Amtrust International Underwriters DAC v. 180 Life Sciences Corp., No. 5:2022cv03844 - Document 59 (N.D. Cal. 2023)
Court Description: ORDER GRANTING IN PART AND DENYING IN PART 41 180 LIFE SCIENCES CORP.'S MOTION FOR PARTIAL SUMMARY JUDGMENT. Signed by Judge Beth Labson Freeman on April 21, 2023. (blflc1, COURT STAFF) (Filed on 4/21/2023)
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1 2 3 4 UNITED STATES DISTRICT COURT 5 NORTHERN DISTRICT OF CALIFORNIA 6 SAN JOSE DIVISION 7 8 AMTRUST INTERNATIONAL UNDERWRITERS DAC, 9 10 United States District Court Northern District of California 11 Plaintiff, v. 180 LIFE SCIENCES CORP., 12 Defendant. __________________________________ 13 180 LIFE SCIENCES CORP., 14 15 16 17 18 19 20 21 22 23 24 Case No. 22-cv-03844-BLF ORDER GRANTING IN PART AND DENYING IN PART 180 LIFE SCIENCES CORP.’S MOTION FOR PARTIAL SUMMARY JUDGMENT [Re: ECF 41] Counterclaimant, v. AMTRUST INTERNATIONAL UNDERWRITERS DAC, Counterdefendant. __________________________________ 180 LIFE SCIENCES CORP., Third-Party Plaintiff, v. FREEDOM SPECIALTY INSURANCE COMPANY, Third-Party Defendant. This action arises out of an insurance coverage dispute relating to the directors and officers 25 liability provisions of two policies issued to KBL Merger Corp. IV (“KBL”). A primary policy 26 was issued by AmTrust International Underwriters DAC (“AmTrust”) and an excess policy was 27 issued by Freedom Specialty Insurance Company (“Freedom”) (collectively, “the Insurers”). The 28 dispute centers on the legal effect of certain corporate transactions in which KBL acquired a United States District Court Northern District of California 1 biotechnology company, changed its name from KBL to 180 Life Sciences Corp. (“180 Life”), 2 and replaced its board of directors. According to 180 Life, those changes did not affect its status 3 as the named insured under the policies; 180 Life asserts that it is merely KBL under a new name. 4 The Insurers take the position that KBL ceased to exist as a result of the corporate transactions and 5 that 180 Life is a new entity that not an insured under the policies. 6 180 Life sought coverage under the AmTrust policy for expenses it advanced to two 7 former KBL directors and officers, Dr. Marlene Krauss (“Krauss”) and George Hornig (“Hornig”), 8 in connection with investigative and legal proceedings relating to their former positions with KBL. 9 AmTrust denied coverage and filed this declaratory relief action, asserting that 180 Life is not an 10 insured under its policy and that in any event coverage for the expenses is barred by two policy 11 exclusions. 180 Life filed a counterclaim against AmTrust and a third-party complaint against 12 Freedom, seeking a declaration that it is an insured and is entitled to coverage for the expenses. 13 180 Life also seeks damages from AmTrust for breach of contract and bad faith. 14 180 Life now moves for partial summary judgment that it is entitled to coverage for the 15 expenses it advanced to Krauss and Hornig in connection with subpoenas issued to them by the 16 Securities and Exchange Commission (“SEC”). As discussed below, 180 Life has made coverage 17 demands to AmTrust and Freedom for additional expenses advanced to Krauss in connection with 18 other proceedings, but those additional expenses are not at issue in this motion. The notice of 19 motion identifies five issues on which 180 Life seeks partial summary judgment: (1) 180 Life is 20 an insured under the AmTrust and Freedom policies; (2) both polices provide coverage for the 21 expenses 180 Life has advanced, and will advance, to Krauss and Hornig in connection with the 22 SEC subpoenas; (3) AmTrust breached its policy by denying coverage for those expenses; 23 (4) AmTrust is obligated to pay 180 Life the expenses it has advanced, and will advance, to 24 Krauss and Hornig in connection with the SEC subpoenas; and (5) once the AmTrust policy is 25 exhausted, Freedom will be obligated to pay 180 Life the expenses it has advanced, and will 26 advance, to Krauss and Hornig in connection with the SEC subpoenas. 27 28 For the reasons discussed below, 180 Life’s motion for partial summary judgment is GRANTED IN PART AND DENIED IN PART. 2 1 BACKGROUND 2 KBL’s Creation as a SPAC and Purchase of Insurance Policies 3 KBL was created in 2016 as a special purpose acquisition company (“SPAC”) with the 4 goal of entering into a business combination or merger with one or more operating businesses. 5 See McGovern Decl. ¶¶ 4-5, ECF 41-1. KBL intended to target businesses in the healthcare and 6 wellness industry. See id. ¶ 5. Krauss was the Chief Executive Officer (“CEO”) of KBL and a 7 director. See id. Hornig was a director of KBL. See id. KBL completed its initial public offering 8 in June 2017. See id. ¶ 6. 9 United States District Court Northern District of California I. KBL purchased a claims-made Directors and Officers and Public Company Liability 10 Policy from AmTrust for the initial coverage period of June 7, 2017 to June 7, 2018. See 11 McGovern Decl. ¶ 7 & Ex. 1 (AmTrust Policy). The policy period later was extended to 12 November 9, 2020. See id. KBL purchased run-off coverage for an additional two-year period 13 from November 9, 2020 to November 9, 2022; KBL thus had until November 9, 2022 to give 14 AmTrust notice of claims arising during the policy period. See id. The AmTrust policy provides 15 $3 million in coverage. See id. 16 KBL also purchased an Excess Insurance Policy from Freedom with the same initial policy 17 period as the AmTrust policy. See McGovern Decl. ¶ 8 & Ex. 2 (Freedom Policy). Like the 18 AmTrust policy, the Freedom policy period was extended to November 9, 2020. See id. KBL 19 purchased run-off coverage under the Freedom policy for the period November 9, 2020 to 20 November 9, 2022. See id. The Freedom policy follows form to the AmTrust Policy and provides 21 $2 million of coverage excess of the AmTrust policy. See id. 22 KBL’s Acquisition of CannBioRx and Corporate Name Change 23 In July 2019, KBL entered into a business combination agreement under which its target, 24 biotechnology company CannBioRx Life Sciences Corp. (“CannBioRx”), would combine with a 25 number of other companies and then enter into a merger (“the Merger”) with KBL’s wholly 26 owned subsidiary, KBL Merger Sub, Inc. See McGovern Decl. ¶¶ 9-10. As agreed, Katexco 27 Pharmaceuticals Corp., CannBioRex Pharmaceuticals Corp., and 180 Therapeutics L.P. became 28 subsidiaries of CannBioRx prior to the Merger. See id. ¶ 10. CannBioRx changed its name twice, 3 1 first to 180 Life Sciences Corp. and then to 180 Life Corp. See id. On November 6, 2020, 180 2 Life Corp. merged with KBL’s wholly owned subsidiary KBL Merger Sub, Inc., which ceased to 3 exist, leaving 180 Life Corp. a wholly owned subsidiary of parent KBL. See id. ¶ 14. 4 In conjunction with the Merger, KBL changed its name to 180 Life Sciences Corp., a name 5 that target company CannBioRx used briefly before ultimately settling on the name 180 Life Corp. 6 See McGovern Decl. ¶¶ 11-16. Thus, at the close of the Merger, two entities remained – parent 7 company 180 Life Sciences Corp. (f/k/a KBL), and its wholly owned subsidiary 180 Life Corp. 8 (f/k/a CannBioRx and 180 Life Sciences Corp.). See id. Also in conjunction with the November 9 6, 2020 Merger, Krauss resigned as director and CEO of KBL. See McGovern Decl. ¶ 14. Hornig United States District Court Northern District of California 10 and the other KBL directors also resigned. See id. 11 180 Life’s Advancement of Expenses to Krauss and Hornig 12 The SEC opened an investigation regarding the Merger. See McGovern Decl. ¶ 17. In 13 connection with that investigation, the SEC issued subpoenas to Krauss and Hornig requiring them 14 to produce all communications and other documents concerning specific aspects of the Merger, 15 including discussions and negotiations, fee arrangements, and KBL’s preparation of its Forms 10- 16 Q for the fiscal quarters ending June 30, 2020 and September 30, 2020. See McGovern Decl. ¶ 17 17 & Ex. 7 (Subpoenas) at 1-5, 10-15, 92-97. 18 Krauss and Hornig requested that 180 Life advance them expenses they incurred in 19 responding to the SEC subpoenas. Krauss also requested advancement of expenses she incurred in 20 defending against third-party claims in a New York state action, and in connection with an action 21 that 180 Life filed against her and others in the Delaware Chancery Court (“Direct Action”). In 22 the Direct Action, 180 Life claims among other things that Krauss breached fiduciary duties to 23 KBL by falsely attesting to KBL’s financial statements, improperly permitting redemption of KBL 24 shares right before the Merger closed, and transferring money to herself and others under her 25 control. See Rohrer Decl. Ex. 2, Direct Action Compl., ECF 47-2. 26 180 Life did not advance the requested expenses to Krauss and Hornig. Krauss filed suit 27 against 180 Life in the Delaware Chancery Court (“Advancement Action”), seeking advancement 28 of expenses relating to the SEC subpoenas, the New York state court action, and the Direct 4 1 Action. See Krauss v. 180 Life Scis. Corp., No. CV 2021-0714-LWW, 2022 WL 665323, at *3 2 (Del. Ch. Mar. 7, 2022). The court found that KBL’s Charter and Bylaws, which were adopted by 3 180 Life in connection with the business combination agreement, “unambiguously provide for 4 mandatory advancement.” Id. at *2-4. Under the Charter and Bylaws, the Delaware court 5 determined, “[a]dvancement is available to Krauss for expenses incurred in connection with ‘any 6 threatened, pending, or completed action, suit or proceeding, whether civil, criminal, 7 administrative or investigative . . . by reason of the fact that . . . she is or was a director [or] officer 8 of the Company.’” Id. Applying those provisions, the court held that 180 Life must advance 9 Krauss the expenses she incurred in connection with the SEC subpoenas and in connection with 10 United States District Court Northern District of California 11 certain defenses and a counterclaim in the Direct Action. See id. at *10. Pursuant to the Delaware Chancery Court’s ruling, 180 Life has advanced expenses to 12 Krauss in the amount of $2,432,002.47, most of which relate to the SEC subpoenas. See 13 McGovern Decl. ¶ 19. 180 Life also has advanced subpoena-related expenses to Hornig in the 14 amount of $104,388.25. See id. ¶ 20. 15 180 Life’s Demand for Coverage under the AmTrust and Freedom Policies 16 180 Life demanded coverage from AmTrust and Freedom with respect to its advancement 17 of expenses to Krauss and Hornig. See Shields Decl. ¶¶ 4-9 & Exs. 9-14, ECF 41-10. AmTrust 18 denied coverage and thereafter engaged in back-and-forth correspondence with 180 Life between 19 June 2021 and June 2022. See Shields Decl. ¶¶ 2-9 & Exs. 8-14. Freedom did not respond to the 20 demand. On July 1, 2022, 180 Life sent a final letter to both AmTrust and Freedom, demanding 21 an acknowledgement of coverage for its advancement of expenses to Krauss and Hornig relating 22 to the SEC subpoenas. See Shields Decl. ¶ 9 & Ex. 14. Neither AmTrust nor Freedom responded 23 to the letter. See id. 24 The Present Action 25 On June 29, 2022, AmTrust filed the present declaratory relief action, alleging that 180 26 Life is not merely KBL under a different name, but rather a new company that does not qualify as 27 an insured under the AmTrust policy. See Compl. ¶¶ 42-50, ECF 1. AmTrust also alleges that 28 even if 180 Life is an insured, coverage is barred by two exclusions – the Change in Control 5 1 exclusion and the Insured v. Insured exclusion. See id. ¶¶ 51-68. 180 Life filed a counterclaim against AmTrust and a third-party complaint against 2 3 Freedom, seeking a declaration that it is an insured under the policies and that it is entitled to 4 coverage for the expenses it has advanced to Krauss and Hornig. See Answer, Counterclaim and 5 Third-Party Compl., ECF 14. 180 Life also seeks damages from AmTrust for breach of contract 6 and bad faith. See id. Freedom answered 180 Life’s third-party complaint, asserting a number of affirmative 7 8 defenses including that 180 Life is not an insured under the Freedom policy and that no coverage 9 is available under the Freedom policy because the AmTrust policy has not been exhausted. See 10 Answer, ECF 32. 180 Life now seeks partial summary judgment that it is entitled to coverage under the United States District Court Northern District of California 11 12 AmTrust and Freedom policies for expenses advanced to Krauss and Hornig in connection with 13 the SEC subpoenas. As noted, while 180 Life’s coverage demands to the Insurers encompass 14 additional expenses, the present motion is directed only to the subpoena-related expenses. 15 16 II. LEGAL STANDARD Under Federal Rule of Civil Procedure 56(a), a party may filed a “Motion for Summary 17 Judgment or Partial Summary Judgment.” Fed. R. Civ. P. 56(a). The moving party must 18 “identify[] each claim or defense--or the part of each claim or defense--on which summary 19 judgment is sought.” Id. “A party is entitled to summary judgment if the ‘movant shows that 20 there is no genuine dispute as to any material fact and the movant is entitled to judgment as a 21 matter of law.’” City of Pomona v. SQM North America Corp., 750 F.3d 1036, 1049 (9th Cir. 22 2014) (quoting Fed. R. Civ. P. 56(a)). “The moving party initially bears the burden of proving the 23 absence of a genuine issue of material fact.” In re Oracle Corp. Sec. Litig., 627 F.3d 376, 387 24 (9th Cir. 2010). 25 “Where the moving party meets that burden, the burden then shifts to the non-moving 26 party to designate specific facts demonstrating the existence of genuine issues for trial.” In re 27 Oracle, 627 F.3d at 387. “[T]he non-moving party must come forth with evidence from which a 28 jury could reasonably render a verdict in the non-moving party’s favor.” Id. “The court must 6 1 view the evidence in the light most favorable to the nonmovant and draw all reasonable inferences 2 in the nonmovant's favor.” City of Pomona, 750 F.3d at 1049. “Where the record taken as a 3 whole could not lead a rational trier of fact to find for the nonmoving party, there is no genuine 4 issue for trial.” Id. (quotation marks and citation omitted). 5 United States District Court Northern District of California 6 III. DISCUSSION 180 Life seeks partial summary judgment that: (1) 180 Life is an insured under the 7 AmTrust and Freedom policies; (2) both polices provide coverage for the expenses 180 Life has 8 advanced, and will advance, to Krauss and Hornig in connection with the SEC subpoenas; 9 (3) AmTrust breached its policy by denying coverage for those expenses; (4) AmTrust is obligated 10 to pay 180 Life the expenses it has advanced, and will advance, to Krauss and Hornig in 11 connection with the SEC subpoenas; and (5) once the AmTrust policy is exhausted, Freedom will 12 be obligated to pay 180 Life the expenses it has advanced, and will advance, to Krauss and Hornig 13 in connection with the SEC subpoenas. 14 Before addressing these issues, the Court takes up two preliminary matters: 180 Life’s 15 assertion of a new argument in its reply, and the Insurers’ request to take additional discovery. 16 Next, the Court sets forth the law governing interpretation of the policies issued by AmTrust and 17 Freedom. Finally, the Court takes up the five issues as to which 180 Life seeks partial summary 18 judgment. 19 A. 20 180 Life’ notice of motion indicates that it seeks partial summary judgment that it is 180 Life’s Assertion of New Argument in Reply 21 entitled to payment from the Insurers because it is an insured and “[b]oth the AmTrust Policy and 22 the Freedom Policy provide coverage” for the subpoena-related expenses advanced to Krauss and 23 Hornig. Mot. at 1, ECF 41. In the body of the motion, 180 Life expands on its position that the 24 policies “provide coverage,” arguing that the subpoenas are “covered” under the policies, id. at 18; 25 the asserted Change of Control exclusion is “inapplicable,” id. at 20; and the Insured v. Insured 26 exclusion is “inapplicable,” id. at 21. 27 28 180 Life repeats those arguments in its reply, but it also raises a new argument that “[e]ven if, arguendo, any question remains as to whether these exclusions apply,” the Court should order 7 1 the Insurers to advance the subpoena-related defense costs to it because there is at least a potential 2 for coverage. Reply at 12-13, ECF 52. 180 Life supports its new reply argument by citing to the 3 “Advancement” clause in the AmTrust policy, which provides: 4 B. Advancement 5 Regardless of whether the defense is so tendered, the Insurer shall advance Defense Costs in excess of the applicable Retention on behalf of the Insured not less often than every 90 days and prior to final disposition of the Claim. Such advanced payments by the Insurer shall be repaid to the Insurer by each and every Insured, severally according to their respective interests, in the event and to the extent that any such Insured shall not be entitled under the Terms and Conditions of this Coverage Element to payment of such Loss. 6 7 8 9 United States District Court Northern District of California 10 AmTrust Policy at 38. 180 Life relies on Braden Partners, LP v. Twin City Fire Ins. Co., No. 14-CV-01689-JST, 11 2017 WL 63019 (N.D. Cal. Jan. 5, 2017), for the proposition that this type of “advancement” 12 clause is enforceable when there are any potentially covered claims. See Reply at 13. In Braden, 13 the district court acknowledged that the Ninth Circuit has not definitively addressed this issue and 14 that there is a split of opinion among district courts within the Ninth Circuit whether the duty to 15 advance defense costs is triggered by a potential for coverage. See Braden at 2017 WL 63019 at 16 *8-10. The Braden court elected to follow those cases that apply the potential for coverage 17 standard, and found that the duty to advance defense costs was triggered on the facts before it. See 18 id. at 10. The court stated that “[t]he policy’s duty to advance defense costs also exists 19 independently of the duty to indemnify, which further suggests that the actual coverage standard 20 does not apply.” Id. 21 At the hearing, the Court advised the parties that it will not consider 180 Life’s new reply 22 argument when ruling on the present motion. The Court noted that the briefing on the motion 23 would have come in quite differently had 180 Life initially framed its request for relief in terms of 24 potential for coverage, and expressed its view that it would be inappropriate to issue a ruling under 25 the potential for coverage standard under those circumstances. “The district court need not 26 consider arguments raised for the first time in a reply brief.” Zamani v. Carnes, 491 F.3d 990, 997 27 (9th Cir. 2007). 28 Accordingly, the Court has disregarded 180 Life’s reply argument on the potential for 8 United States District Court Northern District of California 1 coverage standard. 180 Life may raise that argument at a future date, if appropriate, although as 2 the parties have been advised the Court generally permits only one summary judgment motion per 3 side in the life of the case. See Order Regarding Summary Judgment Procedures (“Each party is 4 limited to one motion for summary judgment or judgment on the pleadings.”), ECF 38; Standing 5 Order Re Civil Cases § VI.B (“Unless otherwise ordered by the Court, only 1 motion for summary 6 judgment, partial summary judgment, or summary adjudication may be filed by each party.”). Insurers’ Request to Take Additional Discovery 7 B. 8 The opposition responds fully to all arguments presented in the motion, including 180 9 Life’s arguments that the Change in Control and Insured v. Insured exclusions do not apply. See 10 Opp., ECF 47. However, the penultimate paragraph of the opposition states that if the Court finds 11 180 Life to be an insured, further discovery will be necessary on the Change in Control and 12 Insured v. Insured exclusions, as well as other potential defenses to coverage. See id. at 23-24. 13 That paragraph refers to the declaration of Erin Zimmerman, a “Complex/Specialty Claims 14 professional,” who opines that “[i]n the event that 180 Life’s Motion for Summary Adjudication is 15 granted, and this Court determines that 180 Life has met its burden to substantiate that it qualifies 16 as an Insured under the AmTrust Policy, discovery will be required as to facts related directly to 17 elements of 180 Life’s further assertions that it is entitled to advancement of Defense Costs related 18 to the SEC Subpoenas under the AmTrust Policy, and AmTrust’s previously-asserted defenses to 19 that assertion.” Zimmer Decl. ¶ 9, ECF 47-1. 20 At the hearing, the Insurers’ counsel referred to these statements as a motion to take 21 discovery pursuant to Federal Rule of Civil Procedure 56(d). The Court did not understand the 22 Insurers to be making a Rule 56(d) motion, perhaps because the opposition does not cite Rule 23 56(d). The Court finds that the general assertion at the tail end of the opposition that discovery is 24 needed in the event the Insurers otherwise would lose is not sufficient to present a Rule 56(d) 25 motion. 26 Moreover, any such motion would be denied. Rule 56(d) provides that “[i]f a nonmovant 27 shows by affidavit or declaration that, for specified reasons, it cannot present facts essential to 28 justify its opposition, the court may: (1) defer considering the motion or deny it; (2) allow time to 9 United States District Court Northern District of California 1 obtain affidavits or declarations or to take discovery; or (3) issue any other appropriate order.” 2 Fed. R. Civ. P. 56(d). “The burden is on the party seeking additional discovery to proffer 3 sufficient facts to show that the evidence sought exists, and that it would prevent summary 4 judgment.” Chance v. Pac-Tel Teletrac Inc., 242 F.3d 1151, 1161 n.6 (9th Cir. 2001). The party 5 seeking additional discovery also must demonstrate that he or she acted diligently to pursue 6 discovery in the past. See id. The Zimmerman declaration does not satisfy these requirements. 7 The bulk of the declaration consists of lengthy quotations of various provisions of the AmTrust 8 policy. See Zimmerman Decl. ¶¶ 5-7, 10, 12, 14. Those quotations are interspersed with 9 conclusory assertions that AmTrust “may need further discovery,” id. ¶ 11, or “will require 10 discovery,” id. ¶ 13, regarding policy exclusions and other defenses to coverage. The declaration 11 does not address what discovery has been taken in the case, what specific additional discovery is 12 needed, or why the discovery has not been taken. 13 14 Accordingly, to the extent the Insurers’ opposition may be construed as including a Rule 56(d) motion, such motion is DENIED. 15 C. 16 Because this is a diversity action, the Court looks to the substantive law of the forum state 17 in construing the policies and determining the applicability of the two exclusions. See Encompass 18 Ins. Co. v. Coast Nat’l Ins. Co., 764 F.3d 981, 984 (9th Cir. 2014) (“California’s substantive 19 insurance law governs in this diversity case.” (internal quotation marks and citation omitted)). 20 Under California law, “‘[i]nterpretation of an insurance policy is a question of law and follows the 21 general rules of contract interpretation.’” MacKinnon v. Truck Ins. Exch., 31 Cal. 4th 635, 647 22 (2003) (quoting Waller v. Truck Ins. Exch., Inc., 11 Cal. 4th 1, 18 (1995)). Interpretation of a 23 policy is controlled by the “clear and explicit meaning” of the contract provisions, which are 24 “interpreted in their ordinary and popular sense” unless given a special meaning by the parties. Id. 25 at 647-48. Policies are interpreted broadly to afford the greatest possible protection to the insured, 26 while “exclusionary clauses are interpreted narrowly against the insurer.” Id. at 648 (internal 27 quotation marks and citations omitted). 28 Applicable Insurance Law “Under California law, the burden is on the insured to establish that a claimed loss is 10 1 within the basic scope of insurance coverage.” Mudpie, Inc. v. Travelers Cas. Ins. Co. of Am., 15 2 F.4th 885, 890 (9th Cir. 2021) (internal quotation marks and citation omitted). “[O]nce an insured 3 has made this showing, the burden is on the insurer to prove the claim is specifically excluded.” 4 Id. (internal quotation marks and citation omitted). 5 D. 6 The Court next addresses the issues as to which 180 Life seeks partial summary judgment. 1. 7 8 United States District Court Northern District of California 9 Issues as to Which 180 Life Seeks Partial Summary Judgment 180 Life is an Insured under the AmTrust and Freedom Policies 180 Life first seeks partial summary judgment that it is an insured under the AmTrust and Freedom policies. As the moving party, 180 Life has the initial burden to prove that it is an 10 insured. The AmTrust policy defines “Insured” to mean any “Company” or “Individual Insured.” 11 AmTrust Policy p. 15, Directors and Officers and Public Co. Liability Coverage Element ¶ II.I. 12 “Company means (i) the Named Insured; (ii) any Subsidiary; and (iii) the Named Insured or any 13 Subsidiary as a debtor-in-possession[.]” AmTrust Policy p. 5, General Terms and Conditions ¶ 14 II.B. Finally, “Named Insured means the entity set forth in Item 1. of the General Declarations.” 15 AmTrust Policy p. 6, General Terms and Conditions ¶ II.I. The entity set forth at Item 1. of the 16 General Declarations is “KBL Merger Corp. IV,” also referred to in this order as “KBL.” 17 AmTrust Policy p. 3, General Declarations ¶ 1. These provisions taken together mean, 18 unsurprisingly, that KBL is an insured under the policy. 180 Life contends that it is the same 19 entity as KBL. 20 There is no dispute that if 180 Life is the same entity as KBL, merely proceeding under a 21 new name, 180 Life is an insured under the policy. See Abbott Bldg. Corp. v. United States, 951 22 F.2d 191, 196 (9th Cir. 1991) (“[T]here is no support for the proposition that a change of name 23 results in a change of entity.”); Toutov v. Curative Labs Inc., No. 2:20-cv-11284-ODW (MAAx), 24 2021 WL 3883607, at *3 (C.D. Cal. Aug. 31, 2021) (“[T]he change of a corporation’s name is not 25 a change of the identity of a corporation and has no effect on the corporation’s property, rights, or 26 liabilities.” (internal quotation marks and citation omitted)); United States for Integrated Energy, 27 LLC v. Siemens Gov’t Techs., Inc., No. SACV 15-01534 JVS (DFMx), 2016 WL 11743177, at *3 28 (C.D. Cal. Mar. 22, 2016) (“Name changes do not affect a company’s rights and liabilities.”). 11 United States District Court Northern District of California 1 180 Life submits the Second Amended and Restated Certificate of Incorporation of KBL 2 Merger Corp. IV, reflecting that the name of “the Corporation” is changed from “KBL Merger 3 Corp. IV” to “180 Life Sciences Corp.” McGovern Decl. Ex. 4 (Second Am’d and Restated 4 Certif.) at 2. The Form 8-K filed with the SEC on November 6, 2020 reported that “[t]he 5 Company’s stockholders approved a proposal to amend the Charter to change the name of ‘KBL 6 Merger Corp. IV’ to ‘180 Life Sciences Corp.’” McGovern Decl. Ex. 3 (Form 8-K) at 3. A press 7 release dated November 9, 2020, discussing KBL’s acquisition of a biotechnology company, noted 8 that “[p]rior to the closing of the merger . . . KBL Merger Corp. IV changed its name to 180 Life 9 Sciences Corp.” McGovern Decl. Ex. 5-2 (Press Release) at 1. 180 Life argues persuasively that 10 nothing in these documents suggests that KBL ceased to exist on the date of the Merger. 11 Moreover, 180 Life points out that it continues to use the same IRS employer identification 12 number it used as KBL, and continues to submit its SEC filings under the CIK number it used as 13 KBL. See McGovern Decl. ¶ 13. This evidence is sufficient to meet 180 Life’s initial burden to 14 show that it is the same entity as KBL, and merely changed its name. The burden thus shifts to the 15 Insurers to identify specific facts demonstrating the existence of genuine issues for trial. 16 The Insurers argue that 180 Life’s assertion that it is the same entity as KBL “is belied by 17 the very factual submissions that 180 Life presented to this Court in support of its [motion].” Opp. 18 at 11. The Insurers assert that the Forms 8-K, press releases, and other documents submitted by 19 180 Life establish that the business combination agreement resulted in a “reverse merger” by 20 which private biotechnology company 180 Life Corp. (f/k/a CannBioRx and 180 Life Sciences 21 Corp.) merged into public corporation KBL, which before the reverse merger was only a shell 22 company with no operations, and afterward was an active biotechnology company. Id. at 14. 23 Characterizing the transaction as a reverse merger is not dispositive of 180 Life’s status as 24 an insured, however. In a reverse merger, “a private company arranges to be acquired by a public 25 company with minimal assets (i.e., a shell company) and transfers the private company’s assets to 26 the new, publicly-traded owner in exchange for the shell company’s equity. Kollman v. Nat’l 27 Union Fire Ins. Co. of Pittsburgh, Pa., No. CIV. 04-3106-PA, 2007 WL 2344825, at *3 n.2 (D. 28 Or. Aug. 13, 2007) (internal quotation marks and citation omitted). After close of the transaction, 12 1 “the private company’s former management then runs the original company under the corporate 2 identity of the acquiring public company.” Id. (internal quotation marks and citation omitted, 3 emphasis added). The Insurers have not cited any authority for the proposition that a reverse 4 merger extinguishes the corporate identity of the acquiring public company. As discussed above, 5 the evidence in this case shows that the new management continues to run 180 Life under the 6 same corporate identity as KBL, using the same IRS employer identification number and the same 7 the CIK number. See McGovern Decl. ¶ 13. 8 United States District Court Northern District of California 9 The Insurers point to various amendments to KBL’s charter and articles of incorporation as evidence that KBL’s corporate identity was extinguished and a new corporation was created. 10 However, “[t]he mere amendment of a charter or articles of incorporation does not create a new 11 corporation or otherwise affect the identity of the corporation, or its existing rights of action, 12 property rights, or liabilities.” 18 C.J.S. Corporations § 81. “[T]his rule does not apply when it 13 clearly appears that the intention was to create a new corporation, either by reincorporating the 14 original corporation or by creating another and distinct corporation to succeed it.” Id. The 15 Insurers have not submitted evidence of an intention to create a new corporation, either by 16 reincorporation or creation of a distinct corporation. 17 The Insurer’s reliance on Simple Global, an unpublished Delaware Superior Court 18 decision, is misplaced. See Simple Global, Inc. v. Brathwait Watches, Inc., No. CV N21C-01-086 19 FWW, 2022 WL 100363 (Del. Super. Ct. Jan. 10, 2022). In Simple Global, the plaintiff sought to 20 enforce a stipulated judgment it entered into with one company, BI, against another company, 21 BWI, on the theory that BWI was merely a continuation of BI under a different name. See id. at 22 *1. The superior court noted that “[m]ere continuation of a predecessor corporation and fraud are 23 two exceptions to the general rule that when one company sells or otherwise transfers all of its 24 assets to another company the buyer generally is not responsible for the seller’s liabilities.” Id. at 25 *2. The superior court stated that “[t]he mere continuation theory of successor liability has been 26 narrowly construed,” and listed a number of factors relevant to application of that theory, 27 including “the common identity of the officers, directors, or stockholders of the predecessor and 28 successor corporations, and the existence of only one corporation at the completion of the 13 1 transfer.” Id. Simple Global is factually distinguishable from the present case, which does not 2 involve the general rule that “the buyer generally is not responsible for the seller’s liabilities” or 3 exceptions to that rule. United States District Court Northern District of California 4 The Insurers argue that “from a coverage perspective, the Insurers issued coverage to KBL 5 as a ‘shell company’ that would seek to enter into a transaction like the Business Combination 6 Agreement, but the Policies were never priced or written to provide coverage for an operating 7 biotechnology company like 180 Life.” Opp. at 14. The Court finds this argument to be 8 completely unpersuasive in light of the fact that the Insurers sold KBL run-off coverage for a two- 9 year period following expiration of the coverage period. KBL paid $58,050 to AmTrust, and 10 $27,000 to Freedom, for that run-off coverage. See AmTrust Policy at p. 57; Freedom Policy at p. 11 8. It was no secret that KBL was a SPAC, or that KBL’s management and control would change 12 as a result of the contemplated Merger. The AmTrust policy expressly states that the policy “may 13 not be cancelled” after such change in management and control. AmTrust Policy at p. 33, 14 Amendments ¶ 5. If the Insurers believed that the named insured would cease to exist as a result 15 of that contemplated change, they charged KBL tens of thousands of dollars for run-off coverage 16 that could never be utilized by the named insured. 17 In summary, 180 Life has met its initial burden to show it is an insured under the policies, 18 and the Insurers have failed to identify any evidence that would support a determination that it is 19 not. Accordingly, 180 Life’s motion for partial summary judgment that it is an insured under the 20 policies is GRANTED. 21 2. Existence of Coverage 22 180 Life next seeks partial summary judgment that both polices provide coverage for the 23 expenses 180 Life has advanced, and will advance, to Krauss and Hornig in connection with the 24 SEC subpoenas. As discussed above, “[u]nder California law, the burden is on the insured to 25 establish that a claimed loss is within the basic scope of insurance coverage.” Mudpie, 15 F.4th 26 890 (internal quotation marks and citation omitted). “[O]nce an insured has made this showing, 27 the burden is on the insurer to prove the claim is specifically excluded.” Id. (internal quotation 28 marks and citation omitted). 14 1 2 Life has the initial burden to show that the subpoena-related expenses are within the basic scope of 3 coverage under the AmTrust and Freedom policies. If 180 Life meets that burden, the burden will 4 shift to the Insurers to show that there are disputed facts that create an issue for trial as to whether 5 the subpoena-related expenses are within the basic scope of coverage. 6 United States District Court Northern District of California In the context of the present motion for partial summary judgment, this means that 180 If 180 Life establishes that the subpoena-related expenses are within the basic scope of 7 coverage, it must address the Insurers’ assertions that coverage is excluded under the Change in 8 Control exclusion and the Insured v. Insured exclusion. Although the Insurers have the ultimate 9 burden of proving the applicability of the exclusions at trial, 180 Life still must meet its initial 10 burden on summary judgment with respect to the exclusions. See In re Oracle, 627 F.3d at 387. 11 180 Life may do so by showing that there is an absence of evidence supporting the Insurers’ 12 position that the exclusions apply. See id. (“Where the non-moving party bears the burden of 13 proof at trial, the moving party need only prove that there is an absence of evidence to support the 14 non-moving party’s case.”). 15 Applying these standards, the Court first addresses whether 180 Life has established that 16 the subpoena-related expenses are within the basic scope of coverage under the policies. Next, the 17 Court addresses whether 180 Life has established that the Insurers cannot prove that the Change in 18 Control exclusion applies. Finally, the Court addresses whether 180 Life has established that the 19 Insurers cannot prove that the Insured v. Insured exclusion applies. a. 20 The Expenses are Within the Basic Scope of Coverage 21 The provisions of the AmTrust policy defining the scope of coverage are set forth below; 22 as noted, the Freedom policy follows form. See McGovern Decl. Ex. 1 (AmTrust Policy); Ex. 2 23 (Freedom Policy). 24 Coverage B: Company Reimbursement Coverage 25 The Insurer shall pay Loss of a Company arising from a Claim first made against an Individual Insured during the Policy Period or the Extended Reporting Period, if applicable, for any actual or alleged Wrongful Act of such Individual Insured, but only when and to the extent that such Company has indemnified such Individual Insured for such Loss. 26 27 28 AmTrust Policy p. 13, Directors and Officers and Public Co. Liability Coverage Element ¶ 1. 15 1 2 General Terms and Conditions ¶ II.B. “Individual Insured” includes an “Executive” of the 3 Company, meaning “any past, present or future duly elected or appointed director (including 4 shadow director and de facto director), officer, trustee, regent, governor, management committee 5 member of a duly constituted committee, member of the Board of Managers, Advisory Board, 6 Supervisory Board or Audit Committee, board representative or board observer of a Company.” 7 AmTrust Policy p. 15, Directors and Officers and Public Co. Liability Coverage Element ¶ II.H; 8 p. 35, Amendments ¶ 12. 9 United States District Court Northern District of California “Company” is defined to include the named insured or its subsidiary. AmTrust Policy p. 5, “Loss” is defined to include “Defense Costs which the insured is legally obligated to 10 pay[.]” AmTrust Policy p. 36, Amendments ¶ 14. “Defense Costs” include “reasonable fees, 11 costs and expenses consented to by the Insurer . . . resulting solely from . . . the investigation, 12 adjustment, defense and appeal of a Claim against an Insured.” AmTrust Policy p. 35, 13 Amendments ¶ 11. “Claim” is defined in relevant part to include: 14 15 3. a civil, criminal, administrative or regulatory investigation of an Individual Insured by a federal, state, local or foreign law enforcement authority or the enforcement body of any securities exchange: 16 ... 17 18 19 20 21 (ii) in the case of an investigation by the Securities and Exchange Commission (“SEC”) or a similar state or foreign government authority, after: (a) the service of a subpoena upon such Individual Insured. . . . AmTrust Policy p. 34, Amendments ¶ 10. 180 Life has the initial burden to show that the expenses it has advanced, and will advance, 22 to Krauss and Hornig in connection with the SEC subpoenas fall within the basic scope of 23 coverage under these policy provisions. Under Coverage B, 180 Life is entitled to reimbursement 24 if it is a “Company” that has suffered a “Loss” arising from a “Claim” first made against an 25 “Individual Insured.” As discussed above, 180 Life has established that it is the named insured, 26 and therefore that it is a “Company.” 180 Life also has submitted evidence that it paid two million 27 dollars (the “Loss”) in expenses relating to the SEC subpoenas (the “Claims”) issued to Krauss 28 and Horning (“Individual Insureds”). The subpoenas (the “Claims”) were first issued to Krauss 16 1 and Hornig during the Extended Reporting Period. The Court finds that 180 Life has shown that 2 the subpoena-related expenses fall with the basic scope of coverage under the policies. The 3 burden thus shifts to the Insurers to demonstrate the existence of disputed facts regarding the basic 4 scope of coverage. 5 Aside from arguing that 180 Life is not the named insured, and therefore is not a 6 “Company,” the Insurers do not dispute that the subpoena-related expenses fall within the basic 7 scope of coverage. 8 9 United States District Court Northern District of California 10 Accordingly, the Court GRANTS 180 Life partial summary judgment that the subpoenarelated expenses fall within the basic scope of coverage under the AmTrust and Freedom policies. b. Change in Control Exclusion 11 The Change in Control exclusion provides as follows: 12 If during the Policy Period: 13 1. the Named Insured shall consolidate with or merge into any other entity or group of persons or entities acting in concert, or 14 15 16 17 18 19 20 2. any person or entity or group of persons or entities acting in concert shall acquire Management Control of the Named Insured, (1 and/or 2 herein referred to as a Change In Control), then this policy may not be cancelled thereafter and it shall not, in any event, apply to any Claim alleging in whole or in part any Wrongful Acts committed, attempted or allegedly committed or attempted by any Insured subsequent the date of such Change In Control. AmTrust Policy at p. 33, Amendments ¶ 5. 180 Life has the initial burden to show that the Insurers cannot prove that the Change in 21 Control exclusion applies. It is undisputed that there was a change in control on November 6, 22 2020, the date the Merger closed, which was also the effective date of the resignations of KBL’s 23 CEO, Krauss, and its entire board of directors. Thus, coverage is barred for “any Claim alleging 24 in whole or in part any Wrongful Acts committed, attempted or allegedly committed or attempted 25 by any Insured” after November 6, 2020. 26 180 Life argues that this provision is not implicated by the SEC subpoenas, because those 27 subpoenas related only to pre-Merger conduct. The Court finds this argument unpersuasive 28 because the subpoenas clearly requested documents created and relating to time periods both pre17 1 Merger and post-Merger. The subpoenas required production of all documents created during, or 2 concerning, the period from January 1, 2018 through the dates of the subpoenas. See McGovern 3 Decl. ¶ 17 & Ex. 7 (Subpoenas) at 1-5, 10-15, 92-97. Krauss was served with two subpoenas, 4 dated April 23, 2021 and May 5, 2021, and Hornig was served with one subpoena, dated May 6, 5 2021. See id. Moreover, the May 5, 2021 subpoena served on Krauss specifically requested 6 documents sent to, received, from, referring to, or otherwise concerning the target biotechnology 7 company after it merged with KBL’s subsidiary.1 See id. at 5. 180 Life argues that because the subpoenas concern the roles of Krauss and Hornig as United States District Court Northern District of California 8 9 directors of KBL, and they resigned those positions on November 6, 2020, the subpoenas by 10 definition cannot relate to wrongful acts committed by Krauss and Hornig after November 6, 11 2020. The Court cannot agree with 180 Life’s reasoning on this point. That Krauss and Hornig 12 resigned from KBL in conjunction with the Merger does not mean that they cut off all 13 involvement with KBL/180 Life as of that date. It also does not mean that they could not have 14 committed a wrongful act after that date. It is clear from the record that some of KBL’s SEC 15 filings were prepared after the Merger date, and that Krauss at least may have been involved in 16 preparation of those filings. Moreover, Krauss and Hornig’s status as Individual Insureds extends 17 beyond their resignation dates. “Individual Insured” includes an “Executive” of the Company, 18 meaning “any past, present or future duly elected or appointed director . . . of a Company.” 19 AmTrust Policy p. 15, Directors and Officers and Public Co. Liability Coverage Element ¶ II.H; p. 20 35, Amendments ¶ 12. In light of the subpoenas’ requests for documents created and relating to time periods both 21 22 pre-Merger and post-Merger, the Court finds that 180 Life has not met it initial burden to show 23 that the Insurers cannot prove that the Change in Control exclusion applies to bar coverage for the 24 25 26 27 The subpoena requested documents relating to “180 Life Sciences Corp. (after its merger with KBL).” See McGovern Decl. Ex. 7 (Subpoenas) at 5. While this request is confusing at first glance in light of the fact that several of the companies have used identical or similar names, the reference to the merger makes clear that the request related to 180 Life Corp. f/k/a 180 Life Sciences Corp. f/k/a CannBioRx, the entity that merged with KBL Merger Sub, Inc. 1 28 18 1 2 3 subpoena-related expenses. Accordingly, 180 Life’s motion for partial summary judgment that both polices provide coverage for the subpoena-related expenses is DENIED. c. United States District Court Northern District of California 4 Insured v. Insured Exclusion 5 The Insured v. Insured exclusion provides “[t]he Insurer shall not be liable to make any 6 payment for Loss in connection with any Claim made against any Insured . . . which is brought 7 by or on behalf of a Company, Outside Entity or any Executive or Outside Entity Executive[.]” 8 AmTrust Policy p. 17, Directors and Officers and Public Co. Liability Coverage Element ¶ III.F. 9 “This Exclusion shall not apply to . . . any Claim brought by an Executive or Outside Entity 10 Executive in the form of a crossclaim or third-party claim for contribution or indemnity which is 11 part of and results directly from a Claim which is covered by this policy[.]” Id. ¶ III.F.1. 12 180 Life has the initial burden to show that the Insurers cannot prove that the Insured v. 13 Insured exclusion applies. The Court finds that burden easily met here, because the SEC 14 subpoenas do not constitute claims brought by or on behalf of a Company, Executive, or other 15 Insured. The burden therefore shifts to the Insurers to identify evidence creating a factual dispute. 16 The Insurers offer argument regarding the Direct Action filed by 180 Life and the 17 Advancement Action filed by Krauss. Expenses relating to those actions are not at issue in this 18 motion. 19 Accordingly, the Court GRANTS 180 Life partial summary judgment that the Insurers 20 cannot prove that the Insured v. Insured exclusion applies to bar coverage for the expenses 21 incurred by Krauss and Hornig in connection with the SEC subpoenas. 22 23 3. AmTrust’s Asserted Breach of its Policy 180 Life seeks partial summary judgment that AmTrust breached its policy by denying 24 coverage for the expenses that Krauss and Hornig incurred in connection with the SEC subpoenas. 25 Because 180 Life has not established the inapplicability of the Change in Control exclusion, it is 26 not entitled to a judgment that AmTrust breached the policy. 27 28 The motion for partial summary judgment is DENIED on the issue of whether AmTrust breached its policy. 19 4. 1 180 Life seeks partial summary judgment that AmTrust is obligated to pay 180 Life the 2 3 expenses it has advanced, and will advance, to Krauss and Hornig in connection with the SEC 4 subpoenas. As discussed above, 180 Life has not established that there is coverage under the 5 AmTrust policy. The motion for partial summary judgment is DENIED on the issue of whether AmTrust is 6 7 obligated to pay 180 Life the subpoena-related expenses advanced to Krauss and Hornig. 5. 8 United States District Court Northern District of California AmTrust’s Asserted Obligation to Pay Expenses Freedom’s Asserted Obligation to Pay Expenses 9 180 Life seeks partial summary judgment that once the AmTrust policy is exhausted, 10 Freedom will be obligated to pay 180 Life the expenses it has advanced, and will advance, to 11 Krauss and Hornig in connection with the SEC subpoenas. As discussed above, 180 Life has not 12 established that there is coverage under the AmTrust policy. The Freedom policy follows form to 13 the AmTrust policy. Accordingly, 180 Life has not established its entitlement to partial summary 14 judgment against Freedom. 15 The motion for partial summary judgment is DENIED on the issue of whether Freedom is 16 obligated to pay 180 Life the subpoena-related expenses advanced to Krauss and Hornig upon the 17 exhaustion of the AmTrust policy. 18 19 IV. ORDER (1) 180 Life’s motion for partial summary judgment is GRANTED IN PART AND 20 DENIED IN PART as follows: 21 (a) with respect to 180 Life’s request for judgment that 180 Life is an insured 22 under the AmTrust and Freedom policies, the motion is GRANTED. 180 23 Life is an insured under both policies. 24 (b) with respect to 180 Life’s request for judgment that the AmTrust and 25 Freedom polices provide coverage for the expenses 180 Life has advanced, 26 and will advance, to Krauss and Hornig in connection with the SEC 27 subpoenas, the motion is DENIED on the ground that 180 Life failed to 28 meet its initial burden to show that the Insurers cannot prove that the 20 1 Change in Control exclusions applies. However, 180 Life is GRANTED 2 partial summary judgment on the issue that the subpoena-related expenses 3 fall within the basic scope of coverage under the AmTrust and Freedom 4 policies, and is GRANTED partial summary judgment on the issue that the 5 Insurers cannot prove that the Insured v. Insured exclusion applies to bar 6 coverage for the subpoena-related expenses. (c) 7 8 policy by denying coverage for the expenses Krauss and Hornig incurred in 9 connection with the SEC subpoenas, the motion is DENIED. (d) 10 United States District Court Northern District of California with respect to 180 Life’s request for judgment that AmTrust breached its with respect to 180 Life’s request for judgment that AmTrust is obligated to 11 pay 180 Life the expenses it has advanced, and will advance, to Krauss and 12 Hornig in connection with the SEC subpoenas, the motion is DENIED. (e) 13 with respect to 180 Life’s request for judgment that upon exhaustion of the 14 AmTrust policy, Freedom will be obligated to pay 180 Life the expenses it 15 has advanced, and will advance, to Krauss and Hornig in connection with 16 the SEC subpoenas, the motion is DENIED. 17 (2) This order terminates ECF 41. 18 19 20 21 Dated: April 21, 2023 ______________________________________ BETH LABSON FREEMAN United States District Judge 22 23 24 25 26 27 28 21
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