Outdoor Venture Corp. v. Phila. Indem. Ins. Co., 20-5306

OUTDOOR VENTURE CORPORATION,J.C. EGNEW, and L. RAY MONCRIEF, Plaintiffs-Appellants, v. PHILADELPHIA INDEMNITY INSURANCE CO., et al, Defendants-Appellees.

No. 20-5306

UNITED STATES COURT OF APPEALS FOR THE SIXTH CIRCUIT

December 22, 2020

NOT RECOMMENDED FOR PUBLICATION

File Name: 20a0715n.06

ON APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE EASTERN DISTRICT OF KENTUCKY

BEFORE: DAUGHTREY, NALBANDIAN, and MURPHY, Circuit Judges.

MARTHA CRAIG DAUGHTREY, Circuit Judge. Plaintiffs Outdoor Venture Corporation (OVC), J.C. Egnew, and L. Ray Moncrief appeal a district court judgment denying their requests that defendants Grange Mutual Casualty Company and Scottsdale Indemnity Company reimburse them for the attorneys' fees and costs incurred by the plaintiffs in defending themselves in underlying lawsuits. Because we conclude that the terms of the relevant insurance policies do not require such reimbursement of fees related to the hiring by the plaintiffs of independent counsel, we affirm the judgment of the district court.

FACTUAL AND PROCEDURAL BACKGROUND

Although this appeal now involves only three plaintiffs and two defendants, the action, as originally filed, included additional parties. In one of its opinions in the course of this litigation, the district court appropriately identified those parties and expertly summarized the relevant facts of the present lawsuit. We thus see no reason to offer an additional summary of those facts and instead adopt the following district court statement of the background of the litigation:

The plaintiffs in this matter are three corporations and two individuals who were officers of the corporations.

The three corporations are Stearns Manufacturing and its successor Outdoor Venture Corporation (together, "OVC") and Kentucky Highlands Investment Corporation. The two individual plaintiffs are J.C. Egnew and L. Ray Moncrief. During at least the relevant time, Egnew was the president of OVC. Moncrief was a director of OVC and an officer of Kentucky Highlands.

The root of this dispute is three lawsuits filed against various of the plaintiffs by a company called LEEP, Inc. and one of LEEP's insiders, Roger Blanken. LEEP alleged that it entered into "joint venture negotiations" with OVC. During the negotiations, Egnew signed on OVC's behalf a non-disclosure and non-circumvention agreement (the "NDA") which prevented OVC from contacting LEEP's lenders or customers.

Eventually, LEEP and OVC signed a letter of intent which "contemplated the formation of a new company to manufacture, in Kentucky, steel insulated building panels." The companies were unable to reach an agreement, however, and negotiations ceased in August 2012.

At the time, LEEP owed more than $7 million to Fortress Credit Corporation and was in default under the terms of the parties' financing agreement. After joint venture negotiations between LEEP and OVC ceased, Kentucky Highlands purchased Fortress's rights under the financing agreement. Kentucky Highlands then repossessed LEEP's assets and sold the assets to plaintiff Stearns Manufacturing, which is a subsidiary of OVC. Stearns Manufacturing no longer exists; OVC now owns Stearns' assets and liabilities.

With the three lawsuits underlying this action, LEEP and Blanken asserted that Kentucky Highlands wrongfully repossessed their assets.

The first lawsuit was brought by LEEP in Jefferson Circuit Court against Kentucky Highlands, OVC, Egnew, and Moncrief (the "LEEP lawsuit["]). With this lawsuit, LEEP alleged that the insureds had devised a scheme to "force LEEP out of business and to take over LEEP's business by virtue of obtaining LEEP's confidential information and then purchasing the Fortress note." LEEP alleged that, after buying the note, the insureds gave notice of default to LEEP and took possession of LEEP's facility and its assets and "took over LEEP's business and contacted LEEP's customers, all in an effort to destroy LEEP and to take over LEEP's business through unlawful means." LEEP sought $30 million in damages.

The second lawsuit was brought by Blanken, who sued Kentucky Highlands and OVC in this Court. See Blanken, et al. v. Kentucky Highlands Investment Corporation, et al., No. 6:13-47-DLB (E.D. Ky. filed April 22, 2013) (the "Blanken Kentucky action"). With this action, Blanken asserted that he—not LEEP—owneda major piece of equipment repossessed by Kentucky Highlands called the Bradbury Roll Forming Machine and, thus, Kentucky Highlands had wrongfully repossessed it and sold it to OVC.

The third lawsuit was also brought by Blanken, this time in state court in Pennsylvania (the "Blanken Pennsylvania action"). In the Pennsylvania action, Blanken again sued Kentucky Highlands and OVC again asserting that the insureds wrongfully repossessed certain other inventory that belonged to him, not to LEEP. That action was later removed to federal court in Pennsylvania, which transferred the case to this Court. See Blanken v. Kentucky Highlands Investment Corporation, et al., 6:14-cv-202-DLB (E.D. Ky. Removed March 7, 2014).

Kentucky Highlands, OVC, Egnew, and Moncrief were insured by at least one of the defendant insurers in this action: Grange Mutual Casualty Co., Scottsdale Indemnity Company, or Auto-Owners/Owners Insurance Company (together, "Owners").¹ These insurers asserted, however, that the claims brought by LEEP and Blanken against their insureds were not covered under the applicable insurance policies. Grange refused to defend their insureds at all. Owners offered to defend the insureds under a "reservation of rights" and appointed counsel to represent them. Scottsdale did the same, except with regard to Moncrief, who Scottsdale refused to defend at all.

The insureds, however, retained their own counsel to represent them. With this action, they seek reimbursement for the amounts they paid to defend themselves in the three lawsuits. They assert a breach of contract claim and seek a declaratory judgment that the insurance companies were obligated to defend them in the underlying actions. They also assert claims for statutory bad faith and common-law bad faith against Scottsdale and Grange.

Each of the insurance company defendants assert a counterclaim in which they ask the Court to declare that they have no duty to reimburse their insureds for the costs incurred in defending the underlying actions. In addition, Owners asks that Kentucky Highlands be required to reimburse it for the costs of defending it in the underlying actions. None of the insurers seek to recover any amounts paid by them to settle the underlying actions.

The insureds move for partial summary judgment, asking for judgment in their favor that the insurance companies had a duty to defend them in the underlying actions. Each of the insurance companies also moves for summary judgment, asking the Court to find that they had no duty to defend the plaintiffs.

Outdoor Venture Corp. v. Phila. Indem. Ins. Co., No. 6:16-cv-182-KKC, 2018 WL 4656400, at *1-2 (E.D. Ky. Sept. 27, 2018) (citations omitted).

After the plaintiffs voluntarily dismissed their claims against Philadelphia Indemnity Insurance Company, the district court issued a lengthy opinion in which it concluded that summary judgment should be entered in favor of Grange and Owners because neither insurer had a contractual duty to defend the plaintiffs in the underlying actions. Id. at *4-11. The district court further held that Scottsdale "complied with its duty to defend OVC and Egnew by appointing counsel to represent them in the LEEP and Blanken actions," but "breached its duty to defend Moncrief in the LEEP and Blanken actions." Id. at *19.

Subsequently, the district court entered agreed orders that dismissed all claims by the plaintiffs against Owners, all counterclaims by Owners against the plaintiffs, all claims by Moncrief against Scottsdale, and Scottsdale's counterclaim against Moncrief. Outdoor Venture Corp. v. Phila. Indem. Ins. Co., No. 6:16-cv-182-KKC, 2020 WL 891213, at *1 (E.D. Ky. Feb. 24, 2020). Finally, the district court granted summary judgment to Grange and Scottsdale on the plaintiffs' bad-faith claims and dismissed any counterclaims by the insurers as moot. Id. at *2. Thus, the only issues now remaining before us on appeal involve the plaintiffs' claims that Grange and Scottsdale are liable for reimbursement of the expenses incurred by the plaintiffs in obtaining independent counsel to defend themselves in the underlying lawsuits.

DISCUSSION

Standard of Review

We review de novo a district court's grant of summary judgment. See Dodd v. Donahoe, 715 F.3d 151, 155 (6th Cir. 2013). Summary judgment is appropriate only "if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed. R. Civ. P. 56(a). A genuine dispute of material fact exists when, assuming the truth of the non-moving party's evidence and construing all inferences from that evidence inthe light most favorable to the non-moving party, there is sufficient evidence for a trier of fact to find for that party. See Ciminillo v. Streicher, 434 F.3d 461, 464 (6th Cir. 2006).

Applicable Law

The district court exercised its diversity jurisdiction over this dispute pursuant to the provisions of 28 U.S.C. § 1332. Consequently, on appeal we are obligated to apply the substantive law of the forum state—here, the Commonwealth of Kentucky. See Erie R.R. Co. v. Tompkins, 304 U.S. 64, 78 (1938); Fox v. Amazon.com, Inc., 930 F.3d 415, 422 (6th Cir. 2019) (citation omitted).

At issue in this appeal are the terms of insurance policies issued by Grange and Scottsdale in favor of OVC and its officers and directors, specifically those terms setting forth the requirements for the insurance companies to defend the plaintiffs against the allegations made by LEEP and Blanken. The Kentucky Supreme Court has held consistently that the construction of insurance contracts generally is considered a matter of law to be...