Fox Paine & Co. v. Twin City Fire Ins. Co.

325 Cal.Rptr.3d 173

FOX PAINE & COMPANY, LLC, et al., Plaintiffs and Appellants,

v.TWIN CITY FIRE INSURANCE COMPANY et al., Defendants and Respondents.

A168803

Court of Appeal, First District, Division 2.

Filed September 5, 2024

Trial Court: San Francisco County Superior Court, Trial Judge: Honorable Andrew Y.S. Cheng (San Francisco County Super. Ct. No. CGC17557275)

Attorney for Plaintiffs and Appellants, Fox Paine & Company, LLC et al.: Reed Smith, Raymond A. Cardozo, San Francisco; King & Spalding, LLP, Anne M. Voigts, Palo Alto, Matthew Noller, San Francisco, Kelly Perigoe, Los Angeles; McKool Smith LLP, Michael J. Miguel, Los Angeles

Attorney for Defendant and Respondent, St. Paul Mercury Insurance Company: Maynard Nexsen LLP, Christopher C. Frost, James J. Hockel, Brandt P. Hill, Braden T. Morel

Attorney for Defendant and Respondent, Liberty Mutual Insurance Company: Hangley Aronchick Segal Pudlin & Schiller, Ronald P. Schiller, Sharon F. McKee; Nicolaides Fink Thorpe Michaelides Sullivan LLP, Matthew C. Lovell, San Francisco

Richman, J.

In 2017, eight plaintiffs sued four defendants, their former insurance broker and three excess insurers, which insurers provided $40 million in excess coverage in four layers of $10 million each. The complaint alleged eight causes of action. Three amended complaints followed, by the third of which the plaintiffs had been reduced to five, the defendants reduced to the three excess insurers, and the claims winnowed to four—breach of contract, declaratory relief, breach of (he covenant of good faith and fair dealing, and aiding and abetting breaches of fiduciary duty. The three excess insurers each filed demurrers, arguing among other things that plaintiffs did not allege, and could not allege, exhaustion of the underlying policies. The trial court overruled the demurrer of the first level excess insurer, but sustained the demurrers of the two other excess insurers without leave to amend, and entered judgments for them. Plaintiffs appeal. We affirm.

BACKGROUND

The General Setting

In 1996 Saul Fox and Dexter Paine formed Fox Paine & Company (FPC), a private equity management firm. Fox was chief executive officer of FPC, Paine the president. In 1998, through FPC, Fox and Paine formed two private equity funds: Fund I, for which Paine was primarily responsible, and Fox Fund II, for which Fox was primarily responsible.

By 2006, Fund I was largely wound down, and Paine wanted to form a new fund, but Fox "was not inclined to do so." So, in 2006, Fox and Paine entered into an agreement under which Paine could start a third fund (Fund III) under a license from FPC to use some of its assets and employees, and Fox would receive an "equity interest" in Fund III. This is the "Newco Agreement."

FPC’S Insurance

In December 2006, FPC obtained a Private Equity Professional Liability Policy from Houston Casualty Company (Houston Casualty). The policy covered the period from December 30, 2006 to December 30, 2007, later extended to January 2, 2008, with policy limits of $10 million. The policy provided coverage to "Insured Organizations" as well as "Insured Persons," including any "director, officer, general partner, manager, . or employee" of an Insured Organization, or the "functional equivalent" of such persons. An endorsement to the policy listed 18 entities included in the term "Insured Organization."

FPC also purchased Excess Private Equity Insurance, specifically four policies issued by three different insurers: Twin City Fire Insurance Company (Twin City), St. Paul Mercury Insurance Company (St. Paul), and Liberty Mutual Insurance Company (Liberty Mutual). The excess coverage provided $40 million in four layers of coverage, each layer providing $10 million in policy limits. The first layer of excess insurance was with Twin City, the second layer with St. Paul, the third layer also with Twin City, and the top layer with Liberty Mutual. In chart form, the "tower" of insurance looked like this:

Excess Policies	Policy Amount	Attachment Point
Twin City	$10 million	$10 million
St. Paul	$10 million	$20 million
Twin City	$10 million	$30 million
Liberty Mutual	$10 million	$40 million
Total Excess Policies	$40 million

The Delaware Litigation

Fox’s relationship with Paine deteriorated, and the Newco Agreement "fell apart," resulting in the first of what would become a litany of litigation, when, in August 2007, Fox, individually and derivatively on behalf of FPC and two Fox-owned entities (the "Fox parties") filed suit in Delaware Chancery Court against Paine, Paine’s family trust, Fox Paine Management III, LLC (FPM III), and FPC (the "Paine Parties").

In September, the Paine Parties filed counterclaims against the Fox parties.

In November, FPC’s broker Equity Risk Partners (ERP) sent a notice of claim of the Paine counterclaims to all insurers, including the three excess insurers.

In December, the Delaware lawsuit was settled, in a settlement agreement that was to effect a "complete divorce" between the Fox parties and FPC and the Paine parties.

Whatever the peace envisioned, it was short-lived, as in January 2008 Paine filed a pleading involving the settlement agreement. This was the first in a series of fights that would last for the next five years, as the Fox parties and Paine parties (including several former FPC directors and officers) became embroiled in lawsuits, arbitration proceedings, writs, and an appeal stemming from the August 2007 lawsuit and its settlement (the Fox-Paine litigation).¹

The Fox-Paine litigation ended with a settlement agreement in August 2012, which agreement represented it "resolved all outstanding issues among" Fox and Paine and "effectively put an end to the Fox-Paine Litigation."

As will be seen, there was more litigation to come.

Meanwhile, according to the third amended complaint, prior to the settlement of the Fox-Paine litigation, relying on the November 2007 notice of claim, the Paine parties sought reimbursement for costs incurred in the Fox-Paine litigation. And, plaintiffs alleged, Houston Casualty "agreed to pay" the Paine parties’ costs after concluding they were covered under the policy, eventually distributing the $10 million policy limits to the Paine parties, thus exhausting the primary policy.

The New York Litigation

In February 2014, Fox and FPC filed suit in New York state court against Houston Casualty and ERP, FPC’s now former insurance broker. Plaintiffs alleged that Houston Casualty, with ERP’s assistance, wrongfully distributed the entire $10 million of insurance proceeds under the Houston Casualty policy to the Paine parties. In 2017, the plaintiffs settled with Houston Casualty, but not with ERP, and the litigation against it continued.

The San Francisco Litigation

In February 2017, alleging they were "insureds," Fox and seven Fox-related entities (plaintiffs) filed a complaint in San Francisco County Superior Court.² The complaint named four defendants, the three excess insurers and ERP, and alleged eight causes of action. Each defendant filed a demurrer. But before the demurrers were heard, on June 26, plaintiffs filed a first amended complaint adding two new causes of action, now alleging 10 claims.

At that point, the proceedings in the San Francisco action were stayed to permit the New York action to proceed against ERP, a stay that lasted several years.

On November 9, 2022, plaintiffs’ filed a second amended complaint, a complaint markedly different from the earlier two complaints in several respects: (1) the plaintiffs were represented by a new law firm; (2) the plaintiffs were reduced from eight to five; (3) the defendants were only the three excess insurers; and (4) the causes of action had been reduced from 10 to five, styled as breach of contract, declaratory judgment, breach of covenant of good faith and fair dealing, aiding and abetting breaches of fiduciary duty, and waiver and estoppel.³

Again, all three excess insurers filed demurrers. Plaintiffs filed opposition and also motions to strike the demurrers of Twin City and St. Paul. Defendants filed replies, and the demurrers and motion to strike came on for hearing on March 1.

On March 17, 2023, the trial court filed its order (1) denying plaintiffs’ motion to strike; (2) sustaining St. Paul’s and Liberty Mutual’s demurrers with leave to amend; and (3) sustaining in part and overruling in part Twin City’s demurrer. As pertinent here, in sustaining the demurrers of St. Paul and Liberty Mutual, the court held that plaintiffs had failed to allege exhaustion.

On April 7, plaintiffs filed their third amended complaint (TAC), now alleging four causes of action, the same claims in the second amended complaint without the waiver and estoppel claim. While making some distinctions between and among the insurers, the TAC generally alleged the same claims against the three excess insurers.

Again, all three excess insurers demurred, fundamentally arguing that plaintiffs "fail[ed] to state sufficient facts establishing that all underlying insurance ha[d] been exhausted" and therefore failed to state a claim. As to plaintiffs’ declaratory relief claim, the insurers argued that it was duplicative of plaintiffs’ breach of contract claim, that the TAC failed to demonstrate an "actual controversy," and that the trial court had discretion to dismiss the claim under section 1061 of the Code of Civil Procedure. As to the remaining claims, the demurrers contended that plaintiffs failed to state a claim for either breach of implied duty of good faith and fair dealing or aiding and abetting breaches of fiduciary duty.

On August 9, the demurrers came on for hearing, along with several other matters. And on August 10, the trial court filed a comprehensive 23-page "omnibus order" ruling on the several matters. As pertinent here, that is, the demurrers, the trial court sustained in part and overruled in part Twin City’s demurrer, overruling it as to the first level of excess insurance, finding that plaintiffs ...