EMSI Acquisition, Inc. v. RSUI Indem. Co.

306 F.Supp.3d 647

EMSI ACQUISITION, INC. (as assignee of Mark S. Davis and Robert P. Brook), Plaintiff/Counterclaim–Defendant,

v.RSUI INDEMNITY COMPANY, Defendant/Counterclaim Plaintiff/ Third–Party Plaintiff,

v.EMSI Holding Company, Third–Party Defendant.

C.A. No. 16–1046–LPS

United States District Court, D. Delaware.

Signed January 31, 2018

Philip Trainer, Jr., ASHBY & GEDDES, Wilmington, DE, Lauren Neal Bennett, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, DE, Stephen C. Hackney, Timothy W. Knapp, KIRKLAND & ELLIS, Chicago, IL, Attorneys for Plaintiff/Counterclaim–Defendant, EMSI Acquisition, Inc.

Michael F. Duggan, Emily Kara Silverstein, MARKS O'NEILL, O'BRIEN, DOHERTY & KELLY, P.C., Wilmington, DE, Kevin A. Lahm, WALKER WILCOX MATOUSEK LLP, Chicago, IL, Attorneys for Defendant/Counterclaim Plaintiff/Third–Party Plaintiff, RSUI Indemnity Company

Lauren Neal Bennett, MORRIS, NICHOLS, ARSHT & TUNNELL LLP, Wilmington, DE, Stephen C. Hackney, Timothy W. Knapp, KIRKLAND & ELLIS, Chicago, IL, Attorneys for Third–Party Defendant, EMSI Holding Company

MEMORANDUM OPINION

STARK, U.S. District Judge:

Pending before the Court are cross-motions for partial judgment on the pleadings, filed pursuant to Federal Rule of Civil Procedure 12(c). The first motion was filed by Plaintiff/Counterclaim–Defendant EMSI Acquisition, Inc. ("EMSI–A"). (D.I. 18) The second motion was filed by Defendant/Counterclaim Plaintiff/Third–Party Plaintiff RSUI Indemnity Company ("RSUI"). (SeeD.I. 22) Both motions seek declaratory judgments relating to whether coverage exists under certain director and officer liability insurance policies issued by RSUI to Third–Party Defendant EMSI Holding Company ("EMSI"). In general, EMSI–A argues that coverage applies, while RSUI takes the opposite view. (SeeD.I. 19, 23) The motions have been fully briefed (seeD.I. 27, 28) and were argued before the Court on September 5, 2017 (seeD.I. 38 ("Tr.") ).

I. BACKGROUND

A. EMSI–A Acquires EMSI

On November 3, 2015, EMSI–A, a Delaware limited liability company, entered into a Stock Purchase Agreement (the "SPA") pursuant to which EMSI–A became the 100% shareholder of EMSI. (SeeD.I. 23 at 3) After the sale closed, EMSI–A sent demand letters to former EMSI Directors Mark S. Davis and Robert P. Brook (the "Management Sellers") seeking indemnification for financial misconduct allegedly committed by the Management Sellers prior to the sale of EMSI to EMSI–A. (SeeJ.A. 141–43) The Management Sellers provided RSUI with prompt notice of EMSI–A's demand letters and, in turn, demanded that RSUI provide the Management Sellers with a defense or indemnification under their director and officer liability insurance policies with RSUI. (SeeJ.A. 140) At the same time, the Management Sellers demanded indemnification from EMSI pursuant to the company's bylaws. (SeeD.I. 23 at 3; D.I. 11 ¶ 29)

B. Litigation Ensues Between EMSI–A and Management Sellers

On August 10, 2016, EMSI–A filed suit against the Management Sellers (and others) in the Delaware Court of Chancery. SeeEMSI Acquisition, Inc. v. Contrarian Funds, LLC, C.A. No. 12648–VCS (J.A. 144–210) (the "Underlying Action"). The Underlying Action alleges breaches of the representations and warranties in the SPA that occurred while the SPA was being negotiated between May and October 2015. (SeeJ.A. 147) The Management Sellers notified RSUI of the complaint and once again demanded a defense and indemnity. (SeeD.I. 3 ¶ 21) RSUI responded by denying any duty to defend or indemnify the Management Sellers in the Underlying Action. (SeeJ.A. 211–20) (the "Coverage Letter")

C. Litigation Ensues Between Management Sellers, RSUI, and EMSI

On October 27, 2016, the Management Sellers filed suit against RSUI in the Delaware Court of Chancery, seeking a declaration of coverage and defense under the RSUI Polices (as defined later in this Opinion). SeeDavis v. RSUI Indem. Co., C.A. No. 12857–VCS (D.I 1 Ex. 1) (the "Instant Action"). That same day, the Management Sellers also filed suit in the same court against EMSI, seeking a declaration of their mandatory advancement rights and recovery of the costs and fees incurred in enforcing those rights. SeeDavis v. EMSI Holding Co., C.A. No. 12854–VCS (J.A. 221–31) (the "Indemnity Action"). On November 1, 2016, EMSI sought coverage from RSUI for the Indemnity Action. (SeeD.I. 6 ¶ 37)

In response, RSUI filed a notice of removal, removing the Management Seller's Instant Action against RSUI to this Court. (SeeD.I. 1) On November 22, 2016, RSUI answered the Management Sellers' complaint in the Instant Action, asserted a counterclaim seeking a declaration that coverage was excluded, and filed a third-party complaint against EMSI, which seeks a similar declaration of coverage exclusion in relation to the Management Seller's Indemnity Action against EMSI. (SeeD.I. 3, 6) In December 2016, in the Instant Action, the Management Sellers filed an answer to RSUI's counterclaim, and EMSI filed an answer to RSUI's third-party complaint. (SeeD.I. 11, 12)

D. The Parties File the Pending Motions

On March 22, 2017, in the Instant Action, the Management Sellers and RSUI filed cross-motions for judgment on the pleadings, seeking declaratory judgment as to whether coverage exists (as the Management Sellers contend) or not (as RSUI contends) under either of the two RSUI Policies. (SeeD.I. 18, 22) Subsequently, the Management Sellers and EMSI–A entered into a settlement agreement, pursuant to which EMSI–A was assigned all right, title, and interest in the Management Sellers' claims in the Instant Action. (SeeD.I. 33 Ex. A) On August 24, 2017, this Court granted the Management Sellers' unopposed motion to substitute EMSI–A as Plaintiff and Counterclaim Defendant here. (SeeD.I. 35) Thus, the pending motions relate to disputes between EMSI–A and RSUI.

All parties agree that an actual case or controversy exists among them concerning whether coverage exists under the RSUI Policies and that the relevant facts were admitted in the pleadings. (SeeD.I. 19 at 8; D.I. 23 at 6) The Court agrees as well. EMSI further acknowledges that it is a Delaware corporation. (SeeD.I. 12 ¶ 6)

E. The RSUI Insurance Policies

The Instant Action, as well as the pending motions, arises from two director and officer liability insurance policies RSUI issued to EMSI (together, the "RSUI Policies" or the "Policies"). (SeeJ.A. 001–139)

The first policy, Policy No. NHP661503, had an initial policy period running from February 21, 2015 to February 21, 2016 (the "Pre–Acquisition Policy"). (SeeJ.A. 005–67) EMSI's application for that policy, which lists all EMSI shareholders and members of the EMSI Board of Directors as of the date of the application (the "Application") (seeJ.A. 060–67), was incorporated into the Pre–Acquisition Policy at multiple points (seeJ.A. 005, 023, 056, 062).

In anticipation of EMSI–A's purchase of EMSI, EMSI exercised an option in the Pre–Acquisition Policy to purchase a Discovery Period Election ("DPE") endorsement for $119,662. (SeeJ.A. 001) The DPE endorsement had the dual effect of terminating coverage under the Pre–Acquisition Policy for alleged Wrongful Acts occurring after November 3, 2015, and extending the discovery period during which EMSI could report "Claims ... against any Insured ... for any Wrongful Act that occurred priorto November 3, 2015" that were "otherwise covered" by the Pre–Acquisition Policy. (See id.) (emphasis added) As the DPE endorsement makes clear, "All other terms and conditions of [the Pre–Acquisition Policy] remain unchanged." (Id.)

RSUI then issued EMSI a second insurance policy, Policy No. NHP665276, to cover claims for Wrongful Acts occurring afterNovember 3, 2015 (the "Post–Acquisition Policy"). (SeeJ.A. 068–139) (emphasis added)

12 Both of the RSUI Policies contain largely the same coverage provisions and endorsements. Section 5(A) provides that RSUI has "the right and duty ... to defend any Claim against the Insured [EMSI] for which coverage applies." (J.A. 053, 122) A "Claim" is defined, in part, as a "written demand for monetary or non-monetary relief" or a "civil ... proceeding for monetary or non-monetary relief." (J.A. 009, 072) A "Wrongful Act" is defined as "any actual or alleged act, error, ... neglect or breach of duty ... by [a]n Insured Person acting in his or her capacity ... on behalf of the Insured Organization." (J.A. 051, 120) The Policies define an Insured Person as "[a]ny past, present or future director [or] officer ... of the Insured Organization." (J.A. 050, 119) The Insured Organization is EMSI. (SeeJ.A. 005, 068) The Policies also state, in all caps and on separate pages, that each is a "claims made" policy (as opposed to an "occurrence policy"). (SeeJ.A. 046, 115)¹

Section V(I)(3) of the Pre–Acquisition Policy (the "M & A Clause") provides that in the event of a 50% or more change in ownership of EMSI, coverage under the Pre–Acquisition Policy will continue "for any Wrongful Act occurring prior to" the change in ownership, but not for any Wrongful Acts that occur after the acquisition transaction. (SeeJ.A. 055–56) By purchasing the DPE endorsement, EMSI extended the policy reporting period—under the Pre–Acquisition Policy—for claims based on Wrongful Acts occurring prior to November 3, 2015 into the year 2021. (SeeJ.A. 001)

The RSUI Polices also contain certain exclusions. Most pertinent here is the "Major Shareholder Exclusion" (the "MSE") of the Pre–Acquisition Policy, which excludes from coverage "payment for Loss arising out of ... any Claim brought by ... [an] entit[y] that own[s] ... five percent (5%) or more of the outstanding stock of the Insured Organization." (J.A. 018, 082) The Post–Acquisition Policy includes an additional "Prior Acts Exclusion," which excludes "any Claim made against any Insured ... based upon ... Wrongful Acts which first occurred prior to November 3, 2015." (J.A. 084)

II. LEGAL STANDARDS

A. Motion for Judgment on the Pleadings

3 Under Federal Rule of Civil Procedure 12(c),...