Abrams v. Allied World Assurance Co. (U.S.)

657 F.Supp.3d 1280

Zachary ABRAMS, Rhett Ohlson, Simon Jones, Craig Such, and Robert Crane, Plaintiffs, v. ALLIED WORLD ASSURANCE COMPANY (U.S.) INC., Defendant.

Allied World Assurance Company (U.S.) Inc., Counterclaimant, v. Zachary Abrams, Rhett Ohlson, Simon Jones, Craig Such, and Robert Crane, Counterdefendants.

Case No. 22-cv-01046-BLF

United States District Court, N.D. California, San Jose Division

Signed February 24, 2023

Franklin D. Cordell, Greg D. Pendleton, Gordon Tilden Thomas & Cordell LLP, Seattle, WA, Samantha Pitsch, Stokes Lawrence, Seattle, WA, Mark T. Drooks, Thomas V. Reichert, Bird Marella Boxer Wolpert Nessim Drooks Lincenberg, & Rhow, P.C., Los Angeles, CA, for Plaintiffs/Counterdefendants.

Jennifer Mathis, Michael K. Cassata, Troutman Pepper Hamilton Sanders LLP, San Francisco, CA, for Defendant/Counterclaimant.

ORDER GRANTING PLAINTIFFS' MOTION FOR PARTIAL SUMMARY JUDGMENT

[Re: ECF 35]

BETH LABSON FREEMAN, United States District Judge

This action arises out of an insurance coverage dispute relating to the directors & officers liability provisions of a policy issued by Defendant Allied World Assurance Company (U.S.) Inc. ("Allied") to non-party Altierre Corporation ("Altierre"). The action was brought by five of Altierre's former directors and officers, who are insureds under the policy ("the Insureds") and who have been sued in state court for breach of fiduciary duties they owed to Altierre and its shareholders ("the Underlying Action"). The Insureds tendered the Underlying Action to Allied but Allied denied coverage based on two policy exclusions, the Insured Capacity Exclusion and the Major Security Holder Claims Exclusion.

The Insureds, who are Zachary Abrams ("Abrams"), Rhett Ohlson ("Ohlson"), Simon Jones ("Jones"), Craig Such ("Such"), and Robert Crane ("Crane"), thereafter filed this suit against Allied for declaratory judgment, breach of contract, and bad faith. Allied has filed a counterclaim for declaratory judgment that it has no duty to defend or indemnify the Insureds in the Underlying Action.

The Insureds now move for partial summary judgment that the two policy exclusions relied on by Allied do not apply. For the reasons discussed below, the Court GRANTS the Insureds' motion for partial summary judgment that the Insured Capacity Exclusion and the Major Security Holder Claims Exclusion do not preclude coverage of the Underlying Action.

I. BACKGROUND

Non-party Altierre was a California corporation that developed and sold hardware and software related to the display of retail prices. See Abrams Decl. ¶ 2, ECF 35-2. Abrams, Ohlson, Jones, Such, and Crane were officers and directors of Altierre at various times. See id. ¶¶ 4-5. While serving in these capacities at Altierre, Abrams and Such also held positions at another company, Stratim Capital, LLC ("Stratim"). See Abrams Decl. ¶ 6. Abrams was the principal of Stratim, and Such was a Stratim partner. See id. At some point, Crane, Jones, and Ohlson obtained positions at a Stratim-related company, Store Intelligence. See Abrams Decl. Ex. D (Underlying SAC) ¶ 73, ECF 35-6. Other Stratim-related companies were shareholders in Altierre. See id. ¶ 31.

The Books and Records Action

One of Altierre's shareholders, Kline Hill, filed a state court petition for writ of mandate on March 30, 2020, seeking access to Altierre's books and records ("Books and Records Action"). See Abrams Decl. Ex. B (Petition), ECF 35-4. The petition alleged that Abrams had seized control of Altierre and executed several transactions to the benefit of Stratim and to the detriment of other shareholders. See Pet. ¶ 2. The petition also alleged that Abrams and Stratim had blocked Kline Hill from obtaining Altierre's records, and that Kline Hill needed Altierre's records to determine "whether certain directors and officers of Altierre (including Abrams) breached their fiduciary duties to Altierre and its shareholders." Id. ¶¶ 1-5.

On June 11, 2020, Kline Hill amended its writ petition to add factual allegations regarding a foreclosure on Altierre's assets. See Abrams Decl. Ex. C (Am'd Petition), ECF 35-5. In the amended petition, Kline Hill alleged that "[f]ollowing the filing of the Verified Petition, Stratim reached an agreement with the Company's largest creditor, Trinity Capital ('Trinity') to foreclose on all of the Company's assets without notice to shareholders, without a shareholder vote, and upon information and belief, without approval from the Company's Board of Directors (the 'Board'). Upon information and belief, Stratim now controls the Company's assets." Id. ¶ 8.

Underlying Action

On August 13, 2021, Kline Hill filed the Underlying Action in state court, asserting claims for breach of fiduciary duties against Abrams, Ohlson, Jones, Such, and Crane, and asserting related claims against various Stratim-related companies. See Abrams Decl. ¶ 15. The second amended complaint in the Underlying Action ("Underlying SAC") alleges that Abrams took control of Altierre's board and thereafter took actions that benefitted Stratim to the detriment of Kline Hill and other shareholders. Underlying SAC ¶¶ 38-58. Abrams allegedly hired and/or promoted Ohlson, Jones, Such, and Crane, who became Altierre board members and were "beholden" to Abrams. See id. ¶¶ 83, 85, 100. Abrams, with the complicity of the other Insureds, allegedly approved "a secret agreement with Altierre's largest secured creditor pursuant to which the creditor foreclosed on Altierre's assets and on the same day flipped the assets to a Stratim affiliate." Underlying SAC ¶¶ 1, 9, 95-97. Kline Hill claims that the Insureds and Stratim effectively stripped Altierre of its assets, leaving Altierre's other shareholders with "an empty shell worth nothing." Id. ¶¶ 7-8.

"At the time of the events at issue, Kline Hill owned approximately 9% of Altierre's stock on a fully diluted basis." Id. ¶ 99 n.7. In May 2021, after filing the Books and Records Action but prior to filing the Underlying Action, Kline Hill bought additional stock that brought its total ownership to 48.8% of Altierre on a fully diluted basis. See id. ¶¶ 33, 99 n.7.

Tender of Books and Records Action and Underlying Action under the Policy

Abrams tendered both the Books and Records Action and the Underlying Action to Allied under a Management Liability Package Policy that Altierre obtained from Allied for the period January 1, 2020 to January 1, 2021. See Abrams Decl. ¶¶ 10, 15; Def.'s Ex. 1 (Policy), ECF 46-5. Allied accepted the tender of the Books and Records Action but denied coverage of the Underlying Action. See Abrams Decl. ¶¶ 10, 15.

Relevant Policy Provisions

The policy's Directors & Officers Liability Coverage Section ("D&O Section") provides that Allied will pay the loss arising from a claim against an "Insured Person" for a "Wrongful Act." Policy D&O Sec. I.B., at AWOPP032. "Insured Person" is defined to include an "Executive." Policy D&O Sec. II.I, at AWOPP036. "Executive" in turn is defined to include any "past, present or future duly elected or appointed director, officer, trustee, trustee emeritus, governor, management committee member or member of the board of managers of" Altierre. Policy D&O Sec. II.N, at AWOPP037. "Wrongful Act" means "with respect to an Insured Person, any actual or alleged act, error, omission, neglect, breach of duty, breach of trust, misstatement, or misleading statement by an Insured Person in his or her capacity as such, or any matter claimed against an Insured Person by reason of his or her status as such." Policy D&O Sec. II.S, at AWOPP039.

Allied does not dispute that Abrams, Ohlson, Jones, Such, and Crane are Insured Persons under the policy's D&O Section. However, Allied takes the position that two policy exclusions preclude coverage of the Underlying Action. The first exclusion is the "Insured Capacity Exclusion," which excludes from coverage any loss "alleging, arising out of, based upon or attributable to any actual or alleged act or omission of any Insured Person serving in any capacity other than as an Executive . . . ." Policy D&O Sec. III.G, at AWOPP040 (italics added). The second exclusion is the "Major Security Holder Claims Exclusion," which provides as follows:

The Insurer shall not be liable to make any payment for Loss from any Claim made against any Insured by or on behalf of, or in the name or right of, any past, present or future security holder of the Company, or the estate, beneficiaries, heirs, legal representatives or assigns of such security holder, who owns or owned as of the date of the Claim, or previously did own, beneficially or in trust, separately or in the aggregate, a 10% or more equity interest in the Company, whether such equity interest is in the form of common stock, preferred stock, membership units or other equity interest, including, but not limited to, any such Claim in the form of a security holder derivative action or any representative class action.

Policy Endorsement No. 2, at AWOPP007 (italics added, bold omitted).

Present Action

The Insureds filed this suit against Allied on February 18, 2022, asserting claims for: (1) declaratory judgment that Allied is obligated to defend and indemnify them against the Underlying Action; (2) breach of contract; and (3) bad faith. See Compl., ECF 1. Allied filed an answer and counterclaim for declaratory judgment on April 20, 2022. See Answer and Counterclaim, ECF 25. The Insureds answered the counterclaim on May 11, 2022. See Answer to Counterclaim, ECF 27.

The Insureds filed the operative FAC in this action on October 25, 2022, solely to correct Defendant Allied's name in the pleading. See FAC, ECF 58. The parties stipulated that all of the pleadings and papers filed prior to the filing of the FAC would remain valid, and that Allied did not need to file a new answer and counterclaim. See Stip., ECF 56.

The Insureds now seek partial summary judgment that neither the Insured Capacity Exclusion nor the Major Security...