The Charter Oak Fire Insurance Company et al v. American Capital, Ltd. et al, No. 8:2009cv00100 - Document 77 (D. Md. 2011)

Court Description: MEMORANDUM OPINION. Signed by Chief Judge Deborah K. Chasanow on 8/9/11. (sat, Chambers)
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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MARYLAND : THE CHARTER OAK FIRE INSURANCE COMPANY, et al. v. : : Civil Action No. DKC 09-0100 : AMERICAN CAPITAL, LTD., et al. : MEMORANDUM OPINION Presently pending and ready for resolution in this insurance case is a motion to dismiss (ECF No. 72) filed by Defendants. The issues are fully briefed and the court now rules, no hearing being deemed necessary. See Local Rule 105.6. For the reasons that follow, Defendants motion will be denied. I. Background A. Principal Allegations This case presents an insurance coverage dispute between two insurers and an investment fund. As two opinions in this case have come before this one, some familiarity with the facts is assumed. See Charter Oak Fire Ins. Co. v. Am. Capital, Ltd., No. 09-0100, 2011 WL 856374 (D.Md. Mar. 9, 2011); Charter Oak Fire Ins. Co. v. Am. Capital, Ltd., No. 09-0100, 2010 WL 437070 (D.Md. Feb. 2, 2010). Beginning in 2008, Defendant American Capital, Ltd. and one of its investments, Defendant Scientific Protein Laboratories LLC ( SPL ), became involved in more than 100 suits pertaining to allegedly defective heparin. to American insurance Capital, policies implicated ( the These suits, at least according certain Policies ) primary that and the umbrella company had purchased from Plaintiffs Charter Oak Fire Insurance Company and Travelers Property Casualty Company of America for the years 2006 through 2009. When American Capital sought coverage under the Policies for itself and SPL, Plaintiffs filed this suit for rescission and reformation. insurers contend that Of particular relevance here, the American Capital made a variety of misrepresentations in its insurance applications, including: ¢ Submitting insurance applications indicating that it had no subsidiaries, even though it now seeks coverage for subsidiaries (id. ¶¶ 32, 34); ¢ Answering no on a 2008 insurance application when asked whether it had acquired any operations in the past five years, even though the company acquired SPL in 2006 (id. ¶ 37); ¢ Answering no when asked whether there had been any product liability loss in the last three years, even though it had been named as a defendant in at least one heparin lawsuit before submitting its 2008 insurance application (id. ¶ 40); ¢ Answering no on its 2008 insurance application when asked whether any products had been recalled, even though heparin and heparin s active pharmaceutical ingredient had been recalled (id. ¶ 43); ¢ Answering no in one or more insurance applications when asked whether it sold, distributed, or used foreign 2 products as components, even processed in China (id. ¶ 46); though the heparin was ¢ Answering no on one or more of its insurance applications when asked whether it had been active or was currently active in any joint ventures, even though American Capital admitted in heparin lawsuits that the allegedly tainted heparin was processed by a joint venture (id. ¶ 49); and ¢ Failing to provide details of pending heparin lawsuits in its 2008 application, even though it was asked to give details of all liability claims exceeding $10,000, or occurrences that might give rise to such claims (id. ¶ 52). B. Allegations Concerning Promptness In an earlier decision on Defendants motion to dismiss, the court explained that Plaintiffs had not their claim for rescission of the Policies. adequately pled See Charter Oak, 2011 WL 856374, at *13-15. Specifically, Plaintiffs failed to plead they facts rescission. showing that acted promptly in seeking Because promptness is an element of a plaintiff s case in any rescission claim, the court dismissed count one of Plaintiffs first amended complaint. The insurers, however, were granted leave to file a second amended complaint, which they were told should include facts showing prompt action. Id. at *15. complaint Filed includes 20 on March 29, additional 2011, the paragraphs Plaintiffs knew and when they knew it. second that amended allege what (ECF No. 67). Plaintiffs allege in the second amended complaint that they first learned of a heparin suit filed against American Capital 3 in mid-August 2008, when American Capital forwarded it a notice of a potential claim. (Id. ¶ 88). defense or indemnity. (Id.). The company did not request The notice further stated that the heparin suit was related to American Capital s ownership interest in SPL, but did not specify the relationship between American Capital and SPL. (Id.). American Capital subsequently sent additional notices with the same or similar designation. (Id.). Plaintiffs allege that the claim notices led them to request a meeting with American Capital to obtain additional information regarding investigation, seeking coverage Plaintiffs meetings and sent in the proceed with whether American Capital determine as to the American the claims, fall of heparin Capital 2008, claims. three while (Id. written also their ¶ requests repeatedly whether American Capital was seeking coverage. (Id. was 90). for asking ¶ 91). American Capital refused to meet with the insurers or discuss whether it was in fact seeking coverage for several months. (Id. ¶ 92). According to insurers in coverage issues, Plaintiffs, October as 2008 its that American it defense did Capital not counsel informed wish to ha[d] the discuss been in discussion with plaintiffs counsel [in the underlying heparin 4 suits] to effect a no-cost dismissal of [American Capital]. (Id. ¶ 93). because issues settlement. 23, American Capital felt discussion was unnecessary 2008, of coverage (Id.). insisting could be mooted by such a Plaintiffs responded by letter on October that it was still important to meet to discuss the claims and reminding the American Capital that it had not explained heparin suits. The whether it was seeking coverage for the that the (Id. ¶¶ 94-95). second amended complaint further explains insurers and American Capital held a confidential meeting on November 4, 2008. for the first Two days later, American Capital requested time that Plaintiffs provide a coverage position as to [American Capital] and any entity alleged in the pleadings to Capital. (Id. ¶ 97). began be submitting a direct or indirect affiliate of Less than a week later, American Capital notices to the insurers for heparin naming SPL - but not American Capital - as a defendant. 98). American suits (Id. ¶ The insurers wrote back to American Capital, explaining that it was still their understanding that American Capital was not seeking defense or indemnification for the heparin suits. (Id. ¶ 1 99).1 The letter also stressed that the insurers That understanding was perhaps tacitly confirmed in late-November 2008, when American Capital provided a chart at 5 continued to reserve all of their rights in this matter, particularly to the extent that there was inadequate disclosure . . . in the placement or renewal of any of [the Polices]. (Id. ¶ 95). On December 4, 2008, American Capital tendered a New General Liability Notice of Claim to the insurers for a nonheparin lawsuit involving American Capital and Defendant Spectator Management Group ( SMG ). (Id. ¶ 101). The insurers learned SMG of Capital s shortly thereafter portfolio intended to tender however, when that companies the American suit and for Capital was one American that American Capital coverage. (Id.). Later, was dismissed from the suit, American Capital purportedly informed Plaintiffs that it did not intend to seek coverage under the Policies for SMG. (Id.). On December 29, 2008, American Capital and SPL allegedly provided Plaintiffs with a settlement agreement they had signed with Baxter Healthcare Corporations. (Id. ¶ 102). In that agreement, SPL indicated that it may have rights under the Policies. (Id.). The settlement agreement, along with all of the request of Plaintiffs that indicated that SPL Holdings LLC, which in turn was owned by SPL Acquisition Corporation, owned SPL. (ECF No. 67 ¶ 100). The chart allegedly did not show any relationship between these entities and American Capital. (Id.). 6 the preceding events, allegedly led Plaintiffs to conclude that American Capital might seek coverage on its own behalf for the heparin suits and for SPL and other portfolio companies under the Policies. (Id. ¶ 103). January 16, 2009. Thus, Plaintiffs filed this suit on (Id. ¶ 104). A month later, for the very first time, American Capital and SPL requested a defense for the heparin suits. C. (Id. ¶ 105). Motion to Dismiss On May 13, 2011, Defendants filed a motion to dismiss in part the second amended complaint, arguing that Plaintiffs have still not alleged facts evidencing promptness. Plaintiffs opposed on June 27, 2011. month later, Defendants replied. II. (ECF No. 72). (ECF No. 73). Roughly a (ECF No. 76). Standard of Review As the explained, Federal opinion the Rule sufficiency on purpose of of Civil the Defendants of a first motion Procedure complaint. to motion dismiss 12(b)(6) is Presley to dismiss pursuant to v. Charlottesville, 464 F.3d 480, 483 (4th Cir. 2006). to test the City of Thus, the court must consider all well-pleaded allegations in a complaint as true, Albright v. Oliver, 510 U.S. 266, 268 (1994), and must construe all factual allegations in the light most favorable to the plaintiff, Harrison v. Westinghouse Savannah River Co., 176 7 F.3d 776, 783 (4th Cir. 1999). everything as true. Still, the court need not take For instance, the court need not accept unsupported legal allegations. Revene v. Charles Cnty. Comm rs, 882 F.2d 870, 873 (4th Cir. 1989). Nor must it agree with legal conclusions couched as factual allegations, Ashcroft v. Iqbal, 129 S.Ct. 1937, 1950 (2009), or conclusory factual allegations devoid of any reference to actual events, United Black Firefighters v. Hirst, 604 F.2d 844, 847 (4th Cir. 1979). After considering only the well-pleaded facts, the court must assess whether those facts permit the court to infer more than the mere possibility of misconduct. (quotation marks omitted). granted. Iqbal, 129 S.Ct. at 1950 If they do not, the motion must be Id. III. Analysis Charter based Because upon Oak and Travelers American Capital s purported Policies misrepresentations. See Org., radical the recognized that a party requesting it must move quickly. Sugarman a rescind long v. is to have Cutler rescission seek Ltd., 88 remedy, Md.App. courts 567, 578 (1991) ( [T]he remedy of rescission must be exercised promptly upon discovery of the fraud or misrepresentation. This is so because rescission is considered to be a radical remedy; it therefore must be promptly asserted once a party discovers facts which 8 justify it. (citations and internal marks omitted)); accord Baumel v. Rosen, 412 F.2d 571, 574 (4th Cir. 1969) (citations omitted). Courts have deemed the promptness requirement so important that they place the onus on the plaintiff to show it. See Merritt v. Craig, 130 Md.App. 350, 365-66 (2000) (quoting Finch v. Hughes Aircraft Co., 57 Md.App. 190, 244 (1984)); Ellerin v. Fairfax Sav. Ass n, 78 Md.App. 92, 109 (1989); accord Johns Hopkins Univ. v. Hutton, 488 F.2d 912, 916 n.2 (4th Cir. 1973) ( [I]n the general area of rescission it appears that the requirement of prompt action is an element of the plaintiff s case, and the burden is upon the rescinding party to show that he acted promptly in seeking rescission. ); see also Heidtman Steel Prods. v. Compuware Corp., 178 F.Supp.2d 862, 864-65 (N.D.Ohio 2001) (collecting cases). Given the importance of promptness, the court instructed Plaintiffs that their complaint would need to do more to address that issue if they wished to pursue rescission. The second amended complaint satisfies the court s earlier instruction. As Plaintiffs correctly recognize, the relevant trigger for rescission is when a plaintiff learns of the facts that would justify rescission, not merely potentiality for rescission. Fid. & Guar. Co., 94 facts that raise the mere Monumental Life Ins. Co. v. U.S. Md.App. 505, 9 541 (1993) (emphasis in original); see also Pence v. Langdon, 99 U.S. 578, 581 (1878) (explaining that a party must ask to rescind when he is fully advised of the relevant facts); Goodman v. Poland, 395 F.Supp. 660, 676 (D.Md. 1975) (stating that plaintiff was not compelled to act before it had concrete indication that it had been defrauded). Furthermore, when an insurer suspects that its policyholder may have made misrepresentations, it is entitled to a reasonable time within which to investigate the matter before it must rescind. N. Am. Specialty Ins. Co. v. Savage, 977 F.Supp. 725, 732 (D.Md. 1997). In this case, the second amended complaint alleges that American Capital originally represented that it had no subsidiaries and no liabilities stemming from activities such as those embodied in the heparin suits. In mid-August 2008, Plaintiffs received their first indication that something was amiss, when they were notified of one heparin suit. Despite the fact that the notification was not a formal claim for coverage, the insurers then arguably made diligent attempts to investigate the suits over the next several months. They further reserved their rights with regard to coverage in late-October 2008. The second amended complaint further alleges that American Capital repeatedly engaged in dilatory and obfuscatory tactics, which included providing Plaintiffs with 10 a chart showing an ownership Capital. structure for SPL that did not include American Only in December 2008 did American Capital receive the information that would truly compel it to act: (1) an indication - in the form of a claim notice for SMG - that American Capital believed it had covered subsidiaries; and (2) an indication in the form of the Baxter settlement agreement that SPL itself coverage. suit. believed it was a subsidiary entitled to Just a few short weeks later, Plaintiffs filed this The facts alleged render it plausible that Charter Oak and Travelers acted promptly upon their first indication that subsidiaries existed. These facts are in stark contrast to the ordinary case of inadequate promptness, wherein the party has simply sat back after knowledge of the facts, through indifference, negligence, or a speculative desire to see how things will turn out, and then, after what the court finds to be an unreasonable Banque Arabe Et time, manifests Internationale his election to D Investissement v. rescind. Md. Nat l Bank, 850 F.Supp. 1199, 1213 (S.D.N.Y. 1994) (quotation marks omitted). Defendants attempt to make a fine distinction, arguing that the second amended complaint refers only to when Plaintiffs realized American Capital might make a claim for coverage based on the putative subsidiaries, not to when Plaintiffs actually 11 recognized that the undisclosed subsidiaries existed. The reasonable inference, however, is that the two events are one and the same. The facts in the second amended complaint indicate that Plaintiffs had no reason to believe that there were any relevant entities related to American Capital until American Capital investigated, began but raising received coverage no firm issues. Plaintiffs answers about the relationship between American Capital and other entities such as SPL. seek When Plaintiffs learned that American Capital planned to coverage under the Policies, that disclosure apparently answered Plaintiffs previously unresolved question; they were then presented Capital had suppressed. a with a concrete relationship with indication SPL that that was American improperly Quite appropriately, Plaintiffs then filed suit. In addition, Defendants cite (much as they did in their last motion to dismiss) certain extra-complaint evidence that they say would have put Plaintiffs on notice of the existence of subsidiaries much earlier than late 2008. As the court explained before, [t]his is a motion to dismiss, not a motion for summary judgment. As such, it is not appropriate to wrestle with these types of factual issues at this stage. 2011 WL 856374, at *12. Charter Oak, No further comment on such matters is necessary here. 12 IV. Conclusion For the foregoing reasons, Defendants motion to dismiss will be denied. A separate order will follow. /s/ DEBORAH K. CHASANOW United States District Judge 13