Amtrust Int'l Underwriters DAC v. 180 Life Scis. Corp.

670 F.Supp.3d 930

AMTRUST INTERNATIONAL UNDERWRITERS DAC, Plaintiff, v. 180 LIFE SCIENCES CORP., Defendant.

180 Life Sciences Corp., Counterclaimant, v. AmTrust International Underwriters DAC, Counterdefendant.

180 Life Sciences Corp., Third-Party Plaintiff, v. Freedom Specialty Insurance Company, Third-Party Defendant.

Case No. 22-cv-03844-BLF

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

Signed April 21, 2023

Adrian Thomas Rohrer, Pro Hac Vice, Bates Carey LLP, Chicago, IL, David Lane Koury, Attorney at Law, Chicago, IL, Samuel James Galvin, Neil M. Kliebenstein, Bowman and Brooke LLP, San Jose, CA, for Plaintiff Amtrust International Underwriters DAC.

Andrea B. Jung, Pro Hac Vice, Andrew N. Bourne, Pro Hac Vice, Cohen Ziffer Frenchman & McKenna LLP, New York, NY, Jeffrey W. Shields, Rick Arthur Varner, Shields Law Offices, Irvine, CA, for Defendant/Counterclaimant/Third-Party Plaintiff.

Valerie Diane Rojas, Cozen O'Connor, Los Angeles, CA, for Third-Party Defendant.

ORDER GRANTING IN PART AND DENYING IN PART 180 LIFE SCIENCES CORP.'S MOTION FOR PARTIAL SUMMARY JUDGMENT

[Re: ECF 41]

BETH LABSON FREEMAN, United States District Judge

This action arises out of an insurance coverage dispute relating to the directors and officers liability provisions of two policies issued to KBL Merger Corp. IV ("KBL"). A primary policy was issued by AmTrust International Underwriters DAC ("AmTrust") and an excess policy was issued by Freedom Specialty Insurance Company ("Freedom") (collectively, "the Insurers"). The dispute centers on the legal effect of certain corporate transactions in which KBL acquired a biotechnology company, changed its name from KBL to 180 Life Sciences Corp. ("180 Life"), and replaced its board of directors. According to 180 Life, those changes did not affect its status as the named insured under the policies; 180 Life asserts that it is merely KBL under a new name. The Insurers take the position that KBL ceased to exist as a result of the corporate transactions and that 180 Life is a new entity that is not an insured under the policies.

180 Life sought coverage under the AmTrust policy for expenses it advanced to two former KBL directors and officers, Dr. Marlene Krauss ("Krauss") and George Hornig ("Hornig"), in connection with investigative and legal proceedings relating to their former positions with KBL. AmTrust denied coverage and filed this declaratory relief action, asserting that 180 Life is not an insured under its policy and that in any event coverage for the expenses is barred by two policy exclusions. 180 Life filed a counterclaim against AmTrust and a third-party complaint against Freedom, seeking a declaration that it is an insured and is entitled to coverage for the expenses. 180 Life also seeks damages from AmTrust for breach of contract and bad faith.

180 Life now moves for partial summary judgment that it is entitled to coverage for the expenses it advanced to Krauss and Hornig in connection with subpoenas issued to them by the Securities and Exchange Commission ("SEC"). As discussed below, 180 Life has made coverage demands to AmTrust and Freedom for additional expenses advanced to Krauss in connection with other proceedings, but those additional expenses are not at issue in this motion. The notice of motion identifies five issues on which 180 Life seeks partial summary judgment: (1) 180 Life is an insured under the AmTrust and Freedom policies; (2) both polices provide coverage for the expenses 180 Life has advanced, and will advance, to Krauss and Hornig in connection with the SEC subpoenas; (3) AmTrust breached its policy by denying coverage for those expenses; (4) AmTrust is obligated to pay 180 Life the expenses it has advanced, and will advance, to Krauss and Hornig in connection with the SEC subpoenas; and (5) once the AmTrust policy is exhausted, Freedom will be obligated to pay 180 Life the expenses it has advanced, and will advance, to Krauss and Hornig in connection with the SEC subpoenas.

For the reasons discussed below, 180 Life's motion for partial summary judgment is GRANTED IN PART AND DENIED IN PART.

I. BACKGROUND

KBL's Creation as a SPAC and Purchase of Insurance Policies

KBL was created in 2016 as a special purpose acquisition company ("SPAC") with the goal of entering into a business combination or merger with one or more operating businesses. See McGovern Decl. ¶¶ 4-5, ECF 41-1. KBL intended to target businesses in the healthcare and wellness industry. See id. ¶ 5. Krauss was the Chief Executive Officer ("CEO") of KBL and a director. See id. Hornig was a director of KBL. See id. KBL completed its initial public offering in June 2017. See id. ¶ 6.

KBL purchased a claims-made Directors and Officers and Public Company Liability Policy from AmTrust for the initial coverage period of June 7, 2017 to June 7, 2018. See McGovern Decl. ¶ 7 & Ex. 1 (AmTrust Policy). The policy period later was extended to November 9, 2020. See id. KBL purchased run-off coverage for an additional two-year period from November 9, 2020 to November 9, 2022; KBL thus had until November 9, 2022 to give AmTrust notice of claims arising during the policy period. See id. The AmTrust policy provides $3 million in coverage. See id.

KBL also purchased an Excess Insurance Policy from Freedom with the same initial policy period as the AmTrust policy. See McGovern Decl. ¶ 8 & Ex. 2 (Freedom Policy). Like the AmTrust policy, the Freedom policy period was extended to November 9, 2020. See id. KBL purchased run-off coverage under the Freedom policy for the period November 9, 2020 to November 9, 2022. See id. The Freedom policy follows form to the AmTrust Policy and provides $2 million of coverage excess of the AmTrust policy. See id.

KBL's Acquisition of CannBioRx and Corporate Name Change

In July 2019, KBL entered into a business combination agreement under which its target, biotechnology company CannBioRx Life Sciences Corp. ("CannBioRx"), would combine with a number of other companies and then enter into a merger ("the Merger") with KBL's wholly owned subsidiary, KBL Merger Sub, Inc. See McGovern Decl. ¶¶ 9-10. As agreed, Katexco Pharmaceuticals Corp., CannBioRex Pharmaceuticals Corp., and 180 Therapeutics L.P. became subsidiaries of CannBioRx prior to the Merger. See id. ¶ 10. CannBioRx changed its name twice, first to 180 Life Sciences Corp. and then to 180 Life Corp. See id. On November 6, 2020, 180 Life Corp. merged with KBL's wholly owned subsidiary KBL Merger Sub, Inc., which ceased to exist, leaving 180 Life Corp. a wholly owned subsidiary of parent KBL. See id. ¶ 14.

In conjunction with the Merger, KBL changed its name to 180 Life Sciences Corp., a name that target company CannBioRx used briefly before ultimately settling on the name 180 Life Corp. See McGovern Decl. ¶¶ 11-16. Thus, at the close of the Merger, two entities remained - parent company 180 Life Sciences Corp. (f/k/a KBL), and its wholly owned subsidiary 180 Life Corp. (f/k/a CannBioRx and 180 Life Sciences Corp.). See id. Also in conjunction with the November 6, 2020 Merger, Krauss resigned as director and CEO of KBL. See McGovern Decl. ¶ 14. Hornig and the other KBL directors also resigned. See id.

180 Life's Advancement of Expenses to Krauss and Hornig

The SEC opened an investigation regarding the Merger. See McGovern Decl. ¶ 17. In connection with that investigation, the SEC issued subpoenas to Krauss and Hornig requiring them to produce all communications and other documents concerning specific aspects of the Merger, including discussions and negotiations, fee arrangements, and KBL's preparation of its Forms 10-Q for the fiscal quarters ending June 30, 2020 and September 30, 2020. See McGovern Decl. ¶ 17 & Ex. 7 (Subpoenas) at 1-5, 10-15, 92-97.

Krauss and Hornig requested that 180 Life advance them expenses they incurred in responding to the SEC subpoenas. Krauss also requested advancement of expenses she incurred in defending against third-party claims in a New York state action, and in connection with an action that 180 Life filed against her and others in the Delaware Chancery Court ("Direct Action"). In the Direct Action, 180 Life claims among other things that Krauss breached fiduciary duties to KBL by falsely attesting to KBL's financial statements, improperly permitting redemption of KBL shares right before the Merger closed, and transferring money to herself and others under her control. See Rohrer Decl. Ex. 2, Direct Action Compl., ECF 47-2.

180 Life did not advance the requested expenses to Krauss and Hornig. Krauss filed suit against 180 Life in the Delaware Chancery Court ("Advancement Action"), seeking advancement of expenses relating to the SEC subpoenas, the New York state court action, and the Direct Action. See Krauss v. 180 Life Scis. Corp., No. CV 2021-0714-LWW, 2022 WL 665323, at *3 (Del. Ch. Mar. 7, 2022). The court found that KBL's Charter and Bylaws, which were adopted by 180 Life in connection with the business combination agreement, "unambiguously provide for mandatory advancement." Id. at *2-4. Under the Charter and Bylaws, the Delaware court determined, "[a]dvancement is available to Krauss for expenses incurred in connection with 'any threatened, pending, or completed action, suit or proceeding, whether civil, criminal, administrative or investigative . . . by reason of the fact that . . . she is or was a director [or] officer of the Company.' " Id. Applying those provisions, the court held that 180 Life must advance Krauss the expenses she incurred in connection with the SEC subpoenas and in connection with certain defenses and a counterclaim in the Direct Action. See id. at *10.

Pursuant to the Delaware Chancery Court's ruling, 180 Life has advanced expenses to Krauss in the amount of $2,432,002.47, most of which relate to the SEC subpoenas. See McGovern Decl. ¶ 19. 180 Life also has advanced subpoena-related expenses to Hornig in the amount of $104,388.25. See id. ¶ 20.

180 Life's...