United States District Court, N.D. Illinois, Eastern Division
MEMORANDUM OPINION AND ORDER
Honorable Marvin E. Aspen United States District Judge
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.
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.)
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
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.)
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
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
(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.)
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).)
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.)
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.)
MOTION FOR JUDGMENT ON THE PLEADINGS
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
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. ...