## F I L E D United States Court of Appeals Tenth Circuit 

### JUN 24 1999 

### PATRICK FISHER Clerk UNITED STATES COURT OF APPEALS

TENTH CIRCUIT

ROBERT E. STAUTH, HARRY L. WINN, KEVIN J. TWOMEY, DONALD N. EYLER, R. RANDOLPH DEVENING, JAMES E. STUARD, FLEMING COMPANIES, INC.

Plaintiffs - Appellees, No. 97-6437 (W.D. Oklahoma) (D.C. No. CV-96-1825-M)

v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH,

Defendant - Appellant, FEDERAL INSURANCE COMPANY,

Defendant.
ROBERT E. STAUTH, HARRY L. WINN, KEVIN J. TWOMEY, DONALD N. EYLER, R. RANDOLPH DEVENING, JAMES E. STUARD, FLEMING COMPANIES, INC.

Plaintiffs - Appellees, No. 97-6438 (W.D. Oklahoma) (D.C. No. CV-96-1825-M)

v. FEDERAL INSURANCE COMPANY,

Defendant - Appellant,* This order and judgment is not binding precedent, e xcept under the

doctrines of law of the case, res judicata, and col lateral estoppel. The court generally disfavors the citation of orders and judg ments; nevertheless, an order and judgment may be cited under the terms and condi tions of 10th Cir. R. 36.3.

** The Honorable Tena Campbell, District Judge, UnitedStates District Court for the District of Utah, sitting by designat ion. -2- NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH,

Defendant.

ORDER AND JUDGMENT *

Before ANDERSON and BRORBY , Circuit Judges, and CAMPBELL , ** District Judge.

This is a diversity declaratory judgment action see king a determination as to two insurance coverage questions: (1) whether i t is the 1993, rather than the 1996, directors and officers liability policy issue d by Federal Insurance Company that will cover any loss resulting from two securit ies class actions filed in 1996 against the plaintiffs; and (2) whether and on whatbasis any potential loss resulting from the 1996 class action lawsuits can, at this time, be allocated-3-

between the insured plaintiff directors and officer s and the uninsured plaintiff corporation. The dispositive issue on the first question is whe ther the 1996 securities actions are “causally connected” (a term used in th e 1993 insurance policy) to a 1993 pricing action brought by a customer against F leming Companies, Inc. and one of its officers. If so, any loss arising from the 1996 actions must be aggregated with the loss suffered from the 1993 act ion, and the limits of coverage under the 1993 policy will apply. We conclude that , for coverage purposes, the 1996 class actions are not causally connected to th e 1993 pricing action, and that coverage under the 1996 policy applies. We therefo re affirm the district court’s summary judgment in favor of the plaintiffs on this issue. The substantive issue presented by the second quest ion is whether the district court erred in determining how any potenti al loss from the 1996 class action lawsuits should be allocated between insuredand uninsured plaintiffs. However, for the reasons stated below, we conclude as an initial matter that the district court prematurely decided the issue. Acco rdingly, we vacate the district court’s grant of summary judgment on this issue.-4- BACKGROUND I. Factual Background
A. The Insurance Policies In 1993, as it had for the past several years, Flem ing, a wholesale distributor of food and related products, purchasedan annual directors and officers (D&O) liability policy from Federal Insurance Company. Under the terms of the policy, the directors and officers wer e covered, but the corporation itself was not. Federal promised to pay for “all L oss . . . which [any] Insured Person becomes legally obligated to pay on account of any claims made against him . . . during the Policy Period . . . for a Wron gful Act” committed before or during the policy period. Appellant’s App. at 6. This clause was entitled the “Executive Liability Coverage” clause. Id. Federal also promised to reimburse Fleming, even though Fleming was not directly insur ed, for any indemnification payments it made to insured directors and officers for liability incurred for wrongful acts. This clause was known as the “Executive Indemnific ation Clause.” Id. The total yearly limit on the Federal D&O policy was $25,000,000. Fleming purchased excess insurance coverage from National Union Fire Insurance Company. The policies issued by National Union were “follow-form” policies that adopted the “terms and conditions” in the underlying Federal policy; thus, coverage under the National Union policies is determined by looking to the1 The renewal policies purchased in 1996 contained la nguage largely

similar, in relevant part, to the 1993 policy. Forinstance, the 1996 policy also contained an “Executive Liability Coverage” clause and an “Executive Indemnification Clause,” with language substantiall y similar to the clauses in the 1993 policy. See Appellants’ App. at 86.

2 ERII is not participating in this appeal. During t he course of the litigation below, ERII “executed a stipulation that it will be bound by any decision” of the district court and was “dismissed without prejudice ” from the litigation. Appellants’ App. Tab X, at 1 n.1. -5- language of the Federal policy. See Appellant’s App. at 66. The National Union policy had a yearly limit of $25,000,000. In 1993, then, Fleming had $50,000,000 worth of D&O insurance coverage. In 1996, in addition to renewing the Federal and National Union policies, 1 Fleming purchased an additional $10,000,000 of D&O insurance from Executive Risk Indemnity, Inc. (“ERII”). 2 This policy also appears to be a follow-form policy, whose terms and conditions are dictated by the underlying Federal policy. Thus, in 1996, Fleming had $60,000,000 worth of D&O insurance coverage.

B. The David’s Litigation In August 1993, David’s Supermarkets, Inc., a custo mer of Fleming, filed a lawsuit against Fleming and James E. Stuard, who wa s then an Executive VicePresident of Fleming, in Texas state court (the “David’s Litigation”). Between 1989 and September 1992, David’s and Fleming had op erated under a “cost-plus” contract, under which Fleming agreed to sell food a nd related products to David’s-6-

at Fleming’s cost plus an agreed-upon markup. The David’s lawsuit contained four causes of action. First, David’s alleged thatFleming and Stuard had breached the cost-plus contract with David’s, by al legedly inflating the “cost” of the food products through “paper transfers between various Fleming offices” and by failing to pass on to David’s the benefit of “‘r ebates’ and promotional discounts obtained from some manufacturers.” Appel lants’ App. Tab J, at 4. Second, David’s alleged that Fleming and Stuard “co mmitted misrepresentation and fraud” against David’s at the time it entered i nto the cost-plus contract, because Fleming and Stuard allegedly “had already f ormed an intention to overcharge David’s.” Id. at 6. Third, David’s alleged that Fleming, Stuard , “and other unnamed parties entered into a . . . conspiracy to defraud David’s.” Id. Finally, David’s alleged that Fleming and Stuard ha d violated the Texas Deceptive Trade Practices Act. The complaint, which was amended four times (largel y to increase the amount of damages sought), alleged no wrongdoing onthe part of any Fleming officer or director other than Stuard, the Executiv e Vice-President who negotiated the agreement with David’s. Also, the complaint al leged no wrongdoing on the part of Fleming, Stuard, or anyone else against anyparty other than David’s. Furthermore, the complaint alleged no wrongdoing byanyone after September
1992. See id. at 3.3 In their briefs, the parties are not forthcoming ab out the details of this

settlement agreement. Elsewhere in the record, how ever, we were able to learn that the settlement amount was apparently $19.9 mil lion, of which Federal paid $14.7 million, leaving $10.3 million in unexhausted insurance under the 1993 Federal policy. See Appellants’ App. at 435-36, 503 (affidavit of Mich ael D. Daugherty, a claims examiner for Federal’s parent c ompany, filed with the district court). -7- The case went to trial, and in March 1996, David’s procured a $207 million verdict against Fleming. The Texas court entered j udgment in the case, but the judgment was later vacated, and the case was subseq uently settled for $19.9 million. 3 See Affidavit of Mary D. Manesis in Support of Federal Br., Ex. A at 1 n.1; Appellants’ App. Tab K, at 65. There is no di spute that this settlement was covered under the 1993 Federal policy, and Federal paid a substantial portion of the claim, leaving just over $10 million of unexhau sted coverage under the 1993 Federal policy, and just over $35 million in total 1993 D&O coverage. Appellants’ App. at 436, 503.

C. The Class Actions Soon after the verdict in the David’s Litigation, b etween March and June 1996, Fleming stockholders and noteholders filed te n different class action lawsuits against Fleming and various officers and d irectors (the “Class Actions”). These class actions were eventually consolidated into two separate actions, one by shareholders and one by noteholders. The noteholde rs’ class action was filed on-8-

behalf of all persons who purchased one of two type s of Fleming notes between December 8, 1994 and March 15, 1996. The plaintiff s chose December 8, 1994 because that was the date on which Fleming filed a registration statement with the Securities and Exchange Commission (SEC) which, bec ause it contained no mention of the then-pending David’s Litigation, was allegedly “materially false and misleading respecting Fleming’s exposure to contingent liabilities.” Appellants’ App. Tab L, at 2. The plaintiffs chose March 15, 1996 because that was the day after the verdict in the David’s Litigation was finally handed down, and on which the company’s potential liability in t he David’s Litigation finally became public knowledge. The noteholders’ class ac tion alleges that the price of the Fleming notes was artificially inflated by Flem ing’s failure to disclose, in the registration statement and in subsequent SEC filing s, the existence of the David’s Litigation and the potential liability that lawsuitrepresented to the company. The noteholders’ class action names as defendants the following parties: Fleming; Fleming officers and directors Robert E. S tauth, Harry L. Winn, Donald N. Eyler, and Kevin J. Twomey; and underwrit ers Merrill Lynch & Co. and J.P. Morgan Securities, Inc. The suit alleges that these defendants violated § 11 of the Securities Act, and §§ 10 and 20(a) of the Exchange Act, by failing to disclose the existence of the David’s Litigation. The suit does not allege wrongdoing on the part of any other person or corpo ration, including Stuard, and-9-

does not seek redress for any wrongdoing prior to D ecember 8, 1994. Also, the suit does not allege any wrongdoing on the part of the named defendants other than their failure to disclose the existence of the David’s Litigation in the documents filed with the SEC. The shareholders’ class action was filed on behalf of all persons or corporations that purchased Fleming common stock be tween November 15, 1993 and March 14, 1996. The plaintiffs in this lawsuitchose those particular dates because November 15, 1993 was the date on which Fle ming’s first post-David’s Litigation SEC Form 10-Q was filed, see Appellants’ App. Tab K, at 26, and because March 14, 1996 was the date on which the David’s verdict was handed down and on which the company’s potential liabilityin the David’s Litigation became public knowledge. The shareholders’ class a ction alleges that the price of Fleming’s stock was artificially inflated due to Fl eming’s failure to disclose, in documents filed with the SEC or in other public statements such as annual reports, either (1) the existence of the David’s Li tigation and the potential liability that lawsuit represented to the company o r (2) the fact that a portion of Fleming’s profits were derived from overcharging cu stomers. The shareholders’ class action names Fleming as a d efendant, as well as Fleming officers and directors Stauth, Devening, Ey ler, and Twomey. The suit alleges that these defendants violated §§ 10 and 20 (a) of the Exchange Act. The4 We refer to the insurance companies who are parties to this

lawsuit—Federal and National Union—collectively as the “Insurers.” -10- suit does not allege wrongdoing on the part of any other person or corporation, including Stuard, and does not seek redress for anywrongdoing prior to November 15, 1993. As of June 1999, both Class Actions were still pend ing before the United States District Court for the Western District of O klahoma.

II. Procedural History Soon after the Class Actions were filed, Fleming notified the Insurers 4 of the existence of the lawsuits. Federal replied that it considered the Class Actions to be covered by the 1993 policy and not the 1996 p olicy. Fleming objected, because nearly $15 million of Federal’s $25 millionannual policy limit had already been exhausted for 1993, as a result of the David’s Litigation. Federal based its position on the language of the 1993 poli cy which states that [f]or the purpose of this policy, all Loss arising out of all interrelated Wrongful Acts of any Insured Person(s) shall be dee med one Loss, and such Loss shall be deemed to have originated inthe earliest Policy year in which any of such Wrongful Acts is f irst reported to the Company. Appellant’s App. at 8. The policy defines “Wrongfu l Acts” and “interrelated Wrongful Acts” as follows:5 The 1996 policy contains a similar statement that l osses stemming from

“Interrelated Wrongful Acts” shall be treated as “o ne Loss” which shall be “deemed to have originated in the earliest Policy P eriod in which a Claim is first made against any Insured Person alleging any such Wrongful Act or Interrelated Wrongful Acts.” Appellants’ App. at 88. The 1996 policy also defines “Interrelated Wrongful Acts” as “all causally connected Wrongful Acts.” Id. at 93. “Causally connected” is left undefined in both policies. -11- Wrongful Act means any error, misstatement or misle ading statement, act or omission, or neglect or breach of duty committed, attempted or allegedly committed or attempted by any Insured Person, individually or otherwise, in the discharge of his duties to the Insured Organization in his Insured Capacity, or any matter claimed against him solely by reason of his serving in suchInsured Capacity. All such causally connected errors, statements, acts, omissions, neglects or breaches of duty or other such matters committed or attempted by, allegedly committed or attempted by o r claimed against one or more of the Insured Persons shall be deemed interrelated Wrongful Acts. Id. at 10 (emphasis added). 5 Federal claims that the wrongful pricing practice s alleged in the David’s Litigation and the securitie s violations alleged in the Class Actions are “causally connected,” and therefore are “interrelated Wrongful Acts.” Thus, Federal asserts that the Class Actions are co vered by the 1993 policy. In October 1996, Fleming and several of its officer s and directors filed this lawsuit, under 28 U.S.C. § 2201 and 28 U.S.C. § 133 2, seeking a declaratory judgment that the Insurers have a duty to indemnifyFleming, under the 1996 D&O policy, for any loss resulting from the Class A ctions. The Insurers answered by denying that the Class Actions were cov ered under the 1996 policy, and by asserting, among other affirmative defenses, that they were entitled to an6 The record reflects that as of August 1, 1997, Fede ral had noticed the

depositions of two Fleming employees and had submitted one set of interrogatories and document requests to Fleming. Fleming responded to the interrogatories and document requests on September 2, 1997. The record does not reveal whether the two noticed depositions ever too k place, and the record does not reveal whether any other discovery was conducte d in this case. -12- allocation, and that they were only obligated to pay for loss directly incurred by the directors and officers, and not by the corporat ion itself. On August 1, 1997, before discovery had been conducted in the case, 6 Fleming moved for summary judgment, arguing that th ere was no genuine issue of material fact in the case, and that the Class Actio ns were not causally connected to the David’s Litigation. Also, Fleming argued th at the Insurers were not entitled to an allocation. Both Insurers respondedto Fleming’s motion. National Union responded by arguing that there were genuine issues of material fact surrounding the “causally connected” inquiry, and that therefore summary judgment was improper on that issue. National Unio n also argued, as it does here on appeal, that any decision with regard to the all ocation issue would be premature. Federal responded by arguing that there was no needfor additional discovery, and that the undisputed facts, as ascert ained from the allegations contained in the David’s complaint and the Class Ac tion complaints, indicated that the two sets of litigation were causally conne cted. In the alternative,-13-

however, Federal stated that “[i]f . . . the Court concludes that a determination of interrelatedness [and “causal connection”] raises f actual issues, Federal requests that plaintiffs’ Motion be denied under Rule 56(f) and Federal be allowed to conduct discovery into such issues.” Appellants’ App. Tab S, at 20. Federal also argued, as did National Union, that any decision on the allocation issue would be premature. On September 2, 1997, Federal filed a summary judgm ent motion of its own, asking the district court to enter summary jud gment in its favor and against Fleming on the interrelatedness issue. In this mot ion, there was no mention of any factual dispute; indeed, Federal maintained that there were no disputed issues of fact and asked the court to enter summary judgme nt. Fleming responded by arguing, as it had in its own motion, that the Clas s Actions and the David’s Litigation were not causally connected. Again, Fle ming made no argument that disputed facts were in issue. In addition, National Union took the unusual step o f responding to Federal’s summary judgment motion, which had soughtsummary judgment against Fleming . In its response, National Union argued vigorousl y that there were disputed factual issues with respect to interr elatedness and causal connection, and that any summary disposition of that issue would be improper.7 Section 5(a) provides that Federal

shall not be liable for Loss on account of any Clai m made against any Insured Person: (a) based upon, arising from, or i n consequence of any circumstance if written notice of such circumst ance has been given under any policy or coverage section of whichthis coverage section is a renewal or replacement and if such pri or policy or coverage section affords coverage (or would afford such coverage (continued...) -14- On November 12, 1997, the district court granted su mmary judgment for Fleming and the directors and officers. The court made no mention of any disputed factual issues, stating only that it made its determination “[b]ased upon the parties’ submissions.” Appellants’ App. Tab X, at 1. The court held that the pricing practices underlying the David’s Litigationand the securities violations alleged in the Class Actions were not “interrelated Wrongful Acts” as that term has been defined by other courts, and that the Insu rers’ affirmative defense of allocation failed as a matter of law under the “lar ger settlement” rule. The Insurers now appeal from this judgment of the d istrict court. On appeal, Federal asserts that the district court err ed by holding that the pricing improprieties and the securities violations were no t interrelated. Federal argues that the district court ignored the policy requirem ent that the acts be “causally connected,” and asserts that the two events are in fact causally connected and therefore are interrelated wrongful acts. Alternat ively, Federal claims that section 5(a) of the 1996 policy precludes coverage for the Class Actions. 7Federal does7 (...continued)

except for the exhaustion of its limits of liability) for such Loss, in whole or in part, as a result of such notice. Appellants’ App. at 87. -15- not argue on appeal that any outstanding factual is sues exist which would prevent summary judgment on this issue. With respect to th e allocation issue, Federal asserts that the district court erred by holding th at the allocation defense fails as a matter of law. Federal argues that the issue was n ot ripe for decision, since no settlement or judgment has yet been entered in the Class Actions, and further that, even if it were proper to reach the issue, the dist rict court should not have applied the “larger settlement” rule in this case. Nationa l Union does not appeal the district court’s holding that the two sets of litig ation were not interrelated; rather, National Union concentrates its appeal on the alloc ation issue, urging the same arguments advanced by Federal.

DISCUSSION We review a decision granting summary judgment de novo , using the same legal standard applicable in the district court. See Wolf v. Prudential Ins. Co. of America , 50 F.3d 793, 796 (10th Cir. 1995). Summary judgm ent is proper only in cases where “there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law. ” Fed. R. Civ. P. 56(c).-16-

I. Coverage Under the Policies A. Interrelated Wrongful Acts Federal’s 1993 policy aggregates all loss arising o ut of “interrelated wrongful acts,” defined as acts which are “causallyconnected.” Thus, the operative term at issue is “causally connected,” as used in an insurance policy covering officers and directors. We are asked to d efine and apply that term on a factual record which both Federal and National Unio n, in varying degrees, considered inadequately developed for summary dispo sition in the district court. Although neither insurance company continues to arg ue on appeal that material issues of fact remain unresolved, the record before us is, at best, problematic. Federal repeatedly urges us to focus on and compare allegations in the 1996 Class Actions with those asserted in the 1993 David ’s complaint. Yet the David’s case has been settled and the complaint presumably dismissed pursuant to the settlement. The allegations have been overtaken by the settlement agreement, and the settlement amount covered by the policy constit utes the “loss.” Among other things, we are not told which specific allegation o r combination of allegations, if any, formed the basis of the settlement; whether any individual defendant in the instant suit was implicated in or even had knowledg e of any matter alleged in the David’s complaint; or the breakdown of the settleme nt figure. From a footnote in one of the district court orders in the noteholders ’ class action, attached to an-17-

affidavit filed with this court in this case by Fed eral’s counsel Mary D. Manesis, we glean information that the David’s case settled for $19.9 million, and from an affidavit of a claims officer filed with the distri ct court in this case, we learn that Federal paid $14.7 million of the settlement. This suggests, among other things, that Stuard himself was responsible for the greaterloss, but Fleming, after deductibles, was responsible as a company for some of the loss. As indicated above, Stuard is not named in the Class Actions, an d no allegation in those actions refer to him, and the individuals named in the Class Actions are not named in the David’s suit. Additionally, Federal directs our attention to the fact that besides the David’s suit, two other Fleming customers brought a ctions, but Federal offers no details regarding these other suits. Federal then asserts that other Fleming customers “investigated” pricing matters, a bland r eference which as easily suggests that those customers found no actionable c onduct by Fleming as the opposite. See Federal Br. at 23, 25. Furthermore, Federal furnishes no sense of scale orproportion other than to assert that Fleming is a multi-billion dollar busin ess. We are not informed, for instance, whether the David’s settlement was proportionately minuscule; whether David’s is only one of hundreds or thousands of cus tomers; whether it rates as a-18-

large or small customer; whether it falls in a spec ial category; or whether Stuard had sole or greater responsibility for pricing to that account. Finally, the inquiry is further complicated by the presence of more than one, and more than one type of, securities class ac tion lawsuit. The two Class Actions allege different facts and press different claims of fraud, and the noteholders’ class action names underwriters among the defendants, while the shareholders’ class action does not. Nevertheless, Federal, on appeal, urges us to rule based on what we have before us. In doing so, it concedes that there is no case directly on point. See Federal Br. at 26. Indeed, there are two general l ines of authority dealing with the term “interrelated acts” in insurance policies, neither of which applies squarely to this case. The first involves policies which do not further define the term, leaving it to the courts to ascertain the meaning. See , e.g. , Eureka Fed. Sav. & Loan Ass’n v. American Cas. Co. , 873 F.2d 229, 234 (9th Cir. 1989); National Union Fire Ins. Co. v. Ambassador Group, Inc. , 691 F. Supp. 618, 622 (E.D.N.Y. 1988). Most courts faced with such policy language have generally taken a proinsured approach to defining “interrelated,” and have held that “legally distinct claims that allege different wrongs to different pe ople” are not “interrelated” claims. Ambassador Group , 691 F. Supp. at 623; see also Home Ins. Co. v. Spectrum Info. Techs., Inc. , 930 F. Supp. 825, 849 (E.D.N.Y. 1996) (stating th at-19-

claims which “describe wrongs which are factually and legally distinct from the prior claims” are not “interrelated”); cf. North River Ins. Co. v. Huff , 628 F. Supp. 1129, 1133 (D. Kan. 1985) (stating that a ser ies of four separate loan transactions were not “interrelated” because they “ occurred at separate times, involved different borrowers, were for different pu rposes, and had separate collateral”). Many of the courts that take a pro-insured approachwhen faced with policies which do not define “interrelated” cite, a s a major reason for taking such an approach, the maxim that ambiguities in insuranc e policies “must be interpreted in favor of the insured.” Spectrum Info. , 930 F. Supp. at 845; see also Ambassador Group , 691 F. Supp. at 623 (stating that “it is axiomati c that [ambiguities in] the Policy [are] to be construed against the insurer”); cf. Atlantic Permanent Fed. Sav. & Loan Ass’n v. American Cas. Co. of Reading, Pa. , 839 F.2d 212, 219-20 (4th Cir. 1988) (holding that several different acts were interrelated, in part because such a holding benefi tted the insured in that case, and stating that “Virginia law requires us to construe all ambiguities in insurance contracts against the insurer and in favor of cover age”). Oklahoma insurance law, applicable in this case, contains a similar requirement. See Bratcher v. State Farm Fire & Cas. Co. , 961 P.2d 828, 830 (Okla. 1998) (stating that “wor ds of inclusion are construed against the insurer; and [] words of exclusion are-20-

construed in favor of the insured”); Phillips v. Estate of Greenfield , 859 P.2d 1101, 1104 (Okla. 1993). Perhaps due in part to this judicial reluctance to broadly interpret the term “interrelated” in insurance contracts, insurers beg an to further define the provision. For instance, some insurers have define d “interrelated wrongful acts” as acts “which have as a common nexus any fact, cir cumstance, situation, event, transaction or series of facts, circumstances, situ ations, events or transactions.” Informix Corp. v. Lloyd’s of London , 1992 WL 469802, at *3 (N.D. Cal. Oct. 15, 1992). Other policy definitions are even more spec ific, excluding coverage whenever “all or part of [any] claim is, directly o r indirectly, based on, attributable to, arising out of, resulting from or in any manner related to the Insured’s Wrongful Act(s).” High Voltage Eng’g Corp. v. Federal Ins. Co. , 981 F.2d 596, 600 (1st Cir. 1992); see also Bendis v. Federal Ins. Co. , 958 F.2d 960, 961 (10th Cir. 1992). Other companies have used th e following language: “Interrelated Wrongful Act(s)” means Wrongful Acts which are the same, related, or continuous; or Wrongful Acts whic h arise from the same, related, or common nexus of facts. Claims ca n allege Interrelated Wrongful Acts regardless of whether su ch Claims involve the same or different claimants, Insureds, or legal causes of action. Specimen Policy Forms For Lawyers Professional Liab ility Coverage in New York, Practising Law Institute: Litigation and Adm inistrative Course Handbook Series 580, at 516 (1998) (quoting a policy issued by Ame rican International-21-

Companies). Courts interpreting these specific def initions have been much more willing to find acts to be “interrelated.” Some of these courts have even concluded that “but for” causation is enough, undersuch policy language, to render two acts “interrelated.” See High Voltage , 981 F.2d at 601. As indicated above, in the case before us, the poli cy language does not fit neatly into either of these two general lines of au thority. The Federal policy does contain a definition of “interrelated,” but this de finition is not as specific as the definitions in the second group of cases discussed above. The Federal policy merely defines “Interrelated Wrongful Acts” as “cau sally connected” wrongful acts. This definition does not greatly advance ourinquiry because, not only does it fail to parallel the language in either of the two groups of established cases, it merely poses a further question: What is the meani ng of “causally connected”? Federal argues first that the alleged acts of overp ricing through 1992 and the later acts of alleged non-disclosure or conceal ment in reporting are part of a single, unitary plan to defraud; thus, they are cau sally connected at the very least. Alternatively, Federal argues that “causally connec ted” means any act that “flows from” another, or that would not have happened “butfor” the precedent act. Finally, it argues that the plain meaning of the wo rds compels a conclusion in its favor.8 Oklahoma courts appear to apply a more relaxed defi nition of causation in

automobile insurance cases, perhaps approximating “ but for” causation. See State v. Indemnity Underwriters Ins. Co. , 943 P.2d 1102, 1105 (Okla. Ct. App. 1997); Wallace v. Sherwood Constr. Co., Inc. , 877 P.2d 632, 633-34 (Okla. Ct. App. 1994). This may be because many automobile insuran ce policies contain “arising out of” language rather than “causally connected” l anguage, and courts have interpreted “arising out of” much more broadly. Se e Federal Ins. Co. v. Tri-State Ins. Co. , 157 F.3d 800, 804 (10th Cir. 1998); 7 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 101:54 (1998) (stating that “[t]he phrase ‘arisi ng out of’ is frequently given a broader meaning than proximate c ause,” and may indicate “that there only need be a causal connection, rather than a proximate causal connection”). Because the case before us does not concern automobile insurance, and because the specific policy language we are int erpreting in this portion of our opinion is not “arising out of” language, we consid er the Oklahoma automobile insurance cases inapposite.

9 Before the district court, Federal argued, alternat ively, that it should be (continued...) -22- At oral argument, counsel for Federal seemed to ret reat somewhat from “but for” causation, in favor of emphasis on the un itary fraudulent scheme theory. We agree that the open-ended nature of “but for” ca usation makes that definition unsuitable for application with any precision in this case. 8 Likewise, we regard the plain meaning argument to be unsuitable. It te nds to be circular, with the answer depending on the viewpoint of the proponent. As for Federal’s main argument, that the complaints allege that the officers and directors named as defendants in the Class Acti ons engaged in fraudulent reporting as part of a unitary fraudulent pricing s cheme, we are unpersuaded. On this record, for all the reasons outlined above, su ch a connection is impermissibly speculative. 9 Even if one were to compare the allegations in th e David’s9 (...continued)

allowed to pursue discovery into whether there was a unitary, overarching scheme to defraud both customers and investors. Federal s tated that it “should be allowed to conduct discovery to ascertain whether the acts underlying the David’s Action and Class Action Litigation are distinct acts or ar ise out of a unitary fraudulent scheme by defendants.” Appellants’ App. Tab S, at 21. National Union argued that “the parties dispute whether the alleged misre presentations and failures to disclose in the Class Action Litigation form a partof a scheme to overcharge Fleming’s customers.” Appellants’ App. Tab. T, at 8. -23- complaint with the allegations in the Class Actions , it is impossible to isolate which allegation relates to another, or which alleg ations predominate. Finally, we turn to the “flows from” argument, rega rding it as suggesting a somewhat stronger link than “but for,” and less spe culative than the allegation of a unitary fraud theory in this case, where differen t times, different acts, and different people are involved. This concept comes closest to the approach suggested by one leading commentator: “[a]bsent po licy or statute provisions to the contrary, the rule of causation applied in the context of insurance coverage is ‘proximate cause.’” 7 Lee R. Russ & Thomas F. Segalla, Couch on Insurance § 101:40 (1998). But “[p]roximate cause must be di stinguished from mere causal relation, which requires only a cause and effect re lationship or sequence; proximate cause imposes an element of nearness or p roximateness of the cause to the effect or result.” Id. § 101.47. In the insurance context, “a cause has been said to be proximate when it sets in motion a chain of events which results in the loss without the intervention of any new or independent force.” Id. § 101:45; see-24-

also id. § 101:41 (stating that “proximate cause, generally , has a different meaning in insurance cases than it has in tort cases”); Bewley v. American Home
Assurance Co. , 450 F.2d 1079, 1081 (10th Cir. 1971) (applying Ok lahoma law and stating that “the rule of proximate cause as ap plied ordinarily in negligence cases does not apply in construing liability under the policy in question” (citations omitted)). Certainly the 1996 and 1993 actions rel ate to each other at some level, as Federal strongly argues. But whether they interrelate in the sense of being proximately causally connected is still more specul ative and argumentative than not. Even if we were to compare the allegations in the complaints with respect to acts and actors, despite the fact that the David’s Litigation was settled on a basis unknown to us, we would still not be able to say wi th any confidence that the pleadings portray a continuous unbroken sequence of events. Thus, returning to Federal’s “flows from” concept, we are unpersuaded at the proximate cause level, and no other satisfactory definition of the term pr esents itself. We must, of course, address the “flows from” concep t—and the “causally connected” concept as a whole—from the practical st andpoint of coverage, not as an abstract proposition. In the end it is a judgme nt call whether a broad or narrow definition of the policy language is applied to the facts before us and whether to resolve any doubts in favor of coverage and againstthe drafter of the policy language. In doing so, sitting in a diversity juri sdiction case where there is no-25-

case law from the highest appellate court of the fo rum state directly on point, “we must in essence sit as a state court and predict ho w the highest state court would rule.” Wood v. Eli Lilly & Co. , 38 F.3d 510, 512 (10th Cir. 1994); see also Phillips v. State Farm Mut. Auto. Ins. Co. , 73 F.3d 1535, 1537 (10th Cir. 1996). From our reading of the Oklahoma cases, we conclude that the Oklahoma Supreme Court would construe any ambiguity surround ing the term “causally connected” against the insurance company and in fav or of coverage on this record. We do so here, and conclude that for cover age purposes the Class Actions are not “causally connected” to the David’s action.

B. Section 5(a) In the alternative, Federal argues that section 5(a ) of the parties’ 1996 policy precludes 1996 coverage for the Class Action s. This argument fails also. In order for section 5(a) to apply, the loss in que stion must be covered by a prior policy. The policy states that Federal is not liab le under the 1996 policy for loss for any claim “based upon, arising from, or in cons equence of any circumstance,” if two conditions are met: (1) “if written notice of such circumstance has been given under any policy of coverage of which this co verage section is a renewal or replacement,” and (2) “if such prior policy or cove rage section affords coverage (or would afford such coverage except for the exhau stion of its limits of liability)-26-

for such Loss.” Appellants’ App. at 87. Without e xpressing any opinion as to whether the first of these two conditions precedentis met, we think the second condition is certainly not satisfied. We hold dire ctly above that any loss resulting from the Class Actions is covered under the 1996 po licy, and not the 1993 policy. Thus, no “prior policy” affords coverage for any Cl ass Action losses, and therefore section 5(a) is of no help to Federal. We conclude, therefore, that any Class Action losse s are covered under the parties’ 1996 policy, rather than the parties’ 1993 policy, and that the district court correctly entered summary judgment on this po int in favor of Fleming and the directors and officers.
II. Allocation Both Federal and National Union appeal from the dis trict court’s grant of summary judgment on the allocation issue. The Insu rers argue first that the district court’s summary judgment as to allocation is premature in this case because no settlement has yet been reached in the C lass Actions, and therefore there is nothing to allocate at this point. They a rgue further that even if the district court’s decision was not premature, it was incorrect, because the district court should have applied the “relative exposure” r ule rather than the “larger settlement” rule. We agree with the Insurers that the district court’s allocation decision was premature.-27-

The allocation problem arises when both the uninsur ed corporation (or other uninsured parties) and the insured directors and officers are found liable in a securities lawsuit. In such cases, it is often d ifficult to determine the amount of the eventual award attributable to the directors an d officers (and therefore subject to the policy). This determination is made especia lly difficult where cases are settled out of court, and one lump sum is paid to t he plaintiffs. The parties’ policy provides only limited guidance on allocation issues. The 1996 policy, which, as we hold above, covers any loss resulting from the Class Actions, states that the Insurers must compen sate the Fleming directors and officers (or Fleming itself, if Fleming indemnifies the directors and officers) for “loss” covered under the policy; the policy defines “loss” as “the total amount which any Insured Person becomes legally obligated to pay on account of each Claim . . . made against them” and covered under th e policy. Appellants’ App. at 86, 93 (emphasis added). In addition, the 1996 pol icy contains an allocation clause, which requires both parties to “use their b est efforts to agree upon a fair and proper allocation.” Appellants’ App. at 90. T his “best efforts” policy language “requires an allocation analysis , but not necessarily an allocation.” Safeway Stores, Inc. v. National Union Fire Ins. Co. , 64 F.3d 1282, 1288 (9th Cir. 1995).-28-

Courts faced with the allocation problem have appli ed one of two different rules. The “relative exposure” rule allocates sett lement amounts “according to the relative exposures of the respective parties to the [suit].” PepsiCo, Inc. v. Continental Cas. Co. , 640 F. Supp. 656, 662 (S.D.N.Y. 1986). “The relative exposure rule . . . envisions a somewhat elaborate inquiry into what happened in a settlement and who really paid for what relief.” Caterpillar, Inc. v. Great American Ins. Co. , 62 F.3d 955, 961 (7th Cir. 1995). The “larger se ttlement” rule, on the other hand, involves a simpler inquiry . This rule allows allocation of settlement costs “only where th[e] settlement is la rger because of the activities of uninsured persons who were sued or persons who were not sued but whose actions may have contributed to the suit.” Caterpillar , 62 F.3d at 960. Allocation is not allowed under this rule where the uninsured party’s liability is “concurrent with the liability” of the insured parties, because in s uch cases, the uninsured party’s conduct has made the settlement no larger. See Safeway Stores , 64 F.3d at 1288. The only two federal circuits to address the allocation issue have applied the larger settlement rule to the facts before them. See id. ; Caterpillar , 62 F.3d at 962; Nordstrom, Inc. v. Chubb & Son, Inc. , 54 F.3d 1424, 1433 (9th Cir. 1995). The Insurers argue, however, that the allocation la ndscape was altered in December 1995, when Congress passed the Private Sec urities Litigation Reform Act of 1995 (PSLRA). Pub. L. No. 104-67, 109 Stat. 737 (1995). That statute-29-

abolished joint and several liability in private se curities lawsuits, except in cases where the defendants committed knowing violations o f the securities laws. Each liable person, under the statute, is liable only fo r that portion of the judgment for which they are responsible. 15 U.S.C. § 78u-4(g)(2 )(B)(i) (1997) (stating that persons found liable in private securities suits “s hall be liable solely for the portion of the judgment that corresponds to the per centage of responsibility of that . . . person”). The statute provides guidelin es for the factfinder to follow in determining the discrete percentages of responsibil ity attributable to the various liable defendants in the lawsuit. Safeway Stores , Caterpillar , and Nordstrom were all decided earlier in 1995, before the passage of the PSLRA, and therefore, the Insurers argue, these cases do not take into account the statutory pronouncements of the PSLRA. The parties do not seem to dispute that the PSLRA applies to the Class Actions, because the Class Actions were filed in 19 96, after the passage of the PSLRA. Thus, if the Class Actions go to trial, the factfinder will, in accordance with the statute, be required to determine the exac t percentages of fault attributable to the various defendants. In such a situation, the culpable directors and officers will each be assigned a relative perce ntage of fault, and thereby also assigned to pay a relative percentage of the judgme nt. Thus, in securities suits covered by the PSLRA that actually go to trial, the entire question regarding the-30-

proper allocation rule is rendered moot. That is, unless the Class Actions settle before trial, we need not determine whether the lar ger settlement rule or the relative exposure rule is the better one. The district court, without mentioning the PSLRA, e ntered summary judgment for Fleming and the directors and officers on the allocation issue. Relying on the cases from the Ninth and Seventh Cir cuits which have applied the larger settlement rule, the district court determin ed that the larger settlement rule should apply in this case as well. The court then stated that “an actual settlement is not required to determine the allocation issue. The Court finds the defendants’ affirmative defense of ‘allocation’ fails as a matt er of law.” Appellants’ App. at 650-51. In making the determination that the affir mative defense failed as a matter of law, the district court was implicitly st ating, without the benefit of a settlement or judgment to guide it, that Fleming (o r other named or unnamed uninsured parties) could not possibly be found separately liable in the Class Actions as those lawsuits had been pled. In determining whether the district court properly granted declaratory relief in this case, we are constrained by the propositionthat “the oldest and most consistent thread in the federal law of justiciabil ity is that federal courts will not give advisory opinions.” Flast v. Cohen , 392 U.S. 83, 96 (1968). Courts have long struggled to reconcile the rule against adviso ry opinions with their authority-31-

to issue declaratory relief. The Declaratory Judgm ent Act, passed in 1934, expressly applies only to “case[s] of actual contro versy.” 28 U.S.C. § 2201(a). This statutory phrase incorporates Article III’s re quirement that federal courts only entertain “cases” or “controversies.” See Aetna Life Ins. Co. v. Haworth , 300 U.S. 227, 239-40 (1937). However, declaratory judgments may issue under the statute, without offending the Constitution, even in cases where som e contingencies exist. For instance, in Maryland Cas. Co. v. Pacific Coal & Oil Co. , 312 U.S. 270 (1941), the Court held that a declaration could issue in a case brought by an insurance company against a third party, even though any clai m the third party might have against the insurer was contingent upon “(1) his ob taining a final judgment in state court against the insured, and (2) the insure d’s failure to personally satisfy the judgment.” Kunkel v. Continental Cas. Co. , 866 F.2d 1269, 1274 (10th Cir. 1989) (discussing Maryland Casualty ). The Supreme Court, in Maryland Casualty , set forth the test for determining whether a disp ute was appropriate for declaratory relief:

The difference between an abstract question and a “controversy” contemplated by the Declaratory Judgm ent Act is necessarily one of degree, and it would be difficul t, if it would be possible, to fashion a precise test for determining in every case whether there is such a controversy. Basically, th e question in each case is whether the facts alleged, under all the ci rcumstances, show that there is a substantial controversy, between pa rties having-32-

adverse legal interests, of sufficient immediacy an d reality to warrant the issuance of a declaratory judgment. Maryland Cas. Co. , 312 U.S. at 273. In the decades since Maryland Casualty , courts have usually been willing to decide question s relating to the existence of coverage under an insurance policy, even though suc h questions are often contingent on several factors, including whether a court in the underlying litigation finds the insured party liable. See Kunkel , 866 F.2d at 1275; Rubins Contractors, Inc. v. Lumbermens Mut. Ins. Co. , 821 F.2d 671, 674-75 (D.C. Cir. 1987); ACandS, Inc. v. Aetna Cas. & Sur. Co. , 666 F.2d 819, 822-23 (3d Cir. 1981); see also 10B Charles Alan Wright et al., Federal Practice and Procedure § 2760 (1998). For instance, in this case, there is no question th at the first part of the case—the coverage issue—presents a live controversydespite the unsatisfactory manner in which it is framed by the parties, and ne ither our opinion nor the district court’s opinion on this point is unconstitutionally advisory. This is so despite the presence of several contingencies, incl uding whether the insured directors and officers are found liable in the Clas s Actions, and whether any settlement or judgment in the Class Actions exceeds $10.7 million (the unexhausted amount of coverage available under the 1993 policy). However, we are convinced that the second part of t he case is at least one step removed from the paradigmatic insurance declar atory relief case. The10 The district court held that the larger settlement rule was the proper

allocation rule in this case, and went on to enter summary judgment for Fleming and the directors and officers because, it held, th e Insurers’ allocation counterclaim failed as a matter of law under the la rger settlement rule. Presumably, the district court based this holding o n the assumption that no uninsured party could, under the allegations in the Class Actions, be held separately liable for the securities fraud. We fai l to see how summary judgment would be proper in this case even if we were to ass ume that the district court was correct to apply the larger settlement rule. The n oteholders’ Class Action, for instance, names as defendants certain underwriters, who are undisputedly not insured by the policies in question. See Appellant’s App. at 310. Alternatively, it is certainly conceivable that Fleming itself could be found liable on some of the securities claims, even if the directors and office rs are not, due to differing standards of liability and the availability of cert ain defenses to the directors and officers. On the record before us, we cannot say at this point that, as a matter of law, no uninsured party can be found separately lia ble for securities fraud in the Class Actions. Thus, even if we were to assume (wh ich we do not) that the district court was correct to apply the larger sett lement rule, we cannot see how summary judgment would have been proper on the allo cation issue. -33- allocation issue presents additional contingencies not present in the other portion of the case. For our opinion on the allocation iss ue to have any relevance, parties other than the insureds must be found liable in the underlying litigation. These parties may include Fleming itself, the underwriter s named in the noteholders’ Class Action, or other unnamed parties. 10 Furthermore, if the underlying Class Actions go to trial, we need not decide the allocat ion questions because the case will be governed by the procedures set forth in the PSLRA. These additional contingencies increase the odds, beyond those usual ly found in insurance declaratory relief cases, that our allocation opini on could turn out to be advisory. We stated in Kunkel that “[c]ertainly a situation may be hypothesized where the11 At oral argument, counsel for Federal stated that t he Insurers pled the

affirmative defense only to avoid potential insuran ce bad faith claims, in the event that a settlement was reached, without their participation, which was unpalatable to the Insurers. Federal’s counsel stated at argument that the Insurers considered it a “mandatory exercise” to plead the a ffirmative defense, while “recognizing that it was something which should be decided, if at all, after the policy provisions had been complied with with respe ct to good faith meeting and negotiation, and after a settlement had been arrive d at.” -34- number of contingencies or the improbability of the ir occurrence is so great that a court would be powerless to render a decision.” Kunkel , 866 F.2d at 1274-75. We think that an opinion on the allocation issue in this case, at least before any settlement or judgment has been rendered, would be premature and, because of the many contingencies involved, would be advisory in nature. Phrased in terms of the Maryland Casualty test, we do not think that, under all the circumst ances presented here, there is a substantial controversy of sufficient immediacy and reality to warrant the issuance of a declaratory ju dgment. Also important to our conclusion is the unusual pro cedural posture of this portion of the case. The allocation issue was pres ented to the district court as an affirmative defense, pled by both Insurers when the y answered Fleming’s Complaint. 11 See Appellees’ Supp. App. at 31, 46. However, before the district court and on appeal, both Insurers have implicitly argued that their own counterclaim was premature, and at least one of the Insurers has explicitly made the argument on appeal that the district court’s op inion in response to its own-35-

counterclaim was advisory. See Federal Br. at 36-37 (stating that “there is no actual controversy between the parties regarding al location”). Finally, neither side has cited to us, nor can we f ind, any case in which allocation questions were decided prior to an actua l settlement or judgment in the underlying litigation. All of the courts which hav e dispositively dealt with allocation issues have done so with the assistance of a settlement or judgment to guide them. See , e.g. , Safeway Stores , 64 F.3d at 1285; Caterpillar , 62 F.3d at 959; Nordstrom , 54 F.3d at 1428; Piper Jaffray Cos. v. National Union Fire Ins.
Co. , 38 F. Supp. 2d 771, 773 (D. Minn. 1999); PepsiCo , 640 F. Supp. at 658. Simply stated, no court has ever reached the issues Fleming and the directors and officers ask us to reach here, in the absence of a settlement or judgment to guide the analysis and remove several of the contingencie s hanging over this portion of the case. We decline the invitation to become the first court to do so. In sum, the allocation issues in this case do not p resent a controversy immediate enough to warrant the issuance of a decla ratory judgment. Any opinion we might issue with regard to these questio ns would be premature and in the nature of an advisory opinion. Therefore, we v acate that portion of the district court’s opinion dealing with allocation, a nd remand the case to the district court with orders to hold the case in abeyance unti l the Class Actions have either been settled or dismissed or have proceeded to judg ment.-36- CONCLUSION For the foregoing reasons, we AFFIRM the district c ourt’s grant of summary judgment as to coverage, VACATE the distric t court’s opinion and judgment as to allocation, and REMAND for further p roceedings consistent with this opinion. It is so ordered.
ENTERED FOR THE COURT
Stephen H. Anderson Circuit Judge