Scottsdale Insurance Company v. Byrne

Filing 60

Judge F. Dennis Saylor, IV: ORDER entered. MEMORANDUM AND ORDER Plaintiff's motion for reconsideration is GRANTED, and defendants' motion for entry of judgment for the entire amount of the underlying judgment is DENIED. Defendants will be awarded the policy limit of $3 million, plus post-judgment interest at the statutory rate dating from November 25, 2015, the date of the judgment in the underlying suit. (FDS, law1)

UNITED STATES DISTRICT COURT
DISTRICT OF MASSACHUSETTS
__________________________________________
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SCOTTSDALE INSURANCE COMPANY,
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Plaintiff and
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Counter-Defendant,
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v.
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TIMOTHY BYRNE and
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ROBERT BOLTON,
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Defendants and
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Counter-Claimants.
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__________________________________________)

Civil Action No.
16-11435-FDS

MEMORANDUM AND ORDER ON PLAINTIFF’S
MOTION FOR CLARIFICATION AND/OR RECONSIDERATION
AND DEFENDANTS’ MOTION FOR JUDGMENT ON PARTIAL FINDINGS
SAYLOR, J.
This is an insurance coverage dispute involving whether an insurer was obligated to
defend an investment fund accused of mismanagement and self-dealing. Wellesley Advisors
Funds was an investment advisor for the investment fund WARF Realty Fund I, LLC
(“WARF”), in which the Plumbers and Pipefitters Local 51 Pension and Annuity Funds (the
“Pension Funds”) had invested. Defendants Timothy Byrne and Robert Bolton are co-chairs of
the Board of Trustees of the Pension Funds.
Wellesley purchased an insurance policy on behalf of WARF from plaintiff Scottsdale
Insurance Company. WARF’s alleged mismanagement and self-dealing precipitated a lawsuit
alleging negligence and an ERISA violation. Scottsdale declined to defend WARF, citing
various coverage exclusions. WARF then went into receivership and did not defend the suit,

leading to a default judgment against it for $5,005,422.12.
In this action, Scottsdale sought a declaratory judgment stating that it had no duty to
defend or indemnify WARF, and defendants counterclaimed for the amount of the default
judgment, alleging breach of contract, breach of the implied covenant of good faith and fair
dealing, and violation of the Massachusetts consumer protection statute, Mass. Gen. Laws ch.
93A. 1 Scottsdale moved for summary judgment, and defendants cross-moved for partial
summary judgment on their breach of contract counterclaims.
On March 1, 2018, the Court granted defendants’ motion for partial summary judgment
and denied Scottsdale’s motion for summary judgment, finding that Scottsdale breached the
insurance contract by refusing to defend WARF. In its memorandum and order, the Court
suggested that it would award defendants the amount of the coverage limit ($3,000,000) and
directed the parties to file motions “concerning the form of judgment” by March 15, 2018.
Scottsdale has now moved for clarification and/or reconsideration of the memorandum
and order. In support of its motion, Scottsdale contends that the Court failed to address the
substance of defendants’ bad-faith claims, and that because those claims remain outstanding,
judgment cannot issue. Defendants have also moved for Scottsdale to pay the entire judgment in
the underlying action. For the reasons set forth below, the Court will grant Scottsdale’s motion
for reconsideration and deny defendants’ motion for payment of the entire judgment.
I.

Motion for Reconsideration
A.

Legal Standard

District courts have “substantial discretion and broad authority” to grant a motion for
reconsideration pursuant to Fed. R. Civ. P. 59(e). Ruiz Rivera v. Pfizer Pharms., LLC, 521 F.3d

1

On May 15, 2016, WARF assigned any right, title, and interest in claims it held against Scottsdale to
defendants.

2

76, 81 (1st Cir. 2008). A motion for reconsideration will be granted upon a showing of (1) a
“manifest error of law,” (2) new evidence, or (3) a misunderstanding or other error “not of
reasoning but apprehension.” Id. at 82. Rule 59(e) motions cannot be used to “advance a new
argument that could (and should) have been presented prior to the district court's original ruling.”
Cochran v. Quest Software, Inc., 328 F.3d 1, 11 (1st Cir. 2003). Nor is a Rule 59(e) motion an
appropriate means to “repeat old arguments previously considered and rejected.” Nat'l Metal
Finishing Co., Inc. v. Barclays American/Commercial, Inc., 899 F.2d 119, 123 (1st Cir. 1990).
B.

Analysis

Plaintiff correctly notes that the Court’s memorandum and order only granted partial
summary judgment to defendants on Counts 1 and 2 of their counterclaims. Accordingly,
defendants’ bad-faith claims (Counts 3-6) remain outstanding, and entry of final judgment is
inappropriate until those claims are resolved. See Fed. R. Civ. P. 54(b). 2 The Court erred in
failing to address the bad-faith claims, and reconsideration is therefore warranted.
Counts 3 and 4 allege breach of the implied covenant of good faith and fair dealing.
(Ans. ¶¶ 37-46). Under Massachusetts law, a covenant of good faith and fair dealing is implied
in every contract. UNO Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 385
(2004). The covenant provides that “neither party shall do anything that will have the effect of
destroying or injuring the rights of the other party to receive the fruits of the contract.”
Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451, 471 (1991). The implied covenant
may not, however, be invoked to create rights and duties not contemplated by the provisions of
the contract or the contractual relationship. UNO Restaurants, 441 Mass. at 385; AccuSoft Corp.

2

Plaintiff had previously moved to sever and stay the bad-faith claims. (Docket No. 18). The Court denied
the motion on March 29, 2017. (Docket No. 22).

3

v. Palo, 237 F.3d 31, 45 (1st Cir. 2001).
Counts 5 and 6 allege unfair and deceptive conduct in violation of Mass. Gen. Laws ch.
93A. (Ans. ¶¶ 47-62). “Conduct is unfair or deceptive if it is ‘within at least the penumbra of
some common-law, statutory, or other established concept of unfairness' or ‘immoral, unethical,
oppressive, or unscrupulous.’” Cummings v. HPG Int'l Inc., 244 F.3d 16, 25 (1st Cir. 2001)
(quoting PMP Assoc. Inc. v. Globe Newspaper Co., 366 Mass. 593, 596 (1975)). In addition, the
plaintiff must show “an injury or loss” and a “causal connection between the defendant’s
deceptive act or practice and the plaintiff’s injury.” Gorbey ex rel. Maddox v. Am. Journal of
Obstetrics and Gynecology, 849 F. Supp. 2d 162, 165 (D. Mass. 2012).
In their summary judgment briefs, the parties agreed that the disposition of the bad-faith
claims turned on whether plaintiff’s conduct in declining to defend WARF in the underlying
litigation and subsequent refusal to pay on the policy was based on a “reasonable or plausible
interpretation of the policy.” Peterborough Oil Co., Inc. v. Great Am. Ins. Co., 397 F. Supp. 2d
230, 244 (D. Mass. 2005). Here, plaintiff’s interpretation of the applicable exclusions was
ultimately incorrect, but it was not unreasonable. For example, a letter mailed to WARF’s
counsel on December 30, 2014, parsed the policy language and provided relevant case law in an
effort to justify why plaintiff was not obligated to defend the underlying suit. (Defs. Ex. G).
Similar letters were mailed to WARF’s counsel on February 10 and March 14, 2016. (Defs. Ex.
J, L).
Defendants have offered no evidence of plaintiff’s purported bad faith beyond the
decisions themselves not to defend the suit and provide indemnification. Indeed, the Court’s
earlier memorandum and order was predicated in large part on the proposition that policy
ambiguities are construed in favor of the insured party. See Hazen Paper Co. v. U.S. Fid. &

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Guar. Co., 407 Mass. 689, 700 (1990). “In such circumstances, an insurer’s refusal to defend,
even if ultimately determined to be wrong, does not support a claim under [Mass. Gen. Laws
93A].” Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747, 754 (1993). The Court similarly
concludes that there was no breach of the implied covenant of good faith and fair dealing.
Accordingly, summary judgment on the bad-faith claims will be granted to plaintiff.
II.

Motion for Entry of Judgment
Defendants have also moved for entry of judgment requiring plaintiff to pay the entire

amount of the judgment in the underlying suit, $5,005,422.12, plus post-judgment interest. In
support, they note that “the general rule under Massachusetts law is that if the insurer fails to
defend the lawsuit, it is liable for all defense costs and (assuming policy coverage) the entire
resulting judgment or settlement, unless liability can be allocated among covered and uncovered
claims.” Liberty Mutual Ins. Co. v. Metropolitan Life Ins. Co., 260 F.3d 54, 63 (1st Cir. 2001).
They contend that liability in the underlying suit could not be allocated between covered and
uncovered claims. (Defs.’ Mot. at 5-6). 3
As a general proposition, “[w]hen an insurer breaches its duty to defend, the insured is
entitled to contract damages.” N.E. Envtl. Techs. Corp. v. Am. Safety Risk Retention Grp., Inc.,
810 F. Supp. 2d 390, 396 (D. Mass. 2011) (citing Liquor Liab. Joint Underwriting Ass’n of
Mass. v. Hermitage Ins. Co., 419 Mass. 316, 323 (1995)). If the insurer’s refusal to defend was
made in “good faith,” as is here, “there is no reason not to apply normal contract principles.”
Polaroid Corp., 414 Mass. at 763 (citing Ficara v. Belleau, 331 Mass. 80, 82-83 (1954)).
“Contract damages are ‘those that cannot be reasonably prevented and arise naturally from the
breach, or which are reasonably contemplated by the parties.’” N.E. Envtl. Techs. Corp., 810 F.

3

As explained in the Court’s March 1, 2018 memorandum and order, in the underlying suit the ERISA
claim was not covered, but the negligence claim possibly was.

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Supp. 2d at 396 (quoting Polaroid Corp., 414 Mass. at 762). Had plaintiff defended the
underlying suit and lost, its liability to WARF would have been capped at the $3 million policy
limit. Defendants, as WARF’s assignees, cannot recover any more than that amount.
To the extent defendants rely on Boyle v. Zurich Am. Ins. Co., 472 Mass. 649 (2015), that
case is inapposite. In Boyle, the defendant insurance company’s sole defense was that the duty to
defend was not triggered because the insured never notified it about the pending suit. Id. at 654.
However, the plaintiffs had separately alerted the company about the suit. Id. In awarding the
plaintiffs the entirety of the judgment in the underlying suit, an amount well in excess of the
policy coverage limit, the Supreme Judicial Court focused its analysis on the fact that the
insurance company had failed to establish prejudice stemming from the insured’s failure to
notify. Id. at 658-59. By contrast, the parties in this suit simply disputed whether coverage
existed in the first instance. 4 Accordingly, defendants’ recovery is limited to $3 million. See
Polaroid Corp., 414 Mass. at 763 (“When a contract is breached, the injured party is entitled to
receive what would have been obtained if there had been no breach; the injured party is not
entitled to recover more.”).
III.

Conclusion
For the foregoing reasons, plaintiff’s motion for reconsideration is GRANTED, and

defendants’ motion for entry of judgment for the entire amount of the underlying judgment is
DENIED. Defendants will be awarded the policy limit of $3 million, plus post-judgment interest
at the statutory rate dating from November 25, 2015, the date of the judgment in the underlying
suit.

4

Plaintiff also contends that unlike the insurance company in Boyle, it (1) did not ignore communications
from the insured, (2) was not provided notice of the motion hearing for the entry of default judgment in the
underlying suit, and (3) had no impact on the insured’s being placed into receivership.

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So Ordered.

/s/ F. Dennis Saylor
F. Dennis Saylor IV
United States District Judge

Dated: May 2, 2018

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