Foodtown Inc. v. National Union Fire Insurance

NOT PRECEDENTIAL
UNITED STATES COURT OF APPEALS
FOR THE THIRD CIRCUIT
____________
Nos. 08-3940, 08-4083
____________
FOODTOWN INC.; GERRY NORKUS; JOSEPH AZZOLINA, SR.;
RONALD DICKERSON; VICTOR LARACCA; PETER LAVOY;
EDWARD PACZKOWSKI; JACK PYTLUK; MICHAEL ZIMMERMAN;
STEVEN BOKSER; SYDNEY KATZ; DAVID MANIACI;
ESTATE OF WILLIAM MICHAS
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA,
National Union Fire Insurance Co.,
Appellant in No. 08-3940
Foodtown, Inc., et al.,
Appellants in No. 08-4083
___________
On Appeal from the United States District Court
for the District of New Jersey
(D.C. Civil No. 2-05-cv-03627)
District Judge: Honorable Katharine S. Hayden
___________
Submitted Under Third Circuit LAR 34.1(a)
November 18, 2010
Before: BARRY, CHAGARES, and VANASKIE, Circuit Judges.
(Filed: January 6, 2011)
___________
OPINION OF THE COURT
___________
VANASKIE, Circuit Judge.
Defendant National Union Fire Insurance Company of Pittsburgh, PA (“National
Union”) and its insureds, plaintiff Foodtown, Inc. and the individual plaintiffs
(collectively “Foodtown”), have appealed the District Court‟s insurance coverage
decisions issued on cross-motions for summary judgment. National Union has also
appealed the District Court‟s award of counsel fees to Foodtown. For the reasons that
follow, we will affirm the District Court‟s rulings in their entirety.
I.
As we write solely for the parties, who are familiar with this case, we set forth
only the facts and procedural history essential to our analysis. Foodtown is a closely-held
grocery cooperative whose members operate supermarkets in New Jersey and New York.
Foodtown obtained “Directors and Officers Corporate Liability Insurance” from National
Union. The insurance policy provides Foodtown and its directors and officers with costs
of defense and indemnification protection for covered claims.
In 2004, Food King, Inc., a member of Foodtown, brought an action against,
among others, Foodtown and members of Foodtown‟s Board of Directors (the “Food
King action”). National Union rejected Foodtown‟s demand for coverage for the Food
King action, asserting that Food King‟s claims were not covered by the policy.
In May of 2005, Foodtown and members of its Board of Directors initiated this
insurance coverage litigation in the Superior Court of New Jersey, Chancery Division,
Middlesex County. National Union timely removed the action to federal court on the
basis of diversity jurisdiction. Following discovery, both National Union and Foodtown
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moved for summary judgment. In an opinion filed August 20, 2008, the District Court
found that two of the four discrete claims asserted in the Food King action against
Foodtown were covered by National Union‟s policy. Specifically, the District Court
ruled that Counts Two and Four of Food King‟s Second Amended Complaint presented
claims falling squarely within National Union‟s policy, but that Count One was not
covered by virtue of the policy‟s “Organization vs. Insured” exclusion, and Count Three
was barred by a “specific entity exclusion” set forth in an endorsement to the policy. The
District Court also ruled that the National Union policy did not impose on National Union
a duty to defend Foodtown in the Food King action. Finally, the District Court held that,
pursuant to New Jersey Court Rule 4:42-9(a)(6), Foodtown was entitled to recover the
attorney‟s fees it incurred in this coverage litigation. National Union‟s appeal and
Foodtown‟s cross-appeal followed.
II.
The District Court had jurisdiction pursuant to 28 U.S.C. § 1332. We have
jurisdiction pursuant to 28 U.S.C. § 1291.
We review a district court‟s rulings on a summary judgment motion de novo,
applying the same standard that governed the district court‟s decision. See Massie v.
U.S. Dep‟t of Hous. and Urban Dev., 620 F.3d 340, 347 (3d Cir. 2010). Summary
judgment is warranted when “there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). In this action
brought in federal court in New Jersey on the basis of diversity jurisdiction, New Jersey
state law supplies the substantive legal principles against which a party‟s entitlement to a
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judgment in its favor must be assessed. See Orson, Inc. v. Miramax Film Corp., 79 F.3d
1358, 1373 n.15 (3d Cir. 1996).
Under New Jersey law, a clear and unambiguous insurance policy provision is to
be enforced according to its plain and ordinary meaning. See Voorhees v. Preferred Mut.
Ins. Co., 607 A.2d 1255, 1260 (N.J. 1992). If, however, a policy provision is ambiguous,
i.e., capable of “support[ing] two meanings, one favorable to the insurer, and the other
favorable to the insured, the interpretation sustaining coverage must be applied.”
Mazzilli v. Accident & Cas. Ins. Co. of Winterthur, Switz., 170 A.2d 800, 803 (N.J.
1961).
With these precepts in mind, we will address the District Court‟s coverage rulings,
discussing first the findings adverse to National Union and then the decisions adverse to
Foodtown. We will then address the award of counsel fees to Foodtown.1
III.
A.
National Union appeals the District Court‟s finding that Count Two of Food
King‟s Second Amended Complaint is not excluded from policy coverage. Count Two is
labeled “Breach of Fiduciary Duty.” Food King alleges that Foodtown Board members
breached duties of loyalty, good faith and fair dealing in connection with Food King‟s
attempt to exercise a right of first refusal for the purchase of another member‟s store and
1
Foodtown‟s cross-appeal does not challenge the District Court‟s finding that the
National Union policy does not impose on National Union a duty to defend Foodtown in
the Food King action. Accordingly, that aspect of the District Court‟s ruling will not be
addressed.
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the failure to assign to Food King a right of first refusal when that member elected to sell
its shares in Foodtown. Specifically, Food King asserts that Foodtown by-laws gave
Foodtown a right of first refusal when a member enters into an agreement to sell its
Foodtown stock or any of its stores, and that the right of first refusal is assignable to any
member in the event that the Foodtown Board elects not to exercise it. Food King further
alleges that Foodtown and its Board members interfered with Food King‟s attempt to
exercise the right of first refusal when a Foodtown member, Manyfoods, Inc., sought to
sell its store in Cedar Knolls, New Jersey. Food King alleges that after that deal fell
through, the Foodtown Board wrongfully refused to accord Food King the right of first
refusal with respect to the sale of a controlling interest in Manyfoods.
National Union argues that because it is Foodtown that holds the right of first
refusal, Food King‟s breach of fiduciary duty claim is actually a disguised derivative
claim seeking redress for injury to the cooperative. Derivative claims are generally
precluded from coverage under Section 4(f) of Foodtown‟s policy, which, in pertinent
part, states:
The Insurer shall not be liable to make any payment for Loss in connection
with a Claim made against an Insured: . . . (f) which is brought by or on
behalf of the Organization against any Individual Insured[.]
(A. 74-75a.) National Union contends that Food King‟s claim was actually brought “by
or on behalf of the Organization” (Foodtown) against an “Individual Insured” (its
directors and officers). National Union offers as evidence the Foodtown by-laws, which
provide, in Article IV, Section 6, that the right of first refusal is vested in Foodtown, and
can be transferred to any member if Foodtown does not choose to exercise the right on its
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own behalf within a limited period of time. National Union argues that the purpose of the
right of first refusal is to keep the cooperative strong by restricting entry, not to inure to
the benefit of individual Foodtown members.
The District Court correctly found that Count Two does not present a disguised
derivative claim. It alleges an actual breach of fiduciary duty by Foodtown‟s directors in
relation to Food King‟s putative right of first refusal. (A. 147a-148a.) As the District
Court recognized, Food King was not seeking to redress harm sustained by Foodtown;
Food King asserted a discrete and particularized injury to itself due to its inability to
exercise a right of first refusal. Thus, National Union‟s argument that coverage is
excluded by Section 4(f) is unavailing.
National Union also claims that the District Court erred in failing to find that
Section 4(k) of the insurance policy barred coverage of Count Two because it was based
on a contract with an Individual Insured. Section 4(k) provides:
The Insurer shall not be liable to make any payment for Loss in connection
with a Claim made against an Insured: . . . (k) alleging, arising out of, based
upon or attributable to any actual or alleged contractual liability of an
Insured under any express contract or agreement; provided, however, that
this exclusion shall not apply to liability which would have attached in the
absence of such express contract or agreement[.]
(A. 74-75a.) National Union contends that Count Two arises out of an alleged
contractual agreement with William Michas, then President of Manyfoods, who qualified
as an Insured under the National Union policy by virtue of his status as a past director of
Foodtown. Specifically, National Union points to the fact that Food King asserts that it
had exercised the right of first refusal by entering into an agreement with Michas, as
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President of Manyfoods, to purchase Manyfoods‟ Cedar Knolls store on the same terms
and conditions that Manyfoods had negotiated to sell the store to a non-Foodtown entity,
but that the Foodtown Board members allowed Manyfoods to renege on its deal with
Food King and to violate the Foodtown by-laws by presenting a different agreement for
the sale of the store in question to a non-Foodtown entity. According to National Union,
these averments are sufficient to trigger the contractual liability exclusion because,
without the agreement between Food King and Manyfoods by its President, an Insured
under the National Union policy, there would be no Count Two.
As the District Court correctly pointed out, however, the plain language of the
policy provides an exception from coverage only for claims “alleging, arising out of,
based upon or attributable to an alleged or actual contractual liability of an Insured.” (A.
75a (emphasis added).) In this case, Count Two does not allege or arise out of the
contractual liability of an insured entity or individual. Nor is Count Two based upon or
attributable to the contractual liability of an insured entity or individual. Instead, Count
Two arises out of the fiduciary duties of the Foodtown Board members in relation to
Food King‟s alleged exercise of a right of first refusal. The fact that the alleged breach of
fiduciary duties occurred in the context of an alleged agreement entered into by an
Insured in his capacity as the President of a Foodtown member simply does not invoke
the contractual liability exclusion. Furthermore, National Union has not shown that
Michas, the asserted insured individual, could have any personal liability for the breach
of the alleged agreement between Food King and Manyfoods. Accordingly, Count Two
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of the Food King Second Amended Complaint does not fall within the Section 4(k)
exclusion.
B.
National Union also appeals the District Court‟s finding that Count Four of Food
King‟s Second Amended Complaint is not excluded from policy coverage. Count Four
alleges numerous instances of misconduct by Foodtown‟s Board of Directors, and is
captioned “Intentional Misrepresentation.” Food King asserts the following claims: (1)
Foodtown‟s Board unfairly allocated costs among its members for the shared
management of its insurance premium; (2) Foodtown‟s Board unfairly allocated
advertising costs among its members; (3) Foodtown‟s Board failed to consistently collect
a “short notice compensatory withdrawal fee,” as required by its by-laws; (4) Foodtown‟s
Board failed to require collateral from some members who owed debts to it; (5)
Foodtown‟s Board failed to enact an ethics policy for its employees, officers and
directors, and refused to obtain financial disclosure and conflict of interest forms from
these individuals; (6) Foodtown‟s Board failed to pay “patronage dividends” on a
uniform pro rata basis; and (7) Foodtown‟s members were fraudulently reporting the
number of coupons which they were delivering to customers. Food King sought
reimbursement to Foodtown for these discrepancies.
National Union asserts that the policy‟s “Organization vs. Insured” exclusion
found in Section 4(f) bars coverage of Count Four. It cites State Bd. of Admin. v.
Cendant Corp., No. 98-4385, 2003 U.S. Dist. LEXIS 14333, at *7-8 (D.N.J. Aug. 19,
2003), which states that “[c]laims of breach of fiduciary duty on the part of corporate
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directors will generally be regarded as derivative claims unless the injury to the plaintiff‟s
shares is distinct from the injury to other shares, or where the breach of duty ca[u]ses a
special injury.” Id. (internal quotation marks omitted). This difference, although fine, is
not predicated on the type of relief sought – as National Union claims – but, rather, on the
type of injury suffered. See Strasenburgh v. Straubmuller, 683 A.2d 818, 830 (N.J.
1996).
The District Court correctly found that the injuries alleged by Food King were
based on “disparate treatment, [which,] although affecting a large number of
shareholders, constitutes a discrete and particularized injury to the members „subsidizing‟
the favored members, not the shareholders as a class or the organization itself.” (A. 16a.)
Food King, as one of the disfavored shareholders, asserted a direct injury, and its claims
in count four are not derivative in nature. Thus, Count Four of the Food King Second
Amended Complaint is not precluded from coverage under Section 4(f) of the policy and
its “Organization vs. Insured” provision.
C.
Foodtown cross-appeals from the District Court‟s grant of summary judgment to
National Union on the first count of Food King‟s Second Amended Complaint. Count
One alleges that the Foodtown Board of Directors, Gerald Norkus and Norkus
Enterprises have misused Foodtown trade names and service marks.2
The District Court awarded summary judgment to National Union on Count One
on the ground that it asserted a derivative claim brought by or on behalf of the
2
The claims against Gerald Norkus and Norkus Enterprises are not at issue here.
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Organization against an Individual Insured. Foodtown argues that Count One falls
within the exception to the exclusion in Section 4(f) for “any derivative Claim made on
behalf of the Organization by a member . . . if such action is brought and maintained
independently of and without the solicitation of or assistance of, or active participation of
or intervention of any Individual Insured.” (A. 75a.) Foodtown contends that Count One
was brought independently and without the participation of any Individual Insured.
National Union responds by asserting that Ronald Ginsberg, the President of Food King
who actively participated in the litigation against Foodtown, is an “Individual Insured”
under the National Union policy by virtue of the fact that he had been President of
Foodtown until 2000 and served on its Board of Directors until 2003. National Union‟s
argument is based upon the fact that the policy defines “Individual Insured” as “a past,
present or future duly elected or appointed director [or] officer . . . of [Foodtown].” (A.
71a (emphasis added).) Thus, according to National Union, coverage is precluded by the
fact that Count One was brought with the active participation of an “Individual Insured,”
Mr. Ginsberg.
Foodtown contends that Mr. Ginsberg‟s prior status is irrelevant. According to
Foodtown, what matters is the fact that he was not an officer or director at the time the
Food King action was brought. Foodtown cites Township of Center v. First Mercury
Syndicate, Inc., 117 F.3d 115 (3d Cir. 1997), for the proposition that the status of an
Individual Insured at the time the claim is made, not at the time of the underlying
occurrence, determines whether Section 4(f) applies.
10
Township of Center is not controlling here. First, it was decided under
Pennsylvania law, and Foodtown has not cited any New Jersey precedent that has applied
it. More importantly, Township of Center involved different policy language. In this
case, the National Union policy defines an “Individual Insured” as “a past . . . director
[or] officer,” which undeniably includes Mr. Ginsberg. (A. 71a.) There is no need to
consider the rationale for the provision at issue in this case, as Foodtown suggests,
because its language is plain. See Villa v. Short, 947 A.2d 1217, 1222 (N.J. 2008)
(construing policies in accordance with their plain meaning). As the District Court
correctly concluded, Mr. Ginsberg‟s active participation in the Food King action “takes
Count One out of [the] realm of the second clause in exclusion 4(f) and subjects it to the
first clause, which bars such actions from coverage.” (A. 11a.) Accordingly, Count One
of the Food King Second Amended Complaint is precluded from coverage under Section
4(f) of the policy and its “Organization vs. Insured” provision.
D.
Foodtown appeals the District Court‟s finding that Count Three of Food King‟s
Second Amended Complaint is excluded from coverage under the policy. Count Three
alleges that Foodtown failed to properly allocate payments connected with a settlement
intended to resolve issues presented during the bankruptcy proceedings of Twin County
Grocers, an independent grocers‟ cooperative that included Class A shareholders of
Foodtown. The District Court found that Endorsement No. 6 of the policy applied to
exclude coverage for Count Three. Endorsement No. 6 provides:
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[I]t is hereby understood and agreed that the Insurer shall not be liable for
any Loss in connection with any Claim(s) brought against the following
entity(ies): 1. TWIN COUNTY GROCERS (including any subsidiary or
affiliate thereof) and/or any director, officer, trustee, trustee emeritus,
executive director, department head, committee member, staff or faculty
member, employee or volunteer thereof.
(A. 105a (emphasis added).) Foodtown argues that Count Three of the Food King
Second Amended Complaint was not “brought against” Twin County Grocers, but rather,
sought a fair allocation of the debt incurred to settle a claim that Twin County Grocers
had brought against Foodtown and members of its Board of Directors. The District Court
stated that “[t]he resolutions, the settlement, and the resulting allocation all arose out of
the bankruptcy trustee‟s claim against Twin County Grocers,” (A. 14a), but the claims
were brought against the directors and officers of Twin County Grocers, rather than the
entity itself. The plain language of the policy indicates that it extends to a “Loss in
connection with any Claim(s)” brought against directors and officers of Twin County
Grocers. Count Three seeks precisely this sort of recovery. Accordingly, Count Three of
the Food King Second Amended Complaint is precluded from coverage under
Endorsement No. 6 to the policy.3
IV.
National Union also appeals the District Court‟s award of attorneys‟ fees to
Foodtown. We review an award of attorneys‟ fees to a prevailing party for an abuse of
discretion. See Bd. of Trs. of Trucking Emps. of North Jersey Welfare Fund, Inc. –
Pension Fund v. Centra, 983 F.2d 495, 508 (3d Cir. 1992). Where the question involves
3
We therefore do not reach National Union‟s argument that it should also be precluded
under Section 4(e) of the policy.
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whether the District Court applied the correct standard, however, our review is plenary.
Id.New Jersey Rule of Court 4:42-9(a) provides, in relevant part, that “[n]o fee for
legal services shall be allowed in the taxed costs or otherwise, except . . . (6) [i]n an
action upon a liability or indemnity policy of insurance, in favor of a successful
claimant.” N.J. R. Ct. 4:42-9(a) (emphasis in original). In this case, there is no question
that Foodtown is a “successful claimant” in “an action upon a liability or indemnity
policy.” It has obtained favorable coverage rulings such that an award of fees may be
made under New Jersey Rule of Court 4:42-9(a)(6). See Guarantee Ins. Co. v. Saltman,
526 A.2d 731, 735-36 (N.J. Super. Ct. App. Div. 1987). Moreover, and contrary to
National Union‟s contention, we discern no abuse of discretion in the District Court‟s
decision to award all fees incurred by Foodtown in pursuing its coverage claims.
Accordingly, we will affirm the attorneys‟ fee award in this case.
V.
For the foregoing reasons, we will affirm the judgment of the District
Court.
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