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CA Jones Management Group, LLC v. Scottsdale Indemnity Co.

United States District Court, W.D. Kentucky, Paducah Division

February 28, 2014

C.A. JONES MANAGEMENT GROUP, LLC, GLOBAL BOOK RESELLERS, LLC, TECHNOLOGY ASSOCIATES, INC., CHARLES A. JONES, and SARAH C. JONES, Plaintiffs/Counterclaim Defendants,
v.
SCOTTSDALE INDEMNITY COMPANY, Defendant/Counterclaim Plaintiff.

MEMORANDUM OPINION AND ORDER

THOMAS B. RUSSELL, Senior District Judge.

This matter is before the Court upon the Motion for Preliminary Injunction of Plaintiffs C.A. Jones Management Group, LLC ("C.A. Jones); Global Book Resellers, LLC ("Global Book"); Technology Associates, Inc. ("Technology Associates"); Charles A. Jones ("Mr. Jones"); and Sarah C. Jones ("Ms. Jones"). (Docket No. 13.) Defendant Scottsdale Indemnity Company ("Scottsdale") has responded, (Docket No. 17), and Plaintiffs have replied, (Docket No. 24). This matter is now ripe for adjudication.

Because Plaintiffs have failed to demonstrate a substantial likelihood of success on the merits and irreparable harm essential to warrant injunctive relief, their Motion for Preliminary Injunction (Docket No. 13) will be denied.

BACKGROUND

This case arises from an insurance coverage dispute. In their complaint, Plaintiffs alleged that Scottsdale breached an insurance contract by failing to provide coverage in defense of two federal court actions.[1] The lawsuits at issue are David Griffin v. Charles A. Jones, Sarah C. Jones, C.A. Jones Management Group, LLC, Global Book Resellers, LLC, Technology Associates, Inc., and John Doe Entities 1-10, USDC WDKY, Case No. 5:12-cv-00163-TBR and Robert H. Waldschmidt, Trustee v. C.A. Jones Management Group, LLC, Charles A. Jones, and Scott Wright, USBC MDTN, Adv. Proc. No. 3:13-ap-90101. Scottsdale denies coverage for these lawsuits and counterclaims for declaratory judgment seeking an order confirming that no such coverage exists. (Docket No. 6.)

Plaintiffs now seek a preliminary injunction, requesting an order that Scottsdale is required to provide legal representation and coverage for these actions. Plaintiffs claim that they will suffer immediate and irreparable injury in the absence of such coverage. (Docket No. 13-1 at 1.)

I. Relevant terms of the Scottsdale Policy

Scottsdale insured issued a Business and Management Indemnity Policy ("the Policy") to C.A. Jones Management Group, LLC ("C.A. Jones") and several of its affiliates under Policy No. EKI3042564 ("the Policy"). Among the Policy's provisions is coverage for the benefit of the entities' directors and officers ("the D&O Policy"). The D&O Policy pays, among other losses,

Loss of the Directors and Officers for which the Directors and Officers have become legally obligated to pay by reason of a Claim first made against the Directors and Officers during the Policy Period... and reported to the Insurer pursuant to Section E.1 herein, for any Wrongful Act taking place prior to the end of the Policy Period.

The Policy ran from July 1, 2011 to July 1, 2012 ("the 7/1/11 Policy"). A second Policy was issued to C.A. Jones on July 1, 2012 ("the 7/1/12 Policy"). Scottsdale alleges that the Policy was cancelled on November 27, 2012 for nonpayment of premium. (Docket No. 17 at 3.)

Both the 7/1/11 and the 7/1/12 Policies are "claims-made" policies; that is, in order to be covered, a claim must be made and reported during the applicable Policy Period for any alleged wrongful act that occurred prior to the end of the Policy Period. The Policy's Insuring Clause specifies that Scottsdale shall pay the losses:

for which the Directors and Officers are not indemnified by the Company and which the Directors and Officers have become legally obligated to pay by reason of a Claim first made against the Directors and Officers during the Policy period or, if elected, the Extended Period, and reported to the Insurer pursuant to Section E.1. herein, for any Wrongful Act taking place prior to the end of the Policy Period.

(Docket No. 17-2 at 22, D&O Coverage Section, ¶ A.1) (emphases added). The Insuring Clauses related to Company losses also require the claim to be reported during the Policy Period. (Docket No. 17-2 at 22; Docket No. 17-1 at 22.)

The Policy considers all related wrongful acts as one insurance claim that must be reported to Scottsdale during the Policy Period when the wrongful acts are first alleged.[2] (Docket No. 17-1 at 27-28.) The Notification section requires the Insureds to notify the Insurer of any claim no later than sixty days after the end of the Policy Period.[3] If, during the Policy Period, the Insureds become aware of a Wrongful Act that may give rise to a future covered Claim and notify the Insurer as soon as practicable, any Claim arising out of the Wrongful Act will be deemed to have been made at the time that the Insurer received notice. (Docket No. 17-1 at 28, D&O Coverage Section, ¶ E.2.) The same section precludes coverage for costs incurred prior to the time that the Wrongful Act results in a claim. (Docket No. 17-1 at 28, D&O Coverage Section, ¶ E.2.)

The Policy defines "Interrelated Wrongful Acts" as "all Wrongful Acts that have as a common nexus any fact, circumstance, situation, event transaction, cause or series of facts, circumstances, situations, events, transactions, or causes." (Docket No. 17-1 at 23, D&O Coverage Section, ¶ B.6.)

A "Claim" includes "a civil proceeding against any Insured seeking monetary damages or non-monetary or injunctive relief, commenced by the service of a complaint or similar pleading." ( See Docket No. 17-1 at 27-28, D&O Coverage Section, ¶ B.1(c), quoted supra; Docket No. 17-2 at 22, D&O Coverage Section, ¶ B.1(c), quoted supra. )) Neither Scottsdale nor the Plaintiffs dispute that Griffin II shares a common nexus of facts, circumstances, and events with David Griffin v. Jones, et al., USDC WDKY, Case No. 5:12-cv-00033-TBR (hereinafter "Griffin I"). Consequently, the two cases comprise a single Claim.4 ( See Docket No. 17-1 at 27-28, D&O Coverage Section, ¶ D.3, quoted supra. )

II. Plaintiffs' litigation history

a. Griffin I

Both Griffin I and Griffin II arise from a soured business relationship between David Griffin and Charles Jones. Griffin filed his first lawsuit (hereinafter "Griffin I") against C.A. Jones, Charles Jones, Sarah Jones, and affiliated companies. Griffin alleged that after he made investments into various entities owned and operated by Jones, Jones formed C.A. Jones Management to operate as the companies' management consultant and charged exorbitant consulting fees to the companies, rendering them nearly insolvent. He sued C.A. Jones Management, Charles Jones, Sarah Jones, and affiliated companies on February 28, 2012 for securities fraud, breach of fiduciary duty, fraud, misappropriation, breach of contract, and unjust enrichment. ( See Case No. 5:12-cv-00033-TBR, Docket No. 1 (Complaint).) The parties ultimately stipulated to the suit's voluntary dismissal upon the appointment of Myles MacDonald as receiver to assume control over the companies' operations. ( See Case No. 5:12-cv-00033-TBR, Docket No. 58 (Stipulation of Dismissal).)

Griffin I was filed against Plaintiffs on February 28, 2012. It accordingly falls within the 7/1/11 Policy Period, which ran from July 1, 2011 to July 1, 2012. Plaintiffs assert that they timely reported the Claim arising from Griffin I as required. (Docket No. 13-1 at 6, 9.) According to Scottsdale, Plaintiffs did not request that Scottsdale assume their defense or pay their costs during the pendency of Griffin I. (Docket No. 17 at 9.) Moreover, Scottsdale claims that Plaintiffs stipulated to dismissal of the suit without ever notifying Scottsdale in violation of the Policy. (Docket No. 17 at 9.)

b. Griffin II

Griffin filed a second lawsuit (hereinafter "Griffin II") against Plaintiffs on November 2, 2012, alleging that MacDonald exposed substantial red flags in the Jones companies' inventories. Among Griffin II's allegations are violations of copyright and trademark law; Griffin claims that SE Book Company and CBR purchased international versions of textbooks, rebound them and removed the copyright marks, and sold them as original U.S. editions. Griffin also asserts that upon MacDonald's investigation, Jones fraudulently transferred the companies' inventories and assets to other entities. ( See Case No. 5:12-cv-00163-TBR, Docket No. 18 (Amended Complaint).)

c. The CBR Trustee case

Robert H. Waldschmidt, Trustee v. C.A. Jones Management Group, LLC, Charles A. Jones, and Scott Wright, USBC MDTN, Adv. Proc. No. 3:13-ap-90101 (hereinafter "the CBR Trustee case") echoes the allegations of Griffin II, contending that Jones constructed a scheme to improperly market international textbooks. ( See USBC MDTN, Adv. Proc. No. 3:13-ap-90101, Docket No. 1 at ¶¶ 33-39.) Both the CBR Trustee case and Griffin II allege that Jones's actions violated the Copyright Act, the Lanham Act, and Federal Trade Commission regulations.

The Complaint in the CBR Trustee case was filed on March 3, 2013. Scottsdale alleges that this date falls outside the 2012 Policy Period, over three months after the Policy was cancelled for nonpayment. (Docket No. 17 at 10.)

STANDARD

"A preliminary injunction is an extraordinary remedy which should be granted only if the movant carries his or her burden of proving that the circumstances clearly demand it." Overstreet v. Lexington-Fayette Urban Cnty. Gov't, 305 F.3d 566, 573 (6th Cir. 2002). Accordingly, "[t]he granting or denial of a preliminary injunction is within the sound judicial discretion of the trial court." Mason Cnty. Med. Ass'n v. Knebel, 563 F.2d 256, 260-61 (6th Cir. 1977).

The Sixth Circuit has enunciated four elements to be "carefully balanced" in determining whether to issue a preliminary injunction. Mason Cnty. Medical Ass'n v. Knebel, 563 F.2d 256, 264 (6th Cir. 1977):

1. Whether the movant has shown a strong or substantial likelihood or probability of success on the merits;
2. Whether the movant has shown irreparable injury;
3. Whether the preliminary injunction could harm third parties; and
4. Whether the public interest would be served by issuing the preliminary injunction.

Id. at 261 (citations omitted). The Mason County criteria "do not establish a rigid and comprehensive test for determining the appropriateness of preliminary injunctive relief." Tate v. Frey, 735 F.2d at 990 (quoting Friendship Materials, Inc. v. Mich. Brick, Inc., 679 F.2d at 102 (6th Cir. 1982)). Rather, these factors "are interrelated considerations that must be balanced together." Mich. Coal. of Radioactive Material Users, Inc. v. Griepentrog, 945 F.2d 150, 153 (6th Cir. 1991).

Furthermore, "[d]espite the overall flexibility of the test for preliminary injunctive relief, and the discretion vested in the district court, equity has traditionally required such irreparable harm before an interlocutory injunction may be issued." Friendship Materials, Inc. v. Mich. Brick, Inc., 679 F.2d 100, 103 (6th Cir. 1982). To establish immediate and irreparable harm there must be an actual, viable, presently existing threat of serious harm. Cabinet for Workforce Dev., 2012 WL 5289659, at *3 (citing Mass. Coal. of Citizens with Disabilities v. Civil Def. Agency & Office of Emergency Preparedness of Mass., 649 F.2d 71, 74 (1st Cir. 1981)). A plaintiff must show injury that is not remote or speculative, but is actual and imminent. United States v. W.T. Grant Co., 345 U.S. 629, 633 (1953); Abney, 443 F.3d at 552. The injury must be of such imminence that there is a clear and immediate need for relief in order to prevent harm. Evans v. Wilson, 2011 WL 5509543, at *2 (W.D. Ky. Nov. 10, 2011) (citing Wis. Gas. Co. v. Fed. Energy Regulatory Comm'n, 758 F.2d 669, 674 (D.C. Cir. 1985).

DISCUSSION

I. Substantial likelihood of success ...


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