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Julio & Sons Co. v. Travelers Casualty and Surety Co. of America

December 22, 2008

JULIO & SONS COMPANY, PLAINTIFF,
v.
TRAVELERS CASUALTY AND SURETY COMPANY OF AMERICA, DEFENDANT.



MEMORANDUM OPINION AND ORDER

Plaintiff Julio & Sons Company ("Julio & Sons" or "Julio") brings this action against defendant Travelers Casualty and Surety Company of America ("Travelers") for payment of claims made under an insurance agreement (the "Policy").*fn1

Plaintiff brought the motion presently before the Court as one for a preliminary injunction, but following oral argument the parties stipulated that the motion may be treated as one for partial summary judgment. The sole issue before the Court is whether the allegations in the original complaint of the Texas litigation Retail Restaurant Growth Capital, L.P. v. MapleWood Partners, L.P. trigger Julio's right to advancement of defense costs under the Policy for the defense of both itself and director and majority shareholder Robert V. Glaser ("Glaser"). For the reasons that follow, the Court finds that they do and grants plaintiff's motion.

BACKGROUND

The facts presented here are either undisputed or viewed in a light most favorable to the defendant. On February 15, 2007, Retail Restaurant Growth Capital, LP ("RRGC") filed suit against Julio & Sons and Glaser, among others. (Pl. Reply Br. at 2; Def. Resp. to Pl.'s Supp. Reply at 7.) The original complaint in that action (the "Underlying Complaint") describes Julio & Sons as doing business as "Uncle Julio's" and identifies Glaser as "an individual doing business in Dallas County, Texas, and the Majority Shareholder of Uncle Julio's." (Underlying Complaint ¶¶ 6-7.)*fn2 It describes RRGC as a "Dallas-based small business investment company" that "focuses on providing capital and strategic counseling for businesses operating in the retail and restaurant industry." (Id. ¶ 10.) RRGC is a creditor of Julio & Sons, having entered into a Note Purchase Agreement providing Julio & Sons with a $3 million loan. (Id. ¶ 13.) Pursuant to an accompanying Warrant Agreement, RRGC received warrants to purchase stock of Julio & Sons in return for providing the loan. (Id.) The Note Purchase Agreement and the Warrant Agreement were amended several times following the original transaction in 2001. (Id. ¶ 14-15.)

The Underlying Complaint alleges four causes of action against Julio and Glaser: (1) breach of contract; (2) breach of fiduciary duty; (3) fraud; and (4) negligent misrepresentation. (Id. ¶ 23-47.) These claims arise from allegations that Julio & Sons bought a company called Tia's Restaurant, Inc. ("Tia's"), guaranteed approximately $17 million in Tia's leases, and entered into transactions with affiliated entities in order to advance Tia's additional funds. (Id. ¶¶ 17-18.) Glaser was alleged to have caused Julio & Sons to take these actions. (Id.) Tia's subsequently filed for bankruptcy, causing "a diminution in the value of RRGC's warrants." (Id. ¶ 19.) The Underlying Complaint alleges that these actions were taken without RRGC's knowledge and consent and were in violation of the Note Purchase and Warrant Agreements as well as Julio and Glaser's fiduciary duties. (Id. ¶¶ 17-20.) These actions allegedly constituted fraud and negligent misrepresentation because, when Glaser and Julio & Sons amended the Note Purchase and Warrant Agreements in 2005, they "had a duty to disclose that they had entered [the transactions] and that they had entered into and were planning to enter into affiliated entity transactions" and failed to so disclose. (Id. ¶ 21.)

While there is no evidence in the record that Julio & Sons requested that Travelers advance the costs of defending both Glaser and itself, Travelers did receive a copy of the Underlying Complaint shortly after its filing. (See Letter of March 7, 2007, Conway Decl. Ex. C.) After requesting additional information from Julio & Sons without success, Travelers denied coverage by letter dated October 5, 2007. (Conway Decl. Ex. D at 1.) ("Based on our review of the materials provided to us, and for the reasons set forth below, Travelers must disclaim coverage for this matter . . . .") Travelers indicated that because "Mr. Glaser did not meet the definition of Insured Person under the Policy", Julio & Sons appeared to be "the only Insured named in this litigation." (Id. at 3.) However, it denied coverage to Julio & Sons under one of the Policy's exclusions because "it appears that all obligations to [RRGC] arise from the Insured Organization's obligations to that entity under a contract." (Id. at 4.) Travelers referenced the following listed exclusion:

III. EXCLUSIONS

A. This Coverage Part shall not apply to, and the Company shall have no duty to defend or to pay, advance or reimburse Defense Expenses for, any Claim: . . . [11(e)] for or arising out of or in consequence of any actual or alleged liability of the Insured Organization under any express contract or agreement; for the purposes of this exclusion, an "express contract or agreement" is an actual agreement among the contracting parties, the terms of which are openly stated in distinct or explicit language, either orally or in writing, at the time of its making . . . . (Policy at 24, 27 (emphasis in original).)

Julio & Sons subsequently commenced the current action and moved for a preliminary injunction ordering Travelers to advance the costs of defending itself and Glaser against the Underlying Complaint. Following oral argument, the parties submitted a "Stipulation and Proposed Order" memorializing their agreement: (1) that the motion be treated as a motion for partial summary judgment on whether Julio & Sons and Glaser were due reimbursement of defense costs under the Policy; (2) that Julio & Sons had produced documentation that Glaser was elected as a director of Julio & Sons at a Special Meeting of Shareholders on February 15, 2007; and (3) that in the event that judgment is rendered in favor of Julio & Sons, Traveler's rights under the Policy would not be otherwise limited by the decision.

DISCUSSION

I. Standards of Review

A. Summary Judgment

Under Federal Rule of Civil Procedure 56(c), summary judgment may be granted "if the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." Fed. R. Civ. P. 56(c). "The plain language of Rule 56(c) mandates the entry of summary judgment . . . against a party who fails to make a showing sufficient to establish the existence of an element essential to that party's case, and on which that party will bear the burden of proof at trial." Celotex Corp. v. Catrett, 477 U.S. 317, 321 (1986); see also Distasio v. Perkin Elmer Corp., 157 F.3d 55, 61 (2d Cir. 1998); Conway v. Microsoft Corp., 414 F. Supp. 2d 450, 458 (S.D.N.Y. 2006). A party moving for summary judgment may discharge its burden "by 'showing'-that is, pointing out to the district court-that there is an absence of evidence to support the nonmoving party's case." Celotex, 477 U.S. at 325.

A fact is considered "material" for purposes of Rule 56 if it "might affect the outcome of the suit under the governing law." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). Whether a material issue is "genuine" depends on whether the evidence is of a type that would permit a reasonable jury to return a verdict in favor of that party. Mitchell v. Shane, 350 F.3d 39, 47 (2d Cir. 2003). In making its showing that a genuine issue of material fact exists, the nonmoving party may not rely on "the mere existence of a scintilla of evidence" to support its position, but must instead proffer "evidence on which the jury could reasonably find for the [plaintiff]." Dawson v. County of Westchester, 373 F.3d 265, 272 (2d Cir. 2004) (citing Anderson, 477 U.S. at 252).

B. Principles of Interpretation

"Under Texas law insurance policies are subject to the general rules of interpretation and construction applicable to contracts." Nautilus Ins. Co. v. ABN-AMRO Mortgage Group, Inc., No. H05 Civ. 2750, 2006 WL 3545034, at *2 (S.D. Tex. Dec. 8, 2006) (citing Progressive County Mut. Ins. Co. v. Sink, 107 S.W.3d 547, 551 (Tex. 2003)).*fn3 "When a contract as worded can be given 'a definite or certain legal meaning,' then it is unambiguous as a matter of law and the court enforces it as written." Id. (quoting Nat'l Union Fire Ins. Co. v. CBI Indus., Inc., 907 S.W.2d 517, 520 (Tex. 1995)). If, however, a court determines that an insurance policy "is susceptible to more than one reasonable interpretation, the court must resolve the ambiguity in favor of the insured." ...


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