15

‐ 495

XL Specialty Ins. Co. v. Knox, LLC

UNITED STATES COURT OF APPEALS

FOR THE SECOND CIRCUIT

SUMMARY ORDER

R ULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT

. C ITATION TO A

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

F EDERAL R ULE OF A PPELLATE P ROCEDURE 32.1 AND THIS COURT ʹ S L OCAL R ULE 32.1.1.

W HEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT

, A PARTY MUST

CITE EITHER THE F EDERAL A PPENDIX OR AN ELECTRONIC DATABASE ( WITH THE NOTATION

ʺ SUMMARY ORDER ʺ ). 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 8 th day of December, two thousand fi fteen.

PRESENT: ROBERT D. SACK,

DENNY CHIN,

RAYMOND J. LOHIER, JR.,

Circuit Judges

.

‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ x

XL SPECIALTY INSURANCE COMPANY,

Plainti ff‐ 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

,‐ 2

‐ v.

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

LLC,

Intervenors

‐ Appellants

.

‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ ‐ x

FOR INTERVENORS

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

Collier, Halpern, Newberg & Nolle tt i, 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 ( ʺ Knox ʺ ), and DJW Advisors, LLC ( ʺ DJW ʺ ), 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 fi led by plainti ff‐ appellee XL Specialty Insurance

Co. ( ʺ XL ʺ ). Knox and DJW contend, inter alia

, that the district court erred by concluding‐ 3

‐ that under Federal Rule of Civil Procedure 24(a)(2) they do not have a direct,

substantial, and legally protectable interest in XL ʹ s insurance payouts that are the

subject of the interpleader action. We assume the parties ʹ 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 ( ʺ Capital L ʺ ), a fi nancial services

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

that the investments would further Capital L ʹ s 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 fi nancial services liability policy from XL for the period from November 11,

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

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

Claims fi rst made against the Insured Persons during the Policy Period. ʺ App. at 70.‐ 4

‐ The Policy de fi nes ʺʹ Loss ʹʺ as ʺ damages, judgments, se tt lements or other amounts

. . .

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

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

Lamm, and their a tt orneys, alleging that it was potentially subject to inconsistent

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

obligations included Lakian ʹ s and Lamm ʹ s 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 XL ʹ s 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 L ʹ s failure to appear in

state court gave rise to ʺ multiple and material breaches ʺ of the Policy that were

su ffi cient to vitiate coverage of the subsequent judgment. Id. at 218. That determination

was premature, and we therefore reverse.

We review a district court ʹ s 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‐ 5

‐ 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 ma tt er, impair or impede the

applicant ʹ s ability to protect its interest; and (4) the applicant ʹ s interest is not adequately

represented by the other parties. ʺ MasterCard Int ʹ l Inc. v. Visa Int ʹ l Serv. Ass ʹ n, Inc.

, 471

F.3d 377, 389 (2d Cir. 2006). We require for intervention that the ʺ interest 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 ʺ one 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 intervenor ʹ s claims

ʺ carries no weight in the determination of whether an interest is su ffi cient 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 DJW ʹ s claims and XL ʹ s defenses. In doing so, the district court abused its

discretion. Knox and DJW have obtained a legal judgment against Capital L for over‐ 6

‐ $2.5 million, and on the face of the Policy, XL is obligated to pay for Capital L ʹ s losses,

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

XL ʹ s 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 XL ʹ s

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

ʺ all 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 ʺ an economic interest [that is] concrete and related to

the underlying subject ma tt er of the action ʺ may permit a ʺ creditor of a defendant to

intervene in a lawsuit ʺ ).

The district court denied Knox and DJW ʹ s motion, concluding that Capital

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

Policy by not obtaining XL ʹ s consent before conceding liability and by increasing XL ʹ s

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

L asked XL for consent, whether XL consented, and whether Capital L ʹ s actions

increased XL ʹ s exposure are be tt er addressed after Knox and DJW have been permi tt ed

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‐ 7

‐ 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 court ʹ s order,

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

subject of the interpleader action.

Knox and DJW also satis fi ed 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 DJW ʹ s interest in the insurance

proceeds would not be protected by the other parties (who opposed Knox and DJW ʹ s

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

intervention. Accordingly, we REVERSE the district court ʹ s order, and we REMAND

the case for further proceedings consistent with this order.

FOR THE COURT:

Catherine O ʹ Hagan Wolfe, Clerk