506 F.Supp.3d 216
S.D.N.Y.2020Background
- Scottsdale issued a D&O policy to Watershed Ventures (the Watershed Policy) covering Watershed, its subsidiaries, and their directors/officers.
- Rocky Aspen LLC was a joint venture formed by RAM 204 (a Watershed subsidiary) and AH DB (Aristone/McGrath) to open a restaurant; each initially held 50% economic and voting interests.
- The Operating Agreement created a "Watershed Option": if AH DB failed required capital contributions by March 25, 2015, AH DB would forfeit 100% of its Voting Units and Watershed would have an option to buy additional units and the sole right to appoint/remove co-managers.
- AH DB failed to fund by March 25, 2015, so the Watershed Option was triggered on March 25, 2015; RAM 204 exercised the option and removed McGrath on January 5, 2016.
- A Chapter 7 trustee later sued McGrath for alleged July 31, 2015 transfers; McGrath tendered defense to Scottsdale, which denied coverage and sued for declaratory relief that McGrath was not an Insured.
- The court considered whether Rocky Aspen became a "Subsidiary" under the Watershed Policy during the period after the option was triggered but before exercise, and denied Scottsdale's summary judgment motion.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether Rocky Aspen was a "Subsidiary" under the Watershed Policy between Mar 25, 2015 (option triggered) and Jan 5, 2016 (option exercised) | Scottsdale: Rocky Aspen was not a Subsidiary until Watershed exercised the option; before exercise RAM 204 did not "solely control" management under Subsection (b), so McGrath was not an Insured | McGrath: Triggering event forfeited AH DB’s voting units, giving Watershed the present right to vote >50% (Subsection (a)); alternatively, Watershed had sole control under Subsection (b) | Court: Rocky Aspen satisfied Subsection (a) when the Watershed Option was triggered—AH DB forfeiture left Watershed with the present right to vote and Voting Units are "securities" for the policy definition; Scottsdale’s Howey-based challenge rejected; summary judgment for Scottsdale denied |
Key Cases Cited
- Celotex Corp. v. Catrett, 477 U.S. 317 (summary judgment standard)
- Anderson v. Liberty Lobby, 477 U.S. 242 (summary judgment standard; genuine issue for jury)
- Securities & Exch. Comm’n v. W. J. Howey Co., 328 U.S. 293 (definition of investment contract for securities law)
- Lamber Timber Co. v. Landreth, 471 U.S. 681 (interpretation of "investment contract" in securities law)
- Kimmel v. State, 29 N.Y.3d 386 ("any" means "all" or "every" under New York law)
- MBIA Inc. v. Federal Ins. Co., 652 F.3d 152 (insurance contract interpretation principles)
- All Seasons Resorts, Inc. v. Abrams, 68 N.Y.2d 81 (Howey test described in New York law)
- Nick's Garage, Inc. v. Progressive Cas. Ins. Co., 875 F.3d 107 (summary judgment burden and standard in 2d Circuit)
- Gilman v. Marsh & McLennan Cos., Inc., 826 F.3d 69 (construing evidence and inferences at summary judgment)
- Abercrombie v. Davies, 130 A.2d 338 (voting interests separable from economic interests)