IDT Corporation v. U.S. Specialty Insurance Company ( 2019 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
IDT CORPORATION and )
HOWARD JONAS, )
)
Plaintiffs, )
)
v. ) C.A. No. N18C-03-032 PRW CCLD
)
U.S. SPECIALTY INSURANCE )
COMPANY, NATIONAL UNION )
FIRE INSURANCE COMPANY )
OF PITTSBURGH, PA, and XL )
SPECIALTY INSURANCE )
COMPANY, )
)
Defendants. )
Submitted: October 25, 2018
Decided: January 31, 2019
Corrected: February 15, 2019
Upon Plaintiffs IDT Corporation and Howard Jonas’
Motion for Partial Summary Judgment,
GRANTED in part; DENIED in part.
Upon Defendant U.S. Specialty Insurance Company’s
Cross-Motion for Summary Judgment,
GRANTED in part; DENIED in part.
Upon Defendant National Union Fire Insurance Company of Pittsburgh, PA’s
Motion for Summary Judgment,
GRANTED in part; DENIED in part.
Upon Defendant XL Specialty Insurance Company’s
Motion for Summary Judgment and Joinder,
DENIED.
MEMORANDUM OPINION AND ORDER
Brian M. Rostocki, Esquire, Benjamin P. Chapple, Esquire, Reed Smith LLP,
Wilmington, Delaware, Robin L. Cohen, Esquire (pro hac vice), Keith McKenna,
Esquire (pro hac vice) (argued), McKool Smith, P.C., New York, New York,
Attorneys for Plaintiffs.
John C. Phillips, Jr., Esquire, David A. Bilson, Esquire, Phillips, Goldman,
McLaughlin & Hall, P.A., Wilmington, Delaware, Alexander R. Karam, Esquire
(pro hac vice) (argued), Addison Draper, Esquire (pro hac vice), Clyde & Co US
LLP, Washington, DC, Attorneys for Defendant U.S. Specialty Insurance Company.
Henry duPont Ridgely, Esquire, John L. Reed, Esquire (argued), Ethan H.
Townsend, Esquire, DLA Piper LLP, Wilmington, Delaware, Joseph G. Finnerty III,
Esquire (pro hac vice), Megan Shea Harwick, Esquire (pro hac vice), Eric S.
Connuck, Esquire (pro hac vice), DLA Piper LLP, New York, New York, Attorneys
for Defendant National Union Fire Insurance Company of Pittsburgh, PA.
Timothy Jay Houseal, Esquire, Jennifer M. Kinkus, Esquire, Young Conaway
Stargatt & Taylor, LLP, Wilmington, Delaware, Charles C. Lemley, Esquire (pro
hac vice) (argued), Wiley Rein LLP, Washington, DC, Attorneys for Defendant XL
Specialty Insurance Company.
WALLACE, J.
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I. INTRODUCTION
Plaintiffs IDT Corporation and Howard Jonas seek declaratory relief and
damages for breach of contract against Defendant Insurers U.S. Specialty Insurance
Company, National Union Fire Insurance Company of Pittsburgh, PA, and XL
Specialty Insurance Company, allegedly arising from those insurers’ obligations to
cover costs IDT and Jonas incurred in a Delaware Court of Chancery case—In re
Straight Path Communications Inc. Consolidated Stockholder Litigation, No. 2017-
0486-SG (Del. Ch.) (the “Straight Path Action”).
Now before the Court are the parties’ several requests for summary judgment.
On those, the Court rules as follows: IDT’s Motion for Partial Summary Judgment
on Defense Costs is GRANTED, in part, and DENIED, in part; U.S. Specialty’s
Cross-Motion for Summary Judgment is GRANTED, in part, and DENIED, in part;
National Union’s Motion for Summary Judgment is GRANTED with respect to
National Union’s coverage obligations for IDT, and DENIED with respect to
National Union’s duty to defend Jonas in the Straight Path Action; and XL
Specialty’s Motion for Summary Judgment and Joinder is DENIED.
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II. FACTUAL BACKGROUND
A. THE PARTIES.
IDT is a Delaware corporation founded by Jonas in 1990 with its principal
place of business in New Jersey. 1 Jonas has served as IDT’s Chairman since its
incorporation, served as its CEO at various times, and controls a majority of IDT’s
voting stock. 2 Straight Path Communications Inc. is a Delaware corporation
headquartered in Virginia that owns two subsidiaries -- one holds 39 GHz and 28
GHz fixed wireless spectrum licenses (the “Spectrum Assets”); the other holds a
majority stake in intellectual property related to internet communications (the “IP
Assets”). 3 Prior to its spin-off in 2013, Straight Path was a wholly-owned subsidiary
of IDT. 4
B. THE STRAIGHT PATH ACTION.
On July 31, 2013, Straight Path was spun-off from IDT (the “Spin-Off”).
One of Jonas’s sons, Davidi Jonas, served as Straight Path’s CEO and President at
the time of the Spin-Off. 5 Under the Spin-Off’s terms, Straight Path common stocks
1
Pls.’ Compl. ¶ 8.
2
Opening Br. in Supp. of Pls.’ Mot. for Partial Summ. J. on Defense Costs against Def. U.S.
Specialty Ins. Co. [hereinafter “Pls.’ Br.”] Ex. 4 Verified Consolidated Amended Class Action and
Derivative Compl. [hereinafter “Straight Path Compl.”] ¶ 18.
3
Straight Path Compl. ¶ 16.
4
Id. ¶¶ 17, 34.
5
Id. ¶ 20.
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were distributed pro rata to IDT stockholders, including Jonas, who maintained
voting control of Straight Path through a dual-class structure.6 In fact, the Spin-Off
resulted in Jonas retaining complete voting control over both IDT and Straight Path.7
But following the Spin-Off, Straight Path was a stand-alone company. 8
Jonas also retained certain consent rights with respect to Straight Path after
the Spin-Off, including the right to consent to any merger, consolidation, or sale of
all of Straight Path’s assets. 9 In addition, as part of the Spin-Off, IDT and Straight
Path entered into a Separation and Distribution Agreement (“Separation
Agreement”) under which IDT agreed to indemnify Straight Path for any liabilities
arising from or related to conduct pre-dating the Spin-Off. 10
In November 2015, Sinclair Upton Research alleged that IDT had defrauded
the Federal Communications Commission when it sought renewal of certain of its
39 GHz licenses in 2011 and 2012. Sinclair Upton alleged that Straight Path had
failed to comply with the FCC’s substantial service requirements because none of
6
Id. ¶ 36; id. ¶ 21 (explaining that Jonas’s Straight Path stock was then held in a trust of
which Jonas was the beneficiary).
7
Id. ¶ 40.
8
Id. ¶ 36.
9
Id. ¶ 39.
10
Id. ¶ 36.
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the systems that IDT had purportedly constructed under those licenses were
operational.11 In 2016, the FCC commenced an investigation into Sinclair Upton’s
allegations and concluded that Straight Path had engaged in fraudulent practices
when seeking its license renewals.
In mid-January, 2017, Straight Path and the FCC entered into a consent decree
(the “Consent Decree”) under which Straight Path:
- agreed to forfeit 20% of its spectrum licenses;
- was required to sell its remaining spectrum licenses to a third-party within
one year of the Consent Decree and to pay 20% of the proceeds of the sale
to the FCC; and
- agreed to pay a $100 million fine.
Under the Consent Decree that $100 million fine could be reduced to $15 million if
Straight Path completed the required third-party sale within the one-year time
frame. 12 But if Straight Path failed to sell its licenses or failed to pay the required
fine, its licenses would be forfeited to the FCC. 13 The terms of the Consent Decree
left Straight Path with little choice but to sell itself. 14
11
Id. ¶¶ 42, 45.
12
Id. ¶¶ 42–55.
13
Id. ¶ 55.
14
Id. ¶¶ 54, 60, 63.
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Soon after Straight Path entered into the Consent Decree with the FCC,
Straight Path’s Board of Directors formed a Special Committee to consider matters
relating to the imminent sale of its remaining assets.15 While the Board’s financial
advisor reached out to potential bidders, the Special Committee considered its
indemnification rights under the Separation Agreement and the feasibility of
asserting an indemnification claim against IDT (the “Indemnification Claim”) for
the financial liability incurred by Straight Path under the Consent Decree.16 At a
meeting held in February 2017, the Special Committee decided to preserve and
pursue the Indemnification Claim for the benefit of Straight Path’s stockholders.17
Later that month, the Special Committee’s counsel advised Straight Path’s
counsel of the Special Committee’s intention to preserve the Indemnification Claim
and advised Straight Path’s counsel that the Special Committee was exploring its
alternatives with respect thereto. Those alternatives included selling only the
Spectrum Assets or assigning the Indemnification Claim to a litigation trust, which,
in either case, would permit Straight Path to pursue the Indemnification Claim
against IDT post-closing. 18 As the sales process moved forward, the Special
15
Id. ¶¶ 69–73.
16
Clark Aff. to Straight Path Compl., Ex. C, at 39–40.
17
Straight Path Compl. ¶71.
18
Id. ¶ 72.
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Committee became increasingly concerned whether any potential bidders for
Straight Path would have an interest in pursuing the Indemnification Claim against
IDT post-closing or what value, if any, potential bidders might ascribe to the
Indemnification Claim in their bids to acquire Straight Path. 19 On March 13, 2017,
the Special Committee decided that it was in the best interests of Straight Path’s
stockholders to exclude the Indemnification Claim from any sale of Straight Path,
and informed potential bidders of that determination.20
Around the same time, Davidi Jonas became aware of the Special
Committee’s interest in pursuing the Indemnification Claim and recognized that
pursuing the claim could be harmful to his family’s interests in IDT. 21 IDT had a
market capitalization of less than $350 million and any successful enforcement of
Straight Path’s indemnification rights under the Separation Agreement would likely
bankrupt IDT. 22 Presumably, Davidi Jones advised his father of the Special
Committee’s plans with respect to the Indemnification Claim and, on March 14th
and 15th, Jonas intervened in the Straight Path sales process.23
19
Clark Aff. to Straight Path Compl., Ex. C, at 39–40.
20
Straight Path Compl. ¶ 75.
21
Id. ¶¶ 76-78. Davidi Jonas and his siblings own over 10% of IDT’s outstanding equity.
His father, Howard, owned 11.3% of IDT’s equity. Id.
22
Id.
23
Id. ¶ 79.
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Jonas contacted each Special Committee member and threatened to blow up
the sales process if they continued to adhere to their plan to preserve the
Indemnification Claim against IDT post-closing.24 His threat was credible given
that Jonas was the controlling stockholder of Straight Path and his consent was
required to approve any sale.25 Jonas also threatened the Special Committee
members personally in an effort to persuade them to settle the Indemnification Claim
for a nominal amount. 26
On March 15, 2017, an IDT representative advised Straight Path that Jonas
was interested in acquiring the IP Assets as part of any settlement of the
Indemnification Claim against IDT. 27 As discussions continued over the next few
days, Jonas made clear he would not support a sale of Straight Path as a whole, but
would consent to sell only the Spectrum Assets.28 In addition, Jonas’s counsel
advised the Special Committee’s counsel that Jonas would not support any
24
Id. ¶ 83.
25
Id. ¶ 80.
26
Id.¶ 83.
27
Id. ¶ 84.
28
Clark Aff. to Straight Path Compl., Ex. C, at 42.
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transaction that would enable the Indemnification Claim to be pursued against IDT
post-closing. 29
Realizing that it had no other options if it did not want to risk a proposed third-
party merger of Straight Path, the Special Committee acquiesced to Jonas’s
demands.30 On April 9, 2017, Straight Path and IDT executed a binding term sheet
under which Straight Path agreed to sell the IP Assets to IDT for $6 million and to
settle the Indemnification Claim against IDT for $10 million plus a right to receive
22% of the net proceeds from any sale of the IP Assets (the “2017 Term Sheet”).31
Meanwhile, the bidding continued for the Spectrum Assets and as of April 7,
2017, Verizon had proposed to acquire Straight Path for $1.262 billion. This created
substantial liability for IDT under the Separation Agreement.32 Given the increasing
value of Straight Path’s Indemnification Claim, the Special Committee attempted to
extract additional settlement consideration from IDT. It didn’t work.33
29
Id.; Straight Path Compl. ¶ 84.
30
Straight Path Compl. ¶ 86.
31
Id. ¶¶ 86–88.
32
Clark Aff. to Straight Path Compl., Ex. C, at 45-46.
33
Id. at 47.
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After a bidding war between AT&T and Verizon, Verizon ultimately acquired
Straight Path for a total enterprise value of $3.1 billion.34 On February 28, 2018, the
Verizon merger closed and, in accord with the Consent Decree’s terms, the FCC
collected $614 million.
C. THE STRAIGHT PATH SHAREHOLDER LITIGATION COMMENCES.
The Straight Path shareholder litigation was initiated in our Court of Chancery
in July 2017—three months after the 2017 Term Sheet was executed.35 Two class
actions were filed and later consolidated into the Straight Path Action.36 A verified
complaint was filed on August 29, 2017 (the “Underlying Complaint”).37
The Underlying Complaint was brought as a class action directly challenging
the Verizon merger and, in the alternative, derivatively on behalf of Straight Path.38
34
Straight Path Compl. ¶ 98.
35
Pls.’ Compl. ¶ 41.
36
Pls.’ Compl. ¶ 43. This case was there captioned In Re Straight Path Communications Inc.
Stockholder Litigation, Case No. 2017-0486-SG.
37
Pls.’ Compl. ¶ 44.
38
Id.
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The named defendants in the Underlying Complaint were IDT, Howard Jonas,
Davidi Jonas, the Patrick Henry Trust, 39 and Straight Path as a nominal defendant.40
The Straight Path Action has four counts:
- Count I alleges that Howard Jonas, in his capacity as the controlling
stockholder of Straight Path, breached his fiduciary duties to the company
and its stockholders.41 Specifically, the Underlying Complaint asserts that
Jonas used his position as a controlling stockholder to extract unique
benefits from the sales process to the detriment of Straight Path’s minority
stockholders.42 Those benefits included the acquisition of the IP Assets
and settlement of the Indemnification Claim for well below fair value. 43
- Count II alleges that Davidi Jonas breached his fiduciary duties to Straight
Path and its stockholders by putting his personal interests and those of his
family above those of the company and its stockholders.44
- Count III alleges that IDT aided and abetted Davidi Jonas and his father in
their respective breaches of fiduciary duty. 45
39
Straight Path Compl. ¶ 21 (The Patrick Henry Trust was the trust established on July 31,
2013, and created to hold Howard Jonas’s Class A Common Stock and Class B Common Stock in
Straight Path.).
40
Pls.’ Compl. ¶ 44.
41
Straight Path Compl. ¶¶ 102, 113, 120–124.
42
Id. ¶ 122.
43
The IP Assets were, in connection with the Consent Decree, previously valued at
approximately $50 million. Id. ¶ 54, n.3.
44
Id. ¶¶ 125–29.
45
Id. ¶¶ 130–33.
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- Count IV seeks a declaratory judgement and the imposition a constructive
trust, but that request became moot upon the closing of the Verizon
merger. 46
In November 2017 letter opinion holding that the matter was not ripe for
decision, the Court of Chancery concluded that the Straight Path shareholders were
“in favor of the merger” with Verizon, and the claim against IDT “arise[s] from
[Straight Path] assets transferred [in 2017] to another entity controlled by [Howard
Jonas], which was a condition of his support for the merger” with Verizon. 47 In a
later opinion denying the defendants’ motion to dismiss the Straight Path Action,
the Court found that the plaintiffs’ claims were direct as opposed to derivative and,
accordingly, survived the closing of the Verizon merger. 48
After the Straight Path Action was filed in July 2017, IDT and Jonas tendered
their claims seeking coverage under the insurance policies. 49 U.S. Specialty refused
to defend them or pay defense costs. 50 National Union similarly refused coverage
46
Id. ¶¶ 134–39.
47
See In re Straight Path Commc’ns Inc. Consol. Stockholder Litig., 2017 WL 5565264, at
*1 (Del. Ch. Nov. 20, 2017).
48
See In re Straight Path Commc’ns Inc. Consol. Stockholder Litig., 2018 WL 3120804 (Del.
Ch. June 25, 2018).
49
Pls.’ Compl. ¶ 48.
50
Id. ¶ 49.
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for past and future loss, even if they exceeded the U.S. Specialty policy limits ($10
million for each of IDT and Jonas).51 XL Specialty reserved its right to deny
coverage for Jonas to the extent his loss is not indemnified or indemnifiable in
connection with the Straight Path Action. 52 Upon denial of coverage by those
Insurers, IDT and Jonas commenced this action.
The issue before this Court is whether the actions taken by Jonas as set forth
in the Underlying Complaint in the Straight Path Action and the losses53 associated
therewith are covered by the terms of the subject insurance policies.
III. LEGAL STANDARD
This Court cannot grant any party’s motion for summary judgment under
Delaware Superior Court Civil Rule 56 unless no genuine issue of material fact
exists and that party is entitled to judgment as a matter of law. 54 Summary judgment
51
Id. ¶ 50.
52
Id. ¶ 51.
53
U.S. Specialty’s policy defines “Loss” to include “Defense Costs” and any damages,
settlements, judgments (including pre- and post-judgment interest) or other amounts that: (1) an
Insured Person is legally obligated to pay as a result of any Claim, or (2) a Company is legally
obligated to pay as a result of any Securities Claim. U.S. Specialty Policy ¶¶ Definition (G);
Endorsement 5.
54
Del. Super. Ct. Civ. R. 56; Motors Liquidation Co. DIP Lenders Trust v. Allianz Ins. Co.,
2017 WL 2495417, at *5 (Del. Super. Ct. June 19, 2017), aff’d sub. nom, Motors Liquidation Co.
DIP Lenders Trust v. Allstate Ins. Co., 2018 WL 3360976 (Del. July 10, 2018);
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will not be granted if there is a material fact in dispute 55 or if “it seems desirable to
inquire thoroughly into [the facts] to clarify the application of the law to the
circumstances.”56 The burden is on the moving party to demonstrate their claim is
supported by undisputed facts.57 If that burden is met, the non-moving party must
demonstrate that “there is a genuine issue for trial.” 58 And in determining whether
there is, the Court must view the facts in the light most favorable to the non-moving
party. 59
The Court cannot grant a motion for summary judgment “[i]f . . . the record
reveals that material facts are in dispute, or if the factual record has not been
55
A fact is material if it might affect the outcome of the suit under governing law. See
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986) (“Only disputes over facts that might
affect the outcome of the suit under the governing law will properly preclude the entry of summary
judgment.”); see also In re Asb. Litigation, 2006 WL 3492370, at *3 (Del. Super. Ct. Nov. 28,
2006); Farmers Bank of Willards v. Becker, 2011 WL 3925428, at *3 (Del. Super. Ct. Aug. 11,
2011).
56
Ebersole v. Lowengrub, 180 A.2d 467, 468-69 (Del. 1962).
57
CNH Indus. Am. LLC v. Am. Cas. Co. of Reading, 2015 WL 3863225, at *1 (Del. Super.
Ct. June 8, 2015); Moore v. Sizemore, 405 A.2d 679, 680 (Del. 1979).
58
Del. Super. Ct. Civ. R. 56(e). See CNH Indus. Am. LLC, 2015 WL 3863225, at *1 (“If the
motion is properly supported, then the burden shifts to the non-moving party to demonstrate that
there are material issues of fact for resolution by the ultimate fact-finder.”; see also Tanzer v. Int’l
Gen. Indus., Inc., 402 A.2d 382, 385 (Del. Ch. 1979) (“If the movant puts in the record facts which,
if undenied, entitle him to summary judgment, the burden shifts to the defending party to dispute
the facts by affidavit or proof of similar weight.”).
59
Judah v. Del. Trust Co., 377 A.2d 624, 632 (Del. 1977) (“The facts must be viewed in the
manner most favorable to the nonmoving party . . . with all factual inferences taken against the
moving party and in favor of the nonmoving party.”).
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developed thoroughly enough to allow the Court to apply the law to the factual
record . . . .”60 But “a matter should be disposed of by summary judgment whenever
an issue of law is involved and a trial is unnecessary.” 61
These well-established standards and rules equally apply when, as here, the
parties have filed cross-motions for summary judgment. 62 Where cross-motions for
summary judgment are filed and neither party argues the existence of a genuine issue
of material fact, “the Court shall deem the motions to be the equivalent of a
stipulation for decision on the merits based on the record submitted with the
motions.”63 But where cross-motions for summary judgment are filed and an issue
of material fact exists, summary judgment is not appropriate. 64 To determine
whether there is a genuine issue of material fact, the Court evaluates each motion
60
CNH Indus. Am. LLC, 2015 WL 3863225, at *1.
61
Jeffries v. Kent Cty. Vocational Tech. Sch. Dist. Bd. of Educ., 743 A.2d 675, 677 (Del.
Super. Ct. 1999); Brooke v. Elihu-Evans, 1996 WL 659491, at *2 (Del. 1996) (“If the Court finds
that no genuine issues of material fact exist, and the moving party has demonstrated his entitlement
to judgment as a matter of law, then summary judgment is appropriate.”).
62
Verizon Commc’ns Inc. v. Illinois Nat’l Ins. Co., 2017 WL 1149118, at *5 (Del. Super. Ct.
Mar. 2, 2017); Capano v. Lockwood, 2013 WL 2724634, at *2 (Del. Super. Ct. May 31, 2013)
(citing Total Care Physicians, P.A. v. O'Hara, 798 A.2d 1043, 1050 (Del. Super. Ct. 2001)).
63
Del. Super. Ct. Civ. R. 56(h).
64
Motors Liquidation, 2017 WL 2495417, at *5; Comet Sys., Inc. S’holders’ Agent v. MIVA,
Inc., 980 A.2d 1024, 1029 (Del. Ch. 2008).
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independently. 65 And where it seems prudent to make a more thorough inquiry into
the facts, summary judgment is denied and the matter submitted for resolution by
trial.66
IV. DISCUSSION
A. CHOICE OF LAW.
The insurance policies here contain no choice-of-law provisions. In the
absence of the parties’ express choice of law, Delaware courts employ the “most
significant relationship test” to determine which state’s law applies. Under that test
the law of the jurisdiction bearing the most significant relationship to the insurance
coverage as a whole is applied.67 IDT and Jonas urge that Delaware law should
apply to govern their insurers’ coverage obligations.68 The insurers argue that New
Jersey law should apply because the policy was issued to IDT in New Jersey, but
65
Motors Liquidation, 2017 WL 2495417, at *5; Fasciana v. Elec. Data Sys. Corp., 829 A.2d
160, 167 (Del. Ch. 2003).
66
Ebersole. 180 A.2d at 470-72; Pathmark Stores, Inc. v. 3821 Associates, L.P., 663 A.2d
1189, 1191 (Del. Ch. 1995) (“[S]ummary judgment may not be granted when the record indicates
a material fact is in dispute or if it seems desirable to inquire more thoroughly into the facts in
order to clarify the application of law to the circumstances.”).
67
See generally Certain Underwriters at Lloyds, London v. Chemtura, 160 A.3d 457 (Del.
2017); Travelers Indem. Co. v. CNH Indus. Am. LLC, 2018 WL 3434562 (Del. July 16, 2018).
See, e.g., Liggett Gp., Inc. v. Affiliated FM Ins. Co., 788 A.2d 134, 145 (Del. Super. Ct. 2001)
(applying North Carolina law to over one-hundred policies because North Carolina had the most
significant relationship to the coverage as a whole).
68
Pls.’ Br., at 15–16. See also Tr. for Oral Argument on Cross-Mots. For Summ. J. held on
Oct. 12, 2018 [hereinafter “O.A. Tr.”], at 6–7 (Pls.’ Argument).
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concede that “there is no apparent conflict” on the relevant coverage issues between
the laws of the two states. 69
Delaware courts recognize that, where possible, a court should avoid a choice-
of-law analysis altogether if the result would be the same under the law of either of
the competing jurisdictions.70 Here, the Court divines no material or significant
differences between the laws of Delaware and New Jersey with respect to this
coverage dispute. 71
If these parties’ concessions and the Court’s inability to detect a true conflict
weren’t enough, there is one more thing. Delaware courts have consistently held
that Delaware law should be applied to resolve disputes over insurance coverage of
directors’ and officers’ liability. When they must engage the multifaceted “most
69
Defendant U.S. Specialty Ins. Co.’s Opening Br. in Supp. of Its Cross-Mot. for Summ. J.
[hereinafter “U.S. Specialty Opening Br.”] at 11, n.4. See also O.A. Tr., at 30 (U.S. Specialty’s
Argument) (“I don’t see [choice of law] as an issue. Plaintiffs have not identified any difference
in the law between Delaware and New Jersey in terms of how these cases are interpreted”);
Defendant National Union Fire Ins. Co. of Pittsburgh, PA’s Opening Br. in Supp. of its Mot. for
Summ. J. [hereinafter “National Union Br.”], at 13 (arguing that “New Jersey law should govern,”
but conceding that “[t]he relevant principles of policy interpretation that are at issue on this motion
are substantial the same in both New Jersey and Delaware.”).
70
Deuley v. DynCorp Int'l, Inc., 8 A.3d 1156, 1161 (Del. 2010). See Laugelle v. Bell
Helicopter Textron, Inc., 2013 WL 5460164, at *2 (Del. Super. Ct. Oct. 1, 2013) (“[I]t must be
first determined that there is an actual—rather than no or merely a ‘false’—conflict. If there is no
actual conflict, ‘the Court should avoid the choice-of-law analysis altogether.’”); see also Lagrone
v. Am. Mortell Corp., 2008 WL 4152677, at *5 (Del. Super. Ct. Sept. 4, 2008) (“In such instances
of ‘false conflicts’ of laws, the Court may resolve the dispute without a choice between the laws
of the competing jurisdictions.”).
71
And the insurers do not object to the application of Delaware law. See O.A. Tr., at 30 (U.S.
Specialty’s Argument) (“I don’t see [choice of law] as an issue.”).
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significant relationship” test, Delaware courts recognize that for directors’ and
officers’ liability, “the insured risk is the directors’ and officers’ ‘honesty and
fidelity’ to the corporation[.]” 72 So, “the state of incorporation has the most
significant relationship” because the policy is issued pursuant to Delaware law, 73
and “Delaware’s law ultimately determines whether a director or officer of a
Delaware corporation” breaches his or her fiduciary duties.74
Here, IDT and Straight Path are both Delaware corporations.75 The insurance
policies covered directors’ and officers’ liabilities, and the Straight Path Action
asserts claims against Jonas and IDT for purported breaches of fiduciary duty owed
to Straight Path. The merits of those claims are (or have been) determined under
Delaware law. Thus, under any choice-of-law analysis, Delaware law bears the
“most significant relationship” to the issues of the insurers’ coverage liability here.
And, the Court, therefore, finds Delaware law is the appropriate governing authority.
72
Mills Ltd. P’ship v. Liberty Mut. Ins. Co., 2010 WL 8250837, at *6 (Del. Super. Ct. Nov.
5, 2010).
73
Id. (citing to DEL. CODE ANN. tit. 8, § 145, which provides for indemnification of, among
others, officers and directors).
74
Id.
75
Straight Path Compl. ¶ 28; Pls.’ Compl. ¶ 8.
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B. PLAINTIFFS’ MOTION FOR PARTIAL SUMMARY JUDGMENT AND
U.S. SPECIALTY’S CROSS-MOTION FOR SUMMARY JUDGMENT ON THE
COVERAGE OF DEFENSE COSTS IN THE STRAIGHT PATH ACTION.
Jonas, IDT, and U.S. Specialty submit cross-motions for summary judgment
with respect to U.S. Specialty’s duty to defend Jonas and IDT in the Straight Path
Action.76 Because both sides make substantially the same arguments in their
respective papers, the Court addresses their respective motions together.
1. APPLICABLE RULES OF CONTRACT INTERPRETATION
FOR INSURANCE POLICIES.
Insurance policies are contracts. 77 It is a well-established principle that
“[u]nder Delaware law, the interpretation of contractual language, including that of
insurance policies, is a question of law.” 78 The objective is to give effect to the
parties’ mutual intent at the time of contracting. 79 In construing the language of a
contract, the Court should interpret the language in the same manner as it “would be
76
Pls.’ Br. ¶ 1; U.S. Specialty Opening Br. ¶ 2.
77
Goggin v. National Union Fire Ins. Co. of Pittsburgh, 2018 WL 6266195, at *4 (Del.
Super. Ct. Nov. 30, 2018); Cont’l Ins. Co. v. Burr, 706 A.2d 499, 500–01 (Del. 1998) (“. . . an
insurance policy is a contract of adhesion …”); Hallowell v. State Farm Mut. Auto. Ins. Co., 443
A.2d 925, 926 (Del. 1982) (“. . . an insurance policy is an adhesion contract . . .”).
78
O’Brien v. Progressive N. Ins. Co., 785 A.2d 281, 286 (Del. 2001). See also Eagle Force
Hldgs., LLC v. Campbell, 187 A.3d 1209, 1212 (Del. 2018) (“Whether [a] contract’s material terms
are sufficiently defined is mostly, if not entirely, a question of law.”); Exelon Generation
Acquisitions, LLC v. Deere & Co., 176 A.3d 1262, 1263 (Del. 2017) (“The proper construction of
any contract ... is purely a question of law[.]”).
79
Exelon Generation Acquisitions, 176 A.3d at 1263.
- 20 -
understood by an objective, reasonable third party.” 80 Absent ambiguity, all contract
terms—including those in insurance policies—should be accorded their plain,
ordinary meaning. 81 A contract term is not ambiguous merely because the parties
disagree on its meaning.82 Rather, ambiguity exists when the disputed term “is fairly
or reasonably susceptible to more than one meaning.”83
Because an insurance policy is “an adhesion contract and is not generally the
result of arms-length negotiation,” the rules of construction “differ from those
applied to most other contracts.”84 Where there is ambiguity in the policy language,
the doctrine of contra proferentem requires that the insurance contract be construed
most strongly against the insurer and in favor of the insured because the insurer is
the drafter of the policy. 85 In construing an ambiguous policy term, the Court looks
to “the reasonable expectations of the insured at the time when he entered into the
contract[.]” 86 But this rule is applicable only where the policy language is indeed
80
Salamone v. Gorman, 106 A.3d 354, 367–68 (Del. 2014).
81
Alta Berkeley VI C.V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012); Goggin v. National
Union Fire Ins. Co. of Pittsburgh, 2018 WL 6266195, at *4.
82
Id.
83
Id.
84
Hallowell, 443 A.2d at 926.
85
Id. (citing Steigler v. Insurance Co. of North America, 384 A.2d 398, 400 (Del. 1978);
Novellino v. Life Ins. Co. of North America, 216 A.2d 420, 422 (Del. 1966)).
86
Id. at 927.
- 21 -
ambiguous.87 When an insurance contract’s language is “clear and unambiguous a
Delaware court will not destroy or twist the words under the guise of construing
them.” 88 And when that language “is clear and unequivocal, [each] party will be
bound by its plain meaning.”89
Now, the Court must decide whether the Straight Path Action presents a claim
or claims covered under the U.S. Specialty, National Union, or XL Specialty
insurance policies.
2. THE TERMS OF THE U.S. SPECIALTY POLICY.
U.S. Specialty’s policy covers the period from June 6, 2016, to June 6, 2017,
which is when the alleged actions giving rise to the Straight Path Action occurred.
Insuring Agreement (B) of the U.S. Specialty’s policy states as follows:
(B) The Insurer will pay to or on behalf of the Company
Loss arising from:
(1) Claims 90 first made during the Policy Period or the
Discovery Period (if applicable) against the Insured
Persons for Wrongful Acts, if the Company has paid
87
Id. at 926.
88
Id.
89
Id.
90
A “Claim” includes, among other things, “any written demand for monetary or non-
monetary,” and “any civil proceeding commenced by service of a complaint or similar pleading.”
See U.S. Specialty policy at Definitions (B)(2). U.S. Specialty does not dispute that the Straight
Path Action is a “Claim” made during the “Policy Period.”
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such Loss to or on behalf of the Insured Persons as
indemnification or advancement, and/or
(2) Securities Claims first made during the Policy Period
or the Discovery Period (if applicable) against the
Company for Wrongful Acts.91
Put more succinctly, U.S. Specialty is liable for the “Losses” (above the
applicable self-insured retentions) incurred by IDT for (1) “Claims” against an
“Insured Person” for “Wrongful Acts” and (2) “Securities Claims” against the
“Company” for “Wrongful Acts.” A look at each of the foregoing defined terms in
the U.S. Specialty policy is necessary to determine whether U.S. Specialty’s duty to
pay defense costs has been triggered by the Straight Path Action.
3. U.S. SPECIALTY HAS THE DUTY TO DEFEND JONAS
IN THE STRAIGHT PATH ACTION BECAUSE
HIS ACTIONS CONSTITUTE “WRONGFUL ACTS.”
The first question is whether Jonas is an “Insured Person” who has engaged
in “Wrongful Acts” through the conduct alleged in the Straight Path Action. The
U.S. Specialty policy defines an “Insured Person,” in relevant part, as “any past,
present or future director or officer of the Company.” 92 The “Company” is IDT.93
Under those definitions, Jonas is an “Insured Person” under the U.S. Specialty
91
Pls.’ Compl. ¶ 17; Pls.’ Compl. Ex. A ¶ Insuring Agreement (emphasis in original).
92
Id. ¶ Definition (F).
93
Id. ¶¶ Definitions (C), (O), Endorsement No. 32, Endorsement No. 3.
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policy. He was the Chairman of IDT’s board of directors during the events that
spawned the Straight Path Action. 94
As an Insured Person under the U.S. Specialty policy, Jonas must be covered
if the actions alleged in the Straight Path Action constitute “Wrongful Acts.” The
U.S. Specialty policy defines “Wrongful Act” to include any:
(1) actual or alleged act, error, misstatement, misleading
statement, neglect, omission or breach of duty: (a) by an
Insured Person in his capacity as such, including . . . while
acting as a Controlling Person, or (b) with respect only to
Securities Claims, by the Company; or
(2) matter claimed against an Insured Person solely by
reason of his or her service in such capacity. 95
Central to the current dispute is the first defined type of “Wrongful Act.” The
Court finds the terms of the U.S. Specialty policy unambiguous. Its plain language
is not “susceptible to more than one meaning.”96 So, to construe the meaning of
“Wrongful Act,” the Court gives the policy’s words their plain, ordinary meaning.97
94
Pls.’ Compl. ¶ 25; U.S. Specialty Answer ¶ 25; In re Straight Path Commc’ns Inc. Consol.
Stockholder Litig., 2018 WL 3120804., at *2.
95
U.S. Specialty Policy ¶¶ Definition (P)(1), Endorsement No. 6 (emphasis added).
96
Goggin, 2018 WL 6266195, at *4; Alta Berkeley VI C.V., 41 A.3d at 385.
97
Goggin, 2018 WL 6266195, at *4; Alta Berkeley VI C.V., 41 A.3d at 385.
- 24 -
a. The “Covered” Conduct is Not Limited to Breach of Duty.
The definition of “Wrongful Act” provides a laundry list of conduct that might
constitute a Wrongful Act. Despite many wide-ranging examples explicitly
expressed therein, U.S. Specialty offers a narrow reading of this definition. U.S.
Specialty seeks to essentially limit “Wrongful Acts” to conduct that constitutes
“breach of duty.” 98
But “Wrongful Acts” are not limited only to conduct that constitutes a “breach
of duty.” Rather, Wrongful Acts encompass a broad array of specifically
enumerated conduct. The types of conduct preceding in the list connects to “breach
of duty” via a disjunctive “or.” 99 And so, each term in the string must be afforded a
separate and independent meaning.100 “Breach of duty” does not absorb, or
incorporate, or otherwise make the other exemplified conduct duplicative or
meaningless. To the contrary, each term represents a separate, independent act that,
if other requirements are satisfied, is capable of triggering coverage obligations
under the U.S. Specialty policy. Therefore, in construing the language of the U.S.
98
U.S. Specialty Opening Br., at 15 (averring that the central questions are “(1) what duty
was allegedly breached and (2) to whom that duty was owed.”).
99
U.S. Specialty Policy ¶¶ Definition (P)(1), Endorsement No. 6.
100
Loughrin v. United States, 573 U.S. 351, 357 (2014) (citing United States v. Woods, 571
U.S. 31, 45 (2013) (“[The] ordinary use [of ‘or’] is almost always disjunctive, that is, the words it
connects are to ‘be given separate meanings’.”)).
- 25 -
Specialty Policy, the Court finds that a “Wrongful Act” is not limited to a “breach
of duty.” Any conduct that is an “act,” or an “error,” or a “misstatement,” or a
“misleading statement,” or “neglect,” or an “omission” could be a “Wrongful Act.”
b. Jonas Acted in His Insured Capacity that Gave Rise
to the Straight Path Action.
To be a “Wrongful Act” under the U.S. Specialty policy, the conduct must be
taken “by an Insured Person in [his] capacity as such[.]”101 Because Jonas’ “Insured
Person” status is based on his position as IDT’s Chairman, his insured capacity must
necessarily derive from acts taken in his capacity as IDT’s Chairman. On this the
parties agree.102 The parties dispute, however, whether the conduct must be taken
in, and solely in, Jonas’s capacity as IDT’s Chairman, and not in his capacity as
Straight Path’s controlling stockholder.
U.S. Specialty takes the position that the Court should only look at “the
capacity characterized by the Underlying Complaint.”103 That is, U.S. Specialty
relies exclusively on how the Underlying Complaint characterizes Jonas’s alleged
101
U.S. Specialty Policy ¶¶ Definition (P)(1), Endorsement No. 6 (emphasis added).
102
Pls.’ Br., at 23 (“To this respect, he is alleged to have been acting solely in his capacity as
IDT’s Chairman . . .”); U.S. Specialty Opening Br., at 17 (“[T]he Underlying Complaint does not
assert any Claim against Jonas for actions he took in his insured capacity as chairman or controlling
stockholder of IDT.”).
103
U.S. Specialty Opening Br., at 15–16 (citing to numerous allegations against Jonas
characterized in the Straight Path Compl.) (emphasis added); U.S. Specialty Opp’n, at 12–13 (the
same).
- 26 -
misconduct.104 According to U.S. Specialty, because the claim against Jonas is
characterized as a “breach of his fiduciary duties” to Straight Path as Straight Path’s
controlling stockholder,105 and not to IDT, those acts could not have been committed
in Jonas’s insured capacity as IDT’s Chairman. 106 In truth, this is just a slight
variation on the prior argument that the only “Wrongful Acts” covered by the
insurance policies are for breach of fiduciary duty. Such a reading of the U.S.
Specialty policy is inconsistent with Delaware law interpreting such insurance
policies.
In determining whether the duty to defend and advance defense costs is
triggered, the Court must examine whether “the underlying complaint alleges facts
that fall within the scope of coverage.”107 Although the Court looks to the allegations
of the underlying complaint, the Court is not “limited to the plaintiff’s unilateral
characterization of the nature of [its] claims.” 108 Rather, the Court reviews “the
complaint as a whole” and considers “all reasonable inferences that may be drawn
104
U.S. Specialty Opening Br., at 15–16; U.S. Specialty Opp’n, at 12–13.
105
U.S. Specialty Opening Br., at 15–16; U.S. Specialty Opp’n, at 13 (referencing to Straight
Path Compl. ¶ 122).
106
U.S. Specialty Opening Br., at 16–17.
107
Verizon Commc’ns, 2017 WL 1149118, at *6 (finding that the same law applies in
Delaware and New York regarding the duty to defend and to advance defense expenses).
108
Id. at *7.
- 27 -
from the alleged facts.” 109 The key is “whether the allegations of the complaint,
when read as a whole, assert ‘a risk within the coverage of the policy.’” 110
The Court here looks beyond the characterization of the acts alleged by the
Straight Path plaintiffs and examines those acts to determine if they were taken by
Jonas in his insured capacity as IDT’s Chairman.
The Underlying Complaint provides a detailed account of Jonas’s alleged
wrongdoing. It alleges Jonas served as IDT’s Chairman and CEO during the 2011–
2012 period when IDT’s fraudulent conduct occurred that resulted in the Consent
Decree. 111 The Underlying Complaint describes and explains that the financial
hardship imposed by the Consent Decree112—coupled with IDT’s indemnification
obligation to Straight Path for pre-Spin-Off liabilities incurred under the Separation
Agreement 113—prompted Jonas to interfere with Straight Path’s sale process.114 The
Underlying Complaint alleges that Jonas leveraged his voting control in Straight
109
Blue Hen Mech., Inc. v. Atl. States Ins. Co., 2011 WL 1598575, at *2 (Del. Super. Ct. Apr.
21, 2011), aff’d, 29 A.3d 245 (Del. 2011).
110
Verizon Commc’ns, 2017 WL 1149118, at *7 (citing Cont'l Cas. Co. v. Alexis I. duPont
Sch. Dist., 317 A.2d 101, 103 (Del. 1974)).
111
Straight Path Compl. ¶ 18.
112
Id. ¶¶ 52–55.
113
Id. ¶ 36.
114
Id. ¶ 81.
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Path in exchange for Straight Path relinquishing the right to pursue its
Indemnification Claim against IDT post-closing, and selling its IP Assets to IDT.115
The Underlying Complaint further avers that Jonas got his way. The 2017 Term
Sheet entered into between IDT and Straight Path provided Straight Path
stockholders with only nominal consideration for the IP Assets and the
Indemnification Claim. 116
Read as a whole, the Straight Path Action, paints a picture of Jonas
singlehandedly furthering his own and IDT’s interests at the expense of Straight Path
and its stockholders. In examining the nature of the claims and alleged acts, the
Court finds that the Underlying Complaint has sufficiently asserted “a risk within
the coverage” of the U.S. Specialty policy. That is, Jonas took the alleged wrongful
actions he did for the benefit of IDT and himself in his capacity as the Chairman of
IDT. The fact that Jonas may at the same time also be a controlling stockholder of
Straight Path and breaching his concomitant fiduciary duties there does not mean
that his actions weren’t taken in his capacity as an IDT officer. 117 Had U.S. Specialty
115
Id. ¶¶ 80–85, 93–94.
116
Id. ¶¶ 88–91, 99.
117
See Continental Copper & Steel Industries, Inc. v. Johnson, 491 F. Supp. 360 (S.D.N.Y.
1980) (finding that coverage existed for actions taken in a dual capacity under similar policy
language and similar facts).
- 29 -
intended the coverage to be so limited, it should have, and could have, drafted the
policy accordingly.
4. U.S. SPECIALTY HAS NO DUTY TO DEFEND IDT
BECAUSE THE STRAIGHT PATH ACTION IS NOT A
“SECURITIES CLAIM.”
Does U.S. Specialty have a separate duty to defend IDT in the Straight Path
Action? With respect to the claims against IDT, U.S. Specialty has the obligation to
provide coverage for “Securities Claims [] against the Company for Wrongful
Acts.”118 There is no dispute that IDT, being the Named Corporation, is within the
meaning of “Company.” 119 But is the Straight Path Action a “Securities Claim?”120
Under the U.S. Specialty policy, Securities Claim means a Claim which:
(1) is brought by or on behalf of one or more securities
holders of the Company in their capacity as such, or
(2) arises from the purchase or sale of, or offer to purchase
or sell, any securities issued by the Company, whether
such purchase, sale or offer involves a transaction with
the Company or occurs in the open market.121
118
U.S. Specialty Policy ¶ Insuring Agreement (B)(2).
119
Id. ¶¶ Declarations, Item 1; Definition (H); Endorsement 32; see also Pls.’ Br., at 24; U.S.
Specialty Opening Br., at 20.
120
U.S. Specialty Policy ¶¶ Definition (P); Endorsement 6 (“Wrongful Act” is an “actual or
alleged act, error, misstatement, misleading statement, neglect, omission or breach of duty . . . (b)
with respect only to Securities Claims, by the Company[.]”).
121
Pls.’ Compl. Ex. A ¶ Definition (N).
- 30 -
IDT argues that the Straight Path Action is a Securities Claim under both
definitions.122 U.S. Specialty contends that the Straight Path Action satisfies
neither.123
a. The Straight Path Action is Not a Securities Claim
Because It Was Brought by Straight Path’s Securities
Holders, not IDT.
To fall under the first part of the definition of a “Securities Claim,” a claim
must be brought by “securities holders of the Company.” 124 The U.S. Specialty
policy defines “Company” to include “the Named Corporation,” here IDT, and any
“Subsidiary” thereof. The U.S. Specialty policy defines a “Subsidiary,” in relevant
part, as:
. . . any entity, including any limited liability
company[]:
(1) during any time on or before the inception of
the Policy Period in which the Named
Corporation owns or owned more than 50%
of the issued and outstanding securities
representing the right to vote for the election
of such entity’s directors or managers (or the
legal equivalent thereof), either directly or
indirectly through one or more other
Subsidiaries; . . .
122
Pls.’ Br., at 23–24.
123
U.S. Specialty Opening Br., at 19–20.
124
U.S. Specialty Policy ¶ Definition (N)(1).
- 31 -
An entity ceases to be a Subsidiary when the
Named Corporation ceases to own more
than 50% of its issued and outstanding
securities representing the right to vote for the
election of such entity’s directors or managers
(or the legal equivalent thereof), either
directly or indirectly through one or more
other Subsidiaries. The coverage afforded
under this Policy with respect to Claims
against a Subsidiary or any Insured Person
thereof will apply only in respect of
Wrongful Acts committed or allegedly
committed after the effective time that such
entity becomes a Subsidiary and prior to the
time that such entity ceases to be a
Subsidiary.”125
Because the Straight Path Action is brought by securities holders of Straight
Path, the Straight Path Action can only be a Securities Claim under the first
provision if Straight Path is a Subsidiary of IDT during the relevant time period.126
IDT doesn’t deny that it ceased to hold “more than 50% of the voting rights”
of Straight Path after the 2013 Spin-Off.127 Nevertheless, it argues, Straight Path
continues to qualify as IDT’s Subsidiary under the policy because “Straight Path’s
role as a Subsidiary” pre-Spin-Off is “central to the Straight Path Action.”128 Put
125
Id. ¶¶ Definitions (O), Endorsement No. 3.
126
See also Pls.’ Br., at 24 (conceding that “the Straight Path Action is a ‘Securities Claim’ as
long as Straight Path is a ‘Company’ under the Policy[.]”).
127
Pls.’ Br., at 24–25.
128
Id. (emphasis added).
- 32 -
another way, IDT proposes that a former subsidiary of IDT is within the meaning of
“Subsidiary” under the U.S. Specialty policy so long as the former subsidiary’s role
is purportedly pivotal to the Underlying Complaint. This Court can’t buy into IDT’s
attempted rewrite of the policy’s terms.
In construing the term “Subsidiary,” the Court finds that the policy language
is clear and unambiguous and must, therefore, afford those terms their plain and
ordinary meaning.129 The policy language provides that an entity qualifies as a
Subsidiary under the policy if IDT owns more than 50% of its voting rights. That
entity ceases to be a Subsidiary when IDT no longer owns more than 50% of its
voting rights. 130 The definition of “Subsidiary” specifies that the benchmark is
“more than”131—not “equal to,” not “no less than,”—50% of the entity’s voting
rights. And the definition’s calculation for voting control accounts for direct and
indirect control “through one or more other Subsidiaries”132; it thereby makes clear
that for indirect control to be taken into account, the intermediary must also qualify
as a Subsidiary. 133 The “Subsidiary” definition in no way includes, either expressly
129
Goggin, 2018 WL 6266195, at *4; Alta Berkeley VI C.V., 41 A.3d at 385.
130
U.S. Specialty Policy ¶¶ Definition (O); Endorsement 3.
131
Id. ¶¶ Definition (O); Endorsement 3.
132
Id.
133
Id.
- 33 -
or impliedly, language that allows a former subsidiary to continue to constitute a
Subsidiary under any other circumstances.
Reading the plain language of the policy, the Court rejects IDT’s proposed
rewriting of its terms and finds that as of the effective date of the 2013 Spin-Off,
Straight Path ceased to be a Subsidiary of IDT. The Wrongful Acts alleged in the
Straight Path Action took place in 2017—four years after Straight Path ceased to be
a subsidiary of IDT—when IDT is alleged to have aided and abetted Straight Path’s
release of its Indemnification Claim. Therefore, Straight Path does not fall within
the definition of “Company.” Accordingly, the Straight Path Action does not
constitute a “Securities Claim” under the first part of the definition because the
Straight Path Action was not brought by IDT’s securities holders.
b. The Straight Path Action is Not a Securities Claim
Because a Spin-Off is Not a “Sale of Securities.”
The second prong of the “Securities Claim” definition requires that the claim
against IDT in the Straight Path Action “arises[] from the purchase or sale of . . .
any securities issued by the Company . . .” 134 This unambiguous language must be
afforded its ordinary meaning.135
134
Id. ¶ Definition (N)(2).
135
Goggin, 2018 WL 6266195, at *4; Alta Berkeley VI C.V., 41 A.3d at 385.
- 34 -
Given that the Court has determined that Straight Path is not a Subsidiary
under the U.S. Specialty policy and is, therefore, outside of the meaning of
“Company,” this second provision of the “Securities Claim” definition can only be
satisfied if the claim against IDT in the Straight Path Action “arises from the
purchase or sale of securities issued by IDT.” IDT says it does.
According to IDT, the Straight Path Action arises from Straight Path’s sale
of its IP Assets and settlement of its Indemnification Claim against IDT due to
Jonas’s coercion.136 Jonas was in a position to exert such pressure because of his
dual control of both Straight Path and IDT after the Spin-Off.137 The terms of the
Spin-Off provided that each IDT shareholder received one share of Straight Path
stock for every two shares of IDT stock owned. 138 IDT claims that because the Spin-
Off involved IDT shares, it “may be deemed a purchase and sale of securities for
purposes of triggering insurance coverage under the U.S. Specialty Policy.” 139
IDT’s posits that the Spin-Off is a “sale of securities.”140 Yet federal and
various state courts have consistently held that a spin-off is not a “purchase or sale
136
Pls.’ Br., at 28.
137
Id.
138
Id.
139
Id.
140
Id.
- 35 -
of securities” within the meaning of the Securities Act of 1933 because it does not
affect a fundamental change in the stockholders’ holdings.141 Moreover, the word
“spin-off” is merely a short-hand term used in corporate transactional parlance for a
certain type of dividend. That is, one in which a parent corporation distributes all of
the shares of one of its wholly-owned subsidiary corporations to its existing
stockholders.142 Under 8 Del. C. §173, [d]ividends may be paid in cash, in property,
or in shares of the corporation’s capital stock.” Accordingly, in Delaware statutory
terms, a “spin-off” is a dividend paid in the property of the parent corporation, not a
sale of its securities.143
Accordingly, IDT’s argument that the Spin-Off here was a “sale of securities”
fails. The Court finds that the Straight Path Action does not implicate a “Securities
141
Rathborne v. Rathborne, 683 F.2d 914, 918 (5th Cir. 1982); Isquith v. Caremark
International Inc. et al., 1997 WL 162881, at *6 (N.D. Ill Mar. 26, 1997), aff’d, 136 F.3d 531 (7th
Cir. 1998), cert. denied, 525 U.S. 920 (Oct. 5, 1998); Fed. Ins. Co. v. Campbell Soup Co., 2004
WL 1631405, at *9 (N.J. Super. Ct. Law Div., July 2, 2004). See also SEC Staff Legal Bulletin
No. 4 Staff Legal Bulletin No. 4 (Cf), Release No. SLB-4 (CF) (Sept. 16, 1997); ISSUE NO. 239,
Corp. Governance Guide 35990017.
142
See, generally, Anadarko Petroleum Corp. v. Panhandle E. Corp., 545 A.2d 1171, 1172
(Del. 1988); In re MCA, Inc., 598 A.2d 687,690 (Del. Ch.1991) (referring to a spin-off as a stock
dividend).
143
IDT and Jonas suggest that this Court’s decision in Verizon Communications Inc. v. Illinois
National Insurance supports their broad view that any spin-off constitutes a purchase or sale of
securities. But the facts surrounding Verizon’s 2006 spin-off of its print and electronic directories
business, and the specific policy language at issue there, are far different than the facts and policy
language here.
- 36 -
Claim” under any natural reading of the definition. And so, U.S. Specialty is not
obligated to provide for IDT’s defense in the Straight Path Action.
C. NATIONAL UNION’S MOTION FOR SUMMARY JUDGMENT.
National Union issued a first layer policy for an aggregate liability of $10
million in excess of the primary U.S. Specialty policy issued to IDT. 144 In its
summary judgment motion, National Union incorporates U.S. Specialty’s arguments
with respect to the coverage obligations for Jonas, asserting that because the Straight
Path Action is not a claim against Jonas for Wrongful Acts, National Union’s
obligation to provide any excess coverage is not triggered.145 In addition to U.S.
Specialty’s arguments, National Union also says that it is not obligated to provide
coverage for IDT’s defense costs for the Straight Path Action.146 For the reasons
now explained, the Court GRANTS National Union’s motion with respect to its
coverage obligations for IDT, and DENIES its motion with respect to its duty to
defend Jonas.
The Court has concluded that the Straight Path Action constitutes a
“Wrongful Act” taken by Jonas in his insured capacity as IDT’s Chairman.147
144
National Union Br., at 5; Ex. B (National Union Excess Policy) ¶ Declarations.
145
National Union Br., at 1.
146
National Union Br., at 1–2.
147
See supra, Section IV.B.1.
- 37 -
Accordingly, the Court finds that National Union has the obligation to provide
coverage for Jonas in connection with the Straight Path Action under the terms and
conditions of the National Union’s excess policy. But does the Straight Path Action
trigger National Union’s coverage obligation for IDT?
Under the National Union excess policy language, it (1) “attaches only after”
the total limits of the $10 million primary policy issued by U.S. Specialty have been
fully exhausted;148 (2) follows the terms, conditions, and limitations contained in the
primary U.S. Specialty Policy; but (3) may be subject to certain terms of its own.149
With respect to this motion, no terms of the National Union excess policy alter
or otherwise amend the relevant terms and conditions of the U.S. Specialty policy it
lay under. In turn, National Union’s arguments (and their resolution) follow U.S.
Specialty’s: the Straight Path Action is not a “Securities Claim” under either of the
definitions.150
But with respect to the second provision requiring that a Securities Claim
arises from the sale of securities, National Union makes an additional argument.151
148
National Union Excess Policy ¶ Insuring Agreement. Above the Court has found that U.S.
Specialty has the duty to defend Jonas, but not IDT. Therefore, the National Union policy limit
available to IDT is the amount of $10 million, but that is only for coverage obligations for
Jonas. See Supra, Section IV.B.
149
Id.
150
National Union Br., at 12–23.
151
Id., at 4, 20–24 (citing authorities of both New Jersey and Delaware).
- 38 -
National Union says the term “arising out of,” requires a “meaningful nexus”
between the Spin-Off and the claims against IDT brought in the Straight Path
Action.152 And, National Union says no such linkage exists between the Spin-Off
and the allegations against IDT set forth in the Straight Path Action. 153
The Court need not consider National Union’s additional argument on the
meaning of “arising out of.” Having concluded that the primary insurer, U.S.
Specialty, has no duty to defend IDT in the Straight Path Action, National Union’s
obligation to provide excess coverage for IDT is not triggered. Thus, the Court
GRANTS National Union’s Motion for Summary Judgment with respect to its
coverage obligation for IDT. The Court, in accordance with its preceding
discussions herein, DENIES National Union’s Motion for Summary Judgment to
the extent National Union seeks to be excused from coverage obligation to Jonas in
the Straight Path Action.
D. XL SPECIALTY’S MOTION FOR SUMMARY JUDGMENT.
XL Specialty contends it has no coverage obligations to IDT in the Straight
Path Action under the Side A policy it issued to IDT.154 The Side A Policy provides
152
Id., at 21–23.
153
Id., at 23–24.
154
XL Specialty Ins. Co’s Opening Br. in Support of its Mot. for Summ. J. and Joinder
[hereinafter “XL Specialty Br.”], at 1.
- 39 -
coverage for Jonas’s losses in excess of the indemnification provided by IDT, up to
the policy limit. 155
XL Specialty’s attack is two-fold. First, it incorporates U.S. Specialty’s
arguments that the Straight Path Action is not a claim for “Wrongful Acts” because
it is not brought against Jonas in his insured capacity. 156 Second, XL Specialty
claims that a declaratory judgment on the scope of coverage is premature for
adjudication because no “actual controversy” currently exists. 157
Having already concluded that Jonas’s actions complained-of in the Straight
Path Action do constitute “Wrongful Acts” undertaken by Jonas in his capability as
IDT’s Chairman, 158 the Court moves directly to XL Specialty’s second argument.
XL Specialty issued the Side A Policy for Management Liability to IDT for
the period of June 6, 2016, to June 6, 2017. 159 The Insuring Agreement states:
The Insurer will pay on behalf of the Insured Persons Loss
resulting from a Claim first made against the Insured Persons
during the Policy Period . . . for a Wrongful Act, except to the
extent that such Loss is paid by any other Insurance Program
155
Pls.’ Compl. ¶ 5; Pls.’ Compl. Ex. C [hereinafter “XL Specialty Policy”].
156
Id. ¶¶ 1–2, 4–7. The definition of a “Wrongful Act” in the XL Specialty Policy is
substantively identical to that in the U.S. Specialty Policy with some inconsequential differences
in the wording. Thus, the Court already decided the merits of XL Specialty’s first argument above
when it resolved the same against U.S. Specialty. See supra, Section IV.B.1.
157
XL Specialty Br. ¶¶ 2, 7–10.
158
Supra, Section IV.B.1.
159
Pls.’ Compl. ¶ 31; XL Specialty Policy.
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or as indemnification or advancement from any source. In the
event that Loss is not paid by such other insurance or as
indemnification or advancement, this Policy will respond on
behalf of the Insured Persons as if it were primary . . . 160
“Insured Persons” include “any past, present, or future director or
officer[.]” 161 There is no dispute that Jonas qualifies as an “Insured Person” under
the Side A Policy, 162 or that there has not yet been a judgment or claim for
payment. 163 The contention is whether a declaratory judgment is appropriate absent
a judgment against the insured. Here, the Court finds it is.
The principle impetus of a declaratory judgment is “to promote preventive
justice [] where an injury has not yet occurred.”164 The decision to issue a
declaratory judgment is within the Court’s discretion.165 And the discretion to
160
XL Specialty Policy ¶ Insuring Agreement.
161
Id. ¶¶ Definitions (I); Endorsement No. 7.
162
XL Specialty Br., at 3; Pls.’ Opp’n to Defendant XL Specialty Ins. Co.’s Mot. for Summ.
J. and Joinder [hereinafter “Pls.’ Opp’n to XL Specialty”], at 4.
163
XL Specialty Br., at 2, 7–10; Pls.’ Opp’n to XL Specialty, at 2–3, 14–19.
164
Lamourine v. Mazda Motor of Am., Inc., 2006 WL 2767021, at *3 (Del. Super. Ct. Aug.
28, 2006). See also Bank of Delaware v. Allstate Ins. Co., 448 A.2d 231, 234 (Del. Super. Ct.
1982) (citing Clemente v. Greyhound Corporation, 155 A.2d 316, 320 (Del. Super. Ct. 1959)
(“[T]he principal reason for the invention of the declaratory judgment procedure was to enable the
law of a case to be determined before mere differences ripen into actual injuries.”)).
165
XI Specialty Ins. Co. v. WMI Liquidating Tr., 93 A.3d 1208, 1216 (Del. 2014) (citing
Gannett Co., Inc. v. Bd. of Managers of the Delaware Criminal Justice Info. Sys., 840 A.2d 1232,
1237 (Del. 2003) (“This Court reviews for abuse of discretion the Superior Court’s decision to
exercise declaratory judgment jurisdiction over a case.”)).
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assume, or not to assume the jurisdiction lies fully with the Court—“the only
limitation being that the Court cannot abuse its discretion.”166 The Court may
“liberally exercise” its discretion to entertain a declaratory judgment “so that the
remedial purpose [] may be well served.”167 But the Court may not exercise that
discretion “unless the action presents an actual controversy.” 168
“The prerequisites of a controversy” require that “the issue involved . . . be
ripe for judicial determination.”169 When determining if a declaratory judgment
claim satisfies the ripeness requirement, the Court “must weigh the reasons ‘for not
rendering a hypothetical opinion . . . against the benefits to be derived from the
rendering of a declaratory judgment.’” 170 That determination is largely “a matter of
practical common sense.” 171
166
See Clemente, 155 A.2d at 321; Burris v. Cross, 583 A.2d 1364, 1372 (Del. Super. Ct.
1990); Mr. Kleen, LLC v. New Castle Cty. Dep't of Special Servs., 2014 WL 4243562, at *7 (Del.
Super. Ct. Aug. 19, 2014).
167
Schick Inc. v. Amalgamated Clothing and Textile Workers Union, 533 A.2d 1235, 1238
(Del. Ch. 1987).
168
XI Specialty Ins., 93 A.3d at 1216 (internal quotation omitted); see also Stroud v. Milliken
Enter., Inc., 552 A.2d 476, 479 (Del. 1989).
169
Lamourine, 2006 WL 2767021, at *3 (citing Schick, 533 A.2d 1235, 1238 (Del. Ch. 1987)
(quoting Rollins Int'l, Inc. v. Int'l Hydronics Corp., 303 A.2d 660 (Del. 1973))).
170
Id. (citing Stroud, 552 A.2d at 480).
171
Hoechst Celanese Corp. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 623 A.2d 1133,
1137 (Del. Super. Ct. 1992) (citing Schick, 533 A.2d at 1239).
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And that application of practical common sense requires a balancing of: “(1)
a practical evaluation of the legitimate interests of the plaintiff in a prompt resolution
of the question presented; (2) the hardship that further delay may threaten; (3) the
prospect of future factual development that might affect the determination made; (4)
the need to conserve scarce resources; and (5) a due respect for identifiable policies
of law touching upon the subject matter in dispute.”172
Applying this balancing to entreaties for declaratory judgment, Delaware
courts have concluded that the exercise of discretion may be proper in settling a
question of an insurer’s liability173 or determining an insurer’s duty to defend. 174 But
a duty-to-indemnify claim is unripe for declaration.175 For the reasons below, the
Court here finds that assuming jurisdiction for this declaratory judgment is
appropriate.
172
See Mine Safety Appliances Co. v. AIU Ins. Co., 2014 WL 605753, at *3 (Del. Super. Ct.
Jan. 21, 2014); Monsanto Co. v. Aetna Cas. & Sur. Co., 565 A.2d 268, 274 (Del. Super. Ct. 1989);
Schick, 533 A.2d at 1239.
173
Harleysville Mut. Cas. Ins. Co. v. Carroll, 123 A.2d 128, 131 (Del. Super. Ct. 1956)
(holding that under Delaware’s Declaratory Judgments Act, “[t]he question of liability under
insurance contracts has proved to be particularly susceptible to declaratory adjudication . . . even
though judgment has not been obtained against the party who asserts coverage.”).
174
Bank of Delaware, 448 A.2d at 235–36 (granting declaratory judgment on provisions of
complaint regarding insurer’s duty to defend, and denying claims as to determination of financial
liability upon judgment that involve the application and effect of a federal law on the agreements
to indemnify).
175
Id. (refusing to exercise discretion on declaratory judgment on issues relating to
determination of financial liability under a federal environmental law).
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With respect to the first factor requiring a practical evaluation of the plaintiff’s
legitimate interest, Jonas is an Insured Person under the Side A Policy and is entitled
to defense costs and/or indemnification under that policy, subject to its terms and
conditions, for Loss that is not paid by any other Insurance Program or as
indemnification from another source.
As to the second factor, a delay of this decision could cause unnecessary
hardship, if not immediately, then upon the moment the U.S. Specialty policy limit
is met. If XL Specialty’s motion were granted on ripeness ground, it would now be
dismissed from this action. If further facts develop (for example, U.S. Specialty
exhausts its policy limit) and the Side A Policy is then triggered, IDT (and/or Jonas)
would have no choice but to reinitiate separate litigation against XL Specialty. The
burden on a party to re-litigate issues is a well-recognized “obvious prejudice.”176
Of course, the prospect of these duplicative efforts—the same parties, relying
on identical facts, contesting the same issues with undifferentiated arguments—are
contrary to the notion of judicial economy and the need to conserve the Court’s
scarce resources.177 Granting declaratory relief now, however, promotes judicial
economy and the efficient resolution of the issues in this action. By issuing this
176
Mine Safety Appliances, 2014 WL 605753, at *5 (citing Hoechst Celanese Corp., 623 A.2d
at 1140).
177
Id.
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declaratory judgment, the Court is not imposing or creating immediate financial
liability on XL Specialty.178 Rather, a declaration by the Court simply affirms that
the Straight Path Action triggers XL Specialty’s coverage obligation under the Side
A Policy. XL Specialty’s duty to pay IDT is still subject to the Side A Policy’s terms
and conditions, i.e., upon the exhaustion of the U.S. Specialty policy limits. So
providing declaratory relief now does not unduly prejudice XL Specialty. Instead,
it clarifies the parties’ respective obligations and the triggering events for those
obligations.
The other remaining factors—those that regarding possible future
development of facts and due respect for relevant policies of law—also lean towards
granting declaratory relief. Here, all the parties involved in the case have filed
motions (or cross-motions) for summary judgment relying on the contested
insurance policies’ language and the factual allegations in the Underlying
Complaint. Where all parties have filed for summary judgment, there appears no
material factual dispute.179 Each party here acknowledges that, without further
178
Bank of Delaware, 448 A.2d at 235–36 (refusing to exercise discretion on declaratory
judgment on issues relating to determination of financial liability under a federal environmental
law).
179
Nat’l Union Fire Ins. Co. of Pittsburgh, PA., 1992 WL 22690, at *5 (Del. Super. Ct. Jan.
16, 1992) (quoting Empire of Am. Relocation Servs., Inc. v. Commercial Credit Co., 551 A.2d 433,
435 (Del. 1988)), aff'd sub nom, Rhone–Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616
A.2d 1192 (Del. 1992).
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discovery, the issues could be resolved at the summary judgment stage. Potential
future development of “facts,” if any, seems highly unlikely to pose a material or
determinative change of the Court’s resolutions of the legal issues herein.180
Granting declaratory relief here is consistent with respecting the “policies of
the law touching upon the subject matter of the dispute.” 181 The most pertinent
policies of law in this motion concern the interpretation of insurance contracts. A
declaratory judgment complies with the fundamental principles of, among others,
according the contract terms their plain and ordinary meaning as the Court has found
them. 182
XL Specialty is wrong here, its coverage issue is ripe for adjudication.
Accordingly, XL Specialty’s motion for summary judgment is DENIED.
V. CONCLUSION
For the reasons discussed above, IDT and Jonas’s Motion for Partial Summary
Judgment against U.S. Specialty is GRANTED, in part, and DENIED, in part.
Defendant U.S. Specialty’s Cross-Motion for Summary Judgment is GRANTED,
in part, and DENIED, in part. Defendant National Union’s Motion for Summary
180
Again, a fact is only material if it might affect the outcome of the suit under governing law.
See n. 55, supra.
181
Schick, 533 A.2d at 1239.
182
Goggin, 2018 WL 6266195, at *4; Alta Berkeley VI C.V., 41 A.3d at 385.
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Judgment is GRANTED with respect to its coverage obligation for IDT, and
DENIED as to its obligation to defend Jonas. Defendant XL Specialty’s Motion for
Summary Judgment and Joinder is DENIED.
IT IS SO ORDERED.
/s/ Paul R. Wallace
Paul R. Wallace, Judge
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