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STEADFAST INSURANCE COMPANY v. STROOCK & STROOCK & LAVAN

May 27, 2003

STEADFAST INSURANCE COMPANY, PLAINTIFF, AGAINST STROOCK & STROOCK & LAVAN LLP, DEFENDANT.


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

I. INTRODUCTION

Steadfast Insurance Company ("Steadfast") seeks a declaration that it is not obligated to defend or indemnify its insured, Stroock & Stroock & Lavan LLP ("Stroock"), for its losses in connection with a now settled California bankruptcy adversary proceeding ("Bankruptcy Proceeding").

Steadfast moves for judgment on the pleadings pursuant to Federal Rule of Civil Procedure ("Rule") 12(c). Stroock cross-moves for partial summary judgment pursuant to Rule 56 declaring that Steadfast is obligated to defend and indemnify it. For the reasons stated below, Steadfast's motion is granted and Stroock's cross-motion is denied.*fn1

II. BACKGROUND FACTS*fn2

A. Stroock's Insurance Policy

Stroock purchased a professional liability insurance policy from Steadfast for the period September 1, 1997 to September 1, 2000.*fn3 See Lawyers Professional Liability Insurance Policy, No. EOC 8297283-01 ("Policy"), Ex. A to Steadfast Complaint ("Steadfast Compl.") This "claims made" policy *fn4 provided up to $25,000,000 in coverage for "all Loss and Defense Expenses in excess of the [$1,000,000] Retention . . . resultinq from Claims first made against any insured durinq the Policy Period . . . for Wrongful Acts occurring before or during the Policy Period." Policy § I (A) The Policy defined "Wrongful Act" as "any actual or alleged act, error, omission, or breach of duty committed by an Insured or by any person for whose actions the Firm is legally responsible . . . but only in connection with the performance of, or failure to perform, Professional Services." Id. § II (K). "Professional Services" were defined as services provided to actual or prospective clients of the Firm by an Insured: (1) as an attorney . . . but only if such services are performed (or to be performed) in the name or on behalf of the Firm . . ." Id. § II (J).

On the other hand, the Policy barred any claims "based on, arising out of or resulting from in fact: (1) any malicious, knowingly wrongful, or criminal act, error, omission, or breach of duty . . .; or (3) the gaining by any Insured . . . of any profit, gain or advantage to which such Insured or person was not legally entitled." Id. §§ III (A)(1), (3). A severability provision in the Policy limited the application of the exclusions by stating "no fact pertaining to or knowledge possessed by any Insured shall be imputed to any other Insured to determine if coverage applies." Id. § IV(I)(1). In addition, the Policy required Stroock to obtain Steadfast's written consent before admitting liability or settling any claims. See id. § 1(B)(3).

B. The Underlying Dispute

In November 1999, the Official Committee of Unsecured Creditors of the Estate of Helionetics, Inc. ("the Creditors") commenced the Bankruptcy Proceeding against hundreds of defendants, including several law firms, financial advisors, consultants, shareholders, officers and directors, seeking to recover assets of Helionetics they claimed were fraudulently transferred. See Second Amended Complaint in The Official Committee of Unsecured Creditors of the Estate of Helionetics, Inc. v. Katz, et al., Adv. Pr. No. 98-1916 ("Creditors Compl."), Ex. B to Steadfast Compl. The Creditors Complaint alleged that, in January 1994, Helionetics formed a subsidiary, KSWI, Inc., to acquire the assets of Kerby-Saunders-Warkol, Inc., a large mechanical contractor. Creditors Compl. ¶ 30. Helionetics later sought to spin off KSWI and another subsidiary, AIM Energy, through an initial public offering ("IPO"). Id. ¶ 38. Stroock and another law firm, Strasbourger Pearson, Tulein & Wolff ("Strasbourger"),*fn5 were responsible "for compiling information and preparing Registration Statements for [Helionetics] which were filed with the SEC." Id. In 1995, Helionetics abandoned the IPO because of financial difficulties. Id. ¶¶ 39-40. At the time, "KSWI was the only subsidiary of [Helionetics] operating at a profit and accounted for about 90% of [Helionetics'] revenues." Id. ¶ 41.

The Creditors Complaint further alleged that Helionetics' directors, officers, majority shareholders and consultants devised a scheme to remove KSWI from Helionetics' assets by distributing the KSWI common stock to Helionetics' shareholders while Helionetics was insolvent (the "KSWI Distribution"). Id. ¶ 42. As a result of the KSWI Distribution, Helionetics had no ability to pay its debts as they came due, causing "irreparable damage" to Helionetics' creditors. Id. ¶ 59.

The Creditors claimed that Stroock conspired with and aided and abetted Helionetics' directors to breach their fiduciary duties to the Creditors by preparing [on behalf of KSWI] the documents necessary to effect the KSWI Distribution.*fn6 Id. ¶¶ 49-51. The Creditors also claimed that Stroock unfairly benefitted by fraudulently transferring so, ooo shares of KSWI stock to itself. Id. ¶¶ 20, 62, 66(a). Stroock was named in five of the nine causes of action in the Creditors Complaint:

• the third cause of action alleged that Stroock participated in a fraudulent transfer in violation of sections 544, 548, and 550 of Title 11 of the United States Code and various sections of the California Civil Code, id. ¶¶ 82-85;
• the fifth cause of action alleged that Stroock benefitted from the fraudulent transfers at the expense of Helionetics' creditors, id. ¶¶ 91-95;
• the seventh cause of action alleged that Stroock aided and abetted the directors to breach their fiduciary duties by drafting documents to effect the stock distribution, id. ¶¶ 101-08;
• the eighth cause of action alleged that Stroock conspired to encourage or assist the directors to breach their fiduciary duties, id. ¶¶ 109-12;
• the ninth cause of action requests a declaration requiring Stroock to return the KSWI assets to creditors, id. ¶¶ 113-15.
There was no claim in the Creditors Complaint against Stroock for legal malpractice or negligence.

The Creditors and Stroock settled their dispute in the Fall of 2002.*fn7 See Memorandum of Law in Support of Motion for Judgment on the Pleadings by Plaintiff Steadfast Insurance Company ("Pl. Mem.") at 7. Stroock now demands coverage under the Policy for all of the defense costs and settlement amounts it paid to ...


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