Philadelphia Indemnity Insurance Company v. Providence Community Action Program, Inc. et al

Filing 31

OPINION AND ORDER denying 20 Motion for Summary Judgment; granting 23 Cross-Motion for Summary Judgment. So Ordered by Chief Judge William E. Smith on 1/24/2017. (Jackson, Ryan)

UNITED STATES DISTRICT COURT
FOR THE DISTRICT OF RHODE ISLAND
___________________________________
)
)
)
)
Plaintiff,
)
)
v.
)
)
PROVIDENCE COMMUNITY ACTION
)
PROGRAM, INC; THOMAS HEMMENDINGER; )
FRANK CORBISHLEY; and
)
WILLIAM BENTLEY,
)
)
Defendants.
)
___________________________________)
PHILADELPHIA INDEMNITY
INSURANCE COMPANY,

C.A. No. 15-388 S

OPINION AND ORDER
WILLIAM E. SMITH, Chief Judge.
Before this Court is a declaratory judgment action brought
by

Philadelphia

against

Indemnity

Providence

Hemmendinger,

Insurance

Community

Frank

Action

Corbishley,

Company
Program,
and

(“Plaintiff”)
Inc.,

William

Thomas
Bentley

(collectively, “Defendants”). Plaintiff has filed a Motion for
Summary Judgment, and Defendants have filed a Cross-Motion for
Summary

Judgment.

The

parties

have

lodged

their

respective

objections. For the reasons set forth below, Plaintiff’s Motion
for Summary Judgment is DENIED, and Defendants’ Cross-Motion for
Summary Judgment is GRANTED.

I. Summary Judgment Standard
“The court shall grant summary judgment if 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.” Fed. R. Civ.
P.

56.

Where,

judgment,

as

this

here,

“simply

there

are

require[s]

cross-motions
[the

Court]

for
to

summary

determine

whether either of the parties deserves judgment as a matter of
law on facts that are not disputed.” Barnes v. Fleet Nat'l Bank,
N.A., 370 F.3d 164, 170 (1st Cir. 2004) (quoting Wightman v.
Springfield Terminal Ry., 100 F.3d 228, 230 (1st Cir. 1996)).
Questions of law may be appropriately resolved on a motion for
summary judgment. Littlefield v. Acadia Ins. Co., 392 F.3d 1, 6
(1st

Cir.

2004).

This

includes

questions

regarding

the

construction of an unambiguous contract. See Lloyd's of London
v. Pagan-Sanchez, 539 F.3d 19, 22 (1st Cir. 2008).
II.

Background1
Providence Community Action Program, Inc. (“ProCAP”) is a

non-profit
2011,

corporation

ProCAP

purchased

located
a

in

Rhode

directors

and

Island.

In

officers

April

of

liability

insurance policy (“D&O Policy” or “Policy”) from Philadelphia
Indemnity Insurance Company (“PIIC”).

1

Soon thereafter, ProCAP

As this is an order on a motion for summary judgment, the
Court recounts the undisputed facts from the record.
2

began

experiencing

financial

difficulty

and

was

forced

into

receivership. The temporary receivership order was signed by the
Rhode Island Superior Court on December 14, 2011, appointing
Thomas

Hemmendinger

(“Receiver”

or

“Hemmendinger”)

as

the

Receiver. (Parties’ Agreed Statement of Facts Ex. B, ECF No. 182.)

That

order

was

later

amended

on

January

4,

2012,

and

Hemmendinger was appointed as the permanent Receiver. (Id. Ex.
E, ECF No. 18-5.)
The Rhode Island Superior Court’s appointing order provides
the Receiver various powers, including as follows:
The Receiver is hereby authorized to collect all the
debts due the Defendant, to prosecute and defend,
suits in its name or in the Receiver’s name and
capacity as Receiver or to intervene in any action,
suit, or proceeding relative to the estate or effects
of the Defendant . . . and generally do any other act
which might be done by the Defendant or that may in
the judgment of the Receiver be necessary or desirable
for the protection, maintenance and preservation of
the property and assets of the Defendant.
(Id. Ex. E ¶ 4, ECF No. 18-5.)
Having been granted these powers, the Receiver brought a
breach of fiduciary duty claim in Rhode Island Superior Court
against two former2 ProCAP officers, Frank Corbishley and William

2

The Rhode Island Secretary of State revoked ProCAP’s
“Certificate of Incorporation/Authority” as of February 18,
2015. (Hemmendinger Aff. Ex. D, ECF No. 24-4.)
3

Bentley. The Receiver then sent a demand letter to PIIC for
payment under the Policy. PIIC denied that claim, explaining
that the Policy does not cover lawsuits brought by the Receiver
“on behalf of” ProCAP. (Id. Ex. K, ECF No. 18-11.)
The D&O Policy3 purchased by ProCAP from PIIC is entitled
“Flexi Plus Five.” (Compl. 36, ECF No. 1.) This sort of D&O
liability policy is fairly common, and its purpose is to protect
organizations against the wrongful acts of their management. To
that end, Part 1 of the “Flexi Plus Five” Policy includes the
following language: “The Underwriter will pay on behalf of the
Organization,

Loss

from

Claims

made

against

the

Organization

during the Policy Period . . . for a D&O Wrongful Act.” (Id.)
The Policy’s broad coverage for all “wrongful act[s]” of
directors and officers is subject to several exclusions. The
relevant exclusion in this case states: “The Underwriter shall
not be liable to make any payment for Loss in connection with
any Claim made against the Insured . . . brought or maintained
by, at the behest, or on behalf of the Organization.”4 (Id. at

3

A complete copy of the Flexi Plus Five Policy is included
in the Complaint. (See Compl. 36, ECF No. 1.)
4

This sort of exclusion is typical for directors and
officers liability insurance policies, and is commonly referred
to as the “insured v. insured exclusion.” Stratton v. Nat’l
Union Fire Ins. Co., No. CIV.A.03-CV-12018-RGS, 2004 WL 1950337,
at *5 (D. Mass. Sept. 3, 2004). The purpose of this exclusion
4

45-46.)

The

Policy

defines

“Organization”

as

the

“Parent

Organization” or “Any Subsidiary.” (Id. at 44.) However, the
Policy provides no definition for the phrase “on behalf of.”
After ProCAP went into receivership, the Policy was amended
to include the Receiver (Hemmendinger) as a named party with
coverage under the Policy. This amendment places the Receiver
under the umbrella definition of an “Individual Insured” and
labels

him

amendment
individual

an

“Independent

defines
who

the

is

term

Contractor.”
“Independent

contracted

to

(Id.

at

11.)

Contractor”

perform

services

The

as

“an

for

the

Organization . . . .” (Id.) Of note, the amendment does not make
any

reference

to

the

insured-versus-insured

exclusion

in

the

original Policy.
III. Discussion
A. Issue Framing
At the core of the parties’ dispute is whether the claim
brought by the Receiver against ProCAP’s former officers should
be considered as brought “on behalf of” ProCAP such that it is
subject

to

the

insured-versus-insured

exclusion.

The

“is to protect insurers from collusive lawsuits by corporations
trying to recoup corporate losses by attributing them to the
wrongdoing of directors and officers who, if insured, have
nothing to lose by taking the blame.” Id.; see also Narath v.
Exec. Risk Indem., Inc., No. CIV.A. 01-10122-RWZ, 2002 WL
924231, at *2 (D. Mass. Mar. 14, 2002) (memorandum decision).
5

disagreement involves two issues. The first hinges on the role
of the Receiver under Rhode Island law. PIIC argues that the
Receiver, in bringing a lawsuit against former ProCAP directors
and

officers,

is

taking

action

“on

behalf

of”

ProCAP.

In

contrast, the Receiver argues that he does not act on behalf of
ProCAP, but instead acts on behalf of the Rhode Island Superior
Court that appointed him.
The second issue revolves around the Policy amendment which
specifically defines the Receiver as an “Individual Insured” and
an “Independent Contractor . . . who is contracted to perform
services for the Organization . . . .” (Compl. 11, ECF No. 1.)
PIIC argues that because the Policy defines

the Receiver as

“perform[ing] services for” ProCAP, the Receiver’s lawsuit was
by definition “on behalf of” ProCAP for the purposes of the
Policy’s insured-versus-insured exclusion (even if, under Rhode
Island law, the Receiver is acting as an agent of the Rhode
Island Superior Court). The Receiver argues that the amendment
was

erroneously

added

and,

in

any

event,

the

amendment’s

language does not transform the Receiver’s actions, which were
taken on behalf of the Superior Court, into actions taken “on
behalf of” ProCAP.

6

B. Issue 1 – Rhode Island Receivership Law
The

parties

disagree

on

whether

the

Receiver

is

taking

action “on behalf of” ProCAP (making the insured-versus-insured
exclusion applicable) or is instead acting on his own behalf as
an agent of the Rhode Island Superior Court (making the insuredversus-insured exclusion inapplicable). The question of whether
various

successors

in

interest

(e.g.,

the

FDIC,

bankruptcy

trustees, receivers, etc.) act “on behalf of” the pre-bankruptcy
or

pre-receivership

entity

for

the

purposes

of

the

insured-

versus-insured exclusion has been the subject of much debate and
disagreement. See, e.g., Michael D. Sousa, Making Sense of the
Bramble-Filled Thicket: the “Insured vs. Insured” Exclusion in
the Bankruptcy Context, 23 Emory Bankr. Dev. J. 365 (2007). This
disagreement has led to conflicting decisions in the federal
courts. See, e.g., W Holding Co., Inc. v. AIG Ins. Co.-Puerto
Rico, 748 F.3d 377, 386 (1st Cir. 2014) (noting that there is
“no controlling authority on whether an insured-versus-insured
exclusion

applies

to

the

FDIC

.

.

.

with

non-binding

cases

pointing in different directions”); Biltmore Associates, LLC v.
Twin City Fire Ins. Co., 572 F.3d 663, 670–71 (9th Cir. 2009)
(discussing the disagreement among federal courts as to whether
the

insured-versus-insured

exclusion

applies

to

a

post-

bankruptcy entity). For their part, the parties have provided
7

several out-of-circuit decisions in support of their arguments,
all of which provide some conflicting analysis.
While the cases that discuss this issue are useful, they
are not controlling. Neither the First Circuit nor the Rhode
Island

Supreme

Court

insured-versus-insured
court-appointed

has

specifically

exclusion

receiver.

As

addressed

applies

the

to

resolution

a

whether
Rhode

of

this

the

Island
issue

depends on Rhode Island law governing receiverships, it is to
that area of law the Court next turns.
When the Rhode Island Superior Court orders a company into
receivership, the court and its receiver (as an officer of the
court)

take

possession

of

the

company

in

custodia

legis.

Manchester v. Manchester, 94 A.2d 235, 238 (R.I. 1962); see also
State of Maine v. Fiore, 497 A.2d 298, 301 (R.I. 1985) (“We
Courts in general accept the view that a receiver appointed by a
court

of

equity

is

an

officer

thereof

and

property

in

his

possession which constitutes a part of the estate that is the
subject of the receivership is in custodia legis until it is
disposed of by the receiver in compliance with an order of that
court.”) (quoting Manchester, 181 A.2d at 238).5 The phrase in

5

The Rhode Island Superior Court’s authority to appoint a
receiver has been codified in the Rhode Island Business
Corporation Act. See R.I. gen. Laws § 7-1.2-1323 (“[T]he
superior court has full power to appoint a receiver, with any
8

custodia legis “is traditionally used in reference to property
taken into the court’s charge during pending litigation over
it.”

Black’s Law Dictionary 783 (8th ed. 2004). “[U]nlike a

mere attachment, the court’s decision to place the property in
custodia

legis

divest[s]

[the

debtor]

of

legal

title

and

le[aves] him with only a contingent right to the property.”
Davis v. Cox, 356 F.3d 76, 94 (1st Cir. 2004) (reviewing the
claim of a receiver under Maine law).
As

the

holder

of

legal

title,

the

Superior

Court

is

empowered (through its receiver) to distribute the property to
various interests as it deems appropriate. Rhode Island Hosp.
Trust Co. v. Rhode Island Covering Co., 182 A.2d 438, 441 (R.I.
1962)

(“[P]roperty

entrusted

to

such

a

receiver

is

in

the

custody of that court to be disposed of only according to its
order

and

in

accordance

with

the

priorities

of

the

parties

concerned.”). The pre-receivership entity that previously owned
the

property

property.

still

Davis,

receivership

is

returned

the

to

holds

356

a

F.3d

terminated,
company

“contingent
at
the

that

93-94.

interest”
Therefore,

receivership
originally

estate

owned

it.

in

that

if

the

may

be

In

re

Steenstra, 307 B.R. 732, 740 (B.A.P. 1st Cir. 2004) (holding
powers and duties that the court, from time to time, directs,
and to take any other proceedings that the court deems advisable
under the circumstances.”).
9

that, in the bankruptcy context, “once the case is dismissed and
the automatic stay is terminated, the property of the estate
revests in the debtor and the doctrine of in custodia legis no
longer applies”).
However, the re-vesting of the receivership estate back to
the

company

guaranteed.

with
As

a

noted

contingent
above,

a

interest

receiver,

as

is
an

by

no

agent

means
of

the

Superior Court, may transfer the property to other interested
parties. See Rhode Island Hosp. Trust Co., 182 A.2d at 441;
Francis v. Buttonwood Realty Co., 765 A.2d 437, 443 (R.I. 2001).
This outcome is particularly likely in this case as the Rhode
Island

Secretary

of

State

Incorporation/Authority”

as

revoked
of

ProCAP’s

February

18,

“Certificate
2015,

making

of
it

impossible for any funds obtained in the Receiver’s lawsuit to
re-vest in ProCAP. (Hemmendinger Aff. Ex. D, ECF No. 24-4.)
Decisions of courts within the First Circuit on the topic
of the insured-versus-insured exclusion in the receivership or
bankruptcy context are consistent with this interpretation of
Rhode Island law.6 For example, in Am. Cas. Co. of Reading,

6

Sec. & Exch. Comm’n v. Churchville, No. C.A. No. 15-191 S,
2016 WL 3816373, at *2–3 (D.R.I. July 12, 2016) (finding “little
case law relating to equitable receiverships” in Rhode Island
and looking to “cases interpreting the U.S. Bankruptcy Code”);
Patel v. Shivai Nehal Realty LLC, No. KB-2012-0301, 2012 WL
5380060, at *2 (R.I. Super. Ct., Oct. 26, 2012) (“[W]here state
10

Pennsylvania v. Sentry Fed. Sav. Bank, 867 F. Supp. 50, 59 (D.
Mass. 1994), the District of Massachusetts held:
[t]he crux of the dispute is this: when the [receiver]
is asserting the claims of the Bank, does it merely
“stand in the shoes” of the bank subject to the same
limitations that would apply to the bank, see FDIC v.
American Cas. Co., 975 F.2d 677, 681–82 (10th Cir.
1992); Mt. Hawley Ins. Co. v. FSLIC, 695 F. Supp. 469,
482 (C.D. Cal. 1987); Gary v. American Cas. Co., 753
F. Supp. 1547, 1555 (W.D. Okla. 1990), or is it
different
from
the
bank
because
it
represents
shareholders and creditors of the bank and is not the
Insured referred to in the exclusion, see Baker, 758
F. Supp. at 1349; American Casualty Co. v. FDIC, 791
F. Supp. 276 (W.D. Okla. 1992); American Cas. Co. v.
FDIC, No. CIV. 86–4018, 1990 WL 66505, at *11 (N.D.
Iowa Feb. 26, 1990), aff’d in relevant part and rev’d
in part, 944 F.2d 455 (8th Cir. 1991); Branning v. CNA
Ins. Cos., 721 F.Supp. 1180, 1184 (W.D. Wash. 1989).
“The weight of opinions concerning ‘insured vs.
insured’ exclusions in the receivership context side
with the American Casualty cases and the Branning
decision by allowing coverage when receivers sue the
former
directors
and
officers
of
a
failed
institution.”
Melanie
K.
Palmore,
‘Insured
vs.
Insured’ Exclusions in Director and Officer Liability
Insurance Policies: Is Coverage Available When Chapter
11 Trustees and Debtors–in–Possession Sue Former
Directors and Officers?, 9 Bankr. Dev. J. 101, 118
(1992).

receivership law provides minimal guidance, this Court instead
‘looks to the Bankruptcy Act and to decisions by the federal
courts for guidance.’”) (quoting Reynolds v. E & C Assoc., 693
A.2d 278, 281 (R.I. 1997)).
11

Id. at 59; see also Narath v. Exec. Risk Indem., Inc., No.
CIV.A. 01-10122-RWZ, 2002 WL 924231, at *2 (D. Mass. Mar. 14,
2002)

(“[C]ourts

have

generally

found

‘insured

v.

insured’

exclusions inapplicable where, as here, one ‘insured’ is the
trustee or receiver of an insolvent institution bringing claims
against

the

management

of

that

institution.”)

(memorandum

decision); In re Molten Metal Tech., Inc., 271 B.R. 711, 726
(Bankr. D. Mass. 2002) (“The claims now belong to the estate,
not to the Company, and the Chapter 11 Trustee brings them on
behalf of the estate, not on behalf of the Company.”).
Under these circumstances, the Court finds that a Rhode
Island

receiver

is

not

accurately

described

as

working

“on

behalf of” the pre-receivership entity. Instead, a Rhode Island
receiver is better understood as an agent of the Superior Court
that appointed the receiver and as working for the potential
benefit of various parties. In this case, the Receiver’s claims
were therefore not brought “on behalf of” ProCAP and are not
subject to the insured-versus-insured exclusion.
C. Issue 2 - Receiver as Defined in the Policy
According

to

PIIC,

regardless

of

how

Rhode

Island

law

defines the role of a court-appointed receiver, the Receiver in
this case should still be considered as acting “on behalf of”
ProCAP under the terms of the Policy. PIIC’s argument is based
12

on the amendment to the Policy that was made after the Superior
Court

appointed

Hemmendinger

as

the

Receiver.

That

amendment

specifically defines Hemmendinger as an “Independent Contractor
. . . who is contracted to perform services for the Organization
. . . .” (Compl. 11, ECF No. 1.) Under PIIC’s reading of the
Policy,

because

the

Receiver

is

defined

as

“perform[ing]

services for the Organization” in the amendment, the Receiver,
by definition, is acting “on behalf of the Organization” for the
purposes of the insured-versus-insured exclusion in the original
Policy

(Rhode

Island

receivership

law

notwithstanding).

(See

Def.’s Mem. in Supp. of Cross-Mot. for Summ. J. 10-11, ECF No.
23-1.)
The Court finds this argument unpersuasive for two reasons.
First, PIIC has no authority to alter the relationship between
the Receiver and the Superior Court by negotiating a contract
amendment with ProCAP’s insurance broker. As was discussed in
the previous section, a Rhode Island receiver has the duty to
marshal the assets of the receivership entity and performs this
duty

on

behalf

of

the

Superior

Court.

This

duty

cannot

be

vitiated by an insurance contract between the insurance carrier
and the entity which is the subject of the receivership. Absent
consent from the

Superior

Court, any such contract is ultra

13

vires and unenforceable.7 To hold otherwise would allow private
parties to contract away a receiver’s legal authority (and, by
extension, the authority of the Superior Court) to collect the
receivership

entity’s

assets.

This

result

would

be

clearly

unconscionable.
Moreover, even if this Court were to find the amendment
defining

the

Receiver

as

“perform[ing]

services

for”

ProCAP

enforceable, which it does not, the Receiver’s claim would still
not fall within the insured-versus-insured exclusion. The Policy
uses different language in its insured-versus-insured exclusion
(defining what claims will not be covered) and its amendment
(defining the Receiver’s role under the contract). The exclusion
applies to claims “brought . . . on behalf of the Organization.”
(Compl. 45-46, ECF No. 1.) By contrast, the amendment defines
the Receiver’s role as an “Independent Contractor . . . who is
7

“[T]he doctrine of ultra vires rests upon the principle
that on grounds of public policy the courts will not enforce an
illegal or an ultra vires contract . . . .” Barron v. McKinnon,
196 F. 933, 938 (1st Cir. 1912); see also Citizens’ Cent. Nat.
Bank of N.Y. v. Appleton, 216 U.S. 196, 205 (1910). This
doctrine has been adopted by the Rhode Island Supreme Court.
See, e.g., City of Warwick v. Boeng Corp., 472 A.2d 1214, 1218
(R.I. 1984) (discussing the “general rule that a contract or
agreement against public policy is illegal and void”) (citing
Weil v. Neary, 278 U.S. 160 (1929)). In Rhode Island, a
“contract or agreement is generally against public policy if it
is injurious to the interests of the public, interferes with the
public welfare or safety, is unconscionable, or tends to
injustice or oppression.” Id. (citing Calamari & Perillo, The
Law of Contracts § 22–1 at 780 (2d ed. 1977)).
14

contracted to perform services for the Organization.
(Compl.

11,

ECF

No.

1.)

In

addition

to

this

. . .”

difference

in

language, the Policy is devoid of any cross-reference between
the

insured-versus-insured

exclusion

and

the

later

amendment

defining the role of the Receiver. The insured-versus-insured
exclusion does not reference claims brought by an “Independent
Contractor,” which is how the amendment defines the Receiver.
Similarly,

the

amendment

makes

no

reference

to

the

insured-

versus-insured exclusion.
As a general rule, “where the document has used one term in
one

place,

presumption

and
is

a

materially

that

the

different

different

term

term

in

another,

denotes

a

the

different

idea.” Antonin Scalia & Bryan A. Garner, Reading Law 170 (2012).
In this case, after reviewing the contract in its entirety, the
Court sees no reason to set aside that presumption and instead
presume that when PIIC drafted the phrase “perform services for
the Organization” in an amendment, what PIIC really meant was to
define the Receiver as acting “on behalf of the Organization”
for the purposes of the insured-versus-insured exclusion in the
original Policy. This conclusion is fortified by the fact that
there is no cross-reference between the insured-versus-insured
exclusion

and

the

later

amendment

defining

the

Receiver.

Therefore, the Court finds that the phrase “perform services
15

for” is unambiguously not encompassed by, or synonymous with,
the phrase “on behalf of” as those terms are used in the Policy.
D. Exception to the Insured-Versus-Insured Exclusion
The

Policy

purchased

by

ProCAP

had

a

built-in

addendum

entitled “Pro-Pak Elite Enhancement.”8 Within that addendum was,
among other things, an exception to the insured-versus-insured
exclusion. That exception states that the insured-versus-insured
exclusion “will not apply to any claim brought as a derivative
action,

or

similar

action,

on

behalf

of

the

Organization,

provided the claim is brought without the assistance of any
current or former Individual Insured.” (Compl. 60, ECF No. 1.)
The parties disagree as to whether the Receiver’s claim falls
under this exception. Because the Court has determined that the
insured-versus-insured

exclusion

is

inapplicable

to

Receiver’s claim, there is no need to determine whether

the
the

Receiver’s claim falls under an exception to that exclusion.
IV.

Conclusion
For

the

reasons

described

above,

Plaintiff’s

Motion

for

Summary Judgment (ECF No. 20) is DENIED, and Defendants’ CrossMotion for Summary Judgment (ECF No. 23) is GRANTED. Judgment
will be entered in favor of Defendants.
8

A complete copy of the “Pro-Pak Elite Enhancement” is
included with the Complaint. (See Compl. 58, ECF No. 1.)
16

IT IS SO ORDERED.

William E. Smith
Chief Judge
Date: January 24, 2017

17