Opinion ID: 2814736
Heading Depth: 3
Heading Rank: 3

Heading: Mr. Templeton and CapWest’s Insurance Policy

Text: When the Cordaros filed their FINRA action, Catlin insured CapWest and Mr. Templeton through an errors and omissions policy. The Policy’s coverage period was September 1, 2009 through September 1, 2010. The Policy covered: Damages which the Insured becomes legally obligated to pay because of a Claim that is both made against the Insured and reported to the Insurer in writing during the Policy Period . . . for a Wrongful Act committed solely in the rendering or failing to render Professional Services for a Client, provided . . . such Wrongful Act occurred on or after the Retroactive Date. -7- Id. at 876 (Policy § I.A).2 The Policy defined “Wrongful Act” as “a negligent act or omission . . . committed by an Insured in the rendering of Professional Services,” id. at 882 (Policy § II.V), and “Professional Services” to include a registered representative’s “sale, attempted sale or servicing of Securities that are approved and authorized by and actually distributed through the Broker/Dealer,” id. at 881 (Policy § II.Q.1.b). The Policy’s “Retroactive Date” was defined as the later of January 1, 2005, or the date when the Insured Registered Representative “first entered into an uninterrupted or continuously renewed contract with the Broker/Dealer.” Id. at 882 (Policy § II.T.2). Mr. Templeton began working at CapWest on September 16, 2005. Thus, the Policy covered claims within the policy period arising from Mr. Templeton’s negligent acts or omissions in rendering professional services that occurred on or after September 16, 2005. The Policy therefore potentially provided coverage for the MedCap IV note Mr. Templeton sold to the Cordaros. It did not cover the sales Mr. Templeton made to the Cordaros while employed with USA. The Policy contained exclusions from coverage, two of which are relevant here— the “Interrelated Wrongful Acts” exclusion (“Exclusion D.1.b”) and the “Insolvency/Receivership” exclusion (“Exclusion N”). Exclusion D.1.b stated, in relevant part: 2 The Policy defined “Insured” to include the Named Insured Broker/Dealer, CapWest, and “Insured Registered Representative(s).” App. at 878-79 (Policy § II.K (“Insured(s)”), II.B (“Broker/Dealer”). Mr. Templeton was an Insured Registered Representative. -8- This Policy shall not apply to and the Insurer shall pay neither Damages nor Defense Expenses for any Claim . . . arising out of, based upon or in consequence of, directly or indirectly resulting from or in any way involving . . . any Wrongful Act occurring on or after the Retroactive Date which, together with a Wrongful Act occurring on or prior to such Retroactive Date, would constitute Interrelated Wrongful Acts. . . . Id. at 882 (Policy § III.D.1.b). The Policy defined “Interrelated Wrongful Act” as: [A]ny Wrongful Acts that are: 1. similar, repeated or continuous; or 2. connected by reason of any common fact, circumstance, situation, transaction, casualty, event, decision or policy or one or more series of facts, circumstances, situations, transactions, casualties, events, decisions or policies. Id. at 880 (Policy § II.M). Exclusion N excluded from coverage any claim: arising out of, based upon or in consequence of, directly or indirectly resulting from or in any way involving insolvency, receivership, . . . or inability to pay of . . . any company, organization, entity, . . . direct private placement, . . . or arrangement of any nature in which any Insureds . . . placed or recommended to be placed funds. Id. at 884 (Policy § III.N). The Policy also imposed upon Catlin a duty to defend “any civil litigations or arbitrations against the Insureds that are covered by [the] Policy.” Id. at 876 (Policy § I.B). It provided that Catlin “shall appoint counsel of its selection to defend the Insureds and pay associated Defense Expenses.” Id. The Policy had a $500,000 aggregate coverage limit, including defense expenses, for claims arising from the sale of private placements, such as the MedCap IV sale, subject to a $100,000 self-insured -9- retention per claim. 4. Catlin Agrees to Provide Representation to Mr. Templeton and CapWest in the Cordaro Matter Subject to a Reservation of Rights On February 4, 2010, CapWest received the Cordaros’ statement of claim, and reported the action to Catlin’s claims office a week later. It also notified Mr. Fehn, a general partner at FF&S, who regularly did legal work for CapWest as general counsel. On February 19, 2010, Mr. Hall sent an email to Mr. Templeton and other CapWest registered representatives notifying them that those registered representatives named in FINRA arbitrations would be required to pay 75% of the legal fees incurred in defending those claims. On May 5, 2010, Catlin’s coverage counsel, Richard Rogers, sent a letter to CapWest and Mr. Templeton stating that Catlin would defend them against the Cordaros’ claims subject to a “full reservation of rights.” Id. at 814. The letter explained the relevant coverage provisions of the Catlin Policy, and reserved the right to deny indemnification for the Cordaros’ claims to the extent they were not covered. It also said Catlin was reserving its right to deny indemnity based on Exclusion N, because the Cordaro “matter arises f[ro]m Securities that are now insolvent, bankrupt, or in receivership.” Id. at 819. It also stated that “Catlin further reserves its right to deny coverage for the arbitration, in whole or in part, based on other exclusions contained in the policy, including . . . Exclusion D which applies to claims that were reported or noticed prior to the policy period . . . .” Id. -10- 5. Catlin’s Initial Choice of Counsel and Counsel’s Withdrawal Catlin initially retained the law firm Markun Zusman & Compton LLP (“Markun Zusman”) to represent Mr. Templeton and CapWest in the Cordaro arbitration. On April 20, 2010, Markun Zusman filed an answer to the Cordaros’ statement of claim. The answer responded to all of the Cordaros’ claims against Mr. Templeton, including those arising out of the investments he sold while at USA. In August 2010, Mr. Templeton left CapWest. Around that time, CapWest became dissatisfied with the amount of Markun Zusman’s legal bills, which it was paying under its self-insured retention, and stopped paying its invoices. On September 28, 2010, Mr. Fehn submitted a “global settlement” proposal to counsel representing four FINRA claimants with arbitrations pending against CapWest, including the Cordaros, attempting to settle the claims for “approximately 3.6% of the claimed amount[s].”3 Id. at 931. The letter said that if all claimants did not agree to the settlement, CapWest would defend the cases on a “first come, first served basis, and then once its coverage and funds are exhausted, it will cease business activity.” Id. The letter referred only to CapWest and not to CapWest’s registered representatives. The claimants did not accept the settlement. On November 5, 2010, Markun Zusman sent a letter to FINRA withdrawing as 3 At the time of the Cordaro arbitration, CapWest had a number of other FINRA arbitrations pending against it, which were subject to the same Catlin Policy. -11- counsel for CapWest and Mr. Templeton. Markun Zusman advised FINRA that Mr. Fehn was CapWest’s general counsel and provided his contact information. Although Markun Zusman did not send a copy of the letter to Mr. Templeton, on November 12, 2010, a lawyer with Markun Zusman notified Mr. Templeton the firm was no longer representing him in the Cordaro arbitration. On December 13, 2010, Mr. Templeton sent FINRA an email updating his contact information to a mail forwarding service in South Dakota.4 In February 2011, FINRA apparently requested Mr. Templeton’s contact information from Markun Zusman so that it could remove Markun Zusman as Mr. Templeton’s attorney of record. Markun Zusman provided an outdated address, a P.O. Box in Santa Fe, New Mexico. FINRA thereafter recognized Mr. Templeton as appearing pro se. In February 2011, Mr. Templeton emailed Mr. Hall and Ed Price, CapWest’s Chief Operating Officer, to ask about the status of the Cordaro arbitration. Mr. Templeton asked if Mr. Fehn was representing CapWest and him in the matter, inquired about the status of settlement negotiations, and said he would need to adjust his travel plans if he needed to be in Albuquerque at the end of March for the arbitration. Mr. Hall responded, stating that “[a]t this moment [Mr. Fehn] is [representing Mr. Templeton],” and that CapWest was working “with Catlin to make that permanent.” Id. at 935. Mr. 4 The letter explained he is a legal resident of South Dakota but travels full time and does not have a residential address where he receives mail. It also provided his email address, noting that email was the best way to contact him because he only receives mail forwarding one or two times a month. -12- Hall also stated that Mr. Fehn was working on a settlement with the Cordaros. 6. Catlin and CapWest’s Disagreement over Replacement Counsel On March 1, 2011, Mr. Hall emailed Mr. Rogers requesting authorization of $10,000 to $15,000 to settle the Cordaro matter. Mr. Fehn was copied on the email. Mr. Rogers responded later that day, explaining that he would need time to review the matter before responding to the settlement request. He further stated that handling the matter was “being hampered by the state of defense counsel arrangements.” Id. at 940. Mr. Rogers attached a letter to his email explaining Catlin’s position on retaining defense counsel. In the letter, he summarized that CapWest rejected the law firm Catlin proposed to represent it and Mr. Templeton and instead insisted FF&S handle the matter. Mr. Rogers objected to retaining FF&S. He explained, Catlin does not agree that FF&S would be appropriate for the defense, for the reasons stated at the inception of these matters, with reference to the firm’s specialty in the representation of claimants and related issues. Moreover, that firm has served as the general counsel for CapWest during these proceedings. As such, it would not be appropriate for FF&S to also serve as independent defense counsel due to potential conflicts of interest. Id. at 945. In addition, Mr. Rogers agreed to pay FF&S a separate $15,000 for services it had rendered in connection with the global settlement offer after Catlin received an itemized invoice. On March 7, 2011, Mr. Rogers emailed Mr. Hall, copying Mr. Fehn, approving the $15,000 settlement authority Mr. Hall had requested. Mr. Rogers further stated that the approaching Cordaro arbitration “underscores the need for an agreed-to defense counsel -13- approach to be put in place immediately.” Id. at 939. The next day, Mr. Hall replied to Mr. Rogers, objecting to his refusal to allow FF&S handle the Cordaro matter. Mr. Rogers and Mr. Hall continued discussing their dispute over defense counsel. On March 9, 2011, Mr. Rogers explained that CapWest wanted “Mr. Fehn, but Catlin does not agree to him, and that they would “have to continue discussions to bridge the divide.” Id. at 949. On March 11, 2011, Mr. Hall responded, agreeing that they would have to continue discussions. He also provided Catlin with invoices for FF&S’s services. Mr. Rogers responded, acquiescing to Mr. Hall’s request to pay FF&S the agreed-upon $15,000, but renewing Catlin’s objection to FF&S providing defense services going forward. On March 13, 2011, at Mr. Hall’s request, Mr. Templeton sent Mr. Hall updated financial information to pass along to Mr. Fehn. On March 17, 2011, Mr. Templeton sent Mr. Hall another email asking if there was “anything new” in the Cordaro matter and if Mr. Hall had received his financial information. Id. at 966. Mr. Hall responded that day, stating: “Got the statement. Tom Fehn was to talk to the [Cordaros’] lawyer this week. [W]ill let you know.” Id. Mr. Templeton did not communicate with anyone at Catlin or FF&S about the Cordaro matter. On March 21, 2011, Mr. Hall emailed a legal assistant at FF&S requesting an update on the Cordaro matter. The legal assistant responded on March 23, 2011, stating: “[Mr. Fehn] asked me to remind you that we don’t represent Daryl Templeton. [Mr. -14- Fehn] is out this week, but the update is that we are trying to settle the case.” Id. at 973. Mr. Hall replied later that day: “We should be representing Daryl. I mentioned that to Tom. If we alienate Daryl our goose could be cooked.” Id. at 972-73. The legal assistant responded, “I will let [Mr. Fehn] know asap.” Id. at 972. 7. FF&S Negotiates with the Cordaros to Settle their Claim and Dismiss CapWest On March 25, 2011, Ms. Davidi, an associate at FF&S, reached an oral agreement with the Cordaros’ representatives, Richard Sacks and Irwin Stein, to settle their claim for $13,500. The Cordaros accepted the offer. But when Ms. Davidi contacted Mr. Sacks to confirm that the settlement was with all the parties, Mr. Sacks stated the settlement was with CapWest only and did not include Mr. Templeton. Ms. Davidi then notified FINRA of the settlement, stating that the Cordaros had “reached a settlement with Respondent CapWest Securities, Inc. only.” Id. at 987. That same day, the Cordaros notified FINRA that they were dismissing their claims against CapWest with prejudice. Mr. Stein sent Mr. Templeton notice of the settlement to the address FINRA had on file, which was apparently the outdated New Mexico address provided by Markun Zusman. 8. Mr. Hall Notifies Mr. Templeton and Catlin that the Cordaro Matter Had Settled On March 25, 2011, Mr. Hall told Mr. Templeton that the Cordaro matter had settled. On March 28, 2011, Mr. Hall also notified Mr. Rogers that FF&S had settled the Cordaro matter for $13,500. Neither Mr. Templeton nor Mr. Rogers were informed that -15- the matter had been settled with CapWest only. 9. Mr. Templeton Does Not Attend the Cordaro Arbitration Unbeknownst to Mr. Templeton and Catlin, the FINRA arbitration proceeded on March 29, 2011, in Mr. Templeton’s absence. USA, the only other remaining respondent, also did not appear.5 At the hearing, the FINRA panel heard uncontested testimony from Mr. Cordaro and argument from Mr. Stein. At the end of the hearing, the panel asked Mr. Stein for an accounting of damages. Mr. Stein stated: “I show 100,000 in DBSI, 150 in Triple Net; . . . 265 in Medical Capital, which I added to 515.” Id. at 1186. He then acknowledged the $515,000 should be reduced by the $13,500 settlement reached with CapWest. 10. The Cordaros Refuse to Finalize their Settlement with CapWest Because FF&S Attempts to Include Mr. Templeton in the Settlement Agreement On April 4, 2011, Ms. Davidi sent a draft settlement to the Cordaros that included CapWest and Mr. Templeton as released parties. The proposed settlement agreement sought to release CapWest and Mr. Templeton from liability for the $100,000 MedCap IV investment. The Cordaros refused to sign the agreement, explaining they never agreed to the release of Mr. Templeton. 11. The FINRA Arbitration Panel Issues an Award against Mr. Templeton On April 12, 2011, the FINRA panel issued a written decision in favor of the 5 The USA principals had been dismissed before the hearing. -16- Cordaros. The panel awarded them $500,000 in damages plus costs and interest, and held Mr. Templeton and USA jointly and severally liable for the award. The panel declined to impose punitive damages. It did not make findings of fact and therefore did not separate the investments the Cordaros made through Mr. Templeton when he was at USA from the investment he made while at CapWest. A copy of the award was sent to Mr. Templeton at the Santa Fe, New Mexico address. 12. Mr. Templeton, Mr. Hall, and Mr. Rogers Learn of the FINRA Award On April 15, 2011, Mr. Templeton asked Mr. Hall for an update on the Cordaro settlement. Mr. Hall then contacted Ms. Davidi to ask if she knew anything about the “Cordaro settlement paperwork.” Id. at 1008. Ms. Davidi responded, The latest update is that Plaintiff’s attorney is upset that Daryl Templeton is included in the settlement at all. We told him that Mr. Templeton must be included as he is an insured under the policy (with respect to the investment MedCap IV at CapWest Securities, Inc[.]). Plaintiff’s attorney said he would take that news back to his client. We have not heard from them yet, but the case has already been taken off [sic] calendar at FINRA. Id. On April 25, 2011, Mr. Hall learned of the FINRA panel’s decision. Mr. Hall emailed it to Mr. Fehn and asked: “Did FINRA misread something? I thought [the Cordaro matter] was adjourned with a settlement.” Id. at 1010. Mr. Fehn replied that the settlement pertained to CapWest and Mr. Templeton only as to the MedCap IV note, and that the matter “went forward as to the rest” of the Cordaros’ claims against Mr. Templeton. Id. -17- In late April, Mr. Templeton received notice of the FINRA arbitration award.6 On April 28, 2011, he emailed Mr. Hall the following: Let me make sure I understand this situation. Please let me know if I have it straight. Tom Fehn or his firm obtained a settlement with Cordaro regarding the CapWest Arb[itration], on behalf of our E&O Insurance. Did this settlement include me, if not why not? It was my understanding from you that [Mr. Fehn] was representing CapWest and Me in this Arb[itration]. If so, will I receive some type of settlement agreement? The arbitration went ahead with regard to the United Securities [arbitration] with an award made to Cordaro. This amounted to a default award on my part because USA and I did not show up. I now need to hire an attorney to represent me in an appeal to FINRA explaining my side of the case. Id. at 1013. Mr. Hall replied, I would say you have it straight. The way Tom Fehn has explained it to me is that the portion that was a sale with CapWest is settled with you included in that and we should have settlement paperwork for that shortly. . . . The sales that occurred at USA was [sic] not. I was unaware that this case involved two sets of sales in the claim with two different [broker-dealers]. Id. at 1012. On May 4, 2011, Mr. Templeton emailed an attorney at Markun Zusman seeking advice on how to appeal or vacate the FINRA award. On May 9, another Markun Zusman attorney forwarded the email to Mr. Rogers and Joe Mooney, Catlin’s claims director. He notified Catlin that he had spoken to the Cordaros’ counsel and had 6 His mail forwarding service sent the award notice from his Santa Fe address to his South Dakota address. -18- requested that they “hold off on collection efforts until [they] all collectively figure out, what if anything can be done.” Id. at 1261. Markun Zusman eventually told Mr. Templeton they would not be able to represent him. The day after receiving Markun Zusman’s email, Mr. Rogers emailed Mr. Hall stating that he had learned about the FINRA award against Mr. Templeton and asking Mr. Hall for a copy of the settlement agreement. Mr. Hall responded the next day, as follows: You may be assuming, as I did, that the Cordaro v. CapWest, et al., as you have titled it, was a case involving only CapWest and Daryl Templeton. The case was actually titled “Cordaro v. United Securities Alliance Inc. [et al.]” Tom Fehn offered and had the agreement, with your authority to settle for up to $15K, to settle the case for CapWest and Daryl Templeton for $13.5K for the amount that included CapWest. As I am sure you would agree, he had no authority to settle for anyone else. I told Daryl that we had settled the case, meaning CapWest’s part of the case, not realizing there were other respondents involved. I did not instruct him not to attend but would understand how he may have interpreted it. . . . The claimants [sic] representative was upset that we had included Daryl Templeton in the settlement for the CapWest portion. This is indeed an unfortunate turn of events, however it was nothing more than a misunderstanding on both my part and Daryl’s. Catlin Supp. App. at 744. Mr. Rogers responded to Mr. Hall’s email, asking him to provide documentation that the Cordaro settlement included Mr. Templeton. On May 20, 2011, FINRA sent Mr. Templeton a notice at his South Dakota address that he had until June 10 to satisfy the Cordaro award or his license to sell securities would be suspended. On May 27, 2011, the Cordaros filed a complaint against -19- Mr. Templeton in New Mexico state court to confirm and enforce the arbitration award. Mr. Templeton retained counsel to represent him in the New Mexico action. His counsel never moved to vacate, modify, or set aside the FINRA award in state court. 13. Mr. Templeton Retains Counsel and Attempts to Negotiate with CapWest and Catlin Mr. Templeton then retained another attorney, Ben White, to assist him in dealing with CapWest and Catlin. On June 14, 2011, Mr. White emailed Mr. Rogers, Mr. Hall, and Ms. Davidi alerting them that the Cordaros were willing to settle their claims against Mr. Templeton for $485,000. Mr. White asked that Catlin, CapWest, and FF&S “put together a counter-proposal to take back to the Cordaros’ attorney, and to take any and all necessary steps to resolve this matter,” failing which Mr. Templeton would initiate litigation against them. App. at 1281. Mr. Rogers then emailed Mr. Fehn to ask for assurances that the claim against Mr. Templeton had been settled. On June 20, 2011, Mr. Fehn responded that the Cordaros “falsely told the arbitration panel that the case had been settled as to [CapWest] but not as to Templeton for his trades while at [CapWest].” Id. at 1014. After Mr. Rogers asked if he had any documentation of that, Mr. Fehn responded: “I sent a draft agreement a few days after the settlement was reached. [I]t included [Mr. Templeton]. I knew he had to be part of the deal.” Id. On June 20, 2011, Mr. Rogers also responded to Mr. White, copying Mr. Fehn and Mr. Hall, stating: -20- [A]s we discussed, Catlin did provide the Insureds, including Mr. Templeton and CapWest, with a defense in this arbitration, subject to full reservations of rights. The Insureds, however, raised objections to fee statements for the firm that they originally agreed to undertake the defense, and while these fees were still subject to a self-insured retention under the Catlin policy. That resulted in the original firm withdrawing from the Insureds’ representation, which was to be taken over by the other firm that CapWest had requested. Catlin’s understanding was that the new firm would represent both Insureds. Moreover, as per CapWest’s request, settlement was also agreed to by Catlin as to both Insureds. It appears from your statements below that something may have gone wrong with implementing the defense and settlement of the Insureds, in accordance with the understandings of Catlin and CapWest. Nevertheless, Catlin is still amenable to resolution of this matter, if possible, in a manner consistent with the terms of the policy, and with any other culpable parties participating in same. Catlin Supp. App. at 751. On June 28, 2011, Mr. Hall proposed that Mr. White approach FINRA and request that the arbitration award be set aside. Mr. White rejected the proposal, stating that “[t]here is absolutely zero chance that FINRA would ‘set aside’ the award.” App. at 1198. In the months that followed, Catlin continued to communicate with Mr. White in an attempt to settle the Cordaro award against Mr. Templeton. On August 5, 2011, Mr. White communicated a $450,000 offer from the Cordaros. On September 14, 2011, Mr. Rogers proposed to Mr. Hall offering $50,000 of the Policy limit toward the settlement of the Cordaros’ award against Mr. Templeton. Mr. Hall, however, objected to the remaining funds under the Policy being used to settle the Cordaros’ award against Mr. Templeton. -21- 14. Mr. Templeton Settles with the Cordaros On April 26, 2012, the New Mexico state court confirmed the arbitration award against Mr. Templeton for $500,000 plus interest and arbitration fees. On September 25, 2012, Mr. Templeton settled the New Mexico judgment with the Cordaros for $555,000.