Free Motion for Summary Judgment - 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
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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 MOTION FOR SUMMARY JUDGMENT ON REMAINING ISSUES (Assigned to the Honorable David G. Campbell (Oral Argument Requested)

Defendant(s).

Plaintiffs move for summary judgment on all outstanding issues in this case, namely 1) that Defendants have no sustainable remaining defenses such that Summary Judgment on liability is warranted, and 2) for an Order requiring Defendants, pursuant to the terms of the policy at issue, to reimburse Plaintiffs for the losses they incurred as a result of Carolina's wrongful denial of coverage for costs of defense incurred in

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1 defending the claims made by Technology Systems International, Inc. (Nevada)1 in the 2 litigation filed in Maricopa County Superior Court, Cause No. CV2003-001937 3 4 5 6 7 to organize TSIN shareholders for purposes of electing a new Board of Directors, as well as defending litigation brought by TSIN in Nevada by its ousted Board of Directors (hereinafter, the "underlying litigation" or "underlying case"), which included work performed in the underlying litigation itself, the TSIN bankruptcy proceedings, efforts

8 to determine control of the company. 9 I. 10 A. 11 12 13 1. Defending the underlying litigation. Background. PLAINTIFFS DESERVE SUMMARY JUDGMENT ON LIABILITY.

The Complaint in the underlying case stated nine causes of action, including

14 common law fraud, securities fraud, negligent misrepresentation, and breach of contract. 15 Of the 118 total paragraphs therein, 56 were specific factual allegations that TSIN 16 believed formed the basis of their fraud claims. SOF ¶ 1. It sought damages in excess of 17 18 19 20 21 motion practice. By the spring of 2004, the majority of TSIN shareholders concluded that the $18 million. Id. Simply put, the underlying case was a very complex matter involving thousands of relevant documents, a substantial number of depositions, and extensive

22 TSIN litigation amounted to little more than a dissipation of company assets. SOF ¶ 2. 23 24 25 26
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Technology Systems International, Inc., a Nevada corporation ("TSIN"), the plaintiff in the underlying litigation, should not be confused with Technology Systems International, Inc., an Arizona corporation ("TSIA"), a defendant in the underlying litigation and plaintiff in this case.

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1 Since the TSIN Board refused to dismiss the litigation, the majority of TSIN 2 shareholders (led by Alanco, a significant shareholder) called a special meeting and 3 4 5 6 7 8 specifically with evaluating the desirability of continuing the underling litigation, among other tasks. SOF ¶ 4. An emergency action was filed by TSIN's former Board of Directors against the elected a new Board of Directors. SOF ¶ 3. At this meeting, at which 87.5% of the outstanding shares were present, a new Board of Directors was elected, and charged

9 newly-elected Board over control of the company in Nevada. SOF ¶ 5. Defending this 10 action was necessary to efficiently defending, and would not have occurred but for, the 11 12 13 14 15 Court. SOF ¶ 7. Once the Nevada action was filed, Maricopa County Superior Court Judge Robert Gottsfield, probably seeing that a question of control would dictate events claims made in the underlying litigation. SOF ¶ 6. During this time, TSIN had on file Chapter 11 proceedings in U.S. Bankruptcy

16 going forward in the underlying litigation but also noting the Order of Bankruptcy 17 Judge Hollowell staying action in the underlying litigation, suspended that litigation 18 until the control issue was decided. SOF ¶ 8. Under this stay, the parties were required 19 20 21 22 23 were no counterclaims in the underlying litigation. SOF ¶ 10. Indeed, the numerous hours of lawyer time expended in this matter would not have occurred, again, but for the to go to bankruptcy court to litigate some of the issues, including the control issue. SOF ¶ 9. No part of this process involved Alanco pursuing a claim against TSIN, as there

24 claims made by TSIN in the underlying litigation. SOF ¶ 11. 25 26
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2.

Coverage litigation.

In November 2002, Plaintiffs put Carolina on notice that if the TSIN shareholders decide to bring suit against them, they would make a claim under the costs of defense provision of the insurance policy it purchased from Defendant Carolina Casualty Insurance Company ("Carolina"). SOF ¶ 12. When Carolina ultimately denied coverage, citing the Insured vs. Insured exclusion (the "IVI exclusion"), Plaintiffs were

8 forced to file this lawsuit which sought the Court's Order requiring Carolina to 9 reimburse the costs of defense of the underlying litigation, and did so on March 19, 10 2004. SOF ¶ 13. On April 20, 2004, after this case was removed to this Court, Carolina 11 12 13 14 15 the record was unclear as to what constituted a "claim" under the policy, and denied Plaintiffs' Motion on the ground that it could not, at that time, be shown that as a matter Plaintiffs then amended their filed a Motion to Dismiss and Plaintiffs filed a Motion for Summary Judgment. SOF ¶ 14. This Court, in a September 20, 2004 Order, denied the Motion to Dismiss because

16 of law, the IVI exclusion did not apply. SOF ¶ 15. 17 Complaint on November 30, 2004. SOF ¶ 16. 18 19 20 21 22 23 24

In answering this amended Complaint, Carolina alleged not only the applicability of the IVI exclusion, but some nineteen other defenses, none of which were pursued at any point throughout the history of this case. SOF ¶ 17. On March 11, 2005, Plaintiffs filed a second Motion for Summary Judgment on the issue of the applicability of the IVI exclusion, among other issues. SOF ¶ 18. On May 19, 2005, the Court granted this Motion in part, finding that the IVI

25 exclusion did not allow Carolina to deny coverage in this case. SOF ¶ 19. Prior to the 4 26
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1 Court's ruling, Carolina provided no facts or law to support any of the "other defenses." 2 As a consequence, after this ruling, Plaintiffs propounded very specific interrogatories 3 4 5 6 7 that point. SOF ¶ 20. In fact, the final interrogatory specifically provided Carolina with an avenue to allege yet more defenses. Id.. Although required to do so under Rule 33, which asked for all factual and legal support Carolina had for each and every defense it had raised in its Answer, including the nineteen that it had ignored in this litigation to

8 Carolina's responses to this discovery provided no factual or legal bases for any of these 9 defenses, and raised no additional defenses. Id.. 10 11 12 13 14 15 Despite having months to take steps to discover such information prior to the Courtimposed deadline, Carolina took no depositions, submitted no discovery, nor made even Moreover, even if Carolina were to have discovered some legal or factual basis to support one of these other defenses, they were required to "seasonably supplement" these responses as new information was discovered. See Rule 26(e)(2), Fed. R. Civ. P.

16 an indirect, informal query for information or evidence that could be seen as seeking 17 information or evidence related to any of these defenses. 18 19 20 21 22 23 24 25 26
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The bottom line is that Carolina made no supplementation, and discovery closed on November 30, 2005. Without any evidence to support these defenses, and given the Court's previous ruling in favor of Plaintiffs on the one defense Carolina did raise in this litigation, Plaintiffs are entitled to summary judgment as a matter of law on liability at this point. /// /// 5
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CAROLINA IS REQUIRED TO PAY THE COSTS PLAINTIFFS HAVE INCURRED IN DEFENDING THE UNDERLYING LITIGATION. Carolina is required, under the specific language of its own policy, to "pay the

loss of each and every director or officer of the company arising from any claim made

5 during the policy period," as well as to "advance costs of defense of such claim prior to 6 its final disposition." SOF ¶ 21. The policy defines "Costs of Defense" as "reasonable 7 and necessary fees, costs and expenses . . . resulting solely from the investigation, 8 9 The underlying defendants (Plaintiffs in this case) incurred reasonable and 10 11 12 necessary fees, costs, and expenses resulting solely from the defense of the claims made in the underling litigation from three separate legal entities: 1) Greenberg Traurig adjustment, defense and appeal of a Claim against the Insureds . . . ." SOF ¶ 22.

13 ("GT"), which represented them from the date the derivative lawsuit was initially filed 14 until January, 2004; 2) Stinson Morrison Hecker ("SMH"), current litigation counsel; 15 and 3) Steven P. Oman, P.C., their outside general counsel, was intimately involved in 16 17 representations by GT and SMH. The total expenses that Plaintiffs have been forced to 18 19 20 pay out-of-pocket is $752,333.59. As noted above, the specific language of Carolina's policy requires it to all phases of the planning and strategy in defending against these claims, during the

21 reimburse Plaintiffs for the work performed by each relating solely to the defense of the 22 claims made in the underlying case. These are outlined below. 23 24 25 26
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A.

Greenberg Traurig

Plaintiffs incurred a total of $120,287.43 in fees and costs during the time this

3 firm was counsel of record in the underlying action, both before and after the Second 4 5 $20,000.00 of these fees because they understand that the balance was paid under a 6 7 8 9 different insurance policy purchased by TSIN through Philadelphia Insurance Company. B. Stinson Morrison Hecker Amended Complaint was filed. SOF ¶ 23. Plaintiffs seek a reimbursement of only

The undersigned law firm was substituted for GT as litigation counsel in

10 connection with defending the claims in the underlying case. SOF ¶ 24. As noted 11 above, the efficient defense of these claims went beyond holding the mere title of 12 13 14 15 16 impacted the underlying litigation), and in the efforts to take over the TSIN Board of Directors (resulting in an effective stay of the underlying litigation). Id. It bears "counsel of record" under that caption. Id. It involved representation in the superseding TSIN bankruptcy matter (in which concessions were negotiated that significantly

17 repeating that these expenses would not have been incurred but for the claims made in 18 the underlying case, and were reasonable and necessary to the defense of those claims. 19 SOF ¶ 25. At present, these fees and costs total $619,064.39. SOF ¶ 26. 20 21 22 underlying action, including the parallel bankruptcy matter and the TSIN takeover. 23 24 SOF ¶ 27. In connection therewith, he performed numerous tasks that would not have C. Steven P. Oman, P.C.

Mr. Oman's firm represented the Plaintiffs' interests in all stages of the

25 been necessary but for the claims made by TSIN in the underlying case, and indeed, 7 26
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1 were reasonably and necessarily incurred in defense of those claims. SOF ¶ 28. At 2 present, these fees and costs total $107,325.55. SOF ¶ 29. 3 4 5 awaits the determination of its obligation in a subsequent proceeding, it acts at its peril, 6 7 and if it guesses wrong it must bear the consequents of its breach of contract." Kepner D. Carolina must reimburse these amounts in their entirety.

Arizona law is clear and unequivocal that "[i]f the insurer refuses to defend and

8 v. Western Fire Ins. Co., 509 P.2d 222, 225 (Ariz. 1973) (citations omitted). In order to 9 alleviate this risk, it is widely held that insurance companies who believe coverage may 10 be appropriately denied are left with two options: 1) seek declaratory judgment of that 11 fact, or 2) grant coverage under a reservation of rights. See, e.g., Lyons v. State Farm 12 13 Employees Ins. Co. v. Progressive Casualty Ins. Co., 622 S.E.2d 92, 95 (Ga. Ct. App. 14 15 2005); Armstrong Cleaners, Inc. v. Erie Ins. Exchange, 364 F.Supp.2d 797, 806 (S.D. Fire and Casualty Co., 811 N.E.2d 718, 727 (Ill. Ct. App. 2004); Government

16 Ind. 2005). 17 Here, Carolina had ample ability to do either of these options, but chose to do

18 neither. No declaratory judgment was sought, and Carolina chose not to grant coverage 19 under a reservation of rights. Instead, Carolina chose to force the Plaintiffs in this case 20 21 Carolina now seeks to have the Court ignore its wrongful actions and grant it the 22 23 benefits of the appropriate course of conduct, as if those were the actions it had taken. to fend for themselves and pay substantial attorney fees and costs out-of-pocket.

24 Such a ruling would be contrary to the logic of Kepner, as well as the numerous 25 decisions (including those cited above) that direct an insurer as to the appropriate course 8 26
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1 of conduct in such situations. Here, Carolina had every opportunity to assume control 2 over the selection of counsel, but refused it. It was offered final decision-making 3 4 5 6 7 justification for the denial of coverage would be upheld by the Court. It was not. Under Kepner, it did so at its peril. It took the risk and lost. Carolina must not be permitted at authority on all strategic decisions, but rejected it. Carolina put itself in this position through its choice to force its insureds to defend themselves, on the hope that its stated

8 this late point to second-guess every decision made by the counsel that Plaintiffs were 9 forced to retain without the coverage to which they were entitled 10 11 12 13 14 15 insureds with the requisite financial resources to bring coverage actions (like this one) while at the same time expending additional resources defending themselves in the Indeed, such a decision would set dangerous precedent, as it would advise all insurance companies that the best practice is to deny coverage as a matter of course ­ after all, there would be little risk of doing so. At the same time, it would force those

16 underlying lawsuits. No reason would exist to grant coverage under a reservation of 17 rights or bring an immediate declaratory judgment action in any instance. Of course, 18 such a result would turn the well-established law that puts the onus on the insurance 19 20 21 22 23 with insurers to do all they can to protect their insureds while at the same time adhering to the terms of their policies. Carolina did not do so, and its actions must not be company (rather than the insured) in these situations on its face. As cases like Lyons, Government Employees, and Armstrong Cleaners make clear, the incentive must stay

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Simply put, Carolina breached its contract with the Plaintiffs by denying

2 coverage without justification. Plaintiffs are therefore entitled to the full amount of the 3 4 5 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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damages resulting from this breach. As such, the Court must order Carolina to pay the total amount that the Plaintiffs in this case were forced to incur in defending the claims made in the underlying litigation: $752,333.59.2 RESPECTFULLY SUBMITTED this 13th day of January, 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.

Plaintiffs expressly do not waive a claim for attorney's fees and costs incurred in this action, pursuant to A.R.S. § 10 12-341 and 12-341.01, and will submit the appropriate fee application upon Final Judgment.

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ORIGINAL electronically filed this 13th day of January, 2006: Clerk of the Court Sandra Day O'Connor U.S. Courthouse 401 West Washington Street Phoenix, Arizona 85003 Copy of the foregoing mailed/handdelivered this 13th day of January, 2006, to: Honorable David Campbell Sandra Day O'Connor U.S. Courthouse 401 W. Washington Street Phoenix, AZ 85003 /s/ Brooke C. Campbell

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