Patriarch Partners, LLC v. AXIS Insurance Company
1:16-cv-02277
S.D.N.Y.Sep 22, 2017Background
- Patriarch Partners was subject to an SEC investigation beginning December 2009 that escalated into a Formal Order of Investigation (June 3, 2011) focused on certain CLOs (the Zohar funds) and culminated in an administrative enforcement action in March 2015.
- Patriarch had a primary D&O tower (CNA as the followed policy) and purchased a $5 million excess follow-form policy from AXIS; AXIS bound coverage on August 12, 2011 via a binder that included a pending-and-prior-claims endorsement.
- The CNA policy defined “Claim” to include a written demand for non-monetary relief or an "Investigation" (expressly including SEC orders of investigation) alleging a Wrongful Act; AXIS’s follow-form policy adopted that definition.
- Before AXIS bound the policy (August 11–12, 2011), the SEC had issued a Formal Order of Investigation (June 3, 2011), served a subpoena on former executive Topbas (July 1, 2011), interviewed witnesses, met with Patriarch’s counsel (July 5, 2011), and informed counsel a subpoena to Patriarch was coming (Aug. 11, 2011).
- After primary and other excess limits were exhausted, Patriarch tendered defense to AXIS; AXIS denied coverage based on the pending/prior-claim exclusion and moved for summary judgment. The district court granted AXIS’s motion, holding the SEC investigation constituted a preexisting “Claim.”
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether the SEC investigation was a “Claim” pending before AXIS policy inception | The pending/prior exclusion should be read narrowly to exclude only preexisting formal claims as defined, and the SEC probe was not a preexisting covered “Claim” at inception | The Formal Order, subpoenas, and investigatory steps constituted a pending or prior “Claim” (demand/investigation) excluded at inception | The court held the SEC investigation (Formal Order, subpoena, underlying investigation) was a prior/pending “Claim” and thus excluded |
| Whether an SEC subpoena (Topbas) is a “demand” for non-monetary relief within the CNA definition of “Claim” | Subpoena was merely investigatory/voluntary or not an allegation of wrongdoing so not a “demand” for relief | A subpoena is a compulsory, enforceable demand for production (non-monetary relief) and counts as a Claim | The court held the subpoena was a demand for non-monetary relief and thus part of a pending Claim |
| Whether the Formal Order alleged a “Wrongful Act” such that the investigation qualifies as a covered “Investigation”/Claim | The Formal Order did not expressly accuse Patriarch of fraud; using “may have been” is insufficient to allege a wrongful act | The Formal Order explicitly states staff had information that tended to show possible fraud; that language sufficiently alleges a Wrongful Act for policy purposes | The court held the Formal Order sufficiently alleged a Wrongful Act, making the investigation a “Claim” under the policy |
| Proper construction of the AXIS binder exclusion (scope of pending/prior clause) | Binder should be read narrowly to only exclude preexisting “Claims” as defined in CNA policy and only those asserted against Patriarch before inception | Even under the narrow reading adopted for summary judgment, the existing investigatory record establishes a preexisting Claim excluded at inception | The court adopted the insured-favoring narrow reading but found the SEC matter nonetheless met that definition and so excluded coverage |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
- Scott v. Harris, 550 U.S. 372 (resolving factual disputes on summary judgment)
- Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574 (summary judgment standards)
- Parks Real Estate Purchasing Grp. v. St. Paul Fire & Marine Ins. Co., 472 F.3d 33 (insurance-contract interpretation; ambiguities construed for insured)
- Morgan Stanley Group, Inc. v. New England Ins. Co., 225 F.3d 270 (contract interpretation is matter of law)
- Gil Enter., Inc. v. Delvy, 79 F.3d 241 (definition of "demand")
- MBIA Inc. v. Federal Ins. Co., 652 F.3d 152 (subpoena as outward-facing form of an investigation)