In re Enron Corp. Securities, Derivative

391 F.Supp.2d 541

In re ENRON CORPORATION SECURITIES, DERIVATIVE & "ERISA" LITIGATION Mark Newby, et al., Plaintiffs v. Enron Corporation, et al., Defendants.

No. MDL-1446.

No. CIV.A. H-01-3624.

United States District Court, S.D. Texas, Houston Division.

August 1, 2005.

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OPINION AND ORDER DENYING MOTIONS TO COMPEL ARBITRATION

HARMON, District Judge.

Pending before the Court in the above referenced cause, relating to four proposed partial settlements, are a number of motions to dismiss or stay interpleader and compel arbitration under the Federal Arbitration Act ("FAA"), 9 U.S.C. §§ 2,¹ 3,² 4³ and 206,⁴ and under the terms of Excess D & O Liability Insurance Policies purchased by Enron Corporation, filed by Third-Party Counterclaim Defendants Shelby, Yeager, Howard and Krautz⁵ ("EBS Defendants") (instrument # 2527),⁶ Jeffrey K Skilling (# 2632),⁷ Kevin Hannon (# 2827), and Mark Koenig (# 3063).⁸

Insurance Policies

Enron purchased one primary directors and officers liability insurance policy: Policy No. D0079A1A98 § IV(Q)(3) issued by Associated Electric & Gas Insurance Services United ("Primary AEGIS Policy"), which provided a $35 million limit of liability.

In addition, Enron purchased ten excess liability policies, the first three of which, like the Primary AEGIS Policy, have been exhausted: (1) Policy No. 900630-00D0 issued by Energy Insurance Mutual ("EIM Policy"), providing a $65 million limit excess of the underlying primary coverage of $35 million; (2) Policy No. 8142-05-47C issued by Federal Insurance Company, providing a $25 million limit excess of the $100 million in underlying coverage; (3) Policy No. NDA 0131301-98H issued by Twin City Fire Insurance Company ("Twin City Policy"), providing a $25 million limit excess of the $125 million in underlying coverage; (4) Policy No. ELU 82248-01 issued by Greenwich Insurance Company ("Greenwich Policy"), providing coverage from $150 million to $175 million; (5) Policy No. 901/LK9802531 issued by certain Underwriters at Lloyd's of London, providing coverage from $175 million to $200 million; (6) Policy No. 568CM0934 issued by St. Paul Mercury Insurance Company ("St. Paul Policy"), providing coverage from $200 million to $225 million; (7) Policy No. 8181-43-14 issued by Federal Insurance Company, providing coverage from $225 million to $250 million; (8) Policy No. PSF000633 issued by Royal Insurance Company of America, providing coverage from $250 million to $275 million; (9) Policy No. ENE-9459D issued by ACE Bermuda Insurance Ltd. ("ACE Policy"), providing coverage from $275 million to $300 million; and (10) Policy No. 8179-41-03 SWH issued by Federal Insurance Company in a Quota Share Policy with five participating insurers (Federal Insurance Company (50%), Kemper Insurance Indemnity Co. (20%), EIM (15%), Greenwich (5%), and AEGIS (10%)), providing coverage from $300 million to $350 million.⁹ Copies of the various policies, all of which are implicated in the $200 million demand by the settling parties, are attached as exhibits to a number of the pleadings.¹⁰

The policies are layered, with each triggered only when the lower one is exhausted. All the excess policies contain language that at minimum follows form of the Primary AEGIS Policy, to be discussed further infra. The Primary AEGIS Policy and the first three excess policies have been exhausted by payment of defense costs and settlements of various insureds, leaving approximately $200 million of proceeds remaining before the filing of the Interpleader.

Procedural Background

In October 2004 three different settlement demands from different insureds were made upon the Excess Insurers for payment from these remaining proceeds. First, eighteen of Enron's former Outside Directors sent a letter dated October 12, 2004 informing the carriers that they had reached a settlement with Newby Lead Plaintiff, an agreement which would require payment of the entire $200 million, in addition to personal contributions from some of the insureds. Another letter dated October 14, 2004 informed the Excess Insurers of a settlement in Pirelli between the Official Creditors Committee and some insureds (the Outside Directors, James Derrick, and Rick Buy) for payment of 17.2% of the remaining insurance proceeds, which would reduce the amount to be paid to the Newby plaintiffs.¹¹ Subsequently Stowers¹² demands were made on the Excess Insurers in connection with these settlements. Finally, in a letter dated October 20, 2004, Kenneth Lay made a demand that Greenwich pay $10.25 million to settle claims against him in two Enron-related suits: The Retirement Systems of Alabama, et al. v. Merrill Lynch & Co., et al., No. CV-03-F-69-N (M.D.Ala.), and City of Montgomery, et al. v. Lay, et al., No. CV-03-F-1152-N (M.D.Ala.). The Outside Directors argue that Lay's settlement is subordinate to the Newby and Pirelli settlements.

Furthermore, legal proceedings were commenced by various parties. On October 12, 2004 certain former Outside Directors of Enron filed in Newby a Third-Party Complaint for Contract Enforcement and Injunctive Relief regarding D & O Policy Proceeds against a number of excess insurance carriers (# 2450). They amended it on October 18, 2004 (# 2462), announcing the settlement with Newby Plaintiffs and with the Official Committee of Unsecured Creditors of Enron in Pirelli and seeking a declaratory judgment acknowledging their right to use all of the remaining proceeds of the excess insurance policies to fund their settlements, regardless of the defense needs of other insureds, as well as for a preliminary and permanent injunction to prohibit the Excess Insurers from paying out any more of the remaining proceeds to others. After notice and a hearing on October 18, 2004, this Court entered a temporary restraining order enjoining Greenwich, the Excess Insurer responsible for providing the first layer of the remaining $200 million of coverage, from processing any claims from or disbursing any funds to insureds, and thus in essence all the layers above it.

On October 20, 2004 Ken Harrison sued the Excess Insurers in New York, seeking to compel them to binding arbitration regarding claims for his defense costs that they had rejected and all claims for allocation of the $200 million in policy proceeds. Harrison v. AEGIS, et al., Case No. 04-CV-08319 (S.D.N.Y.). Alternatively Harrison sought to compel litigation to be filed exclusively in New York.

In response to the demands from the Outside Directors and complaints from other insureds, on October 21, 2004, the Enron Excess Insurers filed their First Amended Third-Party Counterclaim for Interpleader (Part 2 of # 2483), pursuant to 28 U.S.C. §§ 1335, 1397 and 2361 and Rule 22 of the Federal Rules of Civil Procedure, to interplead the contested policy proceeds, as a compulsory counterclaim to the Outside Directors' Third-Party Complaint for Contract Enforcement and Injunctive Relief regarding D & O Policy Proceeds against them, before the Excess Insurers knew of Harrison's suit. The Excess Insurers then amended that counterclaim the next day (# 2488). The interpleader names as defendants all the known persons and entities who are actual or alleged insureds under the Excess Policies and against whom or which one or more claims have been made.

Meanwhile the EBS Defendants also filed a suit similar to Harrison's against the Excess Insurers in New York on October 22, 2004. Krautz, et al. v. Greenwich Ins. Co., et al., Case No. 04 CV 8389 (S.D.N.Y.).

That same day this Court enjoined Harrison, and any other of the interpleader defendants, from prosecuting this suit or initiating any action or arbitration proceedings in New York and any other suit relating to D & O policies. # 2478. It noted that Harrison had appeared by telephone through counsel at the October 18, 2004 injunction hearing, argued against the requested TRO, and was present when the Court granted the restraining order. The Court found that Harrison's filing of the suit in the Southern District of New York "directly contravened the relief already granted" in the temporary restraining order and interfered with this Court's jurisdiction over the interpleader action. # 2478.

On November 1, 2004 the Former Outside Directors of Enron answered the Excess Insurers' interpleader and filed a counterclaim for a declaratory judgment and injunctive relief (# 2552). On December 8, 2004 the Court entered a preliminary injunction enjoining anyone claiming an interest in the remaining excess insurance proceeds from pursuing action outside the interpleader and restraining any disbursement of those proceeds by the Excess Insurers without a court order. # 2782. Then on December 22, 2004 (# 2865), after the parties obtained Judge Gonzalez's leave to lift the automatic stay in the bankruptcy court, the Court authorized payment of all the remaining excess insurance proceeds into the registry of the Court to fund the interpleader.¹³

Movants' Arguments

Movants now further argue that an order compelling arbitration and staying this action should issue under the sections 3, 4, and 206 of the Federal Arbitration Act because this Court lacks jurisdiction over this matter based on the mandatory arbitration provisions, express or incorporated by reference, in the excess insurance policies. Furthermore they contend under other terms of the policies (specifically the EIM Policy and all other higher layers that follow form), all disputes "arising under or relating to" coverage under the policies and to allocation of insurance proceeds are governed by New York law, not Texas law, and, in accordance with the forum selection clause, any non-arbitrable issues must be tried in the Southern District of New York.

Seeking to compel arbitration, Movants, who are all to some degree undisputed insureds under the policies, have made demands...