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Verizon Communications Inc. v. Illinois National Insurance Co.

Superior Court of Delaware

May 16, 2018

VERIZON COMMUNICATIONS INC., et al., Plaintiffs,
v.
ILLINOIS NATIONAL INSURANCE COMPANY, et al., Defendants.

          Submitted: April 13, 2018

         Plaintiffs' Motion for Entry of Final Judgment and Prejudgment Interest -GRANTED

          Jennifer C. Wasson, Esquire, Carla M. Jones, Esquire, Potter Anderson & Corroon LLP, Robin L. Cohen, Esquire, Keith McKenna, Esquire, Michelle R. Migdon, Esquire, McKool Smith, P.C., Attorneys for Plaintiffs.

          Edward M. McNally, Esquire, Meghan A. Adams, Esquire, Nicolas Kravitz, Esquire, Patricia A. Winston, Esquire, Morris James LLC, Attorneys for Defendants Illinois National Insurance Company and National Union Fire Insurance Company of Pittsburgh, PA.

          John C. Phillips, Jr., Esquire, David A. Bilson, Esquire, Phillips, Goldman, McLaughlin & Hall, P.A., Attorneys for Defendant U.S. Specialty Insurance Company.

          Douglas M. Mangel, Esquire, Joseph A. Bailey III, Esquire, Clyde & Co., Attorneys for Defendant U.S. Specialty Insurance Company.

          Joel Friedlander, Esquire, Christopher M. Foulds, Esquire, Christopher P. Quinn, Esquire, Friedlander & Gorris, P.A., Attorneys for Defendant Twin City Fire Insurance Company.

          Bruce E. Jameson, Esquire, Kevin H. Davenport, Esquire, John G. Day, Esquire, Prickett, Jones & Elliott, P.A., Attorneys for Defendant XL Specialty Insurance Company.

          Bruce W. McCullough, Esquire, Bodell Bove LLC, Attorney for Defendant Zurich American Insurance Company.

          CORRECTED MEMORANDUM OPINION

          CARPENTER, J.

         I. INTRODUCTION

         Before the Court is Verizon Communications, Inc.'s ("Verizon"), Verizon Financial Services LLC's ("VFS"), and GTE Corporation ("GTE")'s (collectively the "Plaintiffs") Motion for Entry of Final Judgment and Prejudgment Interest pursuant to Rule 58(b).[1] Plaintiffs' Motion seeks to resolve the remaining post-trial issues relating to Verizon's demand for coverage of its costs in defending and settling the underlying U.S. Bank Action and Coticchio Action.[2]

         After denying the parties' initial summary judgment motions in 2015, in March 2017, the Court granted summary judgment in favor of Plaintiffs and held that the U.S. Bank Action fell under the definition of a securities claim.[3]

         Because the Court found in favor of Verizon, Illinois National, an affiliate of AIG and the issuer of the primary policy, now concedes that this Court has determined that there is coverage under their policy and Verizon is entitled to recovery of Defense Costs. Illinois National Insurance Company ("Illinois National") also concedes that entry of final judgment is proper. Insurers XL Specialty Insurance Company ("XL Specialty"), Zurich American Insurance Company ("Zurich"), Twin City Fire Insurance Company ("Twin City") among other insurers evidenced below (collectively the "Excess Insurers")[4] disagree arguing that final judgment and an award of prejudgment interest are premature and improper at this time. For the reasons discussed below, Plaintiffs' Motion for Entry of Final Judgment and Prejudgment Interest pursuant to Rule 58 is GRANTED.

         II. FACTUAL BACKGROUND

         An extensive review of the facts of this litigation is set forth in the Court's March 20, 2017 Opinion. As such, the Court will limit its factual presentation simply to put the decision in context for those unfamiliar with the previous decision. This lawsuit is one of four underlying actions, [5] which arise out of Verizon's 2006 "spin-off" of its print and electronic directories business into a standalone company: Idearc, Inc. ("Idearc").[6] In November 2006, Verizon transferred the directories business to Idearc in exchange for Idearc common stock and promissory notes among other things.[7] Verizon then distributed all outstanding shares of the Idearc common stock to Verizon shareholders, [8] and transferred the Idearc notes and portion of the term loan to J.P. Morgan Ventures Corporation and Bear Stearns & Co., Inc. (collectively, "Investment Banks") in exchange for Verizon debt securities the banks had purchased in the open market.[9] The Investment Banks then sold the Idearc debt securities to previously solicited purchasers and lenders.[10]

         The four underlying actions arise from this conduct and allege that "Verizon knew that Idearc would be insolvent immediately after the divestiture and, thus, should be held liable for damages resulting from Idearc's subsequent bankruptcy."[11]

         A. IDEARC INSURANCE POLICIES

         In anticipation of the spin-off, Verizon and Idearc purchased primary and excess Executive and Organizational Liability Policies to protect against litigation risks and potential liabilities arising from the transactions ("Idearc Runoff Policies" or "Policies"). Defendant Illinois National issued the primary policy.[12] The excess policies incorporate the provisions of the primary policy and were issued by the insurers evidenced below.[13] Verizon also separately purchased its own Executive and Organization Liability Policies to supplement exposure to liability arising from the spin-off ("Verizon Policies").[14]

Policy Layer

Insurer

Limit of Liability

Primary

Illinois National

$15 million

First Excess

XL

$10 million

Second Excess

Zurich

$15 million

Third Excess

Twin City

$15 million

Fourth Excess

RSUI

$5 million

Fifth Excess

U.S. Specialty

$15 million

Sixth Excess

Westchester Fire

$5 million

Seventh Excess

St. Paul Mercury

$5 million

Eighth Excess

Arch

$5 million

Ninth Excess

ACE

$5 million

         The Idearc Runoff Policies provide coverage for liability resulting from claims first made during the six-year policy period, which spanned from November 17, 2006, to November 17, 2012. As discussed previously, the Policies and the endorsements allowed Verizon to recover "Defense Costs"[15] only in cases where a Securities Claim is brought against both Verizon and an Insured Person and a joint defense is maintained.[16] Under such circumstances, the Insurers agreed to advance "covered Defense Costs no later than ninety (90) days after the receipt by the Insurer of such defense bills."[17] The Policies nevertheless obligated the Insureds to repay the Insurers for sums received "in the event and to the extent that any such Insured…shall not be entitled under this policy to payment of such Loss."[18]

         Following the spin-off, Idearc operated as an independent company, with its stock publicly traded and its debt instruments freely tradable among qualified purchasers.[19] Idearc ultimately defaulted on the notes, and was forced to file a petition for Chapter 11 bankruptcy in March 2009. Soon thereafter, a number of suits were filed against Verizon and others alleging liability in connection with the spin-off.[20] Of most relevance here, the U.S. Bank Action was filed on September 15, 2010, in the U.S. District Court for the Northern District of Texas by U.S. Bank National Association ("U.S. Bank"), the entity appointed Litigation Trustee in Idearc's bankruptcy, to recover funds for the benefit of Idearc debt securities holders and other creditors.[21]

         U.S. Bank demanded approximately $14 billion in damages from Verizon, VFS, GTE, and John Diercksen ("Diercksen"), a Verizon executive and Idearc's sole director at the time of the spin-off.[22] Verizon, VFS, GTE, and Diercksen jointly defended the action for nearly five years. They sought and obtained dismissal of a number of the claims asserted against them and, following a bench trial in October 2012, judgment was entered in their favor on all remaining counts. The Texas court's ruling was later affirmed by the Fifth Circuit.[23]

         In the course of successfully defending the U.S. Bank Action, Plaintiffs incurred significant legal expenses. In accordance with the terms of the Idearc Runoff Policies, Plaintiffs gave notice of U.S. Bank to the Insurers. On June 21, 2011, the claims administrator for the primary Idearc Runoff Policy issued a coverage position letter indicating, in relevant part, that Diercksen's defense costs would be covered, subject to the $7.5 million policy retention, but that the costs incurred in Verizon's defense would not be paid because "the U.S. Bank Complaint does not constitute a Securities Claim."[24]

         U.S. Bank filed a second lawsuit arising out of the Idearc related transactions on March 29, 2013, naming Verizon and former Idearc Chief Financial Officer and Treasurer Andrew Coticchio as co-defendants (the "Coticchio Action"). The Coticchio Action sought more than $2.85 billion in damages from Verizon and Coticchio arising out of non-payment of the Idearc debt securities at issue in the U.S. Bank Action.[25]

         B. INSTANT LITIGATION

         On June 4, 2014, Plaintiffs filed the instant suit claiming, among other things, that they are entitled to $48 million in defense costs relating to the U.S. Bank Action and the Coticchio Action (Plaintiffs' "Defense Costs").[26] Plaintiffs first moved for partial summary judgment on the issue of defense costs in September 2014. The Defendants opposed summary judgment and filed a motion to allow time for discovery under Superior Court Civil Rule 56(f) and Defendants relied on the argument that U.S. Bank did not involve a "Securities Claim."[27] A hearing was held before this Court on December 4, 2014, during which Defendants conceded that, if U.S. Bank fit within the Policy's definition of "Securities Claim, " Plaintiffs would be entitled to defense costs.[28]

         Pursuant to its March 20, 2015 decision, this Court denied Plaintiffs' pre-discovery motion and granted the Defendants' Rule 56(f) motions.[29] Since the issue of whether the U.S. Bank litigation involved a "Securities Claim" was critical to resolve this dispute, the Court's Case Management Order broke discovery into phases.[30] Phase I was to focus on "issues of policy underwriting, drafting, interpretation and intent, so as to aid the Court in determining 'whether the underlying U.S. Bank Action fits within the definition of a securities claim[.]'"[31]Phase II "[was to][] address all remaining issues in the case after the completion of Phase I.[32] Phase II discovery shall not duplicate any discovery that was taken or could have been taken in Phase I, unless agreed to by the parties or ordered by the Court."[33]

         As early as October 2014, the Excess Insurers agreed to allow Illinois National's counsel take the lead in litigation. In fact, the Excess Insurers followed form to Illinois National's arguments in all discovery disputes.[34] The Excess Insurers continued to let counsel for Illinois National take the lead in all arguments before the Court and speak on behalf of all insurers at the renewed motions for summary judgment hearing. As such, Plaintiffs allege all of Illinois National's representations including the concession that entry of final judgment is proper at this time are binding on the Excess Insurers.

         After the Court issued its decision in March of 2015, the parties engaged in discovery for over a year, and on May 20, 2016, Plaintiffs filed a Renewed Motion for Partial Summary Judgment on Defense Costs and Defendant Insurers likewise filed a motion for summary judgment. At the hearing for the parties' Motions, Plaintiffs allege that "Defendants' counsel again conceded that if the Court ruled in favor of Verizon on the 'Securities Claim' issue, Verizon would be entitled to 100% of its costs."[35] The Court granted Plaintiffs' Motion for Partial Summary Judgment and denied Defendants' Motion for Summary Judgment, holding that the U.S. Bank Action constitutes a "Securities Claim."[36]

         On March 24, 2017, Plaintiffs filed a Motion for Entry of Final Judgment and Prejudgment Interest. Plaintiffs are seeking the full amount of unreimbursed defense costs owed to Verizon for both the U.S. Bank Action and the subsequently filed and related Coticchio Action that is in excess of the Idearc Runoff Policies' $7.5 million self-insured retention, as well as prejudgment interest on that amount.[37] Plaintiffs argue that New York law should be applied, and if the Court finds that the Excess Insurers' policies have not yet been triggered, Illinois National should have to pay all prejudgment interest owed.[38] Illinois National, Zurich, XL, and Twin City each filed responses to Verizon's motion on May 4, 2017. Defendant Illinois National in its response did not oppose entry of final judgment, instead, it agreed with the Plaintiffs that there no additional issues to be litigated.[39] Illinois National, however, opposed the calculation and potential distribution of prejudgment interest. Illinois National, unlike the Excess Insurers, urges the Court to continue to use Delaware substantive law to determine the interest rate, accrual date, and whether or not the Plaintiffs can impose all of the prejudgment interest on Illinois National as consequential damages.[40] On the other end, Excess Insurers Defendants oppose both the Plaintiffs' Motion for Final Judgment as well as Prejudgment Interest. The Excess Insurers argue that there are pending issues pertaining to the defense costs Plaintiffs are seeking and Phase II of discovery is required.[41] They also assert that any award of prejudgment interest is premature as the Excess Insurers must be given the opportunity to determine if the defense costs Plaintiffs seek are reasonable-if they are not the total amount of prejudgment interest will be changed.[42]

         To date, Defendants have not paid anything towards the tens of millions of dollars in defense costs that Verizon incurred in excess of the applicable $7.5 million retention.

         III. DISCUSSION

         Before the Court can decide if entry of final judgment and an award of prejudgment interest are proper, it must first discuss which state-Delaware's or New York's -substantive law applies.

         A. DELAWARE LAW APPLIES

         None of the Idearc Runoff Policies contain a choice of law provision. Generally, the Court must apply the choice of law principles from the Restatement (Second) of Conflict of Laws, which identifies five main factors for deciding what law governs a contract that is silent on that issue. [43] These factors include: "(a) the place of contracting, (b) the place of negotiation of the contract, (c) the place of performance, (d) the location of the subject matter of the contract, and (e) the domicil[e], residence, nationality, place of incorporation and place of business of the parties."[44]

         However, if the Court has already applied a particular's states substantive law at one stage of the case, it may be required under law of the case doctrine to apply that same state's substantive law in subsequent stages, [45] therefore eliminating the need for a choice of law analysis. The law of the case doctrine states that "once a matter has been addressed in a procedurally appropriate way by a court, it is generally held to be the law of that case and will not be disturbed by that court unless compelling reason to do so appears."[46] The law of the case doctrine, however, is flexible and gives the court discretion when applying it.[47] Specifically, the Court of Chancery has held if applying the same substantive law may "produce[] an injustice, or should be revisited because of changed circumstances..., "[48] the court may use a different state's laws.

         In the instant case, the Court finds no persuasive reason to ignore its prior decision to apply the substantive laws of Delaware.[49] The Court applied Delaware substantive law in both motions for summary judgment opinions in 2015 and in 2017.[50] The Court may have cited to New York case law in its decision but in its analysis, it relied solely on Delaware law. Significantly Plaintiffs did not object then and have provided no justification to now apply New York law other than it provides a more favorable result for them. Therefore, under the law of the case doctrine, the Court will continue to apply Delaware law.

         B. ENTRY OF FINAL JUDGMENT

         Pursuant to Superior Court Civil Rule 58, the Court may, at its discretion, enter final judgment where it determines that final judgment is in accordance with the provisions of Rule 54(b) and "there is no just reason for delay."[51] Rule 54(b) requires "(1) the action involves multiple claims or parties; (2) at least one claim or the rights and liabilities of at least one party has been finally decided; and (3) that there is no just reason for delaying an appeal."[52]

         Additionally, in reviewing motions for entry of final judgment, the Court must weigh the "judicial administrative interests, " against the possibility of "some danger of hardship or injustice which would be alleviated by immediate appeal."[53]Importantly, the Court must keep in mind "that excessive resort to [Rule 54(b)] will increase the already sizeable burden of appellate dockets..."[54] Therefore, the discretionary entry of final judgment is to be done "sparingly."[55]

         To support its Motion for Final Judgment, Plaintiffs contend that the Excess Insurers' decision to jointly defend Phase I of the litigation and avoid discovery by following Illinois National's form has barred them from any further litigation to determine whether Excess Insurers had to consent to Defense Costs, if those costs were jointly incurred, and if the costs were reasonable.[56] Plaintiff argues "the Court expressly warned them that their decision to defer to [Illinois National] had consequences, and they would not later be heard to renege on that representation."[57]Plaintiffs also argue that the March 2, 2017 Opinion resolves any allocation issues because Illinois National represented to the Court that if "the U.S. Bank Action was made and maintained against both Verizon and Mr. Diercksen and constituted a 'Securities Claim' under the Idearc Runoff Policies, 100% of the costs of defending that action are covered."[58] Considering Illinois National's representation and the Court's decision in favor of the Plaintiff's Renewed Motion for Summary Judgment, the Plaintiff asserts any remaining disputes have been resolved, eliminating any need for Phase II discovery.[59]

         Additionally, Plaintiffs argue that the Excess Insurers should not be allowed to challenge the reasonableness of the U.S. Bank Action Defense Costs because they initially shifted all responsibility of challenging claims to Illinois National. Illinois National has conceded that this Court has determined that there is coverage under the Policy and accepted responsibility that it is timely to enter judgment for its portion of the Defense Costs. Plaintiffs argue that their reasonableness claim against Defense Costs is unsupported as the Excess Insurers have had access to the defense cost invoices and have failed to challenge any of the costs incurred. Thus, the Excess Insurers should be now foreclosed from litigating those costs further.[60]

         The Excess Insurers argue that both parties acknowledged and understood that even if the Court found in favor of Plaintiffs, there were further coverage issues to be addressed in Phase II. In fact, Defendants Zurich and Twin City cite to several filings where Plaintiff acknowledges additional discovery is required.[61] The Excess Insurers provide separate briefs regarding final judgment but each claim that all defense (both affirmative and not) were timely asserted and are unique to each insurer.[62] Excess Insurers argue that these defenses have merit and are not yet ripe for litigation because Phase II of discovery is required.[63] Defendant Zurich also argues that Plaintiffs failed to prove that Defendants waived the conditions precedent that the Plaintiffs must establish for coverage.[64] Such condition precedents include if the expenditures were jointly incurred and reasonable and necessary.[65]

         Plaintiffs reject all of the Excess Insurers arguments and reiterate their assertions discussed above. In response to Zurich's waiver argument, Plaintiffs state that when the Excess Insurers adopted Illinois National's denial of coverage, the Excess Insurers were aware of "what they needed to know to effectuate a waiver of their right to consent: (1) Verizon sought its costs under the Idearc Runoff Policies, and (2) they were adopting AIG's blanket denial of Verizon's costs on the ground that the U.S. Bank Action was not a 'Securities Claim' under those Policies."[66]Further, that waiver requires no further "factual" knowledge.[67]

         While the Court, in the July 2015 Motion to Compel hearing, did warn the Excess Insurers of its decision to let Illinois National lead this portion of the litigation, the Plaintiffs are misinterpreting the Court's warning. The Court simply warned the Excess Insurers that if the Court found that the U.S. Bank Action fell under the definition of Securities Claim, they could not argue to this Court that the U.S. Bank Action is not within their definition of securities claim.[68] It did not say that Excess Insurers could not continue to litigate valid defenses they raised and preserved in their respective pleadings. However, that being said, the Court never guaranteed any of the parties a Phase II of discovery. To reiterate this Court's prior statements, the Court asked the parties to streamline discovery to help it determine the scope of Securities Claim, which this Court also suggested would likely eliminate the need for further litigation and discovery.[69] After deciding the U.S. Bank Action was a Securities Claim and reviewing the Defendants' coverage position letters, the Court believes that final judgment is proper. The Defendants were required to advance the Defense Costs, and if Defendants believe certain costs were not proper or reasonable, they could litigate such costs after payment. But instead of meeting these obligations under the Policies, the Excess Insurers beyond Illinois National simply without justification wants to prolong the litigation.

         The Court has reached this conclusion because Illinois National and the Excess Insurers denied Plaintiffs' coverage based solely on the fact that the U.S. Bank Action was not a Securities Claim.[70] The Court found the opposite to be true in its March 2017 Opinion, and rendered this decision against the Excess Insurers and Illinois National.[71] The Defendants are now required to pay the demanded costs, because that was the sole reason given by all the carriers for their denial. While they may have reserved certain affirmative defenses in their pleadings about costs being fair and reasonable, [72] the Defendants never asserted those issues as a basis for coverage denial, and the Court believes it would be inappropriate and unfair to allow the Excess Insurers to now dispute the fairness and reasonableness of the Defense Costs when they have failed to comply with their duty to advance costs that was affirmed by this Court's previous Opinion.

         While there may be costs that are not reasonable or jointly incurred, the Primary Policy language is clear the Defendants must advance Defense Costs even if the costs cannot be agreed upon. Specifically, the Primary Policy states that:

[u]nder Coverages A, B and C of this policy, except as hereinafter stated, the Insurer shall advance, excess of any applicable retention amount, covered Defense Costs no later than ninety (90) days after the receipt by the insurer of such defense bills. Such advance payments by the Insurer shall be repaid to the Insurer by each and every Insured or Organization, severally according to their respective interests, in the event and to the extent that any such insured or Organization shall not be entitled under this policy to payment of such Loss….[73]
…In the event that a determination as to the amount of Defense Costs to be advanced under the policy cannot be agreed to, then the insurer shall advance Defense Costs excess of any applicable retention amount which the Insurer states to be fair and proper until a different amount shall be agreed upon or determined pursuant to the provisions of this policy and applicable law.[74]

         According to this language, fair and proper Defense Costs must be paid even if there is a disagreement about the final amount. Additionally, once the final amount has been paid, any costs that should not have been covered by the insurers must be repaid. However, because the Excess Insurers, who have had access to Verizon's Defense Cost invoices since 2014, [75] have failed to identify even one unreasonable cost associated with defending the U.S. Bank and Coticchio actions, the Court believes it is appropriate now to grant the request to enter final judgment, [76] instead of continuing to litigate for years over what is a "fair and proper" amount. The Excess Insurers had the ability to raise a fairness and reasonableness issue when it initially denied coverage based on the Securities Claim definition as well as during the four-year period it had the Plaintiffs' Defense Cost invoices but did not do so. The Defendants' position on coverage lived and died on the issue of "Securities Claim" and to continue the litigation is not only unreasonable but would condone the Excess Insurers continual failure to comply with the insurance policies.

         As a result, the Court believes that the proper and most reasonable decision is to grant final judgment and if the parties desire, let the Supreme Court decide if this Court has properly decided the Securities Claim issue. Otherwise, the Excess Insurers, who have not challenged a single invoice, would stall this litigation for years at great expense to everyone while reviewing thousands of invoices. The Court finds their right to challenge has not accrued until they comply with the Policies and advance the Defense Costs. To do otherwise is simply to allow the litigation to linger without the real issue of this litigation being finally resolved.

         It is the Court's opinion that it is simply time to stop this litigation Ferris wheel. In spite of the assertions by the Defendants to the contrary, the litigation will end only when either the parties accept this Court's prior decision or it is affirmed or reversed by the Delaware Supreme Court. Granting final judgment will allow this path to occur. The Court finds the requirements of Rule 54(b) have been established. The litigation includes multiple parties, the rights and liabilities of at least one party, in this case Illinois National, has been finally decided and clearly there is no just reason to delay the appeal of the only real central issue in this case, whether the defended actions were securities claims. Thus, Plaintiffs' Motion for Entry of Final Judgment under Rule 58 is hereby GRANTED.

         C. PREJUDGMENT INTEREST

         Based on the Court's decision to grant entry of final judgment and to continue to use Delaware substantive law, the Court holds that an award of prejudgment interest is also appropriate. Before the Court discusses its specific findings, it makes the following determinations. First, the prejudgment interest rate will be set by Delaware law as well as the accrual date of such interest. Second, the Excess Insurers' obligation to pay prejudgment interest is triggered by the demand made at mediation and will accrue from that date in spite of the Policies having not yet been exhausted; and finally, that the Court will not require Illinois National to pay all of the prejudgment interest as an element of consequential damages. The Court will not discuss in detail Plaintiffs' consequential damages argument, as it is moot because all Defendants will be obligated to pay prejudgment interest to the extent their individual policies are implicated in the Defense Costs at issue. The Court will first discuss the appropriate interest rate and accrual date for Plaintiffs' prejudgment interest and then discuss the exhaustion requirement.

         1. PREJUDGMENT INTEREST RATE & ACCRUAL DATE

         Delaware law sets the prejudgment interest at a rate of five percent over the Federal Reserve Discount Rate.[77] "[T]he rate of interest is calculated according to the Federal Reserve discount rate as of the date of commencement of interest liability and it remains fixed at that rate."[78] This is because Delaware Courts have "traditionally disfavored the practice of compounding interest ...."[79] "In accordance with that distaste, Delaware's legal rate of interest ...


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