QBE Specialty Insurance Company v. Kane et al

Filing 113

ORDER GRANTING IN PART AND DENYING IN PART CHRISTOPHER GOSSERT'S MOTION FOR SUMMARY JUDGMENT; ORDER DENYING PAUL MARINELLI'S AND JEFFERY AU'S MOTIONS FOR PARTIAL SUMMARY JUDGMENT 75 , 79 , 81 , 82 - Signed by JUDGE SUSAN OKI MOLLWAY o n 10/13/2023.The court GRANTS in part and denies in part Gossert's motion for summary judgment, ECF No. 75 , in which Uchiyama joined, ECF No. 79 . The court rules that the Policy terms do not clearly establish a priority of payments am ong Interpleader-Defendants' claims to the interpleaded funds. As such, equitable principles will guide the distribution of the interpleaded funds. Accordingly, the court DENIES Marinelli's and Au's motions for partial summary judgment asto the supremacy of their claims over all others to the interpleaded funds. ECF Nos. 81 , 82 . The parties are ORDERED to file within 14 days ofthis order briefing as to the questions raised in section V.C of this ruling regarding equita ble distribution of the interpleaded funds. The parties are further ORDERED to contact the Magistrate Judge assigned to this case to schedule a settlement conference at the earliest available dateoccurring after the submission of the briefs o rdered here. The Clerk of the Court is DIRECTED to terminate Gossert's Motion for Summary Judgment, ECF No. 75 , Uchiyama's joinder in Gossert's motion, ECF No. 79 , Marinelli's Motion for Partial Summary Judgment, ECF No. 81 , and Au's Motion for Partial Summary Judgment, ECF No. 82 .(cib)

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 1 of 37 PageID.2674

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF HAWAII
QBE SPECIALTY INSURANCE
COMPANY,

)
)
)
Interpleader-Plaintiff, )
)
vs.
)
)
DAVID UCHIYAMA, CHRISTOPHER
)
GOSSERT, PAUL MARINELLI,
)
JEFFERY AU, and CATHERINE
)
YANNONE,
)
)
Interpleader-Defendants. )
_____________________________ )

CIVIL NO. 22-00450 SOM-KJM
ORDER GRANTING IN PART AND
DENYING IN PART CHRISTOPHER
GOSSERT’S MOTION FOR SUMMARY
JUDGMENT; ORDER DENYING PAUL
MARINELLI’S AND JEFFERY AU’S
MOTIONS FOR PARTIAL SUMMARY
JUDGMENT

ORDER GRANTING IN PART AND DENYING IN PART CHRISTOPHER GOSSERT’S
MOTION FOR SUMMARY JUDGMENT; ORDER DENYING PAUL MARINELLI’S AND
JEFFERY AU’S MOTIONS FOR PARTIAL SUMMARY JUDGMENT
I.

INTRODUCTION.
Before the court are dueling requests for partial

summary judgment in an interpleader action arising from
litigation associated with the bankruptcy of Hawaii Island Air,
Inc. (“Island Air”), and a lawsuit against several of the
company’s former officers, directors, owners, and lenders.

The

former officers and directors are covered by QBE insurance policy
number QPLO192298 (“the Policy”).

Rather than assume the risks

associated with determining how to allocate finite Policy funds
among the Interpleader-Defendants, QBE filed a Complaint for
Interpleader.1
1

Not long after, QBE filed a motion for leave to

QBE first filed this interpleader action in the U.S.
Bankruptcy Court for the District of Hawaii pursuant to a
reference from the district court. See QBE Specialty Ins. Co. v.
Kane, Adv. No. 22-90006 (“Bankruptcy Proceeding”), ECF No. 1.

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 2 of 37 PageID.2675

deposit the remaining Policy funds with the court and for
discharge, injunctive relief, and dismissal.

See ECF No. 12.

The court granted QBE’s motion, concluding that QBE faced a real
threat of multiple competing claims and had properly sought
interpleader.

ECF No. 48.

Accordingly, the court enjoined any

party to the action from seeking Policy funds in another state or
federal court proceeding.

ECF No. 48.

Interpleader-Defendant

Paul Marinelli’s appeal of that order is pending before the Ninth
Circuit.

See ECF No. 54.
Now, Interpleader-Defendants seek summary judgment as

to the relative priority of their claims in the distribution of
the interpleaded Policy funds.

The court disagrees with

Interpleader-Defendants Paul Marinelli and Jeffery Au that the
Policy clearly establishes a priority of payments.
81, 82.

See ECF Nos.

The court partially grants Interpleader-Defendant

Christopher Gossert’s motion for summary judgment, ECF No. 75,
which Interpleader-Defendant David Uchiyama joined, ECF No. 79,
on the issue of whether equitable principles control the
distribution.

The court ultimately concludes that questions of

fact preclude a grant of summary judgment on the exact allocation
of funds under an equitable pro rata distribution scheme.

The district court later withdrew the referral, see ECF No. 11,
and this interpleader action came before the district court.
2

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 3 of 37 PageID.2676

II.

BACKGROUND SUMMARY.
The factual background for this case was set forth in

the court’s Order of January 27, 2023, granting QBE’s motion for
leave to deposit interpleader funds.
# 462-67.

See ECF No. 48, PageID

That background is incorporated by reference and is

summarized and supplemented only as necessary here.
Island Air filed for bankruptcy in 2017.
# 17–01078, ECF No. 1.

See Adv. No.

Two years later, the bankruptcy trustee,

joined by two labor unions, filed an adversary proceeding in the
Bankruptcy Court for the District of Hawaii against several of
Island Air’s prior owners, executives, directors, and lenders,
alleging that they had caused the company’s bankruptcy.

See Adv.

No. 19-90027 (“the Trustee Proceeding” originally filed in the
Bankruptcy Court for the District of Hawaii), ECF No. 1.
Throughout the course of the Trustee Proceeding, a number of
parties sought funds from QBE to cover defense costs related to
the trustee’s claims, as well as the related cross-claims, thirdparty complaints, and subpoenas.

See ECF No. 14, PageID

# 108–09.
Relevant here, Interpleader-Defendant Marinelli, as
well as Interpleader-Defendant Au on behalf of himself and
intervenor parties Malama Investments, LLC and PaCap Aviation
Finance, LLC, submitted claims for their defense costs.
81-2, PageID # 823-25; ECF No. 82-1, PageID # 1135-36.

3

ECF No.

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 4 of 37 PageID.2677

Separately, Interpleader-Defendants Gossert and Uchiyama
considered offers to settle with the Bankruptcy Trustee in the
underlying litigation with the expectation (or at least hope) of
being indemnified by QBE for settlement payments.
PageID # 709; ECF No. 79-1, PageID # 774.2

ECF No. 75-1,

QBE acknowledged that

the Trustee Proceeding and various claims deriving from it were
covered claims.

See ECF No. 13, PageID # 97.

Facing multiple competing claims for Policy funds, QBE
initiated this interpleader action in March 2022.

See ECF No. 1.

In opposition to interpleader, Marinelli argued that QBE had no
reasonable fear of multiple liability because the Policy language
clearly established a priority of payments.
PageID # 405.

See ECF No. 38,

According to Marinelli, “the Policy’s

‘Advancement’ and ‘Priority of Payments’ provisions easily solve
all the purported conflicts identified by QBE.”
PageID # 404.

ECF No. 38,

In its January 2023 Order, the court disagreed and

granted QBE’s motion for leave to deposit interpleader funds,
discharge, and dismissal.

See ECF No. 48.

The court concluded

that interpleader was justified because QBE’s fear of multiple

2

In March 2023, the court dispensed Policy funds to then
Interpleader-Defendants David H. Pfleiger Jr. ($86,548.10) and
Philip Wegescheide ($37,639.30) pursuant to a stipulation from
the other Interpleader-Defendants. ECF No. 61, PageID # 667.
Three months later, Interpleader-Defendant Catherine Yannone
passed away, ECF No. 71, and her estate relinquished any claims
she may have had in this action, ECF No. 73, PageID # 694.
4

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 5 of 37 PageID.2678

liability was “real and reasonable” in light of the relevant
Policy language allowing for “considerable interpretation” and
therefore not necessarily “foreclos[ing] all adverse claims.”3
ECF No. 48, PageID # 479-86.

The court noted, however, that

while determining that QBE’s fear of multiple liability was “real
and reasonable[,]” the court was not “making a summary judgment
ruling as to the import of any Policy provision.”

ECF No. 48,

PageID # 479.
Gossert, Uchiyama, Marinelli, and Au seek summary
judgment on the priority of their claims in the distribution of
Policy funs as among themselves.

See ECF Nos. 75, 79, 81, 82.

Gossert seeks summary judgment on his claim to a
“significant pro-rata share” of the Policy proceeds.
PageID # 699.

ECF No. 75,

Uchiyama joins Gossert’s motion and asks the court

to “order an equitable distribution” of the Policy proceeds.
ECF No. 79, PageID # 771.

On the other hand, Marinelli seeks

partial summary judgment to establish the priority of his claims
over all others to the interpleaded funds.
# 789.

ECF No. 81, PageID

However, at this time Marinelli “is not seeking a

specific determination” of the amount to which each claimant is
entitled.

ECF No. 81-1, PageID # 794.

Finally, Au also moves

for partial summary judgment in his favor, submitting a

3

The court noted that the multiple adverse claims already
filed against QBE weighed in favor of allowing interpleader.
ECF No. 48, PageID # 486-89.
5

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 6 of 37 PageID.2679

declaration that he is owed defense costs from the interpleaded
funds, that his defense costs are “reasonable” and “necessary,”
and that the distribution of funds should follow priority rules
he sets forth.
III.

ECF No. 82, PageID # 1118-19.

JURISDICTION.
As discussed fully in the court’s January 2023 Order,

QBE brought this action as an interpleader case under Federal
Rule of Civil Procedure 22.

ECF No. 48, PageID # 467.

In sum,

this court has diversity jurisdiction because the amount in
controversy exceeds $75,000 and Interpleader-Plaintiff’s
citizenship is diverse from that of all Interpleader-Defendants.
The court also has jurisdiction because this matter relates to
bankruptcy.
IV.

See 28 U.S.C. § 1334.

SUMMARY JUDGMENT STANDARD.
Under Rule 56 of the Federal Rules of Civil Procedure,

summary judgment shall be granted when “the movant shows that
there is no genuine dispute as to any material fact and the
movant is entitled to judgment as a matter of law.”
P. 56(a).

Fed. R. Civ.

See Addisu v. Fred Meyer, Inc., 198 F.3d 1130, 1134

(9th Cir. 2000).

The movants must support their position

concerning whether a material fact is genuinely disputed by
either “citing to particular parts of materials in the record,
including depositions, documents, electronically stored
information, affidavits or declarations, stipulations (including

6

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 7 of 37 PageID.2680

those made for the purposes of the motion only), admissions,
interrogatory answers, or other materials”; or “showing that the
materials cited do not establish the absence or presence of a
genuine dispute, or that an adverse party cannot produce
admissible evidence to support the fact.”

Fed. R. Civ. P. 56©.

One of the principal purposes of summary judgment is to identify
and dispose of factually unsupported claims and defenses.
Celotex Corp. v. Catrett, 477 U.S. 317, 323-24 (1986).
Summary judgment must be granted against a party that
fails to demonstrate facts to establish what will be an essential
element at trial.

See id. at 323.

A moving party without the

ultimate burden of persuasion at trial——usually, but not always,
the defendant——has both the initial burden of production and the
ultimate burden of persuasion on a motion for summary judgment.
Nissan Fire & Marine Ins. Co. v. Fritz Cos., 210 F.3d 1099, 1102
(9th Cir. 2000).
The burden initially falls on the moving party to
identify for the court those “portions of the materials on file
that it believes demonstrate the absence of any genuine issue of
material fact.”

T.W. Elec. Serv., Inc. v. Pac. Elec. Contractors

Ass'n, 809 F.2d 626, 630 (9th Cir. 1987) (citing Celotex Corp.,
477 U.S. at 323).

“When the moving party has carried its burden

under Rule 56(c), its opponent must do more than simply show that
there is some metaphysical doubt as to the material facts.”

7

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 8 of 37 PageID.2681

Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574,
586 (1986) (footnote omitted).
The nonmoving party may not rely on the mere
allegations in the pleadings and instead must set forth specific
facts showing that there is a genuine issue for trial.
Elec. Serv., 809 F.2d at 630.

T.W.

At least some “‘significant

probative evidence tending to support the complaint’” must be
produced.

Id. (quoting First Nat'l Bank v. Cities Serv. Co., 391

U.S. 253, 290 (1968)); see also Addisu, 198 F.3d at 1134 (“A
scintilla of evidence or evidence that is merely colorable or not
significantly probative does not present a genuine issue of
material fact.”).

“[I]f the factual context makes the non-moving

party’s claim implausible, that party must come forward with more
persuasive evidence than would otherwise be necessary to show
that there is a genuine issue for trial.”

Cal. Architectural

Bldg. Prods., Inc. v. Franciscan Ceramics, Inc., 818 F.2d 1466,
1468 (9th Cir. 1987) (citing Matsushita Elec. Indus. Co., 475
U.S. at 587).
In adjudicating a summary judgment motion, the court
must view all evidence and inferences in the light most favorable
to the nonmoving party.

T.W. Elec. Serv., 809 F.2d at 631.

Inferences may be drawn from underlying facts not in dispute, as
well as from disputed facts that the judge is required to resolve
in favor of the nonmoving party.

Id.
8

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 9 of 37 PageID.2682

V.

DISCUSSION.
“Very little case law exists on the precise issue of

contemporaneous payment and the priority of defense costs claims
of the insured from interpleaded funds.”

Gabarick v. Laurin Mar.

(Am.) Inc., 635 F. Supp. 2d 499, 509 (E.D. La. 2009).

Generally,

courts “first evaluate the policy to determine whether the policy
prioritized defense claims over other claims.”

Id.; see Reliance

Nat. Ins. Co. v. Great Lakes Aviation, Ltd., 430 F.3d 412, 415
(9th Cir. 2005) (“The interpleader procedure is not intended to
alter substantive rights.”).

When a policy does not prioritize

defense costs, courts “consider the equitable nature of
distribution from the interpleader fund.”

Gabarick, 635 F. Supp.

2d at 509; see Liberty Mut. Ins. Co. v. Estrada, 528 F.2d 319,
319 (9th Cir. 1975) (vacating a pro rata distribution plan
because it contravened “the express terms of the policy, as well
as [] the explicit provisions of the statute to which the policy
refers”).

“To the extent that the priority of claims is not

controlled by policy language or controlling law, determination
of priority of claims ‘is neither a conclusion of law nor a
factual finding, but is, instead, an equitable decision.’”
Gabarick, 635 F. Supp. 2d at 509 (quoting Marine Indem. Ins. Co.
v. Kraft Gen. Foods, Inc., 115 F.3d 282, 287 (5th Cir. 1997)).
To determine the parties’ respective rights to the
Policy funds, the court analyzes the claims at the time the
9

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 10 of 37 PageID.2683

interpleader fund was established.
F.3d 1367, 1370 (9th Cir. 1997).

Texaco, Inc. v. Ponsoldt, 118
Here, the fund was established

by the court’s January 2023 Order.
A.

See ECF No. 48.

Governing Law.

Before evaluating the terms of the Policy, the court
must determine the applicable source of law.

State choice-of-law

rules govern interpleader actions because the court derives
jurisdiction from the parties’ diversity of citizenship.

Federal

Practice & Procedure § 1713; see Fed. Ins. Co. v. Areias, 680
F.2d 962, 963 (3d Cir. 1982) (“Under Erie R.R. v. Tompkins, 304
U.S. 64 (1938), state law determines the rights of the rival
claimants to the interpleaded fund.”); Gray v. Travelers Indem.
Co., 280 F.2d 549, 554, 554 n.2 (9th Cir. 1960) (Alaska law
applied in statutory interpleader action to indemnity agreement
pursuant to Washington conflicts rule).

Under bankruptcy

jurisdiction, however, federal choice-of-law rules apply.

In re

Sterba, 852 F.3d 1175, 1177 (9th Cir. 2017).
Fortunately, here, Hawai‘i substantive law applies
under both state and federal choice-of-law rules.

Hawai‘i’s

choice-of-law doctrine follows a “flexible approach looking to
the state with the most significant relationship to the parties
and subject matter.”

Del Monte Fresh Produce (Haw.), Inc. v.

Fireman's Fund Ins. Co., 117 Haw. 357, 364, 183 P.3d 734, 741
(2007).

There is, however, always “a presumption that Hawai‘i
10

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 11 of 37 PageID.2684

law applies unless another state's law would best serve the
interests of the states and persons involved.”

Abramson v. Aetna

Cas. & Sur. Co., 76 F.3d 304, 305 (9th Cir. 1996).

Given that

all the remaining Interpleader-Defendants are Hawai‘i residents,
ECF No. 1, BP 22-90006, as well as the strong nexus between
Hawai‘i and the conduct underlying this interpleader action,
Hawai‘i courts would likely apply Hawai‘i substantive law to this
case.

See Okada v. MGIC Indem. Corp., 823 F.2d 276, 280 (9th

Cir. 1986) (“Hawai‘i courts apply Hawai‘i state law when the acts
covered by the policy occur in Hawai‘i, the insureds are Hawai‘i
citizens, and the insurance company is not a Hawai‘i citizen.”).
This is especially true because Hawai‘i courts would likely
conclude that the state has a significant public policy interest
in this case because it implicates important issues of insurance
law and corporate conduct.
Federal choice-of-law rules also lead to the
application of Hawai‘i substantive law.

The Ninth Circuit

considers the principles stated in the Restatement (Second) of
Conflicts of Laws section 188, to the extent such principles are
persuasive.

Flores v. Am. Seafoods Co., 335 F.3d 904, 919 (9th

Cir. 2003).

Section 188 considers which state “has the most

significant relationship to the transaction,” including the place
of negotiation, contracting, and performance; the location of the

11

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 12 of 37 PageID.2685

subject matter of the contract; and the domicile, place of
incorporation, and place of business of the parties.

Each of

these factors weighs in favor of applying Hawai‘i substantive
law.

The Policy appears to have been negotiated in Hawai‘i, ECF

No. 81-20, the remaining Interpleader-Defendants are state
residents, ECF No. 1, BP 22-90006, and the conduct covered by the
Policy was primarily performed in Hawai‘i.
Accordingly, under both state and federal choice-of-law
approaches, Hawai‘i substantive law governs the court’s analysis.
B.

Priority of Payments
Under the Policy’s Terms.

Under Hawai‘i law, “insurance policies are subject to
the general rules of contract construction; the terms of the
policy should be interpreted according to their plain, ordinary,
and accepted sense in common speech unless it appears from the
policy that a different meaning is intended.”

Dairy Rd. Partners

v. Island Ins. Co., 92 Hawai‘i 398, 411, 992 P.2d 93, 106 (2000).
1.

Settlement Offers.

Gossert and Uchiyama argue that they had an indemnity
interest in the Policy funds when the interpleader fund was
established.

ECF No. 75-1, PageID # 709;

79-1, PageID # 774.

According to them, because the Policy indemnifies insureds for
settlement obligations and they were both offered settlements by

12

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 13 of 37 PageID.2686

the Bankruptcy Trustee,4 they are entitled to some of the
interpleaded funds.
PageID # 775-76.

See ECF Nos. 75-1, PageID # 713-15; 79-1,

This argument runs up against the plain

language of the Policy.
The Policy provides that funds are available to cover
losses.

A “Loss” occurs when “an Insured becomes legally

obligated to pay on account of any Claim.”
# 745.

ECF No. 76-2, PageID

Because Gossert’s and Uchiyama’s settlements were not

finalized as of the date of the establishment of the interpleader
fund, Gossert and Uchiyama never became legally obligated to pay
any settlement amount.

Settlement offers not creating any legal

obligation do not constitute a “Loss” for which Gossert and
Uchiyama would have a right to indemnity from Policy funds as of
January 2023, when the interpleader fund was established.
Nevertheless, the court addresses here Marinelli’s
contention that the Policy prioritizes defense payments over
indemnity payments, such as settlements and judgments.
No. 81-1, PageID # 806-07 (citation omitted).

4

See ECF

In support of his

After this court established the interpleader fund in
January 2023, Gossert signed a contingent settlement agreement in
the underlying litigation, subject to the Bankruptcy Court’s
approval. ECF No. 92-3, PageID # 1744-51. The terms of this
settlement agreement are irrelevant to whether Gossert has a
legal right to interpleaded funds under the terms of the Policy
because the court analyzes the Interpleader-Defendants’ claims to
the interpleaded funds at the time the interpleader fund was
established in January 2023. See Texaco, Inc., 118 F.3d at 1370.
13

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 14 of 37 PageID.2687

argument, Marinelli points to the defense-within-limits provision
on the declarations page of QBE’s Directors and Officers (“D&O”)
Policy.

ECF No. 81-1, PageID # 806-07.

The defense-within-

limits provision states that “THE LIMIT OF LIABILITY TO PAY
JUDGMENTS OR SETTLEMENT AMOUNTS SHALL BE REDUCED AND MAY BE
EXHAUSTED BY PAYMENT OF DEFENSE COSTS.”
# 741 (emphasis omitted).

ECF No. 76-2, PageID

He contends that this provision makes

clear that the Policy “unambiguously prioritizes defense payments
over indemnity payments.”

See ECF No. 81-1, PageID # 806-07

(citation omitted).
He cites Executive Risk Speciality Insurance Co. v.
Rutter Hobbs & Davidoff, Inc., No. 2:11-cv-04828-SVW-FFM, 2019 WL
9358218, slip. op. at *2-3 (C.D. Cal. May 22, 2019), for support.
See ECF No. 81-1, PageID # 806-08.

In that case, the Central

District of California examined an excess malpractice liability
policy that provided an additional layer of coverage beyond the
base layer of insurance provided under the primary policy.
Risk Speciality Ins. Co., 2019 WL 9358218, at *1.

Exec.

The primary

policy provided that “[a]ll claim expenses shall first be
subtracted from the applicable limit of liability with the
remainder, if any, being the amount available to pay damages.”
Id. at *2.

“Claim expenses” were defined as “(1) attorneys’ fees

incurred by lawyers designated by [the insurance company], and
(2) ‘all other fees, costs and expenses resulting from the
14

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 15 of 37 PageID.2688

investigation, adjustment, defense and appeal of a claim’
incurred by [the insurance company].”

Id.

Damages were “defined

broadly as ‘a monetary judgment or settlement,’ with certain
exceptions.”

Id.

The court concluded that a “plain reading” of

the policy “reveals that defense costs . . . are to be paid first
before any indemnity payments issue, and to the extent that
indemnity payments exceed the remaining liability limit after
defense costs are paid, then only a portion of the settlement or
judgment will be paid under the policy.

In other words, the

[primary] Policy unambiguously prioritizes defense payments over
indemnity payments.”

Id.

The Executive Risk decision then examined the excess
policy, which stated that “[t]he limits of liability available to
pay damages or settlements shall be reduced, and may be
exhausted, by the payment of Defense Expenses.”

Id. at *3.

The

court concluded that “[t]he plain meaning of this sentence
implies that defense costs are prioritized over any ‘damages or
settlements,’ or, in other words, indemnity payments; to the
extent that the total defense and indemnity costs exceed the
policy limit, indemnity ‘shall be reduced’ by any defense costs,
which are to be paid in full.”

Id.

The court also noted that

the excess policy tied the interpretation of its terms to that of
the primary policy, so it reasoned that “the express terms of the
[excess] [p]olicy contemplate that the provisions in the

15

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 16 of 37 PageID.2689

[primary] [p]olicy regarding the priority of payments between
defense and indemnity were intended to apply with equal force to
the [excess] [p]olicy as well.”

Id.

The court thus concluded

that the excess policy, viewed “either in isolation or in its
full context alongside the [primary] [p]olicy,” “unambiguously
intended to prioritize the payment of defense costs over the
payment of indemnity costs.”

Id.

This court is not persuaded that the Central District’s
interpretation should be applied here.
Historically, D&O policies did not contain a duty to
defend; instead, the policies obligated insurers to reimburse
insureds for defense costs.

By the mid-1980s, however, most D&O

contracts included a duty to defend.

See Julie J. Bisceglia,

Practical Aspects of Directors' and Officers' Liability
Insurance-Allocating and Advancing Legal Fees and the Duty to
Defend, 32 UCLA L. Rev. 690, 690 (1985).

The inclusion of a duty

to defend makes the insurer directly liable for payment of the
insured’s defense costs, but it gives the insurer more control to
shape litigation strategy.
There are two principal types of duties to defend in
D&O policies.

In the first type, the costs spent on defense are

independent from the limit of liability, meaning a dollar spent
on defense will not deplete the proceeds available for other
losses.

The insurer’s responsibility to defend the insured and

16

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 17 of 37 PageID.2690

pay defense costs continues until judgment or settlement exhausts
the company's liability.

In the other type, the terms of the

policy include a “defense-within-limits” provision, which
establishes that defense costs deplete the available limit of
liability.

Put differently, each dollar spent on defense costs

reduces the remaining proceeds for indemnity payments.

Among

other benefits for the insurer, defense-within-limits provisions
prevent the insurer from having to pay more funds than the
insured purchased under the policy.

See Gregory S. Munro,

Defense Within Limits: The Conflicts of "Wasting" or
"Cannibalizing" Insurance Policies, 62 Mont. L. Rev. 131, 133,
139-44 (2001).

Contracts that contain such provisions have been

referred to as “wasting,” “self-consuming,” “burning,” “self
liquidating,” “defense-within-limits,” or “cannibalizing”
contracts.

Id.
Here, the Policy is a wasting contract.

A key feature

of these contracts is that the terms make clear that defense
costs are payable against the limits of liability, just like any
other type of loss.5

Munro, supra, at 134.

5

The provision that

Another key feature is that “the limit of liability clause
is altered so that the ‘aggregate’ limit of the company's
liability includes not only damages, but also ‘claims expenses.’”
Munro, supra, at 134. In QBE’s Policy, that is accomplished by
adding “defense costs” to the definition of “Loss.” See ECF No.
76-2, PageID # 745. The final key feature is that such policies
often include “an additional definition for ‘claims expenses’ so
the term will cover all legal defense costs.” Munro, supra, at
134. This is done in the Policy by defining “Defense Costs” to
17

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 18 of 37 PageID.2691

Marinelli champions here does just that——and nothing more.

See

ECF No. 76-2, PageID # 741 (“THE LIMIT OF LIABILITY TO PAY
JUDGMENTS OR SETTLEMENT AMOUNTS SHALL BE REDUCED AND MAY BE
EXHAUSTED BY PAYMENT OF DEFENSE COSTS.”).

The sentence merely

clarifies that the Policy can be exhausted by payment of
judgments, settlements, or defense costs, without assigning any
priority of payment to these different types of covered losses.
In addition to the historical context regarding the
purpose and meaning of such provisions, the court’s conclusion
that the defense-within-limit provision is irrelevant to the
issue of whether the Policy clearly establishes a priority of
payment is bolstered by the Policy’s separate “Priority of
Payments” section.

That section, as discussed below, does not

establish a priority of payment among settlements, judgments, and
defense costs.

See infra Part 2(b).

much before this court.
2.

QBE itself acknowledged as

See ECF No. 35, PageID # 352-54.
Defense Costs.

Marinelli and Au spill much ink attempting to convince
the court that the “Advancement” and “Priority of Payments”
provisions in the D&O Coverage Part clearly establish the
priority of their individual defense costs over all other claims.
See, e.g., ECF Nos. 81-1, 82-1, 89, 96, 107, 108.

include all types of legal expenses.
# 745.
18

As the court

See ECF No. 76-2, PageID

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 19 of 37 PageID.2692

suggested in its January 2023 order, however, the “Advancement”
and “Priority of Payments” provisions allow for considerable
interpretation.

ECF No. 48, PageID # 485.

On the present

summary judgment motions, this court is further assured that it
cannot say that, as a matter of law, the Policy unambiguously
establishes a priority of claims to the interpleaded funds.
a)

Advancement Provision.

The “Advancement” provision provides:
A.

. . . the Insurer shall advance Defense
Costs on a current basis, but no later
than 60 days after receipt of the legal
bills and any supporting documentation.

B.

If it is determined by final adjudication
that any advanced Defense Costs are not
covered[,] the Insureds . . . shall repay
such uncovered Defense Costs to the
Insurer[.] . . . If the Insurer recovers
any portion of an amount paid under this
Coverage Part, the Insurer shall reinstate
the applicable limit of liability with any
amounts recovered up to such amount paid,
less any costs incurred by the Insurer in
its recovery efforts.

ECF No. 76-2, PageID # 743 (emphasis omitted).
Marinelli argues that this provision “makes clear that
claims for ‘Loss’ comprised of ‘Defense Costs’ becomes due and
payable under the Policy ‘as the bills are presented, and no
later than 60 days after their receipts.’”

ECF No. 81-1, PageID

# 810 (citation omitted).
However, as QBE pointed out in support of its motion
for interpleader, although advancements must be made “on a
19

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 20 of 37 PageID.2693

current basis,” the plain meaning of the Policy does not
conclusively resolve substantive rights to Policy funds on that
basis.

See ECF No. 35, PageID # 354 (“The Advancement provision

does not resolve any substantive right to coverage or address
conflicting claims.”); see also Heine v. Bank of Oswego, 144 F.
Supp. 3d 1198, 1207 (D. Or. 2015) (addressing advancement and
indemnification as separate matters and noting that “an
individual ultimately determined to be ineligible for
indemnification may still be entitled to advancement before that
ultimate determination”).

When read together, sections A and B

of the Advancement provision plainly support QBE’s assertion that
the Policy treats advancements and entitlements differently;
section B requires a party to return to QBE any money received as
an advancement that is subsequently found not to be covered by
the Policy.

See ECF No. 76-2. PageID # 743.

If an advancement

and an entitlement were the same under the Policy, a party would
have no obligation to return funds advanced for non-covered
claims.
Although QBE conceded that the Trustee Proceeding is a
covered matter and that it must cover defense costs associated
with it, see ECF No. 14, (page 109), that does not amount to a
concession that either Marinelli or Au is entitled to receive and
retain all of the Policy funds they claim.

Under the Policy,

they may still be required to return some of the advanced money

20

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 21 of 37 PageID.2694

if it were determined, for example, that the fees for which an
advancement was made were not “reasonable.”

See ECF No. 76-2,

PageID # 744 (establishing that, to qualify as “Defense Costs,”
such costs charges, fees, and expenses must be “reasonable”).
Neither QBE nor this court has determined whether Marinelli’s and
Au’s claims are “reasonable.”

See ECF No. 104, PageID # 2593.

Among other scenarios, Marinelli and Au would also be
required to return advancements if it were later determined that
the advancement was for expenses unrelated to covered claims by
insured persons.

Gossert and Uchiyama assert that precisely such

a scenario exists here.

See ECF No. 88, PageID # 1530-31; ECF

No. 104, PageID # 2593.

They point out that Marinelli’s counsel

also represents Marinelli’s co-defendants——Lawrence Investments,
LLC, Lawrence J. Ellison Revocable Trust, Ohana Airline Holdings,
LLC, Carbonview Limited LLC, and Lawrence J. Ellison——in an
action brought by the Bankruptcy Trustee currently before the
District of Hawaii, Civ. No. 19-00574 JAO-RT.
# 1530.

ECF No. 88, PageID

Ellison and the entities are not insureds under the

Policy, and are therefore not entitled to interpleaded funds.
ECF No. 88, PageID # 1530.

Marinelli has not demonstrated that

the defense costs he claims under the Policy were incurred only
for his defense, or that separate billings were kept for
noninsured parties.
Marinelli contends that “no such allocation is required

21

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 22 of 37 PageID.2695

because any and all services that were performed on behalf or for
the benefit of these related defendants were necessarily
performed in connection with, and were reasonably related to, the
defense of Mr. Marinelli.”

ECF No. 91, PageID # 1636-37.

Policy limits coverage, however, to “Insured Persons.”
76-2, PageID # 742.

The

ECF No.

Nowhere in the Policy does it provide that

defense costs “reasonably related” to the defense of both insured
and uninsured persons are entirely covered.

The language

Marinelli relies on comes from Safeway Stores, Inc. v. National
Union Fire Insurance Co., 64 F.3d 1282, 1289 (9th Cir. 1995),
which Marinelli cites for support.

See ECF No. 91, PageID

# 1636-37 (quoting Safeway Stores, 64 F.3d 1282).
But Safeway Stores is inapposite.

That case involved

shareholder class actions against Safeway alleging that its
directors and officers had breached their fiduciary duty by
approving a merger with another corporation.

The claimants

asserted that, under the merger, the corporation would receive
the majority of the regular quarterly dividend that would have
gone to the shareholders absent the directors’ and officers’
approval of the merger.

Safeway Stores, 64 F.3d at 1284.

Safeway settled the class action suits, ultimately agreeing to
pay the dividend to shareholders and the class attorneys’ fees
and other costs.

Id. at 1285.

Thereafter, Safeway sought reimbursement from National

22

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 23 of 37 PageID.2696

Union Fire Insurance Company (“National Union”) under a D&O
liability insurance policy for costs incurred from the defense of
itself, its officers, and directors, as well as from the
settlement.

See id. at 1284-85.

The D&O policy contained a

corporate reimbursement provision that covered Safeway for costs
arising from the indemnification of its officers and directors
for defense and settlement of the claims against them.
1284.

Id. at

National Union, however, refused to reimburse Safeway for

the settlement.

Id. at 1285.

Safeway sued National Union in the

Northern District of California, seeking, inter alia, the class
attorneys’ fees and costs,6 and defense costs and attorneys’ fees
incurred on behalf of itself, its officers, and directors.

Id.

at 1283, 1285.
The district court determined that both Safeway’s
defense costs and the class attorneys’ fees and costs were
covered losses.

Id. at 1285.

The district court, however,

allocated the reimbursement of Safeway’s defense costs and class
attorneys’ fees and costs “three-quarters to the covered
directors and officers (and thus paid for by National Union under
the D&O policy) and one-quarter to Safeway and [the uninsured
merger corporation.]”

Id.

On appeal, Safeway argued that the district court’s

6

The Ninth Circuit referred to the class attorneys’ fees
and costs as “settlement costs.” Id. at 1285.
23

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 24 of 37 PageID.2697

allocation of defense costs was improper because it lumped
together its defense costs and the class attorney’s fees and
costs in allocating only one-quarter of the reimbursement to
Safeway and the uninsured merger corporation.

Id. at 1289.

The

Ninth Circuit agreed, first explaining that “[i]n evaluating
whether defense costs should be allocated between the corporation
and the insured directors and officers, courts have adopted the
‘reasonably related’ test.”

Id. (quoting Raychem Corp. v. Fed.

Ins. Co., 853 F. Supp. 1170, 1182 (N.D. Cal. 1994)).

The court

then went on to state that “[d]efense costs are thus covered by a
D&O policy if they are reasonably related to the defense of the
insured directors even though they may also have been useful in
defense of the uninsured corporation.”

Id.

The court also noted

that Safeway had “already reduced” its reimbursement claim “to
exclude fees attributable to the defense of [the uninsured merger
corporation].”

Id.

The court concluded that “Safeway’s defense

costs [were] reasonably related to the defense of its officers
and directors in the class-action suits and are therefore fully
covered by the D&O policy, subject to the deductible.”

Id.

The factual situation in which the Ninth Circuit
adopted the “reasonably related” test——the allocation of defense
costs “between [a] corporation and the insured directors and
officers,” id. at 1289——is not the factual scenario here.

Unlike

Safeway’s costs incurred through the defense of itself and its

24

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 25 of 37 PageID.2698

insured directors and officers, Marinelli’s costs may have arisen
through the defense of Marinelli, who is insured under the
Policy, and his uninsured co-defendants in the underlying
litigation.

Safeway Stores is distinguishable on its facts.

Marinelli also points to Lionbridge Technologies, LLC
v. Valley Forge Insurance Co., No. 20-10014-WGY, 2023 WL 5985288,
at *3 (D. Mass. Sept. 14, 2023), which interpreted Safeway Stores
as establishing that “an insurer must pay all defense costs that
reasonably relate to the insured, even if those costs involve a
non-insured party.”

Even under the District of Massachusetts’

interpretation of Safeway Stores, Marinelli still does not
establish his priority as a matter of law.

Marinelli has yet to

show that his claims for defense were “reasonably related” to his
defense.

This court has only his counsel’s assurances at the

hearing on October 3, 2023.

In fact, Marinelli’s counsel

acknowledged that the claimed defense costs included work for
both “insured and uninsured clients” and

“proper allocation was

necessary” in related litigation before this court.

See Dkt. 17

at 6, PageID # 506, 527-29, in Marinelli v. QBE Specialty Ins.
Co., No. 1:22-cv-00391-SOM-KJM.
Accordingly, it is not at all clear that, had Marinelli
received the requested advancements for defense costs, QBE or
this court would have deemed the defense costs covered by the
Policy.

If the costs were not covered under the Policy,

25

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 26 of 37 PageID.2699

Marinelli would have had to return the portion of the advancement
that was not covered.

In turn, the Policy requirement that

portions of the advancements not covered by the Policy be
returned indicates that the Policy distinguishes between
advancements and substantive rights to Policy funds for covered
losses.
In sum, the Policy’s different treatment of
advancements and substantive rights, acknowledged in QBE’s
statement that the Advancement provision “does not resolve any
substantive right to coverage or address conflicting claims,” ECF
No. 35, PageID # 354, leads the court to conclude that the
Advancement provision does not clearly establish a priority of
distribution of the interpleaded funds.
b)

Priority of Payments Provision.
i.

Section A.

The Policy also contains a “Priority of Payments”
provision, section A of which provides:
A.

In the event that Loss under Insuring
Clause
A
and
any
other Loss are
concurrently due under this Coverage
Part, then the Loss under Insuring Clause
A shall be paid first. In all other
instances, the Insurer may pay Loss as it
becomes due under this Coverage Part
without regard to the potential for other
future payment obligations under this
Coverage Part.

ECF No. 76-2, PageID # 744 (emphasis omitted).
As the court’s January 2023 Order explained, all
26

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 27 of 37 PageID.2700

Interpleader-Defendants’ “potentially adverse claims arise
under ‘Insuring Clause A,’ so this provision does not
clarify which claimant has priority to the funds in
dispute.”

ECF 48, PageID #485.
Marinelli and Au argue that the last sentence in

section A establishes that defense costs are to be paid on a
first-come, first-served basis.
ECF No. 82, PageID # 1150.

ECF No. 81-1, PageID # 811;

As the court noted in the

January 2023 order, however, “may pay” could be read as
permissive, not mandatory.

That is, the insurer is allowed

to pay loss as it becomes due, but it is not required to do
so.

ECF No. 48, PageID # 485.
Marinelli responds that the word “may” is

“industry standard language” that “(i) cannot reasonably be
construed as ‘permissive’; (ii) repeatedly has been
construed as ‘mandatory’ by other courts; and (iii) was in
fact intended and understood by Marinelli and the other
Remaining Claimants as well as requiring the payment of Loss
on a ‘first-come, first-served’ basis.’”
PageID # 812.

ECF No. 81-1,

Marinelli is unpersuasive.

He proffers SEC v. Morriss, No. 12-CV-80, 2012 WL
1605225, at *1, *4 (E.D. Mo. May 8, 2012), for the
proposition that other district courts have already held
that language “identical” to the last sentence of the

27

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 28 of 37 PageID.2701

Priority of Payments clause requires a first-come, firstserved distribution of payments.
# 813.

ECF No. 81-1, PageID

The Morriss court’s decision regarding the priority

of claims, however, was based on policy language mandating
that the insurer pay claims under a designated insuring
clause to insured individuals before claims under other
insuring clauses.

Morriss, 2012 WL 1605225, at *4 (“[T]he

policy includes a priority of payments provision requiring
Federal to pay claims under Insuring Clause 1 (providing
coverage to an insured individual) before claims under any
other insuring clause, including those of the
organization.”).

For this reason, the court in Morriss held

that “any claim [] the receiver may have for defense costs
is subordinate to the coverage for [] insured persons” under
the relevant insuring clause.

Morriss, 2012 WL 1605225, at

*4.
This court has previously noted that every
Interpleader-Defendant’s claim in this case arises under the
same insuring clause.

ECF No. 48, PageID #485.

Marinelli further argues that a “far more natural
reading” of the term “may” is that it “was intended to
signify each Insured Person’s assent to the fact that QBE
shall pay claims ‘as they become due’ and ‘without regard to
the potential for future payment obligations,’ despite the

28

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 29 of 37 PageID.2702

fact that doing so will erode the Policy limits.”7
81-1, PageID # 812.

ECF No.

This reading of the term “may”

contravenes ordinary understanding, not to mention the
insurer’s understanding, of the term.
A plain reading of the term “may” is that it is
“used to indicate possibility or probability.”

See Merriam

Webster Dictionary, https://www.merriam-webster.com/
dictionary/may (last visited Oct. 12, 2023).
with QBE’s understanding of the term “may.”

This accords
ECF No. 35,

PageID # 353-54 (“The only mandatory portion of the Policy’s
Priority of Payments provision states that Loss under
Insuring Clause A ‘shall be paid’ ahead of Loss under any
other insuring clause.

. . .

The provision goes on to

state that, in other instances, QBE ‘may’ pay Loss as it
becomes due, but it does not use the mandatory language of
the preceding sentence.
amounts ‘become due.’

Nor does it specify when such
The provision does not provide

instruction where Defense Costs are not submitted as they
were incurred over the course of three years.

Nor does it

state any priority as between such accumulated Defense Costs

7

Marinelli points to AvalonBay Communities, Inc. v. County
of Los Angeles, 197 Cal. App. 4th 890, 898 (Cal. Ct. App. 2011),
in which the California Court of Appeal interpreted the word
“may” in a statute as “establishing a mandatory duty[.]”
However, the California Court of Appeal was interpreting the
meaning of a state tax statute, not an insurance contract.
29

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 30 of 37 PageID.2703

and settlement demands made before such time as the relevant
Insureds decide to submit their claimed Defense Costs or
supporting documentation for reimbursement under the
Policy.”).
This court concludes that section A of the
priority of payments provision is permissive and not
mandatory, and therefore does not unequivocally establish
the priority of defense costs under the Policy.
ii.

Section B.

In seeking to establish his priority, Au focuses
on section B(2) of the priority of payments provision, which
provides:
B.

The coverage . . . is intended first and
foremost for the benefit and protection
of Insured Persons.
In the event a
liquidation or reorganization proceeding
is commenced by or against a Company
pursuant to United States Bankruptcy law:
1.

the Insureds hereby agree not to
oppose or object to any efforts by
the Insurer, the Company, or an
Insured to obtain relief from any
stay or injunction issued in such
proceeding; and

2.

the Insurer shall first pay Loss on
account of a Claim for a Wrongful
Act occurring prior to the date such
liquidation
or
reorganization
proceeding commences, and then pay
Loss in connection with a Claim for
a Wrongful Act occurring after the
date
such
liquidation
or
reorganization proceeding commences.

30

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 31 of 37 PageID.2704

ECF No. 76-2, PageID # 744 (emphasis omitted).

In his

briefs and at the hearing on October 3, 2023, Au has focused
on whether Interpleader-Defendants submitted claims to QBE
before or after the commencement of the Bankruptcy
Proceeding.

See ECF No. 96, PageID # 2062-68.

He argues

that section B(2) “is a specific priority provision” which
“direct[s] that, in the event of bankruptcy, Losses on
accounts of Claims for Wrongful Acts occurring prior to the
date when the bankruptcy proceeding commenced shall be paid
before Losses in connection with Claims for Wrongful Acts
occurring after the date the bankruptcy proceeding
commenced.”

ECF No. 96, PageID # 2068; see also ECF No. 82-

1, PageID # 1150.
In response, Marinelli points out that Au’s
interpretation of this section is at odds with the plain
language of the Policy.

ECF No. 107, PageID # 2645.

The

Policy defines “Claim” as, among other events, “a civil []
proceeding[], evidenced by: [] the service of a complaint of
similar pleading in a civil proceeding[.]”
PageID # 744 (emphasis omitted).

ECF No. 76-2,

Thus, according to him,

section B(2) does not “prioritize the payment of Loss
attributable to particular alleged ‘Wrongful Acts’——or to
particular counts or causes of action——asserted within a
covered proceeding; rather it

prioritizes the payment of

31

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 32 of 37 PageID.2705

Loss incurred on account of a covered proceeding.”

ECF No.

107, PageID # 2645.
The court agrees with Marinelli’s interpretation
on this point.

Section B(2) does not determine the priority

of payments as between Marinelli and Au because the “claim”
from which both seek reimbursement for defense costs is the
civil proceeding filed against both of them at the same
time.
Accordingly, the court concludes that neither
Marinelli nor Au shows that the Policy gives the payment of
particular defense costs priority over payment of other
claims to the Policy proceeds.

Thus, the court looks to

equitable principles governing interpleader to determine how
funds should be distributed.
C.

Equitable Distribution.

Gossert asserts that the court should apply “a
portion” of the Policy proceeds to pay his pending
settlement offer, which would “benefit” the plaintiffs and
bankruptcy trustee in the underlying litigation “by
obtaining good faith compensation for their claims” against
him.

ECF No. 75-1, PageID # 717.
Uchiyama asks the court to determine an equitable

ratio “to distribute the remainder of proceeds to each
qualified claim, provided that “it is equitably done, and

32

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 33 of 37 PageID.2706

not calculated to the exclusion of one insured for the
benefit of another.”

ECF No. 79-1, PageID # 775.

Au has not suggested an equitable distribution
scheme.

See ECF No. 82, 102.
Marinelli reprises his argument that the contract

terms should guide any equitable analysis.

In particular,

he argues that “equity generally will ‘follow the law,’ and
‘a court sitting in equity [should therefore generally]
reference a[ny applicable] contract to give effect to
equitable principles.’”

ECF No. 91, PageID # 1641 (quoting

Fed. Ins. Co. v. Thompson, No. 2:16-cv-00023-RJS-EJF, 2017
WL 11476225, at *9-10 (D. Utah Dec. 20, 2017) (alterations
in original)).

But Marinelli chops and splices case law to

come up with a quotation to support his position.

The

Thompson language that Marinelli purports to cite to
actually stated:
A court sitting in equity may reference a
contract
to
give
effect
to
equitable
principles. See, e.g., Gen. Elec. Cap. Corp.
v. Future Media Prods., Inc., 536 F.3d 969,
974 (9th Cir. 2008); Kennedy Elec. Co., Inc.
v. U.S. Postal Serv., 508 F.2d 954, 957 (10th
Cir. 1974). Equitable considerations prevail,
of course, when they favor a different outcome
than a contract analysis. Kennedy Elec. Co.,
Inc., 508 F.2d at 957 (altering the terms of a
contract to subordinate one party's claim to
give effect to equitable principles).
Thompson, 2017 WL 11476225, at *9.
Marinelli substitutes “should therefore generally”
33

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 34 of 37 PageID.2707

in brackets in place of the word “may” used by the Thompson
court.

Compare ECF No. 91, PageID # 1641, with Thompson,

2017 WL 11476225, at *9.

He omits the statement that

“equitable considerations . . . prevail if they favor a
different outcome than the contract analysis.”

Compare ECF

No. 91, PageID # 1641, with Thompson, 2017 WL 11476225, at
*9.

Most notably, he amends the parenthetical quote to

support his position by saying that the court should
“‘reference a[ny applicable] contract to give effect to
equitable principles,’” when the actual quote stated that
the court “alter[ed]” contractual terms “to subordinate one
party’s claim to give effect to equitable principles.”
Compare ECF No. 91, PageID # 1641, with Thompson, 2017 WL
11476225, at *9.
Courts appear to favor pro rata distributions
under the circumstances presented here. See Burchfield v.
Bevans, 242 F.2d 239, 242 (10th Cir. 1957) (“Whenever
several persons are all entitled to participate in a common
fund, or are all creditors of a common debtor, equity will
award a distribution of the fund, or a satisfaction of the
claims, in accordance with the maxim, Equality is equity; in
other words, if the fund is not sufficient to discharge all
claims upon it in full, or if the debtor is insolvent,
equity will incline to regard all the demands as standing
34

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 35 of 37 PageID.2708

upon equal footing and will decree a pro rata distribution
or payment.”); see also Fed. Ins. Co. v. Areias, 680 F.2d
962, 965 (3d Cir. 1982); Hebel v. Ebersole, 543 F.2d 14, 18
(7th Cir. 1976); Ruddle v. Moore, 411 F.2d 718, 719 (D.C.
Cir. 1969); Hudson Ins. Co. v. Klamath Superior Motor Co.,
Inc., No. 1:17-CV-00984-CL, 2018 WL 734669, at *2 (D. Or.
Feb. 6, 2018); Chi. Ins. Co. v. Abstract Title Guar. Co.,
Inc., No. 1:03-CV-00590-JDT-TA, 2004 WL 2750258, at *3 (S.D.
Ind. Oct. 12, 2004); Fid. Bank v. Commonwealth Marine & Gen.
Assurance Co., 581 F. Supp. 999, 1019 (E.D. Pa. 1984); State
Farm Mut. Auto. Ins. Co. v. Hamilton, 326 F. Supp. 931, 93638 (D.S.C. 1971); Gakiya v. Hallmark Props., Inc., 68 Haw.
550, 554, 722 P.2d 460, 463 (1986); Territory v. Mellor, 33
Haw. 523, 525 (1935); Ariz. Pub. Serv. Co. v. Lamb, 84 Ariz.
314, 318, 327 P.2d 998, 1001 (1958).
Thus, this court is faced with designing an
equitable pro rata distribution of the remaining Policy
funds.

In making this determination, the court must

consider, inter alia, whether to provide Gossert and Uchiyama
shares even though they had no legal right to the proceeds
arising from their settlement offers as of the date the

interpleader fund was established; whether to alter the
distribution based on Marinelli’s and the Au’s decisions to
retain expensive counsel and to not regularly report their
35

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 36 of 37 PageID.2709

expenses to QBE; and whether to alter the distribution based
on Marinelli’s counsel’s failure to provide an allocation of
defense costs for Marinelli’s noncovered co-defendants in
the underlying litigation.

Within 14 days of the date of

this order, the court ORDERS the parties to file briefs
addressing the above questions and providing an explanation
of their proposed pro rata distribution of Policy funds.
VI.

CONCLUSION.
The court GRANTS in part and denies in part

Gossert’s motion for summary judgment, ECF No. 75, in which
Uchiyama joined, ECF No.79.

The court rules that the Policy

terms do not clearly establish a priority of payments among
Interpleader-Defendants’ claims to the interpleaded funds.
As such, equitable principles will guide the distribution of
the interpleaded funds.

Accordingly, the court DENIES

Marinelli’s and Au’s motions for partial summary judgment as
to the supremacy of their claims over all others to the
interpleaded funds.

ECF Nos. 81, 82.

The parties are ORDERED to file within 14 days of
this order briefing as to the questions raised in section
V.C of this ruling regarding equitable distribution of the
interpleaded funds.
The parties are further ORDERED to contact the
Magistrate Judge assigned to this case to schedule a

36

Case 1:22-cv-00450-SOM-KJM Document 113 Filed 10/13/23 Page 37 of 37 PageID.2710

settlement conference at the earliest available date
occurring after the submission of the briefs ordered here.
The Clerk of the Court is DIRECTED to terminate
Gossert’s Motion for Summary Judgment, ECF No. 75,
Uchiyama’s joinder in Gossert’s motion, ECF No. 79,
Marinelli’s Motion for Partial Summary Judgment, ECF No. 81,
and Au’s Motion for Partial Summary Judgment, ECF No. 82.

IT IS SO ORDERED.

DATED: Honolulu, Hawaii, October 13, 2023.
/s/ Susan Oki Mollway
Susan Oki Mollway
United States District Judge

37