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Outdoor Venture Corp. v. Philadelphia Indemnity Insurance Co.

United States District Court, E.D. Kentucky, Southern Division, London

September 27, 2018

OUTDOOR VENTURE CORPORATION, STEARNS MANUFACTURING, KENTUCKY HIGHLANDS INVESTMENT CORPORATION, J.C. EGNEW, and L. RAY MONCRIEF Plaintiffs,
v.
PHILADELPHIA INDEMNITY INSURANCE COMPANY, GRANGE MUTUAL CASUALTY CO., SCOTTSDALE INDEMNITY COMPANY, AUTO-OWNERS INSURANCE COMPANY, and OWNERS INSURANCE COMPANY Defendants.

          OPINION AND ORDER

          KAREN K. CALDWELL, CHIEF JUDGE UNITED STATES DISTRICT COURT.

         This matter is before the Court on the parties' cross-motions for summary judgment (DE 52, 54, 55, 58). The defendants are all insurance companies. The plaintiffs were insured by one or more of the insurance companies. With this action, the insureds primarily seek reimbursement from their insurance companies for the costs they incurred in defending three lawsuits filed against them.

         Pursuant to a conference call with the parties and the Court's subsequent order (DE 51), the parties have submitted briefs on the threshold issue of whether the insurance companies had a duty to defend the insureds in the three lawsuits.

         I. Background

         The plaintiffs in this matter are three corporations and two individuals who were officers of the corporations.

         The three corporations are Stearns Manufacturing and its successor Outdoor Venture Corporation (together, “OVC”) and Kentucky Highlands Investment Corporation. (DE 1, Complaint, ¶ 11.) The two individual plaintiffs are J.C. Egnew and L. Ray Moncrief. During at least the relevant time, Egnew was the president of OVC. (DE 1, Complaint, ¶4.) Moncrief was a director of OVC and an officer of Kentucky Highlands (DE 1, Complaint, ¶3.)

         The root of this dispute is three lawsuits filed against various of the plaintiffs by a company called LEEP, Inc. and one of LEEP's insiders, Roger Blanken. LEEP alleged that it entered into “joint venture negotiations” with OVC. (DE 52-1, Mem. at 6.) During the negotiations, Egnew signed on OVC's behalf a non-disclosure and non-circumvention agreement (the “NDA”) which prevented OVC from contacting LEEP's lenders or customers. (DE 52-1, Mem. at 5.)

         Eventually, LEEP and OVC signed a letter of intent which “contemplated the formation of a new company to manufacture, in Kentucky, steel insulated building panels.” (DE 52-1, Mem. at 5.) The companies were unable to reach an agreement, however, and negotiations ceased in August 2012. (DE 52-1, Mem. at 6.)

         At the time, LEEP owed more than $7 million to Fortress Credit Corporation and was in default under the terms of the parties' financing agreement. (DE 52-1, Mem. at 6.) After joint venture negotiations between LEEP and OVC ceased, Kentucky Highlands purchased Fortress's rights under the financing agreement. Kentucky Highlands then repossessed LEEP's assets and sold the assets to plaintiff Stearns Manufacturing, which is a subsidiary of OVC. (DE 52-1, Mem. at 6.) Stearns Manufacturing no longer exists; OVC now owns Stearns' assets and liabilities. (DE 52-1, Mem. at 6 n. 5.)

         With the three lawsuits underlying this action, LEEP and Blanken asserted that Kentucky Highlands wrongfully repossessed their assets.

         The first lawsuit was brought by LEEP in Jefferson Circuit Court against Kentucky Highlands, OVC, Egnew, and Moncrief (the “LEEP lawsuit'). With this lawsuit, LEEP alleged that the insureds had devised a scheme to “force LEEP out of business and to take over LEEP's business by virtue of obtaining LEEP's confidential information and then purchasing the Fortress note.” (DE 53-3, LEEP Complaint ¶ 94.) LEEP alleged that, after buying the note, the insureds gave notice of default to LEEP and took possession of LEEP's facility and its assets and “took over LEEP's business and contacted LEEP's customers, all in an effort to destroy LEEP and to take over LEEP's business through unlawful means.” (DE 53-3, LEEP Complaint ¶¶ 94-97.) LEEP sought $30 million in damages. (DE 52-1, Mem. at 6.)

         The second lawsuit was brought by Blanken, who sued Kentucky Highlands and OVC in this Court. See Blanken, et al. v. Kentucky Highlands Investment Corporation, et al., No. 6:13-47-DLB (E.D. Ky. filed April 22, 2013) (the “Blanken Kentucky action”). With this action, Blanken asserted that he - not LEEP - owned a major piece of equipment repossessed by Kentucky Highlands called the Bradbury Roll Forming Machine and, thus, Kentucky Highlands had wrongfully repossessed it and sold it to OVC. (DE 53-6, Blanken Kentucky Complaint, ¶¶31, 48.)

         The third lawsuit was also brought by Blanken, this time in state court in Pennsylvania (the “Blanken Pennsylvania action”). In the Pennsylvania action, Blanken again sued Kentucky Highlands and OVC again asserting that the insureds wrongfully repossessed certain other inventory that belonged to him, not to LEEP. That action was later removed to federal court in Pennsylvania, which transferred the case to this Court. See Blanken v. Kentucky Highlands Investment Corporation, et al., 6:14-cv-202-DLB (E.D. Ky. Removed March 7, 2014).

         Kentucky Highlands, OVC, Egnew, and Moncrief were insured by at least one of the defendant insurers in this action: Grange Mutual Casualty Co., Scottsdale Indemnity Company, or Auto-Owners/Owners Insurance Company (together, “Owners”).[1] These insurers asserted, however, that the claims brought by LEEP and Blanken against their insureds were not covered under the applicable insurance policies. Grange refused to defend their insureds at all. Owners offered to defend the insureds under a “reservation of rights” and appointed counsel to represent them. Scottsdale did the same, except with regard to Moncrief, who Scottsdale refused to defend at all. (DE 52-1, Mem. at 1.)

         The insureds, however, retained their own counsel to represent them. With this action, they seek reimbursement for the amounts they paid to defend themselves in the three lawsuits. They assert a breach of contract claim and seek a declaratory judgment that the insurance companies were obligated to defend them in the underlying actions. They also assert claims for statutory bad faith and common-law bad faith against Scottsdale and Grange.

         Each of the insurance company defendants assert a counterclaim in which they ask the Court to declare that they have no duty to reimburse their insureds for the costs incurred in defending the underlying actions. In addition, Owners asks that Kentucky Highlands be required to reimburse it for the costs of defending it in the underlying actions. None of the insurers seek to recover any amounts paid by them to settle the underlying actions. (DE 52-1, Mem. at 2.)

         The insureds move for partial summary judgment, asking for judgment in their favor that the insurance companies had a duty to defend them in the underlying actions. Each of the insurance companies also moves for summary judgment, asking the Court to find that they had no duty to defend the plaintiffs.

         II. Determining the Duty to defend

         Kentucky law on the duty to defend is not completely clear. First, is the oft-quoted principle that “[t]he insurer has a duty to defend if there is any allegation which potentially, possibly or might come within the coverage of the policy.” James Graham Brown Found., Inc. v. St. Paul Fire & Marine Ins. Co., 814 S.W.2d 273, 279 (Ky. 1991). In James Graham Brown Found., the Kentucky Supreme Court clearly states the duty to defend is determined by the “language of the complaint” and not the “merit of the action.” Id. This means, “Under Kentucky law, a court should determine at the outset of litigation whether an insurance company has a duty to defend its insured by comparing the allegations in the underlying complaint with the terms of the insurance policy.” Westfield Ins. Co. v. Tech Dry, Inc., 336 F.3d 503, 507 (6th Cir.2003).

         The insureds argue that a court may go beyond the allegations of the complaint and “inquire into the underlying facts” to determine whether an insurer has a duty to defend. (DE 64, Response/Reply at 3.) In making this argument, the insureds cite to the dissent in an unpublished Kentucky Court of Appeals decision. Kentucky Sch. Boards Ins. Tr. v. Bd. of Educ. of Woodford Cty., No. 2002-CA-001748-MR, 2003 WL 22520018, at *12 (Ky. Ct. App. Nov. 7, 2003) (McAnulty, J., dissenting). The majority ruled that the trial court “did not err in focusing on the nature of the allegations rather than the underlying facts as asserted by KSBIT.” Id. at *7 (emphasis added).

         This would seem to indicate that the only matters relevant in determining the duty to defend are the underlying complaint against the insured and the insurance policy. However, another oft-quoted principle is that, under Kentucky law, in addition to the policy and the allegations, the Court may also consider the “known facts.” Lenning v. Commercial Union Ins. Co., 260 F.3d 574, 581 (6th Cir. 2001). In support of this principle, Lenning cites the Kentucky Supreme Court's decision in James Graham Brown Found. In a more recent, albeit unpublished, decision, the Sixth Circuit made clear that, under Kentucky law, “the allegations in the complaint do not contain the only relevant facts” in determining the duty to defend. KSPED LLC v. Virginia Sur. Co., 567 Fed.Appx. 377, 383 (6th Cir. 2014). Instead, the Court should also consider the “known facts.” Id. In KSPED, the court clarified that the relevant “known facts” are the facts known to the insurer at the time it declined to defend its insured. Id.

         In KSPED, the issue was the applicability of an exclusion in an insurance policy for liability arising out of the sale of alcoholic beverages if the insured was in the business of selling or serving alcoholic beverages. In determining that the exclusion applied, the Sixth Circuit looked beyond the allegations of the complaint to the facts known to the insurer. The court noted that, at the time it declined to defend its insured, the insurer had copies of the concession agreements between the insured and its concessionaires. Id. at 383. Thus, the court could consider the facts established by those agreement in determining whether the insured was in the business of selling alcohol.

         There is one more thing that the Court should consider in certain policies: the subjective intent of the insured. This is the holding in James Graham Brown Found. - the same case that holds that “[t]he insurance company must defend any suit in which the language of the complaint would bring it within the policy coverage regardless of the merit of the action.” James Graham Brown Found., Inc., 814 S.W.2d at 279. In that case, the policy provided that the insurer would indemnify the insured for “all sums which the insured will become legally obligated to pay as damages because of. . . property damage. . . caused by an occurrence.” Id. at 275.

         The policy defined an “occurrence” as an “accident . . .which result[s] in. . .property damage, neither expected nor intended from the standpoint of the insured.Id. (emphasis added). The court held, “Whether an insured intended the consequences of its action is normally a question of fact and not one of law. The determination of whether an insured expected or intended the damage resulting in the claim is for the jury.” Id. at 276. “Determination of intent is normally inappropriate for summary judgment.” Id.

         Thus, James Graham Brown Found. instructs that determining the duty to defend in some cases may stray far from merely looking at the allegations of the complaint against the insured. In a policy providing that damages are covered if they are “neither expected nor intended from the standpoint of the insured, ” determining whether the insurer has a duty to defend its insured may even require a jury trial.

         Later, in Cincinnati Inc. Co. v. Motorists Mut. Ins. Co., 306 S.W.3d 69 (Ky. 2010), the Kentucky Supreme Court made clear that the James Graham Brown Found. approach to determining the duty to defend is limited to policies that explicitly reference the “expectations and intentions of the insured.” Id. at 78 (“Upon reflection, we now recognize the crucial, materially different definition of occurrence in this case renders James Graham Brown Foundation, Inc. of, at most, limited value in determining whether there is an ‘occurrence' in the case at hand.”)

         At a conference call in this matter, the insurers requested that the Court permit the parties to brief the threshold issue of whether they had a duty to defend their insureds before permitting the parties to engage in discovery. The insureds argued that discovery was necessary to determine the “facts known” to the insurers. The Court agreed with the insurers and ordered the parties to brief the “duty to defend” before engaging in discovery. However, the Court advised the parties that, if it was unable to determine the duty to defend based only on the complaints and policies, it would order the parties to engage in discovery.

         Thus, in this opinion, the Court will begin by comparing the allegations of the complaint to the policies to determine if there was any duty to defend. The Court will then determine the need for any discovery regarding the facts known to the insurer and the intent of the insureds.

         III. Owners' duty to defend

         Owners issued various policies to the plaintiffs. Despite the extensive briefing on these motions, there is some confusion about the very basic issue of which policies the insureds claim provided them coverage. The Court will assume that the insureds claim coverage under the insurance policies attached as exhibits to their motion for summary judgment. There are three such Owners policies: a businessowners policy covering Kentucky Highlands and its officers and directors (DE 52-7) and two “executive umbrella” policies, one of which covered Egnew (52-10) and the other of which covered Moncrief (52-11). Late in their response/reply brief, the insureds seem to confirm that these are the policies they claim covered them. (DE 64, Response/Reply at 23.)

         The Kentucky Highlands businessowners policy covered Kentucky Highlands itself and its officers and directors, “but only with respect to their duties as [Kentucky Highland's] officers or directors.” (DE 52-7, Policy, § C(1)(c).) According to the complaint, Moncrief was a Kentucky Highlands officer and OVC director during the relevant time period, but Egnew was president of OVC only. (DE 1, Complaint, ¶¶ 3, 4.) The insureds do not dispute this. Thus, the businessowners policy covered only Kentucky Highlands and Moncrief.

         A. The Policy Provisions

         Determining the relevant provisions is somewhat confusing here because the policy that the insureds attach to their motion and address in their briefings consists of 14 pages. Meanwhile, Owners attaches 148 pages to its motion/response brief, which it identifies as the “business owners policy.” (DE 53-10 to 53-15.) Within those 148 pages, however, are the same 14 pages that the insureds identify as the businessowners policy. (DE 53-11 at CM-ECF pp. 7-20.) Thus, the Court assumes that the 14-page document is the basic businessowners policy.

         There are two additional problems with determining the relevant policy provisions. The first problem is with the policy declarations. The insureds attach one page labeled “Businessowners Policy Declarations.” (DE 52-7 at CM-ECF p. 1.) Owners attaches six pages labeled “Businessowners Policy Declarations.” (DE 53-10 at CM-ECF pp. 2-7;)

         The second problem is with the policy “endorsements.” The insureds attach none and do not discuss any. Meanwhile, Owners attaches pages and pages of endorsements, including one relevant to this action that will be discussed further below. (DE 53-10 at CM-ECF pp. 8-10; DE 53-11 at CM-ECF p. 25; DE 53-12 at CM-ECF pp. 1-25; 53-13 at CM-ECF pp. 1-25; 53-14 at CM-ECF pp. 1-25; DE 53-15 at CM-ECF pp. 1-14.)

         Looking to the basic 14-page policy, in determining coverage, the place to start is naturally with the section titled “coverages.” The policy provides coverage for “sums that the Insured becomes legally obligated to pay as damages because of' . . . ‘property damage,' “personal injury,' or ‘advertising injury' to which this insurance applies.” (DE 52-7, Owners KH Policy, § A(1).) Thus, in determining coverage, the policy directs that the Court look at the kinds of damages or injury alleged in the underlying LEEP and Blanken actions.

         The policy defines “property damage” as “physical injury to tangible property, including all resulting loss of use of that property” or “loss of use of tangible property that is not physically injured.” (DE 52-7, Owners KH Policy, § F(12).)

         The policy defines “personal injury” to include “wrongful entry into, or eviction of a person from a room, dwelling, or premises.” (DE 52-7, Owners KH Policy, § F(10)(c).) It is also defined to include “[o]ral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products, or services.” (DE 52-7, Owners KH Policy, § F(10)(d).)

         As to advertising injury, the policy applies only to such an injury committed “[i]n the course of advertising your goods, products or services.” (DE 52-7, Owners KH Policy, § A(1)(a)(3).) It includes injuries arising out of the “oral or written publication of material that slanders or libels a person or organization or disparages a person's or organization's goods, products or services.” (DE 52-7, Owners KH Policy, § F(1)(a).)

         These are the relevant coverage provisions. The Court will now look to the allegations of the LEEP and Blanken actions to determine if they allege “property damage, ” “personal injury” or “advertising injury” as those terms are defined in the policies.

         B. The Allegations in the LEEP and Blanken Complaints

         The LEEP complaint alleged that it manufactures certain insulated panels that have been used by the U.S. Marine Corp. and U.S. Army for the construction of buildings. (DE 53-3, LEEP Complaint.) It alleged that OVC manufactures various outdoor equipment including military tent systems for the Department of Defense. LEEP alleged that, in 2010, its representatives met with Egnew, CEO of OVC, to discuss a joint venture with the goal of preparing a response to a solicitation from the U.S. Army.

         LEEP alleged that the parties entered into a memorandum of understanding, which contained a confidentiality provision. That provision prohibited either party from using the other party's confidential or proprietary information for any purpose except for responding to the Army's solicitation.

         Later, LEEP alleged, it and OVC began discussions about creating a new company together to be called Stearns Manufacturing Corporation. The idea was that OVC would contribute cash while LEEP would contribute “know-how.” LEEP alleged that, during these negotiations, it provided certain confidential and proprietary information to Egnew and his counsel, including information about LEEP's creditors. One of those creditors was Fortress Credit Corporation. LEEP alleged that it had negotiated a deal by which it would pay Fortress $ 1.2 million to settle all its debt.

         At some point, LEEP's president, John Nordstrom, refused to disclose any additional confidential information until the parties signed a non-disclosure agreement. The parties signed that agreement in 2011. OVC again agreed to keep LEEP's confidential and proprietary information “in strict confidence as a fiduciary and not to make any use whatsoever at any time [of] such proprietary and confidential information.” (DE 53-3, LEEP Complaint, ¶42.) It also agreed not to contact any of “LEEP's creditors or lenders or customers or suppliers.” (DE 53-3, LEEP Complaint, ¶41.)

         LEEP alleged that, in August 2012 - after Kentucky Highlands, Moncrief, Egnew, and OVC had obtained all the confidential information that they needed to “circumvent LEEP, strike a better deal with its lender and landlord, and take over LEEP's business” - Egnew informed Nordstrom that the deal was off. Then, in December 2012, Kentucky Highlands informed LEEP that it had purchased Fortress's rights in its financing agreements with LEEP, that LEEP was in default under those agreements, and that Kentucky Highlands intended to take immediate possession of all of LEEP's property.

         LEEP alleged that these events prove that, from early 2012 through December 26, 2012, “the Defendants conspired, planned, organized, and schemed, to force LEEP out of business and to take over LEEP's business by virtue of obtaining LEEP's confidential information and then purchasing the Fortress note.” (DE 53-3, LEEP Complaint, ¶94.) LEEP explained that Nordstrom told “the Defendants” about his negotiations with Fortress and then “the Defendants . . . used that confidential information to approach Fortress to obtain an assignment of the Note for only $750, 000 and then give notice of default to LEEP, demand over $7 million dollars to be paid immediately, take possession of former LEEP facility . . . and wrongfully repossess all LEEP assets.” (DE 53-3, LEEP Complaint, ¶95.)

         LEEP asserted that Kentucky Highlands “wrongfully entered” LEEP's landlord's premises and took insulated panels and equipment, including a particular piece of equipment called the Bradbury Roll Forming machine, which is used in the manufacturing of the panels. LEEP alleged that Kentucky Highlands, using the confidential and proprietary information, also “wrongfully hired away” LEEP's key employees, took over LEEP's business and contacted LEEP's customers, “all in an effort to destroy LEEP and to take over LEEP's business through unlawful means.” (DE 53-3, LEEP Complaint, ¶97.)

         LEEP asserted claims for breach of contract, fraud, tortious interference with various contracts and with prospective business, breach of fiduciary duty, defamation, conversion, violations of RICO, and of the Kentucky Uniform Trade Secrets Act (KUTSA) and aiding and abetting the breach of a fiduciary duty. (DE 53-3, 53-4, 53-8, LEEP Complaints.)

         LEEP alleged that the defendants engaged in “intentional conduct” entitling it to punitive damages. LEEP alleged that the defendants “maliciously breached” their confidentiality agreements “with the intent to cause financial and economic damage and injury to LEEP.” (DE 53-4, LEEP Complaint, ¶ 164.)

         As to the Blanken actions, in the Kentucky action, Blanken alleged that he, not LEEP, owned the Bradbury Roll Forming Machine, valued at $750, 000, and that he had leased the equipment to LEEP. He further alleged that, after Fortress assigned its rights under its financing agreement with LEEP to Kentucky Highlands, he learned that Kentucky Highlands intended to seize the Bradbury Roll Forming Machine. He alleged that he and LEEP both notified Kentucky Highlands that he was the sole owner of the machine and directed Kentucky Highlands not to seize the machine. Blanken alleged that Kentucky Highlands nonetheless seized the machine and removed it from LEEP's facility. Blanken alleged that Kentucky Highlands then sold the machine to OVC, who wrongfully possessed it.

         Blanken asserted claims against Kentucky Highlands and OVC for tortious interference with a contract and conversion. Blanken alleged that OVC and Kentucky Highlands engaged in “intentional conduct, ” entitling him to punitive damages. He alleged that these insureds seized the machine knowing it belonged to Blanken “with the intent to cause financial and economic damage and injury to Blanken.” (DE 53-6, Blanken Kentucky Action, ¶¶ 88, 92.)

         As to the Blanken Pennsylvania action, Blanken again sued Kentucky Highlands and OVC, with allegations similar to the Kentucky action. This time he alleged that Kentucky Highlands and OVC wrongfully seized certain additional inventory, despite knowing that they had no right to it. Blanken asserted that he is the owner of the seized inventory. Blanken asserted a conversion claim against Kentucky Highlands and a claim for replevin against Kentucky Highlands and OVC. He alleged that the actions by Kentucky Highlands and OVC were “extreme and outrageous and demonstrated their intentional, willful, wanton and/or reckless disregard of the rights of others, ” and, thus, entitled him to punitive damages. (DE 78-3, Pennsylvania action, ¶ 49.)

         C. Coverage of Kentucky Highlands and Moncrief under the ...


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