15‐495

XL Specialty Ins. Co. v. Knox, LLC

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT.  CITATION TO A

SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS PERMITTED AND IS GOVERNED BY

FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1.  

WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST

CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION

ʺSUMMARY ORDERʺ).  A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON

ANY PARTY NOT REPRESENTED BY COUNSEL.

At a stated term of the United States Court of Appeals for the Second

Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in

the City of New York, on the 8th day of December, two thousand fifteen.

PRESENT: ROBERT D. SACK,

    DENNY CHIN,

    RAYMOND J. LOHIER, JR.,

    Circuit Judges.

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XL SPECIALTY INSURANCE COMPANY,  

    Plaintiff‐Counter‐Defendant‐Appellee,

     v.

JOHN R. LAKIAN, DIANE W. LAMM,

    Defendants‐Appellees,

KOBRE & KIM LLP,        15‐495

    Defendant‐Counter‐Claimant‐Appellee,

MERRILL COMMUNICATIONS, EISEMAN LEVINE

LEHRHAUPT & KAKOYIANNIS, P.C., BRIEF CARMEN &

KLEIMAN, LLP,

    Intervenors‐Appellees,
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     v.

KNOX, LLC, dba Knox, LLC of New York, DJW ADVISORS,

LLC,

    Intervenors‐Appellants.

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FOR INTERVENORS‐APPELLANTS: HOWARD S. BONFIELD, Philip M. Halpern,

Collier, Halpern, Newberg & Nolletti, LLP,

White Plains, New York.

FOR PLAINTIFF‐COUNTER‐

DEFENDANT‐APPELLEE XL

SPECIALTY INSURANCE CO.:

DAVID H. TOPOL, Leland H. Jones IV, Wiley

Rein LLP, Washington, D.C., and Jonathan A.

Wexler, Vedder Price P.C., New York, New

York.

DEFENDANTS‐APPELLEES JOHN R.

LAKIAN & DIANE W. LAMM:

BRIAN J. OSIAS, Kelly A. Lloyd, McCarter &

English LLP, Newark, New Jersey.  

Appeal from the United States District Court for the Southern District of

New York (Torres, J.).

UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,

ADJUDGED, AND DECREED that the order of the district court is REVERSED, and

the case is REMANDED for further proceedings.

Appellants Knox, LLC (ʺKnoxʺ), and DJW Advisors, LLC (ʺDJWʺ), appeal

from a January 15, 2015 memorandum and order of the United States District Court for

the Southern District of New York denying their motion to intervene as of right or by

permission in an interpleader action filed by plaintiff‐appellee XL Specialty Insurance

Co. (ʺXLʺ).  Knox and DJW contend, inter alia, that the district court erred by concluding
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that under Federal Rule of Civil Procedure 24(a)(2) they do not have a direct,

substantial, and legally protectable interest in XLʹs insurance payouts that are the

subject of the interpleader action.  We assume the partiesʹ familiarity with the

underlying facts, the procedural history of the case, and the issues on appeal.   

In February 2011, Knox purchased $2 million in shares and DJW

purchased $50,000 in shares of Capital L Group, LLC (ʺCapital Lʺ), a financial services

company, allegedly after CEO John R. Lakian and COO Diane W. Lamm represented

that the investments would further Capital Lʹs business operations.  Instead, Lakian and

Lamm allegedly diverted those funds for their personal gain.   

On May 31, 2012, Knox and DJW sued Capital L, Lakian, and Lamm in

New York state court.  Though Lakian and Lamm defended the action, Capital L

defaulted by failing to answer or appear, and on March 27, 2014, the state court entered

judgment for Knox and DJW against Capital L in the amounts of $2,573,918.63 and

$64,566.10, respectively.   

Prior to the state court action, Capital L, Lakian, and Lamm had

purchased a financial services liability policy from XL for the period from November 11,

2011, to November 11, 2012 (the ʺPolicyʺ).  The Policy includes a $3 million liability limit

and provides that XL ʺshall pay on behalf of the Insured Persons Loss resulting from

Claims first made against the Insured Persons during the Policy Period.ʺ  App. at 70.  
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The Policy defines ʺʹLossʹʺ as ʺdamages, judgments, settlements or other amounts . . .

and Defense Expensesʺ in excess of the insurance deductible.  Id. at 48.   

On July 14, 2014, XL filed the instant interpleader action against Lakian,

Lamm, and their attorneys, alleging that it was potentially subject to inconsistent

obligations that exceeded the remaining $1,372,596.10 payable under the Policy.  Those

obligations included Lakianʹs and Lammʹs expenses and fees from defending the state

court action.  On September 8, 2014, Knox and DJW moved to intervene, contending

that they had a legally protectable interest in XLʹs insurance payouts because they had

obtained a judgment against one of the insured persons, namely Capital L.

The district court disagreed.  In its January 15, 2015 memorandum and

order, the district court concluded that Knox and DJW had not claimed a legally

protectable interest in the interpleaded insurance proceeds, as required by Rule 24(a)(2),

because their judgment against Capital L was not covered by the Policy.  The district

court reached that conclusion only after determining that Capital Lʹs failure to appear in

state court gave rise to ʺmultiple and material breachesʺ of the Policy that were

sufficient to vitiate coverage of the subsequent judgment.  Id. at 218.  That determination

was premature, and we therefore reverse.

We review a district courtʹs denial of a motion to intervene for abuse of

discretion.  Floyd v. City of New York, 770 F.3d 1051, 1057 (2d Cir. 2014).  Under Rule

24(a)(2), the district court must permit a party to intervene if it establishes that ʺ(1) the
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motion is timely; (2) the applicant asserts an interest relating to the property or

transaction that is the subject of the action; (3) the applicant is so situated that without

intervention, disposition of the action may, as a practical matter, impair or impede the

applicantʹs ability to protect its interest; and (4) the applicantʹs interest is not adequately

represented by the other parties.ʺ  MasterCard Intʹl Inc. v. Visa Intʹl Serv. Assʹn, Inc., 471

F.3d 377, 389 (2d Cir. 2006).  We require for intervention that the ʺinterest be direct,

substantial, and legally protectable.ʺ  Wash. Elec. Co‐op., Inc. v. Mass. Mun. Wholesale Elec.

Co., 922 F.2d 92, 97 (2d Cir. 1990).   

This test, however, is ʺone of inclusion rather than exclusion.ʺ  7C Charles

Alan Wright et al., Federal Practice & Procedure § 1908.1, at 309 (3d ed. 2007).  ʺ[E]xcept

for allegations frivolous on their face, an application to intervene cannot be resolved by

reference to the ultimate merits of the claims which the intervenor wishes to assert

following intervention . . . .ʺ  Oneida Indian Nation of Wisc. v. State of New York, 732 F.2d

261, 265 (2d Cir. 1984).  We have thus found that a defense to an intervenorʹs claims

ʺcarries no weight in the determination of whether an interest is sufficient for

intervention under Rule 24(a).ʺ  Brennan v. N.Y.C. Bd. of Educ., 260 F.3d 123, 129‐30 (2d

Cir. 2001).  

The district court, in deciding the instant motion, reached the merits of

Knox and DJWʹs claims and XLʹs defenses.  In doing so, the district court abused its

discretion.  Knox and DJW have obtained a legal judgment against Capital L for over
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$2.5 million, and on the face of the Policy, XL is obligated to pay for Capital Lʹs losses,

including its ʺjudgments.ʺ  App. at 48, 70.  Knox and DJW thus claim a direct interest in

XLʹs insurance payouts, because any payouts obtainable by Capital L from XL would go

directly toward satisfying their judgment.  This claim, grounded in the language of XLʹs

Policy, is by no means frivolous.  Indeed, XL filed its interpleader expressly to bring in

ʺall parties who currently assert entitlement to Policy proceeds.ʺ  Id. at 27.  Knox and

DJW appear to be two such parties.  See United States v. Alisal Water Corp., 370 F.3d 915,

920 (9th Cir. 2004) (holding that ʺan economic interest [that is] concrete and related to

the underlying subject matter of the actionʺ may permit a ʺcreditor of a defendant to

intervene in a lawsuitʺ).

The district court denied Knox and DJWʹs motion, concluding that Capital

L could never have obtained insurance payouts from XL because Capital L breached the

Policy by not obtaining XLʹs consent before conceding liability and by increasing XLʹs

exposure.  Whether Capital L breached, however, is a merits question.  Whether Capital

L asked XL for consent, whether XL consented, and whether Capital Lʹs actions

increased XLʹs exposure are better addressed after Knox and DJW have been permitted

to participate in the suit.  

Indeed, as to consent, it appears that XL at least knew about the state court

action for almost two years before Knox and DJW obtained a judgment against Capital

L.  As to exposure, Capital L may have conceded to liability, but it is unclear on this
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record how Capital L increased the risk that XL was exposed to from the commencement

of the state court action.  These are questions that we cannot (and should not) answer so

easily at the motion‐to‐intervene stage.  Indeed, the only practical way to answer these

questions appears to be through litigation with Knox and DJW intervening in an

adversarial proceeding.  We therefore conclude, contrary to the district courtʹs order,

that Knox and DJW claimed a direct, substantial, and legally protectable interest in the

subject of the interpleader action.

Knox and DJW also satisfied the remaining requirements for intervention

as of right under Rule 24(a)(2).  The district court correctly held that their motion to

intervene was timely, and it is clear that Knox and DJWʹs interest in the insurance

proceeds would not be protected by the other parties (who opposed Knox and DJWʹs

intervention) and might be impaired if the interpleader were resolved without their

intervention.  Accordingly, we REVERSE the district courtʹs order, and we REMAND

the case for further proceedings consistent with this order.  

FOR THE COURT:

Catherine OʹHagan Wolfe, Clerk