Scottsdale Insurance Company v. Byrne

UNITED STATES DISTRICT COURT

DISTRICT OF MASSACHUSETTS

__________________________________________

)

SCOTTSDALE INSURANCE COMPANY, ) Civil Action No.

) 16-11435-FDS

Plaintiff and )

Counter-Defendant, )

)

v. )

)

TIMOTHY BYRNE and )

ROBERT BOLTON, )

)

Defendants and )

Counter-Claimants. )

__________________________________________)

MEMORANDUM AND ORDER ON PLAINTIFF’S

MOTION FOR CLARIFICATION AND/OR RECONSIDERATION

AND DEFENDANTS’ MOTION FOR JUDGMENT ON PARTIAL FINDINGS

SAYLOR, J.

This is an insurance coverage dispute involving whether an insurer was obligated to

defend an investment fund accused of mismanagement and self-dealing. Wellesley Advisors

Funds was an investment advisor for the investment fund WARF Realty Fund I, LLC

(“WARF”), in which the Plumbers and Pipefitters Local 51 Pension and Annuity Funds (the

“Pension Funds”) had invested. Defendants Timothy Byrne and Robert Bolton are co-chairs of

the Board of Trustees of the Pension Funds.

Wellesley purchased an insurance policy on behalf of WARF from plaintiff Scottsdale

Insurance Company. WARF’s alleged mismanagement and self-dealing precipitated a lawsuit

alleging negligence and an ERISA violation. Scottsdale declined to defend WARF, citing

various coverage exclusions. WARF then went into receivership and did not defend the suit,

leading to a default judgment against it for $5,005,422.12.

In this action, Scottsdale sought a declaratory judgment stating that it had no duty to

defend or indemnify WARF, and defendants counterclaimed for the amount of the default

judgment, alleging breach of contract, breach of the implied covenant of good faith and fair

dealing, and violation of the Massachusetts consumer protection statute, Mass. Gen. Laws ch.

93A.1 Scottsdale moved for summary judgment, and defendants cross-moved for partial

summary judgment on their breach of contract counterclaims.

On March 1, 2018, the Court granted defendants’ motion for partial summary judgment

and denied Scottsdale’s motion for summary judgment, finding that Scottsdale breached the

insurance contract by refusing to defend WARF. In its memorandum and order, the Court

suggested that it would award defendants the amount of the coverage limit ($3,000,000) and

directed the parties to file motions “concerning the form of judgment” by March 15, 2018.

Scottsdale has now moved for clarification and/or reconsideration of the memorandum

and order. In support of its motion, Scottsdale contends that the Court failed to address the

substance of defendants’ bad-faith claims, and that because those claims remain outstanding,

judgment cannot issue. Defendants have also moved for Scottsdale to pay the entire judgment in

the underlying action. For the reasons set forth below, the Court will grant Scottsdale’s motion

for reconsideration and deny defendants’ motion for payment of the entire judgment.

I. Motion for Reconsideration

A. Legal Standard

District courts have “substantial discretion and broad authority” to grant a motion for

reconsideration pursuant to Fed. R. Civ. P. 59(e). Ruiz Rivera v. Pfizer Pharms., LLC, 521 F.3d

1 On May 15, 2016, WARF assigned any right, title, and interest in claims it held against Scottsdale to

defendants.

76, 81 (1st Cir. 2008). A motion for reconsideration will be granted upon a showing of (1) a

“manifest error of law,” (2) new evidence, or (3) a misunderstanding or other error “not of

reasoning but apprehension.” Id. at 82. Rule 59(e) motions cannot be used to “advance a new

argument that could (and should) have been presented prior to the district court's original ruling.”

Cochran v. Quest Software, Inc., 328 F.3d 1, 11 (1st Cir. 2003). Nor is a Rule 59(e) motion an

appropriate means to “repeat old arguments previously considered and rejected.” Nat'l Metal

Finishing Co., Inc. v. Barclays American/Commercial, Inc., 899 F.2d 119, 123 (1st Cir. 1990).

B. Analysis

Plaintiff correctly notes that the Court’s memorandum and order only granted partial

summary judgment to defendants on Counts 1 and 2 of their counterclaims. Accordingly,

defendants’ bad-faith claims (Counts 3-6) remain outstanding, and entry of final judgment is

inappropriate until those claims are resolved. See Fed. R. Civ. P. 54(b).2 The Court erred in

failing to address the bad-faith claims, and reconsideration is therefore warranted.

Counts 3 and 4 allege breach of the implied covenant of good faith and fair dealing.

(Ans. ¶¶ 37-46). Under Massachusetts law, a covenant of good faith and fair dealing is implied

in every contract. UNO Restaurants, Inc. v. Boston Kenmore Realty Corp., 441 Mass. 376, 385

(2004). The covenant provides that “neither party shall do anything that will have the effect of

destroying or injuring the rights of the other party to receive the fruits of the contract.”

Anthony's Pier Four, Inc. v. HBC Assocs., 411 Mass. 451, 471 (1991). The implied covenant

may not, however, be invoked to create rights and duties not contemplated by the provisions of

the contract or the contractual relationship. UNO Restaurants, 441 Mass. at 385; AccuSoft Corp.

2 Plaintiff had previously moved to sever and stay the bad-faith claims. (Docket No. 18). The Court denied

the motion on March 29, 2017. (Docket No. 22).

v. Palo, 237 F.3d 31, 45 (1st Cir. 2001).

Counts 5 and 6 allege unfair and deceptive conduct in violation of Mass. Gen. Laws ch.

93A. (Ans. ¶¶ 47-62). “Conduct is unfair or deceptive if it is ‘within at least the penumbra of

some common-law, statutory, or other established concept of unfairness' or ‘immoral, unethical,

oppressive, or unscrupulous.’” Cummings v. HPG Int'l Inc., 244 F.3d 16, 25 (1st Cir. 2001)

(quoting PMP Assoc. Inc. v. Globe Newspaper Co., 366 Mass. 593, 596 (1975)). In addition, the

plaintiff must show “an injury or loss” and a “causal connection between the defendant’s

deceptive act or practice and the plaintiff’s injury.” Gorbey ex rel. Maddox v. Am. Journal of

Obstetrics and Gynecology, 849 F. Supp. 2d 162, 165 (D. Mass. 2012).

In their summary judgment briefs, the parties agreed that the disposition of the bad-faith

claims turned on whether plaintiff’s conduct in declining to defend WARF in the underlying

litigation and subsequent refusal to pay on the policy was based on a “reasonable or plausible

interpretation of the policy.” Peterborough Oil Co., Inc. v. Great Am. Ins. Co., 397 F. Supp. 2d

230, 244 (D. Mass. 2005). Here, plaintiff’s interpretation of the applicable exclusions was

ultimately incorrect, but it was not unreasonable. For example, a letter mailed to WARF’s

counsel on December 30, 2014, parsed the policy language and provided relevant case law in an

effort to justify why plaintiff was not obligated to defend the underlying suit. (Defs. Ex. G).

Similar letters were mailed to WARF’s counsel on February 10 and March 14, 2016. (Defs. Ex.

J, L).

Defendants have offered no evidence of plaintiff’s purported bad faith beyond the

decisions themselves not to defend the suit and provide indemnification. Indeed, the Court’s

earlier memorandum and order was predicated in large part on the proposition that policy

ambiguities are construed in favor of the insured party. See Hazen Paper Co. v. U.S. Fid. &

Guar. Co., 407 Mass. 689, 700 (1990). “In such circumstances, an insurer’s refusal to defend,

even if ultimately determined to be wrong, does not support a claim under [Mass. Gen. Laws

93A].” Polaroid Corp. v. Travelers Indem. Co., 414 Mass. 747, 754 (1993). The Court similarly

concludes that there was no breach of the implied covenant of good faith and fair dealing.

Accordingly, summary judgment on the bad-faith claims will be granted to plaintiff.

II. Motion for Entry of Judgment

Defendants have also moved for entry of judgment requiring plaintiff to pay the entire

amount of the judgment in the underlying suit, $5,005,422.12, plus post-judgment interest. In

support, they note that “the general rule under Massachusetts law is that if the insurer fails to

defend the lawsuit, it is liable for all defense costs and (assuming policy coverage) the entire

resulting judgment or settlement, unless liability can be allocated among covered and uncovered

claims.” Liberty Mutual Ins. Co. v. Metropolitan Life Ins. Co., 260 F.3d 54, 63 (1st Cir. 2001).

They contend that liability in the underlying suit could not be allocated between covered and

uncovered claims. (Defs.’ Mot. at 5-6).3

As a general proposition, “[w]hen an insurer breaches its duty to defend, the insured is

entitled to contract damages.” N.E. Envtl. Techs. Corp. v. Am. Safety Risk Retention Grp., Inc.,

810 F. Supp. 2d 390, 396 (D. Mass. 2011) (citing Liquor Liab. Joint Underwriting Ass’n of

Mass. v. Hermitage Ins. Co., 419 Mass. 316, 323 (1995)). If the insurer’s refusal to defend was

made in “good faith,” as is here, “there is no reason not to apply normal contract principles.”

Polaroid Corp., 414 Mass. at 763 (citing Ficara v. Belleau, 331 Mass. 80, 82-83 (1954)).

“Contract damages are ‘those that cannot be reasonably prevented and arise naturally from the

breach, or which are reasonably contemplated by the parties.’” N.E. Envtl. Techs. Corp., 810 F.

3 As explained in the Court’s March 1, 2018 memorandum and order, in the underlying suit the ERISA

claim was not covered, but the negligence claim possibly was.

Supp. 2d at 396 (quoting Polaroid Corp., 414 Mass. at 762). Had plaintiff defended the

underlying suit and lost, its liability to WARF would have been capped at the $3 million policy

limit. Defendants, as WARF’s assignees, cannot recover any more than that amount.

To the extent defendants rely on Boyle v. Zurich Am. Ins. Co., 472 Mass. 649 (2015), that

case is inapposite. In Boyle, the defendant insurance company’s sole defense was that the duty to

defend was not triggered because the insured never notified it about the pending suit. Id. at 654.

However, the plaintiffs had separately alerted the company about the suit. Id. In awarding the

plaintiffs the entirety of the judgment in the underlying suit, an amount well in excess of the

policy coverage limit, the Supreme Judicial Court focused its analysis on the fact that the

insurance company had failed to establish prejudice stemming from the insured’s failure to

notify. Id. at 658-59. By contrast, the parties in this suit simply disputed whether coverage

existed in the first instance.4 Accordingly, defendants’ recovery is limited to $3 million. See

Polaroid Corp., 414 Mass. at 763 (“When a contract is breached, the injured party is entitled to

receive what would have been obtained if there had been no breach; the injured party is not

entitled to recover more.”).

III. Conclusion

For the foregoing reasons, plaintiff’s motion for reconsideration is GRANTED, and

defendants’ motion for entry of judgment for the entire amount of the underlying judgment is

DENIED. Defendants will be awarded the policy limit of $3 million, plus post-judgment interest

at the statutory rate dating from November 25, 2015, the date of the judgment in the underlying

suit.

4 Plaintiff also contends that unlike the insurance company in Boyle, it (1) did not ignore communications

from the insured, (2) was not provided notice of the motion hearing for the entry of default judgment in the

underlying suit, and (3) had no impact on the insured’s being placed into receivership.

So Ordered.

/s/ F. Dennis Saylor

F. Dennis Saylor IV

Dated: May 2, 2018 United States District Judge