Markel American Insurance Company v. Verbeek et al
REPORT AND RECOMMENDATIONS GRANTING Plaintiffs 48 Motion For Leave to File Second Amended Complaint and DENYING Defendants 60 Motion to Strike Plaintiffs Supplemental Brief. RECOMMENDATION the District Court GRANT Plaintiffs 33 Motion for Summary Judgment and DENY Defendants 23 Motion for Partial Summary Judgment. Signed by Judge Mark Lane. (klw)
IN THE UNITED STATES DISTRICT COURT
FOR THE WESTERN DISTRICT OF TEXAS
MARKEL AMERICAN INSURANCE
HUIBERT VERBEEK, ENGELBRECHT
VERBEEK, and JACK ORMBERGET
REPORT AND RECOMMENDATION
TO THE HONORABLE LEE YEAKEL
UNITED STATES DISTRICT JUDGE
Before the Court are the following motions and related briefing:
(1) Defendants Huibert Verbeek and Engelbrecht Verbeek (collectively, for purposes of
this motion, “Defendants,” “the Verbeeks” or “Individual Defendants”)’ 1 Joint Motion for Partial
Summary Judgment on Plaintiff’s Duty to Defend, [Dkt. # 23], Plaintiff Markel American
Insurance Company (“Markel”)’s Response [Dkt #32], and Defendants’ Reply [Dkt. #35];
(2) Markel’s Motion for Summary Judgment on Plaintiff’s Duty to Defend [Dkt. #33],
Defendants’ Joint Response to Markel’s Motion for Summary Judgment on Plaintiff’s Duty to
Defend [Dkt. #36], Markel’s Supplement to Its Motion for Summary Judgment on Plaintiff’s
Duty to Defend [Dkt. #58], and Defendants’ Joint Response to Markel’s Supplemental Brief
It appears Defendant Jack Ormberget has not participated in the summary judgment briefing, either in the
Motion for Partial Summary Judgment [Dkt. #23] filed by Huibert and Engelbrecht Verbeek, or in the Response to
Markel’s Motion for Summary Judgment filed by Huibert and Engelbrecht Verbeek. [Dkt. #36]. The court further
notes original Defendant Kenney Verbeek was voluntarily dismissed pursuant to Fed. R. Civ. P. 41(a)(1)(A)(i) on
August 26, 2014. For purposes of this Report and Recommendation, therefore, the terms “Defendants” and
“Individual Defendants” will refer to Huibert Verbeek and Engelbrecht Verbeek, and not to any codefendant or
former codefendant, unless otherwise noted in the text.
(3) Defendants’ Motion to Strike Plaintiff’s Supplemental Briefing [Dkt. #60], Plaintiff’s
Response thereto [Dkt. #61], and Defendants’ Reply [Dkt. #67]; and
(4) Markel’s Motion for Leave to File Second Amended Complaint [Dkt. #48], Markel’s
Supplement to Motion for Leave to File Second Amended Complaint [Dkt. #51], Defendants’
Response in Opposition to Motion for Leave to File Second Amended Complaint [Dkt #55], and
Markel’s Reply [Dkt. #59].
These Motions were referred by United States District Judge Lee Yeakel to the
undersigned for a Report and Recommendation as to the merits pursuant to 28 U.S.C. § 636(b),
Rule 72 of the Federal Rules of Civil Procedure, and Rule 1(d) of Appendix C of the Local Rules
of the United States District Court for the Western District of Texas. 2 The Magistrate Court
requested supplemental briefing relating to the cross motions for summary judgment on June 29,
2015 [Dkt. #47]. After reviewing the motions and related briefing, the requested supplemental
briefing, the relevant case law, as well as the entire case file, the undersigned issues the
following Report and Recommendation to the District Court.
This dispute concerns whether, pursuant to a policy of Directors’ and Officers’ Insurance
(the “Policy”), Markel has a duty to defend two lawsuits brought against Defendants for alleged
fraud in the inducement of a refinancing agreement. The policy obligates Markel to defend
Insured persons against Claims arising out of Wrongful Acts, including “any actual or alleged
error, misstatement, misleading statement, act, omission, neglect, or breach of duty by any
See Order of May 20, 2015 [Dkt. #42] (referring Joint Motion for Partial Summary Judgment [Dkt. #23],
Motion for Summary Judgment [Dkt #33], and related briefing); Order of July 1, 2015 [Dkt. #49] (referring
Plaintiff’s Motion for Leave to File Second Amended Complaint [Dkt. #48] and related briefing); and Order of
August 12, 2015 [Dkt. #65] (referring Defendants’ Motion to Strike Plaintiff’s Supplemental Brief [Dkt. #60] and
Insured Person in their capacity as such . . ..” App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt.
#24], Ex. J, APP 0422. There is no question that the D&O Policy was in effect during the
relevant time frame, nor is there any question that the Defendants were Insured Persons, acting in
their capacity as such, within the meaning of the D&O Policy, during that period. See id. at APP
0420. Nevertheless, Markel has filed suit requesting a declaratory judgment that exclusions in
the policy language preclude coverage for the underlying lawsuits against the Defendants. See
generally First Am. Compl. [Dkt. #3].
Individual Defendant Huibert Verkbeek has filed counterclaims requesting a declaratory
judgment that Markel is obligated to defend the claims, and seeking damages against Markel for
breach of contract, attorney’s fees, and violation of Texas Inusrance Code Chapter 542 (the
“Prompt Pay Act”). See generally Df. Huibert Verbeek’s Orig. Answer [Dkt. #12]. Individual
Defendant Engelbrecht Verbeek, though he has not styled his affirmative claims for relief as
counterclaims, states in his Answer to Markel’s Complaint that he seeks a declaration that one or
more claims in the underlying lawsuits are covered by the applicable insurance agreement, and
seeks monetary relief including all costs and attorney’s fees incurred in the coverage dispute and
in connection with the underlying lawsuits. Df. Engelbrecht Verbeek’s Orig. Answer [Dkt. #5]
The cross-motions for summary judgment in this case focus on whether Markel is
excused from defending the underlying suits pursuant to an exclusion (or exclusions) in the D&O
policy. The Individual Defendants’ Joint Motion for Partial Summary Judgment additionally
seeks judgment that Markel has violated provisions of the Texas Prompt Pay Act and owes
penalties and attorney’s fees as a matter of law. Df.’s Joint Mot. Part. Summ. J. [Dkt. #23] at 22.
Additionally and in the alternative, Defendants’ Joint Motion for Partial Summary Judgment
seeks attorney’s fees for breach of contract. Id. To these claims, Markel has responded: “In the
unlikely event the Verbeek’s [sic] prevail on their motion, Markel does not dispute the Verbeeks
[sic] claim to attorney’s fees and penalties under the Texas Insurance Code and the Texas Civil
Practice and Remedies Code, as set forth in paragraphs 57 and 58 of their motion.” Pf.’s Resp.
to Df.’s Joint Mot. Part. Summ. J. [Dkt. #35 at 20, n.8.]
The Creditor Exclusion
Markel does not argue that either the Individual Defendants or the underlying lawsuits
are outside the scope of coverage for any reason. See generally Pf.’s Mot. Summ. J. [Dkt. #33].
Given the broad coverage established in the definition of “Wrongful Acts” in the Policy, cited
above, such an argument would be difficult to make. See App’x to Df.’s Joint Mot. Part. Summ.
J. [Dkt. #24], Ex. J, APP 0422 (“Wrongful Act” includes “any actual or alleged . . . act,
omission, neglect, or breach of duty by any Insured Person in their capacity as such,” specifically
including misleading statements.) Therefore, Markel is obligated to tender a defense of the
claims against the Individual Defendants unless an exclusion to coverage applies.
Universal Ins. Co. v. Employers Mut. Casualty Co., 592 F.3d 687, 691-92 (5th Cir. 2010) (While
the insured bears the initial burden of showing that there is coverage, the insurer bears the burden
of providing that any exclusion in the policy applies).
In its Motion for Summary Judgment [Dkt. #33], and in its Response to Defendants’ Joint
Motion for Partial Summary Judgment [Dkt. #32], Markel relies on the following “creditor
exclusion” to deny coverage in this case:
EXCLUSION—BANKRUPTCY AND CREDITORS
This endorsement modifies insurance provided under the following:
The following exclusion is added to the EXCLUSIONS Section:
The Insurer shall not be liable to pay any Loss on account of, and shall not
be obligated to defend, any Claim brought or maintained by or on behalf
A bankruptcy or insolvency trustee, examiner, receiver, similar
official or creditors committee of a Company or Organization or any
assignee of such trustee, examiner, receiver, or similar official or creditors
Any creditor of a Company or Organization in the creditor’s
capacity as such, whether or not a bankruptcy or insolvency proceeding
involving the Company or Organization has commenced.
App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. J, APP 0398.
The boldfaced terms in the Exclusion are defined terms under Section II of the insurance
contract. Id. at APP 0408-10. Markel contends the lawsuits tendered for defense arise out of the
Verbeeks’ attempt to refinance a credit facility for their business, so this creditor exclusion
should apply. Pf.’s Mot. Summ. J. [Dkt. #33] at 12-15; Resp. Df.’s Joint Mot. Part. Summ. J.
[Dkt. #32] at 14-15. The Verbeeks counter that the plaintiffs in the underlying lawsuits are not
suing to recover the money they advanced as creditors, but to hold the Verbeeks individually
liable for allegedly making material misstatements and omissions that defrauded the plaintiffs
into entering the credit facility. Df.’s Joint Mot. Part. Summ. J. [Dkt. #23] at 14-15; Resp. Pf.’s
Mot. Summ. J. [Dkt. #36] at 8-10. It is, of course, possible for the officers of a company to
defraud lenders in their capacity as creditors. The Verbeeks, however, assert the allegations in
these underlying suits are not made in the plaintiffs’ capacity as creditors of Color Star, but in
their capacity as investors in the credit facility. See generally id.
B. The Investor Exclusion
Neither Markel nor the Individual Defendants have provided any case law in their cross
motions for summary judgment to support their respective definitions of a creditor of Color Star
who is suing the Verbeeks “in its capacity as a creditor” as opposed to suing in some other
capacity. See App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. J, APP. 0398. Given the
Defendants’ contention that the plaintiffs in the underlying suits are not suing as creditors, but as
investors, the Magistrate Court invited the parties to submit “no more than 10 pages of
supplemental briefing concerning the effect, if any, of SEC v. W.J. Howey Co., 328 U.S. 293, 66
S. Ct. 1100 (1946) and its progeny on the creditor exclusion in the insurance policy at issue.”
Although Howey is a securities case, not an insurance defense case, the Howey test has
provided the baseline distinction between “investment contracts” and other types of transactions
(such as loans, liens, and other creditor agreements) for approximately 69 years. See, e.g., Life
Partners, Inc. v. Arnold, No. 14-0122, 2015 Tex. LEXIS 440, 24-25 (Tex. 2015) (publication
status pending) (citing Howey, 328 U.S. at 298 for the proposition that the court “must focus on
the ‘economic realities’ of the transaction” to determine whether it is an investment contract.)
Thus, application of the Howey test to the allegations brought in the underlying lawsuits may
shed light on whether the “creditor exclusion” applies or whether, as the Verbeeks contend, the
lawsuits’ allegations concern disputes between investors. 3
Under Howey, a contract is an
investment contract, not merely a loan, if “the scheme involves an investment of money in a
common enterprise with profits to come solely from the efforts of others. If that test be satisfied,
it is immaterial whether the enterprise is speculative or non-speculative or whether there is a sale
of property with or without intrinsic value.” 328 U.S. at 301.
The Magistrate Court takes care to note that the application of Howey to the allegations of the underlying state
court pleadings is all that is required for purposes of determining the duty to defend in this case. GuideOne Elite
Ins. Co. v. Fielder Road Baptist Church, 197 S.W.3d 305, 308 (Tex. 2006). The Magistrate Court in no way makes
any factual or legal findings concerning whether the transactions at issue were actually investments, loans, or any
other type of financial instrument; what matters is whether the complaints allege an investment dispute or a creditor
dispute for purposes of analyzing the claimed exclusions in the Policy. Id.; see also Colony Nat'l Ins. Co. v. Unique
Indus. Prod. Co., 487 F. App’x 888, 890-92 (5th Cir. 2012).
On June 30, 2015, one day after the Magistrate Court invited supplemental briefing on
this case law distinguishing investors from creditors, Markel sought leave to add the following
“investor exclusion” in the contract as an additional affirmative defense:
The Insurer shall not be liable under this Coverage Part to pay any Loss on
account of, and shall not be obligated to defend, any Claim made against
Based upon, arising out of, or in any way involving (i) the actual
alleged or attempted purchase or sale or offer or solicitation of an offer to
purchase or sell, any debt or equity securities, or (ii) the actual or alleged
violation of any federal, state, local, or common or foreign law relating to
debt or equity securities; provided this exclusion shall not apply to any
Based upon, arising out of or in any way involving the purchase or
sale or offer or solicitation of an offer to purchase or sell, any debt or
equity securities in a private-placement transaction exempt from
registration under the Securities Act of 1933, as amended . . .
Mot. Leave to File 2d. Am. Compl. [Dkt. #48], Ex. A; see also App’x to Df.’s Joint Mot.
Part. Summ. J. [Dkt. #24], Ex. J, at APP 0423. In addition to seeking leave to amend its
complaint to assert this “investor exclusion” as an affirmative defense, Markel has briefed the
application of this exclusion in the Supplement to its Motion for Summary Judgment [Dkt. #58]
requested by the Magistrate Court. See [Dkt. #58] at 8-10.
Defendants contend Markel should not be allowed to introduce a new affirmative defense
after motions for summary judgment are on file, either as an amendment to its complaint or as an
argument in supplemental briefing. See generally Df.’s Resp. Mot. Amend [Dkt. #55], Df.’s
Mot. Strike [Dkt. #60]. Defendants have elected not to address the investor exclusion in their
supplemental briefing, contending it is beyond the scope of the Magistrate Court’s briefing
request. Df.’s Joint Response to Suppl. Br. [Dkt. #64] at 8. Defendants have moved to strike
Markel’s supplemental briefing on the investor exclusion. See generally Df.’s Mot. Strike [Dkt.
For the reasons outlined below, the Magistrate Court GRANTS the Motion For Leave to
File Second Amended Complaint [Dkt. #48]
The Magistrate Court further DENIES Defendants’ Motion to Strike Plaintiff’s
Supplemental Brief [Dkt. #60], thus allowing Plaintiff to make its arguments concerning the
applicability of the investor exclusion to limit the duty to defend the underlying lawsuits. The
undersigned finds, however, that Markel has not met its burden to establish all of the factual
allegations in the underlying complaints fall within this investor exclusion. Trinity Universal
Ins. Co., 592 F.3d at 691-92. Therefore, this exclusion provides no basis to limit coverage. Id.
It does appear to the undersigned that each of the underlying complaints alleges the
Individual Defendants fraudulently induced the financial institutions to loan Color Star money.
To the extent the “factual allegations showing the origin of the damages” arise out of the
creditor-debtor relationship between the financial institutions and Color Star, the creditor
exclusion applies. Colony Nat’l Ins. Co. v. Unique Indus. Prod. Co., 487 F. App’x 888, 890-92
(5th Cir. 2012). (internal citations omitted); see also Evanston Ins. Co. v. Legacy of Life, Inc.,
645 F.3d 739, 745 (5th Cir. 2011) (“The eight corners rule focuses on the facts alleged in the
complaint, rather than the legal theories, and considers these alleged facts (but not the legal
theories ‘without reference to their truth or falsity.’”) (citing Wilbros RPI, Inc. v. Cont’l Cas.
Co., 601 F.3d 306, 309 (5th Cir. 2010)). The undersigned finds all of the damages currently
plead in the underlying complaints arise out of an allegedly fraudulently induced loan, and
therefore the creditor exclusion applies. See Colony Nat’l Ins. Co., 487 F. App’x at 890-92;
Wilbros RPI, Inc., 601 F.3d at 311.
Accordingly, the undersigned RECOMMENDS that the District Court GRANT
Plaintiff’s Motion for Summary Judgment [Dkt. #33] on its original grounds—the application of
the creditor exclusion—and not as supplemented by the arguments concerning the investor
Finally, the Magistrate Court RECOMMENDS the District Court DENY Defendants’
Joint Motion for Partial Summary Judgment [Dkt. #23]. Markel is not obligated to provide
coverage in the underlying lawsuits, because Markel has met its burden to establish that the
underlying factual allegations showing the origin of the damages fall within the creditor
exclusion to the D&O Policy or cannot be separated from facts triggering the exclusion. Wilbros
RPI, 601 F.3d at 311 (citing Travelers Indem. Co. v. Citgo Petroleum Corp., 166 F.3d 761, 771
(5th Cir. 1999).
Leave to Amend and Motion to Strike
Plaintiff’s Motion for Leave to File Second Amended Complaint [Dkt. #48] is governed
by Federal Rules of Civil Procedure 15 and 16. S&W Enters. v. Southtrust Bank of Ala., 315
F.3d 533, 536 (5th Cir. 2003). The District Court has entered a Scheduling Order in this case,
under which the deadline for amending pleadings passed on April 30, 2015, two months before
Plaintiff’s proposed Amended Complaint. See Scheduling Order, [Dkt. #38]. The dispositive
motion deadline imposed by the scheduling order passed on May 8, 2015, some 53 days before
Plaintiff’s motion for leave to amend the complaint was filed on June 30, 2015. Id. Under these
circumstances, the motion for leave to amend must satisfy the “good cause” standard of Federal
Rule of Civil Procedure 16(b)(4), in addition to the more lenient “freely given” leave of court
standard of Rule 15(a)(2). S&W Enters., 315 F.3d at 536; see also Henry’s Marine Serv. v.
Fireman’s Fund Ins. Co., 193 F. App’x 267, 273 (5th Cir. 2006).
To establish “good cause” for purposes of Rule 16(b), a party must “‘show that the
deadlines cannot reasonably be met despite the diligence of the party needing the extension.’”
Fahim v. Marriott Hotel Servs., 551 F.3d 344, 348 (5th Cir. 2008) (quoting S&W Enters., 315
F.3d at 535). Four factors are relevant to establish good cause: “(1) the explanation for the
failure to timely move for leave to amend; (2) the importance of the amendment; (3) potential
prejudice in allowing the amendment; and (4) the availability of a continuance to cure such
prejudice.” Sw. Bell Tel. Co. v. City of El Paso, 346 F.3d 541, 546 (5th Cir. 2003) (citing S&W
Enters., 315 F.3d at 536). “Only upon the movant’s demonstration of good cause to modify the
scheduling order will the more liberal standard of Rule 15(a) apply to the district court’s decision
to grant or deny leave.” S&W Enters., 315 F.3d at 536.
Rule 15(a) directs courts to grant leave to amend freely, absent some prejudice to the
nonmovant. See FED. R. CIV. P. 15(a)(2). Even under the less demanding standards of Federal
Rule of Civil Procedure 15(a), however, the Fifth Circuit “‘carefully scrutinize[s] a party’s
attempt to raise new theories of recovery by amendment when the opposing party has filed a
motion for summary judgment.’” Squyres v. The Heico Companies, L.L.C., 782 F.2d 224, 239
(5th Cir. 2015) (quoting Parish v. Frazier, 195 F.3d 761, 764 (5th Cir. 1999) (per curiam)).
“The summary judgment procedure has built-in protections against premature judgments.”
Overseas Inns S.A. P.A. v. United States, 911 F.2d 1146, 1151 (5th Cir. 1990). When a motion
for leave to amend is filed after motions for summary judgment have been filed, “to grant . . .
leave to amend is potentially to undermine [the opposing party’s] right to prevail on a motion
that necessarily was prepared without reference to an unanticipated amend[ment].” Id.
The timing of Markel’s Motion for Leave to Amend implicates these concerns. In order
to obtain leave to amend to assert the “investor exclusion” to coverage, Markel must establish
good cause for the delay under Rule 16 and also meet Rule 15(a)’s requirement that no undue
prejudice will result from their late amendment. S&W Enters., 315 F.3d at 536. Defendants
assert Markel’s argument that it inadvertently overlooked the investor exclusion does not
establish good cause. The Magistrate Court finds, however, that its request for supplemental
briefing on the implications of Howey, coupled with Defendants’ own arguments that the
plaintiffs in the underlying lawsuits were acting in their capacity as investors, provided good
cause for Markel to reassess the applicability of the investor exclusion to the duty to defend in
Moreover, the Individual Defendants have failed to articulate any cognizable prejudice
from allowing the amendment, even after summary judgment briefing has been prepared.
Contrary to Defendants’ assertions, discovery into whether the contracts at issue were actually
investment contracts is not necessary in a dispute over the duty to defend, because such meritsbased evidence is extrinsic to the “eight corners” of the insurance contract and the underlying
complaint. Colony Nat’l Ins. Co., 487 F. App’x at 890-92. And although Defendants opted not
to address the investor exclusion in their supplemental briefing, the Magistrate Court’s request
for supplemental briefing certainly provided them the opportunity to do so.
IT IS ORDERED that Plaintiffs’ Motion for Leave to File Second Amended Complaint
[Dkt. #48] be GRANTED.
IT IS FURTHER ORDERED that Defendants’ Motion to Strike Plaintiff’s Supplemental
Briefing [Dkt. #60] is DENIED.
Texas Substantive Law Governs This Dispute
Markel asserts Colorado law applies to this dispute. Pf.’s Mot. Summ. J. [Dkt. #33] at 910; Resp. Df.’s Joint Mot. Part. Summ. J. [Dkt. #32] at 8-10. Markel takes this position despite
the lack of a choice of law clause in the insurance contract, and notwithstanding the facts that (a)
Markel chose the Western District of Texas as the forum for this dispute and (b) the lawsuits
Markel seeks to avoid defending are brought in Texas state court.
A federal court sitting in diversity must apply the law of the forum state—in this case,
Texas. Harken Exploration Co. v. Sphere Drake Ins. P.L.C., 261 F.3d 466, 470 n.3 (5th Cir.
2001). Application of the forum state’s law includes application of its choice of law rules.
Simmons v. Liberty Mut. Fire Ins. Co., 420 F. App’x 388, 390 (5th Cir. 2011) (citing Delta
Seaboard Well Servs., Inc. v. Am. Int’l Specialty Lines Ins. Co., 602 F.3d 340, 342-43 (5th Cir.
2010)). In the absence of a controlling choice of law provision in a contract, Texas follows the
RESTATEMENT (SECOND) OF CONFLICT OF LAWS (1971) (“The Restatement”). DeSantis v.
Wackenhut, 793 S.W.2d 670, 679 (Tex. 1990). Section 6 of the Restatement directs a court to
follow the statutory directives of the forum state regarding choice of law. RESTATEMENT § 6.
Texas Insurance Code, Article 21.42 dictates that Texas law applies to insurance contracts if the
insurance contract is payable to a Texas resident and offered by an insurance company doing
business in Texas. Id.; see also Delta Seaboard, 602 F.3d at 342. Specifically,
Any contract of insurance payable to any citizen or inhabitant of this State by any
insurance company or corporation doing business within this State shall be held to
be a contract made and entered into under and by virtue of the laws of this State
relating to insurance, and governed thereby, notwithstanding such policy or
contract of insurance may provide that the contract was executed and the
premiums and policy (in case it becomes a demand) should be payable without
this State, or at the home office of the company or corporation issuing the same.
TEX. INS. CODE art. 21.42. Thus, in most cases “the Texas Insurance Code dictates that Texas
law applies to insurance contracts.” Simmons, 420 F. App’x at 390 (citing TEX. INS. CODE art.
21.42.); see also Delta Seaboard, 602 F.3d at 342.
Markel’s choice of law argument relies on the “most significant relationship” test
outlined in Section 188 of the Restatement, but these factors come into play only if no statutory
mandate directs the application of Texas law. See, e.g., Mayo v. Hartford Life Ins. Co., 354 F.3d
400, 403 (5th Cir. 2004) (finding there was no contractual choice of law clause or “statutory
directive [that] governs the choice of law determination here, . . . so this Court applies the
Restatement’s fact-based analysis.”); W.R. Grace & Co. v. Continental Casualty Co., 896 F.2d
865, 883 (5th Cir. 1990) (acknowledging the Texas statute mandates choice of Texas law where
insurance contract is “payable to any citizen or inhabitant of this State” but declining to expand
statutory directive beyond its plain wording). Here, Markel is an admitted lines insurer in Texas,
First Am. Compl. ¶ 1, and three of the four insureds under the D&O policy at issue are Texas
residents. Id. at ¶¶ 2-5. Of the Defendants participating in bringing the pending Motion for
Partial Summary Judgment and Motions to Strike, at least one is a Texas resident. Id. at ¶¶ 2-3.
Therefore, Texas Insurance Code, Article 21.42 applies to direct the choice of Texas’ substantive
law in this case. Delta Seaboard, 602 F.3d at 342; see also W.R. Grace, 896 F.2d at 883.
III. APPLICABLE LAW
Cross-Motions for Summary Judgment
Summary judgment is appropriate under Rule 56 of the Federal Rules of Civil Procedure
only “if the movant shows there is no genuine dispute as to any material fact and that the movant
is entitled to judgment as a matter of law.” FED. R. CIV. P. 56(a). A dispute is genuine only if
the evidence is such that a reasonable jury could return a verdict for the nonmoving party.
Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 254 (1986).
The party moving for summary judgment bears the initial burden of “informing the
district court of the basis for its motion, and identifying those portions of [the record] which it
believes demonstrates the absence of a genuine issue of material fact.” Celotex Corp. v. Catrett,
477 U.S. 317, 323 (1986). The burden then shifts to the nonmoving party to establish the
existence of a genuine issue for trial. Matsushita Elec. Indus. Co., Ltd. v. Zenith Radio Corp.,
475 U.S. 574, 585-87 (1986); Wise v. E.I. Dupont de Nemours & Co., 58 F.3d 193, 195 (5th Cir.
1995). The parties may satisfy their respective burdens by tendering depositions, affidavits, and
other competent evidence. Estate of Smith v. United States, 391 F.3d 621, 625 (5th Cir. 2004).
The Court will view the summary judgment evidence in the light most favorable to the nonmovant. Griffin v. United Parcel Serv., Inc., 661 F.3d 216, 221 (5th Cir. 2011). The non-movant
must respond to the motion by setting forth particular facts indicating that there is a genuine
issue for trial. Miss. River Basin Alliance v. Westphal, 230 F.3d 170, 174 (5th Cir. 2000). “After
the non-movant has been given the opportunity to raise a genuine factual issue, if no reasonable
juror could find for the non-movant, summary judgment will be granted.” Id. Where, as here,
the parties have filed cross motions for summary judgment, “the motions are reviewed
independently, with evidence and inferences taken in the light most favorable to the nonmoving
party.” White Buffalo Ventures, LLC v. Univ.of Texas, 420 F.3d 366, 370 (5th Cir. 2005) (citing
Ford Motor Co. v. Tex. Dep’t of Transp., 264 F.3d 493, 498 (5th Cir. 2001)).
Texas Follows the “Eight-Corners” Rule
Texas courts apply the “eight-corners” or “complaint allegation” rule in deciding whether
an insurer owes a duty to defend. Potomac Ins. Co. v. Jayhawk Med. Acceptance Corp., 198
F.3d 548, 551 (5th Cir. 2000); King v. Dallas Fire Ins. Co., 85 S.W.3d 185, 187 (Tex. 2002).
Under this rule, courts must determine whether an insurer owes a duty to defend “solely from the
allegations in the most recent [underlying] petition and the language of the insurance policy.”
Harken, 261 F.3d at 471; King, 85 S.W.3d at 187. “As to the policy, if a term is susceptible to
more than one reasonable interpretation, [the court] must resolve that uncertainty in favor of the
insured.” Evanston Ins., 370 S.W.3d 377, 380 (Tex. 2012) (citing Fiess v. State Farm Lloyds,
202 S.W.3d 744, 746 (Tex. 2006)).
The insured bears the burden of showing that the claim against it is potentially within the
insurance policy’s scope of coverage. Harken, 261 F.3d at 471. “The focus of this inquiry is on
the facts alleged, not on the actual legal theories.” St. Paul Fire & Marine Ins. Co. v. Green Tree
Fin. Corp.-Tex., 249 F.3d 389, 392 (5th Cir. 2001); Nat’l Union Fire Ins. Co. of Pittsburgh, Pa.
v. Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997). If the complaint alleges
“even one covered claim, the insurer must defend the entire suit.” Potomac, 198 F.3d at 551;
Evanston, 370 S.W.3d at 380 (citing Zurich Am. Ins. Co. v. Nokia, Inc., 268 S.W.3d 487, 491
(Tex. 2008)). If, however, the complaint alleges both covered and excluded claims, the court
must determine whether the covered claims provide an independent cause of the alleged damages
or whether they arise out of the same set of facts trigger the policy exclusion. Wilbros RPI., 601
F.3d at 311 (5th Cir. 2010) (citing Travelers, 166 F.3d at 771). If the covered claims are an
independent cause of the alleged damages, the insurer must defend the entire suit, but the insurer
has no duty to defend based on covered claims that are entirely derivative of the same facts as the
excluded claims. Travelers, 166 F.3d at 771.
There are two lawsuits pending against the Defendant insureds: Cause No. DC-1314628, MCG Capital Corporation Solutions Capital, LLP v. Barrier Advisors, Huibert Verbeek,
Engelbrecht Verbeek, Kenney Verbeek, Jack Ormberget and Ehrhardt Keefe Steiner & Hottman,
P.C., pending in the 101st District Court of Dallas County, Texas (the “MCG Suit”), and Cause
No. DC-13-01466; Regions Bank v. Nexbank Securities, Inc d/b/a NexBank Capital Advisors
f/k/a Barrier Advisors, et al., currently pending in the 101st District Court of Dallas County,
Texas (the “Regions Bank Suit”). App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. D,
E. The Regions Suit and the MCG Suit have been consolidated into a single lawsuit under Cause
No. DC-13-14628. See id. at Ex. D. Comerica Bank has intervened in the consolidated suit,
asserting claims against Defendants. Id. at Ex. I.
A. The Underlying Lawsuits Allege Fraud Against the Individual Defendants
Each live pleading in the underlying consolidated action makes virtually identical factual
allegations concerning Huibert Verbeek and Engelbrecht Verbeek. “In determining whether an
exclusion applies, Texas courts ‘examine the factual allegations showing the origin of the
damages rather than the legal theories asserted by the plaintiff.’” Colony Nat’l Ins. Co., 487 F.
App’x at 890-92 (internal citations omitted). With this principle in mind, and following the
example of the parties themselves, who have briefed the application of the exclusions to the
underlying lawsuits as a unit, the Magistrate Court examines the duty to defend the claims
asserted in the underlying consolidated actions together.
MCG, Regions Bank, and Comerica have each filed pleadings alleging that the Individual
Defendants participated in a fraudulent scheme to induce MCG, Regions, and Comerica to fund a
multi-million dollar credit facility for the Color Star group of companies. See generally App’x to
Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. D, E, I. According to the live pleadings filed by
MCG, Regions Bank, and Comerica, Regions Bank acted as the leader of a bank syndicate that
funded the senior debt portion of the credit facility, totaling $52.5 million. Id. at Ex. E, APP
0205. Regions Bank is an Alabama state-chartered bank, regulated by the Federal Reserve
Board, and authorized to do business in Texas. Id. at Ex. E, APP 0206, 0209. Comerica, a
Texas banking association, was solicited by Regions Bank as a co-lender for the credit facility
syndication, and provided one third of the total funding for the senior debt portion of the credit
facility. Id. at Ex. I, APP 0345-46, 0350. MCG “is a publicly traded, commercial finance
company that invests in companies throughout the United States.” Id. at Ex. D, APP 0150.
MCG’s wholly-owned subsidiary, Solutions (a co-plaintiff in the MCG complaint) “is a small
business investment company (“SBIC”) as defined by section 103 of the Small Business
Investment Act of 1958 (15 U.S.C. § 662) and is licensed to operate as a SBIC by the Small
Business Administration.” Id. MCG/Solutions entered into the Subordinate Credit Agreement
and Junior Loan that made up the remaining $13.5 million portion of the credit facility. Id. at
The credit facility consisted in part of a revolving line of credit that was “formula based,”
“meaning that Color Star could only borrow the lesser of (a) the credit limit or (b) a specified
percentage of the value of Color Star’s inventory and receivables. Thus, not only was Color
Star’s financial performance important to obtaining underwriting approval for the Regions
Facility, but Color Star’s inventory value would directly impact the amount of revolving credit
available to fund its operations.” Id. at Ex. I, APP 0349. Shortly after entering the syndicated
credit facility, Color Star announced a “monumental” write-down in the value of its inventory,
meaning that it could no longer access the revolving line of credit, defaulted on the loans
contained in the syndicated credit facility, and declared bankruptcy. Id. at Ex. D, APP 0176-77;
Ex. E, APP 204, 240-41; Ex. I, APP 0378. Each of the financial institutions that participated in
the syndicated credit facility has claims against Color Star in the bankruptcy proceeding. See id.
The underlying consolidated lawsuits have been brought by the financial institutions
against the Individual Defendants and other individual actors outside the bankruptcy proceedings
against Color Star. The financial institutions have sued the investment brokerage firm, law firm,
investment broker, and counsel involved in facilitating the negotiation of the syndicated credit
facility, along with the Verbeeks, alleging all of them engaged in a conspiracy to fraudulently
induce the financial institutions to enter the syndicated credit facility. See generally id. at Ex.D,
E, I. With regard to the Verbeeks, each of the financial institutions alleges that Huibert (“Herb”)
Verbeek and Engelbrecht (“Brett”) Verbeek had actual knowledge, before the credit facility
closed, that Color Star’s inventory was overstated by approximately $6.6 million. Id. at Ex. D,
APP 0184-86, 0191-200; Ex. E, APP 0241-48; Ex. I, APP 0352-58, 0372-74. The Verbeeks
allegedly knew, before the credit facility closed, that their former comptroller was threatening to
sue the company for wrongful termination because he was fired when he insisted that the
material misstatement of Color Star’s inventory should be corrected and disclosed to the
financial institutions who were negotiating the syndicated credit facility.
Id. Each of the
Verbeeks individually guaranteed, in a personal guarantor agreement, that the financial
disclosures associated with the credit facility agreement were true and correct, despite allegedly
having personal knowledge that neither the $6.6.million pending inventory write-down nor the
threatened lawsuit relating to the overstated inventory had been disclosed to the financial
institutions. Id. Each of the Verbeeks allegedly knew, at the time they authorized Color Star to
enter the credit facility and made their personal guarantees, that Color Star would be unable to
comply with the debt ratio covenants in the credit syndicate agreements and would therefore lose
access to the revolving line of credit necessary to keep Color Star in business. Id.
B. Markel Has the Burden to Establish An Exclusion Applies to All Claims
Markel does not contest that the Verbeeks are insured under the D&O Policy for the type
of wrongful acts alleged in the underlying litigation, specifically including “misstatements” and
“omission[s].” See App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. J, APP 0422.
Markel nevertheless contends the Policy’s creditor exclusion and/or its investor exclusion
operate to preclude coverage based on the factual allegations plead in the underlying
consolidated suits. Pf.’s Reply in Support of Suppl. Br. [Dkt #66] at 5. As noted above, it is
Markel’s burden to prove these exclusions apply to the factual allegations in the underlying live
pleadings; if even one plead claim is covered by the policy, Markel’s duty to defend is not
extinguished. Potomac, 198 F.3d at 551; Evanston, 370 S.W.3d at 380. “Furthermore, in the
event of ambiguity, any exceptions and limitations contained in a policy are strictly construed
against the insurer.” Colony Nat’l Ins. Co., 487 F. App’x at 890-92 (internal citation omitted).
Application of the Creditor Exclusion
Defendants argue there are several structural reasons why the creditor exclusion
categorically fails: first, they assert it is applicable only to suits seeking to recover on debts of
Color Star. Df.’s Joint Mot. Part. Summ. J. [Dkt. #23] at 17-18. Next, they assert it conflicts
with the obligations created by Policy language stating that Markel cannot deny coverage
because of a party’s bankruptcy. Id. at 18-19. Finally, they assert the application of the creditor
exclusion would operate in violation of 11 U.S.C § 541(c) because it would create a forfeiture or
termination of the Color Star bankruptcy estate’s rights in the Policy. Id. at 21-22. For the
reasons discussed below, none of these arguments categorically prevents application of the
creditor exclusion to suits against individual officers and directors of Color Star.
The Creditor Exclusion and the Severability Clause
As the Individual Defendants correctly point out, the underlying Policy “expressly creates
separate insurance policies” for Huibert Verbeek, Engelbrecht Verbeek, and Color Star. Df.’s
Joint Mot. Part. Summ. J. [Dkt. #23] at 16 (citing King, 85 S.W. 3d at 191; see also App’x to
Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. J, at APP 0415 (underlying insurance policy’s
Defendants contend this “severability clause” means that the creditor
exclusion can apply only to claims brought against Color Star by its creditors. Df.’s Joint Mot.
Part. Summ. J. [Dkt. #23] at 17-18. Each of the underlying lawsuits acknowledges that Color
Star is not a defendant and notes that the financial institutions bringing suit have creditor claims
against Color Star in Color Star’s bankruptcy proceedings. App’x to Df.’s Joint Mot. Part.
Summ. J. [Dkt. #24], Ex. D, APP 0176-77; Ex. E, APP 204, 240-41; Ex. I, APP 0378. The
individual Defendants therefore assert, “The Verbeeks are not Color Star, and Regions and
MCG/Comerica have not sued the Verbeeks in their capacity as creditors of Color Star.” Df.’s
Joint Mot. Part. Summ. J. [Dkt. #23] at 18.
Markel, in contrast, contends the language of the creditor exclusion recognizes that “a
Company creditor could assert claims against Insureds other than the Company in that party’s
capacity as a creditor of the Company.” Pf.’s Mot. Summ. J. [Dkt. #33] at 13 (emphasis in
original). Markel’s construction of the creditor exclusion and severability clause is sensible and
gives full effect to both provisions. A creditor of Color Star could indeed bring suit against the
Individual Defendants in its capacity as a creditor of Color Star: for example, each of the
Individual Defendants is a personal guarantor on the credit facility extended to Color Star and
could be sued to recover on this guaranty by creditors of Color Star. See App’x to Df.’s Joint
Mot. Part. Summ. J. [Dkt. #24], Ex D, APP 0169.
Of course, as Defendants point out, none of the financial institutions has alleged the
Individual Defendants are liable, as guarantors, to pay off the amounts due and owing under the
credit facility loans. Id. at Ex. D, APP 0182-202; Ex. E, APP 0241-49; Ex. I, APP 0378-82. Nor
is any party suing the Individual Defendants for breach of contract arising out of their role as
guarantors of the credit facility agreements. Id. “[T]he insurer’s duty to defend is limited to
those claims actually asserted in an underlying suit. . . . The policy imposes no duty to defend a
claim that might have been alleged but was not, or a claim that more closely tracks the true
factual circumstances surrounding the . . . claimant’s injuries but which, for whatever reason, has
not been asserted.” Pine Oak Builders, Inc. v. Great Am. Lloyds Ins. Co., 279 S.W.3d 650, 65556 (Tex. 2009). Markel cannot apply the creditor exclusion on the basis of claims not asserted
(or asserted only in the bankruptcy proceedings, which are not at issue here). Id.
Markel acknowledges the Verbeeks are not being sued to collect Color Star’s debt, but
contends the creditor exclusion nevertheless applies because “the loan transactions and resulting
unpaid debts forms the basis of every cause of action in the Lawsuits.” Pf.’s Mot. Summ. J.
[Dkt. #33] at 15. It is well settled that “the eight corners rule focuses on ‘factual allegations that
show the origin of the damages.’” Evanston, 645 F.3d at 745 (citing Nat’l Union Fire Ins. Co. v.
Merchs. Fast Motor Lines, Inc., 939 S.W.2d 139, 141 (Tex. 1997)). Markel relies on language in
each of the underlying lawsuits alleging the plaintiff financial institutions were fraudulently
induced to loan Color Star money and that the plaintiffs were damaged in the amount of that loan
and its expected interest returns. 4
The Creditor Exclusion and the Bankruptcy Condition
Defendants contend that if the claims against them are brought by the financial
institutions as creditors, then Markel is nevertheless obligated to provide coverage because the
plaintiffs in the underlying lawsuits are bankruptcy creditors of Color Star. Df.’s Joint Mot. Part.
Summ. J. [Dkt. #23] at 18-19. Section XVII of the Policy provides that “Bankruptcy or
insolvency of any Insured or of the estate of any Insured shall not relieve the Insurer of its
obligations nor deprive the Insurer of its rights and defenses under this policy.” Id. at Ex. J, App.
0417. Defendants’ argument that Markel is obligated to defend against any suit brought by a
bankruptcy creditor ignores the second half of this clause, which acknowledges that Markel
retains its rights to assert coverage limitations notwithstanding a bankruptcy. Id.
The Creditor Exclusion and 11 U.S.C. § 541(c)
Defendants argue in the alternative that the Creditor Exclusion is unenforceable in the
event of an actual bankruptcy, because “it attempts to limit Markel’s liability for claims
presented by Color Star’s creditors in violation of 11 USCS § 541(c).” Id. at 21-22. Under this
statute, any interest of the debtor (Color Star) becomes the property of the bankruptcy estate
See, e.g., App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. D, APP 0195 (“MCG
Capital has been damaged by at least $13.5 million, the amount of its investment in the Junior
Loan.”); Ex. E, APP 0244 (“The goal of the common scheme described above . . . was to
fraudulently induce Regions to enter into loan transactions for Borrowers’ benefit by
misrepresenting the value of Borrowers’ inventor and preventing Regions from discovering the
true value of that inventory.”); id. (“As a result of the Defendants’ common scheme and the acts
done in furtherance of it, Regions was injured in an unliquidated amount to be determined at
trial, but not exceeding $35,000 in principal loss, exclusive of interest, costs, fees, expenses,
other damages, and other losses caused to Regions.”); Ex. I, APP 0378 (Had Defendants
disclosed the true value of Color Star’s inventory, “Comerica would have declined to be a colender in the Regions Facility.”).
notwithstanding any agreement that is “conditioned on the insolvency or financial condition of
the debtor . . . and that effects or gives an option to effect a forfeiture, modification, or
termination of the debtor’s interest in property.” 11 U.S.C. § 541(c).
While there may be factual scenarios where the invocation of the creditor exclusion
would operate as an unenforceable limitation on Color Star’s interest in the Policy as an asset of
the bankruptcy estate, the Individual Defendants do not explain how Markel’s refusal to defend
lawsuits against them, in which Color Star is not a party, violates Section 541. As Defendants
themselves have stressed, the insurance policy is structured to “expressly create separate
insurance policies” for Color Star and the Individual Defendants. Df.’s Joint Mot. Part. Summ.
J. [Dkt. #23] at 16 (citing King, 85 S.W. 3d at 191; see also App’x to Df.’s Joint Mot. Part.
Summ. J. [Dkt. #24], Ex. J, at APP 0415 (underlying insurance policy’s severability clause).
Markel’s invocation of the creditor exclusion implicates the non-bankrupt Individual
Defendants’ interest in coverage, not the debtor, Color Star’s, interest in the Policy. See 11
U.S.C. § 541(c).
Are the Underlying Lawsuits Brought by Plaintiffs “In Their
Capacity as Creditors” of Color Star?
Having determined there is no reason the creditor exclusion is categorically inapplicable
to individual insured’s claims for defense costs under the policy, the Magistrate Court next
considers whether the creditor exclusion is applicable on the specific facts alleged here. As
noted above, “[t]he policy imposes no duty to defend a claim that . . . more closely tracks the true
factual circumstances . . . but which, for whatever reason, has not been asserted.” Pine Oak
Builders, Inc., 279 S.W.3d at 655-56. Each of the underlying lawsuits at issue here is an attempt
to recover against the Individual Defendants that expressly excludes any creditor claims against
Color Star, likely because those claims are being handled in Color Star’s bankruptcy
proceedings. App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. D, APP 0176-77; Ex. E,
APP 204, 240-41; Ex. I, APP 0378. Nevertheless, it is equally well settled that “the eight corners
rule focuses on ‘factual allegations that show the origin of the damages.’” Evanston, 645 F.3d at
745 (internal citation omitted). As Markel points out, each of the underlying lawsuits alleges
damages arising from the Individual Defendants’ fraudulently inducing the plaintiffs to enter into
creditor relationships with Color Star. See supra, note 4 and record citations therein.
The Individual Defendants assert the financial institutions’ allegations of fraud are not
brought in their capacity as creditors, but in their capacity as allegedly duped investors. Df.’s
Mot. Summ. J. [Dkt. #23] at 14-15; Resp. Pf.’s Mot. Summ. J. [Dkt. #33] at 8-10. Defendants
point, in particular, to plaintiff MCG’s pleadings claiming breaches of the Texas Securities Act
and other “investor-centric claims.” Df.’s Joint Resp. to Pf.’s Suppl. Br. [Dkt. #64] at 7. The
question, then, is whether MCG’s invocation of Texas securities law alleges an independent
factual basis for the financial institutions’ claims against the Individual Defendants as investors,
rather than as creditors. See Colony Nat’l Ins. Co., 487 F. App’x at 890-92; Wilbros RPI, Inc.,
601 F.3d at 311.
In the Magistrate Court’s view, the answer is no—MCG’s theories of recovery are not
factual allegations that provide a basis for coverage independent of the factual allegations that
trigger the creditor exclusion. In reaching this finding, the Magistrate Court considered and
harmonized several key principles underlying the eight corners rule:
(1) The scope of coverage and exclusions must be evaluated against the claims actually
plead in the underlying litigation, without considering claims that could have been plead but
were not. Pine Oak Builders, 279 S.W.3d at 655-56. (2) The claims and legal theories in the
pleading, however, are not dispositive of the coverage issue. Evanston, 645 F.3d at 745. (3) To
evaluate coverage, the reviewing court must determine whether the factual allegations
underlying the claims actually plead describe damages that originated from a covered loss or
from a cause that falls within the scope of an exclusion. Colony Nat’l Ins. Co., 487 F. App’x at
890-92; Wilbros RPI, Inc., 601 F.3d at 311. (4) If an exclusion applies, the court must determine
whether the underlying factual allegations describe some covered conduct that is an independent
cause of the damages, in which case the insurer must defend the entire suit. Potomac, 198 F.3d
at 551; Evanston, 370 S.W.3d at 380. (5) If the facts alleged describe only excluded conduct and
alternate theories of recovery that rest on or are derivative of the same facts that trigger the
exclusion, no duty to defend applies. Wilbros RPI, 601 F.3d at 311 (citing Travelers Indem. Co.,
166 F.3d at 771).
Thus, in this case, Texas law requires that the undersigned make a finding determining
whether claims actually alleged in the underlying lawsuits—fraud and violation of the Texas
Securities Act—are supported by factual allegations showing the plaintiff financial institutions
were damaged in their capacity as creditors of Color Star or in their capacity as investors in
Color Star. Pine Oak Builders, Inc., 279 S.W.3d at 655-56; Evanston, 645 F.3d at 745 (internal
To the extent the damages alleged arose in both creditor and investor
capacities, the undersigned must consider whether the underlying factual allegations describe
two independent claims or two alternate theories of recovery arising out of the same facts.
Wilbros RPI, 601 F.3d at 311 (citing Travelers Indem. Co., 166 F.3d at 771). In making these
determinations, the Magistrate Court expresses no opinion on the validity of the claims plead or
the underlying factual allegations, but simply compares what is stated within the four corners of
the live pleadings with what is covered (or excluded) within the four corners of the Policy. Pine
Oak Builders, 279 S.W.3d at 655.
The Howey Distinction Between Creditors and Investors
As noted above, neither party provided any legal authority in their original cross motions
for summary judgment to support their respective assertions that the financial institutions were
acting “in their capacity” as either creditors or investors. Therefore, the Magistrate Court asked
for supplemental briefing on the distinction between a creditor-debtor relationship and an
investment relationship that was first articulated in Howey, 328 U.S. 293.
In their supplemental briefing, Defendants acknowledge that MCG, in particular, has
specifically alleged the credit facility is a security within the statutory definition provided by the
Texas Securities Act, and “avers that it believed itself to be an investor, and asserts, in addition to
others, investor-centric claims.” Df.’s Joint Resp. to Pf.’s Suppl. Br. [Dkt. #64] at 7. Defendants
further acknowledge Howey distinguishes such “investor-centric” claims from other claims
arising out of commercial loan disputes. Id. Defendants, however, contend Howey is applicable
only to the issue of whether the underlying credit facility is or is not an investment agreement,
and are adamant that “[t]he Court may not consider the truth or falsity of the allegations made by
MCG, nor make an inquiry under Howey as to facts not alleged in the underlying pleadings as a
means of applying the Bankruptcy and Creditor Exclusion.” Id. at 8 (citation omitted).
Defendants misunderstand the thrust of the Magistrate Court’s request. The truth or
falsity of MCG’s allegations that the credit facility is a security is not at issue here. Rather, as
Plaintiff Markel concedes, “the issue of whether the Loans at issue in the Underlying Litigation
are securities as addressed in Howey is directly relevant to whether the underlying plaintiffs . . .
are suing in their respective capacities as creditors of Color Star.” Pf.’s Reply in Support of
Suppl. Br. [Dkt. #66] at 1.
MCG’s allegations that the credit facility is a security, whether ultimately true or false,
tend to suggest MCG is suing, not in its capacity as the creditor on a commercial loan, but as an
investor who was allegedly fraudulently induced to invest by the Verbeeks and their
codefendants. Despite MCG’s “investor-centric” pleadings, however, Markel contends that none
of the financial institutions have made factual allegations sufficient to cast them as “investors”
rather than “creditors” under Howey. Pf.’s Suppl. to Mot. Summ. J. [Dkt. #58] at 6-8.
Howey and its progeny establish that an investment contract is distinguished from other
transactions (such as a commercial loan) if it is “a scheme whereby a person invests his money in
a common enterprise and is led to expect profits solely from the efforts of the promoter or a third
party.” Howey, 328 U.S. at 298-99. Markel cites Resolution Trust Corp. v. Stone, 998 F.2d 1534
(10th Cir. 1993) for the proposition that “because the plaintiff received specific interest payments
from its investment. . . rather than dividends tied to the profitability of [the issuer] or any other
entity,” the loans at issue were not securities or investment contracts. According to Markel, the
financial institutions have not alleged they expected any return other than their principal and
interest payments, and therefore their factual allegations, whether true or false, establish they are
suing to recover for the alleged fraud in their capacity as creditors of ColorStar. Pf.’s Suppl. to
Mot. Summ. J. [Dkt. #58] at 6-8.
The Individual Defendants do not attempt to rebut Markel’s characterization of the
financial institutions’ claimed damages as the “principal and interest payments” on the allegedly
fraudulently induced loans. See id. Instead, they note that MCG also seeks statutory damages
based on alleged violations of the Texas Securities Act. Df.’s Joint Resp. to Pf.’s Suppl. Br. [Dkt.
#64] at 3. The Individual Defendants further assert MCG “believed itself to be an investor” with
respect to Color Star. Id. at 7.
The mere fact that MCG has asserted legal theories of recovery based on the Texas
Securities Act is not controlling with regard to whether the creditor exclusion applies to the
Individual Defendants’ claims against Markel. Evanston, 645 F.3d at 745 (internal citation
omitted). MCG’s claim for statutory damages is not a factual allegation regarding the origin of
the damages, but an alternate legal theory of recovery. See App’x to Df.’s Joint Mot. Part.
Summ. J. [Dkt. #24], Exhibit D, 0184-87. In “eight corners” cases, Texas courts determine
whether an insurer has a duty to defend based on “the factual allegations showing the origin of
the damages,” not the legal theories espoused by the plaintiff in the underlying suit. Colony
Nat’l, 487 F. App’x at 890-92. Further, to the extent MCG does make allegations that its
damages arise from a breach of the securities laws, the conduct alleged to breach the securities
laws is the same conduct alleged to have fraudulently induced MCG to loan money, and the
damages allegedly caused are the same—the amount of money loaned and interest expected.
App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Exhibit D, 0184-187; 0191-95. Thus, the
securities claim is entirely derivative of the fraudulently induced creditor claim. Id.
law is clear: where a claim against an insured would not exist ‘but for’ conduct explicitly
excluded by the policy, the dependent claims are also not covered under the policy, regardless of
whether the insured against whom the derivative claims are directed actually engaged in the
excluded acts.’” Travelers, 166 F.3d at 771 (quoting Canutillo Indep. Sch. Dist. v. Nat. Union
Fire Ins. Co. Of Pittsburgh, 99 F.3d 695, 704-05 (5th Cir. 1995)).
Markel is correct that none of the financial institutions (even MCG) has made factual
allegations describing damages that were sustained in some capacity other than as a creditor of
Color Star. Id. “[In] this Circuit, a loan is not automatically considered a security.” Wolfe v.
Bellos, No. 3:11-cv-02015-L, 2012 U.S. Dist. LEXIS 26452 (N.D. Tex. Feb. 28, 2012) (citing
McClure v. First Nat’l Bank, 497 F.2d 490, 492 (5th Cir. 1974)). Instead, a loan transaction is
“characterized as commercial or investment in nature,” Bellah v. First Nat’l Bank, 495 F.2d
1109, 1112-13 (5th Cir. 1974), based on whether the arrangement is “so structured as to
contemplate, at the outset, some risk—either that the investor could lose his investment, or that
the value of his return could fluctuate.” Guidry v. Bank of LaPlace, 954 F.2d 278, 284 (5th Cir.
Whether or not the credit facility at issue is ultimately determined to be a security, a
commercial loan, or another type of transaction entirely, the allegations in the current underlying
pleadings—including MCG’s “investor-centric” pleading—state that the financial institutions’
damages are the amount of principle and interest they expected to recover from the loans they
were fraudulently induced to make. See supra, note 4 and record citations therein The financial
institutions do not allege they anticipated any extra profit based on Color Star’s performance, or
any risk beyond the commercial risk that a debtor will not repay the agreed principal and interest
on a loan.
Guidry, 954 F.2d at 284.
Under these circumstances, it appears the financial
institutions have brought their complaints in their capacities as defrauded creditors of Color Star.
To the extent the factual allegations in the underlying complaints can be taken to describe
conduct that would violate Texas securities law, that alleged conduct is the same as the conduct
underlying the creditors’ fraud claims, and not a separate, independent cause of damages;
therefore the exclusion remains applicable.
Travelers, 166 F.3d at 771.
undersigned finds the creditor exclusion applies to bar the Individual Defendants’ claims for
defense costs under the D&O Policy.
Application of the Investor Exclusion
The Magistrate Court is of the opinion that all of the facts alleged in the underlying
complaints are within or derivative of the creditor exclusion, as explained above. In the event
that the District Court finds the Individual Defendants have identified factual allegations in the
pleadings that establish claims for damages brought by the financial institutions in their
capacities as investors, distinct from the claims brought in their capacity as creditors, Markel
argues the investor exclusion in the policy should apply to preclude coverage. Pf.’s Suppl. to
Mot. Summ. J. [Dkt. #58] at 8-10. Therefore, a brief analysis of this exclusion is appropriate.
It is Markel’s burden to establish the application of any exclusion. Ewing Constr. Co. v.
Amerisure Ins. Co., 420 S.W.3d 30, 33 (Tex. 2014). The investor exclusion, by its terms, does
not apply to “a private-placement transaction exempt from registration under the Securities Act
of 1933, as amended.” App’x to Df.’s Joint Mot. Part. Summ. J. [Dkt. #24], Ex. J, at APP 0423.
Markel brushes this limitation aside by simply asserting, with no citation to the record or case
law, “carve-out 1 does not apply because the securing of the Loan is not a ‘private placement
transaction.’” Pf.’s Suppl. to Mot. Summ. J. [Dkt. #58] at 10.
Whether a private-placement transaction is exempt from registration under the Securities
Act is a fact-sensitive inquiry. Pinter v. Dahl, 486 U.S. 622, 627 (1988). The offering must (1)
not be made by any means or form of general solicitation or advertising; (2) be made only to
those persons whom the issuer has reasonable grounds to believe are of knowledge and
experience which would enable them to evaluate the merits of the issue or who are financially
able to bear the risk; and (3) be made only to those persons who have access to the same kind of
information as would be contained in a registration statement. Mary S. Krech Trust v. Lakes
Apartments, 642 F.2d 98, 101 (5th Cir. 1981). “Under this rule, the issuer must have reasonable
grounds to believe, and must believe, that there are no more than thirty-five purchasers from the
The Magistrate Court does not engage in any factual finding as to whether the credit
facility at issue in the underlying lawsuits is a commercial transaction or a security, much less
whether it is a private placement security. See Pine Oak Builders, 279 S.W.3d at 655 (“In
deciding the duty to defend, the court should not consider extrinsic evidence from either the
insurer or the insured that contradicts the allegations of the underlying petition.”) The factual
allegations in the underlying petitions, however, are that the syndicated credit facility was
offered by a FINRA licensed broker to two banks and a licensed SBIC, and supported by a “data
room” and multiple financial disclosures (albeit allegedly misleading ones).
ultimate truth or falsity of these factual allegations, the pleadings on their face allege several of
the hallmarks of a private placement transaction. See Krech, 642 F.2d at 101; 15 U.S.C. §77d(2)
(statutory basis for “private placement” exemption); 17 C.F.R. §230.501 (defining “accredited
investors” for purposes of private placement transactions as entities including banks and SBICs);
id. at §230.500 (failure to comply with technical requirements of SEC regulations governing
private placements (“Regulation D”) does not preclude application of statutory “private
placement” exemption). A statutorily exempt private placement is, by definition, outside the
scope of the Investor Exclusion in the D&O Policy. App’x to Df.’s Joint Mot. Part. Summ. J.
[Dkt. #24], Ex. J, at APP 0423. Therefore, in light of the factual allegations on the face of the
underlying complaints, Markel’s unsupported statement that the Loan is not a private placement
transaction fails to meet the insurer’s burden to prove that the investor exclusion limits the duty
to defend the underlying cases. Zurich, 268 S.W.3d at 491; King, 85 S.W.3d at187. “Where the
complaint does not state facts sufficient to clearly bring the case within or without the coverage,
the general rule is that the insurer is obligated to defend if there is, potentially, a case under the
complaint within the coverage of the policy.”
Zurich, 268 S.W.3d at 491 (citing Heyden
Newport Chem. Corp. v. S. Gen. Ins. Co., 387 S.W.2d 22, 26 (Tex. 1965)).
As discussed above, however, the underlying complaints, as currently plead, make factual
allegations that fall within or are entirely derivative of the facts triggering the creditor exclusion
to the D & O Policy. Wilbros RPI, 601 F.3d at 311; Travelers, 166 F.3d at 771. Therefore, the
Magistrate Court RECOMMENDS the District Court GRANT Plaintiff’s Motion for Summary
Judgment [Dkt. #33]. The Magistrate Court further RECOMMENDS the District Court DENY
the Verbeek’s Motion for Partial Summary Judgment [Dkt. #23], finding Markel has no duty to
defend the underlying lawsuits based on the current pleadings and therefore owes no attorney’s
fees or penalties under Texas law.
For the reasons outlined above,
IT IS ORDERED that Plaintiff’s Motion For Leave to File Second Amended Complaint
[Dkt. #48] is GRANTED;
IT IS FURTHER ORDERED that Defendants’ Motion to Strike Plaintiff’s Supplemental
Brief [Dkt. #60] is DENIED.
The undersigned further RECOMMENDS the District Court GRANT Plaintiff’s Motion
for Summary Judgment [Dkt. #33].
Finally, the Magistrate Court RECOMMENDS the District Court DENY Defendants’
Motion for Partial Summary Judgment [Dkt. #23].
The parties may file objections to this Report and Recommendation. A party filing
objections must specifically identify those findings or recommendations to which objections are
being made. The District Court need not consider frivolous, conclusive, or general objections.
See Battles v. United States Parole Comm’n, 834 F.2d 419, 421 (5th Cir. 1987).
A party’s failure to file written objections to the proposed findings and recommendations
contained in this Report within fourteen (14) days after the party is served with a copy of the
Report shall bar that party from de novo review by the District Court of the proposed findings
and recommendations in the Report and, except upon grounds of plain error, shall bar the party
from appellate review of unobjected-to proposed factual findings and legal conclusions accepted
by the District Court. See 28 U.S.C. § 636(b)(1)(C); Thomas v. Arn, 474 U.S. 140, 150-53, 106
S. Ct. 466, 472-74 (1985); Douglass v. United Services Automobile Ass’n, 79 F.3d 1415 (5th Cir.
To the extent that a party has not been served by the Clerk with this Report &
Recommendation electronically, pursuant to the CM/ECF procedures of this District, the Clerk is
ORDERED to mail such party a copy of this Report and Recommendation by certified mail,
return receipt requested.
SIGNED September 17, 2015
UNITED STATES MAGISTRATE JUDGE
Disclaimer: Justia Dockets & Filings provides public litigation records from the federal appellate and district courts. These filings and docket sheets should not be considered findings of fact or liability, nor do they necessarily reflect the view of Justia.
Why Is My Information Online?