Bay Club Members, LLC v. Selective Insurance Company of America

UNITED STATES DISTRICT COURT

FOR THE DISTRICT OF MASSACHUSETTS

BAY CLUB MEMBERS, LLC,

RICHARD REILLY, JOAN KELLY,

MARY ANN SULLIVAN,

WILLIAM J. HEWITT, MELISSA

GORDON, MATT COSTA,

JON A. CIFFOLILLO, and

MICHAEL F. STAUFF, NO. 1:21-cv-11791-DPW

Plaintiffs,

v.

SELECTIVE INSURANCE COMPANY OF

AMERICA,

Defendant.

ORDER ON DEFENDANT SELECTIVE INSURANCE COMPANY OF AMERICA’S

MOTION TO JOIN

CABELL, U.S.M.J.

The plaintiffs, Bay Club Members, LLC (“Bay Club”) and members

of Bay Club’s board, Richard Reilly, Joan Kelly, Mary Ann Sullivan,

William J. Hewitt, Melissa Gordon, Matt Costa, Jon A. Ciffolillo,

and Michael F. Stauff (“the individual plaintiffs”), have brought

an action against their insurance provider, defendant Selective

Insurance Company of America (“the defendant”), for its failure to

provide coverage for litigation costs the plaintiffs incurred.

The defendant moves pursuant to Fed. R. Civ. P. 19(a) to join two

entities as plaintiffs: (1) Joseph and Nancy Bruno in their

capacity as co-trustees of the Shemamedoit Trust III (referred to

singularly as “Trust III”), and (2) Walter Uihlein, a previous Bay

Club board member (“Uihlein”). (D. 23). The motion has been

referred to this court for resolution. Following a hearing on the

motion, and for the reasons explained below, the motion is denied.

I. RELEVANT BACKGROUND

In December 2018, the defendant issued a private company

management liability policy (“the Selective policy”) to Bay Club

and its “members of the board of managers,” i.e., the individual

plaintiffs. (D. 19-1, pp. 11, 20). Part A of the Selective policy

covers liability for company directors, officers, and the entity

itself, including members of the board of managers, by paying on

behalf of them “all ‘loss’ which [they] shall be legally obligated

to pay as a result of a ‘claim’ made against [them] during the

‘policy period’ or the ‘Extended Reporting Period’ for ‘wrongful

acts.’” (D. 19-1, pp. 20, 37). Claims that are covered include

“criminal or civil” proceedings “for monetary, non-monetary, or

injunctive relief” as well as arbitration proceedings. (D. 19-1,

p. 38). Wrongful acts covered include “any actual or alleged act,

omission . . . neglect, or breach of duty, by [the insured] in

their capacity with the ‘company.’” (D. 19-1, p. 39).

Relevant here, the Selective policy excludes coverage for

“‘loss’ from any ‘claim’ made against any ‘insured’. . . made by

or made on behalf of the ‘company,’ or any security holder of the

‘company,’ or any ‘insured person.’” (D. 19, ¶ 25) (D. 19-1, p.

39). There are several exceptions within this exclusion, however,

including for claims brought by “any former director or officer”

and for “shareholder derivative action[s].” (D. 19-1, p. 40).

The plaintiffs also had an Operating Agreement which was in effect

prior to the beginning of the Selective policy that provided that

Bay Club “shall indemnify, save harmless, and pay all judgments

and claims against each Manager or Officer.”1 (D. 31-3, p. 18).

According to the plaintiffs, Uihlein, a “previous Board

Member of Bay Club in 2006,” notified Bay Club in October of 2019

of his “claims against the plaintiffs.” (D. 19, p. 6). One month

later, the Brunos, in their capacity as co-trustees of Trust III,

and others allegedly notified Bay Club of their own “claims against

the plaintiffs.” (D. 19, p. 6). The plaintiffs assert that they

notified the defendant of both notices in November 2019. (D. 19,

p. 6). According to the plaintiffs, Uihlein’s and Trust III’s

respective claims qualified for coverage under the Selective

policy because Uihlein is a former director or officer and the

claims include counts asserting a shareholder derivative action.

(D. 19, p. 7). Later, Trust III filed a demand for arbitration

against the plaintiffs with the American Arbitration Association

(“AAA”) for which the defendant denied coverage. (D. 19-2, pp. 2-

3) (D. 19, pp. 6-7).

Trust III and Uihlein then jointly filed an additional demand

for arbitration (“the underlying arbitration”) with the AAA in

1 The Operating Agreement’s definition of “Manager” includes the plaintiffs.

(D. 31-3, p. 3)

September 2020, for which the defendant again denied coverage.

(D. 19-3, pp. 2-3). According to the “Alleged Facts” section of

the defendant’s “Coverage Declination” letter for the underlying

arbitration, “the Brunos and Uihlein . . . alleg[ed] that the

Insureds devised a self-interested deal . . . to enrich themselves

and other members of the Insured Entity to the detriment of the

Insured Entity, its members, and [the Brunos and Uihlein].” (D.

19-3, pp. 2-3).

In January 2022, Trust III received a “Final Order and Award”

from the underlying arbitration (D. 24-1, p. 4, ¶ 13), and Uihlein

reached a settlement agreement with the plaintiffs. (D. 19, p. 8)

(D. 24-1, pp. 50-51, ¶¶ 276, 278). Trust III subsequently filed

a complaint in a Court of Chancery in Delaware (“the Delaware

action”) seeking to partially vacate the Final Order and Award.

(D. 19-4, p. 2). The defendant denied coverage for the Delaware

action, including for any obligation to defend or indemnify the

plaintiffs. (D. 19-5, p. 2).

The plaintiffs contend the defendant breached the Selective

policy by “fail[ing] and/or refus[ing] to provide coverage for

defense costs and [to] indemnify Bay Club and the Board Members

against the [underlying arbitration] or the Delaware [a]ction.”

(D. 19, p. 10). They seek a declaratory judgment regarding

coverage and also assert claims for breach of contract and

violation of M.G.L. c. 93A and 176D for engaging in unfair

settlement practices. (D. 19, pp. 10-12).

II. THE MOTION TO JOIN

The defendant moves to “join [the Brunos], in their capacity

as co-trustees of Trust III, and Uihlein as plaintiffs in this

case” on the ground that they are necessary parties under Fed. R.

Civ. P. 19(a)(1) (“Rule 19(a)(1)”). (D. 23). The defendant argues

that Trust III and Uihlein have an interest in the potential

proceeds from this case, and the defendant could be subject to a

substantial risk of inconsistent obligations if Trust III and

Uihlein are not joined. (D. 24, p. 5). The plaintiffs and Uihlein

argue in opposition that neither is a necessary party because

“neither Trust III nor Uihlein can relitigate the issue of policy

coverage.” (D. 30, p. 2) (D. 31, p. 2). The plaintiffs also note

that Uihlein and Trust III have not expressed any desire in

protecting their potential interests in this action. (D. 31, p.

11).

III. LEGAL STANDARD

Under Federal Rule of Civil Procedure 19(a), a person “must

be joined as a party if “in that person’s absence, the court cannot

accord complete relief among existing parties (19(a)(1)(A)),” or

“that person claims an interest relating to the subject of the

action and is so situated that disposing of the action in the

person’s absence may” “impair or impede the person’s ability to

protect the interest,” (19(a)(1)(B)(i)) or “leave an existing

party subject to a substantial risk of incurring double, multiple,

or otherwise inconsistent obligations because of the interest.”

(19(a)(1)(B)(ii)). The party seeking joinder bears the burden of

establishing that joinder is warranted. Roy v FedEx Ground Package

Sys., Inc., No. 3:17030116-KAR, 2020 WL 3799203, at *2 (D. Mass.

July 7, 2020) (citations omitted). When determining if a person

is a necessary party, “the court is expected ‘to make pragmatic,

practical judgments that are heavily influenced by the facts’ of

the specific case.” Duggan v. Martorello, Civil Action No. 18-

12277-JGD, 2022 WL 952187, at *5 (D. Mass. Mar. 30, 2022) (quoting

Bacardi Int’l Ltd. v. V. Suarez & Co., Inc., 719 F.3d 1, 9 (1st

Cir. 2013)).

Regarding Rule 19(a)(1)(B)(i), courts have held that proceeds

from insurance coverage qualify as the sort of interest that may

appropriately underlie a motion for joinder. See e.g., Travelers

Indem. Co. v. Dingwell, 884 F.2d 629, 634 (1st Cir. 1989) (members

had “concrete interest in the unexecuted settlement agreement”

involving proceeds from insured’s policies); Nat’l Union Fire Ins.

Co. of Pittsburgh, Pa. v. Mass. Mun. Wholesale Elec. Co., 117

F.R.D. 321, 322 (D. Mass. 1987) (finding nonparty “indicated that

it does not desire such protection” of its interest in insurance

proceeds); see also AIG Prop. Cas. Co. v. Green, 172 F. Supp. 3d

468, 476 (D. Mass. 2016) (assuming tort-claimant is interested

party in dispute between insured and insurer). However, if a

person decides not to intervene in the action, it indicates the

person does not believe their interest to be at risk, and courts

should not question that decision absent compelling reason. United

States v. San Juan Bay Marina, 239 F.3d 400, 407 (1st Cir. 2011).

Regarding Rule 19(a)(1)(B)(ii), and assuming all other

requirements have been met, a person is a necessary party if their

nonjoinder would subject a party to “substantial risk of . . .

inconsistent obligations.” Fed. R. Civ. P. 19(a)(1)(B)(ii).

“[I]nconsistent obligations occur when a party is unable to comply

with one court’s order without breaching another court’s order

concerning the same incident.” Delgado v. Plaza Las Americas,

Inc., 139 F.3d 1, 3 (1st Cir. 1998) (citation omitted); Hopkinson

v. Equifax Info. Servs., LLC, No. 19-cv-12290-IT, 2021 WL 664040,

at *6 (D. Mass. Feb. 19, 2021) (quoting Delgado, 139 F.3d at 3).

Rule 19(a)(1) only speaks to inconsistent obligations, not to

inconsistent judgments or results. Nat’l Union Fire, 117 F.R.D.

at 322; CFI of Wis., Inc. v. Hartford Fire Ins. Co., 230 F.R.D.

552, 555 (W.D. Wis. 2005) (“[J]udgments and results are not the

same as obligations under F.R.C.P. 19(a).”) (citations omitted);

see Delgado, 139 F.3d at 3.

With respect to insurance coverage disputes, courts do

recognize that the interests of judicial economy are served in

having a tort claimant join an action. See Nat’l Union Fire, 117

F.R.D. at 323 (discussing how declaratory judgment would mean

little if non-party could relitigate coverage issue and party could

not be afforded complete relief); AIG Property Casualty Co., 172

F. Supp. 3d at 476 (citing Indemnity Ins. Co. of N. Am. v. Kellas,

173 F.2d 120, 124 (1st Cir. 1949)). Where a third-party claimant

can relitigate the issue of insurance coverage in a separate

proceeding, a court may join the claimant to afford “more complete

relief.” See Indemnity Ins. Co. of N. Am., 173 F.2d at 124

(citations omitted).

IV. ANALYSIS

Focusing principally on Rule 19(a)(1)(B), the defendant

argues that Trust III and Uihlein have an interest in the insurance

proceeds at issue here but “would not be bound by any judgment

from this court” absent joinder, and consequently would be free to

bring an action regarding the same issue in a different proceeding,

and/or could pursue any “unpaid payment obligations they are

entitled to under the Final Award and Mr. Uihlein’s settlement

agreement.” (D. 24, p. 5-6). The defendant argues the court

therefore must join Trust III and Uihlein as plaintiffs here to

eliminate the risk of inconsistent obligations. The defendant

advances two principal arguments in support of its contention but

the court does not find either persuasive.

The defendant first argues that Trust III and/or Uihlein could

bring an action against the defendant under Massachusetts’ direct-

action statute, M.G.L. c. 214, § 3(9). (D. 24, p. 6). That

statute allows a judgment creditor to file an action to reach a

judgment debtor’s insurance to satisfy damages suffered “on

account of bodily injury or death or for loss or damage resulting

therefrom, or on account of damage to property.” M.G.L. c. 214,

§ 3(9). But proceeding under this statute would be unavailing for

at least two reasons.

First, section 3(9) is limited to cases where the claimed

damages arise from “bodily injury or death,” or from “damage to

property.” The claimed damages here do not arise from such events

but instead arise solely from financial decisions the plaintiffs

made. It follows that section 3(9) is facially inapplicable and

would not permit either Trust III or Uihlein to bring an action

against the defendant.

Second, and independently, section 3(9) requires an injured

party to first obtain a judgment of liability against the insured

before acting against the insurer, but no judgment has yet been

rendered against the plaintiffs here. See Dorchester Mut. Ins.

Co. v. Legeyt, No. CV2006-02077, 2008 WL 5784218, at *5 n.8 (Mass.

Sup. Dec. 30, 2008) (“It is clear that, in the absence of a final

judgment. . . [the injured party] has no right to reach and apply

the Policy under M.G.L. c. 214, §3(9).”); Bonilla v. Allstate Ins.

Co., No. 98-0329A, 2001 WL 1173307, at *3 (Mass. Super. Oct. 1,

2001) (holding injured party allowed to “reach and apply” policy

where judgment entered against insured in case involving bodily

injury from motor vehicle collision); Szafarowicz v. Gotterup, 68

F. Supp. 2d 38, 43 (D. Mass. 1999) (“[T]ort victim must obtain a

judgment against the tortfeasor before initiating an action

against that tortfeasor’s liability insurer.”); accord In re

Dolphinite, Inc., 355 B.R. 391, 403 (Bankr. D. Mass. 2006) (“Until

. . . there is a determination that [the insured] is liable to the

estate . . . the Trustee lacks standing to seek a declaratory

judgment with respect to any insurance proceeds.”). It is true

that the plaintiffs executed a settlement agreement, but that does

not constitute a final judgment against them. On the contrary, it

instructs by its terms that it “shall not be construed as an

admission by the Parties of any liability, misconduct, or

wrongdoing . . . or as an admission by them . . .” (D. 31, p. 9).

Accordingly, Trust III and Uihlein would not be able to sue the

defendant under section 3(9) because they are not judgment

creditors, and the plaintiffs similarly are not judgment debtors.

The defendant next contends that Trust III and/or Uihlein

could bring an action against the defendant based on a third-party

beneficiary theory. (D. 51). For a nonparty to have standing to

sue as a beneficiary, they must show that they are an “intended”

beneficiary under the contract at issue. A party is considered an

intended beneficiary when the language and circumstances of the

contract indicate a “clear and definite” intent that the party

would benefit from the promised performance. See Anderson v. Fox

Hill Village Homeowners Corp., 424 Mass. 365, 366 (1997).

An intended beneficiary need not be specifically named in the

contract, however, so long as they fall “within a class clearly

intended by the parties to benefit from the contract.”

Massachusetts v. Mylan Laboratories, 357 F. Supp. 2d 314, 326 (D.

Mass. 2005). Absent clear intent that they are intended to benefit

from the contract, a nonparty that may merely indirectly benefit

from the contract is merely an “incidental” beneficiary. Markle

v. HSBC Mortg. Corp. (USA), 844 F. Supp. 2d 172, 181 (D. Mass.

2011). The distinction matters because “[u]nder Massachusetts

law, only intended beneficiaries, not incidental beneficiaries,

can enforce a contract.” Pollack v. Fed. Ins. Co., Civil No. 13-

12114-FDS, 2013 WL 6152335, at *2 (D. Mass. Nov. 21, 2013) (quoting

Harvard Law Sch. Coalition for Civil Rights v. President & Fellows

of Harvard College, 413 Mass. 66, 71 (1992)); accord Lakew v. MBTA,

65 Mass. App. Ct. 794, 799 n.10 (2006) (“[C]ontracting parties may

well intend that a third party receive a benefit as a result of

their contract but not intend to confer on the third party a right

to enforce the contract.).

The record here fails to show a clear and definite intent

that Trust III and Uihlein were to benefit under the Selective

policy. Neither is named in the policy and the court has not been

directed to any portion of the policy unambiguously indicating

that they fall “within a class clearly intended by the parties to

benefit from the contract.” Mylan Labs, 357 F. Supp. 2d at 326.

Indeed, the policy at issue includes an anti-assignment clause

preventing the plaintiffs from assigning any rights under the

policy to anyone without the defendant’s written consent,

undermining any suggestion that one could otherwise reasonably

infer a “clear and definite” intent to extend the policy’s benefits

to any entity who might have an interest in any benefits available

under the policy. (D. 19-1, p. 35). Thus, even assuming Trust

III and Uihlein have some potential beneficial interest in the

outcome of this litigation, they are, on the basis of the present

record, at most incidental, rather than intended, beneficiaries,

which means they have no right to bring an action to litigate the

scope of coverage here.

Further, to the extent it is probative, Trust III and Uihlein

do not even seek to be joined to this action, and Uihlein has in

fact stated that he does not need protection under the policy for

his interest, a factor militating against forced joinder. (D. 30,

p. 5); see San Juan Bay Marina, 239 F.3d at 407. Further still,

it appears that neither party is likely to assert an interest in

the suit in the future where, as the court understands it, Bay

Club has already paid Trust III the amount awarded by the

arbitrator from the Final Order and Award, and paid Uihlein the

first $750,000 he is entitled to under the Settlement Agreement,

with the potential for a second installment of $750,000 depending

on the outcome of this lawsuit, (D. 31, p. 4) (D. 51).

In sum, the record fails to show that the court must join

Trust III and/or Uihlein as plaintiffs to avoid a substantial risk

of inconsistent obligations. The record suggests that neither

entity has an interest in bringing an action against the defendant,

now or in the future. Even assuming otherwise, Trust III and

Uihlein could not bring an action against the defendant under

Massachusetts’ direct-action statute, M.G.L. c. 214, § 3(9),

because they are not judgment creditors, and because the damages

regardless do not arise from serious bodily injury or property

loss. They also could not bring an action as beneficiaries under

the Selective policy because there is nothing in the policy, or

for that matter in the record as a whole, to show a clear and

definite intent that they specifically were intended to benefit

from the policy.2

2 The defendant cites National Union Fire and AIG Property as authority for the

proposition that a nonparty like Trust III and/or Uihlein may litigate the

insurance coverage issue here. Those cases are already of dubious

instructive value given the factual differences, but they are also easily

distinguishable because the noninsured entities in those cases had either a

clear legal right or an actual obligation to litigate the insurance coverage

issue. AIG Property, 172 F. Supp. 3d at 476 (joinder necessary where

claimant was injured party); Nat’l Union Fire, 117 F.R.D. at 323 (court

refused claimant’s request to be dropped from case where claimant was also a

named party). Here, Trust III and Uihlein have no legal right or obligation

to join the suit where they are neither named parties nor intended

beneficiaries under the policy.

V. CONCLUSION

For the foregoing reasons, the defendant’s motion to join (D.

23) is DENIED.

/s/ Donald L. Cabell

DONALD L. CABELL, U.S.M.J.

DATED: January 27, 2023