Goggin v. National Union Fire Insurance Company of Pittsburgh, PA ( 2018 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
KEITH GOGGIN AND MICHAEL
GOODWIN,
Plaintiffs,
V. C.A. NO.: Nl7C-10-()83 PRW CCLD
NATIONAL UNION FIRE
INSURANCE COMPANY OF
PITTSBURGH, PA,
Defendant.
Subrnitted: August 23, 2018
Decided: November 30, 2018
Upon Plaintl'jj% Keith Goggin and Michael Gooa’wz``n ’s Motion
for Jua'gment On the Pleadl``ngs,
DENIED.
MEMORANDUM OPINION AND ORDER
David J. Baldwin, Esquire, Carla M. Jones, Esquire, POTTER ANDERSON &
CORROON, LLP, Wilmington, Delaware, Seth B. Schafler, Esquire (pro hac vice),
Seth D. Fiur, Esquire (pro hac vice), PROSKAUER ROSE, LLP, New York, NeW
York, Attorneys for Plaintiffs.
Seth A. Niederman, Esquire, FOX RC)THSCHILD, LLP, Wilmington, Delaware,
Joseph Collins, Esquire (pro hac vice), FOX ROTHSCHILD, LLP, Chicago, Illinois,
Attorneys for Defendant.
WALLACE, J.
I. INTRODUCTION
Plaintiffs, Keith Goggin (“Goggin”) and Michael Goodwin (“Goodwin”),
bring the above-captioned action against Defendant, National Union Fire Insurance
Company of Pittsburgh, PA (“National Union”), seeking declaratory relief from the
Court to clarify the scope of coverage of the Directors & Officers Insurance Policy
(“D&O Policy”) issued by National Union to U.S. Coal Corporation (“U.S. Coal”),
a company that is currently in Chapter 7 bankruptcy proceedings The D&O Policy
provides that National Union Will pay for, among other things, the damages and
defense costs for claims made against U.S. Coal’s past, current, or future directors
and officers.
After filing for bankruptcy, the trustee of U.S. Coal brought an action against
Goggin and Goodwin and their affiliated entities alleging, among other claims,
breach of their duties as directors of U.S. Coal for scheming and engaging in self-
interested dealings at U.S. Coal’S expense. Goggin and Goodwin tendered those
claims to National Union, seeking coverage for defense and indemnity under the
D&O Policy. National Union denied coverage invoking one of the D&O Policy’s
exclusionary clauses. Goggin and Goodwin brought this action for a declaration that
the exclusionary clause does not apply, and that National Union has the duty to
defend.
NoW before the Court is Goggin and Godwin’s motion for judgment on the
pleadings For the reasons stated beloW, the motion is DENIED.
II. FACTUAL AND PROCEDURAL BACKGROUND
Goggin and Goodwin’s Complaint lays out the material background facts of:
(l) their involvement With U.S. Coal as its members, directors and/or investors;
(2) the gradual decline and eventual bankruptcy of U.S. Coal; and (3) the claims
asserted against them by U.S. Coal’s bankruptcy trustee. National Union, in its
AnsWer, mostly admits the factual events that took place; National Union disputes
the framing and completeness of Plaintiffs’ allegations So the Court here can With
some confidence recount undisputed material facts relevant to this motion.
A. PLAINTIFFS’ INvoLvEMENT WITH U.S. CoAL AND THE D&O PoLICY.
Plaintiffs Goggin and Goodwin began their involvement With U.S. Coal,
initially as investors, in 2007 and 2008 respectively.l They became U.S. Coal
directors on October l, 2009,2 and served in that capacity until their resignations
Goodwin resigned on October 19, 2012; Goggin on February 3, 2014.3
l Compl. 11 17. National Union claims lack of sufficient information to affirm the
truthfulness of this allegation. But given National Union’s later concession to Plaintiffs’ status as
“Insureds” covered under the D&O Policy, its lack of information averment is meaningless for
purposes of this motion. Nat’l Union Fire Ins Co. of Pittsburgh, PA’s AnsWer to Complaint1] l7.
The same is true for National Union’s later “lack of information” protests
2 Compl. 11 20.
3 Compl. 11 20.
National Union issued U.S. Coal a D&O Policy for the period from November
10, 2013, through May 10, 2015, that covered U.S. Coal and its officers4 The D&O
Policy “pay[s] the Loss of an Individual Insured ...for any Wrongful Act
except When and to the extent that the Company has indemnified such Individual
Insured.”5 The parties do not dispute that Plaintiffs are “lndividual Insureds”
covered under the D&O Policy.6
B. PLAINTIFFS FORMED INvEsTMENT VEHICLES DURING THEIR
DIRECToRsHIP oF U.S. CoAL.
During their terms as U.S. Coal investors and directors, Goggin and Goodwin
purportedly attempted to reinvigorate U.S. Coal through debt purchase and other
capital restructuring by forming two investment vehicles7 The first, East Coast
Miner, LLC (“ECM”), Was formed in late 2009. Goggin Was an ECM investor and
manager; Goodwin just an investor.8 In December 2011, Goggin formed the second
4 Compl. 1111 2, 13; AnsWer 111[ 2, 13; Compl. Exhibit A Management Liability, Professional
Liability, Crime Coverage and Kidnap And Ransom/Extortion Coverage for Private Companies 11
Endorsement #21 (extending the policy’s original expiration date of November 10, 2014 to May
10, 2015) (this overall policy includes the Director, Officers and Private Company Liability
Insurance (“D&O Coverage Section”) [hereinafter “D&O Policy”]).
5 D&O Policy 11 1 (Coverage A: Individual Insured Insurance) (emphasis added)
6 Compl. 1111 5-6; AnsWer 1111 5-6.
7 Compl. 1111 18-19, 21.
8 Compl. 11 18.
vehicle, East Coast Mine II LLC (“ECM II”), and acted as an investor and manager.
Again, Goodwin was just an ECM ll investor.9
C. BANKRUPTCY oF U.S. CoAL AND TRUsTEE’s CLAIMS AGAIN'sT GoGGIN
AND GooDWIN.
In 2014, U.S. Coal entered into bankruptcy when its creditors filed a petition
for a Chapter 7 proceeding, and a trustee was appointed.lo Following the bankruptcy
filing, on March 24, 2015, the Official Committee of Unsecured Creditors brought
suit against Goggin, Goodwin, ECM, and ECM II, alleging, among other things, that
Goggin and Goodwin breached their fiduciary duties and committed other acts in
favor of their own personal interests (“Underlying Action”).ll Counsel for Goggin
and Goodwin tendered a defense request to National Union on April 17, 2015,12
National Union acknowledged, with reservation, to assume defense for certain
claims13 But, National Union’s position was that the claims against Goggin and
9 Compl. 11 21.
10 Compl. ‘“ 24; Answer 11 24.
ll Compl. 11 25; Answer 1[ 25 (admitting the complaint’s averments and additionally asserts
that those acts were taken at the expense of creditors in Plaintiffs’ capacity as members of ECM
and ECM n). !
12 Compl. ‘H 27; Answer 11 27 (National Union additionally averred factual allegations relating
to its Reservation of Rights letter dated June 12, 2015 , that reflectd its doubt on the obligation to
provide coverage for Goggin and Goodwin).
13 While National Union describes its acknowledgement to defend certain claims somewhat
differently, in essence, they did not disagree that National Union assumed defense of certain
claims See Compl. 11 27; Answer 11 27.
Goodwin were, by and large, not covered under the D&O Policy. Invoking the
policy’s Exclusion 4(g)_the so-called “capacity” exclusion_National Union
denied their coverage on the ground that Plaintiffs’ alleged wrongdoing that
breached their fiduciary duties was not “solely by reason of their status as [U.S.
Coal] Executives.”14
Because of the ongoing bankruptcy proceeding, the parties to the Underlying
Action filed a First Amended Complaint (“FAC”) in January 2017 to substitute the
trustee as the plaintiff therein.15
Before the FAC was filed, in the fall of 2016, Goggin, Goodwin, National
Union, and other parties related to the bankruptcy proceeding attempted to resolve
the Underlying Action and related insurance issues through mediation. That was
unsuccessful. Plaintiffs and National Union mediated again, unsuccessfully, in
September 2017.
D. PROCEDURAL HIsToRY.
After the second unsuccessful mediation, this action was brought. Goggin
and Goodwin seek a declaration that Exclusion 4(g) does not apply to the allegations
asserted against them in the Underlying Action, and that National Union is obligated
to pay all the defense and indemnity costs
14 Answer 11 27.
15 Compl. 11 26; Answer 11 26.
National Union initially filed a motion to dismiss,16 which Plaintiffs
answered,17 and National Union followed with a reply brief.18 The parties later
stipulated and agreed, among other things, that National Union would withdraw its
dismissal motion and answer the Complaint.19 National Union filed its Answer. And
Goggin and Goodwin now move for judgment on the pleadings
III. STANDARD OF REVIEW
A party may move for judgment on the pleadings pursuant to Civil Rule
12(c).20 The standard for a motion for judgment on the pleadings is “almost
identical” to the standard for a motion to dismiss.21 In determining a Rule 12(c)
motion, the Court assumes the truthfulness of all well-pleaded allegations of fact in
the complaint,22 takes those well-pleaded facts as admitted,23 and then views those
16 D.I. 6 (Def. Nat’l Union’s Mot. to Dismiss).
17 D.I. 13 (Pls.’ Opp’n to Mot. to Dismiss).
18 D.I. 15 (Reply in Further Supp. of Def.’s Mot. to Dismiss).
19 D.I. 17 (Stipulation And [Proposed] Order Regarding Def.’s Mot. to Dismiss).
20 Super. Ct. Civ. R. 12(c).
21 Blanco v. AMVAC Chem. Corp., 2012 WL 3194412, at *6 (Del. Super. Ct. Aug. 8, 2012)
(citing Ross Holdz'ng and Mgrnt. C0. v. Advcmce Really Group, LLC, 2010 WL 1838608, at *5
(Del. Ch. Apr. 28, 2010)).
22 Almah LLC v. Lexington Insurance Company, 2016 WL 369576, at *4 (Del. Super. Ct. Jan.
27, 2016).
23 Deserl‘ Equities, Inc. v. Morgan Stanley Leveraged Equity Fund, II, L.P., 624 A.2d 1199,
1205 (Del. 1993).
_6_
facts and draws inferences therefrom in the light most favorable to the non-moving
party.24 The Court accords a party opposing a Rule 12(c) motion the same benefits
as a party defending a dismissal motion under Rule 12(b)(6).25 And a moving party
is entitled to judgment on the pleadings only when there are no material issues of
fact and the movant is entitled to judgment as a matter of law.26
IV. DISCUSSION
So, with the record developed in the pleadings thus far, does Exclusion 4(g)
of the D&O Policy_the “capacity” exclusion_apply to the claims asserted by U.S.
Coal’s trustee against Goggin and Goodwin in the FAC (“Trustee Claims”)?
THE TRUSTEE CLAIMS CAN BE REAsoNABLY SEEN To “ARISE OUT OF”
SoME CAPACITY oF PLAINTIFFS OTHER THAN THAT As U.S. CoAL’s
DIRECToRs.
Goggin and Goodwin contend that National Union erroneously denied the
coverage on the ground that their alleged misconduct prompting the Trustee Claims
was not in an “insured” capacity due to the conflict of interest. According to Goggin
and Goodwin, that the alleged conflict of interest existed due to their capacities and
status as both the directors of U.S. Coal and the members/managers of ECM and
24 Ia’. (citz``ng Desert Equities, 624 A.2d at 1205).
25 See Ki-Poong Lee v. So, 2016 WL 6806247, at *2 (Del. Super. Ct. Nov. 17, 2016).
26 Desert Equities, 624 A.2d at 1205; Alcoa WorldAlumina LLC v. Glencore Lta'., 22016 WL
521193, at *6 (Del. Super. Ct. Feb. 8, 2016).
ECM II (collectively, “ECM Entities”) does not eliminate the coverage via the
“capacity” exclusion if the alleged wrongful action was performed in their capacities
as directors of U.S. Coal.27
National Union proposes a different interpretation of the exclusion’s
language, asserting that the crux is interpreting the term “arising out of,” and
discerning the issue of whether the sued-upon conduct “arises out of” a capacity
other than that of U.S. Coal’s directors28
The Exclusionary Clause May Be Applied Because the Misconduct
Giving Rise to the Trustee Claims Arose Out of Plaintiffs’ Capacity as
Members/Managers of ECM Entities.
Goggin and Goodwin champion interpretation of the exclusion’s language
They say that because the exclusion applies only when directors act in a capacity
wholly “other than” as directors, and because their alleged wrongdoing was
undertaken precisely in the capacity as U.S. Coal directors, they are not subject to
Exclusion 4(g).29 Goggin and Goodwin suggest that the exclusion targets claims
deriving from a wholly “uninsured” activity or duty, and that the D&O Policy’s
coverage does not require the complained-of misconduct be taken “solely” in an
27 Pls.’ Mem. In Supp. of Their Mot. for J. on the Pleadings [hereinafter “Pls.’ Br.”] 1111 1-2.
28 Def.’s Resp. to Pls.’ Mot. for Partial J. on the Pleadings [hereinafter “Def.’s Opp’n”] 11 1.
29 Pls.’ Br. 11 2.
insured capacity.30 Thus, even if there is the simultaneous existence of conflict of
interests and their directorship status, the former does not negate the latter to exclude
coverage.
In response, National Union says that the alleged conduct giving rise to the
Trustee Claims arose out of Goggin and Goodwin’s capacity as members/managers
of ECM Entities, and their mere status as U.S. Coal’s directors does not per se
warrant a finding that any action “arises out of” their capacity as directors.31 Rather,
National Union urges the Court to examine the substantive relationship between the
actions and the capacity in which those actions were taken.32
Exclusion 4(g) of the D&O Policy states:
The Insurer shall not be liable to make any payment for Loss in
connection with any Claim made against an insured:
(g) alleging, arising out of, based upon or attributable to any
actual or alleged actor omission of an Individual Insured serving
in any capacily, other than as an Executive or Employee of a
Company, or as an Outside Entity Executive of an Outside
Entity[.]33
30 Pls.’ Reply Mem. In Further Supp. of Their Mot. for J. on the Pleadings [hereinaf``ter “Pls.’
Reply”] 1111 1-2.
31 Def.’s Resp. to Pls.’ Mot. for Partial J. on the Pleadings [hereinafter “Def.’s Opp’n”] 1111 1-
2.
32 Der Br. 1[ 2.
33 D&O Policy 1111 6-7 (emphasis added).
“Claim” is defined as “(i) a written demand (ii) a civil proceeding
commenced by a complaint; or (iii) a civil investigation of an Individual
Insured ...”34 Such a Claim, if arising out of any acts or omissions of Goggin and
Goodwin in any capacity other than directors of U.S. Coal, would be excluded from
coverage.
Insurance policies are contracts35 And “[t]he proper construction of any
contract is purely a question of law.”36 The objective is to give effect to the parties’
mutual intent at the time of contracting.37 Under Delaware’s objective theory of
contract, construing a contract’s language should adhere to what “would be
understood by an objective, reasonable third party.”38 Absent ambiguity, contract
terms should be accorded with their plain, ordinary meaning.39 A contract term is
not ambiguous merely because the parties dispute its meaning40 Rather, ambiguity
34 1a 112.
33 O’Brien v. Progressive N. Ins. Co., 785 A.2d 281, 286 (Del. 2001); Cont’l Ins. Co. v. Burr,
706 A.2d 499, 500-01 (Del. 1998) (“[b]ecause an insurance policy is a contract of adhesion ...”).
36 Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d 1262, 1263 (Del. 2017).
See also Eagle Force Hldgs., LLC v. Campbell, 187 A.3d 1209, 1212 (Del. 2018) (“[w]hether [a]
contract’s material terms are sufficiently defined is mostly, if not entirely, a question of law.”);
O’Brien, 785 A.2d at 286.
37 Exelon Generation Acquisitions, 176 A.3d at 1263.
38 Salarnone v. Gorman, 106 A.3d 354, 367-68 (Del. 2014).
39 Alta Berkeley VI C. V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012).
40 Id
_10_
exists when the disputed term “is fairly or reasonably susceptible to more than one
meaning.”41
The “capacity” exclusion’s language is clear and unambiguous, so the Court
must accord the words their plain and ordinary meaning.
Turning to the contested term “arising out of,” Delaware law has construed
the term broadly in accordance with general insurance contract principles42
“Arising out of” is a term that “lends itself to uncomplicated, common
understanding.”43 Such a broad construction is also supported by “[c]ases from other
jurisdictions[.]”44 Delaware law has since adopted the construction that “arising out
of” is broader than “caused by,” and is understood to mean “originating from,”
“having its origin in,” “growing out of,” or “f``lowing from.”45 In short, it means
“incident to, or having connection with.”46
41 hi
42 Pac. lns. Co. v. Libeny Mur. Ins. Co., 956 A.2d 1246, 1256-57 (Del. 2008) (h01dingthat
“under Delaware law, the term ‘arising out of`` is broadly construed to require some meaningful
linkage between the two conditions imposed in the contract.”). See also Eon Labs Mfg. v. Reliance
Ins. Co., 756 A.2d 889, 892-93 (Del. 2000) (acknowledging that although either New York or
lllinois law applies, the proposition of a broad construction for the term “arising out of” is
consistent under the general insurance contract principles).
43 Eon Labs, 756 A.2d at 893.
44 Pac. Ins. Co., 956 A.2d at 1256 (citing cases from Fifth, Ninth and Tenth Circuits, as well
as various state courts that similarly accord a broad construction to the term “arising out of.”).
45 Ia'., n.42 (citing Fibreboara’ Corp. v. Hartfora1 Accident & Ina’ern. Co., 20 Cal. Rptr. 2d
376, 383 (Cal. Ct. App. 1993)).
46 hi
_11_
Notwithstanding the general tendency to broadly construe the term, Delaware
courts have not articulated precisely where the line is drawn between “arising out
of,” and “not arising out of” in the insurance policy context. So the Court takes
occasion here to review some decisions analyzing that tenn in other circumstances
Delaware has applied the “but-for” test to determine if a claim “arises out of”
a manufacturer’s product in a product liability suit.47 Other courts have applied the
“but-for” test to construe a D&O policy’s exclusionary clause identical to this one.48
When the traditionally tort-liability oriented “but-for” test is applied to insurance
policy exclusion language, the question is whether the underlying claim would have
failed “but for” the purportedly excluded conduct.49 A claim does not “arise out of”
a circumstance or conduct if, independent of that circumstance or conduct, the claim
is still valid.50
47 Eon Labs, 756 A.2d at 893 (finding that, in a product liability suit, the defendant drug
manufacturer is liable because “but for” defendant’s product, there would not have been actions
leading up to the claims).
48 See, e.g., Langa'ale Co. v. Nat’l Union Fire Ins. Co., 609 F. App’x 578, 588-96 (11th Cir.
2015) affirming the trial court’s application of the “but-for” test in finding that the exclusion was
applicable, and no coverage was obligated by the insurer to the conflicted officers of a family-
owned business who were also trustees of an affiliated family trust where the underlying self-
dealing claims, among other allegations “arose out of” the alleged breach of duties as trustees and
in the meantime, as officers and directors
49 Langa'ale, 609 F. App’x at 588.
50 Id
_12_
Here, using the “but-for” test, the purportedly excluded conduct-namely,
namely, Goggin and Goodwin’s actions taken as members/managers of the ECM
Entities_-falls under the exclusionary clause.
According to the FAC’s allegations, Goggin and Goodwin schemed to form
and use the ECM Entities to control U.S. Coal and defraud its creditors by, among
other things, entering various agreements that secured them: benefits of a higher
return on investment; preferred recovery in the event of U.S. Coal’s liquidation; and
a loan at a significantly discounted value. The Trustee asserted twenty-one counts
against, individually and/or collectively, Goggin, Goodwin, and ECM Entities.
Those counts brought against Goggin and Goodwin were largely based on their self-
interested dealing that benefited ECM Entities and themselves and undermined the
interest of U.S. Coal and its debtors and creditors
According to those factual allegations and the claims asserted in the FAC, the
Court concludes that the Trustee Claims_which give rise to this declaratory action
_would not have been established “but-for” Goggin and Goodwin’s alleged ECM-
related misconduct Indeed, the alleged formation and use of the ECM Entities to
engage in self-interested dealing benefiting themselves and those ECM Entities, all
at the expense of U.S. Coal, are no collateral matters but rather the core of the Trustee
Claims “But for” Goggin and Goodwin’s roles as members/managers of ECM
Entities, the FAC claims would fail.
_13_
The Court finds, therefore, that the Trustee Claims asserted in the FAC are
most reasonably viewed as having arisen from Goggin and Goodwin’s misconduct
as members/managers of ECM Entities (although certainly related too to their co-
existence as U.S. Coal’s directors). Accordingly, the exclusionary clause applies
and eliminates National Union’s coverage obligation under the D&O Policy.
Goggin and Goodwin’s incantation of their contrary interpretation of that clause is
unavailing
V. CONCLUSION
The Trustee Claims asserted against Goggin and Goodwin arose out of their
capacity as members/managers of ECM Entities. As such, Exclusion 4(g) applies,
Goggin and Goodwin would not be due coverage for the ECM-related activity claims
under the D&O Policy, and, as to the specific application made here, they are not
due judgment as a matter of law. In turn, their Motion for Judgment on the Pleadings
must therefore be DENIED.
IT IS SO ORDERED.
@D....
Paul R. Wallace, Judge
_14_