litigation included 11 12 13 14 15 16 17 based on the presence of the non-securities claims. In this scenario, a retention of only $100,000 would apply.3 F. Final calculation. both securities and non-securities claims. SOF ¶ 18. Thus, any interpretation of the Policy (strictly favoring the insureds) dictates that the applicability of the retention be

Under the foregoing analysis, the correct measure of recoverable damages is the

18 following: 19 20 21 $ 22 23 24 25 26
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$ $

20,000.00 618,642.41

84,587.89

(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)

Last week, the newly-assigned Judge in the underlying case denied TSIN's motion to keep the case on the inactive calendar, a clear signal that dismissal could be imminent. SOF ¶ 19. Should a dismissal take place, the Policy would provide for no retention on the recoverable costs of defense. Plaintiffs will promptly notify the Court should a dismissal of that action occur.

3

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1 2 3 4 5 6 7 IV.

$ 713,230.30 $ (100,000.00)

(Total ) (minus applicable retention)

$

613,230.30

[TOTAL RECOVERABLE]

CAROLINA'S LAST-DITCH ARGUMENTS AS TO OTHER POLICY EXEMPTIONS AND RIPENESS ARE WHOLLY WITHOUT MERIT. A. Rescission is not a possible remedy in the underlying litigation.

This argument, to which Carolina devotes nearly six pages in its Motion,

8 illustrates its lack of understanding of the events that took place in the underlying 9 10 the underlying action filed on July 31, 2003 sought rescission as a potential remedy. 11 12 However, as discussed above (see Section III(C)(1), supra), after discussions that were litigation. Plaintiffs are certainly willing to acknowledge that the amended complaint in

13 the sole focus of Alanco's involvement in the TSIN Bankruptcy matter, TSIN agreed 14 more than a year ago to voluntarily waive rescission as a potential remedy in the 15 underlying case. SOF ¶ 7. As such, Carolina's argument regarding any possible "ill 16 gotten gain" is moot, and frankly has been for some time. 17 18 For the first time in the nearly two years in which this coverage case has existed, 19 20 Carolina argues that because the underlying litigation has not been fully resolved, the B. Carolina's ripeness argument is equally baseless.

21 Court is somehow precluded (on some concocted jurisdictional basis) from awarding 22 the damages that Plaintiffs have suffered due to its wrongful conduct. Motion, at 13. 23 Not only is this is contrary to the wording of Carolina's own policy, it further illustrates 24 Carolina's lack of even a basic understanding with regard to the underlying case. 25 26
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Section I of the Policy mandates that "The Insurer shall, subject to section VI,

2 advance the Costs of Defense of such Claim prior to its final disposition." SOF ¶ 1 3 4 5 6 7 In support of this strange request, it cites American Nat. Fire Ins. Co. v. Hungerford, 53 F.3d 1012 (9th Cir. 1995). In Hungerford, the facts were not yet fully (emphasis added). In arguing that the Court must stay this litigation until final

disposition, it is asking it to rule contrary to its own Policy language!

8 developed in the underlying case, and the court was concerned that without developed 9 facts in that matter, it would be required to "assume the facts as alleged to be true." Id. 10 at 1027. 11 12 13 14 15 fact, the discovery and dispositive motions deadlines passed long ago, and numerous dispositive motions were filed. SOF ¶ 21. The facts in the underlying case are as This is the polar opposite of the underlying case. The underlying case involved extensive discovery, including hundreds of pages of deposition testimony. SOF ¶ 20. In

16 developed as they can ever be, and Carolina's statements otherwise are simply incorrect. 17 From the beginning of the underlying litigation, Carolina was required under the

18 wording of its own policy to reimburse the costs of defense that were incurred by its 19 20 21 22 23 24 25 26
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insureds. It refused to do so. In fact, its own Policy requires that this reimbursement take place before final disposition, not after, as it suggests to the Court. This argument therefore must be rejected. /// /// /// 13
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1 V. 2

CONCLUSION. For the foregoing reasons, Carolina's Motion for Summary Judgment must be

3 denied, and the Court must Order Carolina, as a matter of law, to reimburse Plaintiffs' 4 5 RESPECTFULLY SUBMITTED this 2nd day of February, 2006. 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26
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costs of defense in the amount of $ 613,230.30.

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. ORIGINAL electronically filed this 2nd day of February, 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 2nd day of February, 2006, to: Honorable David Campbell Sandra Day O'Connor U.S. Courthouse 401 W. Washington Street Phoenix, AZ 85003 /s/ Anne Finch

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