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XL Specialty Insurance Co. v. Lakian

United States District Court, S.D. New York

March 20, 2017

XL SPECIALTY INSURANCE COMPANY, Plaintiff,
v.
JOHN R. LAKIAN, DIANE W. LAMM, and KOBRE & KIM LLP, Defendants, and EISEMAN LEVINE LEHRHAUPT & KAKOYIANNIS, P.C., BRIEF CARMEN & KLEIMAN, LLP, MERRILL COMMUNICATIONS, LLC, KNOX, LLC d/b/a KNOX, LLC OF NEW YORK, DJW ADVISORS, LLC, and PANGEA CAPITAL MANAGEMENT, LLC, Intervening Defendants. KOBRE & KIM LLP, Counterclaim Plaintiff,
v.
XL SPECIALTY INSURANCE COMPANY, Counterclaim Defendant.

          MEMORANDUM OPINION & ORDER

          KIMBA M. WOOD, District Judge

         This is an interpleader action brought by Plaintiff XL Specialty Insurance Company ("XL") to resolve competing claims to the remaining $1, 372, 596.10 (the "Interpleaded Funds") of a $3 million financial services liability policy (the "Policy") purchased by non-party Capital L Group, LLC ("Capital L"), which provided insurance for Capital L's CEO, Defendant John R. Lakian, and its COO, Defendant Diane W. Lamm, with certain exceptions. XL interpleaded as defendants Lakian, Lamm, and Kobre & Kim LLP ("Kobre & Kim"). On January 15, 2015, the Honorable Analisa Torres granted motions to intervene by Eiseman Levine Lehrhaupt & Kakoyiannis, P.C. ("Eiseman"), Brief Carmen & Kleiman ("Brief Carmen"), and Merrill Communications LLC ("Merrill"), and denied motions to intervene from Knox, LLC d/b/a Knox, LLC of New York ("Knox") and DJW Advisors, LLC ("DJW"). ECF No. 68. On March 19, 2015, XL, Lakian, Lamm, Kobre & Kim, Eiseman, Brief Carmen, and Merrill filed a settlement agreement (the "Settlement Agreement"), ECF No. 87, which Judge Torres ordered on April 24, 2015, ECF No. 100. Following a decision by the Second Circuit Court of Appeals, Judge Torres vacated the order denying Knox and DJW's motion to intervene and the final judgment implementing the Settlement Agreement, and instead granted Knox and DJW's motion to intervene and a motion to intervene by Pangea Capital Management, LLC ("Pangea"). ECF No. 122. The case was transferred to the undersigned on November 11, 2016.

         Before the Court are motions for summary judgment[1] filed by (1) Kobre & Kim, Eiseman, Brief Carmen, and Merrill (the "K&K" motion), (2) Knox and DJW (the "Knox" motion), and (3) Pangea. ECF Nos. 138, 143, 145.[2] Knox and Pangea each claim that they are entitled to the Interpleaded Funds; K&K moves to dismiss Knox's, DJW's, and Pangea's claims to the Interpleaded Funds, and moves for a judgment in accordance with the terms of the Settlement Agreement. For the reasons set forth below the Knox and Pangea motions are DENIED, and the K&K motion is GRANTED.

         I. BACKGROUND[3]

         1. The Policy

         This interpleader action arises from an insurance policy, Financial Services Liability Policy Number ELU1236303-11, issued by XL to Capital L for the period of November 11, 2011, toNovemberll, 2012. K&K56.1 Stmt. ¶ 1, ECF No. 137; Hansen Decl. Ex. 1 ("Policy"), Fin. Servs. Liab. Policy Decls. Items 1-3, ECF No. 140-1. The Policy provided for a maximum aggregate limit of liability of $3 million, of which $1, 372, 596.10 remains. K&K 56.1 Stmt. ¶ 11. That remainder, the Interpleaded Funds, was deposited with the Court on July 28, 2014, pursuant to Local Civil Rule 67.1 and as required by 28 U.S.C. § 1335. K&K 56.1 Stmt. ¶ 12; Dkt. Entry, July 31, 2014, Receipt No. 465401101200.

         The Policy provides that "[t]he Insurer shall pay on behalf of the Insured Persons Loss resulting from Claims first made against the Insured Persons during the Policy Period ... for Wrongful Acts." K&K 56.1 Stmt. ¶ 3; Policy, Inv. Advisers Mgmt. Liab. Coverage Part § 1(A). The Policy also provides that "[t]he Insurer shall pay on behalf of the Adviser Loss which the Adviser is required or is permitted to pay .. . resulting from Claims first made against the Adviser ... for Wrongful Acts." Policy, Inv. Advisers Mgmt. Liab. Coverage Part § 1(B).

         The Policy defines "Insured Persons" as including "any past, present or future director, officer, or member of the Board of Managers of Capital L. K&K 56.1 Stmt. ¶ 6; Policy, Inv. Advisers Mgmt. Liab. Coverage Part § 11(D)(1). The Policy defines a "Loss" as including "damages, judgments, settlements or other amounts (including punitive, exemplary or multiplied damages where insurable by law) in excess of the Retention that the Insured is obligated to pay, and Defense Expenses, whether incurred by the Insurer or the Insured." K&K 56.1 Stmt. ¶ 5; Policy, Endorsement No. 6. The Policy defines a "Claim" as including, among other things, "any civil proceeding in a court of law or equity, or arbitration." K&K 56.1 Stmt. ¶ 10; Policy, Gen. Terms & Conditions, § 1(B)(2). The Policy defines a "Wrongful Act" as "any actual or alleged act, error, omission, misstatement, misleading statement or breach of duty, " and must arise, for an Insured Person, "solely by reason of his or her status as [an Insured Person]." K&K 56.1 Stmt. ¶ 7; Policy, Inv. Advisers Mgmt. Liab. Coverage Part § 11(F)(1), (2).

         The Policy states that "[i]t shall be the duty of the Insured to defend any Claim under this Policy." K&K 56.1 Stmt. ¶ 8; Policy, Gen. Terms & Conditions § 11(B)(1). Further, "No Insured may incur any Defense Expenses or admit any liability for, make any settlement offer with respect to, or settle any Claim without the Insurer's consent, such consent not to be unreasonably withheld." K&K 56.1 Stmt. ¶ 9; Policy, Gen. Terms & Conditions § 11(B)(2). "As a condition precedent to any right to payment under this Policy, the Insured shall give written notice to the Insurer of any Claim as soon as practicable after it is first made." Id. § 11(C)(1).

         The Policy excludes Loss in connection with any Claim that was "brought about or contributed to in fact by any: (1) intentionally dishonest, fraudulent or criminal act or omission or any willful violation of any statute, rule or law; or (2) profit or remuneration gained by any Insured to which Insured is not legally entitled." Id. § III(A). Once the limit of liability is reached, "all obligations of the Insurer under this Policy will be completely fulfilled and exhausted, and the Insurer will have no further obligations of any kind whatsoever under this Policy." Id. § II(J).

         2. The Knox Action

         In May 2012, Knox and DJW filed a complaint against Capital L, Lakian, Lamm, and JRL Investment Group, Inc. (not a party here) (the "Knox Action"). K&K 56.1 Stmt. ¶ 13; see Knox LLC, et al. v. Capital L Group, LLC, etal., No. 651880/2012 (N.Y. Sup. Ct). The complaint included allegations that Lakian and Lamm fraudulently induced Knox and DJW to invest over $2 million in Capital L and that they breached their fiduciary duties by misusing the investments for personal benefit. Knox 56.1 Stmt. ¶ 4, ECF No. 144. Lakian and Lamm initially retained Kobre & Kim to defend them. Compl. ¶ 39, ECF No. 2. When Kobre & Kim withdrew, Lakian hired Eiseman, and Lamm hired Brief Carmen. Id. ¶ 41. The Knox Action constitutes a "Claim" under the Policy, K&K 56.1 Stmt. ¶ 19, and on June 20, 2012, XL acknowledged coverage under the Policy for Lakian and Lamm. Knox 56.1 Stmt. ¶ 5; Compl. ¶38.

         Despite being served with a copy of the complaint and, later, an amended complaint, Capital L failed to appear in the Knox Action. K&K 56.1 Stmt. ¶¶ 14-16. On January 3, 2013, XL's counsel sent a letter (the "January 2013 Letter") to Capital L's insurance broker that acknowledged that Knox and DJW had filed a motion for default judgment against Capital L, noted that Capital L had a duty to defend under the Policy, and requested information as to whom to contact at Capital L. Knox 56.1 Stmt. ¶ 8; Halpern Aff. Ex. F at 4, ECF No. 148-7. Knox and DJW's motion for a default judgment against Capital L was granted in July 2013. K&K 56.1 Stmt. ¶ 17; Knox, No. 651880/2012, Doc. No. 63 (N.Y. Sup. Ct. July 23, 2013). Default judgments against Capital L in favor of Knox and DJW totaling over $2.5 million were filed in the New York County Clerk's Office in March 2014. K&K 56.1 Stmt. ¶ 18; Knox 56.1 Stmt. ¶ 11.

         Lakian and Lamm were charged, in February 2015, in a five-count criminal indictment that alleged conspiracy to commit securities fraud, wire fraud, and bank fraud, and two counts of securities fraud. Knox 56.1 Stmt. ¶¶ 18-19. Lakian and Lamm pled guilty to the two securities fraud counts in February 2016. Knox 56.1 Stmt. ¶ 20; Halpern Aff. Exs. M, N.

         The parties disagree about whether (1) XL acknowledged coverage under the Policy for Capital L, (2) Capital L sought or obtained XL's consent before defaulting, and (3) XL was ever served with a copy of the default judgment against Capital L. K&K 56.1 Stmt. ¶¶ 20-22; Knox Resp. to K&K 56.1 Stmt. ¶¶ 20-22 (denying all three paragraphs); Pangea Resp. to K&K 56.1 Stmt. ¶¶ 20-22 (admitting all three paragraphs).

         3. The Branigan Action

         In addition to his role as a member of Capital L's Board of Managers, Lakian served as a managing member of Pangea from approximately 2009 to 2011. K&K 56.1 Stmt. ¶ 23. In June 2012, Pangea and one of Pangea's managing members, Mark Branigan, filed a complaint against Lakian and Lamm, among others, in New York State Supreme Court (the "Branigan Action"). K&K 56.1 Stmt. ¶ 24; see Spatola Decl. Ex. 3 ("Branigan CompL"), ECF No. 142-3. The allegations in the Branigan Action "concern[ed] the fiduciary obligations owed by the managers of Pangea to each other, and to Pangea, itself, and Lakian's abuse of that position of trust to perpetrate a fraud upon Branigan, Pangea, and its investors, " with the assistance of Lamm. K&K 56.1 Stmt. ¶ 25 (internal quotation marks omitted); Branigan Compl. ¶ 10. The Branigan Action plaintiffs alleged that Lakian and Lamm fraudulently induced them into making investments in Capital L and then misused those investments. Compl. ¶ 26. XL has confirmed its obligation to cover Lamm in connection with the Branigan Action, but has denied coverage to Lakian. See Compl. ¶ 31-32; K&K 56.1 Stmt. ¶ 27. The parties agreed to resolve the Branigan Action by arbitration. K&K56.1 Stmt. ¶ 28. The arbitration statement of claim was filed in November 2012, and included the same causes of action as the state court complaint and additional causes of action arising out of the same underlying conduct. K&K 56.1 Stmt. ¶¶ 29, 30. On February 2, 2016, Pangea obtained an award (the "Arbitration Award") against Lakian on its claims for fraud, breach of fiduciary duty, and a violation of RICO. K&K 56.1 Stmt. ¶ 32. On November 22, 2016, subsequent to the filing of the present motions, the Arbitration Award was reduced to a judgment, and the Honorable Lewis A. Kaplan entered a judgment (the "Arbitration Judgment") of over $14 million against Lakian. K&K 56.1 Stmt. ¶ 34; Letter from Pangea, ECF No. 170; Pangea Capital Management, LLC v. Lakian, No. 16 Civ. 840, ECF No. 87. The action against Lamm was stayed due to Lamm's filing of Chapter 7 bankruptcy in September 2014. Pangea 56.1 Stmt. ¶ 17, ECF No. 146.

         The parties disagree on whether the Branigan Action, the arbitration, the Arbitration Award, and the Arbitration Judgment arose solely out of Lakian's status as a member of Capital L's Board of Managers, or whether they arose, at least in part, out of his status as a managing member of Pangea. K&K 56.1 Stmt. ¶¶ 26, 31, 33; Knox Resp. to K&K 56.1 Stmt. ¶¶ 26, 31, 33 (admitting all three paragraphs); Pangea Resp. to K&K 56.1 Stmt. ¶¶ 26, 31, 33 (denying all three paragraphs). If the award did not arise solely out of Lakian's status as a member of Capital L's Board of Managers, it may not be covered by the Policy. See Policy, Inv. Advisers Mgmt. Liab. Coverage Part § 2(F)(1) (limiting coverage of a "Wrongful Act" for "Insured Persons" to acts "solely by reason of his or her status as [an Insured Person]").

         II. SUMMARY JUDGMENT STANDARD

         Summary judgment shall be granted if "the movant shows that there is no genuine dispute as to any material fact and that the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56(a). A dispute of fact is genuine if "the evidence is such that a reasonable jury could return a verdict for the nonmoving party." Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). A fact is material if it "might affect the outcome of the suit under the governing law." Id.; see also Roe v. City of Waterbury, 542 F.3d 31, 35 (2d Cir. 2008). "Where the record taken as a whole could not lead a rational trier of fact to find for the non-moving party, there is no 'genuine issue for trial.'" Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp., 475 U.S. 574, 587 (1986). In determining whether there are genuine disputes of material fact, the Court "must 'resolve all ambiguities, and credit all factual inferences that could rationally be drawn, in favor of the party opposing summary judgment.'" Roe, 542 F.3d at 35 (quoting Brown v. Henderson, 257 F.3d 246, 251 (2d Cir. 2001)). "In an interpleader action, each claimant has the burden of establishing her right to the property by a preponderance of the evidence, and although certain claims may be disposed of by summary judgment, that does not automatically entitle the remaining defendants to the funds." McEnery v. Gallagher, No. 93 Civ. 5795, 1996 WL 457297, at *3 (S.D.N.Y. Aug. 14, 1996) (citing Midland Ins. Co. v. Friedgood, 577 F.Supp. 1407, 1410 (S.D.N.Y. 1984)).

         III. ...


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