Source: http://de.findacase.com/research/wfrmDocViewer.aspx/xq/fac.20180301_0000227.DE.htm/qx
Timestamp: 2019-04-20 16:58:02+00:00

Document:
DAVID H. MURDOCK, C. MICHAEL CARTER, DOLE FOOD COMPANY, INC., and DFC HOLDINGS, LLC, Defendants.
Robert J. Katzenstein, Esquire, and Kathleen M. Miller, Esquire, Smith, Katzenstein & Jenkins LLP, Wilmington, Delaware. Attorneys for Arch Insurance Company, liberty Mutual Insurance Company, Continental Casualty Insurance Company, Navigators Insurance Company, RSUI Indemnity Company, and Berkley Insurance Company.
Michael R. Goodstein, Esquire, Bailey Cavalieri LLC, Columbus, Ohio. Attorneys for Arch Insurance Company and liberty Mutual Insurance Company.
Merril Hirsh, Esquire, Troutman Sanders, LLP, Washington, District of Columbia, and John R. Gerstein, Esquire and Stacey E. Rufe, Esquire, Clyde & Co. US, LLP, Washington, D.C. Attorneys for Continental Casualty Insurance Company.
Michael L. Manire, Esquire, and Deanna M. Galla, Manire & Galla LLP, New York, New York. Attorneys for Navigators Insurance Company.
Robert P. Conlon, Esquire, and Kevin A. Lahm, Esquire, Walker Wilcox Matousek LLP, Chicago, Illinois. Attorneys for RSUI Insurance Company.
Ommid C. Farashahi, Esquire, Michael T. Skoglund, Esquire, and Nicholas R. Novak, Esquire, BatesCarey LLP, Chicago, Illinois. Attorneys for Berkley Insurance Company.
This breach of contract case is assigned to the Complex Commercial Litigation Division of this Court. Plaintiffs Arch Insurance Company, Liberty Mutual Insurance Company, Continental Casualty Insurance Company, Navigators Insurance Company, RSUI Indemnity Company, and Berkley Insurance Company (collectively, "Insurers") are six excess insurance carriers. The Insurers filed a declaratory judgment against Defendants David H. Murdock, C. Michael Carter (collectively with Mr. Murdock, the "Individual Defendants"), Dole Food Company, Inc. ("Dole"), and DFC Holdings, LLC ("DFC"). The Insurers seek a declaration that they do not have to fund an underlying settlement due to Insureds' alleged breaches of the applicable insurance policies (the "Policies).
On April 28, 2016, the Insureds filed a Motion to Dismiss. On December 21, 2016, the Court granted in part and denied in part the Motion to Dismiss. As set out more fully in the MTD Decision, the Court found that: (1) there is an actual controversy between the Insurers and the Insureds for coverage of the Stockholder Action; but (2) under Delaware or California choice of law, the Insurers cannot subrogate against the Insured.
On April 18, 2017, the Insureds filed their Amended Answer, Affirmative Defenses, and Counterclaims (the "Counterclaims"). In the Counterclaims, the Insureds argue that the Insurers acted in bad faith by not paying the Insurance Policies and are subject to punitive damages. All of the Insurers have answered the Counterclaims.
On June 30, 2017, Insurers' filed their Opening Brief in Support of Motion for Summary Judgment (the "Motion"). On August 7, 2017, Defendants filed their Answering Brief in Opposition to Plaintiff Insurers' Motion for Summary Judgment (the "Opposition"). Insurers filed their Reply Brief in Support of their Motion for Summary Judgment (the "Reply") on August 29, 2017.
On October 30, 2017, the Court held a hearing (the "Hearing") on the Motion, Opposition, and Reply. After the Hearing, the Court took the matter under advisement. This is the Court's opinion the Motion. For the reasons set forth more full below, the Motion is GRANTED in part and DENIED in part.
The Insurers provided Dole's overall package of Directors and Officers Liability insurance coverage. Dole is a Delaware corporation. DFC is a Delaware LLC. The Policies are in excess of, and follow form to, Axis Insurance Company's Primary Policy and two, non- party, excess carriers: National Union Fire Insurance Company and Federal Insurance Company.
Dole executed the Policies with the Insurers. The Policies are claims based insurance for the directors, officers, and corporate liability. The Policies contain a provision requiring that the Insured received the Insurers' written consent before action is taken (the "Written Consent Provision"). The Written Consent Provision states: "The Insureds shall not admit any liability, settle, offer to settle, stipulate to any judgment or otherwise assume any contractual obligation with regard to any Claim or Insured Inquiry without the Insurer's prior written consent, which shall not be unreasonably withheld."
The Insurer shall have the right and shall be given the opportunity to effectively associate with the Insureds in the investigation, defense and settlement, including but not limited to the negotiation of a settlement, of any Claim that appears reasonably likely to be covered in whole or in part hereunder.... The Insureds shall provide the Insurer with all information, assistance and cooperation which the Insurer reasonably requests and shall do nothing that may prejudice the Insurer's potential or actual rights of recovery with respect to Loss paid; provided the failure of one Insured Individual to comply with this provision shall not impair the rights of any other Insured Individual under this Policy.
Mr. Murdock owned 40% of Dole's stock and was a director and officer of Dole. Mr. Carter was Dole's president and CEO. In 2013, Mr. Murdock utilized DFC, a holding company, to acquire the remaining Dole stock and take it private. Mr. Murdock completed the acquisition in November 2013. Mr. Murdock paid shareholders $13.50 per share. Thereafter, the shareholders filed multiple lawsuits challenging the transaction's fairness.
In re Dole Food Company, Inc. Stockholder Litigation ("Memorandum Opinion") is one of two shareholder litigations relevant to this civil action. This action was filed in the Delaware Court of Chancery (the "Chancery Court"). The Insureds were all parties to the Memorandum Opinion. The stockholders alleged Defendants engaged in a lengthy process that manipulated the stock price so that Mr. Murdock could acquire the stock at a lower price. Vice Chancellor Laster, in his Memorandum Opinion, repeatedly cited to "fraud" and "fraudulent activity." Vice Chancellor Laster found breaches of the duty of loyalty, and assessed liability against Mr. Murdock, Mr. Carter, and DFC in the amount of $148, 190, 590.18.
On September 21, 2015, Dole's "insurance recovery counsel" wrote to the Insurers.The letter notified the Insurers that Dole was considering settlement and mediation. It asked that the Insurers consider funding a settlement. The Insurers all responded, citing various potential exclusions and requesting more information from Dole. On October 29, 2015, Dole responded. Dole disagreed with Federal's reservations, and again demanded coverage for the underlying settlement.
On November 5, 2015, Dole signed a term sheet settling the underlying action. On December 7, 2015, the underlying parties signed a formal Stipulation and Agreement of Settlement (the "Settlement"). In lieu of an appeal, the parties settled for 100% plus interest.Mr. Murdock agreed to pay the settlement on the Defendants' behalf. Vice Chancellor Laster approved the settlement on February 10, 2016 (the "Order and Final Judgment"). The Settlement caused the Chancery Court action to be dismissed "with prejudice and in its entirety."
The Insureds contend that they kept the Insurers informed as to the progress of the negotiations and provided copies of drafts of term sheets. The Insureds also state that none of the Insurers asked to participate in the settlement negotiations or objected to or commented on any of the settlement terms.
On February 26, 2016, Dole's counsel wrote to the Insurers, seeking indemnification for the Settlement. The Insurers did not in the Chancery Court object to the Settlement or appeal the Order and Final Judgment.
On January 13, 2016, prior to the Chancery Court's approving the Settlement, the Insurers filed this civil action. The parties stipulated to dismiss the Insurers' claims against DFC, because DFC, is not an insured under any of the policies." The Insurers filed an Amended Complaint for Declaratory Judgment (the "Amended Complaint") on April 8, 2016.
C. San Antonio Fire & Police Pension Fund v. Dole Food Co., Inc.
On December 9, 2015, suit was filed against Dole and Mr. Murdock in United States District Court for the District of Delaware-San Antonio Fire & Police Pension Fund v. Dole FoodCo., Inc., No. 1:15-CV-01140 (D. Del.)(the "San Antonio Action"). The Insureds state that Dole gave the Insurers notice of the San Antonio Action. The Insurers responded over a six-month period as to their respective coverage positions. According to the Insureds, the Insurers took the same coverage positions with respect to the San Antonio Action as were taken in the Memorandum Opinion.
In October 2016, the Delaware District Court scheduled an Alternative Dispute Resolution teleconference in the San Antonio Action. The Insureds notified the Insurers of this teleconference. The San Antonio Action plaintiffs then approached the Insureds about mediation, and the parties discussed the timing of such a mediation and potential mediators.
The Insureds then scheduled a teleconference to discuss the potential mediation with the Insurers. During this teleconference, the Insureds stated to the Insurers that the Insureds thought it would be beneficial to mediate the San Antonio Action. The Insureds purported to identify potential mediators that had been previously discussed with the plaintiffs and asked the Insurers for input. The Insurers provided some feedback on potential mediators but none objected to the mediation or to using Judge Layn Phillips as a mediator.
Arch and Liberty asked the Insured to provide who was the Insured's damages expert and a damage assessment report during the teleconference. The Insureds refused to provide this information, claiming that it was work product or attorney-client privileged information and if it was disclosed to non-defending insurers it could be argued that the Insureds waived these privileges.
The Insureds relayed to the Insurers the mediation dates. Once each Insurer signed a Mediation Confidentiality Agreement required by the mediator, the Insureds provided the mediation briefs to the Insurers. According to the Insureds, only Arch and Liberty attended the mediation and the other Insurers received telephonic updates.
After the mediation, the Insureds told the Insurers that the Insureds had provisionally agreed to terms of a term sheet (the "Term Sheet"). The Term Sheet was subject to the approval of Dole's board of directors within ten business days. The Insureds asked the Insurers to confirm that the Insurers would contribute to the settlement reached in the Term Sheet. The Insureds also provided the Insurers with information requested in the November 2016 teleconference-damage analyses by Dole's consulting expert-and asked them to let the insureds know if they needed any additional information. According to the Insureds, none of the Insurers requested additional information.
The Insurers each responded to the request that it contribute to fund the settlement. The Insureds did not fund the settlement. The Insureds negotiated a final settlement (the "San Antonio Settlement") with the San Antonio Action plaintiffs. The Delaware District Court entered a Judgment Approving Class Action Settlement, finding that the settlement was "in all respects, fair, reasonable, and adequate to the Settlement Class."
The Insurers did not provide prior written consent for (i) the Settlement or (ii) the San Antonio Action Settlement.
In the Motion, the Insurers present a number of arguments. The Insurers contend that they do not have to indemnify the Insureds because: (i) Delaware and California law does not permit indemnification under the facts here; (ii) the Insureds failed to obtain written consent prior to settling certain litigations; and (iii) the Insureds failed to cooperate with the Insurers. In addition, the Insurers also ask the Court to grant judgment on the Insureds' fraud in the inducement and bad faith claims, contending that the such claims cannot exist when there is no duty to indemnify. The Insurers also ask the Court to apply the doctrine of collateral estoppel, or issue preclusion, with respect to matters adjudicated in and addressed by the Chancery Court in the Memorandum Opinion.
The Insureds oppose the Motion, contending that the Insurers' arguments "miss the mark." In the Opposition, the Insureds contend that the Court has already held that the Memorandum Opinion has no collateral estoppel effect and, therefore, cannot support a granting of summary judgment. The Insureds claim that Delaware law applies to the Policies, and that Delaware public policy does not bar indemnification here. The Insureds also argue that the facts do not support summary judgment on the issues of failure to obtain consent or cooperation. Additionally, the Insureds claim that the Motion is premature on their tort claims because there has been no discovery in the civil proceeding.
A. The Collateral Estoppel Doctrine Applies Here With Respect to the Insureds and the Memorandum opinion.
The Court will look to Delaware law to determine whether the collateral estoppel doctrine applies to the Insureds on factual issues litigated and decided by the Memorandum Opinion. In Delaware, resjudicata refers to claim preclusion and collateral estoppel refers to issue preclusion. The two principles are distinct. "Under the doctrine of res judicata, a judgment in a prior suit involving the same parties, or persons in privity with them, bars a second suit on the same cause of action." The doctrine of collateral estoppel prohibits a party from relitigating a factual issue that was adjudicated previously.
Under collateral estoppel "a judgment in a prior suit does not operate to bar a subsequent cause of action but rather precludes the relitigation of a factual issue which was litigated and decided in in prior suit between the same parties." "[O]nly parties to the former judgment or their privies may take advantage of or be barred by it." "A privy is one who, after the rendition of the judgment, has acquired an interest in the subject matter affected by the judgment through or under one of the parties. . ., " The Court expanded the notion and found that "privity, need not be present in order to apply collateral estoppel . . . [if the party] had a full and fair opportunity to present [its] case." In order to adopt the previous court's ruling on an issue, the party wishing to enforce that ruling must show "that (1) a question of fact essential to the judgment (2) be litigated and (3) determined (4) by a valid and final judgment." Further, new issues being estopped must involve a party from the first case and that party must have had a "full and fair opportunity to litigate the issue in the prior action."
Collateral estoppel only prevents particular issues previously litigated from being challenged. In Stephenson v. Capano Dev., Inc., the plaintiff filed several claims in the Court of Chancery. The Chancellor refused to consider plaintiffs fraud claim because it was untimely filed. Following this decision, the plaintiff filed suit in the Superior Court based on the defendant's fraud. The Superior Court judge found that any findings of fact would receive collateral estoppel effect, but resjudicata was inapplicable because the Chancellor did not address the legal merits of the plaintiffs fraud claim for procedural reasons.
Generally, a dismissal with prejudice has the effect of a final adjudication on the merits." When parties "voluntarily dismiss[ ] the action, knowing that they either received the full relief to which they were legally entitled, or that they waived their rights to seek further relief, the dismissal is tantamount to a judgment on the merits." "[F]inality is neither a precise nor a rigid concept." "It is widely recognized that the finality requirement is less stringent for issue preclusion than for claim preclusion." "[F]inality may mean little more than that the litigation of a particular issue has reached such a stage that a court sees no really good reason for permitting it to be litigated again" or include "any prior adjudication of an issue in another action that is determined to be sufficiently firm to be accorded conclusive effect."
The Delaware Supreme Court has found that "once interlocutory rulings achieve finality at the trial level, through incorporation in the final judgment of the trial court, review of those subsidiary rulings must be achieved through a timely appeal of that final order."
The Court put the parties on notice during the May 1, 2017 Scheduling Conference (the "Scheduling Conference") that the Court might apply collateral estoppel with respect to the Memorandum Opinion. During the Scheduling Conference, the Court told the parties that the Court is "not going to re-litigate matters that have been litigated in a case." "The question was whether it's a final non-appealable order, that's different as to whether a judge found a fact after hearing it." "[I]t would be at least collateral estoppel, and I'm not going to put in front of a jury a fact that a judge has had on the same question." "That's a big difference between finding that contractually you agreed to a final non-appealable order. . ., " "I'm not going to re-litigate an issue that somebody testifies under oath and Vice Chancellor Laster makes findings, a very long specific decision. . ., "
Vice Chancellor Laster's Memorandum Opinion is sufficiently firm to be accorded conclusive effect for collateral estoppel. Vice Chancellor Laster issued a 106-page opinion discussing Mr. Murdock's and Mr. Carter's breach of the duty of loyalty after a trial. The trial lasted nine days and involved: (i) the introduction of 1, 800 exhibits; (ii) the live testimony often fact witnesses and three expert witnesses; (iv) the lodging of twenty-nine depositions; (v) a 419 paragraph pre-trial order; and (vi) pre- and post-trial briefing that totaled 668 pages. Although the Memorandum Opinion may not be sufficient under resjudiciata, the lengthy opinion goes into detail about the findings of Mr. Murdock's fraudulent activities that breached the duty of loyalty to the shareholders. Vice Chancellor Laster specifically found that "Murdock and Carter's conduct throughout the Committee process . . . demonstrated that their actions were not innocent or inadvertent, but rather intentional and in bad faith." Further, the Memorandum Opinion finds that defendants, including Mr. Murdock, "engaged in fraud."
As to the finality of the Memorandum Opinion, Vice Chancellor Laster ends the Memorandum Opinion by saying that the "parties will confer and advise the court as to any issues that remain to be addressed." After Vice Chancellor Laster issued the Memorandum Opinion, the Parties reached the Settlement. The Memorandum Opinion is sufficiently definite to be a final judgment on the merits. The 106 page opinion talks in detail about the scheme used by Mr. Murdock and his co-defendants to drive down the price of Dole. Additionally, the Settlement rendered the Memorandum Opinion final for collateral estoppel.
The Court holds that collateral estoppel vis a vis the Memorandum Opinion applies to this civil action and the Motion. First, factual issues relevant to this civil action and the Motion are factual issues decided by the Memorandum Opinion. Second, the Memorandum Opinion is "finally adjudicated" for purposes of collateral estoppel. Third, the Insureds were parties to the litigation memorialized in the Memorandum Opinion. Fourth, the Insureds have had their day in court on the facts addressed in the Memorandum Opinion. For these reasons, the Court will employ collateral estoppel against the Insureds on factual issues determined in the Memorandum Opinion to the extent those factual issues are relevant to issues in this civil action.
B. Delaware Law Applies to this Civil Action and Neither Delaware Law Nor Delaware Public Policy Precludes Indemnification Here.
The Policies do not contain a choice of law provision. The Insurers argue that California law applies, noting that Dole's management and board are located in California, and that Mr. Murdock and Mr. Carter are located in California. The Insurers also contend that the underlying facts supporting the Memorandum Decision mostly occurred in California. The Insureds claim that Delaware law applies, arguing that Dole is a Delaware corporation and Mr. Murdock and Mr. Carter were directors and officers of Dole. The Insureds go on to argue that Delaware has a direct interest because (i) Dole had the authority to obtain the Policies under Delaware law, 8 Del. C. § 145(g), and (ii) Delaware law ultimately determines whether an officer or director has violated duties owed to the company, its shareholders and its investors.
The Court did not address or decide whether Delaware or California law would apply to this civil action in the MTD Opinion. For purposes of the Motion, the Court must make such a determination. As set forth below, the Court holds that Delaware law applies in this civil action.
The first step in a conflict-of-law analysis is to decide whether a conflict truly exists. The Court must compare the competing jurisdictions to determine whether the laws actually conflict on a relevant point." "In determining whether there is an actual conflict, Delaware state courts . . . answer a single and simple inquiry: does application of the competing laws yield the same result?" If the answer is yes, then "the Court should avoid the choice-of-law analysis altogether"
Further, the laws of competing jurisdictions must actually conflict to require an analysis. When one state's laws failed to address a particular issue, it cannot conflict with the laws of another state. Where one state fails to address a particular issue, the Court should apply the settled law.
The parties disagree about what law applies to this case. Plaintiffs argue that California law applies. The Defendants argue that Delaware law applies.
(1) The rights and duties of the parties with respect to an issue in contract are determined by the local law of the state which, with respect to that issue, has the most significant relationship to the transaction and the parties under the principles stated in [Restatement (Second) of Conflict of Laws] § 6.
(e) the domicil[e], residence, nationality, place of incorporation and place of business of the parties.
The Court evaluates the contacts based on their relative importance with each particular issue.
"In complex insurance cases with risks in multiple states such as this one, Delaware courts have generally held that the most significant factor for the conflict-of-law analysis is the principal place of business of the insured because it is 'the situs which link[s] all the parties together.'" However, when the "risk is the directors' and officers' honesty and fidelity to the corporation, and the choice of law is between the headquarters or the state of incorporation, the state of incorporation has the most significant relationship." The Court notes that the first legal principle relied upon involves insurance cases with general comprehensive liability policies. The second legal principle is a situation, like the one here, involving director and officer liability insurance coverage.
Delaware and California law conflict regarding whether an insurance policy covers a director or officer's willful or wanton actions. As the Insurers note, Cal. Ins. Code § 533 ("Section 533") provides that "[a]n insurer is not liable for a loss caused by the willful act of the insured's agents or others." Section 533 is "an implied exclusionary clause which by statute is to be read into all insurance policies, " regardless of the policy's language. The Insurers rely upon Section 533 and the Memorandum Opinion, and contend that the Insureds have committed fraud to affect the purchase price of stock and the Insurers cannot be liable for a loss related to that fraud.
... a corporation shall have the power to purchase and maintain insurance on behalf of any person who is or was a director, officer, employee or agent of the corporation, . . . against any liability asserted against such person and incurred by such person in any such capacity, or arising out of such person's status as such, whether or not the corporation would have the power to indemnify such person against such liability under this section.
Under Delaware law, therefore, a corporation is permitted to purchase insurance against any liability asserted against an officer or director even when the corporation would not be able to otherwise indemnify that person under 8 Del. C. § 145. This would include insurance for a breach of the duty of loyalty-the determination made in the Memorandum Opinion.
The Insurers rely heavily on Liggett Group Inc. v. Affiliated FM Ins. Co.[] That is a very well-reasoned opinion and strong authority on the issue of choice of law in complex insurance coverage situations. Liggett involves defense and indemnification claims arising out of more than one-thousand tobacco health related claims filed throughout the United States. However, Liggett discusses choice of law as it relates to general comprehensive liability policies and not an officer and director insurance policy.
The Court finds that the better authority for this situation is Mills Ltd. Partnership v. Liberty Mut. Ins. Co. Mills Ltd. Partnership addresses the choice of law issue in the context of an officer and director insurance policy. The underlying loss involved the officers and directors of Mills Ltd. Partnership ("Mills") using their positions to defraud investors in various ways, including lying about Mills' financial pictures. Mills eventually admitted massive fraudulent overstatements of income, shareholders' equity and partners' capital for close to six years.
When the insured risk is the directors' and officers' "honesty and fidelity" to the corporation, and the choice of law is between the headquarters or the state of incorporation, the state of incorporation has the most significant relationship.

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