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Pereira v. Nat'l Union Fire Insurance Co. of Pittsburgh

July 12, 2006


The opinion of the court was delivered by: Laura Taylor Swain, United States District Judge


Plaintiff John S. Pereira (the "Trustee"), as Trustee of Trace International Holdings, Inc. ("Trace"), brings this action to collect insurance proceeds allegedly due to him by virtue of a judgment entered against Defendants' insureds by this Court in Pereira v. Cogan, 00 Civ. 619 (RWS) (the "Underlying Action"). Defendant insurance companies National Union Fire Insurance Co. of Pittsburgh ("NUFIC"), Gulf Insurance Co. ("Gulf'), Executive Risk Indemnity, Inc. ("Executive"), (collectively "Defendants") move, on a number of grounds, to dismiss the Complaint pursuant to Federal Rule of Civil Procedure 12(b)(6). Andrea Farace ("Farace") and Phillip Smith ("Smith") move to intervene in the action and for a preliminary injunction. The Court has jurisdiction of the instant action pursuant to 28 U.S.C. 9 1334(b).

The Court has considered carefully the parties' oral and written arguments. For the following reasons, the Court grants in part and denies in part Gulfs and Executive's motion to dismiss, denies, in its entirety, NUFIC's motion to dismiss, and grants Farace's and Smith's motion for intervention but denies their application for a preliminary injunction.


The following facts alleged in the Complaint are taken as true for the purposes of the instant motions to dismiss the complaint for failure to state a claim. On or about July 21, 1999, Trace filed a petition for reorganization under Chapter 11 of the Bankruptcy Code in the United states Bankruptcy Court for the Southern District of New York. (Compl. § 10.) As part of the bankruptcy case, an Official Committee of Unsecured Creditors (the "Creditors Committee") was formed. On or about October 18, 1999, the Creditors Committee, with permission of the bankruptcy court, commenced the Underlying Action as an adversary proceeding on behalf of the Trace estate against current and former officers and directors of Trace. (Id. §§ 11-12.) In the adversary proceeding, the Creditors Committee alleged that the officers and directors had violated their fiduciary duties to Trace and sought monetary relief for those violations. (Id. § 13.)

Trace had purchased and maintained directors and officers ("D & 0") liability insurance from the Defendants and Reliance National Company ("Reliance").*fn1 (Id. § 14.) The Defendants and Reliance provided D & 0 coverage to indemnify the directors and officers from liabilities and reasonable litigation expenses incurred in connection with the adversary proceeding in the following manner: NUFIC provided the primary layer up to $10 million; Reliance provided the first excess layer above $10 million and up to $20 million; Gulf provided the second excess layer above $20 million and up to $30 million; Executive provided the third excess layer above $30 million and up to $40 million; Reliance provided a fourth and final excess layer above $40 million and up to $50 million. (Id. §§ 14-19.)

On the motion of certain Defendants, this Court (Sweet, J.) withdrew the reference of the Underlying Action from the bankruptcy court. (Id. §§ 20-21.) On or about January 24,2000, the bankruptcy case was converted from a Chapter 11 reorganization to a liquidation under Chapter 7 of the Bankruptcy Code, and the Trustee was appointed as trustee for Trace's estate. (Id. § 22.) The Trustee, after being substituted for the Creditors Committee as the plaintiff in the Underlying Action, amended the complaint and prosecuted the litigation through trial and judgment. (Id. § 23.) In connection with the Underlying Action, NUFIC advanced some or all of the legal fees for the officers and directors. (Id. § 24.) The Trustee is unaware of these amounts and whether they were reasonable or appropriate under the NUFIC D & 0 insurance policy. (Id.)

On June 25,2003, after trial, this Court (Sweet, J.) entered judgment in the Underlying Action ("the Judgment") against the following directors and officers in the following amounts:

Marshall S. Cogan ("Cogan")$44,374,824.16 Andrea Farace ("Farace")$27,308,841.12 Frederick Marcus ("Marcus")$37,360,290.70 Robert H. Nelson ("Nelson")$38,321,643.30 Philip Smith ("Smith")$21,392,974.45 Karl Winters ("Winters")$21,350,774.60*fn2

(Id. § 25.) The Judgment is exclusive of pre-judgment interest from June 15,2003, through June 25,2003, and post-judgment interest. (Id. 7§26.) On July 8, 2003, the Trustee served notice of the Judgment on Defendants and Reliance, pursuant to Section 3420(a)(2) of the New York Insurance Law. (Id. § 27.) The Judgment exceeded the limits of each Defendant's respective insurance coverage.*fn3 (Id. § 30.) At the time the Complaint was written, Defendants had not paid any portion of the Judgment. (Id. § 28.)

The Trustee alleges that he is entitled to recover the full extent of coverage under the insurance policies. (Id. § 31.) As part of his claim for relief, the Trustee also seeks proof by NLFIC that its payment of defense costs to the Trace officers and directors in connection with the Underlying Action was appropriate and reasonable. (Id. § 24.)


In evaluating a motion to dismiss a complaint pursuant to Rule 12(b)(6), the Court must take as true the facts alleged in the plaintiffs complaint and draw all reasonable inferences in his favor. W. Mohegan Tribe & Nation v. Orange County, 395 F.3d 18, 20 (2d Cir. 2004); Hernandez v. Coughlin, 18 F.3d 133, 136 (2d Cir. 1994). The Court must not dismiss a complaint "unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief." Conley v. Gibson, 355 U.S. 41,45-46 (1 957).

On a motion to dismiss, the court may consider "any written instrument attached to the complaint as an exhibit or incorporated in the complaint by reference, as well as documents upon which the complaint relies and which are integral to the complaint." Subaru Distribs. Corn. v. Subaru of Am., Inc., 425 F.3d 1 19, 122 (2d Cir. 2005). This includes documents "that the plaintiff[] either possessed or knew about and upon which [it] relied in bringing the suit." Rothman v. Gregor, 220 F.3d 8 1, 88-89 (2d Cir. 2000). In his Complaint, the Trustee refers to the D & 0 liability insurance purchased from Defendants for the Trace officers and directors. (Compl. § 14.) The Court finds that the relevant insurance policies of Defendants are integral to the Complaint and that Plaintiff knew about these policies and relied on them in bringing the instant action. The Court will therefore consider these policies in making its determination on the motions to dismiss. (See Lisa B. Lance Aff. in Supp. of Executive's Mot. to Dismiss, "Lance Aff.," Exs. A, "NUFIC Policy," C, "Gulf Policy," D, "Executive Policy.") The Court will also take judicial notice of the pleadings, orders, and judgments in prior litigation related to this instant case. See Patrowicz v. Transamerica Homefirst. Inc., 359 F. Supp. 2d 140, 144 (2d Cir. 2005).

Motions to Dismiss

Defendants Gulf and Executive make their motion to dismiss on five grounds, each of which they contend applies equally to both insurers. Gulfs brief addresses two of the grounds and Executive's brief addresses the other three. Defendant NUFIC makes its own motion on independent grounds. The Court will first address Gulfs and Executive's motion to dismiss and then address NLJFIC's motion to dismiss.

Gulf's/Executive 's Motion to Disiniss

(1) Nature of Judgment Against Trace Officers and Directors

Gulf argues that the complaint should be dismissed, contending that the damages awarded against the Trace officers and directors in the prior litigation are not recoverable as a matter of law under its insurance policy because the underlying claims and judgment were equitable in nature. Gulf cites the New York law*fn4 principle that, as a matter of public policy, "[o]ne may not insure against . . . the orders of a court sitting in equity." (& Gulfs Reply in support of Mot. to Dismiss at 4 (citing, =, Debruyne v. Clay, No. 94 Civ. 4704 (JSM), 1999 WL 782481 at *14 (S.D.N.Y. Oct. 1, 1999)). However, an examination of the relevant authorities (including those cited by Gulf) reveals that the cited principle does not preclude the claims asserted in this action. The "equitable" judgments as to which insurance coverage is precluded are ones involving the restitution of ill-gotten gains or the return of property wrongfully in the possession of the defendant. See Reliance Grouv Holdings, Inc. v. Nat. Union Fire Ins. Co., 594 N.Y.S.2d 20 (N.Y. App. Div. 1993). Reliance, a decision upon which the Debruyne court relied, held that an insurance company could not insure "against the risk of being ordered to return money or property that has been wrongfully acquired." Reliance Group Holdings Inc., 594 N.Y.S at 24. In that case, the corporation which had bought the D & 0 insurance was also in ...

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