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First Specialty Insurance Corp. v. Giftco

October 21, 2010

FIRST SPECIALTY INSURANCE CORPORATION, PLAINTIFF,
v.
GIFTCO, INC., PATRICK D. CAVANAUGH OF HIGH RIDGE PARTNERS, INC., AS TRUSTEE- ASSIGNEE OF GIFTCO, INC., AND CATHEDRAL ART METAL CO. INC., DEFENDANTS.



The opinion of the court was delivered by: Amy J. St. Eve, District Court Judge

MEMORANDUM OPINION AND ORDER

Defendant Cathedral Art Metal Co. Inc. ("Cathedral") has filed a motion to dismiss for lack of subject matter jurisdiction pursuant to Fed. R. Civ. P. 12(b)(1), or, alternatively, to stay or transfer the case. Based on the Court's review of the relevant factors, the Court stays this declaratory judgment action pending resolution of the jurisdictional issues in the related copyright and trademark infringement action currently before the United States District Court for the District of Rhode Island.

BACKGROUND

I. Procedural History

Plaintiff First Specialty Insurance Corporation ("FSIC") filed the underlying declaratory judgment action on February 19, 2010 seeking a declaration that it has no obligation to defend or indemnify Giftco Inc. ("Giftco"), one of its primary insureds, in connection with a copyright and trademark infringement lawsuit currently pending in the United States District Court for the District of Rhode Island (the "Rhode Island Litigation").*fn1 In its complaint, FSIC also has asked the Court to declare that claims asserted under Giftco's insurance policies by the plaintiff in the Rhode Island Litigation (Cathedral Art Metal Co. Inc., or "Cathedral") and Patrick D. Cavanaugh (Giftco's assignee, or "Assignee"), are precluded.

The Assignee answered the complaint on July 15, 2010. On July 16, 2010, Cathedral filed the present motion to dismiss or, alternatively, to stay or transfer the case.

II. Factual Background

Defendant Cathedral is a Rhode Island corporation that makes jewelry and gift items. On October 23, 2006, Cathedral filed a lawsuit against Giftco and one of Giftco's distributors in the United States District Court for the District of Rhode Island. In that lawsuit, Cathedral alleged, among other things, that Giftco had committed copyright and trademark infringement.

In April 2009, with the Rhode Island Litigation still pending, Giftco transferred substantially all of its assets to an appointed assignee ("Assignee") under an Assignment for the Benefit of Creditors and terminated its counsel. While the parties have not affirmatively represented Giftco's legal status (i.e. whether Giftco's Assignment for the Benefit of Creditors constitutes a voluntary liquidation under Chapter 7 of the United States Bankruptcy Code), the parties agree that, for all intents and purposes, Giftco is now defunct.*fn2

In September 2009, responding to a records subpoena from Cathedral, the Assignee produced "voluminous" business records that it had received from Giftco. (R. 38, Def.'s Mem. at 5.) Included among those documents were records of insurance policies that First Specialty Insurance Corporation ("FSIC") and four other insurers issued to Giftco, as early as 2005. (Id.) This discovery came as a surprise to Cathedral, as Giftco previously had represented that it did not possess any insurance coverage. (R. 39-1, Ex. A to Decl. of Thomas R. Noel, at 7-8.)

Cathedral filed an amended complaint in the Rhode Island Litigation on September 22, 2009, joining three of Giftco's former officers and directors -- David Bagley, John Breslin, and Johnny Johnson -- as defendants. On October 28, 2009, FSIC received a copy of the amended complaint from Mr. Breslin. FSIC alleges that Giftco never notified FSIC that it had been sued, and that until FSIC received the faxed complaint on October 28, 2009, it knew nothing about the Rhode Island Litigation. Cathedral has not disputed these allegations. FSIC promptly undertook an investigation into its obligations under Giftco's insurance policies,*fn3 and on December 9, 2009, FSIC notified the parties and the Rhode Island court that it was disclaiming defense and indemnification coverage for the claims asserted against Giftco and Mr. Bagley.*fn4

October 23, 2009, Cathedral filed a motion seeking default against Giftco. Cathedral v. Giftco, No. 06-00465 (Dkt. No. 96). The Rhode Island court recorded an entry of default against Giftco on December 18, 2009. Id. (Dkt. No. 114.)

In accordance with Illinois law, which requires an insurer to either (i) defend the lawsuit under a proper reservation of rights, or (ii) secure a declaratory judgment about its obligations under the policy prior to trial, see Utica Mut. Ins. Co. v. David Agency Ins., Inc., 327 F. Supp. 2d 922, 927 (N.D. Ill. 2004) (citing Employers Ins. Of Wausau v. Ehlco Liquidating Trust, 708 N.E.2d 1122, 1134-35 (Ill. 1999)), FSIC filed the underlying declaratory judgment action in this Court. In this action, FSIC is asking the Court to declare that it has no obligation to indemnify or defend Giftco in connection with the Rhode Island Litigation because: (1) Giftco breached the Policies' reporting requirements; (2) Giftco breached the Policies' cooperation requirements; (3) the '05-'06 Policy is not implicated because its definition of "personal and advertising" injury does not encompass the allegations in Cathedral's complaint; and (4) the Policies' applicable provisions and exclusions operate to preclude coverage.*fn5 FSIC is also asking the Court to declare that Giftco's breach of the Policies' notification and cooperation requirements, or the Policies' applicable provisions and exclusions, preclude any claims asserted against FSIC by Cathedral and the Assignee.

On July 16, 2010, Cathedral filed the present motion to dismiss FSIC's declaratory judgment action or, alternatively, to stay or transfer the case to the United States ...


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