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AR Capital, LLC v. Xl Specialty Insurance Co.

Superior Court of Delaware

April 25, 2019

AR CAPITAL, LLC, EDWARD M. WEIL, WILLIAM M. KAHANE, NICHOLAS S. SCHORSCH, and PETER M. BUDKO, Plaintiffs,
v.
XL SPECIALTY INSURANCE COMPANY, CONTINENTAL CASUALTY COMPANY, ARGONAUT INSURANCE COMPANY, FREEDOM SPECIALTY INSURANCE COMPANY, QBE INSURANCE COMPANY, WESTCHESTER FIRE INSURANCE COMPANY, STARR INDEMNITY & LIABILITY COMPANY, RSUI INDEMNITY COMPANY, and AXIS INSURANCE COMPANY, Defendants.

          Submitted: March 21, 2019

         Upon Defendants Westchester Fire Insurance Company, Starr Indemnity & Liability Company, RSUI Indemnity Company, and Axis Insurance Company's Motions to Dismiss GRANTED.

         Upon Defendants XL Specialty Insurance Company, Continental Casualty Company, Argonaut Insurance Company, Freedom Specialty Insurance Company, and QBE Insurance Company's Motion to Dismiss or Stay DENIED.

          Marc S. Casarino, Esq., White & Williams LLP, Wilmington, Delaware; Erica Kerstein, Esq., White & Williams LLP, New York, New York; Thomas K. Hanekamp, Esq., Mark A. Swantek, Esq., Aronberg, Goldgehn, Davis, & Garmisa LLP, Chicago, Illinois; Allen Burton, Esq., (Argued), Gerard Saveresse, Esq., Ephraim McDowell, Esq., O'Melveny & Myers LLP, New York, New York and Washington, District of Columbia; Michael R. Goodstein, Esq., Bailey Cavalieri LLP, Columbus Ohio, Attorneys for Defendants Westchester Fire Insurance Company, Starr Indemnity & Liability Company, RSUI Indemnity Company, and Axis Insurance Company

          Leslie S. Ahari, Esq., (Argued), Alexander R. Karam, Esq., Cyde & Co US, LLP, Washington, District of Columbia; Robert J. Katzenstein, Esq., Eve H. Ormerod, Esq., Smith, Katzenstein, & Jenkins LLP, Wilmington, Delaware; Cara Tseng Duffield, Esq., Matthew W. Beato, Esq., Wiley Rein LLP, Washington, District of Columbia; Michael T. Skoglund, Esq., Tiffany Saltzman-Jones, Esq., Bates Carey LLP, Chicago, Illinois; Michael P. Duffy, Esq., Scarlett M. Rajbanshi, Esq., Peabody Arnold LLP, Boston, Massachusetts; Amber W. Locklear, Esq., Geoffrey W. Heineman, Ropers, Majeski, Kohn, & Bentley LLP, New York, New York; John C. Phillips, Jr., Esq., David A. Bilson, Esq., Philips, Goldman, McLaughlin, & Hall, P.A., Wilmington, Delaware; Alexis J. Rogoski, Esq., Edward C. Carleton, Esq., Skarzynski, Marick, & Black LLP, New York, New York; Bruce E. Jameson, Esq., John G. Day, Esq., Prickett, Jones, & Elliott P. A., Wilmington, Delaware, Attorneys for XL Specialty Insurance Company, Continental Casualty Company, Argonaut Insurance Company, Freedom Specialty Insurance Company, and QBE Insurance Company

          Kenneth J. Nachbar, Esq., (Argued), John P. DiTomo, Esq., Elizabeth A. Mullin, Esq., Morris, Nichols, Arsht, & Tunnell LLP, Wilmington, Delaware; Robin L. Cohen, Esq., Natasha Romagnoli, Esq., Orrie A. Levy, Esq., Alexander M. Sugzda, Esq., (Argued), McKool Smith P.C., New York, New York, Attorneys for Plaintiff's AR Capital, LLC, Edward M. Weil, William M. Kahane, Nicholas S. Schorsch, and Peter M. Budko

          HON MARY M. JOHNSTON.

         PROCEDURAL AND FACTUAL CONTEXT

         Introduction This is an indemnification action. Plaintiff seek declaratory relief and damages for losses XXXXX.

         Plaintiffs allege Defendants have failed to treat Plaintiffs fairly and equitably under separate insurance programs (the "ARCT III Policy," "ARCTIV Policy," "AR Capital Policies," and "Drop-Down Policies" (collectively, the "Policies")). Plaintiffs have sought coverage for losses arising from a government investigation involving VEREIT, Inc. ("VEREIT"), f/k/a American Realty Capital Properties, Inc. ("ARCP"), and certain of the companies and personnel XXXXX including American Realty Capital Trust III ("ARCT III"), American Realty Trust IV, Inc. ("ARCT IV"), and AR Capital and its wholly-owned subsidiaries (the "Government Investigation").

         The Parties

         AR Capital provided advisory services to VEREIT, a real estate investment trust.[1] Individual Plaintiffs Schorsch, Kahane, Weil, and Budko were members of AR Capital.

         There are two classes of Defendants in this action: Westchester Fire Insurance Company, Starr Indemnity & Liability Company, RSUI Indemnity Company, and AXIS Insurance Company provided Difference in Conditions (DIC) policies (hereinafter, "DIC Defendants"); and XL Specialty Insurance Company, Continental Casualty Company, Argonaut Insurance Company, Freedom Specialty Insurance Company, and QBE Insurance Corporation provided Directors and Officers (D&O) policies (hereinafter "D&O Defendants"). The Defendants moved separately to dismiss this action on different grounds.

         Plaintiffs seek a declaratory judgment that the DIC Defendants must indemnify them pursuant to DIC insurance policies the DIC Defendants have issued. DIC Defendants argue that this Court lacks personal jurisdiction over the DIC Defendants, and that this Court lacks subject matter jurisdiction because there is no ripe controversy.

         Plaintiffs seek indemnification against D&O Defendants, implicating separate D&O Insurance policies. D&O Defendants argue that this Delaware action should be stayed under the "first to file" doctrine of Mc Wane Cast Iron Pipe Corp. v. McDowell-Wellman Engineering Co[2] D&O Defendants contend that the New York actions were filed first, and that Plaintiffs filed this reactive lawsuit to avoid the New York forum. D&O Defendants also argue that even if the suits are considered to be contemporaneously filed, the case should be dismissed or stayed based on the forum non conveniens factors stated in General Food Corp. v. Cryo-Maid, Inc.[3] because the parties have no meaningful connection to Delaware. D&O Defendants also assert that dismissal without prejudice is appropriate based on Plaintiffs' failure to join an indispensable party over whom the Court lacks personal jurisdiction.

         In addition to the parties' briefing on the subject motions to dismiss, the Court received letters following oral argument. The letters informed the Court of the progression of the pending New York actions.

         STANDARDS OF REVIEW

         Improper Venue

         Rule 12(b)(3) governs a motion to dismiss or stay on the basis of improper venue. The Court should "give effect to the terms of private agreements to resolve disputes in a designated judicial forum out of respect for the parties' contractual designation."[4] "The Court can 'grant a dismissal motion before the commencement of discovery on the basis of affidavits and documentary evidence if the plaintiff cannot make out aprima facie case in support of its position.'"[5] However, the Court usually must allow the plaintiff to take discovery where the plaintiff "advances a non-frivolous legal argument that would defeat the motion if the facts turn out to be as it alleges."[6] "In reviewing a motion to dismiss, the court must assume as true all the facts pled in the complaint and view those facts and all reasonable inferences drawn from them in the light most favorable to the plaintiff."[7]

         Indispensable Parties

         Pursuant to Superior Court Civil Rule 12(b)(7), the Court may dismiss a claim for failure to join a party under Superior Court Civil Rule 19, "which provides for the joinder of persons needed for just adjudication of the claims."[8] Dismissal is warranted under Rule 19 "if the party not joined is indispensable to the case but cannot be made a party."[9] The factors for the Court to consider in making this determination, as stated in Rule 19, include:

First, to what extent a judgment rendered in the person's absence might be prejudicial to the person or those already parties; second, the extent to which, by protective provisions in the judgment, by the shaping of relief or other measures, the prejudice can be lessened or avoided; third, whether a judgment rendered in the person's absence will be adequate; fourth, whether the plaintiff will have an adequate remedy if the action is dismissed for nonjoinder.[10]

         If the party is subject to service of process and the joinder will not deprive the Court of subject matter jurisdiction, the Court may order that the person be made a party.[11]

         Personal Jurisdiction

         Plaintiffs have the burden to demonstrate aprima facie case establishing personal jurisdiction. Plaintiffs "must plead specific facts and cannot rely on mere conclusory assertions."[12] In deciding whether the Court has personal jurisdiction over a nonresident defendant, the Court must engage in a two-step analysis.[13] First, the Court must determine whether Delaware's long-arm statute is applicable.[14] Second, the Court must decide whether subjecting a nonresident defendant to jurisdiction would violate due process.[15]

         An exercise of specific jurisdiction requires that a "defendant's suit-related conduct.. .create[s] a substantial connection with the forum State."[16] Where a Plaintiff fails to allege that the defendant's "in-state activity...gave rise to the episode-in-suit," the defendant is not subject to specific jurisdiction.[17]

         McWane and Cryo-Maid Factors

         "Where one of two 'competing' actions is filed before the other, the so-called McWane standard controls and the first-filed action generally is entitled to preference."[18]"Where two or more actions are contemporaneously filed, the Court 'examines a motion to stay under the traditional forum non conveniens framework without regard to a Mc Wane-type preference of one action over the other.'"[19]

         If the Court finds that the actions were filed contemporaneously, the movant seeking dismissal has the burden to prove that litigating in Delaware would cause overwhelming hardship.[20] Where a stay of litigation likely would have substantially the same effect as a dismissal, the overwhelming hardship standard applies.[21]

         "To justify a stay, the movant need only demonstrate that the preponderance of applicable forum factors 'tips in favor' of litigating in the non-Delaware forum."[22] "In balancing all of the relevant factors, the focus of the analysis should be which forum would be the more 'easy, expeditious, and inexpensive' in which to litigate."[23]

         "Delaware courts examine six factors, known as the Cryo-Maid factors, when determining whether to dismiss or stay an action on forum non conveniens grounds ."[24]The Court will consider: (1) whether Delaware law governs the case; (2) the relative ease of access to proof; (3) the availability of compulsory process for witnesses; (4) the pendency or nonpendency of a similar action or actions in another jurisdiction; (5) the possibility of a view of the premises; and (6) all other practical considerations that would make the trial easy, expeditious, and inexpensive.[25]

         ANALYSIS

         DIC Defendants' Motion

         Plaintiffs concede that there is no general personal jurisdiction over DIC Defendants. For the Court to exercise general personal jurisdiction over DIC Defendants, DIC Defendants either would have to be incorporated in Delaware, or have their principal places of business in Delaware. DIC Defendants are neither incorporated in Delaware, nor have their principal places of business in Delaware. Therefore, in order for the Court to exercise jurisdiction over DIC Defendants, DIC Defendants must be subject to specific personal jurisdiction.

         DIC Defendants cite Bristol-Myers Squibb v. Superior Court of California, San Francisco County, [26] and Walden v. Fiore[27] to support their argument that the Court does not have specific personal jurisdiction over DIC Defendants.

         In Bristol-Myers Squibb, the United States Supreme Court held that due process did not permit exercise of specific personal jurisdiction in California over nonresident consumers' claims.[28] The plaintiffs sued Bristol-Myers Squibb (BMS) in California alleging that one of the company's drugs had damaged their health. BMS is incorporated in Delaware and headquartered in New York, and it maintains substantial operations in both New York and New Jersey. Although BMS engages in business activities in California, it did not manufacture, develop, or advertise the particular drug in California. The Supreme Court found that the "bare fact that BMS contracted with a California distributor is not enough to establish personal jurisdiction in the State."[29] ■ DIC Defendants argue that any connection with Delaware is insufficient to establish personal jurisdiction in this state because the connections are outside the context of this action.

         In Walden v. Fiore, [30] the United States Supreme Court considered whether a court in Nevada could exercise personal jurisdiction over a defendant on the basis that he knew his allegedly tortious conduct in Georgia would delay the return of funds to plaintiffs with connections to Nevada.[31] The Court held that "it is the defendant, not the plaintiff or third parties, who must create contacts with the forum State. In this case, the application of those principles is clear: Petitioner's relevant conduct occurred entirely in Georgia, and the mere fact that his conduct affected plaintiffs with connections to the forum State does not suffice to authorize jurisdiction."[32] DIC Defendants urge this Court to adopt the Supreme Court's holding and find that DIC Defendants' contacts with Delaware are insufficient to establish specific personal jurisdiction.

         DIC Defendants also point out that in Weil v. VEREIT Operating Partnership LP, [33] the Delaware Court of Chancery held that VEREIT is not subject to personal jurisdiction in Delaware.[34] The Court determined that VEREIT is a Maryland corporation, and that "there is not a basis for jurisdiction over VEREIT in Delaware for claims under the indemnification agreements."[35]

         DIC Defendants further assert that the Delaware long-arm statute does not authorize an exercise of personal jurisdiction over DIC Defendants. Delaware's long-arm statute, 10 Del. C. § 3104(c) provides:

As to a cause of action brought by any person arising from any of the acts enumerated in this section, a court may exercise personal jurisdiction over any nonresident, or a personal ...

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