Biochemics, Inc. v. Axis Reinsurance Company , 924 F.3d 633 ( 2019 )

United States Court of Appeals
For the First Circuit
No. 17-2059
BIOCHEMICS, INC.; JOHN MASIZ,
Plaintiffs, Appellants,
v.
AXIS REINSURANCE COMPANY,
Defendant, Appellee.
JOHN P. RAUCCI; BROWN & BROWN OF NEW YORK, INC.,
Defendants.
APPEAL FROM THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MASSACHUSETTS
[Hon. Rya W. Zobel, U.S. District Judge]
Before
Thompson, Kayatta, and Barron,
Circuit Judges.
Steven L. Schreckinger, with whom Anderson & Kreiger LLP were
on brief, for appellants.
Melinda B. Margolies, with whom Kaufman Borgeest & Ryan LLP,
William A. Schneider, and Morrison Mahoney LLP were on brief, for
appellee.
May 23, 2019
BARRON, Circuit Judge. This appeal concerns a 2013 suit
that BioChemics, Inc. ("BioChemics"), a pharmaceutical company
based in Massachusetts, and John Masiz ("Masiz"), its president
and chief executive officer, brought in the District of
Massachusetts to enforce a directors and officers ("D&O")
insurance policy (the "Policy") with AXIS Reinsurance Company
("AXIS"). BioChemics and Masiz seek damages for what they contend
is AXIS's breach, under the Policy, of its "duty to defend" them
in connection with a Securities and Exchange Commission ("SEC")
investigation against the company and its officers.
BioChemics and Masiz moved for partial summary judgment
in 2013, and the District Court denied the motion. BioChemics,
Inc. v. Axis Reinsurance Co., 963 F. Supp. 2d 64, 70-71 (D. Mass.
2013). They filed a renewed motion for partial summary judgment
in 2015, and AXIS cross-moved for summary judgment. AXIS contended
in that motion that it did not breach its duty to defend under the
Policy because, among other things, BioChemics and Masiz were
seeking to enforce that duty in relation to a "Claim" that -- given
when the SEC investigation commenced -- was "first made" before
the Policy took effect and thus was not "covered" by the Policy.
The District Court granted AXIS's motion. BioChemics and Masiz
now appeal from the grant of summary judgment to AXIS. We affirm.
- 2 -
I.
The undisputed facts are the following. On May 5, 2011,
the SEC began a "Non-Public Formal Investigation" by issuing a
Formal Order captioned "In the Matter of BioChemics, Inc., B-02641"
(the "2011 Order"). The 2011 Order mentioned Masiz by name,
described him as the sole officer of the company, and identified
several "possible" securities violations. These "possible"
violations included instances of fraud and misrepresentation,
beginning as early as 2009, that were aimed at distorting the value
of BioChemics securities. The 2011 Order also noted that Masiz
had been sanctioned for securities violations in the past and that,
due to those sanctions, he had been barred from serving as an
officer or director of any publicly traded company until 2009.
On May 9, 2011, and then again on September 12, 2011,
the SEC served subpoenas on BioChemics. The 2011 subpoenas
requested documents pertaining to, among other things, the
company's finances, operations, drugs under development,
interactions with pharmaceutical companies, and payments to Masiz.
These subpoenas bore the same caption as the 2011 Order and
expressly referenced the 2011 Order as authorizing their issuance.
In a cover letter that accompanied the September 2011 subpoena,
the SEC stated that the "investigation . . . should not be
construed as an indication by the [SEC] that any violation of law
has occurred."
- 3 -
After receiving the May 2011 subpoena, BioChemics
retained legal counsel and a consulting firm to assist with its
response. At that time, BioChemics had a D&O insurance policy
with Greenwich Insurance Company. BioChemics did not, at any
point, notify that insurer about the ongoing SEC investigation.
In October of 2011, BioChemics and Masiz, in his
individual capacity, applied to have AXIS take over as the D&O
insurer for the policy period that ran from November 2011 to
November 2012. In that application, BioChemics and Masiz
represented that there were no legal claims pending against them.
AXIS agreed to provide the D&O insurance for the requested policy
period.
In January of 2012, the SEC served deposition subpoenas
on Masiz and other individuals. In March of that same year, the
SEC followed up by serving documents subpoenas on BioChemics and
Masiz. Each of these 2012 subpoenas -- eight in total -- bore the
same caption as the 2011 Order and the 2011 subpoenas. One of
these subpoenas was served on Masiz in his individual capacity for
deposition testimony and one was served on him in his individual
capacity for document production.
Finally, in December of 2012, the SEC commenced an
Enforcement Action ("2012 Action") against BioChemics, Masiz, and
two other individuals. The 2012 Action "allege[d]" that, beginning
as early as 2009, Biochemics and Masiz had "engaged in a fraudulent
- 4 -
scheme" to mislead investors about the company's value. At least
one of the "allege[d]" misrepresentations, concerning a topical
ibuprofen product, took place after the 2011 Order and the 2011
subpoenas were issued.
After receiving the March 2012 documents subpoenas,
BioChemics and Masiz notified AXIS of them, as well as of the
subpoenas that the SEC had issued in January of 2012. AXIS
"agree[d] that the SEC Investigation . . . constitute[d] a D&O
Claim" under the Policy. AXIS asserted, however, that BioChemics
and Masiz were necessarily seeking -- given the terms of the
Policy -- "coverage" for a single "Claim" that encompassed the SEC
investigation as a whole and that this "Claim" was "first made" in
May of 2011 when the SEC issued the documents subpoena to
BioChemics and thus that this "Claim" was "first made" "prior to
the inception of the Policy Period."1 On the basis of that
assertion, AXIS stated that "because the Claim was not made during
the Policy Period, coverage is not available for the SEC
Investigation."
AXIS later took the same position with respect to the
2012 Action. It concluded that the 2012 Action was also part of
the same single "Claim" that was "first made" when the SEC issued
1BioChemics and Masiz had not informed the insurer about the
2011 Order at the time that AXIS denied coverage.
- 5 -
the May 2011 documents subpoena, which was prior to the start of
the policy period.
In response, on February 27, 2013, BioChemics and Masiz
sued AXIS in Massachusetts Superior Court. BioChemics and Masiz
alleged breach of contract and breach of fiduciary duty, under
Massachusetts law, based on the contention that AXIS had breached
its duty to defend under the Policy. The case was subsequently
removed to the United States District Court for the District of
Massachusetts based on diversity jurisdiction. 28 U.S.C. § 1332.
BioChemics and Masiz filed a Motion for Partial Summary Judgment
in the District Court on June 5, 2013. They argued that each of
what they contended were the "Claim[s]" that triggered AXIS's duty
to defend under the Policy -- respectively, each of the 2012
subpoenas and the 2012 Action -- had been brought by the SEC after
the policy period began to run and thus was "first made" within
the policy period.
The District Court denied that motion in August of 2013.
BioChemics, Inc. v. Axis Reinsurance Co., 963 F. Supp. 2d 64 (D.
Mass. 2013). In reaching this decision, the District Court did
not address the relevance of the 2011 Order, as BioChemics and
Masiz had not yet disclosed the 2011 Order to AXIS or the District
Court.
On February 14, 2014, BioChemics and Masiz filed a
renewed Motion for Partial Summary Judgment. They again argued
- 6 -
that, under the Policy, AXIS had a duty to defend that was
triggered by "Claim[s]" -- each of the 2012 subpoenas and the 2012
Action -- that had been "first made" during the policy period.
AXIS cross-filed a Motion for Summary Judgment. AXIS argued that
it had no such duty because, among other things, the SEC filings
were properly treated as a single "Claim" that had been "first
made" when the SEC issued the May 2011 documents subpoena and thus
that was "first made" prior to the policy period.
On January 6, 2015, the District Court entered an order
granting AXIS's Motion for Summary Judgment and denying BioChemics
and Masiz's Motion for Partial Summary Judgment. BioChemics, Inc.
v. Axis Reinsurance Co., 83 F. Supp. 3d 405 (D. Mass. 2015)
[hereinafter BioChemics II]. By that time, the District Court had
been made aware of the 2011 Order. Equipped with that knowledge,
the District Court held that the 2012 Action, and the multiple
2012 subpoenas, were all part of a "Claim" that had been "first
made" when the 2011 Order issued (May 5, 2011). Id. at 408.
BioChemics and Masiz then appealed the District Court's order.2
2 The Policy sets forth AXIS's "duty to defend" and its duty
to cover "defense costs" under separate provisions. BioChemics
and Masiz's complaint requested the recovery only of "damages
caused by [AXIS's] breach of . . . its duty to defend." We proceed
on the understanding that the parties, in referring to "coverage"
under the Policy, are referring to AXIS's duty to defend.
- 7 -
II.
The Policy incorporates four separate Insuring
Agreements: the D&O Corporate Liability Agreement, the Employment
Practices Liability Agreement, the Fiduciary Liability Agreement,
and the Outside Executive Liability Agreement. The only agreement
that is at issue in this appeal is the D&O Corporate Liability
Agreement.
That agreement obligates AXIS to cover "all Loss on
behalf of any Insured arising from any D&O Claim for a Wrongful
Act . . . first made against such Insured . . . during the Policy
Period ."3 The Policy defines "Loss" as "the amount(s) which the
Insureds become legally obligated to pay on account of a Claim,
including damages, judgments, any award of pre-judgment and post-
judgment interest, settlement amounts, costs and fees awarded
pursuant to judgments, and Defense Costs." (Emphasis added). The
Policy separately provides that AXIS has "both the right and duty
to defend and appoint counsel with respect to any Claim made
against the Insureds alleging a Wrongful Act, even if such a Claim
is groundless, false or fraudulent."
The Policy defines a "D&O Claim" as:
a. a written demand against an Insured for
monetary or nonmonetary relief;
3 The policy period ran from November 13, 2011 to November
13, 2013.
- 8 -
b. a civil, arbitration, administrative or
regulatory proceeding against any Insured
commenced by:
(i) the service of a complaint or similar
pleading;
(ii) the filing of a notice of charge,
investigative order or like document; or
(iii) written notice or subpoena from an
authority identifying such Insured as an
entity or person against whom a formal
proceeding may be commenced; or
c. a criminal investigation or proceeding
against any Insured Individual commenced by:
(i) the return of an indictment, information,
or similar pleading; or
(ii) written notice or subpoena from an
authority identifying such Insured Individual
as an individual against whom a formal
proceeding may be commenced.
A "Wrongful Act," in turn, is defined as "any actual or
alleged error, misstatement, misleading statement, act, omission,
neglect, or breach of duty."
There is one more provision that is important for present
purposes. Under the Policy's "Limits of Liability" heading, there
is a provision [hereinafter "Interrelated Wrongful Acts
Provision"] that states:
All Claims, including all D&O Claims . . .
arising from the same Wrongful Act, Wrongful
Third Party Act, and all Interrelated Wrongful
Acts shall be deemed one Claim and such Claim
shall be deemed to be first made on the earlier
date that: (1) any of the Claims is first made
against an Insured under this Policy or any
prior policy, or (2) valid notice was given by
the Insureds under this Policy or any prior
policy of any Wrongful Act, Wrongful Third
Party Act, or any fact, circumstance,
situation, transaction or cause which
underlies such Claim. Coverage under this
- 9 -
Policy shall apply only with respect to Claims
deemed to have been first made during the
Policy Period and reported in writing to the
Insurer in accordance with the terms herein.
The Policy earlier separately defines "Interrelated Wrongful Acts"
as "any and all Wrongful Acts that have as a common nexus any fact,
circumstance, situation, event, transaction, cause or series of
causally or logically connected facts, circumstances, situations,
events, transactions or causes."4
With that background in place, we now turn to the merits
of the parties' contentions. Because we are reviewing a grant of
summary judgment to AXIS, we must affirm the order below if there
is no genuine issue of material fact and AXIS is entitled to
judgment as a matter of law. See Utica Mut. Ins. Co. v. Herbert
H. Landy Ins. Agency, Inc., 820 F.3d 36, 41 (1st Cir. 2016). Our
review is de novo. See id. Moreover, in this case, only "the
interpretation and application of the [insurance] policy language"
are in dispute. Massamont Ins. Agency, Inc. v. Utica Mut. Ins.
Co., 489 F.3d 71, 72 (1st Cir. 2007) (citation omitted). We review
those issues of interpretation and application de novo as well.
Id.
4
The Policy also includes a section on "Exclusions" outlining
several circumstances under which AXIS will not bear liability for
"Claims" against the insured parties. However, it appears that
neither party argues that any of these "Exclusions" apply to the
instant matter.
- 10 -
III.
BioChemics and Masiz, the appellants, begin by
contending that the District Court erred in ruling that the "Claim"
that triggered AXIS's duty to defend had been "first made" when
the SEC issued the 2011 Order in May of that year -- and thus prior
to the start of the policy period, which began in November of 2011.
The appellants contend that the District Court based that ruling
solely on a construction of the definition of "D&O Claim" in the
Policy and thus without reference to the Interrelated Wrongful
Acts Provision. The appellants then go on to contend that this
construction of the definition of "D&O Claim" was mistaken.
To make that case, the appellants assert that the Policy
defines a "D&O Claim" in a way that makes the 2011 Order, each of
the various subpoenas issued in its wake, and the 2012 Action a
"Claim" in its own right, rather than merely components of a
"Claim" that encompasses the SEC investigation as a whole. Thus,
the appellants contend, the District Court's sole reason for
treating the 2012 subpoenas and the 2012 Action as part of a
"Claim" that was "first made" when the SEC issued the 2011 Order
and thus before the policy period began rests on a mistaken
construction of the Policy's definition of a "D&O Claim."
The appellants appear to rely for their argument about
the nature of the District Court's reasoning on the following
portions of the District Court's ruling:
- 11 -
The policy here defines a "Claim" broadly to
include, inter alia, any "civil, arbitration,
administrative or regulatory proceeding
against any Insured commenced by . . . the
filing of a notice of charge, investigative
order, or like document." The triggering
events are all part of a single SEC
Investigation under the Formal Order. Each
subpoena was issued under, and referred to,
the original Formal Order, and investigated
the same officers and company for the same
pattern of security violations through public
material misstatements. Under the clear
language of the Policy, and on the record
before the [C]ourt, the subpoenas all
constituted a single "Claim" under the policy.
The only remaining question is whether the
Claim at issue is covered under the AXIS
policy. A Claim is only covered under the
policy if "deemed to have been first made
during the Policy Period." A claim "shall be
deemed to be first made on the earlier date
that: (1) any of the Claims is first made
against an Insured under this Policy or any
prior policy . . . ." Docket # 30, Ex. A
(Policy) § V.A. The Formal Order issued on
May 5, 2011. The policy went into effect on
November 13, 2011. The investigation and
enforcement action, the Claim at issue, was
thus "first made" before the policy period and
is, therefore, not covered under the policy.
BioChemics II, 83 F. Supp. 3d at 407-08 (internal citations
omitted) (alterations in original).
The problem with the appellants' argument is that the
District Court does not purport in these passages to rely solely
on the Policy's definition of a "D&O Claim" to reach the conclusion
that the 2011 Order, the subpoenas, and the 2012 Action are part
and parcel of one "Claim." Rather, the District Court explains in
- 12 -
this passage that the 2012 Action may be deemed to be part of one
"Claim" that was "first made" prior to the start of the policy
period by citing to the portion of the Interrelated Wrongful Acts
Provision that states that "[a] Claim 'shall be deemed to be first
made on the earlier date that: (1) any of the Claims is first made
against an Insured under this Policy or any prior policy.'" Id.
at 408 (citing "§ V.A" of the Policy -- the Interrelated Wrongful
Acts Provision) (alteration in original).
In other words, the District Court appears to have
concluded that, pursuant to the Policy's definition of a "D&O
Claim," the 2012 Action constitutes a "Claim" that was distinct
from the "Claim" of which the 2011 Order was a part. But, the
District Court then went on to conclude, those two otherwise
distinct "Claim[s]" must be deemed to be "one Claim" pursuant to
the Interrelated Wrongful Acts Provision.
Thus, the appellants' contention that the District Court
erred in treating the 2012 Action as part of a "Claim" that was
"first made" before the start of the policy period because the
District Court relied on a mistaken construction of the Policy's
definition of a "D&O Claim" fails for a simple reason. The
District Court did not base its conclusion as to the 2012 Action
on that allegedly erroneous ground.
We still must address, though, the appellants'
contention that the District Court erred by construing the Policy's
- 13 -
definition of a "D&O Claim" to make each of the 2012 subpoenas
merely a component of a "Claim" that "commenced" with the issuance
of the 2011 Order and not a "Claim" in its own right. Here, too,
we reject the argument.
The Policy's definition of a "D&O Claim" is set forth in
Section III.B.2 of the Policy. As we have noted above, that
provision defines a "D&O Claim," as relevant here, to include
either "a written demand . . . for . . . non-monetary relief" or
"a civil . . . administrative or regulatory proceeding against any
Insured commenced by":
(i) the service of a complaint or similar
pleading;
(ii) the filing of a notice of charge,
investigative order or like document; or
(iii) written notice or subpoena from an
authority identifying such Insured as an
entity or person against whom a formal
proceeding may be commenced.
The appellants contend that the first component of this
two-part definition of a "D&O Claim" -- the "written
demand . . . for . . . non-monetary relief" -- encompasses each of
the 2012 subpoenas. The appellants thus contend that this
component of the definition renders each subpoena a "Claim" in its
own right.
Black's Law Dictionary, however, defines "relief" as
"[t]he redress or benefit, esp. equitable in nature (such as an
injunction or specific performance) that a party asks of a court."
- 14 -
Relief, Black's Law Dictionary (10th ed. 2009) (emphasis added);
see Metro. Prop. & Cas. Ins. Co. v. Morrison, 951 N.E.2d 662, 671
(Mass. 2011) (instructing courts to construe clear policy language
according to its "usual and ordinary sense"). The 2012 subpoenas
were requests made of a party for information. They were not
requests made of a court for equitable redress or benefit, such as
specific performance. See Diamond Glass Cos., Inc. v. Twin City
Fire Ins. Co, No. 06-CV-13105, 2008 WL 4613170, at *4 (S.D.N.Y.
Aug. 18, 2008) (noting that, based on the "plain meaning of
relief," a subpoena would not constitute a "demand[ ] for
non-monetary relief" (internal quotation marks omitted)). Thus,
the text of the component of the definition on which the appellants
rely would appear to refute their position that the definition of
a "D&O Claim" treats each subpoena as a "Claim" in its own right.
The rest of the definition reinforces that conclusion.
See Starr v. Fordham, 648 N.E.2d 1261, 1269 (Mass. 1995) (noting
that contract language must be interpreted in the context of the
entire document). The second component of the definition concerns
"a civil . . . administrative or regulatory proceeding." That
component of the definition expressly refers to "subpoena[s],"
while the component of the definition on which the appellants rely
does not. The second component of the definition thus makes clear
that "subpoenas" are components of the "Claim" that "a civil
proceeding" against an insured constitutes.
- 15 -
For this reason, the appellants' preferred construction
of the definition necessarily has the following odd consequence.
It requires us to construe a portion of that definition that does
not mention subpoenas at all as if it makes them "Claim[s]" in
their own right, even though the portion of the definition that
expressly mentions subpoenas treats them as if they are merely
components of a "Claim." Cf. J.A. Sullivan Corp. v. Commonwealth,
494 N.E.2d 374, 378 (Mass. 1986) (noting that every phrase in a
contract must be given meaning that, when interpreted relative to
other provisions in the document, gives the contract "workable and
harmonious" effect (quoting Charles I. Hosmer, Inc. v.
Commonwealth, 19 N.E.2d 800, 804 (Mass. 1939))).5
The appellants do point to out-of-jurisdiction cases
that have held that a subpoena, like those at issue here, is itself
a "Claim" under other D&O insurance policies. See Polychron v.
Crum & Forster Ins. Co., 916 F.2d 461, 463 (8th Cir. 1990);
Minuteman Int'l, Inc. v. Great Am. Ins. Co., No. 03 C 6067, 2004
WL 603482, at *5 (N.D. Ill. Mar. 22, 2004). But, neither of these
precedents is controlling, as neither was decided by a
Massachusetts court applying Massachusetts law. Nor does either
5 The appellants' preferred construction presents an
additional complication. Even if we assumed that subpoenas are
"Claims" in their own right, that conclusion does not, on its own,
imbue them with "actual or alleged" "errors" such that they state
"Wrongful Acts" and trigger the duty to defend under the Policy.
- 16 -
case, by terms, purport to be interpreting a policy that
denominates subpoenas to be components of "Claims" as expressly as
the Policy does here, let alone explain how such a policy could be
construed to permit a subpoena such as those at issue here to be
deemed a "Claim" in its own right. In fact, multiple other courts
have reached the opposite conclusion. See Trice v. Emp'rs
Reinsurance Corp., 124 F.3d 205 (Table), 1997 WL 449736, *3 (7th
Cir. 1997); National Fire Ins. v. Bartolazo, 27 F.3d 518, 519 (11th
Cir. 1994); Diamond Glass Cos., 2008 WL 4613170, at *4.
Thus, while we are mindful that we must construe
ambiguous policy language to favor coverage, see Metro. Prop. &
Cas. Ins. Co., 951 N.E.2d at 671 (setting forth the interpretive
principle -- known as contra proferentem -- that ambiguous contract
language should be interpreted in favor of coverage against the
drafter), we conclude that the Policy here is simply too clear in
the relevant respect to permit us to do so. See id. (instructing
courts to construe clear policy language according to its "usual
and ordinary sense" (internal quotation marks omitted)).
Accordingly, we reject this aspect of the appellants' challenge to
the District Court's summary judgment ruling.
IV.
The appellants next contend that, insofar as the
District Court did rely on the Interrelated Wrongful Acts Provision
to conclude that they were bringing a "Claim" that was "first made"
- 17 -
when the SEC issued the 2011 Order, the District Court erred in
doing so. The appellants offer a variety of reasons for reaching
that conclusion. But, we do not find any of them to be persuasive.
A.
The appellants' first argument is premised on the fact
that the Interrelated Wrongful Acts Provision appears only within
the section of the Policy entitled "Limits of Liability." The
appellants contend that, because Massachusetts law requires that
ambiguities be construed in favor of coverage, see id., the
provision's placement requires that we construe it to address only
the "amount of coverage available" and not the availability of
"coverage." For that reason, the appellants contend, the
Interrelated Wrongful Acts Provision cannot serve as the basis for
a conclusion that the "Claim" at issue was "first made" when the
SEC issued the 2011 Order such that AXIS did not breach its duty
to defend.
The text of the Interrelated Wrongful Acts Provision,
however, is at odds with the appellants' restricted construction
of its import. The text of the provision states that "[c]overage
under this Policy shall apply only with respect to Claims deemed
to have been first made during the Policy Period." It is unclear
what purpose this sentence would serve if the appellants' proposed
construction were correct. Section VIII.L of the Policy, moreover,
expressly states that "[t]he descriptions in the headings and
- 18 -
subheadings of this Policy are solely for convenience, and form no
part of the terms and conditions of coverage." Thus, we read the
provision to mean just what it says. It addresses "coverage under
this Policy" rather than merely the limits of liability. See id.6
B.
The appellants also contend that the terms of the
Interrelated Wrongful Acts Provision simply do not permit the
distinct "Claim[s]" that the appellants contend triggered AXIS's
duty to defend under the Policy -- namely, each of the 2012
subpoenas and the Action -- to be "deemed" to be part and parcel
of "one Claim" that was "first made" before the start of the policy
period. But, we do not find the various arguments that the
appellants make in support of this aspect of their challenge to
the grant of summary judgment to AXIS to be persuasive either.
1.
The appellants first argue that, even if the 2011 Order
may be understood to refer to an "error, misstatement, misleading
statement, act, omission, neglect, or breach of duty," it does not
6 Our Court's holding construing Puerto Rico law in Lind-
Hernández v. Hospital Episcopal San Lucas Guayama, 898 F.3d 99
(1st Cir. 2018), is not to the contrary. The Limits of Liability
provision at issue there contained different language, and, in any
event, Lind-Hernández held only that the placement of the
"Interrelated Wrongful Acts" provision in the Policy's "Limits of
Liability" section did not indicate that the insurer could use the
provision to aggregate "Claims" that were levied against different
insured parties who fell under different insuring agreements. Id.
at 108. No such issue is presented here.
- 19 -
"allege[]" one, as the Policy's definition of a "Wrongful Act"
requires. If that is so, the appellants then contend, the 2011
Order contains no "Wrongful Acts," which means, in turn, that there
is no basis for concluding that either the 2012 Action or any of
the 2012 subpoenas contains "Wrongful Acts" that "share[] a common
nexus" with any "Wrongful Acts" set forth in the 2011 Order.
Accordingly, the appellants contend, the Interrelated Wrongful
Acts Provision supplies no basis for treating any of the discrete
2012 SEC filings -- whether the 2012 Action or any of the 2012
subpoenas -- as if it constitutes one unified "Claim" with the
2011 Order, such that the resulting unified "Claim" was "first
made" prior to the start of the policy period.
The 2011 Order quite clearly refers to various actions
that, if they occurred, would constitute violations of the federal
securities laws and thus constitute an "error, misstatement,
misleading statement, act, omission, neglect, or breach of duty"
within the meaning of the Policy's definition of "Wrongful Acts."
For example, the 2011 Order clearly stated that the SEC was
investigating possible violations of Sections 5(a), 5(c), and
17(a) of the Securities Act and Rule 10b-5, as well as Section
15(a) of the Exchange Act. These possible violations included
"making false statements of material fact or failing to disclose
material facts concerning . . . BioChemics' business prospects
- 20 -
(including products under development and agreements that the
company has entered into)."
But, there remains the question of whether the 2011 Order
in referring to such misconduct "allege[s]" it, as it must in order
to contain a "Wrongful Act," given that the Policy defines a
"Wrongful Act" as "any actual or alleged error, misstatement,
misleading statement, act, omission, neglect, or breach of duty."
(Emphasis added).7
With respect to their contention that the 2011 Order
contains no such allegations, the appellants point out that the
2011 Order simply noted that the SEC "ha[d] information that
tend[ed] to show" that violations had occurred. The appellants
note, too, that the 2011 Order goes on to list what it describes
as merely "possible" violations where certain persons "may have
been" engaging in actions that ran afoul of various securities
laws. Moreover, in the letter accompanying the September 2011
7
A "Wrongful Act" is defined with reference to whether there
is "any . . . alleged error, misstatement, misleading statement,
act, omission, neglect, or breach of duty," even though the duty
to defend provision refers to "any Claim made against the Insureds
alleging a Wrongful Act." (Emphases added). The parties in the
course of their briefs frequently refer to whether the 2011 Order
and the subpoenas "allege[]" any "Wrongful Acts." Considered in
context, we understand those references to be intended to address
whether those documents contain "any . . . alleged error,
misstatement, misleading statement, act, omission, neglect, or
breach of duty" and not the more metaphysical question of whether
those documents "allege[]" "an alleged error, misstatement,
misleading statement, act, omission, neglect, or breach of duty."
- 21 -
subpoena, the appellants emphasize, the SEC pointedly noted that
the "investigation . . . should not be construed as an indication
by the [SEC] that any violation of law has occurred."
To show that these qualified references to misconduct in
the 2011 Order do not "allege[]" that misconduct, the appellants
cite to cases that conclude that similar investigative filings did
not "allege" the misconduct referenced in them. See Emp'rs' Fire
Ins. Co. v. ProMedica Health Sys., Inc., 524 F. App'x. 241, 247
(6th Cir. 2013); MusclePharm Corp. v. Liberty Ins. Underwriters,
Inc., 712 F. App'x. 745, 756 (10th Cir. 2017). But other courts
have held just the opposite. See Patriarch Partners, LLC v. AXIS
Ins. Co., 16-CV-2277 (VEC), 2017 WL 4233078, at *6 (S.D.N.Y. Sept.
22, 2017); Weaver v. Axis Surplus Ins. Co., No. 13-CV-7374 (SJF),
2014 WL 5500667, at *12 (E.D.N.Y. Oct. 30, 2014), aff'd, 639 F.
App'x. 764 (2d Cir. 2016); Nat'l Stock Exch. v. Fed. Ins. Co., No.
06 C 1603, 2007 WL 1030293, at *5 (N.D. Ill. Mar. 30, 2007); Morden
v. XL Specialty Ins., 177 F. Supp. 3d 1320, 1330 (D. Utah 2016).
Moreover, none of these precedents are from Massachusetts courts
construing Massachusetts law. Nor is the word "allege[]" in and
of itself so clearly restrictive that -- simply by virtue of that
word -- the Policy must be construed to ensure that it does not
provide coverage for any loss arising from, or trigger the duty to
defend against, an SEC Order of the sort that is at issue here.
And the appellants develop no argument to the contrary. Thus, it
- 22 -
is certainly not clear that the 2011 Order fails to "allege[]" any
"Wrongful Acts."
The appellants may mean to argue that the term "alleged"
in the Policy's definition of "Wrongful Acts" is at least ambiguous
as to whether it encompasses the qualified references to the
misconduct that the 2011 Order contains and thus that their
proposed construction prevails due to the contra proferentem
interpretive rule. But we do not see how such an argument can
succeed in this case.
To be sure, ambiguities must be construed in favor of
coverage for the insured. See Metro. Prop. & Cas. Ins. Co., 951
N.E.2d at 671. But, as AXIS notes, the appellants seek in this
very case to show that the 2012 subpoenas triggered AXIS's duty to
defend under the Policy, even though the Policy is clear that a
"Claim" must "allege[]" a "Wrongful Act" in order for it to trigger
the duty to defend. As a result, the 2012 subpoenas could be
covered under the Policy only if the word "allege[]" could be
construed to encompass an SEC investigative filing that makes no
mention of "Wrongful Acts" and merely refers back to a filing that
denotes them in a qualified manner. As favorable as the contra
proferentem rule may be to insureds, the appellants may not rely
upon that interpretive guide to advance an argument that would
require us to construe the same word -- here, "allege[]" -- to
mean two diametrically opposed things in this very case. Cf.
- 23 -
Hartford Cas. Ins. Co. v. Am. Dairy and Food Consulting Labs.,
Inc., No. 09–CV–00914–OWW–DLB, 2009 WL 4269603, at *12 (E.D. Cal.
Nov. 25, 2009) ("[I]f a pled claim is internally inconsistent with
itself, the inconsistencies may cancel each other out and render
the claim subject to dismissal for failure to state a claim.");
Steiner v. Twentieth Century–Fox Film Corp., 140 F. Supp. 906, 908
(S.D. Cal. 1953) ("[N]o authority is known . . . which permits
blowing hot and cold in the same cause of action."). Yet the
appellants' logic would require us to do just that.8
It may be that the appellants also separately mean to
argue that the 2012 subpoenas cannot be said to be part of any
"Claim" that was "first made" when the 2011 Order was issued,
because those subpoenas do not contain any "Wrongful Acts." The
appellants are right that, insofar as the subpoenas do not contain
any "Wrongful Acts" they cannot be treated as part and parcel of
a "Claim" that was first made when the 2011 Order was issued on
the basis of the Interrelated Wrongful Acts Provision. But, a
necessary premise of this contention is that each subpoena is a
"Claim" in its own right. As we explained earlier, see supra
8 To avoid this inconsistency, the appellants in their reply
brief argue for the first time that they are entitled to coverage
for the 2012 subpoenas because the Policy is ambiguous as to how
it treats a "Claim" that does not contain any "Wrongful Acts" and
that ambiguity should inure to the benefit of the insured party.
But in addition to the fact that new arguments in reply briefs are
waived, see United States v. Torres, 162 F.3d 6, 11 (1st Cir.
1998), the plain terms of the Policy preclude this contention.
- 24 -
Section III, however, the plain terms of the definition of a "D&O
Claim" compel the conclusion that the 2012 subpoenas are -- by
virtue of the second component of that definition -- merely
components of the "Claim" constituted by the
"civil . . . administrative or regulatory proceeding against"
BioChemics and Masiz.9
And, in any event, the appellants cannot rightly contend
that the 2012 subpoenas, which they concede contain no references
to misconduct, nonetheless somehow allege "Wrongful Acts" for
purposes of triggering the duty to defend, while simultaneously
contending that the 2011 Order, which indisputably does contain
references to misconduct, does not allege "Wrongful Acts." But,
for reasons we have explained, the plain language of the Policy
requires the appellants to make such an internally inconsistent
argument if they are to explain how the subpoenas could trigger a
9 We suppose it is not entirely clear whether the "Claim" of
which the 2012 subpoenas are best understood to be a part was the
"Claim" that was "commenced by" the "investigative order" that the
SEC issued on May 5, 2011 or the "Claim" that was "commenced" by
the filings of the first of the subpoenas. But, that ambiguity is
of no significance here. Insofar as the subpoenas are part of the
"Claim" commenced by the issuance of the 2011 Order, they are
plainly part of a "Claim" that was "first made" prior to the policy
period. And, insofar as the subpoenas are part of a "Claim" that
commenced upon the first of those subpoenas having been issued and
that then culminated in the 2012 Action, that "Claim" -- at least
given the arguments presented here -- would still have been "first
made" prior to the start of the policy period, if the "Wrongful
Acts" contained in the 2012 Action share a "common nexus" with the
"Wrongful Acts" that the 2011 Order may fairly be construed to
have contained.
- 25 -
duty to defend, given that such a duty is only triggered by a
"Claim" "alleging a Wrongful Act."
2.
We turn, then, to the appellants' next contention. Here,
the appellants challenge the way in which the District Court
applied the Interrelated Wrongful Acts Provision in deeming the
"Claim" that encompassed the 2012 Action and the "Claim" that
encompassed the 2011 Order to be "one Claim." The appellants press
this point by arguing that, even if the 2012 Action contained
"Wrongful Acts," the 2011 Order described the misconduct that it
may be said to have "alleged" in too diffuse a manner to permit
the conclusion, pursuant to the Interrelated Wrongful Acts
Provision, that it contained "Wrongful Acts" that share "a common
nexus" with those contained in the 2012 Action.10 Thus, the
appellants contend, the Interrelated Wrongful Acts Provision
affords no basis for deeming these two otherwise distinct
"Claim[s]" to be "one Claim."
The appellants fail to identify any authority, however,
to support the proposition that the Interrelated Wrongful Acts
Provision implicitly establishes some threshold of specificity
that was not met here but that must be met before a "Wrongful Act"
10The appellants do not separately contend that we should
grant them relief for the 2012 Action -- which clearly contains
"Wrongful Acts" -- even if we find that they are not entitled to
relief for the 2012 subpoenas.
- 26 -
contained in one "Claim" may be said to "share a common nexus"
with a "Wrongful Act" contained in another. Instead, the
appellants rely for the assertion that such an implicit threshold
of specificity exists -- and that it has not been met here -- only
on cases that require courts to perform a "detailed comparison of
the facts underlying pre and post Policy claims." See, e.g.,
Allmerica Fin. Corp. v. Certain Underwriters at Lloyd's, London,
871 N.E.2d 418, 430 (Mass. 2007); Mass. Insurers Insolvency Fund
v. Redland Ins. Co., 891 N.E.2d 718 (Mass. App. Ct. 2008) (table).
But, those cases just show that a detailed comparison of "Wrongful
Acts" in distinct "Claims" is required before a determination that
they are "interrelated" can be made. They do not purport to
establish a threshold of specificity that must be met before that
inquiry even can be undertaken, let alone one that was not met
here.
We proceed, then, to consider a related contention that
the appellants make. Here, the appellants argue that a detailed
comparison of the "Wrongful Acts" contained in the 2011
Order -- insofar as there are any -- with the "Wrongful Acts" that
are contained in the 2012 Action reveals that they do not share a
"common nexus [in] fact, circumstance, situation, event, [or]
transaction" and thus are not "Interrelated Wrongful Acts."
The appellants stake this contention on the fact that
the 2012 Action includes a reference to at least one "Wrongful
- 27 -
Act" that occurred after the 2011 Order and the 2011 subpoenas
were issued. Specifically, the 2012 Action "allege[s]" that
BioChemics misled investors regarding the results of a clinical
trial on the effectiveness of a new ibuprofen cream.
The appellants note that the preliminary results of that
trial were not available until five months after the SEC issued
its 2011 Order and two months after it issued the last of its 2011
subpoenas. On that basis, the appellants contend that this
"Wrongful Act" could not have been contemplated as part of the
SEC's initial investigation and thus that the 2012
Action -- insofar as it is a "Claim" (or, we may posit, part of a
"Claim") -- does not contain "Wrongful Acts" that share a "common
nexus [in] fact, circumstance, situation, event, transaction, [or]
cause" with those referenced in the 2011 Order.
In pressing this point, the appellants appear to accept
that the "substantial overlap" test from Federal Ins. Co. v.
Raytheon Co., 426 F.3d 491 (1st Cir. 2005), is also the test that
we should use to determine whether the Policy's requirement that
"Interrelated Wrongful Acts" share a "common nexus" has been met.11
The appellants thus appear to argue only that, even if we assume
11 The appellants appear to do so, we note, even though
Raytheon was interpreting a different type of exclusionary
provision. See id. at 495 (noting that parties in Raytheon were
contesting the applicability of the policy's "prior and pending
litigation clause").
- 28 -
that the 2012 Action contains many "Wrongful Acts," there is
one -- misrepresentation concerning the ibuprofen trial -- that
does not "overlap" with any of the "Wrongful Acts" that are
referenced in the 2011 Order and that, for this reason alone, the
"substantial overlap" of the "Wrongful Acts" alleged that would
otherwise require the aggregation of the "Claim[s]" under Raytheon
fails to exist.
But, Raytheon forecloses the conclusion that, under the
"substantial overlap" test, the existence of a single
non-overlapping "Wrongful Act" can suffice to preclude the
aggregation of distinct "Claim[s]" that the Policy's Interrelated
Wrongful Acts Provision would otherwise require. In Raytheon, we
compared a 2002 ERISA complaint with an earlier securities fraud
complaint to determine if the two were "substantially similar" for
the purposes of a policy exclusion. Id. at 500. We recognized
that the ERISA complaint contained several allegations that
occurred after the fraud case's completion. See id. We
nevertheless held that "substantial [factual] overlap" existed
between the two matters, because many of the factual allegations
in the ERISA action were identical to those in the earlier fraud
suit. Id. Accordingly, we fail to see how the reference to the
ibuprofen trial misrepresentation in the 2012 Action in and of
itself suffices to show that there is no "substantial overlap"
- 29 -
between the "Wrongful Acts" referenced in 2011 Order and those
referenced in the "Claim" encompassing the 2012 Action.
The appellants do cite to multiple cases that, they
contend, stand for the proposition -- seemingly in contravention
of Raytheon -- that where a single allegation in a recent "Claim"
differs from the "Wrongful Acts" contained in a pre-policy "Claim,"
the insured is entitled to coverage for the entire recent "Claim,"
notwithstanding a prior acts exclusion. But, even if we were to
treat the appellants' reliance on these cases as an implicit
argument that some test other than the one set forth in Raytheon
governs whether the relevant set of "Wrongful Acts" are
interrelated for purposes of this Policy's "Interrelated Wrongful
Acts Provision," each of these cases is readily distinguishable
from this one.
Brown v. American Int'l Grp., Inc., 339 F. Supp. 2d 336
(D. Mass. 2004), for example, appears to be interpreting Kentucky
law and therefore hardly sheds light on how we should treat the
described scenario under Massachusetts law. See id. at 345 n.5.
Allmerica, moreover, compared a pre-policy "Claim" containing a
single allegation of wrongdoing with a "Claim" made during the
policy period that contained multiple allegations and determined
that, based on the record, the court could not conclude that any
overlap existed between the two cases. See Allmerica, 871 N.E.2d
at 430. Thus, Allmerica does not even appear to address the
- 30 -
situation where it is uncontested that some "overlap" in factual
allegations does exist, notwithstanding some non-overlapping
allegations.
The appellants do also rely on Redland, which is a
Massachusetts case applying Massachusetts law. There, the court
compared two pre-policy "Claims" with a "Claim" issued during the
policy period. The court determined that, despite the existence
of some overlapping allegations, the "bulk" or "heart" of the more
recent allegations occurred well after the pre-policy "Claims"
were issued. 2008 WL 3342991 at *2. The court therefore
determined that there was not enough overlap to trigger the
exclusion. Id. But, the appellants do not explain why the one
point of non-overlap that they identify -- the ibuprofen
trial -- suffices to show that the "bulk" or "heart" of the
"Wrongful Acts" contained in the 2012 Action do not "substantially
overlap" with those contained in the 2011 Order. Indeed, it
appears that the court in Redland is tacitly endorsing the
"substantial overlap" test from Raytheon.
Thus, at least given the arguments advanced to us on
appeal, the appellants' argument that the "Wrongful Acts" listed
in the 2012 Action are not "interrelated" with those contained in
the 2011 Order due to the diffuse nature of the allegations those
filings contain is not persuasive. Accordingly, we reject the
appellants' contention that, due to the diffuse nature of the
- 31 -
description of the acts in the SEC filings, the District Court
erred in relying as it did on the Interrelated Wrongful Acts
Provision in granting summary judgment to AXIS.
V.
We must consider one last argument, which concerns only
a portion of the District Court's grant of summary judgment to
AXIS. The appellants contend that, even if we disagree with the
appellants' arguments regarding AXIS's duty to defend the
"Claim[s]" encompassing the 2012 subpoenas and 2012 Action
generally, we must still hold that AXIS has a duty to defend the
"Claims" against Masiz individually.
The contention relies on language in the Policy covering
"Claims" "first made against such Insured . . . during the Policy
Period." The argument is that this language indicates that the
duty to defend is only triggered when a "Claim" "is first made
against [a] particular insured." The argument then proceeds that
even though a "Claim" had been made against BioChemics at the time
the 2011 Order was issued, no "Claim" had been made against Masiz
as of that time. The contention is that the earliest point in
which a "Claim" had been made against Masiz was the moment that he
was served by the SEC with one of the 2012 subpoenas, which is an
event that occurred during the policy period.
In so arguing, the appellants rely on the analysis in
TranSched Sys. Ltd. v. Fed. Ins. Co., 958 F. Supp. 2d 331 (D.R.I.
- 32 -
2013). But, the dispute there centered on whether the phrase "such
Insured" applied to a party who was neither an "insured" nor
seeking coverage. Id. at 336-37. Here, by contrast, the dispute
concerns whether the 2011 Order and pre-Policy subpoenas were clear
enough to inform Masiz, who is an insured seeking coverage, that
he was a target of the SEC's investigation commenced by the 2011
Order. Given that the Court's analysis in TranSched does not speak
at all to that type of question, we fail to see how that case is
instructive here.
To the extent that this argument rests on the fact that
the 2011 Order did not "allege[]" "Wrongful Acts" performed by
Masiz due to the qualified nature of the only misconduct therein
described, we have already explained why that contention is
untenable here. Qualified though these references to misconduct
were, they did suffice to "allege[]" "Wrongful Acts."
It is possible that the appellants mean to argue that
the 2011 Order does not constitute a "Claim" made against Masiz
because, although he was served with certain of the 2012 subpoenas
and named as co-defendant in the 2012 Action, he was not similarly
served with or named in the 2011 Order. But, here too, we are
unpersuaded.
The appellants do invoke, seemingly in support of this
contention, a number of precedents that concern private suits in
which the complaints named particular defendants, the most
- 33 -
directly analogous of which is Medical Mut. Ins. Co. of Maine v.
Indian Harbor Ins. Co., 583 F.3d 57 (1st Cir. 2009). There, we
held that a suit against an insured company that alleged wrongdoing
by some of its officers did not constitute a claim against those
officers. Id. at 63. But, the relevant document here is not a
complaint in a private suit naming a particular defendant. It is
an SEC Order authorizing a private investigation by that agency
into alleged wrongdoing by a company and persons associated with
it. The appellants identify no precedent that supports the
proposition that a filing of that type must be formally
served -- as a suit or subpoena must be -- on the insured for it
to constitute a "Claim" against him.
Moreover, the Policy expressly identifies an
"investigative order" as a component of a "D&O Claim." The 2011
Order opens with a full paragraph that, in the course of describing
Masiz's past securities violations and the terms of his probation,
identifies him to be the "sole officer and director of BioChemics."
The document then proceeds to describe misconduct that, for the
reasons that we have already given, see supra Section IV.B.1,
suffices to "allege[]" "Wrongful Acts" within the meaning of the
Policy and that attribute that possible misconduct to a range of
persons that include not only the company itself but its
"officers." Finally, the Order goes on to state that the SEC
"ORDERS . . . that a private investigation be made to determine
- 34 -
whether any persons or entities have engaged in, or are about to
engage in, any of the reported acts or practices or any acts or
practices of similar purport or object." Accordingly, the "plain
language" of Masiz's Policy shows that the 2011 Order -- in
announcing an investigation of BioChemics's officers and expressly
naming Masiz as the only one -- is properly deemed a "Claim"
against not only BioChemics but also Masiz himself. See Nat. Stock
Exch., 2007 WL 1030293, at *4-5 (emphasis added).
VI.
For the foregoing reasons we affirm the District Court's
decisions granting summary judgment in favor of AXIS and denying
the appellants' Motion for Partial Summary Judgment. The parties
shall bear their own costs.
- 35 -