Fed. Sec. L. Rep. P 98,678,
NORDSTROM, INC., a Washington Corporation, Plaintiff-Appellee,
v.
CHUBB & SON, INC., a New York corporation dba Chubb or The
Chubb Group of Insurance Companies; Federal Insurance
Company, an Indiana corporation dba Chubb or The Chubb Group
of Insurance Companies, Defendants-Appellants.
No. 93-35495.
United States Court of Appeals,
Ninth Circuit.
Argued and Submitted July 13, 1994.
Decided April 14, 1995.
As Amended on Denial of Rehearing and Rejection of
Suggestion for Rehearing En Banc Aug. 1, 1995.
*
Peter W. Davis, Crosby, Heafey, Roach & May, Oakland, CA, for defendant-appellant.
Larry S. Gangnes, Lane, Powell, Spears, Lubersky, Seattle, WA, for plaintiff-appellee.
Michael L. Charlson, Heller, Ehrman, White & McAuliffe, San Francisco, CA, for amicus curiae American Electronics Ass'n, Network Equipment Technologies, Inc., Silicon Graphics Corp., and VLSI, Inc.
David W. Steuber, Kirk A. Pasich and Michael A. Rossi, Hill Wynne Troop & Meisinger, Los Angeles, CA, for amicus curiae Pacific Enterprises.
Rex E. Lee, Sidley & Austin, Washington, DC, for amicus curiae Aetna Life & Cas. Co., CNA Ins. Cos., The Home Ins. Co., Old Republic Ins. Co., Reliance Ins. Co., and Zurich Ins. Co.
Appeal from the United States District Court for the Western District of Washington.
Before: GOODWIN, D.W. NELSON, and HALL, Circuit Judges.
D.W. NELSON, Circuit Judge:
Federal Insurance Company and its managing agent, Chubb & Son, Inc., (collectively, "Federal") appeal the district court's grant of summary judgment in favor of Nordstrom, Inc. ("Nordstrom") in an insurance coverage dispute. In 1990, various groups of Nordstrom shareholders brought class action suits alleging securities fraud against Nordstrom and its directors and officers. These suits were consolidated, and the parties eventually reached a $7.5 million settlement. Federal, which had issued Nordstrom a policy covering "all loss" stemming from the wrongful acts of corporate directors and officers (the "D & O policy"), consented to the settlement. Federal, however, only agreed to fund half of the settlement and half of the defense costs because both individual directors and officers of Nordstrom (insured entities) and the corporation (an uninsured entity) were named as defendants in the underlying suit. Nordstrom subsequently brought this diversity action in federal district court, claiming that the policy covered the entire settlement sum. The district court granted Nordstrom's motions for summary judgment. Nordstrom, Inc. v. Chubb & Son, Inc.,
BACKGROUND
The present coverage dispute stems from the settlement of a class action suit against Nordstrom and six named directors and officers of Nordstrom. The underlying suit alleged that, in 1989 and 1990, Nordstrom fraudulently concealed from investors the existence of material adverse risks arising out of a company-wide policy requiring Nordstrom employees to work "off-the-clock." In 1989, the union for some of Nordstrom's Washington employees challenged this policy. In its annual report for the fiscal year ending January 31, 1989, and in subsequent quarterly reports, Nordstrom made no mention of the potential liability and other risks facing it because of its labor practices. In late 1989 and early 1990, Nordstrom consistently denied that the union's allegations had any merit, and Nordstrom spokespersons issued numerous public statements and press releases downplaying the importance of the allegations. On February 15, 1990, following an investigation, the Washington Department of Labor and Industries issued a report concluding that Nordstrom was in violation of Washington's wage laws. On February 16, 1990, Nordstrom's stock price dropped by ten percent. The stock price fell again the following day.
Nordstrom shareholders filed securities fraud class action suits in both federal and state court. The separate actions eventually were consolidated into a single class action complaint that set forth allegations of securities fraud and common law misrepresentation in five counts. The first four counts alleged that Nordstrom and the named directors and officers had violated: (1) Section 10(b) of the Securities Exchange Act of 1934 ("1934 Act"), 15 U.S.C. Secs. 78j(b), 78t, and Rule 10b-5 promulgated thereunder, 17 C.F.R. Sec. 240.10b-5; (2) the Washington State Securities Act, Wash.Rev.Code Sec. 21.20.010 et seq.; (3) the common law of negligent misrepresentation; and (4) the Washington Consumer Protection Act, Wash.Rev.Code Sec. 19.86.020, 19.86.090. The fifth count, directed solely against the named directors and officers, alleged that, as "controlling persons" under section 20(a) of the 1934 Act, each was liable for the acts of all other Nordstrom employees involved in the alleged fraud.
After the suit was filed, Nordstrom gave notice to Federal, the issuer of Nordstrom's D & O policy. Pursuant to the policy, Federal agreed to reimburse Nordstrom for defense costs subject to "an appropriate allocation as between covered and non-covered defendants, potentially non-covered claims, and satisfaction of the deductible amount." Beginning in March 1991, Federal, through its attorney, Patrick Kelly, conducted an inquiry into the merits of the class action suit. Nordstrom attorneys provided information about the suit to Kelly, who interviewed several Nordstrom officers and employees. Joseph Demarte, who was in charge of personnel at Nordstrom and responsible for the initial Nordstrom investigation into the union's labor violations charges, told Kelly that he had concluded that, although there were some isolated instances of abuse by Nordstrom store managers, "there was little if any validity to the charges by the union." Demarte also told Kelly that he had communicated his findings to his Nordstrom superiors.
The Nordstrom directors and officers, including co-chairmen John Nordstrom, Bruce Nordstrom, and James Nordstrom, told Kelly that although they knew from Demarte's report that there had been "isolated instances of abuse," they believed that Nordstrom had done nothing wrong, based both on reports from Demarte and personal inquiries of regional managers made by James Nordstrom. Two of the directors and officers, as well as public relations director Chris Bridenbaugh, acknowledged that the press disclosures on this matter were reviewed by a member of the Nordstrom family.
In April 1991, settlement negotiations began before United States District Judge William L. Dwyer. Federal was represented by counsel at the settlement conferences. The parties eventually agreed to a settlement figure of $7.5 million, with the corporate entity and the individual directors and officers jointly and severally liable for the sum.
On May 10, 1991, Federal consented to the settlement as reasonable, stating in writing that its consent was conditioned "on the specific understanding that all parties reserve their rights to litigate ... in resolving the allocation issues in this matter and that neither party is waiving any defense with respect to those allocation issues." Federal also agreed provisionally to fund one-half of the settlement ($3.75 million), subject to the outcome of any subsequent allocation. Federal only agreed to fund half the settlement because it contended that the uninsured corporate entity was partially responsible for the loss.
Although defense costs were not allocated at the time of the settlement, Federal subsequently agreed to fund half of Nordstrom's proffered defense costs as well, after first auditing Nordstrom's billing statements and deducting $10,800, which it deemed not subject to reimbursement under the policy. After the deduction, the total came to $1.072 million, of which Federal agreed to pay $536,000.
The D & O policy issued to Nordstrom by Federal provides in relevant part as follows:
The Company shall pay on behalf of the Insured Organization all Loss for which the Insured Organization grants indemnification to each Insured Person, as permitted or required by law, which the Insured Person has become legally obligated to pay on account of any claim first made against him, individually or otherwise, during the Policy Period ... for a Wrongful Act committed, attempted, or allegedly committed or attempted, by such Insured Person(s) before or during the Policy Period. (emphasis added)
Although the policy alludes to an "appropriate allocation of defense costs" where both the corporate entity and directors and officers are named as defendants and where the insured consents to pay defense costs as incurred, it does not specifically provide for allocation of a settlement sum where a suit involves both covered and noncovered claims. The policy also provides for subrogation, and states in relevant part: "If any payment is made under this policy, the Company shall be subrogated to the extent of such payment to all the Insureds' rights of recovery."
In January 1992, Nordstrom brought this action seeking payment under the policy for the full amount of the settlement, claiming that the entirety of the defense costs and settlement sum represented a "loss ... which the Insured Person has become legally obligated to pay" within the meaning of the policy. The parties undertook document and interrogatory discovery to supplement the discovery that had taken place during the pendency of the class action suit. Nordstrom produced over 100,000 pages of documents to Federal, and provided a list of requested documents that it claimed were protected from disclosure under the attorney-client privilege and the work product doctrine. Federal claims that among the documents withheld from production were documents that set forth Nordstrom's attorneys' analysis of the corporation's exposure in the underlying suit at the time the settlement was reached.
On July 16, 1992, Nordstrom moved for partial summary judgment on its claims for full indemnification of the settlement and for defense costs. In response, Federal claimed that numerous issues of disputed fact remained concerning the allocation issues and asserted the necessity of further discovery to identify the disputed issues more precisely.
On October 9, 1992, the district court granted Nordstrom's motions for partial summary judgment, finding that Federal was liable for the entirety of the settlement over the deductible identified in the policy and for defense costs of $1.072 million, an amount which Federal attorneys had determined after their audit to have been "appropriate and reasonable."
STANDARD OF REVIEW
We review a district court's grant of summary judgment de novo, reviewing all facts in the light most favorable to the nonmoving party. Jesinger v. Nevada Federal Credit Union,
The parties agree that Washington state law governs this diversity dispute. Under Washington law, insurance policies are construed as contracts, and interpretation of policies is a matter of law. State Farm Gen. Ins. Co. v. Emerson,
DISCUSSION
Federal's principal contention is that it should not be required to pay the entire amount of the settlement agreement because the policy does not provide for indemnification to Nordstrom for liability arising out of claims made against the corporate entity. Because the corporate entity was named as a co-defendant in four of the five counts in the underlying complaint, Federal argues that it is necessary to determine whether any portion of the settlement sum was the exclusive responsibility of the corporate entity. See Harbor Ins. Co. v. Continental Bank Corp.,
I. Nordstrom's Threshold Contentions
Nordstrom offers three independent grounds to justify affirmance of the district court without reaching the merits of Federal's allocation arguments. First, Nordstrom contends that because the Federal policy lacks an express allocation clause, there is no basis for the present appeal, for Federal's only remedy is an action for subrogation. Second, Nordstrom contends that the joint and several liability provision of the settlement, by rendering the directors and officers "legally obligated to pay" the entire settlement sum, forecloses any right to allocation. Third, Nordstrom claims that Federal is estopped from asserting any right to allocation because it violated its duties under Washington law to investigate Nordstrom's claim promptly and to provide a reasoned explanation of the facts and law supporting its denial of coverage. We conclude that each of Nordstrom's contentions is without merit.
A. Express Allocation Clause
Washington law does not prohibit allocation in the present context, despite the absence of an express allocation clause. Under Washington law, allocation is not permitted if an insurer has improperly refused to defend the insured against claims, see Waite v. Aetna Casualty & Sur. Co.,
Outside of these narrow areas, Washington law permits allocation, even in the absence of an express allocation clause. See Waite,
In this instance, the lack of an express allocation clause in the policy should not be dispositive because the policy unambiguously covers only losses which "the Insured Person has become legally obligated to pay on account of any claim first made against him during the Policy Period ... for a wrongful Act ... allegedly committed ... by [an] Insured Person." Indeed, this action centers on the question whether any portion of the settlement sum is attributable to acts of the corporate entity, a named defendant in the underlying class action suit, rather than to acts of the named directors and officers. If the factfinder were to conclude that the corporate entity's independent exposure accounts for a portion of the settlement sum, that part of the sum would not constitute a covered "loss" within the meaning of the policy. Accordingly, allocation would be necessary to reflect properly the terms of coverage under the policy. See Waite,
B. Joint and Several Liability
Nordstrom's second argument fails because it misstates Federal's obligations under the policy. Nordstrom notes that the joint and several liability provision of the settlement makes the directors and officers legally responsible for the entire settlement sum, and asserts that the corporation properly indemnified the directors and officers for that amount. On this basis, Nordstrom reasons that full coverage is mandated by the policy's indemnification clause, which expressly provides that "[Federal] shall pay all loss for which [Nordstrom] grants indemnification to each Insured Person ... which the Insured Person has become legally obligated to pay on account of any claim first made against him during the Policy Period...."
The flaw in Nordstrom's argument is that this indemnification clause is modified by the following: "for a Wrongful Act committed, attempted, or allegedly committed or attempted, by such Insured Person(s) [during the Policy Period]." To the extent that the sum the directors and officers are "legally obligated to pay" under the joint and several settlement provision is not a result of their own "wrongful acts," but of acts attributable solely to the corporate entity, there is no coverage under the policy. See PepsiCo,
C. Estoppel
We reject Nordstrom's claim that Federal is estopped from denying full coverage under Washington law. Insurers have a duty to investigate claims promptly and may be estopped if they withhold possible bases for denial of coverage. See Bosko v. Pitts & Still, Inc.,
II. Allocation
A. Background Principles
Washington law has not addressed the issue of how a court should allocate settlement payments and defense costs between directors and officers and the corporate entity when they are joined as co-defendants. Although we have held previously that an insurer providing D & O liability insurance may allocate defense costs between covered and noncovered claims, Okada v. MGIC Indem. Corp.,
Under general principles of insurance law, "[a] D & O insurer is responsible for only the loss attributable for liability imposed by law upon the named insureds ... [and] has no responsibility for liability imposed on the corporation for its wrongful acts...." Knepper & Bailey, supra, Sec. 17.06, Supp. at 246; see also Waite,
In this instance, the underlying complaint alleges wrongdoing by both insured and uninsured parties, and the settlement agreement does not include a breakdown of the parties' proportional responsibility for the liability embodied in the settlement. The parties agree with the district court that, in order to determine the extent of coverage under the policy, "[t]he court must ... determine which class action claims would have exposed Nordstrom to liability independent of, rather than derivative from, its directors' and officers' liability."
Borrowing from the contribution context, Federal counters that relative exposure should be based on a measure of proportional fault. See Smith v. Mulvaney,
We do not decide whether any given rule is generally applicable to all settlement agreements under D & O insurance policies. Rather, we consider the particular policy in question to determine which rule best effectuates the reasonable expectations and intentions of the parties under the insurance contract. See Okada,
B. Nordstrom's Relative Exposure
In determining whether Nordstrom faced any independent, nonconcurrent liability, we may only consider the claims actually settled, which are defined by the allegations in the complaint. Caterpillar,
We conclude that Nordstrom's liability, even where based on an independent theory, was wholly concurrent with D & O liability. We reach this conclusion because we reject both theories by which Federal claims that there was independent and nonconcurrent liability on the part of Nordstrom. Federal first argues that because the complaint alludes to Nordstrom employees' responsibility for allegedly misleading press releases and other public representations, Nordstrom was exposed to vicarious liability based on the acts of these uninsured corporate employees, and the directors and officers were not necessarily responsible for those actions as "controlling persons" within the meaning of section 20(a) of the 1934 Act. Second, Federal asserts that the corporation could be solely and directly liable for certain acts and omissions of the directors and officers, because it is possible that only the corporation, under a theory of "collective scienter," would have had the intent required to establish liability.
1. Vicarious Corporate Liability
Federal argues that the corporation may have been independently liable because it may have faced vicarious liability under the doctrine of respondeat superior for actions by Nordstrom employees such as personnel director Joseph Demarte and public relations director Chris Bridenbaugh. Even if we were to find that persons other than the named directors and officers engaged in activity in furtherance of securities fraud, however, the insured directors and officers would be liable for these same acts because they are "controlling persons" under section 20(a).3 Although respondeat superior liability is independent of section 20(a) liability, Hollinger v. Titan Capital Corp.,
Federal theorizes that liability was not necessarily concurrent because the directors and officers may have been able to avoid section 20(a) liability by invoking the "good faith" defense. See 15 U.S.C. Sec. 78t(a). Citing an unpublished decision, Federal argues that because corporations cannot employ this statutory defense to avoid respondeat superior liability, Nordstrom would then be solely liable for some of the fraudulent activity, thus necessitating allocation.
Federal's theory fails in this instance because these directors and officers cannot invoke the good faith defense. According to the statute, the defense is only available when the directors and officers did not "directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. Sec. 78t; see Hollinger,
In this instance, the allegedly misleading public disclosures, press releases, and statements to the press that constituted the fraud were all approved by one or more of the insured directors and officers. The Federal attorney's interviews of Nordstrom directors, officers, and employees, reveal that an Executive Committee consisting of four of the insured directors and officers reviewed and approved the press releases. James Nordstrom specifically stated that the public relations department reported directly to him. Most significantly, public relations director Chris Bridenbaugh stated that she was involved in all press disclosures, and that these responses to the media were "cleared through a member of the Nordstrom family." By authorizing the misleading statements, the insured directors and officers induced the fraud. Cf. Kersh v. General Council of Assemblies of God,
2. Direct Corporate Liability
Federal also argues that Nordstrom may have had direct corporate liability for the securities fraud. For example, a corporation may be liable for actions by senior management personnel that are "intrinsically corporate and bear the imprimatur of the corporation itself." Caterpillar,
Federal's reliance on Olympic Club v. Those Interested Underwriters at Lloyd's London,
Federal also claims that Nordstrom's direct corporate liability would not be concurrent with D & O liability because the directors and officers may have defenses unavailable to the corporation. Noting that one element of a Rule 10b-5 action is scienter, see Ernst & Ernst v. Hochfelder,
However, there is no case law supporting an independent "collective scienter" theory. Although the court in In re Warner Communications Securities Litigation,
Moreover, there is no evidence in this case to support "collective scienter" without a concurrent finding that a defendant director or officer also had the requisite intent. A finding of liability under section 10(b) requires recklessness, which is defined as "a highly unreasonable omission, involving not merely simple, or even inexcusable negligence, but an extreme departure from the ordinary standards of care, ... which presents a danger of misleading buyers or sellers that is either known to the defendant or is so obvious that the actor must have been aware of it." Hollinger,
Our preceding analysis reveals that Nordstrom has satisfied its burden of showing that the D & O policy covered the entire settlement amount. Federal has not demonstrated any genuine issue of material fact as to whether the corporation may have incurred liability that was not concurrent with that of the insured directors and officers so as to preclude summary judgment. See Raychem,
III. Discovery
Federal claims that the district court abused its discretion in denying its requests for further discovery to uncover information that uninsured Nordstrom employees were actually responsible for the fraudulent activity attributed to the insured directors and officers. We review the district court's decision not to permit additional discovery pursuant to Federal Rule of Civil Procedure 56(f) for an abuse of discretion. Qualls v. Blue Cross of California, Inc.,
We affirm the district court's denial of discovery, largely for the reasons stated in the district court opinion. Id. at 535-36. First, Federal has already had ample opportunity for discovery, including over 100,000 pages of documents, and has not established facts to show that additional discovery would lead to new information. See id.; Volk v. D.A. Davidson & Co.,
IV. Attorney Fees
Although Washington generally follows the American rule in awarding attorney fees, which denies attorney fees in the absence of a contract, statute, or recognized ground of equity providing for such fees, see State ex rel. Macri v. Bremerton,
In the present case, the dispute concerns coverage of actions by Nordstrom employees under the D & O policy. Because Dayton does not apply to this case, and because this case required Nordstrom to take legal action to gain the "full benefit of [its] insurance contract," Olympic Steamship,
CONCLUSION
For the foregoing reasons, the judgment of the district court is AFFIRMED.
Notes
Judge Hall voted to reject the suggestion for rehearing en banc, and Judges Goodwin and D.W. Nelson recommended rejection of the suggestion for rehearing en banc.
In PUD, the issue was whether a single set of acts were negligent, and therefore covered, or intentional, and therefore noncovered.
We reject Federal's contention that allocation in this case should also depend on an analysis of factors other than liability, such as negative publicity, that might have had a practical effect on the amount of the settlement. Although such factors have been applied by other courts, we decline to require consideration of such factors, which likely would lead to protracted discovery on issues wholly outside the context of liability. Cf. Harbor,
Under section 20(a), "[e]very person who, directly or indirectly, controls any person liable under any provision of this chapter ... shall also be liable jointly and severally with and to the same extent as such controlled person to any person to whom such controlled person is liable, unless the controlling person acted in good faith and did not directly or indirectly induce the act or acts constituting the violation or cause of action." 15 U.S.C. Sec. 78t(a)
We note that the version of the Slottow opinion addressed by the parties, reported at
Although Federal does not directly raise the issue of defense costs, it also implicitly challenges the district court's decision that Federal must indemnify Nordstrom for the full cost of the defense. Under Washington law, the insurer is liable for all defense costs if "there is no reasonable means of prorating the costs" between covered and noncovered claims. Prudential,