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McKenna Long & Aldridge, Llp v. Ironshore Specialty Insurance Co.

United States District Court, S.D. New York

January 12, 2015

McKENNA LONG & ALDRIDGE, LLP, et al., Plaintiffs,
v.
IRONSHORE SPECIALTY INSURANCE COMPANY, Defendant. VINCENT W. SEDMAK, Plaintiff,
v.
IRONSHORE SPECIALTY INSURANCE COMPANY, Defendant.

OPINION & ORDER

KATHERINE B. FORREST, District Judge.

Plaintiffs McKenna Long & Aldridge, LLP and Vincent W. Sedmak filed motions for summary judgment seeking to enjoin a pending arbitration brought against them by Ironshore Specialty Insurance Company before the International Centre for Dispute Resolution. For the reasons that follow, plaintiffs' motions are DENIED, and summary judgment is GRANTED in favor of defendant.

I. BACKGROUND

A. Factual Background[1]

Plaintiffs in these declaratory-judgment actions are the law firm McKenna Long & Aldridge, LLP, and its partners Song Jung and Gaspara Bono (collectively, "McKenna"), and Vincent W. Sedmak, the chairman and chief executive officer of Eidos, LLC ("Eidos"). (Declaration of Kevin K. Windels, 14-cv-6633 ECF No. 28 & 14-cv-6675 ECF No. 23 ("Windels Decl.") ex. 1 ("SOC") ex. I.) Defendant is Ironshore Specialty Insurance Company ("Ironshore").

In 2010, Eidos took out a loan of approximately $20 million (the "Loan") from Stairway Capital Management II LP ("Stairway") in order to fund a patent enforcement litigation program in which McKenna served as Eidos' counsel. (See SOC ¶¶ 1, 11.) As a condition for the loan, Stairway required Eidos to obtain a contingent loss reimbursement policy. (SOC ex. K at 31 (§ 15.2(b)).) Sedmak requested such a policy from Ironshore on behalf of Eidos, [2] and in the process he and Stayko D. Staykov, Eidos' President and Chief Operating Officer, warranted and represented that Eidos' due diligence documents were valid, complete, and current through documents signed "Eidos, LLC" and "Eidos Partners, LLC, " "by" Sedmak and Staykov. (SDSOF ¶ 4; SOC ¶ 50 & ex. I.) McKenna authored and signed several documents in connection with Eidos' application for the Policy, and these documents indicated that McKenna would serve as counsel in the patent enforcement litigation. (Windels Decl. ¶ 15; 14-cv-6633 ECF No. 27 ("Opp. Br.") at 4.)

Ironshore subsequently issued the requested policy[3] (the "Policy"), which designated Eidos and its subsidiaries and affiliated companies the named insured, and Stairway the loss payee. (SOC ex. A; see also SPSOF ¶¶ 4-5.) Neither McKenna nor Sedmak signed the Policy. (MDSOF ¶ 4; SDSOF ¶ 4.) The Policy provided coverage to Eidos in the event Eidos failed to obtain recoveries from the patent enforcement litigation program required sufficient to repay the principal amount of the Loan by November 2, 2013. (SOC ¶ 1, ex. A.) The Policy contained an arbitration clause (MDSOF ¶ 3), which reads:

In the event any controversy, claim or dispute arises in connection with this Policy, the Insurer and the Insured shall participate in a non-binding mediation in which the Insurer and the Insured shall attempt in good faith to resolve such controversy, claim or dispute. In the event any such controversy, claim or dispute is not resolved in mediation the matter shall be submitted to final and binding arbitration in accordance with the Commercial Arbitration Rules of the American Arbitration Association then in effect. Each party shall appoint one arbitrator and the two arbitrators so appointed shall select a third independent arbitrator. Arbitration shall take place in New York, New York, unless otherwise agreed.

(SOC ex. A § V.D.)

McKenna was paid $11, 084, 893 in legal fees in connection with the patent enforcement litigation program. (Windels Decl. ex. 11.) Sedmak, as Eidos, used a portion of the proceeds from the Loan to pay Sedmak a salary of $3, 763, 656.[4] (SDSOF ¶ 5; Windels Decl. ¶ 23, ex. 9). Ironshore contends that Sedmak was without authority to do so, and that this constituted a misuse of loan funds. (See Opp. Br. at 14.) In addition, $2 million in proceeds from the Loan was transferred to Warren & Lewis Investment Corporation, a corporation in which Sedmak is the owner and general partner. (Windels Decl. ¶ 23, ex. 3; SOC ex. D at 14.[5])

Because principal from the Loan was outstanding on November 2, 2013, Stairway and Eidos demanded that Ironshore pay pursuant to the Policy, and Ironshore refused. (14-cv-6633 ECF No. 20 ("McKenna Opening Br.") at 3; 14-cv-6675 ECF No. 17 ("Sedmak Opening Br.") at 3.)

B. Procedural Background

On October 8, 2013, Ironshore initiated the now-pending arbitration against Eidos before the International Centre for Dispute Resolution ("ICDR").[fn] (MDSOF ¶ 1; SDSOF ¶ 1.) In the arbitration, Ironshore seeks, inter alia, a judgment that Ironshore owes nothing under the Policy, or alternatively a finding that its liability limit should be reduced by $5 million, actual damages in excess of $8.7 million, and punitive damages. (SOC ¶¶ 119, 124, 131, 153, 159, 166, 174, 179, 184, 189, 203, 210, 216).

On November 26, 2013, Ironshore filed suit in this Court to compel Eidos to arbitrate. (13-cv-8434 No. 1.) Ironshore moved to compel arbitration on December 2, 2013, and this Court granted the motion on January 17, 2014.[6] (13-cv-8434 ECF Nos. 22, 39.) Eidos appealed, and the Second Circuit affirmed on December 23, 2014. (13-cv-8434 ECF Nos. 47, 68, 78.)

Earlier, on January 2, 2014, Stairway sued Ironshore in this Court, also seeking to enjoin the arbitration in favor of litigation. (No. 14-cv-00025 ECF No. 1.) Owing to a lack of diversity, Stairway voluntarily dismissed its federal case, (14-cv-00025 No. 15), and re-filed in New York state court, where Justice Ramos refused to enjoin the arbitration as to Stairway, Stairway Capital Mgmt. II L.P. v. Ironshore Specialty Ins. Co., No. 650363/2014 (N.Y. Sup. Ct. 2014) (Nos. 1, 112).

In June 2014, Ironshore added plaintiffs as respondents in the ICDR arbitration. (MPSOF ¶ 1; SPSOF ¶ 1.) Since then, the parties and the ICDR have engaged in extensive back-and-forth regarding whether their dispute is arbitrable, whether the issue of arbitrability should be decided by the ICDR, and whether they could in any event agree to arbitrate all of their disputes. (See MPSOF ¶ 2; SPSOF ¶ 2; Windels Decl. ¶ 32, ex. 7.) The ICDR has refused to declare that plaintiffs need not participate in the arbitration (MPSOF ¶ 2; SPSOF ¶ 2), and the parties have been unable to come to an agreement.

McKenna filed a complaint for declaratory judgment on August 19, 2014, and Sedmak did so on August 20, 2014. (No. 14-cv-6633 ECF No. 1; 14-cv-6675 ECF No. 1.) Ironshore filed answered on September 30, 2014. (14-cv-6633 ECF No. 11; 14cv-6675 ECF No. 11.) On October 2, 2014, the Court ordered the McKenna and Sedmak actions to be coordinated for pre-trial purposes. (14-cv-6633 ECF No. 12; 14-cv-6675 ECF No. 12.) The Court held an initial pre-trial conference for both actions on November 14, 2014.

McKenna and Sedmak moved for summary judgment on November 25, 2014. (14-cv-6633 ECF No. 19; 14-cv-6675 ECF No. 16.) McKenna's and Sedmak's motions for summary judgment both seek (1) a declaration that Ironshore's claims against them under the Policy are not arbitrable and that they cannot be compelled to arbitrate; and (2) a declaration that any award Ironshore might obtain from the ICDR is unenforceable against them.[7] (McKenna Opening Br. at 15; Sedmak Opening Br. at 15.)

On December 10, 2014, McKenna and Sedmak filed a joint letter informing the Court that the ICDR intended to appoint an arbitrator on their behalf and to proceed with arbitration on December 16, 2014, and requesting that the Court enter a temporary restraining order ("TRO") that would effectively suspend the arbitration. (14-cv-6633 ECF No. 23.) The Court held a hearing on the TRO request on December 15, 2014, at which the parties agreed to stand down from the pending ICDR arbitration until December 31, 2014, by which time the Court stated it would have resolved the summary judgment motions. (14-cv-6633 ECF No. 30; 14-cv-6675 ECF No. 24.) The motions for summary judgment became fully briefed on December 23, 2014. (14-cv-6633 ECF No. 35; Sedmak Reply Br.)

On December 31, 2014, the Court issued an order denying both McKenna's and Sedmak's motions for summary judgment in their entirety, and stating that the Court would provide a rationale for its decision in a separate Opinion & Order. (14cv-6633 ECF No. 36; 14-cv-6675 ECF No. 27.) The order also stated in light of the fact that Ironshore did not cross-move for summary judgment, the Court was providing notice of its intent to dismiss these actions in their entirety at the time it issued the Opinion & Order, and that any party in disagreement with that proposed course of action should show cause why in a written submission due not later than January 7, 2015. (14-cv-6633 ECF No. 36; 14-cv-6675 ECF No. 27.) Neither party made a further filing.

II. SUMMARY JUDGMENT STANDARD

The Federal Rules of Civil Procedure apply in declaratory judgment actions. Fed.R.Civ.P. 57. Under Rule 56, summary judgment may not be granted unless the movant shows, based on admissible evidence in the record placed before the court, "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). The moving party bears the burden of demonstrating "the absence of a genuine issue of material fact." Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). When the moving party does not bear the ultimate burden on a particular claim or issue, it need only make a showing that the non-moving party lacks evidence from which a reasonable jury could find in the non-moving party's favor at trial. Id. at 322-23. In making a determination on summary judgment, the court must "construe all evidence in the light most favorable to the nonmoving party, drawing all inferences and resolving all ambiguities in its favor." Dickerson v. Napolitano, 604 F.3d 732, 740 (2d Cir. 2010).

Once the moving party has asserted facts showing that the non-movant's claims cannot be sustained, the opposing party must set out specific facts showing a genuine issue of material fact for trial. Price v. Cushman & Wakefield, Inc., 808 F.Supp.2d 670, 685 (S.D.N.Y. 2011); see also Wright v. Goord, 554 F.3d 255, 266 (2d Cir. 2009). "[A] party may not rely on mere speculation or conjecture as to the true nature of the facts to overcome a motion for summary judgment, " as "[m]ere conclusory allegations or denials... cannot by themselves create a genuine issue of material fact where none would otherwise exist." Hicks v. Baines, 593 F.3d 159, 166 (2d Cir. 2010) (citations omitted); see also Price, 808 F.Supp.2d at 685 ("In seeking to show that there is a genuine issue of material fact for trial, the nonmoving party cannot rely on mere allegations, denials, conjectures or conclusory statements, but must present affirmative and specific evidence showing that there is a genuine issue for trial.").

Only disputes relating to material facts-that is, "facts that might affect the outcome of the suit under the governing law"-will properly preclude the entry of summary judgment. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986); see also Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986) (stating that the non-moving party "must do more than simply show that there is some metaphysical doubt as to the material facts"). The Court should not accept evidence presented by the nonmoving party that is so "blatantly contradicted by the record... that no reasonable jury could believe it." Scott v. Harris, 550 U.S. 372, 380 (2007). If the evidence favoring the non-moving party is "merely colorable... or is not significantly probative, summary judgment may be granted." Anderson, 477 U.S. at 586.

Under Rule 56(f)(1), the Court may, "[a]fter giving notice and a reasonable time to respond... grant summary judgment for ...


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