Court Opinion

ID: 3152198
Source: CourtListenerOpinion
Date Created: 2015-11-05 00:00:37.133628+00
Date Added: 2024-06-11T11:55:37.163871
License: Public Domain

NOT PRECEDENTIAL

                       UNITED STATES COURT OF APPEALS
                            FOR THE THIRD CIRCUIT
                                 ____________

                                      No. 14-4094
                                     _____________

                      CHARTER OAK INSURANCE COMPANY

                                            v.

                           MAGLIO FRESH FOODS,
                                   d/b/a
                        MAGLIO'S SAUSAGE COMPANY;
                     AMERICAN GUARANTEE AND LIABILITY
                           INSURANCE COMPANY

                                   Maglio Fresh Food,
                                                Appellant
                                    _____________

             APPEAL FROM THE UNITED STATES DISTRICT COURT
               FOR THE EASTERN DISTRICT OF PENNSYLVANIA
                            (D.C. Civil No. 12-cv-03967)
                  District Judge: Honorable Michael M. Baylson
                                   ____________

                       Submitted Under Third Circuit LAR 34.1(a)
                                   October 9, 2015
                                    ____________

                Before: FUENTES, SMITH and BARRY, Circuit Judges

                           (Opinion Filed: November 4, 2015)
                                    ____________

                                       OPINION*
                                     ____________

*
   This disposition is not an opinion of the full court and pursuant to I.O.P. 5.7 does not
constitute binding precedent.
BARRY, Circuit Judge

       Appellant Maglio Fresh Foods (“Maglio”) appeals the District Court’s grant of

summary judgment and entry of declaratory judgment in favor of Appellee American

Guarantee & Liability Insurance Company (“American Guarantee,” a subsidiary of

Zurich American Insurance Company) on the issue of insurance coverage, and grant of

judgment, following a bench trial, in favor of American Guarantee on Maglio’s claims of

bad faith and breach of contract. Because the Court correctly concluded that American

Guarantee had no duty to defend or indemnify Maglio and properly rejected Maglio’s

claims of bad faith and breach of contract, we will affirm.

                                             I.

       Unfortunately, a rather full recitation of the facts and procedural history is

necessary for an understanding of our analysis and ultimate decision. In 2010, Leonetti’s,

a supplier and competitor of Maglio, brought a lawsuit against it in the Court of Common

Pleas of Philadelphia County. Leonetti’s complaint cited several different causes of

action, and the court interpreted the complaint as essentially raising two claims: the

“Maglio brand claim” and the “Forte brand claim.” The “Maglio brand claim” refers to

Leonetti’s claim that after terminating its private label manufacturing agreement with

Leonetti’s and finding a new manufacturer, Maglio continued to use boxes reflecting

product information corresponding to Leonetti’s stromboli, instead of the new

manufacturer’s stromboli. The “Forte brand claim” refers to Leonetti’s claim that Maglio
                                             2
sold stromboli under the “Forte” brand name, despite the fact that Leonetti’s had

purchased and obtained exclusive rights to distribute Forte brand stromboli.

       A.     The Insurance Policies

       In connection with the lawsuit, Maglio sought a defense and indemnity from its

primary insurer, The Charter Oak Fire Insurance Company (“Charter Oak,” a Travelers

company), and its excess and umbrella insurer, American Guarantee.

       The Charter Oak policy had a limit of $1,000,000, and covered claims for

“advertising injury,” which included injury arising out of “Oral, written or electronic

publication of material that slanders or libels a person or organization or disparages a

person’s or organization’s goods, products or services . . . .” (App. 614.) It excluded

coverage for advertising injury “arising out of oral or written publication of material, if

done by or at the direction of the insured with knowledge of its falsity.” (App. 496.)

       The American Guarantee policy had a limit of $25,000,000, and provided both

excess coverage, incorporating the same terms and conditions as the underlying insurance

(here, the Charter Oak policy), and umbrella coverage pursuant to its own terms. The

terms of the American Guarantee umbrella coverage likewise included coverage for

“advertising injury” and included an identical “knowledge of falsity” exclusion.

       The Charter Oak policy provided that it had a duty to defend Maglio against any

suit seeking damages for advertising injury, and that its duty to defend would end when it

had used up the limits of insurance for the payment of judgments or settlements. The

American Guarantee policy stated that it had a duty to defend as an excess carrier “when
                                             3
the applicable limit of underlying insurance has been exhausted by payment of claims for

which coverage is afforded under this policy.” (App. 396.)

       B.     The Underlying Lawsuit

       Charter Oak agreed to defend Maglio with regard to the allegations in the

Leonetti’s complaint subject to a reservation of rights. Charter Oak stated that only the

allegations of “trade libel” were potentially covered as advertising injury under the

policy, and agreed to indemnify Maglio up to its policy limit with respect to that claim

only. In the complaint, the allegations of “trade libel” appeared under Count III, in which

Leonetti’s alleged that “[Maglio] made derogatory, misleading and untrue statements that

would be understood by the average person to denigrate the quality of the stromboli

manufactured and sold by Leonetti’s under the Forte Brand and which would decrease

the value of the Forte Brand.” (App. 1891.) None of the specific “trade libel” allegations

dealt with the facts of the Maglio brand claim.1

       American Guarantee, through its parent company, Zurich, acknowledged Maglio’s

claim and corresponded with defense counsel. After receiving counsel’s case analysis

and copies of the pleadings, it determined that the case was unlikely to reach the excess

layer of coverage and closed its file.

       In 2011, the lawsuit proceeded to a jury trial on both claims, but a mistrial was

declared as to the Forte brand claim due to a hung jury. Thereafter, on October 3, 2011,

1
  The tort of trade libel, in Pennsylvania, arises from “the publication of a disparaging
statement concerning the business of another.” Maverick Steel Co. v. Dick Corp./Barton
Malow, 54 A.3d 352, 354 (Pa. Super. Ct. 2012).
                                             4
the jury returned a verdict in favor of Leonetti’s on the Maglio brand claim, awarding

compensatory damages of $2,000,000 and punitive damages of $555,000.

       Following the verdict, Charter Oak confirmed that it would continue to defend

Maglio, pursuant to its reservation of rights, through any post-verdict motions and on re-

trial of the Forte brand claim. American Guarantee was notified of the verdict and

informed Maglio that it had no duty to provide defense or indemnity because Charter Oak

was continuing to provide a defense and because the verdict on the Maglio brand claim

was based on a claim for unfair competition that did not constitute “advertising injury”

within the meaning of either insurance policy.

       The court retried the Forte brand claim in December 2011. Prior to completion of

the trial, Charter Oak informed Maglio that it was willing to pay its full $1 million limit

of liability toward a settlement and dismissal with prejudice of all claims. The parties

could not reach an agreement, however, and a jury again found in favor of Leonetti’s,

awarding compensatory damages of $660,000. In January 2012, Charter Oak deposited

its policy limit ($1 million) plus post-judgment interest with the court, in order to halt the

accrual of interest and facilitate settlement.

       Settlement discussions ensued between Maglio, Leonetti’s, and the insurers, but

the case remained unresolved. Maglio indicated to its insurers that it lacked the assets

necessary to obtain an appeal bond for the full amount of the judgment, and that it was

therefore considering assigning its rights against the insurers to Leonetti’s. Charter Oak

stated that it would defend Maglio through appeal, subject to its reservation of rights, and
                                                 5
offered to pay the cost of an appeal bond up to its policy limit. It also offered to assist

Maglio in obtaining an appeal bond for the balance of the judgment, and continued to

state that its $1 million policy limit remained available for settlement. Meanwhile,

counsel for Maglio, assisted by defense counsel, explored the possibility of obtaining an

appeal bond and determined that it was not financially feasible for Maglio to itself obtain

a bond, due to the company’s financial condition.

       In May 2012, the state court denied Maglio’s post-trial motions and Maglio

entered into a settlement agreement and assignment of rights with Leonetti’s, awarding

Leonetti’s $4.5 million and assigning to Leonetti’s its claims against the insurers. In the

agreement, Maglio assigned all of its legal rights and claims arising out of or resulting

from the underlying lawsuit, including “all contractual, extra-contractual, legal, statutory

and equitable claims relating to legal malpractice, insurance, common law bad-faith, and

statutory claims under 42 Pa. C.S.A. § 8371.” (App. 2328.) Under the terms of the

agreement, however, Maglio retained an interest in the outcome of claims against the

insurers: it was entitled to 50% of any amount recovered in excess of $4.5 million, and if

less than $2 million was recovered, it was responsible for paying up to $250,000 to

Leonetti’s. The settlement agreement further stated that it would be “automatically

terminated, rescinded and considered null and void” if Maglio’s insurers agreed to post

an appeal bond before May 18, 2012. (App. 2325.)

       Charter Oak thereafter informed Maglio that by entering into the settlement

agreement and assignment of rights, Maglio breached its policy’s “cooperation”
                                             6
provision. Neither insurance company, nor Maglio, posted an appeal bond, and the

verdicts were reduced to judgment. On July 16, 2012, the funds that had been deposited

into court by Charter Oak were released to Leonetti’s.

       C.     The Present Action

       On July 12, 2012, Charter Oak brought this action against Maglio, and against

American Guarantee as a “nominal defendant,” seeking a declaratory judgment that

Leonetti’s claims against Maglio in the underlying state court action were not covered

under its policy. American Guarantee brought a cross claim seeking a similar declaratory

judgment, and Maglio brought counter and cross claims for breach of contract and bad

faith against the insurers.

       On October 24, 2013, the District Court granted the insurers’ motions for

summary judgment and entered a declaratory judgment in their favor on the issue of

coverage. The Court concluded that neither policy covered the Maglio brand claim

because the only theory of liability presented at trial was “that Maglio knowingly

misrepresented the quality, appearance, and contents of its own products.” (App. 18.) It

observed, as well, that Maglio failed to point to any evidence from the trial that it

disparaged Leonetti’s or its products. The Court held that even if the claim was covered

as “advertising injury,” it was excluded from coverage by the knowledge of falsity

exclusion. Maglio’s broker and sales manager, Richard Taubman, had admitted at trial

that he “knew that the Maglio brand boxes did not accurately represent the product

contained within them and that Maglio misled the public by using those boxes.” (App.
                                            7
19.) The Court concluded that Maglio also failed to meet its burden to show that the

Forte brand claim was covered by the policies.

       The litigation proceeded with respect to Maglio’s claims against the insurers.2

Just prior to trial, it was determined that although the parties had been acting under the

assumption that the case was proceeding to a jury trial, in fact Maglio had failed to file a

jury demand as required under Federal Rule of Civil Procedure 38. The docket notation

stating “Jury Demand: Plaintiff” was determined to be a clerical error, acknowledged by

the Clerk’s office, and the docket also indicated that Maglio’s counsel had previously

filed a conference information report in which “non-jury trial” had been checked off.

After this issue was identified, Maglio filed a motion for a jury trial under Federal Rule

of Civil Procedure 39(b).

       Following oral argument, the District Court denied Maglio’s motion. Weighing

the factors set forth by us in SEC v. Infinity Gr. Co., 212 F.3d 180, 195-96 (3d Cir.

2000), the Court determined that the issues were not well suited to a jury trial because the

case was “to a . . . significant extent, governed by legal issues.” (App. 3250.) The Court

also observed that Maglio had provided no explanation for its failure to file a jury

demand as required. The Court did, however, decide to proceed with a bench trial solely

2
  The Court had denied the insurers’ motions for summary judgment on Maglio’s claims
because it determined that genuine issues of material fact existed, including issues as to
(1) whether American Guarantee met its defense obligations to Maglio during the time
between the first and second verdicts, (2) whether American Guarantee’s obligations to
Maglio changed after Charter Oak tendered its $1 million policy limit, and (3) whether
American Guarantee’s refusal to participate in Maglio’s defense was reasonable.
                                             8
on liability, with a promise to revisit the issue of a jury trial if the case proceeded to a

damages phase.

       Charter Oak settled with Maglio just prior to trial, and the District Court held a

bench trial on the claims against American Guarantee. On August 8, 2014, the Court

issued its findings of fact, and, on September 9, 2014, issued its conclusions of law and

verdict, in favor of American Guarantee.

       The District Court concluded that Maglio failed to meet its burden to show that

American Guarantee acted in bad faith. It determined that Charter Oak’s tender of its

policy limits in December 2011 did not affect the obligation of American Guarantee to

defend Maglio, because Charter Oak continued to defend and its policy limits had not

been exhausted by the payment of claims.          The Court also found that American

Guarantee’s conduct did not lack a reasonable basis, as it continued to be “watchful of its

duty to Maglio” following the Forte brand verdict by hiring coverage counsel and closely

monitoring the underlying action. (App. 55.) It determined, as well, that American

Guarantee had no duty to post an appeal bond because the Charter Oak policy had not

been exhausted by the payment of covered claims.3

       This appeal followed.

                                            II.

       The District Court had jurisdiction pursuant to 28 U.S.C. § 1332 and we have

3
  At this stage of the proceedings, despite the District Court’s October 24, 2013 holding
that Charter Oak’s policy did not cover the Forte brand claims, the parties agreed that
Charter Oak had admitted coverage for the Forte brand verdict.
                                             9
jurisdiction pursuant to 28 U.S.C. § 1291. We review a district court’s order granting

summary judgment de novo, applying the same standard as the district court. Post v. St.

Paul Travelers Ins. Co., 691 F.3d 500, 514 (3d Cir. 2012). Summary judgment is

appropriate where “the movant shows that there is no genuine dispute as to any material

fact and the movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56. We

review a district court’s findings of fact following a bench trial for clear error, and

exercise plenary review over its conclusions of law. Post, 691 F.3d at 514-15. We

review a district court’s denial of a request for a jury trial under Rule 39(b) for abuse of

discretion. Infinity Gr. Co., 212 F.3d at 195.

                                             III.

       On appeal, Maglio contends that the District Court erred in determining that

American Guarantee was not obligated to indemnify it for the underlying verdicts and

erred in rejecting its claims for bad faith and breach of contract.4

4
  Maglio also argues that the District Court abused its discretion in denying its motion for
a jury trial, an argument we reject without further discussion. It contends, as well, that it
has standing to prosecute this appeal or, in the alternative, that the Court erred in denying
its petition to join Leonetti’s in the federal court action. Neither party challenges
Maglio’s standing to pursue its claims; however, by virtue of its assignment of rights to
Leonetti’s, one could argue that Leonetti’s, not Maglio, is the real party in interest. See
Fed R. Civ. P. 17(a) (requiring that an action be prosecuted in the name of the “real party
in interest”). In this case, however, Leonetti’s interests are adequately protected by
Maglio. When Maglio (unsuccessfully) moved in the District Court for joinder of
Leonetti’s, it represented that “the interests of Maglio and Leonetti’s are perfectly
aligned, and their claims against the two insurers are identical.” (See Mem. in Support of
Pet. for Joinder, at 2 (Dist. Ct. ECF No. 135).) This continues to be the case. In denying
Leonetti’s motion to intervene (for the first time) on this appeal, we likewise observed
that Leonetti’s “offers no reason to believe that Maglio will not adequately represent its
                                              10
       A.     Coverage

       The “well-established rules of insurance contract interpretation” under

Pennsylvania law provide that “[t]he task of interpreting [an insurance] contract is

generally performed by a court rather than by a jury.” 401 Fourth Street, Inc. v. Investors

Ins. Gr., 879 A.2d 166, 171 (Pa. 2005). Interpretation of an insurance policy “is a

question of law over which we exercise plenary review.” Nationwide Life Ins. Co. v.

Commonwealth Land Title Ins. Co., 579 F.3d 304, 307 (3d Cir. 2009).                  “Under

Pennsylvania law, which applies to this action, we ascertain the intent of the parties by

reading the policy as a whole, and we give unambiguous terms their plain meaning.” Id.;

see 401 Fourth Street, Inc., 879 A.2d at 171.

       The plain language of the American Guarantee policy makes clear that neither its

excess nor its umbrella coverage applied to the damages at issue. The October 2011

verdict, totaling $2.5 million, did not result from claims constituting “advertising injury”

within the meaning of either policy, and the December 2011 verdict for $660,000 was

covered by Maglio’s underlying insurance (Charter Oak) within the limits of that policy.

interests in litigating the appeal on the merits.” (Order Denying Mot. to Intervene, at 2.)
In addition, under the terms of the settlement agreement, Maglio retains a financial
interest in the outcome of the claims. For these reasons, we decline to dismiss this appeal
for lack of standing, and find that Maglio is a real party in interest for purposes of Rule
17(a). See HB Gen. Corp. v. Manchester Partners, L.P., 95 F.3d 1185, 1188 (3d Cir.
1996) (referring to the rules of joinder as “flexible, pragmatic federal procedural rules”);
ICON Gr., Inc. v. Mahogany Run Devel. Corp., 829 F.2d 473, 478 (3d Cir. 1987)
(holding that “the essential purposes” of the real-party-in-interest rules of joinder “are to
ensure that a judgment will have res judicata effect . . . and adequately to protect the
interests of absent parties.”).
                                             11
      As the District Court correctly concluded, the Maglio brand claim—the only claim

adjudicated to verdict in the first state court trial—did not encompass a claim for trade

libel or disparagement of Leonetti’s products.5 The only allegations of disparagement in

Leonetti’s amended complaint corresponded to the Forte brand claim, which only

proceeded to verdict in the second trial. Nevertheless, Maglio contends that the jury in

the first trial could have found that Maglio disparaged Leonetti’s products because the

evidence showed that it placed Leonetti’s product information on inferior stromboli. As

American Guarantee points out, however, there was no evidence at trial that any

consumer ever knew that Leonetti’s made a Maglio stromboli. The theory of liability on

the Maglio brand claim was never that Maglio made disparaging statements about

Leonetti’s stromboli, but that it unfairly competed by making false statements about its

own products. Maglio has failed to point to evidence indicating otherwise.

      Even if we were to conclude that the Maglio brand claim fit within the definition

of “advertising injury,” the District Court properly determined that coverage was

excluded under the “knowledge of falsity” exclusion. It is undisputed that Taubman,

Maglio’s broker and sales manager, testified that he knew the Maglio brand boxes

contained false statements and did not accurately represent the product contained within

them. Maglio does not dispute that Taubman acted as its agent with respect to stromboli

sales, but contends that the policy exclusion applies only to actions done “by or at the

5
   Because the first verdict did not encompass both covered and non-covered claims,
Maglio’s argument that the lack of specific jury findings as to each precludes American
Guarantee from disclaiming coverage is unavailing.
                                           12
direction of the insured,” and that he was not “the insured.” As the Supreme Court of

Pennsylvania has held, however:        “A corporation shall be held responsible for the

knowledge which is possessed by those whom it appoints to represent it. From the nature

of its constitution it can have no other knowledge than that of its officers, and, in dealing

with such officers, as with the corporation itself, third parties have a right to consider that

what they know it knows.” Gordon v. Cont’l Cas. Co., 181 A. 574, 577-78 (Pa. 1935);

see also W. C. A. B. v. Evening Bulletin, 445 A.2d 1190, 1192 (Pa. 1982) (“It is well

settled in the law of this jurisdiction that knowledge of an agent, acting within the scope

of his authority, real or apparent, may be imputed to the principal, and therefore,

knowledge of the agent is knowledge of the principal.” (internal citations omitted).)

Because Taubman was an agent of Maglio acting within the scope of his duties, his

knowledge is imputed to the corporation, the named “insured” under both policies.

       The District Court did not err in granting summary judgment and a declaratory

judgment in favor of American Guarantee with respect to coverage.

       B.     Bad Faith

       Having concluded that American Guarantee owed Maglio no duty of indemnity, it

is difficult to conceive of how American Guarantee could have acted in bad faith by

failing to defend it.     Charter Oak provided Maglio with a defense throughout the

underlying litigation; thus, the only real issue is whether American Guarantee acted in

bad faith by failing to post, or contribute to the posting, of an appeal bond. Maglio

contends that, at the time it sought to appeal the verdicts, there remained a possibility that
                                              13
the Maglio brand verdict could be covered under the American Guarantee policy, and that

American Guarantee therefore acted in bad faith by failing to post a bond. As we have

elsewhere observed, however, it is a “rare” case in which an insurer is liable for bad faith

when there is no duty to provide coverage, see Post, 691 F.3d at 524, and, because

American Guarantee had a reasonable basis for its conduct with respect to Maglio, this is

not one of those rare cases.6 See Amica Mut. Ins. Co. v. Fogel, 656 F.3d 167, 179 (3d

Cir. 2011) (“[A]n insurer may defeat a claim of bad faith by showing that it had a

reasonable basis for its actions.”).

       The language of the American Guarantee policy provided that it had a duty to

defend “when the applicable limit of underlying insurance has been exhausted by

payment of claims for which coverage is afforded under this policy.” (App. 396.) Here,

the District Court correctly determined that the limits of the Charter Oak policy were

never “exhausted by payment of claims for which coverage is afforded.” Although

Charter Oak offered and ultimately paid its $1 million policy for settlement, it only

admitted coverage for the Forte brand verdict ($660,000), which did not exceed the

policy limit. Because the limit of the Charter Oak policy was never exhausted by the

payment of covered claims, the defense provision of the American Guarantee policy was

never triggered.     Throughout the relevant time period, American Guarantee acted

6
   Because the District Court correctly concluded that Maglio’s bad faith claim failed
because Maglio could not prove that American Guarantee lacked a reasonable basis for
its actions, we need not address the Court’s alternative holding that Maglio’s claim also
failed because it did not prove that American Guarantee acted out of self-interest or ill
will.
                                            14
reasonably in assessing Maglio’s claim, investigating the claim, continuing to monitor the

events of the underlying action, and hiring counsel to provide guidance as to its

obligations. The Court correctly concluded that Maglio failed to show that American

Guarantee acted in bad faith or breached its contract with Maglio.7

       The District Court’s entry of judgment as to the bad faith and breach of contract

claims will be affirmed.

                                            IV.

       For the reasons stated above, we will affirm.

7
  Maglio contends that the District Court misconstrued its breach of contract claim and
erred in failing to rule on it. The Court construed the contract claim to be a claim for
breach of the implied covenant of good faith and fair dealing, while Maglio states that its
claim was a “pure” contract claim for breach of the policy’s express language. While
Maglio correctly points out that the legal standard applicable to a breach of contract claim
differs from the legal standard applicable to a bad faith claim, the Court’s rulings with
respect to American Guarantee’s duties of indemnity and defense make clear that the
Court determined, based on its interpretation of the contractual language, that American
Guarantee had not breached a duty to Maglio. The Court’s findings and determinations
conclusively resolved Maglio’s “pure” breach of contract claim, as well as its claims for
common law and statutory bad faith.
                                            15