Secretary of Labor v. Potts et al
ORDER granting 10 Gemini Insurance Company's Motion to Intervene. Signed by Magistrate Judge Terence P. Kemp on 12/15/16. (sem)
IN THE UNITED STATES DISTRICT COURT
FOR THE SOUTHERN DISTRICT OF OHIO
Thomas E. Perez, Secretary
Thomas E. Potts, Jr., et al.,
Case No. 2:16-cv-612
JUDGE JAMES L. GRAHAM
Magistrate Judge Kemp
OPINION AND ORDER
The Secretary of Labor filed this action under 29 U.S.C.
§1132(a)(2) and (5), alleging that Defendants Thomas E. Potts and
Fiduciary Trust Services, Inc. (FTS), violated ERISA in
connection with an ESOP stock purchase which took place on
January 28, 2011.
In that transaction, the ESOP of Triple T
Transport, Inc., purchased 80% of the outstanding stock of the
company for $17.46 million.
The Secretary alleges that Mr.
Potts, who was the trustee of the ESOP and an agent and employee
of Fiduciary Trust Services, did not act prudently with respect
to the transaction even though he retained a separate company to
value the stock and that company (ComStock Valuation Appraisers)
concluded that the stock was worth more than the proposed
The Secretary contends that the valuation was
flawed for several reasons and resulted in an over-valuation of
the stock by almost $6 million above fair market value.
the Court to order the Defendants to “restore all losses caused
to the ESOP as a result of their fiduciary breaches” and to undo
At relevant times, FTS and/or Mr. Potts had insurance
through Gemini Insurance Company.
They believe that the claims
made against them in the complaint are covered under the Gemini
Gemini apparently disagrees, and has moved to intervene
in this case for purposes of obtaining a declaratory judgment as
to its obligations.
Defendants do not oppose the intervention,
but the Secretary does.
The motion to intervene (Doc. 10) is now
For the following reasons, the motion will be
Mr. Potts and/or FTS have been insured by Gemini for some
According to Gemini’s motion, only two policies are
relevant to this case - one issued for the time period from
September 1, 2014 to August 31, 2015, and one for the succeeding
Both are “claims-made” policies.
appears that neither Defendant made a claim under the earlier
Gemini asserts that both Mr. Potts and FTS were aware
during that policy period that the Department of Labor was going
to assert the claims against them which have ripened into this
lawsuit, and that by failing to make the claims during the
correct policy period (the earlier of the two) and not notifying
Gemini prior to its issuance of the later policy that these
claims were pending, Defendants have forfeited any coverage they
may otherwise have enjoyed.
Gemini contends that it has an
economic interest in the outcome of this case and that the
coverage issues it wishes to raise might be impacted by the way
the claims between the Secretary and the Defendants are resolved.
It seeks intervention as of right under Fed.R.Civ.P. 24(a) and,
alternatively, permissive intervention under Rule 24(b).
The Secretary opposes intervention, arguing that Gemini
should simply litigate its state-law contract dispute with
Defendants in a different case.
The Secretary disputes Gemini’s
claim that it is entitled to intervene as of right, arguing that
Gemini does not have a “substantial legal interest” in the action
as required by Rule 24(a), and also argues that there are no
common questions of law or fact between the Secretary’s ERISAbased claim and the coverage dispute which Gemini seeks to
litigate which would justify intervention under Rule 24(b).
Court will begin its analysis with Rule 24(a).
Intervention as of Right
Fed.R.Civ.P. 24(a) reads in full as follows:
(a) Intervention of Right. On timely motion, the
court must permit anyone to intervene who:
(1) is given an unconditional right to intervene
by a federal statute; or
(2) claims an interest relating to the property or
transaction that is the subject of the action, and is
so situated that disposing of the action may as a
practical matter impair or impede the movant's ability
to protect its interest, unless existing parties
adequately represent that interest.
In Bradley v. Milliken, 828 F.2d 1186 (6th Cir. 1987), the
Court of Appeals provided a comprehensive explanation of the
functioning of this Rule.
With respect to intervention as of
right under Rule 24(a)(2), Milliken indicates that, first, the
application must be timely.
Whether an application for
intervention is timely must be evaluated in light of the purpose
for which intervention is sought, the length of time that the
intervenor has known about the interest in the litigation,
whether any of the original parties to the litigation would be
prejudiced, and the stage to which the lawsuit has progressed
when intervention is sought.
See also Michigan Association for
Retarded Citizens v. Smith, 657 F.2d 102, 105 (6th Cir. 1981),
holding that the stage to which a lawsuit has progressed is only
one factor in the inquiry and is not dispositive, and that the
court must also consider whether there are any "unusual
circumstances" militating either in favor of or against
Second, in order to intervene as of right, a party must
have an interest in the subject matter of the suit.
indicates that this requirement must be liberally construed.
Id. at 1192.
However, the interest must be direct and
substantial rather than peripheral or speculative.
Norris, 870 F.2d 343 (6th Cir. 1989); Meyer Goldberg, Inc. v.
Goldberg, 717 F.2d 290 (6th Cir. 1983).
Next, the intervenor's ability to protect its interest
must somehow be impaired by the disposition of the case.
Grubbs, supra; Triax Co. v. TRW, Inc., 724 F.2d 1224, 1227
(6th Cir. 1984).
Finally, the interest which the intervenor
seeks to assert must not be adequately represented by the
existing parties to the suit.
Milliken, supra, at 1192.
Ordinarily, where the intervenor and an existing party have
the same ultimate objective in the litigation, the
representation of the intervenor's interest by the existing
party is presumed to be adequate, and the intervenor bears
the burden of demonstrating the inadequacy of that party's
representation of his interests.
Meyer Goldberg, Inc. v.
Goldberg, supra, at 293; see also In re General Tire and
Rubber Co. Securities Litigation, 726 F.2d 1075, 1087 (6th
However, the burden is not a particularly
heavy one, and is satisfied if the intervenor can show that
there is substantial doubt about whether his interests are
being adequately represented by an existing party to the
National Wildlife Federation v. Hodel, 661 F.Supp. 473
(E.D. Ky. 1987); see Trbovich v. United Mine Workers, 404 U.S.
528, 538 n. 10 (1972).
Gemini asserts that it meets all four of these requirements.
Since the Secretary does not argue that the motion was untimely and it clearly was not - there is no need for further discussion
of that factor.
The Secretary does take issue with the
proposition that Gemini has a direct and substantial (rather than
peripheral or speculative) interest in the case, however, so the
Court’s analysis will focus on that factor.
The interest which Gemini identifies in its motion is “an
economic interest in the subject matter of this lawsuit.”
to Intervene, Doc. 10, at 9.
It argues that such an interest is
present whenever a proposed intervenor “may be forced to pay
litigation costs or have an economic interest that is contingent
on the outcome of the lawsuit....”
Id. at 10.
That is the case
here, according to Gemini, because the Defendants now claim that
insurance coverage is available to cover their potential
liability, and the Secretary may ultimately make the same
argument in a direct action which could be brought if Defendants
prove unable to pay the full amount of any judgment rendered.
cites to numerous decisions where such intervention has been
allowed, and also argues that being forced to litigate coverage
in a different case would itself impair its economic interests
and also might have no effect on a direct action brought under
O.R.C. §3929.06(A)(2) unless the Secretary were made a party to
the coverage suit - in which case it simply is more efficient to
use this case, where the Secretary is already a party, as the
vehicle to litigate the coverage question.
The Secretary’s counter-argument is simple.
characterizes Gemini’s interest in the outcome of this case as
“contingent” because the question of whether Gemini actually has
some economic interest here is entirely dependent on the
resolution of the coverage issue.
The Secretary cites to
numerous decisions which, it asserts, treat such a contingent
interest as an inadequate basis for intervention under Rule
The Court begins with a brief review of the cases upon which
the parties rely.
The primary case cited by the Secretary is
Travelers Indem. Co. v. Dingwell, 884 F.2d 629 (1st Cir. 1989).
There, a group of insurers sought to intervene in an action which
was brought against their insured for indemnification for certain
environmental clean-up costs.
The insurers had reserved their
right to deny coverage for those costs.
denied the motion to intervene.
The District Court
The Court of Appeals first
addressed the issue of intervention of right under Rule 24(a),
and particularly the question of whether the insurers had
demonstrated a sufficient interest in the subject matter of the
In its analysis, the Dingwell court identified three
possible interests which the insurers might have had in the
indemnification action: (1) minimizing their insured’s liability;
(2) obtaining a determination that the claims against the insured
were not covered by the policies or had been waived; and (3)
staying the indemnification action until they could obtain a
declaratory judgment about coverage.
Id. at 638.
that “[t]here is no precise and authoritative definition of the
interest required to sustain a right to intervene under Rule
24(a)(2)”, the court found the first claimed interest to be
contingent based upon the fact that the insurer denied coverage.
The second interest, it said, was simply unrelated to the issues
in the underlying case, which dealt exclusively with the
potential liability of the insured, and not with the issue of
As to the third, the court concluded that it
was really no different from the first two.
It did recognize,
however, that having coverage determined first was an important
interest, but that it could be protected through permissive
intervention under Rule 24(b).
It also affirmed denial of
intervention under that rule, but under a deferential standard of
review which, in the court’s view, rendered a district court’s
exercise of discretion to deny permissive intervention
Id. at 641.
Dingwell’s key holding - that in the absence of conceding
coverage, an insurer has only a contingent interest in the
subject matter of a case against its insured - has not been
For example, in Ross v. Marshall, 426 F.3d
745 (5th Cir. 2005), the Court permitted an insurer to intervene
in a case against its insured after judgment had been entered,
and for purposes of pursuing an appeal, even though the insurer
had reserved its right to deny coverage.
Although that court
distinguished Dingwell on grounds that, in that case, the insurer
sought to intervene before liability had been established,
meaning that the insurer’s liability depended both upon an
unfavorable outcome in the underlying case and an unfavorable
outcome in any coverage litigation, it also stressed that “‘the
interest ‘test’ is primarily a practical guide to disposing of
lawsuits by involving as many apparently concerned persons as is
compatible with efficiency and due process.’” Id. at 757
It considered, as an important factor, the
fact that the insurer was not intervening for the purpose of
controlling or interfering with the defense of the insured or in
order to steer the jury into returning a verdict favoring the
insured based on a consideration of coverage questions.
courts, too, have stressed the practical goals served by the
“interest test” and have rejected any hard and fast rule that an
interest which is contingent on the outcome of the case is, per
se, a disqualifying factor.
See, e.g., San Juan county, Utah v.
United States, 503 F.3d 1163, 1203 (10th Cir. 2007)(“‘Although
the intervenor cannot rely on an interest that is wholly remote
and speculative, the intervention may be based on an interest
that is contingent upon the outcome of the litigation,’” quoting
United States v. Union Elec. Co., 64 F.3d 1152, 1162 (8th Cir.
That concept seems to have been embraced by the Sixth
Circuit Court of Appeals in Purnell v. City of Akron, 925 F.2d
941, 947-48 (6th Cir. 1991), where the court treated an interest
in a case which was clearly contingent on the outcome of other
proceedings - in that case, paternity proceedings which would
determine whether the intervenors had a legally protectable
interest in the wrongful death action at issue - as one which
could support intervention under Rule 24(a).
The upshot of this conceptual disagreement is that it is
possible to find cases which support the right of an insurer to
intervene even when it has denied coverage, and cases which reach
the opposite conclusion.
Each party has cited at least one such
Compare In re Nitschke, 2008 WL 141510 (Bankr. N.D.
Ohio Jan. 11, 2008)(allowing insurer to intervene in adversary
action) with Joe Hand Promotions, Inc. v. Buren, 2015 WL 5675112
(N.D. Ohio Sept. 25, 2015)(finding an interest in resolving
coverage issues insufficient to satisfy Rule 24(a)).
There is no
definitive ruling from the Court of Appeals for this circuit on
That means that this Court has a substantial amount
of discretion to resolve the issue either way.
All of the cases cited thus far which have allowed
intervention as of right have one thing in common - the reason
that the insurer was permitted to intervene was not simply to
obtain a declaration as to coverage.
So, for example, in Ross v.
Marshall, the insurer asked to intervene in order to prosecute an
appeal which would, if successful, minimize or eliminate the
liability of its insured (the insured in that case had fired his
counsel and assigned all of his rights against his insurer to the
In the Nitschke case, the way in which the
insured’s conduct was ultimately characterized - whether it was
willful and malicious or not - would determine whether there was
coverage, and the insurer faced the prospect of being
collaterally estopped from denying coverage if the insured’s
conduct was determined to be merely negligent.
That same factor
supported intervention in another decision which Gemini relies
on, Vasandani v. Dublin Green Condominium Owners’ Ass’n, 2014 WL
2695499 (S.D. Ohio June 13, 2014).
None of these cases involved
an issue like the notice problem which Gemini has identified in
However, in its reply brief, Gemini raises another issue
which it contends is pertinent to the coverage issue.
that even if timely notice was given, FTS and Mr. Potts had no
insurance coverage for knowingly breaching their fiduciary
The complaint makes no mention of such conduct, but one
of the letters written by the Department of Labor to Defendants
(Exhibit 3 to Gemini’s motion to intervene) does, stating that a
civil penalty of 20% can be assessed against anyone who knowingly
participates in a breach of fiduciary duty.
To that extent, the
nature of the Defendants’ conduct may well be at issue in the
case, and there is some force to Gemini’s claim that it could be
collaterally estopped from relitigating any determination that
the Defendants’ conduct did not rise to that level - thus
eliminating one of the defenses which Gemini has on the issue of
coverage. Defendants, of course, have an interest in making sure
that they are not found to have committed an intentional act,
both because it would reduce their potential liability but also
because it might trigger insurance coverage if the notice issue
is resolved in their favor.
This consideration brings this case
into line with those decisions which have permitted intervention,
although it would suggest that the reason for intervention would
be to permit Gemini to weigh in on the question of whether
Defendants acted knowingly and willfully, rather than to litigate
the notice issue.
The Court does have a concern about how inserting the
notice issue into this case might affect the Court’s ability to,
as the Marshall decision notes, dispose of the case with
“efficiency and due process.”
Gemini has suggested that
resolving the notice issue first might promote efficiency because
it can have an impact on settlement.
That may or may not be the
If the notice question is resolved in Defendants’ favor,
Gemini retains other defenses to coverage, including the issue of
the nature of any wrongful conduct Defendants may have engaged
in, and that issue will not likely be decided until the
Secretary’s claim is resolved on its merits.
While that suggests
that delaying litigation on the merits pending a decision on the
notice issue might not be an efficient course to follow, that is
not the question before the Court now, and may never be if no
party asks to stay proceedings on the merits pending the outcome
of Gemini’s request for declaratory relief on that issue.
Court does not believe that the notice issue is so factually or
legally complicated that litigating it in the context of this
case will detract from the parties’ ability to proceed on the
merits, and also notes that the Secretary may have a practical
interest in the outcome of that issue because it may affect the
amount of recovery available to the Secretary and, ultimately,
the ESOP participants, should the Secretary prevail.
thus be some benefit to allowing the Secretary to have input on
the issue, which can be accomplished if it is litigated in the
context of this case.
Consequently, the Court concludes that Gemini’s interest in
litigating the nature of Defendants’ conduct is a sufficient
interest to satisfy the liberal requirements of Rule 24(a).
Because there is no argument that the motion is untimely, and
because there is the possibility that the existing parties may
not adequately protect Gemini’s interest in this issue, the Court
concludes that intervention is appropriate.
declines to answer the question of whether Gemini’s desire to
litigate the notice issue would, standing alone, justify
intervention, since resolving that issue is unnecessary to the
For the reasons set forth above, the Court grants the motion
to intervene (Doc. 10).
The Clerk shall detach and file the
Complaint of Intervenor Gemini Insurance Company for Declaratory
Judgment which is attached to the motion.
Motion for Reconsideration
Any party may, within fourteen days after this Order is
filed, file and serve on the opposing party a motion for
reconsideration by a District Judge.
28 U.S.C. §636(b)(1)(A),
Rule 72(a), Fed. R. Civ. P.; Eastern Division Order No. 14-01,
The motion must specifically designate the
order or part in question and the basis for any objection.
Responses to objections are due fourteen days after objections
are filed and replies by the objecting party are due seven days
The District Judge, upon consideration of the
motion, shall set aside any part of this Order found to be
clearly erroneous or contrary to law.
This order is in full force and effect even if a motion for
reconsideration has been filed unless it is stayed by either the
Magistrate Judge or District Judge.
S.D. Ohio L.R. 72.3.
/s/ Terence P. Kemp
United States Magistrate Judge
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