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Vita Food Products, Inc. v. Navigators Insurance Co.

United States District Court, N.D. Illinois, Eastern Division

June 2, 2017

VITA FOOD PRODUCTS, INC., Plaintiff,
v.
NAVIGATORS INSURANCE COMPANY, Defendant.

          MEMORANDUM OPINION AND ORDER

          Honorable Marvin E. Aspen United States District Judge

         Plaintiff Vita Food Products, Inc. (“Vita”) filed this declaratory judgment action to adjudicate the rights and obligations of the parties with respect to Vita's demand for defense and indemnity under two insurance policies Defendant Navigators Insurance Company (“Navigators”) issued to Vita. Presently before us is Navigators' motion for judgment on the pleadings. (Dkt. No. 22.) Also before us is Vita's motion to strike Navigators' affirmative defenses. (Dkt. No. 19.) For the reasons stated below, both motions are granted in part and denied in part.

         BACKGROUND

         On October 2, 2009, two dozen of Vita's former shareholders filed a complaint asserting claims against six of Vita's directors (the “underlying lawsuit”). (Compl. ¶ 6; see also Underlying Compl. (Dkt No. 1-1).) The plaintiff-shareholders in the underlying lawsuit asserted federal racketeering claims, as well as state-law breach of fiduciary duty and negligence claims arising out of a 2009 merger under which Vita's outstanding shares were sold to one of the underlying defendants, Howard Bedford, for an allegedly inadequate price. (Compl. ¶ 7.) The underlying complaint alleged that Bedford, one of Vita's directors, engaged in a “fraudulent scheme to steal the business and assets of a profitable company, VITA . . ., by paying substantially less for that business and those assets than their true value.” (Underlying Compl. ¶ 1.) The underlying lawsuit claimed “[t]hrough fraud, deceit, breaches of fiduciary duties, self-dealing, and other acts, ” Bedford and five other Vita directors formed an enterprise “to steal the business and assets of VITA through engaging in a pattern of racketeering.” (Id. ¶ 3.) The alleged “integral ingredients of Bedford's scheme” included (1) taking effective control of Vita through an additional contribution to its capital; (2) replacing members of the Board of Directors of VITA with individuals who would participate in carrying out the corrupt enterprise; (3) issuing public financial reports, which contrary to internal reports, would show VITA to be experiencing continuing, long-term difficulties; (4) arranging to merge VITA into a corporation, all of the stock of which would be wholly owned, directly or indirectly, by Bedford; (5) carrying out an elaborate process which would fraudulently make it appear that the terms of the merger were fair to VITA; (6) completing the merger of VITA into the Bedford corporation. (Id. ¶ 34.)

         Shortly after the defendants were served with the underlying lawsuit, Vita demanded that Navigators provide coverage under a “claims made” Directors and Officers Liability Insurance Policy Navigators issued to Vita, as amended, for the policy period January 17, 2009 to April 23, 2014 (the “2009 Policy”). (Compl. ¶¶ 11, 15; 2009 Policy, Compl., Ex. C (Dkt. No. 1-3).) By letter dated October 26, 2009, Navigators denied coverage. (Compl. ¶ 16; see also Denial Letter, Compl., Ex. D (Dkt. No. 1-4).) Specifically, Navigators stated that pursuant to Section IV.B, the 2009 Policy did not apply. (Compl. ¶¶ 16-17.) Section IV.B of the 2009 Policy provides:

Section IV. Exclusions
The Insurer shall not be liable to make any payment for Loss in connection with any Claim made against any Insured:
. . .
B. based upon, arising out of, relating to, directly or indirectly resulting from or in consequence of, or in any way involving any Wrongful Act or Related Wrongful Act or any fact, circumstance or situation which has been the subject of any notice or Claim given under any other policy of which this Policy is a renewal or replacement.

(Id. (emphasis in original).) Navigators asserted Section IV.B barred coverage because the underlying lawsuit was based on alleged wrongful acts that were the subject of a prior claim reported by Vita to Navigators in 2007. (Id. ¶ 18.)

         Navigators contended Vita previously reported a claim made by Vita shareholder Michael N. Kreiger under the Directors and Officers Liability Insurance Policy issued to Vita for the policy period of January 17, 2007 to January 17, 2008 (the “2007 Policy”). (See 2007 Policy, Compl., Ex. F (Dkt. No. 1-6).) Kreiger, via his attorney, sent correspondence dated April 24, 2007 to Vita's directors (the “Kreiger letter”), alleging that in April 2007 Vita reached an agreement in principle to issue common stock and warrants to Bedford at “very favorable prices and terms.” (Compl. ¶ 18; see also Kreiger Letter, Compl. Ex. E (Dkt. No. 1-5).) Specifically, the letter referenced Vita's Form 10-K for the fiscal year ending on December 31, 2006, wherein Vita reported its agreement with Bedford, including:

Possible Subsequent Event - Additional Equity Issuance
The Company has reached an agreement in principle, with Howard Bedford, a Company director, pursuant to which Mr. Bedford would invest $3, 000, 000 in the Company. Substantially all of these funds would be used for working capital requirements. In consideration for his investment, Mr. Bedford would receive 2, 400, 000 shares of Common Stock; two year warrants to purchase 500, 000 shares of Common Stock at an exercise price of $1.25 per share; three-year warrants to purchase 500, 000 shares of Common Stock at an exercise price of $1.50 per share; four-year warrants to purchase 500, 000 shares of Common Stock at an exercise price of $1.50 per share; and five-year warrants to purchase 500, 000 shares of Common Stock at an exercise price of $1.75 per share. The warrants would be exercisable immediately. Subsequent to this transaction, Mr. Bedford would own approximately 38.2% of the Company's outstanding common stock and warrants to acquire another 10.3%. On April 10, 2007, $1, 000, 000 has been invested.

(Counterclaim (Dkt. No. 17) ¶ 12 (emphasis in original).) The Kreiger letter advised Vita that “[g]iven the relationship of Mr. Bedford to the Company and what appears to be very favorable prices and terms, both my client and I believe that Vita's board of directors has violated its fiduciary duties to Mr. Kreiger and other Vita shareholders under both federal, state and common law.” (Kreiger Letter at 1.) The letter urged Vita to make adjustments to the terms of the financing, requested that Vita provide documentation supporting the Bedford deal as the “proposal, as it currently stands, does not treat the shareholders fairly, ” and requested that Vita furnish “the requisite documentation supporting this proposed financing including board resolutions and fairness options, if any.” (Id. at 2.)

         Navigators claims it acknowledged receipt of the Kreiger letter as notice of circumstances that might give rise to a claim under the 2007 Policy. (Counterclaim ¶ 14.) Like the 2009 Policy, the 2007 policy is an indemnity policy, which provides in relevant part, “[t]he insurer shall pay on behalf of the Company all Loss which the Insured Persons shall be legally obligated to pay as a result of a Claim . . . first made against the Insured Persons during the Policy Period or the Discovery Period for a Wrongful Act, but only to the extent the Company is required or permitted by law to indemnify the Insured Persons.” (2007 Policy at Section I.B (“Insuring Agreements”); see also 2009 Policy (same).)

         The parties point to different provisions of both policies in support of their respective positions regarding whether Navigators must provide coverage and pay the costs of defending the underlying lawsuit. Vita filed the instant complaint on August 19, 2016, seeking declaratory relief. In Count I, Vita claims that it is entitled to coverage for the underlying lawsuit under the 2009 Policy, and Navigators therefore has an obligation to pay all of Vita's costs of defense of the underlying suit, together with interest. (Compl. ¶¶ 39-44.) In the alternative, Vita asserts in Count II that Navigators must cover the costs of defending the underlying lawsuit pursuant to the terms of the 2007 Policy. (Id. ¶¶ 45-46.) Vita also argues that Navigators is estopped from raising any defenses to coverage under the policies because it improperly denied coverage and refused to advance the costs of defending the underlying lawsuit. (Id. ¶¶ 23-26.)

         Navigators filed an answer and counterclaim on January 17, 2017, attaching several documents, including the Kreiger letter and related correspondence. (Dkt. No. 17.) Navigators' counterclaim seeks a declaration that the 2009 Policy does not afford coverage because the underlying lawsuit is not a claim first made during the 2009 policy period. (Counterclaim ¶¶ 3, 40-48. Navigators also seeks a declaration that coverage is precluded under both the 2007 and 2009 policies, because Section IV.H of both policies, as modified by Endorsement Nos. 3, 4 and 20, bars coverage for any claim made against an insured by any security holder, officer, or director. (Id. ¶¶ 4-5, 49-61.)

         ANALYSIS

         I. MOTION FOR JUDGMENT ON THE PLEADINGS

         Navigators' motion for judgment on the pleadings is brought pursuant to Federal Rule of Civil Procedure 12(c). Rule 12(c) provides that a party may seek judgment on the pleadings “[a]fter the pleadings have closed-but early enough not to delay trial.” Fed.R.Civ.P. 12(c). When reviewing Rule 12(c) motions, we employ the same standards applicable to motions brought under Rule 12(b)(6). Landmark Am. Ins. Co. v. Hilger, 838 F.3d 821, 824 (7th Cir. 2016); Buchanan-Moore v. Cty. of Milwaukee, 570 F.3d 824, 827 (7th Cir. 2009) (citing Pisciotta v. Old Nat. Bancorp, 499 F.3d 629, 633 (7th Cir. 2007)). The complaint must state a claim that is plausible on its face. St. John v. Cach, LLC, 822 F.3d 388, 389 (7th Cir. 2016) (citing Vinson v. Vermilion Cnty., Ill., 776 F.3d 924, 928 (7th Cir. 2015)). “A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Ashcroft v. Iqbal, 556 U.S. 662, 678, 129 S.Ct. 1937, 1949 (2009). We accept all well-pleaded allegations in the complaint as true and draw all reasonable inferences in the plaintiff's favor. St. John, 822 F.3d at 389.

         The parties agree Illinois law governs their dispute. See Auto-Owners Ins. Co. v. Websolv Computing, Inc., 580 F.3d 543, 547 (7th Cir. 2009) (“Courts do not worry about conflict of laws unless the parties disagree on which state's law applies.” (internal citation and quotations omitted)). Accordingly, we apply the law that “the Supreme Court of Illinois would apply if the case were before that tribunal rather than before this court.” Help at Home, Inc. v. Med. Capital, LLC, 260 F.3d 748, 753 (7th Cir. 2001). The construction of an insurance policy is a question of law. Country Mut. Ins. Co. v. Livorsi Marine, Inc., 222 Ill.2d 303, 311, 856 N.E.2d 338, 342 (Ill. 2006); Travelers Ins. Co. v. Eljer Mfg., Inc., 197 Ill.2d 278, 292, 757 N.E.2d 481, 491 (Ill. 2001); Crum & Forster Managers Corp. v. Resolution Trust Corp., 156 Ill.2d 384, 391, 620 N.E.2d 1073, 1079 (Ill. 1993). “When construing the language of an insurance policy, a court's primary objective is to ascertain and give effect to the intentions of the parties as expressed by the words of the policy.” Cent. Ill. Light Co. v. Home Ins. Co., 213 Ill.2d 141, 153, 821 N.E.2d 206, 213 (Ill. 2004). An insurance policy is to be construed as a whole, “giving effect to every provision, if possible, because it must be assumed that every provision was intended to serve a purpose.” Valley Forge Ins. Co. v. Swiderski Elecs., Inc., 223 Ill.2d 352, 362, 860 N.E.2d 307, 314 (Ill. 2006) (citing Cent. Ill. Light, 213 Ill.2d at 153, 821 N.E.2d at 213). “If the words used in the policy are clear and unambiguous, they must be given their plain, ordinary, and popular meaning.” Cent. Ill. Light, 213 Ill.2d at 153, 821 N.E.2d at 213 (citing Outboard Marine Corp. v. Liberty Mutual Ins. Co., 154 Ill.2d 90, 102, 607 N.E.2d 1204, 1212 (Ill. ...


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