Court Opinion

ID: 45221
Source: CourtListenerOpinion
Date Created: 2010-04-25 22:34:17+00
Date Added: 2024-06-11T17:17:23.169687
License: Public Domain

[DO NOT PUBLISH]

             IN THE UNITED STATES COURT OF APPEALS

                    FOR THE ELEVENTH CIRCUIT            FILED
                      ________________________ U.S. COURT OF APPEALS
                                                         ELEVENTH CIRCUIT
                             No. 06-12464                 OCTOBER 11, 2006
                         Non-Argument Calendar            THOMAS K. KAHN
                                                              CLERK
                       ________________________

                    D. C. Docket No. 05-02103-CV-P-S

VULCAN ENGINEERING COMPANY,
PETER PETRILLO,
RYAN WIERCK, an individual,

                                                     Plaintiffs-Appellants,

                                  versus

XL INSURANCE AMERICA, INC.,

                                                     Defendant-Appellee.

                       ________________________

                Appeal from the United States District Court
                   for the Northern District of Alabama
                      _________________________

                            (October 11, 2006)

Before TJOFLAT, CARNES and MARCUS, Circuit Judges.

PER CURIAM:
      Philip S. Zettler is a former shareholder and former officer of Vulcan. In

2005, he sued Vulcan, Peter Petrillo and Ryan Wierck (collectively “the Vulcan

litigants”), among others, in the Circuit Court of Jefferson County, Alabama (“the

Zettler action”). He asserted two of his claims against the individual plaintiffs in

this action. Count III alleged that Petrillo and Wierck breached fiduciary duties

owed to Zettler. Count IV alleged that Petrillo and Wierck engaged in fraud and

suppression of Vulcan’s worsening financial condition.

      Zettler brought his claims as direct actions. The Vulcan litigants have a

strong argument that Zettler should have brought those claims derivatively.

Normally defendants are happy when they believe that a plaintiff has incorrectly

plead his case. The Vulcan litigants, however, have directors and officers’ liability

insurance issued by XL Insurance America, Inc. That policy includes both an

“insured vs. insured exclusion” and a “securityholder derivative action” exception

to that exclusion. Because Zettler is a former Vulcan officer, he is an “insured”

under the insured v. insured exclusion. If the Zettler action is direct, the insured

vs. insured exclusion kicks in, and XL Insurance has no duty to defend the Vulcan

litigants. If the Zettler action is a securityholder derivative action, the insured v.

insured exclusion does not apply, and XL Insurance has a duty to defend. XL

Insurance concluded that the securityholder derivative action exception to the

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exclusion did not apply, and refused to pay the Vulcan litigants’ defense costs.

The Vulcan litigants brought this lawsuit to make XL pay.

      Both sides filed motions for summary judgment before the district court.

The court granted XL Insurance’s motion, finding that the insured vs. insured

exclusion applies. The Vulcan litigants appealed, contending that the claims

asserted in the Zettler action are shareholder derivative claims as a matter of

Alabama law, and thus the securityholder derivative action exception to the insured

vs. insured exclusion applies. We review de novo a district court's grant of

summary judgment. Witter v. Delta Air Lines, Inc., 138 F.3d 1366, 1369 (11th

Cir. 1998). Here, we agree with the district court.

      There are two fundamental problems with the arguments put forward in the

Vulcan litigants’ appellate briefs. First, they never address the actual language of

the underlying insurance policy. Second, they fail to come to grips with the

difference between having a derivative claim and bringing a derivative cause of

action.

      The parties agree that coverage turns on whether the securityholder

derivative action exception applies. The Vulcan litigants immediately begin their

attack on the decision below by defining derivative claims under Alabama law.

Hitting the case law is premature, however, because the insurance policy itself

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defines “Securityholder Derivative Action.” The policy reads:

        A Securityholder Derivative Action is defined as: any Claim brought on
        behalf of, or in the name or right of, the Insured Organization by one or
        more securityholders of the Insured Organization in their capacity as such if
        such Claim is brought and maintained without the assistance, participation or
        solicitation of any Executive.

According to the plain meaning of this clause, whether a claim is derivative turns

on how that claim is brought, rather than on the injury underlying that claim. How

it actually was brought trumps how it might have been brought.

        The district court found ample evidence that Zettler brought his claims as

part of a direct action. Zettler himself said as much, alleging in his state court

lawsuit that his “claims are individual rather than derivative because [he] was the

only minority stockholder in Vulcan and his injuries are personal.” The circuit

court adjudicating the Zettler action agreed. It found that Zettler did not have

standing to assert any derivative claims and allowed the case to proceed only to the

extent that Zettler asserted his claims directly. Even the Vulcan litigants

represented to the circuit court that “Zettler seeks recovery for his alleged injuries

through an individual action.” Zettler’s complaint also does not adhere to Rule

23.1 of the Alabama Rules of Civil Procedure, which lays out the procedural

requirements for bringing a derivative action under Alabama law. Ala. R. Civ. Pro.

23.1.

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      The Vulcan litigants, however, focus their attention on demonstrating that

each of Zettler’s claims is “derivative in nature.” They argue that the “established

law in Alabama is that claims for self-dealing, mismangement, waste of corporate

assets, and the like are derivative in nature and do not form the proper basis for a

direct action by shareholders.” The Vulcan litigants might be right that “Zettler’s

facts support derivative claims,” but they are wrong to the extent they assert that

Zettler brought those claims derivatively.

      The cases that the Vulcan litigants cite to themselves prove that Zettler’s

claims are derivative in nature demonstrate that Alabama draws a distinction

between having a derivative claim and bringing a derivative cause of action. Each

case involves the dismissal of a lawsuit brought directly but alleging injuries that

are derivative in nature. See, e.g., Brooks v. Hill, 717 So. 2d 759, 762 (Ala. 1998);

Pegram v. Hebding, 667 So. 2d 696, 702 (Ala. 1995); Shelton v. Thompson, 544

So. 2d 845, 847 (Ala. 1989). In Hill, for example, the Alabama Supreme Court

found that a claim of waste of corporate assets “could have been brought only as a

derivative claim on behalf of the corporation” but that “the plaintiff did not bring

such a claim.” 717 So. 2d at 762. It thus affirmed a dismissal of the complaint.

Id. at 760. These cases demonstrate that it is possible to bring a derivative claim in

a direct action, although it is procedurally improper and will lead to a dismissal. A

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finding that a particular claim is derivative does not retroactively transform the suit

into a derivative action. If it did, there would be no procedural defect and the

lawsuits could have proceeded in cases like Hill.

       Here, Zettler filed a direct action. It may be that any injuries allegedly

caused by the Vulcan litigants are derivative in nature. In that case, damages can

only be recovered by a plaintiff with standing to bring a suit on behalf of Vulcan.

But Zettler did not bring that suit. He brought a direct suit in his own name.

Because his lawsuit was not “brought on behalf of, or in the name or right of, the

Insured Organization,” it is not a “Securityholder Derivative Action” as that term is

defined in the insurance policy. Therefore, the district court correctly found that

the ssecurityholder derivative suit exception does not apply. The insured vs.

insured exclusion is therefore applicable, and XL has no duty to defend the Vulcan

litigants.

       The Vulcan litigants make a final argument not directly addressed by the

district court. They contend that XL Insurance’s duty to defend independently

attaches because Zettler’s claims are groundless. The insurance policy, however,

does not provide affirmative coverage against groundless claims. Instead, it

forbids XL Insurance from refusing to defend claims “covered by [the] Policy” if

that refusal is based only on the insurance company’s determination that those

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claims are “groundless, false or fraudulent.” For example, if Zettler had brought

his claims derivatively, XL Insurance could not have denied coverage based on its

determination that Zettler’s claim lacked merit. Here, however, XL Insurance

refused to defend not because it deemed Zettler’s claims to be without merit, but

because it decided the policy did not cover the Zettler action regardless of whether

the action had merit. The company was right about that.

AFFIRMED.

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