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ALFIN, INC. v. PACIFIC INS. CO.

April 13, 1990

ALFIN, INC., IRWIN ALFIN, SAM REICH, BETSY ALFIN, JOHN D. SAUNDERS AND BERNARD STERN, PLAINTIFFS,
v.
PACIFIC INSURANCE COMPANY, DEFENDANTS.



The opinion of the court was delivered by: Conboy, District Judge:

MEMORANDUM OPINION AND ORDER

This dispute centers around the interpretation of an exclusion in a directors' and officers' liability policy. Both the insured and the insurer have moved for summary judgment. The insured, a company and its directors and officers (referred to collectively as "Alfin"), seek, inter alia, a declaration that the exclusion in issue does not exclude coverage for certain lawsuits against the company and its officials.

BACKGROUND

The following facts are distilled primarily from the parties' statements pursuant to Civil Rule 3(g) of the United States District Courts for the Southern and Eastern Districts of New York ("Rule 3(g) Statement"). We observe that Alfin moved for summary judgment first, submitting a basically useless Rule 3(g) Statement in that it does not set out a "short and concise statement of the material facts as to which [it] contends there is no genuine issue of material fact to be tried." Civil Rule 3(g) of the United States District Courts for the Southern and Eastern Districts of New York. Instead of setting out the facts, Alfin's statement simply declares that certain documents exist and are appended to certain affidavits. We would like to make it clear that such a submission will not be countenanced in the future. Furthermore, we note that Alfin also did not submit, in accordance with the local rule, a statement controverting the Rule 3(g) Statement by defendant Pacific Insurance Co. ("Pacific") on its cross-motion for summary judgment. Accordingly, we have deemed "admitted" all of the material facts as set forth in Pacific's Rule 3(g) Statement.*fn1

In September of 1983, Alfin*fn2 made an initial public offering of its stock. In connection with this offering. Alfin obtained through the United States Fire Insurance Company a policy of insurance protecting it in the event of claims based on omissions or misrepresentations in the offering materials. In late 1983, Alfin desired to purchase a directors' and officers' liability insurance policy ("D & O policy"). Alfin obtained proposals for such policies from three insurers — National Union Fire Insurance Company, Federal Insurance Company and the defendant Pacific. The proposals from National and Federal called for higher premiums than the proposal from Pacific. National offered a $3 million policy at a 1-year pre-paid premium of 9.100. Federal quoted a $3 million 1-year policy at a premium of $11,250. Both of these proposals indicated the following exclusion from the coverage offered:

  Special Exclusion for any claims based upon or arising out of
  the public offering of stock to the general public through
  Ladenburg, Thalman & Co., Inc., as provided in the Preliminary
  Prospectus dated August 3, 1983.

By contrast, the proposal from Pacific quoted a $3 million policy at a 3-year prepaid premium of $7,108. Under the conditions of the policy, as listed in the proposal, the following condition is listed:

Blanket SEC Exclusion.

Alfin, after comparing the proposals, ultimately procured a D & O policy through Pacific. Pacific issued to Alfin Policy No. PI 020068 A & B (the "Policy"). Endorsement No. 6 to the policy as issued reads as follows:

SECURITIES EXCHANGE COMMISSION EXCLUSION

  IN CONSIDERATION OF THE PREMIUM CHARGES, IT IS UNDERSTOOD AND
  AGREED THAT THE COMPANY SHALL NOT BE LIABLE TO MAKE ANY PAYMENT
  IN CONNECTION WITH ANY CLAIM OR SUIT, INCLUDING BUT NOT LIMITED
  TO SHAREHOLDERS' DERIVATIVE AND/OR REPRESENTATIVE CLASS ACTION
  SUITS, BASED UPON OR ARISING OUT OF ANY OFFERING OR SALE OF
  SECURITIES AND EXCHANGE COMMISSION PURSUANT TO THE FEDERAL
  SECURITIES ACT OF 1933 AND OR THE FEDERAL SECURITIES OF 1934
  AND AMENDMENTS THERETO.

It is the interpretation of this exclusion that is at the crux of the lawsuit.

Currently pending against the plaintiffs in this District are three putative class actions, Hemming v. Alfin Fragrances, Inc., et al., (S.D.N.Y. No. 86 Civ. 2563 (LBS)); Ryback v. Alfin Fragrances, et al., (S.D.N.Y. No. 87 Civ. 4353 (LBS)); Antwiel v. Alfin Fragrances, et al., (S.D.N.Y. No. 88 Civ. 0525 (LBS)). Each of these actions alleges violations of Section 10(b) of the Securities Exchange Act of 1934, and Rule 10b-5 promulgated thereunder. The named plaintiffs in each of the suits purchased shares of Alfin not from the initial public offering but on the open market of the American Stock Exchange. Plaintiffs retained counsel to defend these actions, then requested that Pacific cover the attorneys' fees pursuant to the D & O Policy. Pacific advised Alfin of the former's belief that these lawsuits "[fall] squarely within the ambit of Exclusion 6" and, therefore, that "any liability that either Alfin or its officers or directors may incur as a result of the Hemming, Ryback, and Antwiel claims falls outside the scope of coverage afforded by" the Policy. Affidavit of Kenneth I. Schacter ("Schacter Moving Aff."), sworn to on November 3, 1989, Exhibit C. In light of this disclaimer of coverage, Alfin filed this declaratory relief action. In the meantime, Alfin, which is permitted pursuant to Section 6.06 of its bylaws to indemnify its officers and directors to the fullest extent permitted by law*fn3 for claims arising out of civil or criminal actions or proceedings in connection with their service as an officer or director of Alfin, has incurred significant attorneys' fees and expenses in the defense of these three actions.

The parties' positions can be summarized as follows. Pacific believes that Endorsement No. 6 excludes coverage for all claims based upon any violation of either the 1933 or 1934 Acts, which interpretation is fundamentally based on an elided version of the exclusion (omitting the phrase "registered with the Securities and Exchange Commission"). Alfin claims that this exclusion is operative only against claims based on violations arising out of the public offering of the securities in 1983, and does not operate to exclude coverage of claims arising out of purchases of stock in the open market. This interpretation is founded primarily on the elided phrase as well as the term "offering or sale of securities" immediately preceding that phrase, which Alfin claims tracks the language of the 1933 Act, the act relating to public offerings of securities. Alfin points out that its initial public offerings had to be registered under the 1934 Act as well. Finally, Alfin directs attention to the fact that the language of the exclusion was substantially modified in 1986, to unambiguously exclude claims of fraud asserted by a purchaser of the stock on the open market. See Alfin's Memorandum of Law in Support of its Motion for Summary Judgment, Exhibit 2. To Alfin, "[t]he fact that Pacific thought it necessary to make dramatic changes in policy language . . . shows that the first policy, if intended [by the insurer] to cover the same ...


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