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

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LAW OFFICES SANDERS & PARKS, P.C. 1300 ABACUS TOWERS 3030 NORTH THIRD STREET PHOENIX, ARIZONA 85012-3099 TELEPHONE (602) 532-5600 FACSIMILE (602) 532-5700

James K. Thurston, ARDC No. 6202021 Daniel E. Tranen, ARDC No. 6244878 WILSON, ELSER, MOSKOWITZ, EDELMAN & DICKER LLP 120 North LaSalle Street Chicago, IL 60602 Telephone: (312) 704-0550 Facsimile: (312) 704-1522 Admitted Pro Hac Vice Mark G. Worischeck, No. 011147 J. Steven Sparks, No. 015561 SANDERS & PARKS, P.C. 3030 North Third Street, Suite 1300 Phoenix, AZ 85012-3099 Telephone: (602) 532-5795 Facsimile: (602) 230-5054 Attorneys for Defendant Carolina Casualty Insurance Company 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, Plaintiffs,

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Case No.: CV-04-0789-PHX-DGC DEFENDANT'S REPLY BRIEF IN SUPPORT OF ITS MOTION TO STAY THE DISCOVERY SCHEDULE [Oral Argument Requested]

v. Carolina Casualty Insurance Company, a Florida corporation, Defendant. /// ///

Case 2:04-cv-00789-DGC

Document 75

Filed 08/22/2005

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LAW OFFICES SANDERS & PARKS, P.C. 1300 ABACUS TOWERS 3030 NORTH THIRD STREET PHOENIX, ARIZONA 85012-3099 TELEPHONE (602) 532-5600 FACSIMILE (602) 532-5700

There were two components to Carolina's motion to stay discovery. Plaintiffs respond to only one of them. Their failure to respond to Carolina's first argument that discovery be stayed until at least 30 days after this Court's ruling on the motion for reconsideration now pending before this Court signals at least acquiescence to Carolina's position. As a result, at the very least, the discovery deadline should be stayed until 30 days after this Court rules on the motion for reconsideration. As noted in Carolina's motion, this Court specifically envisioned the possible need to extend discovery due to the expected summary judgment motion on the Insured v. Insured exclusion. Certainly, spending thousands of dollars seeking to compel discovery,1 reviewing documents, and deposing witnesses should be avoided if this course of action will be unnecessary. With respect to the request for a stay until the conclusion of the underlying case, Plaintiffs misconstrue both Carolina's argument and the Insuring Agreement. Alanco argues that the fraud and personal profit exclusions apply only to Carolina's obligation to "pay[] any potential judgment", but not to its obligation to pay Costs of Defense (i.e., defense expenses). (Alanco's Brief, p.3.) This is simply wrong. Carolina's Insuring Agreement states, in part: "This Policy shall pay the Loss of the Company..." (Policy, Section 1.B.) "Loss" is defined as "damages, judgments, settlements and Costs of Defense..." (Policy, Section III.I.)(Emphasis added.) However, the exclusions section of the Policy states that Carolina "shall not be liable to make any payment for Loss in connection with a Claim made against any Insured" for "gaining in fact of any profit or advantage to which the Insured was not legally entitled" or for any "deliberate fraudulent act." (Policy, Sections IV.A. and B.) Accordingly, if for example any Insured were found liable in the underlying lawsuit for "Fraud" (Counts I and II) or

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"Securities Fraud" (Counts IV and V), said exclusions would bar coverage for any "Loss" incurred -- which includes any "Costs of Defense." In addition, the Policy is not Plaintiffs allude to the need for such a motion in their response brief, when they indicate that they objected to producing any information in the underlying case, including discovery. In fact, they have not produced a single document in response to Carolina's written discovery requests. -2Document 75 Filed 08/22/2005 Page 2 of 4
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Case 2:04-cv-00789-DGC

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LAW OFFICES SANDERS & PARKS, P.C. 1300 ABACUS TOWERS 3030 NORTH THIRD STREET PHOENIX, ARIZONA 85012-3099 TELEPHONE (602) 532-5600 FACSIMILE (602) 532-5700

a "duty to defend" policy, but rather it expressly provides: "The Insurer does not, however, under this Policy, assume any duty to defend. The Insureds shall defend and contest any Claim made against them." (Policy, Section VI.B.) Consequently, Alanco's argument that the incurrence of Costs of Defense is immune from the Policy's personal profit and fraud exclusions is simply wrong. Second, with respect to Carolina's argument, of course Carolina has the right to conduct discovery on the underlying case. This Court noted in its order on summary judgment that a decision on the Insured v. Insured exclusion did not end this matter. Instead, this Court found that this case and specifically discovery on the other exclusions could proceed. In that regard, Carolina is now simply seeking to reduce the need for expansive and unnecessary discovery aimed at trying to answer questions that might be answered by the underlying court in a final adjudication of the allegations of fraud and other liability asserted against Plaintiffs. Obviously, if there is a final adjudication that

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Plaintiffs did not commit fraud, then there will be no reason to conduct discovery on this issue. Similarly, depending upon findings of fact by the underlying court, specific issues might be raised which could focus discovery on particular issues relative to the question of whether the loss is "[b]ased upon, arising out of, directly or indirectly resulting from" either "the committing in fact of any dishonest or fraudulent act or omission," or "the gaining in fact of any personal profit or advantage to which they were not legally entitled." (Policy, Sections VI.A and B.) Given the need to wait for a resolution from the underlying case before adjudicating these issues in the present case, it only makes sense to stay the case now and preserve litigation resources, rather than expend those resources, only to find out later that those resources were unnecessarily utilized. Accordingly, for purposes of judicial economy, (including the apparent need to file a motion to compel discovery taken in the underlying case) and for purposes of conserving litigation resources, for both parties, Carolina respectfully requests that this Court grant its motion and that it stay this case until 30 days after the later of the this
Case 2:04-cv-00789-DGC Document 75

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LAW OFFICES SANDERS & PARKS, P.C. 1300 ABACUS TOWERS 3030 NORTH THIRD STREET PHOENIX, ARIZONA 85012-3099 TELEPHONE (602) 532-5600 FACSIMILE (602) 532-5700

Court's ruling on Carolina's motion for reconsideration or the conclusion of the underlying claims against Plaintiffs. DATED this 22nd day of August, 2005. SANDERS & PARKS, P.C.

By: s/ Mark G. Worischeck Mark G. Worischeck J. Steven Sparks 3030 N. Third Street, Suite 1300 Phoenix, AZ 85012-3099 and James K. Thurston Daniel E. Tranen WILSON, ELSER, MOSKOWITZ, EDELMAN & DICKER LLP 120 North LaSalle Street Chicago, IL 60602 Attorneys for Defendant Carolina Casualty Insurance Company

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I hereby certify that on August 22nd, 2005, I electronically transmitted the foregoing document to the Clerk's Office using the CM/ECF System for filing and transmittal of a Notice of Electronic Filing to the following EM/ECF Registrants: mdaggett @stinsonmoheck.com Attorneys for Plaintiffs To be mailed as a courtesy hard copy on August 22, 2005 to The Honorable David G. Campbell

/s Mark G. Worischeck

Case 2:04-cv-00789-DGC

Document 75

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