Bay Club Members, LLC v. Selective Ins. Co. of Am.

654 F.Supp.3d 1

BAY CLUB MEMBERS, LLC, Richard Reilly, Joan Kelly, Mary Ann Sullivan,William J. Hewitt, Melissa Gordon, Matt Costa, Jon A. Ciffolillo, and Michael F. Stauff, Plaintiffs, v. SELECTIVE INSURANCE COMPANY OF AMERICA, Defendant.

NO. 1:21-cv-11791-DPW

United States District Court, D. Massachusetts

Signed January 27, 2023

Grace V. Hebbel, Richard Brown, Saxe Doernberger & Vita, P.C., Trumbull, CT, for Plaintiffs.

Lindsey A. Viscomi, Day Pitney LLP, Hartford, CT, Michael P. Mullins, Day Pitney LLP, Boston, MA, for Defendant.

ORDER ON DEFENDANT SELECTIVE INSURANCE COMPANY OF AMERICA'S MOTION TO JOIN

CABELL, United States Magistrate Judge

The plaintiffs, Bay Club Members, LLC ("Bay Club") and members of Bay Club's board, Richard Reilly, Joan Kelly, Mary Ann Sullivan, William J. Hewitt, Melissa Gordon, Matt Costa, Jon A. Ciffolillo, and Michael F. Stauff ("the individual plaintiffs"), have brought an action against their insurance provider, defendant Selective Insurance Company of America ("the defendant"), for its failure to provide coverage for litigation costs the plaintiffs incurred. The defendant moves pursuant to Fed. R. Civ. P. 19(a) to join two entities as plaintiffs: (1) Joseph and Nancy Bruno in their capacity as co-trustees of the Shemamedoit Trust III (referred to singularly as "Trust III"), and (2) Walter Uihlein, a previous Bay Club board member ("Uihlein"). (D. 23). The motion has been referred to this court for resolution. Following a hearing on the motion, and for the reasons explained below, the motion is denied.

I. RELEVANT BACKGROUND

In December 2018, the defendant issued a private company management liability policy ("the Selective policy") to Bay Club and its "members of the board of managers," i.e., the individual plaintiffs. (D. 19-1, pp. 11, 20). Part A of the Selective policy covers liability for company directors, officers, and the entity itself, including members of the board of managers, by paying on behalf of them "all 'loss' which [they] shall be legally obligated to pay as a result of a 'claim' made against [them] during the 'policy period' or the 'Extended Reporting Period' for 'wrongful acts.' " (D. 19-1, pp. 20, 37). Claims that are covered include "criminal or civil" proceedings "for monetary, non-monetary, or injunctive relief" as well as arbitration proceedings. (D. 19-1, p. 38). Wrongful acts covered include "any actual or alleged act, omission . . . neglect, or breach of duty, by [the insured] in their capacity with the 'company.' " (D. 19-1, p. 39).

Relevant here, the Selective policy excludes coverage for " 'loss' from any 'claim' made against any 'insured' . . . made by or made on behalf of the 'company,' or any security holder of the 'company,' or any 'insured person.' " (D. 19, ¶ 25) (D. 19-1, p. 39). There are several exceptions within this exclusion, however, including for claims brought by "any former director or officer" and for "shareholder derivative action[s]." (D. 19-1, p. 40). The plaintiffs also had an Operating Agreement which was in effect prior to the beginning of the Selective policy that provided that Bay Club "shall indemnify, save harmless, and pay all judgments and claims against each Manager or Officer."¹ (D. 31-3, p. 18).

According to the plaintiffs, Uihlein, a "previous Board Member of Bay Club in 2006," notified Bay Club in October of 2019 of his "claims against the plaintiffs." (D. 19, p. 6). One month later, the Brunos, in their capacity as co-trustees of Trust III, and others allegedly notified Bay Club of their own "claims against the plaintiffs." (D. 19, p. 6). The plaintiffs assert that they notified the defendant of both notices in November 2019. (D. 19, p.6). According to the plaintiffs, Uihlein's and Trust III's respective claims qualified for coverage under the Selective policy because Uihlein is a former director or officer and the claims include counts asserting a shareholder derivative action. (D. 19, p. 7). Later, Trust III filed a demand for arbitration against the plaintiffs with the American Arbitration Association ("AAA") for which the defendant denied coverage. (D. 19-2, pp. 2-3) (D. 19, pp. 6-7).

Trust III and Uihlein then jointly filed an additional demand for arbitration ("the underlying arbitration") with the AAA in September 2020, for which the defendant again denied coverage. (D. 19-3, pp. 2-3). According to the "Alleged Facts" section of the defendant's "Coverage Declination" letter for the underlying arbitration, "the Brunos and Uihlein . . . alleg[ed] that the Insureds devised a self-interested deal . . . to enrich themselves and other members of the Insured Entity to the detriment of the Insured Entity, its members, and [the Brunos and Uihlein]." (D. 19-3, pp. 2-3).

In January 2022, Trust III received a "Final Order and Award" from the underlying arbitration (D. 24-1, p. 4, ¶ 13), and Uihlein reached a settlement agreement with the plaintiffs. (D. 19, p. 8) (D. 24-1, pp. 50-51, ¶¶ 276, 278). Trust III subsequently filed a complaint in a Court of Chancery in Delaware ("the Delaware action") seeking to partially vacate the Final Order and Award. (D. 19-4, p. 2). The defendant denied coverage for the Delaware action, including for any obligation to defend or indemnify the plaintiffs. (D. 19-5, p. 2).

The plaintiffs contend the defendant breached the Selective policy by "fail[ing] and/or refus[ing] to provide coverage for defense costs and [to] indemnify Bay Club and the Board Members against the [underlying arbitration] or the Delaware [a]ction." (D. 19, p. 10). They seek a declaratory judgment regarding coverage and also assert claims for breach of contract and violation of M.G.L. c. 93A and 176D for engaging in unfair settlement practices. (D. 19, pp. 10-12).

II. THE MOTION TO JOIN

The defendant moves to "join [the Brunos], in their capacity as co-trustees of Trust III, and Uihlein as plaintiffs in this case" on the ground that they are necessary parties under Fed. R. Civ. P. 19(a)(1) ("Rule 19(a)(1)"). (D. 23). The defendant argues that Trust III and Uihlein have an interest in the potential proceeds from this case, and the defendant could be subject to a substantial risk of inconsistent obligations if Trust III and Uihlein are not joined. (D. 24, p. 5). The plaintiffs and Uihlein argue in opposition that neither is a necessary party because "neither Trust III nor Uihlein can relitigate the issue of policy coverage." (D. 30, p. 2) (D. 31, p. 2). The plaintiffs also note that Uihlein and Trust III have not expressed any desire in protecting their potential interests in this action. (D. 31, p. 11).

III. LEGAL STANDARD

Under Federal Rule of Civil Procedure 19(a), a person "must be joined as a party if "in that person's absence, the court cannot accord complete relief among existing parties (19(a)(1)(A))," or "that person claims an interest relating to the subject of the action and is so situated that disposing of the action in the person's absence may" "impair or impede the person's ability to protect the interest," (19(a)(1)(B)(i)) or "leave an existing party subject to a substantial risk of incurring double, multiple, or otherwise inconsistent obligations because of the interest." (19(a)(1)(B)(ii)). The party seeking joinder bears the burden of establishing that joinder is warranted. Roy v. FedEx Ground Package Sys., Inc., No. 3:17030116-KAR, 2020 WL 3799203, at *2 (D. Mass. July 7, 2020) (citations omitted). When determining if a person is a necessary party, "the court is expected 'to make pragmatic, practical judgments that are heavily influenced by the facts' of the specific case." Duggan v. Martorello, 596 F.Supp.3d 195, 203 (D. Mass. 2022) (quoting Bacardi Int'l Ltd. v. V. Suarez & Co., Inc., 719 F.3d 1, 9 (1st Cir. 2013)).

Regarding Rule 19(a)(1)(B)(i), courts have held that proceeds from insurance coverage qualify as the sort of interest that may appropriately underlie a motion for joinder. See e.g., Travelers Indem. Co. v. Dingwell, 884 F.2d 629, 634 (1st Cir. 1989) (members had "concrete interest in the unexecuted settlement agreement" involving proceeds from insured's policies); Nat'l Union Fire Ins. Co. of Pittsburgh, Pa. v. Mass. Mun. Wholesale Elec. Co., 117 F.R.D. 321, 322 (D. Mass. 1987) (finding nonparty "indicated that it does not desire such protection" of its interest in insurance proceeds); see also AIG Prop. Cas. Co. v. Green, 172 F. Supp. 3d 468, 476 (D. Mass. 2016) (assuming tort-claimant is interested party in dispute between insured and insurer). However, if a person decides not to intervene in the action, it indicates the person does not believe their interest to be at risk, and courts should not question that decision absent compelling reason. United States v. San Juan Bay Marina, 239 F.3d 400, 407 (1st Cir. 2001).

Regarding Rule 19(a)(1)(B)(ii), and assuming all other requirements have been met, a person is a necessary party if their nonjoinder would subject a party to "substantial risk of . . . inconsistent obligations." Fed. R. Civ. P. 19(a)(1)(B)(ii). "[I]nconsistent obligations occur when a party is unable to comply with one court's order without breaching another court's order concerning the same incident." Delgado v. Plaza Las Americas, Inc., 139 F.3d 1, 3 (1st Cir. 1998) (citation omitted); Hopkinson v. Equifax Info. Servs., LLC, No. 19-cv-12290-IT, 2021 WL 664040, at *6 (D. Mass. Feb. 19, 2021) (quoting Delgado, 139 F.3d at 3). Rule 19(a)(1) only speaks to inconsistent obligations, not to inconsistent judgments or results. Nat'l Union Fire, 117 F.R.D. at 322; CFI of Wis., Inc. v. Hartford Fire Ins. Co., 230 F.R.D. 552, 555 (W.D. Wis. 2005) ("[J]udgments and results are not the same as obligations under F.R.C.P. 19(a).") (citations omitted); see Delgado, 139 F.3d at 3.

With respect to insurance coverage disputes, courts do recognize that the interests of judicial economy are served in having a tort claimant join an action. See Nat'l Union Fire, 117 F.R.D. at 323 (discussing...