632 F. App'x 667
2d Cir.2015Background
- Knox and DJW purchased shares in Capital L and later obtained default judgments in state court against Capital L for $2,573,918.63 and $64,566.10, respectively, based on alleged diversion of investor funds.
- Capital L, Lakian, and Lamm had a financial services liability policy from XL (Nov 11, 2011–Nov 11, 2012) with a $3 million limit that covered ‘‘Loss’’ including "judgments" and defense expenses.
- XL commenced an interpleader action claiming competing claims to the remaining $1,372,596.10 under the Policy and named insureds and their counsel as defendants.
- Knox and DJW moved to intervene, asserting a direct, legally protectable interest in any policy proceeds because such proceeds would satisfy their judgments against Capital L.
- The district court denied intervention after concluding (on the merits) that Capital L had breached Policy conditions (e.g., failure to obtain consent before conceding liability), vitiating coverage for the judgment.
- The Second Circuit reversed, holding the district court abused its discretion by resolving coverage merits at the motion-to-intervene stage and remanded for further proceedings with Knox and DJW permitted to intervene.
Issues
| Issue | Plaintiff's Argument (XL) | Defendant's Argument (Knox/DJW) | Held |
|---|---|---|---|
| Whether Knox/DJW may intervene as of right under Fed. R. Civ. P. 24(a)(2) asserting a direct interest in insurance proceeds | Capital L breached the Policy; therefore Knox/DJW have no legally protectable interest in proceeds | Their state-court judgments are "judgments" under the Policy and any payable proceeds would satisfy those judgments | Reversed: Knox/DJW stated a direct, substantial, legally protectable interest and may intervene |
| Whether the district court may resolve coverage/merits defenses (e.g., breach, lack of consent) when ruling on a motion to intervene | The alleged breaches defeat any claim to coverage, so intervention is properly denied | Merits defenses should not be resolved at the intervention stage; intervention inquiry is inclusionary and excludes only frivolous claims | Reversed: district court abused discretion by deciding merits; such defenses carry little weight at intervention stage |
| Whether Knox/DJW met the remaining Rule 24(a)(2) factors (timeliness, impairment, adequacy of representation) | Interpleader could proceed without them; they oppose intervention | Motion was timely; their ability to satisfy judgments could be impaired; existing parties do not adequately represent their interests | Affirmed that timeliness satisfied and other prongs met; remand for further proceedings with intervenors permitted |
Key Cases Cited
- Floyd v. City of New York, 770 F.3d 1051 (2d Cir. 2014) (standard of review for denial of intervention)
- MasterCard Int’l Inc. v. Visa Int’l Serv. Ass’n, Inc., 471 F.3d 377 (2d Cir. 2006) (elements of intervention as of right under Rule 24(a)(2))
- Wash. Elec. Coop., Inc. v. Mass. Mun. Wholesale Elec. Co., 922 F.2d 92 (2d Cir. 1990) (intervenor’s interest must be direct, substantial, and legally protectable)
- Oneida Indian Nation of Wisc. v. State of New York, 732 F.2d 261 (2d Cir. 1984) (intervention inquiry is inclusionary; generally do not resolve ultimate merits)
- Brennan v. N.Y.C. Bd. of Educ., 260 F.3d 123 (2d Cir. 2001) (defenses to intervenor’s claims carry little weight in Rule 24(a) analysis)
- United States v. Alisal Water Corp., 370 F.3d 915 (9th Cir. 2004) (creditor’s concrete economic interest can support intervention)