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Pekin Insurance Company v. Precision Dose

March 16, 2012

PEKIN INSURANCE COMPANY,
PLAINTIFF-APPELLEE,
v.
PRECISION DOSE, INC., FRANK DARNELL, JAMES KLEINHEINZ, ROBERT KOOPMAN, WARREN SWANSON, JAMES ARTHUR, AND DAVID ZOELLNER, AS SHAREHOLDERS OF XACTDOSE, INC.,
DEFENDANTS-APPELLANTS.



Appeal from the Circuit Court of Winnebago County. No. 06-MR-514 Honorable Eugene G. Doherty, Judge, Presiding.

The opinion of the court was delivered by: Justice Burke

JUSTICE BURKE delivered the judgment of the court, with opinion. Justices McLaren and Birkett concurred in the judgment and opinion.

OPINION

¶ 1 Pekin Insurance Company, issued a commercial general liability (CGL) policy covering Xactdose, Inc., a packager and distributor of single-dose units of liquid medication. While serving as directors of Xactdose, Frank Darnell, James Kleinheinz, and Robert Koopman (collectively, defendants) allegedly formed and operated another company, defendant Precision Dose, Inc., which engaged in the same type of business. The policy was amended to name Precision Dose as an insured. Warren Swanson, James Arthur, and David Zoellner (collectively, plaintiffs) were the minority shareholders of Xactdose. Plaintiffs filed an amended complaint against defendants, derivatively on behalf of Xactdose, for breach of fiduciary duty.

¶ 2 Defendants tendered plaintiffs' suit to Pekin for defense and indemnity. Pekin denied that the policy covered any of the claims in the underlying suit, which eventually was dismissed. Pekin filed a declaratory judgment action in this case, seeking a declaration that it had no duty to defend. Pekin and defendants filed cross-motions for summary judgment, and Pekin additionally moved to strike the affidavit of Koopman, the former president of Xactdose and current president of Precision Dose. Pekin argued that the affidavit contained facts of which Pekin was unaware when coverage was denied, and therefore the facts were not relevant to whether the denial of coverage was proper.

¶ 3 The trial court struck the affidavit and granted Pekin summary judgment, and defendants appeal. Defendants argue that the trial court erred in striking the affidavit and in determining that Pekin did not owe defendants a duty to defend the underlying suit. First, we hold that, even though "a circuit court may, under certain circumstances, look beyond the underlying complaint in order to determine an insurer's duty to defend" (Pekin Insurance Co. v. Wilson, 237 Ill. 2d 446, 459 (2010)), the trial court did not err in striking Koopman's affidavit on the ground that Pekin was unaware of the contents of the affidavit, which arguably would have shown that the claims asserted against defendants were potentially within the coverage of the insurance policy (cf. Konstant Products, Inc. v. Liberty Mutual Fire Insurance Co., 401 Ill. App. 3d 83, 87 (2010) ("an insurance carrier may not ignore unpleaded facts within its knowledge, which it knows to be correct, and which, when taken together with the complaint's allegations, indicate that the claim asserted against the putative insured is potentially within the coverage of the insurance policy" (internal quotation marks and emphasis omitted)). Second, we hold that the allegations in the amended complaint were not potentially within the policy's coverage, and therefore Pekin is entitled to summary judgment. We affirm.

¶ 4 FACTS

¶ 5 A. The Underlying Amended Complaint

¶ 6 On March 29, 2006, plaintiffs filed a complaint against Precision Dose and defendants. The four-count complaint asserted claims for shareholder relief and an accounting (see 805 ILCS 5/12.56 (West 2010)), common-law fraud, breach of fiduciary duty, and successor-corporation liability that resulted in economic losses to plaintiffs. On November 15, 2006, plaintiffs filed an amended complaint alleging breach of fiduciary duty against defendants. The amended complaint substituted Xactdose for Precision Dose as a defendant and did not incorporate the original complaint by reference.

¶ 7 In their reply brief, defendants suggest that "since [this] is a case involving both an original complaint and an amended complaint, the duty to defend issue is not necessarily an 'all or nothing' proposition." Acknowledging the possibility that plaintiffs' amendment of the underlying complaint might have no bearing on Pekin's duty to defend, defendants speculate that perhaps "the original complaint that named Precision Dose triggered a duty to defend for at least a period of time until the amended complaint was filed," at which point the change in the underlying claims might have extinguished Pekin's duty to defend. Defendants offer no analysis as to how changing the claims and naming Xactdose and removing Precision Dose as a defendant in the underlying suit might have affected Pekin's duty to defend. In fact, the parties do not specify whether the insureds tendered the defense to Pekin before plaintiffs amended their complaint.

¶ 8 The trial court concluded that Pekin owed no duty to defend the original complaint or the amended complaint. We conclude that defendants have procedurally defaulted any argument regarding whether Pekin owed a duty to defend the original complaint. See Ill. S. Ct. R. 341(h)(7) (eff. Sept. 1, 2006) ("Points not argued are waived ***."); see also Foxcroft Townhome Owners Ass'n v. Hoffman Rosner Corp., 96 Ill. 2d 150, 154 (1983) (where an amendment is complete in itself and does not refer to or adopt the prior pleading, the earlier pleading ceases to be part of the record for most purposes, being in effect abandoned and withdrawn). Accordingly, we need address only the amended complaint, which alleged only claims of breach of fiduciary duty against defendants and named Xactdose as a defendant.

¶ 9 The three-count amended complaint alleged that defendants were majority shareholders and served as three of the four directors of Xactdose. Plaintiffs were the minority shareholders, with Arthur serving as the fourth director. Defendants allegedly "formed an 'alliance' and were essentially in control of the corporation." On June 24, 2003, a special Xactdose shareholders meeting was held to discuss Xactdose's financial state and its future. Zoellner was the only shareholder who was not present. At the time of the meeting, Xactdose's financial state had been significantly affected by the termination of its contract with Alpharma Pharmaceuticals, a company in the business of developing, manufacturing, and marketing generic liquid pharmaceuticals. The shareholders discussed Xactdose's state of insolvency, the lack of potential investors and profitable products, and the means by which Xactdose should "wind down" its business and dissolve. Based on discussions at the meeting, the shareholders who were present resolved four-to-one to wind up Xactdose's business, sell its assets to defendants for $1.4 million, and dissolve Xactdose.

¶ 10 Allegedly unknown to plaintiffs, on April 9, 2003, defendants incorporated Precision Dose and became its majority shareholders, officers, and directors. The amended complaint alleged that "Precision Dose began assuming operations of the Xactdose packaging factory" and immediately began earning a profit by promoting Megestrol, a new generic liquid medication. Upon information and belief, plaintiffs alleged that Precision Dose sold units of Megestrol earning (1) a $1.8 million profit "in fiscal year 2003/2004," (2) a $4.3 million profit in 2005, and (3) a projected $10 million profit in 2006.

¶ 11 Besides the preceding allegations common to all counts, the amended complaint contained three identical counts of breach of fiduciary duty directed against defendants. The claims alleged that, at the June 24, 2003, meeting, defendants denied that there were any potential products under development that could have any positive financial impact on Xactdose or on the shareholders themselves. Specifically, defendants failed to mention Megestrol. For several months before the meeting, defendants allegedly had been engaging in discussions with multiple individuals about the future of the single-unit liquid medication packaging industry and their own futures personally. Defendants discussed with Tom Anderson, the former Alpharma president, the possibility of setting up a partnership with ANI Pharmaceuticals so that Precision Dose and ANI could develop and market new unit-dose products. Defendants also held discussions with PAR Labs regarding the development of Megestrol, the potential future market for the product, and a future business partnership between Precision Dose and PAR Labs. Defendants negotiated with ANI, PAR Labs, and other pharmaceutical companies and laboratories for the express purpose of diverting potential future business opportunities from Xactdose to Precision Dose. Defendants allegedly never disclosed to plaintiffs that they were involved in discussions with these companies or that there was a potential market for Megestrol or any other product.

¶ 12 Further, defendants allegedly had never accounted for the $1.4 million payment owed to Xactdose or any of the other winding-up activities. Defendants had represented to plaintiffs that they would apply the purchase price to Xactdose's corporate debts, which defendants had guaranteed personally. However, defendants allegedly created a windfall for themselves by negotiating the debt downward, to perhaps as much as 80% off the original amount, and retaining the remainder without disbursing the entire $1.4 million on behalf of Xactdose.

¶ 13 The breach-of-fiduciary-duty counts alleged that, as officers, directors, and shareholders of Xactdose, defendants owed Xactdose a duty of loyalty, good faith, and honesty. However, by misrepresenting and withholding information vital to plaintiffs and by diverting corporate opportunities for their own personal benefit, defendants breached their fiduciary duties to Xactdose and its shareholders. Plaintiffs sought compensatory and punitive damages, a constructive trust on any profits or income realized by defendants as a result of their "wrongful conduct," an accounting of the sale of assets and other winding-up activities, and costs.

¶ 14 B. Declaratory Judgment Action

¶ 15 On January 29, 2007, Pekin filed an amended complaint for declaratory judgment, setting forth the following facts. Pekin issued a CGL policy, No. 00CL85805, to Xactdose as the named insured. The policy was amended on June 30, 2003, to name Precision Dose as the named insured. Defendants qualified as insureds under the policy by virtue of their roles as directors and shareholders of Xactdose. The policy was to be effective from February 27, 2003, through February 27, 2004, but it was cancelled on January 22, 2004. The policy provided in relevant part as follows:

"Coverage B. Personal and Advertising Injury Liability

1. Insuring Agreement.

a. We will pay those sums that the insured becomes legally obligated to pay as damages because of 'personal injury' or 'advertising injury' to which this insurance applies. We will have the right and duty to defend any 'suit' seeking those damages. We may at our discretion investigate any 'occurrence' or offense and settle any claim or 'suit' that may result. But:

(1) The amount we will pay for damages is limited as described in Limits of Insurance (Section III); and

(2) Our right and duty to defend end when we have used up the applicable limit of insurance in the payment of judgments or settlements under Coverage A or B or medical expenses under Coverage C.

No other obligation or liability to pay sums or perform acts or services is covered unless explicitly provided for under Supplementary Payments-Coverages A and B.

b. This insurance applies to:

(1) 'Personal injury' caused by an offense arising out of your business, excluding advertising, publishing, broadcasting, or telecasting done by you or for you; and

(2) 'Advertising injury' caused by an offense committed in the course of advertising your goods, products, or services; but only if the offense was committed in the 'coverage territory' during the policy period."

¶ 16 The policy defines "advertising injury" and "personal injury" as follows:

"Section V-Definitions

1.'Advertising injury' means injury arising out of one or more of the following offenses:

c. Misappropriation of advertising ideas or style of doing business; or

d. Infringement of copyright, title, or slogan. * * *

13. 'Personal injury' means injury, other than 'bodily injury' arising out of one or more of the following offenses;

c. The wrongful eviction from, wrongful entry into, or invasion of the right of private occupancy of a room, dwelling, or premises that a person occupies by or on ...


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