Federal Ins. Co. v Tyco Intl. Ltd.

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Federal Ins. Co. v Tyco Intl. Ltd. 2006 NY Slip Op 30686(U) August 10, 2006 Supreme Court, New York County Docket Number: 600507/03 Judge: Helen E. Freedman Republished from New York State Unified Court System's E-Courts Service. Search E-Courts (http://www.nycourts.gov/ecourts) for any additional information on this case. This opinion is uncorrected and not selected for official publication. [* 1] SUPREME COURT OF THE STATE OF NEW YORK PRESENT: - NEW YORK HELEN E. FREEDMAN COUNTY PART 39 Justice Federal Insurance Company, 6005Q7/03 INDEX NO. Pla lntiff , - v- MOTION DATE Tyco International Ltd., et al. MOTION SEQ. NO. Def sndant. MOTION CAL. NO. were read on this motion to/for The following papers, numbered 1 to PAPliRQ NUMBFRED Notice of Motion/ Order ta Show Cause - Affidavits Answering Affidavits - Exhibits ... - Exhibits Replying Affidavits Cross-Motion: Dated: L-,- Yes , :-I I-_ No Auaugt 10, 2006 Helen E. %Freedman, J.S.C. Check one: NON-FINAL DISPOSITION FINAL DISPOSITION Check if appropriate: DONOTPOST . . .. . . . . - [* 2] SUPREME COURT OF T H E STATE OF NEW YOKK C O I J N T Y OF NEW YOICK: PNC T 39 _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ - - - - - _ _ - - - - - -X _ _ - - - -Federal Insurance Company, P1ai 11 tiff, -against- Tyco Iiiternational T,td., et al. D cfend ant s, Plaintiff Federal Jnsurance Company ( Fedcral ) coiiimcnced this declaratory judgment action to rcsolve whether it is obligated to dcknd and indcninify defendants Tyco International, Ltd. ( l yco ) and former- Tyco officers aiid directors in the civil lawsuits and criminal proceedings brought against those defendants. Dehidant L. Dennis Kozlowski now niovcs for an order dii-ectiiis that Federal pay him about $ 17.8 million as a first installment for the costs and I ccs that he incurred to defend himself in the now-concluded criniiiial procceding against him and defendant Mark H. Swartz, People 1 . Kozlowski, index no. 5259/02 (Sup. Ct. N.Y. Co.) (the Criminal Actioii )l, and thc related civil forfeiture action, Morgeiith~izrv. K o z l o ~ ~ d - no. 41)3698/02 (Sup. C t. N.Y. Co.) Federal opp partial sunimary judgmcnt and declaring that the Policies that it is Kozlowski s or Swartz s dcfcnse costs in [he Ciiiiiinal Acti L For the sake of concision, I will assuinc action, which prior decisions sct forlh in dctail. SCJ Op. SOlGO(U)(Mar. 5 , 2004) ( Fdernl I ), uJf d (w:L1prlll ir). ity with the history of this 1 S A.D.3d 33 (1st Dept. 2005) Defined tcrms in Feclcrrrl 1 and Fedmil I/ have the s m c meaniiig in this decision, unless otherwise indicated. [* 3] For the reasons set forth bclow. Kozlowski s motioii is deiiicd and Fcderal s crossmotion is granted. Brrc.kgrnz~riri: Ct-i/izi/iL/l Actiorr - Kozlowskj and Swartz werc indicted for conspiring to stcal Tyco asscts and dcfiaud its investors, and h r falsifying business records to conceal thcir crimes. Afler a mistrial followed by a six-month trial ciiding in June 2005, the jury foillid Kozlowski and Swartz each guilty on twelvc counts of p n d larceny in the first d e g e c (in violation of New York Peiial Law ( NYPL ) 155.42), one count of conspiracy in the fourlh dcgree (in violation ol NYPL 5 105.10[1]), one count of securities fraud (in violation of the Martin Act, N.Y. Gcn. Bus. Law 5 352-c[5])), nine counts of falsifyiiig business records in and tlic first degrcc (in violation o I N Y P L $ 175.10). The Court sentenced both Kozlowski and Swartz to prison tcmis of 8 and 1/3 ycars to Iwenty-five years. The Court also (1) ordered them to pay restitution to Tyco illat totaling about $ 134 million, for which the Court held them jointly and scvcrally liablc, (2) oi-dcrcd Swartz to pay Tyco an additional $1.2 million, arid (3) iniposed fines of$70 million on Ko7,lowski and $ 35 million on Swartz.. Kozlowski and Swai-tz were nut convicted of a few of the charges. Of the thirty-onc counts submitted to the juiy, Kozlowski and Swartz were acquitted of Count # 17 , which charged that tlicy falsilicd busiiicss records in the first degee in connection with the Tyco liitcrnational (US) h c . Florida Corporate Headquartcrs Relocation program. Moreover, ccrtain werc never submitted to tlic jury (the Dropped Charges. ) T h e included a charge o f enterprise corruption, two grand larceny charges, and a i alsifyng of business records charge. C i x ~ ~ ~proviviom rog~ - Moving fbr an oi-der directing payment, Kozlowski claims that Federal must rcimbur-se his defensc expeiiscs for thc Criminal Action pursuant to hisuring 2 [* 4] Clause 1 of-the Executive Liability and Indenmification section of the Policics (the ELI Section ), which applies to Loss for which the Insured Person is not indemiiificd by [Tyco] and which the Insured Person bcconies legally obligated tu pay on. account of any Claim first made against him . . . during the Policy Period . . . for a Wrongful hct. j The Policies contain Iwo rclevant coveragc cxcliisions. Scction G(b) of the ELI Section (the Fraudulent A d s Provision ) provides: [Federal] shall not be liable under hsuring Clause 1 for Loss on accouiit of any Claim made against any Iiisiii-ed Person . . . bascd upon, arising from, or in conscqucnce of any delibcrately fraudulent act or omission or any willful violation of any statute or regulation by such lrisured Person, if a judynent or other final adjiidicatjon adverse to the Insured Person establishes such a deliberatcly fraiidirlciit act or omission or willful violation . . . . Section G(c) oI ELI Section (tlic Personal Profit Provision ) provides: the [Federal] shall riot be liable under Insuring Clause 1 for Loss on account of any Claim rnade against any Tnsured Person . . . based iipon, arising from, or in consequence of such Insured Person having gaiiicd in fact any personal prolit, remimeration or advantage to which such Insured Person was not legally entitled. Prior- 1tzdiiig.Y Belore the verdicts in thc Criminal Action were rendcrcd, this Court and the First Deparlment issued dccision that addrcssed Kozlowski s rights to covcrage iiiider the I n March 2004, this Court granted Kozlowski s siinimai*yjudgriientmotion (the Prior Policy. Motion ) i n part and declared (among other things) that tlic Policies obligatcd Federal to ruimburse Kozlowskj for those dcfciise expenses. Fedcr-a1 1,2004 N.Y. Slip Op. 501 h;O(U) at *7-*8 &*!I. l his Court found that [:ijfany portion o r a complaint [against an insLlrcdj might result in coverage, the insurer must defend or pay defenses expenses for all claims, both covered and non-covered. Id, at 8. I he Personal Profit Provisioii did no1 excusc Fcderal horn 3 Capitalized tenns in the quotations lrom tlic Policy are delilied in it. 3 [* 5] covcrage4, because [w Ihile the hidictmcnt alleges that Kozlowski obtained money illcgally Ihrough thc criminal enlerprise, it also accuses him of crimes from he did not directly profit. lcl. at *7. On appcal, the First Department limited Fedcral s duty to pay Kozlowski s defense costs to only those costs d a t i n g to liabilitics that fall under thc covcrage providcd, i.e., defensc costs for the covered claims. Fc.der-rrlI / , 18 A.D.3d at 38. The Appellate Division distinguished an insurer s duty to defend ii-oiii its duty to pay defeiisc expenses under its policy: if the policy iiiiposcs a duty to delend, insurer must afford a defense to the insured for covcred as well as lion-covered claims i 1 the latter are intertwined with covered claims, but if the policy only imposes a duty to pay defense expciiscs, the insurer could apportion them bchveeri covered and excluded claims. Id. at 41. Yet while an iiisurer can apportion defense expenses, its duty to reimburse h e iiisurcd for expenses ariscs when the insured pays them. Id. at 41 -42 Accord i rig1y, the Appc 11at c Di v i si011 1ound, wliilc Federal must pay defense costs as they arc incurred in the [Criminal Action], its ultimatc liability ibr such costs is only with respect to such liabilities as fall under the coverage provided. To the extent such liabilitics are excluded from coverage by the [Personal Profit Provision], Federal is not required to pay for defense costs. Siticc h i s allocation cannol be made at this juncturc . . . Federal must pay all defense costs 3s incurred, subjcct to recoupment when Kozlowski s liabilities, if any, are deteimiiied. I d at 42. 4 The courts did not acidress whether the Fraudulcnt Acls Provision affecled coverage i n F&rrrl I aiicl FetEcrral I / . The parties did not raise the issue in connection with tlic Prior Mot1oii, sincc it was decided before tlic verdict in [he Ciiriiiiial Action. 4 [* 6] After Fcderol I was issucd, Federal commenced an intcrplcader action to resolve the competing claims to tlic Policy proceeds by Kozlowski and others. Fed Ins, Co. v. Kozlow,vki, index 110.601416/04 (Sup. Ct. N.Y. Co.) (the Intcrplcader Action ). L)isczrssion: A40tiori - Kozlowski s application lor an interim payment fi-om thc Policy proceeds i s dcnied at h i s juncturc bccause virtually all of Kozlowski s defense expenses are excludcd by his convictions in thc Criniinal Action. IlKozlowski had any pre-conviction right to be reimbursed for cxpenses as he incurred thciii, he never exercised it hccause he nevei- sent Federal any invoices Tor his dcrcnse costs. See Lehrer McGovcrn Rovis, Itzc. v. IIulscy C otzstr. C orp., 254 A.D.2d 335, 336 (2d Uepl. 1998) (insured cannot seek payment oldcfciisc costs i P i t fails LO provide insiircr with copies of the bills it paid). In any event, Kozlowski s motion papcrs do not include any competent evidence of the amount and reasonableness of the defensc costs he lias incurred, arid all claiiiis to the proceeds of the Policy must bc pursued in the Tntcrpleader Action. S ce Ititcrplcader Aclion, ckc, & order dated April 30, 2004. CZ-oss-mo~ion Fcdcral s ci-oss-motion lor a dcclaration that the Policies do not cover any - ol-Kozlowski s and Swartz s ddeiisc costs in thc Criminal Action is granted because virtually all of Kozlowski s and Swartz s defense expenses arc now excluded from covcrage by [he Fraudulent Acts or Personal Profit Provisions, and Kozlowski and Swartz make no showing that ally of their defense expenses can hc allocaled to covered losseshSBcfore Koxlowski and Swartz were convicted, Federal hac1 iio duty to reimburse their defciisc costs because they iicvcr 5 In fact, Kcjzlowski did not submit opposition to the Fcdcral cross-motion, and S w a r l ~ docs riot address the issue of allocation, but iiicrcly requests that the Court stay its decision on the cross-motion while his cnminal appeal is pending. That request is denied because Swart7 s conviction and sentcncc coiistitute a tjudgnent within the meaning of the Fraudulciit Acts P rovi s i o ti. 5 [* 7] prcsciitcd Fcdcral with their bills, and after they were coiivictcd 011 thirty of the thirty-one coiink, the Fraudulent Acts Provision excludcd the defense costs coimected with those thirty offenses. Ti1 addition, thc Personal Profit Provision excluded all costs connected with criines froin which Kozlowski and Swartz directly profited In theory, some ol Kozlowski s and Swartz s delense costs would hc payable if they could bc apporlioned to covered losses to wliicli ncither the Fraudulent Acts nor the Personal Profit Provisions apply. l hese include thc cost of defending Kozlowski and Swartz against Count # I7 and the Dropped Charge lor falsifyiiig business records, for they which wcrc not convicted and which do not accuse them of concealing crimes lrom which they directly profited. However, as a practical inattcr it scenis all but impossible to allocate defense costs between the covered claims and the prcdominaiit exclded claims, since Kozlowski and Swartz were defended 111 a single criminal procccdiiig that ended with their conviction of all but one count. Moreover, Konzlowski s and Swartz s fail to subinit billing records or any other evideiitiary basis [or apportioiiiiig costs speci tlcally to covered expenses. hi any event, thc covered costs woitld be a niinusculc portion of the total anioirnt. ORDERED that thc motion by defendant L. Dennis Kozlowski for an order directing payiieiit is dcnicd and thc cross-motion by plaintiff Fcdcral Insurance Company lor partial suniniary judgiiicnt is granted, and it is firrtlier Also, dcfcnse expenses allocated to tlic Droppcd Charge for enterprise corniptionwould bc pwtially covered, since i t was based oil pattcrn acts that corresponded to the other counts i n the indictment, including C oLuit # 17. However, the two Dropped Cliargcs of grand larceny fall with the Personal Profit Provision because they allcgcd that Kozlowski and Swartz stole lor their ow11 gain. 6 [* 8] ORDERED AND ADJUDGED that Executivc Protection Policy 8 121-34-42-H that plaintiff Federal hisurancc Company issucd to defendant Tyco Intcrnational, Ltd. providing coverage li-01~1 March 15, 2001 lo March 15, 2002, as extended by endorsement to March 15, 2003, docs not provide coverage for the defense costs incurred by defendants Dcfendant L. Dcnnis Kozlowski and Mark 11. Swartz in People v. Kozlowski, index no. 5259/02 (Sup. Ct. N.Y. CO.) Dated: August 10, 2006 Helen E. Freedkin, J.S.C. 7

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