2010 D e c i sion s O p inion s of the U nit e d S t at e s C our t of Appe al s for the Thir d C ir c uit 5-5-2010 

# In Re: D elt a Fin anc i al C orp P r e c e de nt i al or N on-P r e c e de nt i al : N on-P r e c e de nt i al D ocke t N o . 09-3557

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w . vi ll anova . e du . Re c omme nde d C it at ion " In Re: D elt a F in anc i al C orp " (2010). 2010 D e cisio n s . P ape r 1394. http://d i git alc ommon s .l a

w . vi ll anova . e du/thir dc ir c uit_2010/1394T he H onor abl e Loui s H . Pol l ak, Seni orD i s tr i ctJ udge forthe U ni t ed St at es * D is tr ic t C o u rt f

o r t h e E a s te rn D is tr ic t o f P e n n s y lv a n ia , s ittin g b yd e s ig n a tio n . UN I TED STATES CO UR T OF A PP EALS F O R T H E T H IR D C IR C U IT

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v. W E S T C H E S T E R S U R P L U S IN S U R A N C E C O M P A N Y ; UNI T E D S T AT E S F I RE I NS UR ANC E CO M P ANY

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____________ Subm i t t ed U nderT hi r d C i r cui tL A R 34. 1( a)

A pr i l 15, 2010 B e f o re : S L O V IT E R , H A R D IM A N , C i r cui tJudges a n d P O L L A K , D is tr i ct Judge . * ( Fi l ed: M ay5, 2010)2 ____________ OPI NI ON O F THE COURT

____________ H A R D IM A N , C i r cui tJudge . D elt a F inan cial C o rpo rati o n ap p ea ls from the ju d g m en t of the D istri ct C o u rt aff i r m i ng an or derof the B ankrupt cyC our tgr ant i ng m ot i ons forj udgm enton the p lead ing s filed b yW estch ester S u rplu s Ins u ran ce C o m p an yan d U n it ed S tat es F ir e In su ra n c e C o m p a n y . L a rg e lyf o r th e re a so n s e x p lain e d b yth e B a n k ru p tcy C o u rt in its th o r o u g h o p i n i o n , we wi l l a f f i r m. I.

A. B eca us e w e w r i t e forthe part i es , w ho ar e fa m i l i arw i th the fa ct s and pr ocedur al hi s t ory , w e r ecountonl ythos e as pect s of the ca s e thatar e es s ent i al t o ourdeci s i on. D el t a Fi nanci al and i t s di r ect or s and off i cer s ar e i ns ur eds underdi r ect or s and o ff icers li ab il ityinsu ran ce (D & O ) po li cies issu ed b yW estch ester, th e p ri m aryinsu rer, a n d U .S . F ire , the e x c e ss in su re r, (c o llec tiv e ly , the In su re rs) . D e lta F in a n c ial a n d its d ire c to rs a n d o f

f ice rs s o u g h t co v e ra g e u n d e r th e D & O p o licie s a f ter th e yw e re su e d in N e w Y o rk s ta te c o u rt (t h e U n d e rl y in g A c tio n ) b yD e lta F u n d in g R e s id u a l E x c h a n g e C o ., L L C ( D el t a LL C ) and D el t a Fundi ng R es i dual M anage m ent , I nc. ( col l ect i vel y , the U n d erly ing P lai n ti ff

s).3

T h e U n d e rly in g P lain tiff s a ss e rte d a n u m b e r o f

c laim s a g a in st D e lta F in a n c ial, inclu d ing b rea ch o f c o n tr ac t, fra u d , n eg li g en t m isr ep rese n tat ion , an d b rea ch o f f idu ciary d u ty , fo llo w in g a d e b t re stru c tu rin g tra n sa c tio n in 2 0 0 1 . A c c o rd in g to th e a lleg a tio n s in the U nder l y i ng A ct i on, the tr ans act i on cons i s t ed of tw o part s . Fi r s t , D el t a Fi nanci al debt hol der s s urr ender ed thei runs ecur ed not es and s eni ors ecur ed not es t o D el t a LL C , an ent i tyform ed s ol el yt o fac i l i t at e the tr ans act i on. I n excha nge, the not e hol der s r ece i ved c e rta in in ter e sts in D e lta L L C a n d its n e w lyf o rm e d m a n a g e m e n t co m p a n y . S e c o n d , in e x c h a n g e f

o r D e lta L L C ’s s u rre n d e r o f th e n o tes , D e lta F in a n c ial tra n sf e rre d to D e lta L L C “ e x c e ss c a sh f

lo w c e rtific a tes ” th a t itv a lu e d a t ap p ro x im a tely$ 1 5 3 m ill io n . D e lta F in a n c ial re p re se n ted th e v a lu e o f th e e x c e ss c a sh f

lo w c e rtific a tes a n d o th e r a ss e ts transferred t o D el t a L L C w ou l d eq ual the o uts t and i ng balance of the surr end ered no t es. I n 2003, the U nder l y i ng A ct i on w as fi l ed i n s t at e court . T her ei n the U nder l y i ng P lai n ti ff s all eg ed that the e x ce ss ca sh flo w ce rt ifi ca tes tran sfe rred to D elt a L L C w ere w or th onl y$40 m i l l i on atthe t i m e the r es tructur i ng tr ans act i on cl os ed. A ft erthe U nder l y i ng A ct i on w as fi l ed, D el t a Fi nanci al i m m edi at el ynot i fi ed the I ns ur er s and made a demand fordefe ns e cos t s and i ndemni fi cat i on. T he D & O pol i ci es cont ai n a pr ovi s i on excl udi ng cl ai m s “forL os s on acc ountof anyC l ai m m ade a gai ns tanyI ns ur ed: . . . bas ed upon, ar i s i ng outof, orattr i but abl e t o the ac tual orpr opos ed paym entbythe C om panyof al l egedl yi nadequa t e . . . cons i der at i on i n connec t i on w i th the C om pany ’ s pur chas e ofT he B ankrupt cyC our thad j ur i s di ct i on overthe adve r s arypr ocee di ng under28 1 U. S . C. § 1 5 7 , a n d th e Di s tr i c tCo u r th a d j u r i s d i c t i o n t o r e v i e w t h e o r d e ru n d e r2 8 U. S . C. § 1 5 8 (a). W e h av e jurisdicti o n to h ea r th e a p p ea l un d er 2 8 U . S . C . § 1 5 8 (d)(1 ). 4 s ecur i t i es i s s ued byanycompany ” ( the I nadequa t e C ons i der at i on E xcl us i on) . T he I ns ur er s deni ed cove r age, pr i m ar i l yr el y i ng upon the I nadequa t e C ons i der at i on E xcl us i on. B. A ft err evi ew i ng the pl ai n m eani ng of the t erm s i n the I nadequa t e C ons i der at i on E xcl us i on, the B ankrupt cyC our tconcl uded thatthe tr ans ferof the exc es s cas hfl ow cert i fi cat es t o D el t a LL C i n excha nge forthe not es hel d bythe U nder l y i ng Pl ai nt i ffs c o n stitu ted th e a c tu a l p a ym e n t b yD e lta F in a n c ial o f in a d e q u a te c o n sid e ra tio n in connec t i on w i th D el t a Fi nanci al ’ s pur chas e of s ecur i t i es of anycompany . T he B a n k ru p tcy C o u rt a lso c o n c lu d e d th a t all o f th e c laim s in th e U n d e rly in g A c tio n “ w o u ld notexi s t‘ butfor ’ the cl os i ng of the [2001] r es tructur i ng tr ans act i on, ” ther ebypr ecl udi ng c o v e ra g e a n d re q u ir in g d is m is s a l o f D e lta F in a n c ia l’ s c o m p la in t a g a in s t th e In s u re rs . In r e D el ta F i nanci alC or

p. , 3 9 8 B . R . 3 8 2 , 4 0 0 (B an k r. D . D el. 2 0 0 8 ). T h e D istri ct C o u rt a f f irm e d th e o rd e r o f

th e B a n k ru p tcy C o u rt, an d D e lta F in a n c ial f iled th is tim e lya p p e a l. 1 II. “In asm u ch as th e D istri ct C o u rtw as sitt ing as a n ap p ell ate c o u rt , w e e ssen ti all yare r evi ew i ng the B ankrupt cyC our t ’ s or derof di s m i s s al . ” I n r e Pl as s ei n I

nt ’ lC or p. , 590 F . 3 d 2 5 2 , 2 5 6 (3d C ir . 2 0 0 9 ). W e re v iew su ch an o rde r de novo . I d.5

D e lta F in a n c ial a rg u e s th a t th e B a n k ru p tcy C o u rt m isa p p lied N e w Y o rk law in its c o n stru c tio n o f

th e In a d e q u a te C o n sid e ra tio n E x c lu sio n a n d f a iled to h o ld th e In su re rs to thei rheavybur den w hen i nvoki ng an exc l us i on t o i ns ur ance cover age. D el t a Fi nanci al al s o cont ends thatthe al l egat i ons i n the U nder l y i ng A ct i on do notfal l “s ol el yand en ti rely ” w ith in the Ina d eq u ate C o n side rati o n E x clus ion an d that the B an k rup tcyC o u rt err ed i n concl udi ng thatthe s econd c aus e of a ct i on i n the U nder l y i ng A ct i on w oul d not h a v e a rise n b u t f

o r th e e x c lu d e d c o n d u c t. W e f in d D e lta F in a n c ial’s a rg u m e n ts unper s uas i ve. A. A re v iew o f

th e B a n k ru p tcy C o u rt’s o p in io n sh o w s th a t th e C o u rt p ro p e rly id e n tifie d th e c o n tro lli n g N e w Y o rk law c o n c e rn in g in terp re tatio n o f in su ra n c e c o n tra c ts and appl i ed thos e pr i nci pl es t o t he I nadequa t e C ons i der at i on E xcl us i on and the U nder l y i ng A ct i on. W hi l e i ti s true thati ns ur er s beara hea vybur den w hen i nvoki ng an e x c lu s io n , s ee Tec hni con El ectr oni cs C or p. v. A m er i can H

om e Ass ur ance Co. , 74 N . Y . 2d 66, 73- 74 ( N . Y . 1989) ( “w hen an e xcl us i on cl aus e i s r el i ed upon t o denycover age, the i ns ur erhas the bur den of de m ons tr at i ng thatthe ‘ al l egat i ons of the compl ai ntcas tthat pleadi ng sol el yand enti rel yw i thin the p oli cyexclusi on s, and , further, that the all egati on s, in to to , are su b

jec t to n o o th e r in terp re tatio n ’” ), w e h o ld th a t th e In su re rs h a v e m e t th e ir s ubs t ant i al bur den i n t hi s cas e.6

F irst, th e B a n k ru p tcy C o u rt’s r e lian c e o n d ictio n a ryd e f in iti o n s to id e n tifyth e p lain m e a n in g o f

th e te rm s o f

th e In a d e q u a te C o n s id e ra tio n E x c lu s io n w a s p ro p e r. See Rosne r v. Metr o. P r op. and Li ab. I ns . C o. , 7 5 4 N . E . 2 d 7 6 0 , 7 6 2 -63 (N . Y . 2 0 0 1 ) (“d ict ion ary defi ni t i ons [pr ovi de] ‘ us eful gui depos t s ’ i n det erm i ni ng the meani ng of a w or d or p h ra se ” ) (c itatio n o m itt e d ); R iggs v. B l ue C r os s of W . N ew Y ork, I nc. , 460 N . Y . S. 2d 677, 6 7 8 -79 (N . Y . A p p . D iv. 19 8 3 ) (co n su lt ing d ict ion aryto d eterm ine p lai n m ea n ing o f term in in su ra n c e e x c lu sio n p ro v isio n ); A m . H om e Ass ur ance Co. v. Levy , 686 N . Y . S. 2d 639, 6 4 9 (N .Y . S u p . C t. 19 9 9 ) (s a m e ). M o re o v e r, th e In a d e q u a te C o n sid e ra tio n E x c lu sio n is notambi guous i n t hi s cas e. D el t a Fi nanci al has nei thers ugges t ed an a l t ernat i ve, narr ow er m eaning o f t he ex cl usi on , no r poi nted t o an yrel evan textr i nsi c evidence o f t he p art i es’ a c tu a l in te n t w ith re s p e c t to th e In a d e q u a te C o n s id e ra tio n E x c lu s io n . C f. N a t’l Fo o tb a ll League v. V

igi lantI ns . C o. , 824 N . Y . S. 2d 72, 36 A . D . 3d 207, 214 ( N . Y . A pp. D i v. 2006) (h o ld in g th a t lan g u a g e o f e x c lu sio n d id n o t “c lea rlya n d u n a m b ig u o u slyin d ica te th a t it ext ended” t o t he under l y i ng cl ai m s ati s s ue w her e the al t ernat i ve i nt erpr et at i on of the e x c l u s i o n p r o v i d e d b yth e i n s u r e d wa s n o ts h o wn t o b e u n r e a s o n a b l e ) . Ac c o r d i n g l y , we per cei ve no err ori n t he B ankrupt cyC our t ’ s anal y s i s i n thi s r egar d. B. D el t a Fi nanci al nextar gues thatthe al l egat i ons of the U nder l y i ng Pl ai nt i ffs do not fal l “sol el yand enti rel y ” w i thin the Inad equ at e C on si derat i on E xclusi on becau se tho se a lle g a tio n s a re s u b

je c t to a re a s o n a b le in te rp re ta tio n o u ts id e o f th e e x c lu s io n .7

Speci fi cal l y , D el t a Fi nanci al ar gues thatthe al l egat i ons conce rni ng the 2001 r es tructur i ng transact i on can b e i nterpret ed as a d i scharge of d ebt vi a a stri ctforecl osure on the ex cess c a s h f l o w c e r t i f

i c a t e s b yth e n o t e h o l d e r s , c i t i n g N . Y . U . C . C . § § 9 - 6 2 0 a n d 9 - 6 2 2 . We di s agr ee thatthe al l egat i ons i n t he U nder l y i ng A ct i on coul d be cons trued as a s tr i ct for ecl os ur e underU . C . C . § 9- 620 beca us e the al l egat i ons ar e i ncons i s t entw i th s uch a tr ans act i on. Fi r s t , as not ed byW es t ches t er , § 9- 620 r equi r es ( a) a def aul tbythe borr ow er w i th r es pectt o t he debt , ( b) for ecl os ur e aga i ns tthe as s et s thats ecur ed the debt , and ( c) phy s i cal pos s es s i on of the col l at er al bythe cr edi t or s . N one of thes e el ement s i s al l eged bythe U nder l y i ng Pl ai nt i ffs . Fur therm or e, ther e i s no al l egat i on thatanyof the p ro c e d u ra l re q u ire m e n ts o f N .Y . U .C .C . § § 9 -6 2 0 o r 9 -6 2 1 w e re f o llo w e d w ith re sp e c t to the 2001 r es tructur i ng tr ans act i on. Fi nal l y , the U nder l y i ng Pl ai nt i ffs al l ege thatthey s urr ender ed both s ecur ed and uns ecur ed not es t o D el t a Fi nanci al i n excha nge for ow ner s hi p i nt er es t s i n D el t a LL C . B ut , the uns ecur ed not e hol der s coul d nothave be en for ecl os i ng on col l at er al . I n l i ghtof thes e omi s s i ons and i ncons i s t enci es , the al l egat i ons of the U nder l y i ng A ct i on cannotr eas onabl ybe i nt erpr et ed as a s tr i ctfor ecl os ur e on the n o tes ’ c o llate ra l as a rg u e d b yD e lta F in a n c ial. C. L as t l y , D el t a Fi nanci al cl ai m s the B ankrupt cyC our terr ed i n fi ndi ng thatthe se c o n d c a u se o f

a c tio n in th e U n d e rly in g A c tio n w a s e x c lu d e d u n d e r th e “ b u t f o r” tes t, beca us e “[ t ] hatcl ai m coul d have be en br ought , and damages r ecove r abl e, r egar dl es s of8

w hatthe C as hfl ow C ert i fi cat es and otheras s et s w er e w or th atthe t i m e of the exc hange. ” D el t a Fi nanci al B r . at52. D el t a Fi nanci al ci t es , as evi dence thatthe s econd c aus e of act i on i s unr el at ed t o t he exc l uded conduc t , the fa ctthatthe U nder l y i ng Pl ai nt i ffs s eek onl y$500, 000 i n damages underthe s econd c aus e of a ct i on, w her eas theys eek $110 m ill io n in d a m a g e s th ro u g h o u t th e re m a in d e r o f th e c o m p lain t. I n the s econd c aus e of a ct i on, the U nder l y i ng Pl ai nt i ffs al l ege thatD el t a Fi nanci al b re a c h e d th e M a n a g e m e n t A g re e m e n t b yf a ili n g to tim e lyn o tifyD e lta L L C th a t D e lta Fi nanci al had deva l ued compar abl e ca s hfl ow cert i fi cat es on i t s ow n books . T he fa ctt hat the U nder l y i ng Pl ai nt i ffs s eek a di ffe r entamount of damages underthe s econd c aus e of a c tio n d o e s n o t n e g a te th a t th e c a u s e o f a c tio n a ri s e s o n ly “b u t f o r” th e e x c lu d e d c o n d u c t. H ad D el t a Fi nanci al nottr ans ferr ed ca s h fl ow cert i fi cat es t o D el t a LL C w or th $110 m il li o n less than their rep rese n ted v alue in ex ch an g e f o r th e n o tes (th e e x clud ed co n d u ct), then i tw oul d nothave be en nec es s aryforD el t a Fi nanci al t o i nform D el t a LL C of the dev al uati on of si m i l ar cert i fi cat es several m on ths l at er. T hu s, the U nd erl y i ng P l ai nti ffs’ s econd c aus e of a ct i on, l i ke thei rot hercl ai m s , ar os e fr om the s ame “actual . . . paym ent bythe C om panyof al l egedl yi nadequa t e . . . cons i der at i on i n connec t i on w i th the C om pany ’ s pur chas e of s ecur i t i es i s s ued byanycompany ” and w as pr oper l yexcl uded from cov erage un der the D & O po l i ci es. III . F o r th e f o re g o in g re a so n s, w e w ill a f f irm th e o rd e r o f

th e D istric t C o u rt.