MASSACHUSETTS MUTUAL LIFE INSURANCE COMPANY, et al., Plaintiffs,
CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON SUBSCRIBING TO BOND NOS. B0391/FD020720G AND B0391/ FD020730G, et al., Defendants.
Submitted: March 20, 2014
Prothonotary (Civil Division) Stephen N. Dratch, Esquire Martin L. Fenik, Esquire Noah Franzblau, Esquire Christian Douglas Wright, Esquire Mary F. Dugan, Esquire Jennifer C. Wasson, Esquire John A. Sensing, Esquire
Robert K. Beste, III, Esquire Robert J. Katzenstein, Esquire Kevin F. Brady, Esquire Allen M. Terrell, Jr., Esquire Scott W. Perkins, Esquire Regina A. Ripley, Esquire Joseph R. Marconi, Esquire Scott L. Schmookler, Esquire
Fred S. Silverman, Judge
After paying a fortune in claims stemming from Bernie Madoff's Ponzi scheme, Plaintiffs demanded coverage from their fidelity and crime insurance tower. Now, the court is focused on whether Plaintiffs' recently added, good-faith/fair dealing claims "relate-back, " whether the court has jurisdiction over a Massachusetts statutory fraud claim, and whether Plaintiffs' settlements with the underlying insurers in their tower satisfy the excess policy's exhaustion clause.
The multi-billion dollar, Madoff fraud was widely covered by the media and it took the nation's breath away. For this case's purposes, investors purchased ownership interests in the Rye Funds Plaintiffs. Through Plaintiff Tremont Partners, Inc., these ownership interests were invested using dozens of investment managers and advisors, including Madoff. Hundreds of millions of dollars entrusted to Madoff's "investment" company were lost.
After Madoff's fraud was uncovered, many lawsuits were filed against Plaintiffs, generally alleging misrepresentation, breach of fiduciary duty, mismanagement, and failure to supervise. In turn, Plaintiffs, which are Delaware corporations: Massachusetts Mutual Life Insurance Company and its subsidiaries, sought coverage from Defendants, their D&O and financial institution bond insurers. Plaintiffs annually had purchased a fidelity and crime insurance tower covering losses up to $100 million per loss with a $200 million aggregate limit. Eleven insurers contributed to the tower's six tiers.
Initially, Defendants denied coverage and Plaintiffs defended themselves, accruing billions of dollars in losses and defense costs in the underlying litigation against them. Plaintiffs then filed suit, first in Chancery court, then here, against Defendants for apportionment, breach of contract, and declaratory relief.
Over four years into the litigation, on September 4, 2013, Plaintiffs amended their complaint, adding claims for breach of the implied covenant of good faith and fair dealing, bad faith, and statutory consumer fraud. Plaintiffs settled with all but two Defendants – RLI and Great American. These remaining Defendants form the fifth excess layer, the top tier of the six tier tower.
Defendants filed motions to dismiss the counts added in the amended complaint, Counts V and VI, and to strike paragraphs 135 to 156 supporting those counts. Defendants also filed motions for partial summary judgment, alleging failure to exhaust underlying insurance because Plaintiffs settled for less than the underlying policies' limits. Briefing was completed December 20, 2013. Oral argument was January 6, 2014. The transcripts were filed March 20, 2014.
The court will first address the amended complaint's new claims and allegations, which turn on relation-back and subject matter jurisdiction. Then the court will discuss summary judgment on exhaustion, which turns on policy construction.
Plaintiffs withdrew their bad faith claim, Count VII, in their Response to Defendants' Motion to Dismiss. Accordingly, oral argument clarified that there are two distinct bases for Counts V and VI of the amended complaint: 1) a statutory, consumer fraud claim,  and 2) an alleged violation of the common law implied covenant of good faith and fair dealing. They must be kept separate, although they suffer from the same infirmities, particularly a statute of limitations problem.
Defendants' motions to dismiss characterize both the implied covenant of good faith/fair dealing and the statutory claims as involving "bad faith, " thus requiring heightened pleading. Defendants argue Plaintiffs' allegations do not satisfy Rule 9(b) because they are not specific enough. And, the allegations are based on litigation conduct, which, as a matter of law, are subject to the absolute litigation privilege. Further, Defendants correctly assert Massachusetts's consumer fraud law only protects acts "primarily and substantially within the commonwealth, " and here, Plaintiffs do not allege any conduct took place in Massachusetts. Lastly, in their strongest argument, Defendants counter the statute of limitations bars the amended complaints' new counts and they do not relate-back. The statute of limitations problem is paramount because unlike a pleading problem that can be fixed, a statute of limitations violation is fatal.
Plaintiffs first respond that a Massachusetts statutory fraud claim cannot generally be dismissed on the pleadings because the "primarily and substantially" standard requires fact-finding. Plaintiffs also assert that a good faith/fair dealing claim is not the same as a bad faith claim, although they concede that the claims commonly overlap. Finally, Plaintiffs acknowledge that the statute of limitations has run, but argue the new counts relate-back because they arise from previously pled facts.
Specifically, as to the prime issue, Defendants argue the amended complaint adds new allegations and claims that are barred by the statute of limitations. Statutes of limitations protect defendants from undue prejudice: "Thus, notice to the defendant of a plaintiff's cause of action is essential to ensure that a defendant is not prejudiced in preparing an adequate defense." An amendment relates-back to the original complaint's date only when the new claim "arose out of the conduct, transaction, or occurrence set forth or attempted to be set forth in the original pleading." Accordingly, the new claim can "relate-back" to the original complaint only if Defendants originally had sufficient notice of the late-filed, new claim. Conversely, where a new claim "presents an independent theory of liability based on independent facts that were not set forth in the original complaint, " it does not relate-back.
Defendants rely on Moore v. Emeigh, an aircraft disaster case. There, the initial complaint alleged an aircraft's owner was vicariously liable for a pilot's negligence. The new claim alleged the owner negligently failed to inspect the plane. The Supreme Court affirmed dismissal because "the new claim presents an independent theory of liability based on independent facts that were not set forth in the original complaint." Defendants argue that like in Moore, the new claims here are independent because they rely on newly pled facts. Specifically, Defendants contend none of the original complaint's allegations "suggested that the defendants acted in bad faith ... because the mere denial of coverage, without more, does not establish bad faith."
As mentioned, Plaintiffs concede the amended complaint is untimely. Rather, Plaintiffs attempt to distinguish Moore, arguing their new claims are not independent, but arise from the same failure to provide coverage alleged originally. Plaintiffs argue that claims relate-back where "the factual situation upon which the action depends remains the same, " even if the legal theory changes. When they allude to the standard for relation-back, however, Plaintiffs attempt to substitute their broader term, "factual situation, " for the Supreme Court's narrower standard, "independent facts." Under Plaintiffs' thinking, the dismissed claim in Moore should have related-back because it depended on and related to the same airplane crash.
In make-weight fashion, Plaintiffs bolster their argument by quoting several cases. But, Defendants correctly observe that none addresses the issue here. Only one discusses adding new claims or facts: F.P. Woll & Co. V. Valiant Ins. Co. conclusively allows the new claim to relate-back to the original complaint because "the original complaint clearly 'set forth' the details of [the] interaction." Here, in contrast, the original complaint does not allege facts relating to Defendants' claims handling. As discussed next, forcing Defendants to reveal and justify ...