American Trucking and Transport Insurance Company v. Nelson et al

Filing 64

ORDER denying 48 Motion to Compel; denying 48 Motion to Stay; granting 54 Motion to Amend/Correct. See Order for deadline to file opposition brief to Defendant Westchester's Motion 51 . Signed by Chief Judge Dana L. Christensen on 4/20/2018. (dle)

IN THE UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF MONTANA
MISSOULA DIVISION

AMERICAN TRUCKING AND
TRANSPORTATION INSURANCE
COMPANY, a Risk Retention Group,

CV 16–160–M–DLC

ORDER

Plaintiff,
vs.
RALPH NELSON, ROBERT
GORMAN, SR., BOBBY J.
GORMAN, DAN DOOLEY, and
WESTCHESTER
SURPLUS LINES INSURANCE
COMPANY,
Defendants.

Before the Court is the Defendant Westchester Surplus Lines Insurance
Company’s (“Westchester”) Motion to Compel Arbitration and to Stay Plaintiff’s
Claims against Westchester (Doc. 48), and Defendant Dan Dooley’s Motion to File
Amended Answer with Cross-Claims (Docs. 54). For the reasons below, the
Court denies Westchester’s Motion to Compel Arbitration and grants Defendant
Dooley’s Motion to File Amended Answer.

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BACKGROUND
Plaintiff American Trucking and Transportation Insurance Company
(“ATTIC”) is a risk retention group located in Missoula, Montana. ATTIC offers
its member insureds certain benefits which are not generally available to insureds
purchasing insurance on the open market. In exchange for these benefits, the
member insureds are subject to heightened duties to ATTIC and the other member
insured shareholders. Gorman Group is a transportation, shipping, and logistics
company, and was the holding company for a number of subsidiaries, including
Tango Transport. Tango Transport was the principal operating entity for Gorman
Group’s trucking operations. In 2010, Gorman Group became a shareholder of
ATTIC and both Gorman Group and Tango Transport became ATTIC insureds
(hereafter collectively referred to as “the Insureds”). As shareholders, the
Insureds nominated Ralph Nelson, Gorman Group’s Senior Vice President and
General Counsel, to be their representative to the ATTIC Board of Directors, and
ATTIC required that at least one board meeting be held in the State of Montana.
On October 1, 2010, ATTIC issued policy number ATTTAN110 which
provided coverage to the Insureds and other affiliated companies. The policy
provided the insureds with commercial trucking, property, and personal injury
liability coverage with a $5 million per occurrence policy limit subject to a
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$350,000 per occurrence deductible. Tango Transport managed all obligations to
ATTIC on behalf of itself and Gorman Group. Tango Transport made all
premium payments, paid claims, paid defense costs on the claims it handled, and
reimbursed ATTIC on the claims it paid.
ATTIC provided coverage and issued annual policies to the Insureds in
2010, 2011, 2012, 2013, and 2014. From October 1, 2010, through September
30, 2015, Ralph Nelson, acting as the Insureds’ claims handling manager, handled
the intake, investigation, and resolution of claims in which the Insureds anticipated
ultimate exposure would fall below $175,000. The Complaint alleges that Robert
Gorman, Sr., as well as Dan Dooley, as the restructuring agent of Tango Transport,
were advised and aware of the status of the claims handling process.
In 2014, Tango Transport began experiencing financial difficulties.
However, Ralph Nelson informed ATTIC that the Insureds were refinancing their
debt obligations. By September 2015, the Insureds were unable to meet their
financial obligations to ATTIC. At this time, Dan Dooley advised ATTIC that
Tango Transport was either going to sell its operating equipment or would cease
operations.
ATTIC immediately took over all open liability claims that were within
Tango Transport’s deductible under the policies issued by ATTIC, and all other
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open but unpaid claims. ATTIC alleges that once it took over the claims, it
became clear that the Insureds had failed to satisfy their obligations under the
ATTIC Shareholders Agreement and Bylaws, had misrepresented their liabilities,
and were negligent in the manner in which they had handled the claims.
On September 20, 2015, ATTIC and the Insureds agreed to extend the policy
for 45 days to allow the Insureds time to transfer their operating equipment to
another purchasing entity, Celadon, Inc. The Insureds paid a flat rate for
coverage, and also transferred funds to ATTIC to pay for unpaid claims. By
October 2015, the Insureds had informed ATTIC and their creditors that they
planned to liquidate their remaining assets. In April 2016, Tango Transport filed
for Chapter 11 Bankruptcy.
As of December 1, 2016, ATTIC had filed two unsecured claims in the
consolidated bankruptcy case pending in the Federal Bankruptcy Court, Eastern
District of Texas, Dallas, In re Tango Transport, LCL, et al. On December 21,
2016, the bankruptcy court determined that ATTIC could proceed against the nondebtors for civil damages.
ATTIC’s Complaint alleges ten counts against Dooley: (I) breach of
contract; (II) breach of fiduciary duty; (III) negligent misrepresentation; (IV) fraud;
(V) constructive fraud; (VI) negligence; (VII) negligence per se; (VII) acts in
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concert; (IX) civil conspiracy; and (X) piercing the corporate veil. (Doc. 1.)
In July 2017, the Court granted in part and denied in part Dan Dooley’s
Motion to Dismiss. (Doc. 33.) The motion was denied with respect to personal
jurisdiction, and Counts III, IV, V, VI, VIII, and IX of the Complaint. Counts I,
II, VII, and X were dismissed as to Defendant Dooley.
On July 20, 2017, ATTIC filed its Amended Complaint, which joined
Westchester as a Defendant. (Doc. 32.) The claims against Westchester arise
out of a Directors and Officers Insurance Policy, policy no. G27131712
(“Westchester Policy”), issued by Westchester to Gorman Group. As a result of
Westchester’s refusal to defend and indemnify the officers of Gorman Group,
including Ralph Nelson, Bobby J. Gorman, and Robert Gorman, Sr. (the
“Westchester Insureds”), these same individuals agreed to settle with ATTIC
which included a stipulated judgment in favor of ATTIC in the amount of
$3,121,758.45, in exchange for a complete release of any and all claims. In
Count XI of the Amended Complaint, ATTIC seeks a judicial declaration of
Westchester’s obligations under the Westchester Policy, the settlement agreement
just described, and a declaration that Westchester is liable for the $3,121,758.45
stipulated judgment.
Westchester now moves to compel arbitration under the Westchester Policy
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and Defendant Dooley moves to amend his answer to include cross claims against
Westchester.
LEGAL STANDARD
I.

Arbitration
The Federal Arbitration Act (“FAA”) “embodies a liberal federal policy

favoring arbitration” and facilitates private dispute resolution by making arbitration
agreements presumptively “valid, irrevocable, and enforceable.” Mortensen v.
Bresnan Communications, LLC, 722 F.3d 1151, 1157 (9th Cir. 2013) (citing
Kilgore v. KeyBank, Nat. Ass’n, 718 F.3d 1052, 1057 (9th Cir. 2013)) (quoting 9
U.S.C. § 2). Under the FAA, a party to an arbitration agreement may bring a
motion in federal district court to compel arbitration and stay the proceeding
pending resolution of the arbitration. 9 U.S.C. §§ 3–4. Any ambiguities as to
the scope of the arbitration provision must be interpreted in favor of arbitration.
Mastrobuono v. Shearson Lehman Hutton, Inc., 514 U.S. 52, 62 (1995); see also
AT&T Techs. Inc. v. Commc’n Workers of Am., 475 U.S. 643, 650 (1986). The
FAA limits a district court to determining, “(1) whether a valid agreement to
arbitrate exists and, if it does, (2) whether the agreement encompasses the dispute
at issue.” Kilgore, 718 F.3d at 1058 (internal citation and quotation omitted). If
a valid arbitration agreement exists, the district court is required to enforce the
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arbitration agreement according to its terms. Lifescan, Inc. v. Premier Diabetic
Servs., Inc., 363 F.3d 1010, 1012 (9th Cir. 2004).
II.

Amend Answer
Rule 15(a)(2) of the Federal Rules of Civil Procedure provides a liberal

amendment policy, instructing that a court should freely give leave to amend
“when justice so requires.” Under Rule 15(a)(2), “leave to amend should be
granted unless amendment would cause prejudice to the opposing party, is sought
in bad faith, is futile, or creates undue delay.” Johnson v. Mammoth Recreations,
Inc., 975 F.2d 604, 607 (9th Cir. 1992) (citing DCD Programs, Ltd. v. Leighton,
833 F.2d 183, 185–87 (9th. Cir. 1987)). However, once a district court enters a
scheduling order pursuant to Rule 16, that rule’s standards control. Johnson, 975
F.2d at 607–08. Therefore, a party seeking to amend a pleading after the date
specified in the scheduling order must show “good cause” exists for amendment
under Rule 16(b)(4) in addition to satisfying the Rule 15(a)(2) requirements. Id.
at 608.
DISCUSSION
I.

Arbitration
Westchester moves the Court to compel arbitration and stay proceedings,

asserting that the Westchester Policy mandates arbitration when either party has
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requested it. ATTIC asserts that Westchester breached its obligations under the
Westchester Policy and waived any right to enforce the arbitration provision.
All of the named individual Defendants tendered the Complaint in this
matter to Westchester for a defense under the Westchester Policy. (Doc. 32 at
39.) Westchester denied a defense to the Westchester Insureds because it
believed the Westchester Policy’s Creditor exclusion barred coverage. Thus,
Westchester did not provide a defense under a reservation of rights and did not file
a declaratory judgment action. As previously explained, after Westchester
refused to provide a defense, Defendants Ralph Nelson, Bobby J. Gorman, and
Robert Gorman, Sr. agreed to settle with ATTIC, provided a stipulated judgment in
the amount of $3,121,758.45, and assigned to ATTIC all of their rights and claims
which they may have against Westchester. (Id. at 40.) In exchange, ATTIC
signed a covenant not to execute against the settling Defendants, and also agreed to
dismiss its claims against Darrell Gorman and Liz Cannon with prejudice. (Id. at
41.)
The Westchester Policy contains the following Alternative Dispute
Resolution clause:
J.

ALTERNATIVE DISPUTE RESOLUTION

The Insureds and the Insurer shall submit any dispute or controversy
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arising out of or relating to this Policy or the breach, termination or
invalidity thereof to the alternative dispute resolution (“ADR”)
process described in this subsection.
Either an Insured or the Insurer may elect the type of ADR process
discussed below; provided, however, that the Insured shall have the
right to reject the choice by the Insurer of the type of ADR process at
any time prior to its commencement, in which case the choice by the
Insured of ADR process shall control.
There shall be two choices of ADR process: (1) nonbinding mediation
administered by any mediation facility to which the Insurer and the
Insured mutually agree, in which the Insured and the Insurer shall
try in good faith to settle the dispute by mediation in accordance with
the then-prevailing commercial mediation rules of the mediation
facility; or (2) arbitration submitted to any arbitration facility to which
the Insured and the Insurer mutually agree, in which the arbitration
panel shall consist of three disinterested individuals. In either
mediation or arbitration, the mediator or arbitrators shall have
knowledge of the legal, corporate management, and insurance issues
relevant to the matters in dispute. In the event of arbitration, the
decision of the arbitrators shall be final and binding and provided to
both parties, and the award of the arbitrators shall not include
attorneys’ fees or other costs. In the event of mediation, either party
shall have the right to commence arbitration in accordance with this
section; provided, however, that no such arbitration shall be
commenced until at least 60 days after the date the mediation shall be
deemed concluded or terminated. In all events, each party shall share
equally the expenses of the ADR process.
Either ADR process may be commenced in New York, New York or
in the state indicated in Item A of the Declarations as the principal
address of the Parent Company. The Parent Company shall act on
behalf of each and every Insured in connection with any ADR process
under this section.

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(Doc. 49-1 at 9–10.)
As a threshold matter, the Court finds that a valid arbitration clause exists.
The clause binds the parties to arbitrate any unresolved dispute at the request of
either party. (Doc. 3 at 45.) The “controversy” here relates to the terms of the
Westchester Policy and whether Westchester is obligated to provide the Insureds a
defense and indemnify them for the amount in the stipulated judgment. Having
found a valid arbitration clause, the only question remaining is whether the
arbitration clause is binding, or whether Westchester’s refusal to provide a defense
at the outset renders the arbitration provision unenforceable.
Westchester argues that because the arbitration clause is valid, the right to
arbitrate under the FAA is not abrogated by Montana law. ATTIC counters that
due to Westchester’s refusal to offer the Westchester Insureds a defense, Montana
law renders the arbitration provision unenforceable. For support, both
Westchester and ATTIC rely on the Montana Supreme Court’s holding in
Tidyman’s Mgmt. Servs. v. Davis, 330 P.3d 1139 (Mont. 2014) (“Tidyman’s I”).
In Tidyman’s I, the Court found that an insurer’s “duty to defend arises when a
complaint against an insured alleges facts which, if proved, would result in
coverage.” Id. (citing Farmers Union Mut. Ins. Co. v. Staples, 90 P.3d 381
(Mont. 2004). The duty to defend is “independent from and broader than the duty
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to indemnify created by the same insurance contract.” Id. (quoting Staples, 90
P.3d at 385). Thus, “[w]here a complaint alleges facts which represent a risk
outside the coverage of the policy but also avers facts which, if proved, represent a
risk covered, the insurer is under a duty to defend.” Id. (citations omitted).
And, “[u]nless there exists an unequivocal demonstration that the claim against an
insured does not fall within the insurance policy's coverage, an insurer has a duty
to defend.” Id. (citing Staples, 90 P.3d at 385).
“When a court compares allegations of liability advanced in a complaint
with policy language to determine whether the insurer’s obligation to defend was
‘triggered,’ a court must liberally construe allegations in a complaint so that all
doubts about the meaning of the allegations are resolved in favor of finding that the
obligation to defend was activated.” Id. (quoting Staples, 90 P.3d at 385). Also,
“[p]olicy exclusions must be construed narrowly in recognition of the fundamental
protective purpose of an insurance policy and the obligation of the insurer to
provide a defense. The insurer must construe factual assertions from the
perspective of the insured rather than from its own perspective.” Id. (quoting
Staples, 90 P.3d at 385).
Ultimately, if an insurer unjustifiably refuses to provide a defense to an
insured, “the insurer is estopped from denying coverage and becomes liable for
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defense costs and judgments.” Id. (quoting Staples, 90 P.3d at 386). Thus,
“where an insurer [unjustifiably] refuses to defend its insured, it does so at its
peril.” Id. (citation omitted). Because of this result, the Montana Supreme
Court has recommended as follows:
[W]here an insurer believes it is not required to provide a defense
under the policy, the prudent course of action is to defend the insured
under a reservation of rights and file a declaratory judgment action to
discern coverage.
Id. (citations omitted).
Pursuant to Tidyman’s I, Westchester argues that the Creditor’s Exclusion in
the Westchester Policy is the kind of “unequivocal” basis for denial of coverage
that an insurer may assert as a ground for properly declining to defend an insured.
(Doc. 49 at 15.) The Westchester Policy Creditor Exclusion states:
CREDITOR EXCLUSION
It is agreed that subsection C1 of the Directors & Officers and
Company Coverage Section is amended by the addition of the
following:
brought, or maintained by, on behalf of, in the right of, at the direction
of, at the behest of, or for the benefit of any:
(i) person
(ii) partnership or any of its partners, directors, officers, or
employees; or

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(iii) corporation, or any of its directors, officer or employees
who is a secured or unsecured creditor of the Company.
(Doc. 49-1 at 40.) Westchester argues that this exclusion clearly applies because
ATTIC was a creditor in the Tango Transport Chapter 11 Bankruptcy, and thus
coverage under the Westchester Policy was never implicated. For further support,
Westchester relies on two subsequent Montana Supreme Court cases that clarified
the Tidyman’s I holding that insurers may decline coverage if the claim
unequivocally falls outside the policy. See Beaverhead Cty. v. Montana Ass'n of
Ctys. Joint Powers Ins. Auth., 335 P.3d 721, 725 (Mont. 2014) (finding that “there
was an ‘unequivocal demonstration’ that the claims against the [insurer] were not
covered by its insurance policy” and that “[n]o duty to defend was ever triggered,
and [the insurer’s] denial of coverage was proper.”); Huckins v. United Servs.
Auto. Ass’n, 396 P.3d 121, 125–26 (Mont. 2017) (concluding that under the
homeowners policy, the Failure to Disclose Exclusion and the facts of the
underlying complaint presented an unequivocal demonstration that the claims did
not fall within the insurance policy’s coverage, and USAA had no duty to defend.)
Westchester also argues that ATTIC’s amended complaint does not allege that
Westchester was in a position to commence a declaratory judgment action when it
first declined coverage to its insureds. (Doc. 49 at 16–17.) Westchester asserts
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that under Tidyman’s I, a declaratory judgment cannot be brought unless there is a
definite dispute regarding coverage, and that here the Westchester Policy
unequivocally precluded coverage. In sum, Westchester’s argument is premised
entirely on the fact that it believes the Westchester Policy provides no coverage
due to the Creditor’s Exclusion.
ATTIC argues that Tidyman’s I controls and Westchester’s reading of the
case is incorrect. Thus, when Westchester disclaimed coverage for the
Westchester Insureds and took no steps to discern its duties to defend or
indemnify—by filing a declaratory judgment action—Westchester forfeited its
rights to rely on the insurance contract itself and any defenses therein. (Doc. 58
at 10–11.) ATTIC argues that the facts here are analogous to those in Tidyman’s
I and that when an insurer believes a policy exclusion precludes coverage, it should
defend its insureds under a reservation of rights and file a declaratory action.
ATTIC also counters that Westchester’s reliance on Beaverhead County and
Huckins is misplaced because the Montana Supreme Court upheld Tidyman’s I in
those cases and, specifically in Huckins, found that as to the renter’s policy in that
case the insurer breached its duty to defend because coverage did exist. ATTIC
contends that because the Complaint includes claims against Westchester’s
insureds that are not excluded by the Creditor’s Exclusion, such as fraud,
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misrepresentation, and negligence, that there is still arguably coverage under the
Westchester Policy for a majority of the claims and, consequently, Westchester
breached its duty to defend by precluding coverage as a whole.
Next, ATTIC argues that because it is not a creditor as contemplated by the
Westchester Policy’s Creditor Exclusion, there existed a genuine dispute regarding
coverage at the outset when the Westchester Insured’s asked Westchester to defend
them in the lawsuit. Thus, ATTIC argues there is no need for the Court to do a
full coverage analysis of whether it is in fact a creditor and whether the exclusion
applies because the initial dispute meant that Westchester was required under
Montana law to defend the Westchester Insureds and file a declaratory action.
Therefore, ATTIC concludes that Westchester is now estopped from relying on the
arbitration provision at issue here.
Lastly, in regards to the FAA and the arbitration clause itself, ATTIC
argues that that a valid agreement to arbitrate does not exist because ATTIC is not
an “Insured” under the terms of the Policy and was merely assigned the rights of
the Insureds post-breach of the contract. And, even if ATTIC was an Insured,
ATTIC contends that the contract is a contract of adhesion because it was nonnegotiable when it was presented to Gorman Group. 1 Thus, compelling
1

ATTIC filed a notice to the Court on January 11, 2018, in regards to supplemental
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arbitration in New York would be unjust.
After reviewing ATTIC’s Complaint against the Insureds, the Court finds
that Westchester cannot unequivocally demonstrate that ATTIC’s claims against
the Westchester Insureds were completely precluded from coverage. The
Complaint alleges breach of contract, breach of fiduciary duties, negligent
misrepresentation, fraud, constructive fraud, negligence, negligence per se, acts in
concert, civil conspiracy, and piercing the corporate veil. (Doc. 1.) The parties
do not dispute that some of these claims are covered as occurrences under the
Westchester Policy. See State Farm Fire and Cas. Co. v. Schwan, 308 P.3d 48,
51 (Mont. 2013) (citations omitted) (“Montana follows what other courts have
termed the ‘mixed-action’ rule, which requires an insurer to defend all counts in a
complaint so long as one count potentially triggers coverage, even if the remaining
counts would not be covered.”) While ATTIC does admit to holding two
unsecured claims in the underlying bankruptcy case (Doc. 1 at 15), after a cursory
review of the Westchester Policy, the Court cannot unequivocally conclude that
authority on this issue. ATTIC contends that if the Court finds that the assignment in this case
operates to make ATTIC an “Insured” to the Westchester Policy, that Montana Code Annotated
§ 27–5-114(2)(c), which prohibits arbitration clauses in agreements that relate to insurance
policies or insurance contracts, serves to bar Westchester’s demand for arbitration. However,
Montana law does not govern this contract dispute because it is preempted by the FAA. See,
e.g., Elk Mountain Motor Sports v. Arctic Cat Sales, Inc., No. CV 13-7-H-CCL, 2013 WL
5492960, at *2 (D. Mont. Oct. 1, 2013) (“[T]he Federal Arbitration Act (“FAA”) governs this
dispute because it involves a transaction implicating interstate commerce.”)
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ATTIC qualifies as a “Creditor” under the Westchester Policy. In fact, the parties
dispute the definition of “Creditor” under the policy, establishing that there was a
dispute regarding coverage at the outset of this case when the Westchester Insureds
asked Westchester to provide them with a defense. (See Docs. 58 at 19–27; Doc.
61 at 5–10.)
However, at this point in the litigation, it is not necessary for the Court to
make a determination regarding coverage and whether the exclusion applies.
What is mandated by Tidyman’s I under the facts of this case is that Westchester
should have initially offered a defense to its Insureds under a reservation of rights
and then filed a declaratory judgment action regarding coverage. Because
Westchester failed to provide a defense, Montana law is clear that Westchester has
lost its right to invoke insurance contract defenses, including the right to arbitrate.
Indep. Milk & Cream Co. v. Aetna Life Ins. Co., 216 P. 1109, 1110 (Mont. 1923);
State Farm Mut. Auto. Ins. Co. v. Freyer, 312 P.3d 403, 413 (Mont. 2013);
Tidyman’s I, 330 P.3d at 1149 (citing Staples, 90 P.3d at 387) (“It is wellestablished that where an insurer refuses to defend a claim and does so
unjustifiably, the insurer is estopped from denying coverage and becomes liable for
defense costs and judgments.”); Tidyman’s Mgmt. Servs. Inc. v. Nat’l Union Fire
Ins. Co. of Pittsburgh, PA, 378 P.3d 1182, 1186 (Mont. 2016). Therefore,
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Westchester cannot now claim that the arbitration clause is mandatory under the
terms the Westchester Policy after it breached its duty to defend. The Court need
not analyze the parties’ additional arguments and concludes that the arbitration
clause is unenforceable.
II.

Amend Answer
Because the Court has found that Westchester breached its duty to defend

and that the arbitration clause is unenforceable, the Court will also allow
Defendant Dooley to amend his answer. Dooley moves for leave to file an
amended answer and include cross claims against Westchester to determine its
obligations to defend and indemnify Dooley. That is the same issue that ATTIC
is currently litigating in Count XI of its Amended Complaint. Westchester will
not be unduly prejudiced because it has yet to answer ATTIC’s Amended
Complaint and no preliminary pretrial conference has been held. Further, these
claims come as no surprise to Westchester as it has already litigated this issue in
regards to its own motion to compel arbitration. While Westchester contends that
Defendant Dooley’s cross claims are futile because the alleged claims are subject
to mandatory arbitration, the Court has already resolved the issue of arbitration
above and found that the arbitration clause is unenforceable due to Westchester’s
failure to provide a defense to the Westchester Insureds at the outset of this
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litigation.
Under Rule 15(a)(2), the Court concludes that Defendant Dooley’s proposed
amendment to his answer is not prejudicial, futile, nor does it create undue delay.
Judicial economy is best served by ATTIC and Defendant Dooley litigating this
issue before the Court at the same time.

Therefore, Defendant Dooley’s Motion

to File Amended Answer is granted.
Accordingly, IT IS ORDERED that Westchester’s Motion to Compel
Arbitration is (Doc. 48) is DENIED, and Defendant Dooley’s Motion to File
Amended Answer (Doc. 54) is GRANTED.
IT IS FURTHER ORDERED that pursuant to the Court’s Order dated
September 26, 2017 (Doc. 59), ATTIC and Defendant Dooley have 30 days from
the date of this Order to file their opposition to Defendant Westchester’s Motion
Pursuant to Fed. R. Civ. P 12(B)(6) to Dismiss Plaintiffs Claims Against
Westchester (Doc. 51).
DATED this 20th day of April, 2018.

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