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I. Directors and Officers
ERIC C. RAJALA v. LOOKOUT WINDPOWER, LLC
(D.Kansas, February 4, 2011) [lexis.com]
Civil RICO Claims Fail to Withstand Motion to Dismiss
Several individuals formed a company called Generation Resources Holding Company, LLC (“GRHC”) for purposes of developing wind farm projects in Pennsylvania. On April 28, 2008, GRHC filed a voluntary petition for bankruptcy under Chapter 7. Thereafter, the Trustee for the estate of GRHC commenced suit against the individual investors and several corporate entities, alleging multiple causes of action. In essence, the Trustee contended that defendants had manipulated certain companies in order to deprive GRHC of the proceeds of the sale of the wind projects and to leave GRHC unable to pay over $6,000,000 in debt.
Factually, GRHC sought to develop three wind power projects and took out several loans to finance the projects. Meanwhile, several of the individual investors formed several other LLCs and holding companies, including Forward Windpower and Lookout Windpower. Ultimately, Forward Windpower and Lookout Windpower sold the projects to Mission Wind for $13,000,000. GRHC received none of the proceeds from the sale.
The trustee’s original complaint was amended. Following the amendment, defendants moved to dismiss several causes of action, including breach of fiduciary duty, negligent misrepresentation, fraud, civil RICO, and civil conspiracy. Defendants also asserted that the claims were barred based upon the expiration of the statute of limitations as well as lack of subject matter jurisdiction.
With respect to the civil RICO claim, plaintiff alleged that defendants conspired to devise a scheme whereby they would keep the proceeds of the sale of the wind power projects and leave the GRHC creditors unpaid and without recourse. The complaint alleged that defendants used the U.S. Postal Service and interstate phone lines to accomplish their scheme.
In assessing the validity of the pleadings, the District Court noted that there are four elements to a civil RICO claim: (1) conduct; (2) of an enterprise; (3) through a pattern; (4) of racketeering activity. The court determined that the dispositive question on defendants’ motion to dismiss was whether a pattern of activity had been sufficiently alleged. Observing that a pattern of racketeering activity must include the commission of at least two predicate acts, the court also noted that a viable RICO claim must demonstrate “continuity plus relationship.” In the case sub judice, the court concluded that:
Continuity is both a closed- and open-ended concept, referring either to a closed period of repeated conduct, or to past conduct that by its nature projects into the future with the threat of repetition. … If, however, the alleged facts do not demonstrate any threat of “future criminal conduct,” the claim will fail. … Here, Plaintiff alleges that Defendants engaged in a series of acts to accomplish the discrete goal of depriving GRHC’s creditors of Defendants’ assets. This appears to be a closed-ended scheme to accomplish a specific goal in that the Complaint alleges the Insiders planned to keep the profits for themselves while leaving GRHC bankrupt. In addition, there does not appear to be any threat of future criminal conduct[.]
Thus, the court dismissed the civil RICO count.
With respect to the issue of subject matter jurisdiction, having determined that the claims under RICO must be dismissed, the only remaining basis for subject matter jurisdiction was that the case “related to” another case over which the court had jurisdiction – here, the bankruptcy case. The court enunciated a test for determining whether a civil case is sufficiently related to a bankruptcy proceeding such that subject matter jurisdiction exists, stating that the determinative factor is whether the outcome of the civil matter could conceivably have any effect on the bankruptcy estate. In this case, the court found that it did insofar as the claims could result in damages being awarded such that additional funds would be available to the bankruptcy creditors.
Impact: This case illustrates once again the difficulty of sufficiently pleading a civil RICO claim so as to survive a motion to dismiss.
KWAME ASAFO-ADJEI v. FIRST SAVINGS MORTGAGE CORP.
(D. Maryland, February 1, 2011) [lexis.com]
Maryland’s 3-Year Statute of Limitations Bars Professional Liability and Fraud Claims
This case involves a failed business venture in which the investors attempted to purchase and develop certain land located in Maryland. After the venture failed, one investor filed suit in Maryland state court against other investors and business advisors, asserting claims for common law fraud, conspiracy to commit fraud, intentional infliction of emotional distress, violations of the Truth in Lending Act and violations of the Fair Credit Reporting Act. The action was subsequently removed to federal court.
Following removal, plaintiff filed an amended complaint, asserting claims for fraud against all defendants and professional liability against defendant Hal J. Epstein. Defendants moved to dismiss the claims based upon the statute of limitations.
The crux of plaintiff’s claim was that plaintiff and the other investors were fraudulently led him to believe that they were purchasing two plots of land rather than one. Plaintiff further contended that he was unaware that the loan financing the purchase of the land had been issued solely to him and not to the other defendants. Plaintiff urged that defendant Epstein had a fiduciary duty to him as the settlement agent for the purchase to ensure that he was receiving title to two plots of land rather than one. Ultimately, the court determined that all of plaintiff’s claims were barred by the three-year statute of limitations under Maryland law applicable to fraud claims and professional liability claims. The court rejected plaintiff’s argument that the statute of limitations should be tolled, concluding that the complaint failed to set forth specific allegations as to how the fraud perpetuated by defendants prevented plaintiff from discovering defendants’ misconduct.
Impact: This case demonstrates the importance of pleadings allegations of fraud with specificity. Here, the lack of specificity prevented the court from giving the plaintiff the benefit of a longer, discovery-based accrual date for statute of limitations purposes.
II. Errors and Omissions
II. Errors and Omissions
CONTINENTAL CAS. CO. v. BOWEN
(D. Utah, January 21, 2011) [lexis.com]
Insurer Fails to Prove Applicability of Joint Venture Exclusion
Kimberly Bowen is a real estate agent connected to RE/MAX. She loaned an acquaintance, Sandra Chapple, $80,000 to start up a series of companies for the purpose of facilitating the sale and development of land located within various developments, including one entitled Fox Hollow. Bowen later refinanced her home and gave Chapple an additional $120,000. Bowen also purchased computers and even paid Chapple’s employees at times.
Bowen acted as the real estate agent for both buyers and sellers on the lot purchases in the Fox Hollow subdivision. Eventually, three lawsuits were filed naming Bowen as a defendant. Two lawsuits arose out of the Fox Hollow development and were filed after the municipality, Saratoga Springs, would not issue building permits because no secondary water was available. A third action, (Besser) was filed in California. Bowen sought coverage under an errors and omission policy issued by plaintiff for the three actions.
Continental Casualty disclaimed coverage based upon the joint venture and financial interest exclusions. The court stated that in order to establish a joint venture, the proponent must show the parties combined their property, money, effects, skill, labor and knowledge. Moreover, “there must be a community of interest in the performance of the common purpose, a joint proprietary interest in subject matter, a mutual right to control, a right to share in the profits, and unless there is an agreement to the contrary, a duty to share in any losses which may be sustained.”
The court concluded that even though the third action (Besser) actually alleged a joint venture, the complaint did not allege that Ms. Bowen would be responsible for any losses if the venture failed. Further, Continental did not present any evidence of an intent among those involved in the transaction to share losses. Accordingly, the court held that the exclusion did not apply.
Turning to the financial interest exclusion, the court noted that the phrase “financial interest” was not defined in the policy. The court also stated that the record was unclear about what was done with Ms. Bowen's money except that some definitely went to one of the involved companies. Accordingly, the court could not find as a matter of law that Ms. Bowen had a financial interest in the transactions.
Impact: This decision is the latest in a series of decisions we have reported on whereby the court arguably places a higher evidentiary burden on the insurer than is traditionally required. Typically, an insurer is required to prove that the allegations in the complaint fall within the terms of the exclusion. Here, the court required the insurer to actually prove, factually, that the insured’s action fell within the scope of the exclusion. This is a difficult standard to meet absent lengthy (and costly) discovery.
III. Legal Malpractice
III. Legal Malpractice
FLEMING, INGRAM & FLOYD v. CLARENDON NAT’L INS. CO.
(S.D. Ga, January 13, 2011) [lexis.com]
Court Unwilling to Grant New Trial After Jury Finds for Insured
The defendant issued a professional liability policy to the plaintiff law firm (“Fleming”). In March 2002, an attorney at the firm audited various files and discovered a number of case files involving potential malpractice. One of the files included the representation of Wendell Jenifer. In the Jenifer case, the associate failed to file suit against the correct defendant within the statute of limitations.
On March 25, 2002, the attorney called Clarendon to discuss the potential instances of malpractice, including the Jenifer file. The Clarendon representative advised that there was no reason to provide written notice of the Jenifer claim. The policy was subsequently cancelled effective August 29, 2002. However the firm purchased a one-year extension to report claims.
On September 23, 2002, the attorney met with Jenifer to discuss the error and advised that dismissal of his case was likely. The attorney conceded that he would either recover from the tort action or from the firm’s malpractice insurer. Subsequently, the attorney wrote a letter to Clarendon describing the Jenifer action and concluding, “this may be a claim.” Jenifer later filed suit and the insurer disclaimed coverage. The coverage action went to trial with a jury finding in favor of the firm. The insurer appealed.
Given that this claim arose after the expiration of the policy, the issue before the court was whether the firm provided adequate notice of the potential claim during the policy period and the firm “reported to” Clarendon that an actual claim subsequently arose.
With regard to the requirement to give notice of the potential claim, the court held that a reasonable jury could have concluded Clarendon waived the requirement of written notice of a potential claim based upon the attorney’s conversation with a Clarendon representative.
Regarding the requirement that the claim be “reported to” Clarendon, the court concluded that a reasonable jury could have concluded that the letter sent by the firm constituted a report under the policy.
Impact: Trial by jury is always a dangerous proposition for an insurer when the dispute centers on whether an insured is entitled to coverage. Rarely is the insurer the sympathetic party, even when the insured is a lawyer. Further, it is an exacting burden on any litigant to succeed in a motion to set aside a verdict or order a new trial. Courts are very reluctant to disturb the conclusions reached by a jury.
IN RE JOSEPH DELGRECO & COMPANY, INC. v. DLA PIPER LLP
(S.D. N.Y, January 26, 2011) [lexis.com]
Withdrawal of Reference to Bankruptcy Court as Legal Malpractice Action Is Not A Core Proceeding
In In Re Joseph DelGreco & Company, Inc. v. DLA Piper LLP, the plaintiff debtor retained the law firm in 2007 to represent it in connection with certain litigation and arbitration proceedings arising out of a September 2007 transaction. The defendant law firm advised the plaintiff about the wisdom of filing for bankruptcy protection prior to the end of their attorney client relationship in June 2009. In October 2009 the plaintiff filed for Chapter 11 bankruptcy protection. In July 2010, this legal malpractice action was commenced by plaintiff in New York state court and three days later plaintiff filed a notice of removal to bankruptcy court arguing that the allegations in the legal malpractice case arise under and are related to the bankruptcy case. The defendant law firm filed a motion to withdraw the bankruptcy court reference, arguing that the legal malpractice action is not a core proceeding under the Bankruptcy Code.
The District courts have original jurisdiction over all civil proceedings arising under cases under title 11 or arising in or related to cases under title 11. Additionally, the courts have the authority to withdraw any case or proceeding referred to bankruptcy court on its own or on motion for “cause shown.” “Cause shown” is not defined in section 157 (d); however, the Second Circuit has instructed district courts to consider: (1) whether the claim is a core or non-core proceeding; (2) whether the claim is legal or equitable and whether a right to a jury trial exists; and (3) whether other factors, such as judicial economy, delay, costs to parties, uniformity of bankruptcy administration and the prevention of forum shopping exist.
In this case, the district court determined that since the allegations in the four count legal malpractice action pre-dated the bankruptcy filing, the action is a non-core proceeding. The court rejected plaintiff’s arguments that the action is the principal asset of the debtor and that the actions complained about relate directly to the circumstances and timing of the bankruptcy filing.
Looking at the second prong of the Second Circuits’ test for determining if cause is shown, the court looked to the parties’ right to a jury trial. Pursuant to Section 157, all bankruptcy rulings in non-core matters are reviewable by a district court. As a result, a jury verdict in bankruptcy court would be subject to review, thereby violating the Reexamination Clause of the Seventh Amendment. Since the Second Circuit has ruled that the “constitution prohibits bankruptcy courts from holding jury trials in non-core matters, here a timely jury demand constitutes cause to withdraw the reference to bankruptcy court.
The court looked at the other considerations in the third prong of the “cause shown” test and determined that no credible arguments were made by the plaintiff that the bankruptcy court is better equipped or more familiar with the matter so as to oversee discovery and other pre-trial proceedings or that it would be more cost effective to the parties. The court also determined that withdrawing the reference would not undermine the uniform administration of the law and determined that the law firm was not forum shopping.
Impact: Given that the economy is in a flat and even downward spin, there has been an increase in bankruptcy filings. With everyone looking to blame someone with a deep pocket, the analysis in this ruling is particularly important to determine whether a claim can be adjudicated in bankruptcy court or should remain in state or federal court.
MARCIANO v. KRANER
(App. Ct. Conn., January 18, 2011) [lexis.com / lexisONE]
Expert Testimony Is Required to Prove Breach of Fiduciary Duty Claim
The plaintiff contacted the defendant attorney seeking assistance with his mentally and physically ill parents’ estate planning so as to preserve the value of his parents’ assets while also transferring some real property to himself and qualifying for state Medicaid assistance. Plaintiff learned that if he were to have the parents’ real estate transferred, then his parents’ Medicaid applications would be denied as such a transfer would be considered illegal. If the parents’ applications were granted, then the parents’ assets would have to be liquidated and used for the nursing home care before Medicaid would pay any of the medical costs. Events transpired such that the defendant attorney did not record the deed transferring the property to the plaintiff.
A five count action alleging legal malpractice and breach of fiduciary duty count was filed. A jury trial ensued and the court directed a verdict on the legal malpractice counts because plaintiff did not have admissible expert testimony. The court reserved its decision on the motion for directed verdict on the breach of fiduciary duty counts. The jury returned a $196,000 verdict in favor of the plaintiff on the breach of fiduciary duty counts and the trial court set aside the verdict because the plaintiff failed to present any expert testimony as to what conduct by the defendants constituted a breach of fiduciary duty and because there was no evidence that any conduct by the attorney in failing to record the deed before his father’s death caused the plaintiff to sustain damages. Plaintiff appealed the trial court’s judgment.
The Appellate Court first noted that the breach of fiduciary duty count was pled as a carbon copy of the legal malpractice count with nothing more than reference to the fact that defendants owed the plaintiff a fiduciary duty. The Court stated that a plaintiff cannot avoid his burden to present expert testimony to articulate the contours of that relationship by styling his cause of action as a breach of fiduciary duty. The Court also stated that here the jury’s verdict was unsupported by any evidence as to what fiduciary duty was owed, and how that duty was violated. The Court also agreed that there was no evidence that any of the defendants’ actions or inactions caused the plaintiff any damages.
Impact: This case’s holding is not unlike many which stress the requirement of expert testimony to prove a legal malpractice action; however, here, more importantly, the Court’s holding stresses the requirement for expert testimony to prove a breach of fiduciary duty count against an attorney.
GREAT AMERICAN E&S INS. v. QUINTAIROS, PRIETO, WOOD & BOYER
(Ct. of App. Miss., January 18, 2011) [lexis.com / lexisONE]
Excess Insurer In Mississippi May Not Sue Defense Counsel for Legal Malpractice But May Sue for Equitable Subrogation
A series of complaints involving nursing-home liability were filed against Shady Lawn Nursing Home and Vicksburg Convalescent Home. The defendant law firm was hired by Royal Indemnity Company to defend Shady Lawn and Vicksburg. Shady Lawn also held an excess policy with the plaintiff, which provided coverage for the losses that exceed the Royal Indemnity coverage. The lawsuits against Shady Lawn and Vicksburg resulted in a settlement which implicated the excess insurance policy.
Great American filed suit against Royal and Quintairos, the attorney hired by Royal Indemnity to defend the lawsuits, asserting their respective mishandling of the defense resulted in an unnecessarily large settlement. Great American asserted a legal malpractice action against Quintairos. In the alternative, Great American sought to recover under a theory of equitable subrogation. Quintairos filed a 12(b)6 motion to dismiss, arguing that Great American lacked standing to bring the legal malpractice action against it, as there was no attorney-client relationship between it and Great American. The motion to dismiss was granted and Great American appealed.
Great American argued that an action lies against the law firm as it relied on representations made by the law firm and that an excess carrier can maintain a cause of action for equitable subrogation against counsel hired by the primary carrier. Great American argued that the status updates consistently undervalued the underlying cases so as to intentionally avoid giving Great American notice that its excess coverage may be needed. Other concerns were that the partners and trial counsel were not licensed to practice law in Mississippi and failed to timely designate medical experts.
The Mississippi court refused to abolish the requirement of an attorney-client relationship in regard to the excess carrier and did not sanction a direct action for legal malpractice. However, the Court found that Great American could maintain a claim under the doctrine of equitable subrogation.
Impact: Mississippi is one of the states that still require privity of contract in order to bring a legal malpractice action in cases other than title work. Additionally, the court recognized that a possibility exists that frivolous claims by excess insurance carriers may be made, but stated that to prohibit such claims would be to leave the attorney who allegedly committed malpractice free from consequences if the primary insurer declined to pursue the claim. The case also discusses how such lawsuits do not create a conflict among the parties as their interests are aligned in seeking and getting competent representation for the insured and as the attorney-client communications and work product have been shared with Great American in the underlying case.
SCHLATHER, STUMBAR & SALK v. ONE BEACON INS. CO.
(N.D. N.Y., January 21, 2011) [lexis.com]
Court Dismisses Claim for Consequential Damages
In August 2008, a broker contacted the managing partner of the plaintiff law firm regarding professional liability coverage. The attorney filled out the application and submitted the application in September 2008. The defendant accepted the application, and committed in writing to provide coverage but did not send a copy of the policy or send out any exclusions.
In December 2008, a former client advised the firm of a potential malpractice claim and subsequently filed suit in January 2009. Plaintiff sought coverage under the policy. The defendant provided a defense under a reservation of rights and then ultimately withdrew the defense. Plaintiff’s filed a complaint alleging breach of contract and bad faith. Defendant moved to dismiss plaintiff’s bad faith claim.
Plaintiff eventually amended the complaint. In the course of an amended complaint, and in support of its bad faith claim, the firm contended that the defendant acted deceitfully in its application. The plaintiff alleged that the application only inquires whether the applicant is aware of any “fact, circumstance or situation” which may give rise to a claim, whereas, the policy language is more broad and excludes coverage for any wrongful act if the insured “had a reasonable basis to believe” that a wrongful act had been committed. The plaintiff alleged that the coverage promised by the defendant was illusory.
The defendant made a motion to dismiss the plaintiff’s bad faith claim contending it was redundant. In response to plaintiff’s motion, defendant argued that its bad faith claim was not a tort claim but a claim for consequential damages, a distinction recognized by the New York Court of Appeals in Bi-Economy Mkt. Inc. v. Harleysville Ins. Co., 886 N.E.2d 127 (2008). In reviewing the amended complaint, the court concluded that plaintiff’s third cause of action (bad faith) was duplicative of their second cause of action for breach of contract where plaintiff also sought consequential damages. Accordingly, defendant’s motion to dismiss the bad faith claim was granted.
Impact: New York courts continue to deal with the implications of the Court of Appeal’s decision in Bi-Economy, supra, where the court permitted consequential damages based upon the breach of the insurance contract. Insurer’s must be cognizant of this evolving area of law in New York.
SKLODOWSKY v. LUSHIS
(Superior Court of New Jersey, Appellate Division, February 2, 2011) [lexis.com / lexisONE]
Entire Controversy Doctrine
The Plaintiff retained the defendant-attorney to assist with marital-owned property. The defendant allegedly advised the plaintiff to sell the property without telling his wife with whom he was having marital difficulties. However, defendant also stated plaintiff’s wife would have an interest in the sale proceeds. Plaintiff subsequently entered into an agreement with a development company concerning the property but the deal fell through when it was discovered that his wife objected to the deal.
Plaintiff sued the development company, allegedly on defendant’s advice. The development company then filed a counterclaim for fraud and collusion. A third-party claim was also brought against the defendant alleging he violated a duty of good faith. The claims against defendant were eventually dismissed via motion for summary judgment. Plaintiff then fired the defendant and his law firm.
Plaintiff later filed a separate claim against the defendant based upon his faulty advice to the sell the property. Moreover, Plaintiff alleged defendant was practicing law in New Jersey without a license. This suit was initially dismissed on motion for summary judgment because the plaintiff failed to assert his claims against the defendant when the suit was initially filed against the development company.
On appeal, the Court reversed and held the entire controversy doctrine no longer compels the assertion of a legal malpractice claim in an underlying action that gives rise to the claim. It was further held that the entire controversy doctrine can chill attorney-client relations. Requiring a plaintiff to assert his legal malpractice claim against a defendant in an earlier action results in the divergence of their respective interests, which compromises the attorney-client relationship.
Impact: The entire controversy doctrine no longer compels the assertion of a legal malpractice claim in the underlying action which gives rise to that claim.
IV. Medical Malpractice
DITCH v. WAYNESBORO HOSPITAL
(Supreme Court of Pennsylvania, January 18, 2011) [lexis.com / lexisONE]
Certificate of Merit Requirement
The plaintiff-decedent had a stroke and was taken to the emergency room of the defendant-hospital. She fell off of her hospital bed and suffered fatal head injuries. Subsequently, the plaintiff-decedent’s family brought forth a lawsuit against the hospital, which sounded in ordinary negligence and did not raise any medical malpractice claims.
According to Pennsylvania Rule of Civil Procedure 1042.3, in all professional liability claims against licensed professionals, a certificate of merit must be filed contemporaneously with or within sixty (60) days after the filing of the complaint. The certificate of merit must state that a licensed healthcare professional opines the defendant was negligent. Failure to timely file the certificate of merit may result in a judgment of Non Pros against the plaintiff.
The plaintiff-decedent failed to timely file a certificate of merit. Subsequently, the defendant filed a praecipe for Entry of Judgment of Non Pros for failure to file a certificate of merit, which was granted by the trial court. Plaintiff-decedent then filed a petition to open and/or strike the judgment of non pros, which was denied. On appeal to the Pennsylvania Superior Court, it was argued this was simply a “slip and fall” claim and Rule 1042.3 was not applicable. This argument was rejected. The Court held this was a medical malpractice claim because it was alleged the agents and/or employees of the defendant-hospital did not properly restrain the plaintiff-decedent during transport for medical treatment and left her unattended after she fell. Furthermore, the Court found that someone in the emergency room with medical knowledge was involved in the decision to transport the plaintiff-decedent. This ruling was affirmed by the Pennsylvania Supreme Court.
Impact: If a patient suffers injuries after a “slip and fall” at a hospital during the course of treatment, a claim concerning same may be considered a medical malpractice claim, which requires the filing of a certificate of merit.
PENNSYLVANIA HOUSE BILL NO. 299
(PA House Bill 299, Printer’s No. 252 introduced and referred to Committee on Judiciary January 27, 2011)
Bill Would Limit Non-Economic Damages in Most Medical Professional Liability Actions to $250,000
Nineteen Republican members of the Pennsylvania House of Representatives introduced an act proposing to amend the act of March 20, 2002 (P.L. 154, No. 13), known as the Medical Care Availability and Reduction of Error (MCARE) Act. The proposed bill would amend the MCARE Act by adding a section to read:
Section 505.1. Medical professional liability actions.
(a) General rule.‑‑In any medical professional liability action against a health care provider based on professional negligence, the injured patient shall be entitled to recover noneconomic losses to compensate for pain, suffering, inconvenience, physical impairment, disfigurement and other nonpecuniary damage.
(b) Damages.‑‑In no medical professional liability action shall the amount of damages for noneconomic losses exceed $250,000.
(c) Exclusion.‑‑The provisions of this section shall not apply to a health care provider if the act or omission to act in the rendering of professional services was not in good faith and in a manner amounting to gross negligence or reckless, willful or wanton conduct.
(d) Definitions.‑‑As used in this section, the following words and phrases shall have the meanings given to them in this subsection:
"Professional negligence." A negligent act or omission to act by a health care provider in the rendering of professional services which is the proximate cause of a personal injury or wrongful death if the services are within the scope of services for which the provider is licensed and which are not within any restriction imposed by the entity licensing the health care provider.
Impact: While this bill is in its infancy, the potential impact to medical professional liability claims cannot be ignored. Given the costs associated with pursuing a malpractice claim, a $250,000 cap on noneconomic damages would certainly give plaintiffs’ attorneys cause to more thoroughly consider whether to bring a lawsuit. Thus, the number of medical professional liability filings may decrease if this bill becomes law. Additionally, physicians and their insurance carriers would have less exposure to excess verdicts. Thus, counties such as Philadelphia may see more cases being tried to verdict if this bill becomes law.
For a copy of the bill, click here: http://tinyurl.com/GS-Feb-PLM
V. Fidelity Insurance
NEW HAMPSHIRE INSURANCE COMPANY, ET AL v. MF GLOBAL
(Supreme Court of the State of New York, New York County – September 28, 2010) [lexis.com]
Application of the Direct Loss Exclusion
This matter arose in connection with a claim for losses sustained by the trading activity of a MF Global (“Global”) employee, Mr. Evan Dooley (“Dooley”) on the Chicago Mercantile Exchange (the “Exchange”). The Plaintiff Insurers denied the claim and during the course of litigation moved for summary judgment dismissing the complaint. The Insurers’ position was that Dooley was not an employee; Global did not sustain a loss; Dooley did not commit a fraudulent or wrongful act; and Global failed to mitigate its losses. The Court denied the Insurers’ motion and, upon searching the record, granted Global summary judgment.
There are two methods of trading on the exchange: an open outcry format and the electronic trading platform. On one particular day of trading, Dooley traded on the electronic trading platform well in excess of his margin entering into a large number of sell contracts for various commodities. By entering into these sell contracts, he created open positions which could be liquidated by physical delivery or by entering into buy contracts. Thus, if the market price for a commodity dropped, he could purchase buy contracts for the commodity for less than the price of the sell contracts and thus gain the difference (in contrast, if the commodity price increased, a loss would ensue). At the close of the exchange, Dooley’s position on one particular commodity showed a Net Liquidation Value (“NLV”) of $44 million. Upon the opening of trading the next morning, the price of that commodity rose quickly and by early morning, Dooley’s position went from a net gain of $44 million to a net loss of $7 million. The loss materialized as Dooley began to close his open positions by entering into blocks of buy contracts. The final loss of these series of transactions was over $140 million. This loss was charged to Global who, as a clearing house member of the Exchange, was primarily responsible to cover the losses. The Exchange’s clearing house demanded an accounting of Global’s accounts. Eventually, there was a settlement of $150 million, of which $140 million was attributable to Dooley’s actions. Global submitted a claim under its primary and excess financial institution bonds.
The Court found that Dooley was clearly an employee of Global as defined by the policies language. The policies define an employee as a natural person under an “implied contract of employment or service.” Dooley was directly supervised and controlled by Global. The crux of the Insurers’ position, however, was that Global did not suffer a direct loss from a wrongful act committed by an employee. The policies require that Global suffer a direct financial loss sustained by a wrongful act committed by an employee with the intent to obtain financial gain.
The Court found that Dooley’s act created a loss to Global, not to any other party. His actions were not a fraud on the public but rather, a series of acts that created a debt for Global. In finding that the policies at issue supported coverage for this claim, the Court found that the policy provided coverage for a direct loss from a wrongful act or a fraudulent act and which is committed to cause a loss to the insured or for financial gain. Therefore, the Court held that Dooley’s actions created direct losses to Global which resulted in payments to the Exchange.
Impact: This decision reiterates the need to read every policy and understand the language and intent of the policy language. Here, there was a comparison of different policy language with other fidelity bonds. Other bonds will require direct loss with the manifest intent of the employee to cause a loss to the insured and with the manifest intent to gain improper personal financial benefit. Here, the policy provided coverage for wrongful acts which either created a loss for the insured or for financial gain.
VI. News and Notes
Rough Winter Proving to be Rough For Insurers
It is estimated that insurers sustained $36 billion in worldwide catastrophe losses as severe weather has impacted areas from Queensland, Australia to Metropolitan New York. Concerns about changing weather patterns have undermined the industry’s assumptions, especially as insurers are continually being called upon to insure valuable properties in high risk areas.
For a full copy of this article, click here: http://tinyurl.com/PLM-Feb-1
Judicial Oversight May Affect Administration of BP Claim Fund
Kenneth Feinberg, the administrator of the BP claim fund, may be forced to change how claims are made now that the fund has come under the jurisdiction of a federal judge in New Orleans. Recently, the court ordered Feinberg to stop representing that he is completely independent of BP and arguably brought the administration of the fund within judicial oversight for the first time since it was initially set up by BP.
For a complete copy of this article, click here: http://tinyurl.com/PLM-Feb-2
US Investigation Discounts Allegations Regarding Toyota Car Throttles
A U.S. government investigation has concluded there is no link between electronic throttles in Toyotas vehicles and instances of unintended acceleration. This is clearly a significant victory for the world’s top automaker. U.S. Transportation Secretary Ray LaHood has stated, “There is no electronic-based cause for unintended high-speed acceleration in Toyotas.”
For a full copy of this article, click here: http://tinyurl.com/PLM-Feb-3
Pulsar Re Ltd Files Suit Against Lehman Brothers Holdings, Inc.
(Pulsar Re Ltd v. Lehman Brothers Holding, Inc. Case No. 08-13555)
Pulsar Re has filed a $450 Million suit against Lehman Brothers alleging the former investment company looted money it held for Pulsar in an effort to improve its books. The Adversary Suit filed in the U.S. Bankruptcy Court for the Southern District of New York seeks an order placing the $450 Million placed into a trust contending that the money is not part of the bankruptcy estate.
According to the complaint, Pulsar and Lehman reached an agreement whereby Lehman ceded approximately $1 Billion in reinsurance risk to Pulsar. Pulsar then pledged $450 Million to Lehman (in cash) to secure Pulsar’s reinsurance obligations. Lehman purportedly promised that the money would be held as cash and would not be converted into any other assets.
Subsequent to Lehman’s bankruptcy filings, Pulsar learned that Lehman misappropriated the money through a one-sided repurchase transaction backed by illiquid and materially overvalued assets. The suit alleges that the vast majority of the $718 Million taken out was, in fact, Pulsar’s money.
For a copy of the complaint, click here: http://tinyurl.com/GS-Feb-PLM
Bank Files Suit Seeking Coverage for $22 Million in Ponzi Losses
Integra Bank Corp. has filed suit against its insurer, Fidelity and Deposit Company of Maryland, seeking recovery of $22 Million in losses arising out of loan issued by a former employee to Ponzi scheme architect Lou Pearlman. Integra maintains that the losses were covered under a policy issued by FDCM and the insurer improperly denied coverage. Pearlman was best known for managing 1990’s boy bands Back Street Boys and N’ Sync.
For a copy of the complaint, click here: http://tinyurl.com/GS-Feb-PLM
VII. The Insurance Agents’ and Brokers’ E&O Report
New York Insurance Department Opines That an Insurance Producer May Not Pay a Fee to an Association for Access to Members
The Office of the General Counsel of the New York State Insurance Department issued OGC Op. No. 11-01-02 on January 5, 2011. http://www.ins.state.ny.us/ogco2011/rg110102.htm
The New York Insurance Department opined that under the facts described in the opinion, an insurance producer may not pay a fee to an association for the association to provide access to the association’s employer members so that the agent can sell group policies of life and accident and health insurance to the employer members. To do so would run afoul of Insurance Law § 4224(c), as any such payment would constitute an unlawful payment of commissions by a producer to an unlicensed person. However, the insurance producer may provide the administrative services as listed in the opinion to the association and its employer members without violating the rebating and inducement prohibitions contained in Insurance Law § 4224(c), provided that the agent offers the services in a fair and nondiscriminatory manner to like insureds or potential insureds.
A prudent insurance agent or broker will be aware of and comply with the mandates in his or her state concerning payments of fees to non-licensed persons. Indeed, failure to do so in New York could result in the Insurance Department finding the insurance agent or broker to be acting in an “untrustworthy” manner pursuant to the Insurance Law § 2110(a)(4)(c), an undesirable position for any insurance agent or broker.
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