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
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