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In re Verizon Insurance Coverage Appeals

Supreme Court of Delaware

October 31, 2019

IN RE VERIZON INSURANCE COVERAGE APPEALS

          Submitted: September 11, 2019

          Court Below: Superior Court of the State of Delaware C.A. No. N14C-06-048 (CCLD)

         Upon appeal from the Superior Court. REVERSED.

          Kurt M. Heyman, Esq. (argued), Aaron M. Nelson, Esq., HEYMAN, ENERIO, GATTUSO & HIRZEL LLP, Wilmington, Delaware; Scott B. Schreiber, Esq., James W. Thomas, Jr., Esq., William C. Perdue, Esq., ARNOLD & PORTER KAYE SCHOLER LLP, Washington, D.C.; Robert Reeves Anderson, Esq., ARNOLD & PORTER KAYE SCHOLER LLP, Denver, Colorado; Attorneys for Defendants-Appellants Illinois National Insurance Co. and National Union Fire Insurance Co. of Pittsburgh, PA.

          Bruce W. McCullough, Esq., BODELL BOVÉ, LLC, Wilmington, Delaware; Ronald P. Schiller, Esq. (argued), Daniel J. Layden, Esq., Jason A. Levine, Esq., HANGLEY, ARONCHICK, SEGAL, PUDLIN & SCHILLER, Philadelphia, Pennsylvania; Attorneys for Defendant-Appellant/Cross-Appellee Zurich American Insurance Company.

          John C. Phillips, Jr., Esq., David A. Bilson, Esq., PHILLIPS, GOLDMAN, MCLAUGHLIN & HALL, P.A., Wilmington, Delaware; Joseph A. Bailey III, Esq., CLYDE & CO U.S. LLP, Washington, D.C.; Attorneys for Defendant-Appellant U.S. Specialty Insurance Company.

          Jennifer C. Wasson, Esq., Carla M. Jones, Esq., POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Robin L. Cohen, Esq. (argued), Keith McKenna, Esq., Michelle R. Migdon, Esq., McKOOL SMITH P.C., New York, New York; Attorneys for Plaintiffs Below-Appellees/Cross-Appellants Verizon Communications Inc., Verizon Financial Services LLC, and GTE Corporation.

          Before VALIHURA, VAUGHN, and SEITZ, Justices.

          SEITZ, JUSTICE

         This appeal turns on the definition of a Securities Claim in an insurance policy. Under the policy, a Securities Claim is a claim against an insured that "alleg[es] a violation of any federal, state, local or foreign regulation, rule or statute regulating securities . . . ." The Superior Court found the definition ambiguous. Using extrinsic evidence, the court held that fiduciary duty, unlawful dividend, and fraudulent transfer claims brought by a bankruptcy trustee against Verizon Communications Inc. and others are Securities Claims covered under the policy. We disagree, and find that, applying the plain meaning of the Securities Claim definition in the policy, the litigation trustee's complaint did not allege any violations of regulations, rules, or statutes regulating securities. Thus, we reverse the Superior Court's grant of summary judgment to Verizon and direct that summary judgment be entered for the Insurers.

         I.

         In 2006, Verizon divested its print and electronic directories business to its stockholders in a tax-free "spin-off" transaction. As part of the transaction, Verizon created Idearc, Inc. and appointed John W. Diercksen, a Verizon executive, to serve as Idearc's sole director. Idearc obtained Verizon's print and online directory business in exchange for about 146 million shares of Idearc stock, $7.1 billion in Idearc debt, and $2.5 billion in cash. Verizon then distributed Idearc common stock to Verizon shareholders. Idearc launched as a separate business with $9.1 billion in debt.

         In connection with the Idearc spinoff, Verizon and Idearc purchased primary and excess Executive and Organizational Liability Policies ("Idearc Runoff Policies").[1] Illinois National, an affiliate of AIG, issued the primary policy. Zurich American Insurance Company and other carriers issued follow form excess policies, meaning that the excess policies incorporate the coverage provisions of the primary policy. We refer to the primary and excess insurer parties as the "Insurers."[2]

         The Idearc Runoff Policies covered certain claims made against the defined insureds during the six-year policy period that exceeded a $7.5 million retention. Relevant to the dispute before us, Endorsement No. 7 to the policies states that "[i]n connection with any Securities Claim," and "for any Loss . . . incurred while a Securities Claim is jointly made and maintained against both the Organization and one or more Insured Person(s), this policy shall pay 100% of such Loss up to the Limit of Liability of the policy."[3] "Securities Claim" is defined in pertinent part as a "Claim" against an "Insured Person" "[a]lleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including, but not limited to, the purchase or sale or offer or solicitation of an offer to purchase or sell securities)."[4] Under the policy, Verizon could recover its "Defense Costs" when a Securities Claim was brought against it and covered directors and officers, and Verizon indemnified those directors and officers.[5]

         Idearc operated as an independent, publicly traded company until it filed for bankruptcy in 2009. During the reorganization, the bankruptcy court appointed U.S. Bank N.A. as trustee of a litigation trust to pursue claims against Verizon and others on behalf of creditors. In 2010, U.S. Bank filed suit in Texas federal court against Verizon, two related entities, and John Diercksen, the Idearc director at the time of the spin off. U.S. Bank as trustee sought $14 billion in damages allegedly caused by saddling Idearc with excessive debt at the time of the spin-off. Its complaint alleged violations of fraudulent transfer statutes; payment of unlawful dividends in violation of Delaware General Corporation Law; and common-law counts for breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, promoter liability, unjust enrichment, and alter ego liability.[6]

         After a bench trial, Verizon prevailed. The United States Court of Appeals for the Fifth Circuit affirmed the district court's decision.[7] During the nearly five years of litigation, Verizon and Diercksen incurred more than $48 million in defense costs. Verizon notified Illinois National of the U.S. Bank action and sought coverage for its joint defense costs under the Idearc Runoff Policies. In a June 21, 2011 letter, Illinois refused to cover Verizon's defense costs and claimed that "the U.S. Bank Complaint does not constitute a Securities Claim."[8]

         In 2014, Verizon filed suit in the Superior Court of Delaware against Illinois National, National Union, U.S. Specialty, Zurich, and other excess insurers seeking coverage for its defense costs in the U.S. Bank action and related lawsuits. Verizon immediately moved for partial summary judgment and claimed that its defense costs should be covered because the U.S. Bank action qualified as a Securities Claim under the policy. The Superior Court denied Verizon's motion. According to the court, there was "sufficient ambiguity in the language of the policy such that prior communications and the dealings between the parties may become relevant."[9]

         Following discovery, the parties cross-moved for summary judgment on whether the U.S. Bank action fell within the policy's definition of a Securities Claim. The parties agreed that "no factual disputes exist for submission to the jury" and the outcome depended on the U.S. Bank action qualifying as a "Securities Claim."[10]

         The Superior Court, after reviewing the evidence, found that Verizon's construction of "Securities Claim" was reasonable and the Insurers had failed to show that their interpretation was the only reasonable one.[11] Because each side had offered reasonable but conflicting interpretations for a "Securities Claim," the court deemed the definition ambiguous and looked to extrinsic evidence.[12] Resolving any uncertainty in Verizon's favor under the rule of contra proferentum, the court interpreted "any . . . regulation, rule or statute regulating securities" as "pertaining to laws one must follow when engaging in securities transactions."[13] The court found that "[t]he language in subsection (a) [of the Securities Claim definition] here is so broad it would simply be inappropriate to find that U.S. Bank's claims did not either allege, arise from, or were based upon or attributable to 'the purchase or sale or offer or solicitation of an offer to purchase or sell any securities of an Organization.'"[14] Accordingly, the court granted Verizon's motion on summary judgment.[15]

         II.

         A.

         To decide this appeal, we focus on the following arguments. The Insurers claim that the trustee in the U.S. Bank complaint did not raise a violation of any "regulation, rule or statute regulating securities" because the words "regulating securities" limits coverage to specific securities activities, as opposed to matters of general applicability. In other words, this Court should employ an ordinary interpretation of the word "regulate," which has been applied by courts in other closely related contexts to mean laws that regulate specifically the relevant subject matter, and not matters generally. As the Insurers argue, under the Superior Court's interpretation, "regulations, rules or statutes" would encompass a variety of non-security related claims.

         The Insurers also argue that the Superior Court's contrary reading renders superfluous the "regulating securities" qualifier in the overall definition because of the already-stated separate requirement that a Securities Claim arise from a "purchase or sale" of securities or be brought by a security holder. Also, the Insurers claim that the common law duties raised in the complaint are not "regulations, rules or statutes" within the meaning of the policy. The "regulations, rules or statutes," according to the Insurers, are commonly understood to refer to federal and state securities law claims, like Rule 10b-5 claims, [16] Securities Act and regulatory violations, [17] and state Blue Sky laws.[18]

         In response, Verizon argues that the plain language of the Securities Claim definition includes claims alleging a violation of "any . . . regulation, rule or statute regulating securities (including but not limited to, the purchase or sale . . . [of] securities." According to Verizon, the use of the word "any" shows the parties did not intend to exclude common law "rules" or claims that do not "specifically" or "principally" regulate securities. Further, as Verizon argues, because the Insurers chose the words "including but not limited to" when referring to securities law claims, "any . . . regulation, rule or statute regulating securities" should be construed broadly to include breach of fiduciary duty, unlawful dividend, and fraudulent transfer claims. Verizon also points to the drafting history of the policy, witness testimony purportedly contrary to the Insurers' plain meaning construction, and the Insurers' inconsistent coverage treatment of the same policy language.

         At the outset of the litigation, Verizon and the Insurers took the position that the definition of a Securities Claim was unambiguous-Verizon by filing for summary judgment just weeks after filing its complaint, and the Insurers who agreed in their opposition to summary judgment.[19] That is no surprise, "as is often true in cases involving disputes over complex agreements" that "each of their views . . . are supported by the unambiguous terms of the [] Agreement."[20] A court need not, however, open the door to discovery simply because the parties disagree about the meaning of what they claim are unambiguous terms.[21] On appeal, we agree with the parties that the definition of a Securities Claim is unambiguous. We also conclude that the Insurers' reading of the definition is the proper one based on the plain meaning of the Securities Claim definition.

         B. We review the interpretation of an insurance contract de novo.[22] Under the policy definition:

"Securities Claim" means a Claim made against any Insured Person:
(1) Alleging a violation of any federal, state, local or foreign regulation, rule or statute regulating securities (including, but not limited to, the purchase or sale or offer or solicitation of an offer to purchase or sell securities) which is:
(a) brought by any person or entity alleging, arising out of, based upon or attributable to the purchase or sale or offer or solicitation of an offer to purchase or sell any securities of an Organization; or
(b) brought by a security holder of an Organization with respect to such security holder's interest in securities of such Organization; or
(2) brought derivatively on behalf of an Organization with respect to such security holder of such Organization, relating to a Securities Claim as defined in subparagraph (1) above.[23]

         Looking at the definition as a whole[24] and applying the plain and ordinary meaning of the words used by the parties, [25] two things immediately stand out. First, the words used in the definition mirror those in a specific area of the law recognized as securities regulation. In the parlance of securities law statutes, securities laws typically apply to "the purchase or sale, or offer for sale" of securities.[26] Second, securities laws typically involve not only statutes, but also rules and regulations. For example, under the federal Securities Act, the Commission has the authority to make, amend, and rescind "rules and regulations" as necessary, [27] where "rules and regulations" are defined together as "all rules and regulations adopted by the Commission."[28] An example of a "rule" created under the 1934 Act is Rule 10b-5, which governs fraud "in connection with the purchase or sale of any security."[29]And a typical securities regulation would be Regulation 13A, which contains several rules governing certain reports.[30] The language throughout securities statutes and administrative rules regularly refers to "rules and regulations." [31] Similarly, Delaware Securities Law, i.e. a state Blue Sky law, allows the Investor Protection Director to "make, amend and rescind rules, [and] regulations, "[32] and defines a "Federal covered security" as "any security . . . [under] the Securities Act of 1933 . . . or rules or regulations promulgated thereunder."[33] Thus, we start with a basic understanding of the words used in the policy that the definition of a Securities Claim is aimed at a particular area of the law, securities law, and not of general application to other areas of the law.

         Our basic understanding is also confirmed by the parties' use of the limiting phrase "regulating securities." When we use the plain meaning of the words of the policy, and do not stretch their meaning to create an ambiguity, [34] the regulations, rules, or statutes must be those that "regulate securities." As noted earlier, regulations, rules, or statutes that regulate securities are those specifically directed towards securities, such as the sale, or offer for sale, of securities. They would not be directed at the common law or statutory laws outside the securities regulation area.

         Our basic understanding is confirmed by other courts that have addressed the same or similar issues. The New York Court of Appeals considered a similar insurance policy that defined "Securities Claim" as a claim "against any insured . . . for a violation of any federal, state, local regulation, statute or rule regulating securities, including but not limited to the purchase or sale of, or offer to purchase or sell, securities . . . ."[35] The Court of Appeals found that the common law "entire fairness rule is not a rule regulating securities" because "[i]t is a standard to review corporate transactions."[36] The court held that "[t]he clear language of the policy does not encompass losses arising from an action . . . claiming only common-law breach of fiduciary duty."[37]

         The United States Court of Appeals for the Ninth Circuit has also affirmed a decision interpreting an insurance policy that defined a "Securities Claim" as a violation of "any federal, state, local or foreign regulation, rule or statute regulating securities (including but not limited to the purchase or sale or offer or solicitation of an offer to purchase or sell securities)."[38] The court held that the policy did not cover a breach of contract claim that involved securities transactions or a conspiracy claim that included stock transactions because neither violated "any rule, statute, or regulation" regulating securities.[39]

         There are parallels in cases in other contexts. For example, in Pilot Life Ins. Co. v. Dedeaux, [40] the United States Supreme Court interpreted a similar phrase in an ERISA case. In general, ERISA preempts any state law that relates to employee benefit plans.[41] But, a savings clause exempts from preemption "any law of any State which regulates insurance, banking, or securities."[42] When interpreting the savings clause, the Court found that a "common-sense view of the word 'regulates' would lead to the conclusion that in order to regulate insurance, a law must not just have an impact on the insurance industry, but must be specifically directed toward that industry."[43]

         In Pilot Life, an employee brought several state common law claims against an insurer and argued that the tortious breach of contract claim fell under the savings clause.[44] The Court disagreed because "the roots of this law are firmly planted in the general principles of [] tort and contract law. Any breach of contract, and not merely breach of an insurance contract, may lead to liability . . . ."[45] Because the tortious breach of contract claim was rooted in general contract law, and not specifically directed towards insurance, the savings clause did not apply.[46] Similarly here, the plain meaning of the qualifier "regulating securities" means any "regulation, rule or statute" specifically directed towards securities regulation.

         Finally, our interpretation is confirmed by the fundamental rule of contract interpretation to "give effect to all terms of the instrument."[47] "Contracts are to be interpreted in a way that does not render any provisions 'illusory or meaningless.'"[48]The definition of a Securities Claim separately requires the claim either arise from a "purchase or sale" of securities or be brought "by a security holder."[49] If a claim arises from a "purchase or sale" of securities, or is brought by a securities holder with respect to such interest, the claim necessarily pertains to a law one must follow when engaging in a securities transaction. Because the Securities Claim definition separately establishes a connection to a securities transaction, then regulations, rules, or statutes must be directed specifically towards securities laws for "regulating securities" to have meaning in the definition.

         C.

         Having interpreted the policy language according to its plain meaning, we apply the definition to the claims brought by the trustee against Verizon. The trustee's complaint alleged fiduciary duty violations, unlawful dividends under Delaware law, statutory fraudulent transfer claims, and unjust enrichment and alter ego common law claims.[50] Because none of these claims implicates a "regulation, rule or statute" specifically directed towards securities law, none of the claims fall under the "Securities Claim" definition of the policy.

         Taking the fiduciary duty allegations first, the trustee alleged breach of fiduciary duty, aiding and abetting the breach of fiduciary duty, and promoter liability claims against Verizon and others.[51] These claims are not reasonably characterized as regulations, rules, or statutes. Instead, they involve a common law duty that if breached, leads to liability. Equally important, the trustee's fiduciary-based claims are not specific to regulations, rules, or statutes regulating securities. Instead, they include a variety of claims when "one person reposes special trust in another" or when "a special duty exists on the part of one person to protect the interests of another."[52] In other words, fiduciary duty claims do not depend on a security being involved. They encompass claims like director and officer compensation claims, [53] corporate opportunity claims, [54] or disputes between trustees and beneficiaries of a trust.[55] Thus, because the trustee's fiduciary duty-based claims do not involve regulations rules and statutes regulating securities, they do not fall within the definition of a Securities Claim under the policies.

         Next, the trustee alleged the unlawful distribution of dividends under 8 Del. C. §§ 170, 173, 174, and claimed that "Idearc lacked a surplus or net profits under which the dividends could legitimately occur," and "Verizon received the dividends . . . in bad faith and with knowledge of facts indicating the dividends were unlawful."[56] These statutes authorize directors to issue dividends out of surplus or net profit, [57] permit dividends in the form of stock, [58] and provide for joint and several liability for directors who willfully or negligently issue dividends unlawfully.[59]Although they are statutes under the policy, the statutes here regulate dividends, not securities. While it is possible to issue securities as a dividend, the fact that stock might be involved is incidental to the regulatory purpose of the statute-to ensure that dividends are not issued to render a corporation insolvent.[60] As a result, they are not statutes "regulating securities."

         Turning to the trustee's fraudulent transfer claims under the Texas Uniform Fraudulent Transfer Act and the U.S. Bankruptcy Code, "TUFTA's purpose is to prevent debtors from prejudicing creditors by improperly moving assets beyond their reach."[61] The relevant provisions of TUFTA set standards for fraudulent transfers and specify creditors' remedies.[62] The Bankruptcy Code provisions "outline the circumstances under which a trustee may pursue avoidance."[63] Neither of these statutes is specific to transfers involving securities. Like the statutory unlawful dividend claims, these laws give rise to causes of action with or without the ...


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