OPINION AND ORDER
This action stems from an insurance dispute over the proceeds of an excess directors and officers (“D & 0”) policy purchased by National Century Financial Enterprises, Inc. from Great American Insurance Company. The policy provided coverage of National Century’s directors and officers for claims made against them based on “wrongful acts.” The policy also covered National Century itself for claims based on wrongful acts (“entity coverage”).
On one side of the dispute is Great American, which believes no one is eligible for coverage under the D & 0 policy. On the other side are those claiming that they are entitled to coverage. These parties include: the Unencumbered Assets Trust (“UAT”), which was created in bankruptcy court to pursue legal causes of action belonging to debtor National Century and its subsidiaries; several of National Century’s principal executives (the “Principals”), including Lance Poulsen, Donald Ayers, Roger Faulkenberry, and James Dierker; Lance Poulsen’s wife, Barbara Poulsen; and National Century’s outside directors, Thomas Mendell, Harold Pote, and Eric Wilkinson.
Several dispositive motions are pending before the court. The Principals have moved for summary judgment to require the payment of defense costs on the grounds that they have incurred a loss defending themselves in criminal and civil litigation relating to their wrongful acts at National Century. Both Great American and the UAT oppose the Principals’ motions for summary judgment.
Great American has moved for summary judgment against all potential claimants. Its motion relies heavily on the fact that the Principals have been convicted of crimes relating to their roles at National Century. Great American argues that the criminal convictions establish its grounds for denying coverage, namely: (1) rescission of the policy because Poulsen’s false representations in the policy application rendered the contract void ab initio, and (2) the policy’s “dishonesty exclusion” that excluded from coverage a loss brought about by an insured’s deliberately fraudulent actions.
For the reasons set forth below, the court denies the Principals’ motions for summary and denies summary judgment to Great American as it pertains to its void ab initio argument, but the court grants summary judgment to Great American as to the dishonesty exclusion.
I. Pending Procedural Motions
Before reaching the merits of the overarching motions for summary judgment, several procedural motions must be addressed.
A. Motion for Leave to Amend
Great American has moved for leave to file an amended counterclaim for rescission. The court originally dismissed one of the rescission counterclaims because it failed under Rule 9(b), Fed.R.Civ.P., to allege with particularity the misrepresentations that were allegedly made in certain financial statements that Poulsen submitted with the insurance proposal form. See Unencumbered Assets Trust v. Great American Ins. Co., No. 2:04-cv-908,
Under Rule 15(a), Fed.R.Civ.P., leave to amend “shall be freely granted when justice so requires.” See Brennan v. Arkay Indus., Inc.,
Under Rule 9(b) averments of fraud and the circumstances constituting the fraud must be stated with “particularity.” To comply with Rule 9(b), “a plaintiff, at a minimum, must ‘allege the time, place, and content of the alleged misrepresentation on which he or she relied.’ ” Walburn v. Lockheed Martin Corp.,
The court finds that Great American’s amended counterclaim is sufficiently specific. The counterclaim now points out that the data in the documents was based on “nearly ten years worth of financial improprieties.” Great American Am. Countercl., ¶ 99. Great American alleges numerous examples supporting the proposition that the documents were fraudulent. The counterclaim explains that the financial documents utterly failed to account for National Century’s actual financial status and operations. The amended counterclaim contains no less than seventeen pages of data and events not reflected in the financial documents National Century
Although the court need not recount every part of the amended counterclaim, a few examples are particularly helpful. The counterclaim details that the three annual financial statements and the interim statement Poulsen submitted did not reflect the following: that internal National Century communications highlighted the company’s collateral shortfalls over the three year period of the false financial reports, including shortfalls of $45,000,000, id. at ¶ 36, over $100,000,000, id. at ¶ 54, “at least” $85,000,000, id. at ¶ 61, and $511,000,000, id. at ¶ 75. The counterclaim also explains that the financial reports failed to reflect that several National Century executives awarded themselves multimillion dollar bonuses, id. at ¶82, and failed to report that the executives wrongfully forwarded millions of dollars to subsidiary companies that they owned, id. at ¶¶ 31-33, 39,40.
Given the particularity with which Great American highlights inconsistencies between the financial reports and National Century’s actual financial status during the years in question, the court thus finds that its amended counterclaim satisfies Rule 9(b). Accordingly, Great American’s motion for leave to amend is granted (doc. 67).
B. Other Procedural Motions
After Ayers filed a motion for partial summary judgment to require the payment of defense costs, Poulsen moved to join Ayers’ motion, and the court now grants Poulsen’s motion for joinder (doc. 57). Faulkenberry then moved to intervene in the proceedings to file his own motion for summary judgment; the court also grants this motion to intervene (doc. 62). Dierker filed a motion for the court to consider Federal Rule of Evidence 201 and the doctrine of judicial estoppel as it pertains to the Principals’ motions for summary judgment. The court grants this motion (docs. 73, 74) and construes it as Dierker’s joinder with the other Principals in their requests for defense costs. In essence, each Principal makes a claim under the Great American policy for coverage relating to the litigation costs they have incurred.
The court also grants the following motions: Great American’s motion for leave to file a supplemental memorandum opposing Lance Poulsen’s request for costs (doc. 83); Great American’s motion for an extension of time to file a reply brief (doc. 105); and the Outside Directors’ motion to substitute the Estate of Harold W. Pote for defendant Harold W. Pote (doc. 107). Finally, Lance and Barbara Poulsen’s motion to strike Great American’s filing of a supplemental exhibit — the government’s criminal complaint against Lance Poulsen — is denied as moot (doc. 85).
II. Background
A. National Century
Although National Century’s bankruptcy and the proceedings that followed are well-documented, a brief review of the events before and after the company’s financial collapse is appropriate.
Lance Poulsen and Donald Ayers were two of the original founders of National Century in 1990. They owned a controlling stake in National Century and occupied positions of executive authority at all times. Poulsen served as president, chairman, and director; Ayers was vice chairman, chief operating officer, and director. See In re Nat’l Century Fin. Enterprises, Inc., Inv. Litig.,
Poulsen and the original founders owned 100% of National Century until July 1998, when the Beacon Group III — Focus Value Fund, L.P. purchased a 19% equity position in the company. This purchase gave the Focus Value Fund the right to appoint two outside directors to National Century’s six-member board; Thomas Mendell, Harold Pote, and Eric Wilkinson served variously as the outside directors.
National Century’s business was to purchase accounts receivable at a discount from healthcare providers. Poulsen established several corporate subsidiaries to carry out this task. NPF VI, Inc. and NPF XII, Inc. were wholly-owned subsidiaries formed in Ohio in 1995 and 1999 respectively. They functioned as special-purpose corporations through which National Century purchased accounts receivable and raised capital by issuing investinent-grade notes. See In re Nat’l Century Fin. Enterprises,
As they did with National Century, Lance Poulsen and Ayers occupied officer and director positions of NPF VI, NPF XII, and the Servicer. Poulsen was the president, treasurer, and director of NPF VI and NPF XII, while Ayers and Rebecca Parrett
Lance Poulsen and the other Principals used their power over National Century and its supposedly independent subsidiaries to defraud investors. National Century represented that its investment-grade notes issued through NPF VI and NPF XII were secured by healthcare receivables obtained in its regular course of business. The Master Indentures governing the NPF note programs required NPF VI and NPF XII to purchase “eligible” receivables, those that satisfied certain criteria designed to ensure that the receivables were of high quality. Id. National Century presented its bonds as being backed by the pool of receivables, meaning they were “asset-backed securities.” The company also marketed its bonds as “over-collateralized,” meaning the value of the receivables exceeded the value of the bonds. Poulsen,
It is undisputed that Poulsen, Ayers, Faulkenberry, and Dierker used their authority at National Century to commit a multi-billion dollar fraud. See, e.g., Faulkenberry, 614 F.3d at 577-79 (6th Cir.2010); In re Nat’l Century Fin. Enterprises, Inc., Inv. Litig.,
B. The D & O Policies
Before its collapse, National Century purchased two separate D & O insurance policies on March 28, 2002. The primary policy was issued by Gulf Insurance Company and provided $5 million of coverage. National Century purchased an excess policy from Great American for an additional $5 million of coverage, effective upon exhaustion of the Gulf policy. The insureds under both policies were National Century and its directors and officers. Although the policy period ran to March 28, 2003, National Century exercised an option for tail coverage under both policies, giving it an additional one-year discovery period for bringing claims that arose during the original policy period.
Both the Gulf policy and the Great American policy are important in this case. Great American’s policy was a “follow form” to Gulfs, meaning that it “conform[ed] to the exact terms, conditions, insureds and additional insureds” of the Gulf policy unless stated otherwise. Great American Excess Policy, p. 1. As a bit of background, the Gulf policy generally provides coverage for any loss incurred by an insured as a result of a claim made against the insured for a wrongful act. See Gulf Policy, § 1. A loss includes amounts the insured is legally obligated to pay as a result of all claims made against the insured, including defense costs incurred in defending or investigating a claim. See id., § 2.Q. Wrongful acts include “any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed or attempted, or allegedly committed or attempted, by one or more Director or Officer .... ” Id., § 2.HH.
Several additional clauses from both policies are noteworthy up front. The Gulf policy protects the insurer from liability in claims where the insured committed a fraudulent or dishonest act. See id., § 4.1.1. Further, it provides that where a statement or misrepresentation in the insurance application is untrue, the policy is “void and of no effect” with respect to those who knew of the facts that were not truthfully disclosed. See id., § 20.B.
As for Great American’s policy, its Excess Follow Form Policy states that it
C. Procedural History
1. Prior Proceedings
On November 18, 2002, National Century filed a voluntary petition for relief under Chapter 11 of the Bankruptcy Code. National Century’s investors soon filed numerous civil actions against Poulsen and Ayers, the Outside Directors, and against other persons and entities involved in the company’s operations. The Judicial Panel on Multidistrict Litigation consolidated those actions before this court in November 2008. See In re Nat’l Century Fin. Enterprises, Inc., Inv. Litig., 2:03-md-1565 (S.D.Ohio).
The debtors originally filed this action as an adversary proceeding against Gulf, Great American, and the other potential insureds under the two D & O policies. The complaint sought a declaration that the policies were enforceable and requested an equitable procedure for apportioning the proceeds among the insureds. The UAT later was substituted as the plaintiff when the bankruptcy court’s liquidation plan authorized the UAT to pursue certain legal causes of action that belonged to the debtors. The UAT exists for the benefit of National Century’s many creditors.
Gulf filed a motion to deposit the policy limit and obtain a discharge of liability. The bankruptcy court granted this motion, and Gulf deposited $5 million into an escrow account. The bankruptcy court then held a hearing to determine covered losses under the Gulf policy and how to allocate the proceeds. Aside from the UAT, seven individuals asserted a right to the proceeds: Lance Poulsen, Barbara Poulsen, Donald Ayers, Rebecca Parrett, Thomas Mendell, Harold Pote, and Eric Wilkinson. The court issued an opinion and order on January 10, 2005 finding that the UAT and the seven individuals had all incurred covered losses. The court ordered that UAT receive $1.5 million and that each of the seven individuals receive $500,000. None of the parties appealed the bankruptcy court’s decision.
Meanwhile, Great American asserted counterclaims seeking rescission of its policy and declaratory judgment that the policy was void for fraud. The UAT filed a motion to dismiss the counterclaim. Donald Ayers also filed a motion for advancement of defense costs. The bankruptcy court severed all claims, cross-claims, counterclaims, and defenses relating to the Great American policy so that the court could move forward with the Gulf policy dispute. Great American moved to withdraw the reference of the excess D & O policy dispute. This court granted the motion to withdraw on July 5, 2005.
Ayers re-filed his motion to advance defense costs pursuant to the Great American policy on January 27, 2006. The matter was then stayed for a time pending
On July 10, 2007 this court denied the motion filed by Ayers for the advancement of defense costs. The court found that his claim suffered from many defects, not the least of which was that he had failed to prove that he had exhausted his proceeds from the Gulf policy.
2. Related Criminal Cases
The government successfully pursued criminal charges against each of the Principals. The evidence from trial against the Principals, and against Lance Poulsen in particular, was “substantial.” U.S. v. Poulsen, No. 2:06-cr-129,
The trial records provide an in-depth account of how exactly National Century went about deceiving investors and auditors. At Poulsen’s direction, the company’s Compliance Department prepared regular investment reports, but with one catch. The data in the reports was entirely fabricated. Id. at *10. From 1995 onward, “every single” NPF VI investor report “contained false and fabricated data.” Id. “The same was true for every single investor report issued for NPF XII, which opened in 1999.” Id.
National Century’s dealings with auditors were just as deceitful. National Century “create[d] all the [fabricated] backup data that went into producing the investor reports” so that it would “match the false data shown in the investor reports.” Poulsen,
Based on each of their roles in the fraud, Poulsen, Ayers, Dierker, and Faulkenberry have all been convicted in criminal proceedings. Poulsen was convicted of securities fraud, wire fraud, conspiracy to commit those crimes, money-laundering conspiracy, and concealment of money laundering. Poulsen,
Ayers appealed after a jury convicted him of securities fraud, conspiracy to commit securities and wire fraud, and conspiracy to commit money laundering. The Sixth Circuit reversed his money-laundering conviction and affirmed his fraud convictions. On December 22, 2010, the district court sentenced Ayers to 15 years incarceration. U.S. v. Ayers,
Faulkenberry likewise was convicted of securities fraud, wire fraud, money laundering, and conspiracies to commit those crimes. The Court of Appeals reversed
Dierker’s case tracks a similar path. He was convicted of conspiracy to commit securities and wire fraud, conspiracy to commit money laundering, and concealment money laundering. He appealed, and the Sixth Circuit reversed his money-laundering convictions and affirmed his other convictions. U.S. v. Dierker,
3. Motions Sub Judice
a. The Principals’ Motions for Summary Judgment
Ayers has filed a motion for partial summary judgment to require Great American to pay his defense costs. Poulsen and Dierker moved to join Ayers’ motion, and Faulkenberry has intervened to file his own motion for summary judgment to require Great American to pay defense costs to him. Despite multiple motions, the parties’ theories are generally consistent. They argue that they are insured parties according to the language of the contract; that their litigation defenses have cost them a substantial amount of money; and that the Gulf policy has been exhausted, triggering Great American’s duty to pay.
Both the UAT and Great American oppose these motions. The UAT believes that the Principals have failed to address the effect of entity coverage under the insurance policy. The UAT argues that as a matter of equity, any payment under the policy should be given to it and not to anyone else. The UAT further asserts that the Principals have failed to prove that they exhausted the $500,000 awarded to each of them from the Gulf policy (only Poulsen and Ayers received money from the Gulf policy), and request a hearing on the matter.
Great American argues that it rescinded the contract. The insurance contract is void ab initio, Great American argues, based on Poulsen’s fraudulent conduct in procuring the policy.
b. Great American’s Motions for Summary Judgment
After more information emerged from the criminal proceedings about National Century’s business failings, Great American filed two of its own motions for summary judgment: one moving that Ayers, Faulkenberry, and Dierker are not entitled to insurance coverage, and one that Lance Poulsen and all other potential claimants are not entitled to insurance coverage.
In its first motion, Great American argues that the convictions of Ayers, Faulkenberry, and Dierker trigger the dishonesty exclusion found in the Gulf insurance policy. See Gulf Policy § 4.1. The dishonesty exclusion, Great American argues, is included in its policy because it follows form to Gulfs policy. The three Principals named in the motion attempt to counter by arguing that their criminal convictions are not “final” and thus could not be used to exclude them from coverage.
Great American’s second motion for summary judgment likewise argues that Lance Poulsen is excluded from coverage under the dishonesty exclusion. Great American also argues that Lance Poulseris conduct bars everyone else from coverage because he committed fraud in the procurement of the policy, thus rendering it void ab initio. The UAT and Outside Directors counter that the Great American policy contained no provision allowing Great American to rescind the policy as void ab initio. They further argue that Great American waived its right to rescind when it accepted the premium payment for
The matter is now before the court on the above competing motions for summary judgment.
III. Standard of Review
Under Fed.R.Civ.P. 56(c), summary judgment is proper “if the pleadings, the discovery and disclosure materials on file, and any affidavits show that there is no genuine issue as to any material fact and that the movant is entitled to judgment as a matter of law.” See Longaberger Co. v. Kolt,
Further, the “mere existence of some alleged factual dispute between the parties will not defeat an otherwise properly supported motion for summary judgment; the requirement is that there be no genuine issue of material fact.” Anderson v. Liberty Lobby, Inc.,
A district court considering a motion for summary judgment may not weigh evidence or make credibility determinations. Daugherty,
IV. Discussion
A. Ohio Law Applies
As an initial matter, all parties agree that Ohio law applies to the current contract dispute, and the court agrees. “It is well-settled in Ohio that in cases involving a contract, the law of the state where the contract is made governs interpretation of the contract.” Nationwide Mut.
In this case, the balance points to Ohio. At the time National Century and Great American signed and executed the insurance contract, their respective principal places of business were in Ohio. Further, the subject matter of the contract concerns actions in Ohio, and the parties negotiated and signed the contract in Ohio. Because the parties do not argue otherwise and because the information before the court confirms what the parties agree upon, Ohio law applies to resolving this contract dispute.
B. Rescission
1. Void Ab Initio
Great American argues that is entitled to rescind the excess policy as void ab initio because Poulsen’s false representations in the policy proposal form render the policy null and void. If Great American is correct, this would have a broad sweep, excluding all insureds from coverage, not just those (the Principals and the UAT) denied coverage by the dishonesty exclusion, as discussed in Part IV.C below. The UAT and the Principals, as well as the Outside Directors and Barbara Poulsen, oppose Great American’s rescission argument.
As a threshold matter, the court has little difficulty in concluding that Poulsen made misrepresentations of material fact in the proposal form. See Cross v. Ledford,
Further, it is uncontroverted that Poulsen’s representations about National Century’s financial condition were material to, and reasonably relied upon by, Great American in deciding whether to issue the policy. See, e.g., Nat’l Union Fire Ins. Co. of Pittsburgh, P.A. v. Sahlen,
Now to the effect of Poulsen’s misrepresentations. Whether or not a policy’s language allows the contract to be voided ab initio depends on what is known in Ohio as the Boggs test.
Statements by an insured fall into two classes — those which constitute warranties, and those which constitute representations.
The consequences of a misstatement of fact by an insured are entirely different, depending on whether the statement is a warranty or a representation. If the statement is a warranty, a misstatement of fact voids the policy ab initio. However, if the statement is a representation, a misstatement by the insured will render the policy voidable, if it is fraudulently made and the fact is material to the risk, but it does not void the policy ab initio.
In the law of insurance, a representation is a statement made prior to the issuance of the policy which tends to cause the insurer to assume the risk. A warranty is a statement, description or undertaking by the insured of a material fact either appearing on the face of the policy or in another instrument specifically incorporated in the policy. Hartford Protection Ins. Co. v. Harmer (1853),2 Ohio St. 452 . See 30 Ohio Jurisprudence 2d 415, Section 460.
The insurer’s decision to incorporate the statement in or to omit it from the policy generally controls whether the statement is a warranty or a representation.
Allstate Ins. Co. v. Boggs,
To put the Boggs test in context, the proposal form signed by Poulsen included material misrepresentations about various aspects of National Century’s financial condition. Under Boggs, Poulsen’s misrepresentations fall into one of two categories: “those which constitute warranties, and those which constitute representations.” Id. at 218,
In order to render the policy void ab initio, Poulsen’s statements must satisfy two criteria. First, they must “either appear[ ] on the face of the policy or in another instrument specifically incorporated into the policy.” Boggs,
Under the first part of the test, the question is whether the statement at issue appears “on the face of the policy or in another instrument specifically incorporated in the policy.” Id. “In order to have an incorporation by reference in an insurance policy, it must be done in unequivocal language on the face of the policy.” Id. at 220,
In consideration of the payment of premium, and in reliance upon the information furnished to the Great American Insurance Company ... it is hereby understood and agreed that this excess policy will conform to the exact terms, conditions, endorsements, Insureds and additional Insureds of the Primacy Policy at its inception, except with respect to the Limit of Liability, Policy Period, premium, endorsements attached hereto and terms as set forth below.
Great American Excess Policy, p. 1. In short, the UAT and the Outside Directors contend that this language does not unequivocally incorporate the proposal form and its attached financial statements.
The court would agree that this clause alone is insufficient to incorporate the proposal form, but the declarations page does unambiguously incorporate the proposal form. The declarations page provides, “These Declarations, along with the endorsements (if any) and the completed and signed Proposal Form shall constitute the contract between the Insured and Insurer.” Great American Declarations, p. 2. The declarations thus specifically incorporate the proposal form, which in turn specifically incorporates the financial statements. And to take one step back, the excess policy expressly refers to the declarations in defining coverage. See Great American Excess Policy, §§ II.A, VI.A, VI.D. Moreover, Ohio courts follow the well-accepted rule that the declarations to an insurance contract are considered part of the policy. See Davidson,
If this were not enough, the excess policy follows form to the primary Gulf policy, which specifically states that the application form is incorporated into the terms of the policy. See Gulf Policy, p. 1. The proposal form itself confirms the parties’ intent that it be part of the policy. It provides, “It is agreed by the Company and the Insured Persons that the particulars and statements contained in the Proposal Form and any information provided herewith ... are the basis of this Policy and are to be considered as incorporated in and constituting a part of this Policy.” Great American Proposal Form, p. 4. Ohio case law holds that language of this sort shows “unambiguously” that applications and any attached forms are incorporated into the actual policy. See Winston v. Illinois Nat’l Ins. Co., No. C000251,
Here, the Gulf policy — again to whose “exact terms” the excess policy followed form — states that “In the event that any statement or representation in the Application is untrue, this Policy shall be void and of no effect whatsoever ....” Gulf Policy, § 20.B (emphasis added). The court finds as a matter of law that this language unambiguously indicates that “any misstatement or misrepresentation made by the insured shall render the policy void.” Boggs,
The UAT argues, however, that the excess policy has its own provision concerning the effect of a misrepresentation. An endorsement to the excess policy provides that the insurer may cancel the policy for numerous reasons, including “discovery of fraud or material misrepresentation in the procurement of this insurance or with respect to any claims submitted hereunder.” Ohio Excess Amendatory Endorsement, § B(1)(b). If this cancellation clause conflicts with the rescission clause in the primary policy, then the terms of the excess policy must control. See Griewahn v. United States Fid. & Guar. Co.,
The court finds that the two clauses provide alternative, not conflicting, remedies to the insurer. Though Boggs sets a higher standard for when a policy may be rescinded as void ab initio, there is no apparent reason why an insurer could not have both cancellation and rescission available as remedies if the policy so provides. Cf. Ozbay v. Progressive Ins., No. WD-02-007,
The UAT and the Outside Directors next argue that the severability language of the Gulf policy protects innocent insureds from Poulsen’s actions. The language states that the contract is void for a misrepresentation in the application “only with respect to any Insured Person who had knowledge or information as of the Policy Inception Date of the facts that were not truthfully disclosed.” Gulf Policy, § 20.B.1. And because the summary judgment record establishes for now that only Poulsen and the Principals knew of the misrepresentations, so the argument goes, the contract is not void as to other potential claimants.
This would be the case were it not for a clause in the Great American proposal form that provides to the contrary. The excess policy follows form to the primary policy except where the terms of the excess policy state otherwise. The Great American proposal form contains a clause modifying the Gulf Policy’s severability language:
“[EJxcept for material facts or circumstances known to the person who subscribed this Proposal Form, any misstatement or omission in this Proposal From or information provided herewith in respect of a specific Wrongful Act by a particular Director or Officer or his or her cognizance of any matter which he or she has reason to believe might afford grounds for a future Claim against him or her shall not be imputed to any other Director or Officer for purposes of determining the validity of this Policy as to such other Director or Officer.”
Great American Proposal Form, p. 4. This language thus provides that material facts or circumstances known by Poulsen when he signed the form will be imputed to other insureds “for purposes of determining the validity” of the policy.
Other courts interpreting the exact same contractual language agree that it is unambiguous and imputes the signor’s knowledge of material facts or circumstances to other directors and officers. See Travelers Indem. Co. v. Bally Total Fitness Holding Corp.,
That clause indicates that a director’s or officer’s knowledge of a misrepresentation made with an intent to deceive is not imputed to other directors or officers unless the application’s signor knew of the misrepresentation. This clearly implies that when the signor knows that there are misrepresentations in the application materials, that knowledge is imputed to all other directors or officers. The result is that innocent directors or officers retain coverage unless the application’s signor knows of a misrepresentation within the application, in which case even innocent directors and officers lose coverage.
Poulsen’s fraudulent conduct and material misstatements are not in controversy. He knew beyond doubt that the financial statements he submitted were false. Indeed, Poulsen had his own “Lance Copy”
2. Waiver of the Right to Rescind
The UAT contends that Great American waived its right to rescission when it accepted a premium payment for tail coverage. The Gulf and Great American policies expired on March 28, 2003. The Gulf policy provided National Century with the option of purchasing tail coverage, which gave the company an additional one-year discovery period to make claims for wrongful acts that occurred within the original policy period. See Gulf Policy, Endorsement No. 2. As a follow form policy, the Great American policy also offered tail coverage. On March 28, 2003, the debtors (by this time National Century had filed for bankruptcy) purchased tail coverage from Gulf. Id., Endorsement No. 8. The debtors also purchased tail coverage from Great American on March 28, 2003 and tendered payment of $64,750, which Great American accepted. See Great American Excess Policy, Endorsement No. 3.
On June 6, 2003, the debtors filed an adversary proceeding against Gulf and Great American for coverage under the D & O policies. Gulf deposited $5 million with the bankruptcy court for the court to apportion the proceeds among the insureds. Great American answered and filed counterclaims for rescission and declaratory relief on October 1, 2003. It notified the debtors of its election to rescind and tendered the return of premiums to the debtors on October 10, 2003. See Great American Mot. for Summ. J. (Doc. 96), Ex. F.
The UAT’s argument that Great American waived its right to rescind the policy relies on the following Ohio Supreme Court decision:
A party to a contract who, after discovery or knowledge of facts which would entitle him to rescind, treats the contract as a subsisting obligation and leads the other party to believe the contract is still in effect, waives his right to rescind .... Therefore, the receipt and retention of consideration after knowledge that conditions precedent have been broken, constitutes a waiver of such conditions so as to withdraw them from the terms of the contract.
It is also a well settled rule of law that an insurer, which, with knowledge of the facts which would entitle it to treat the policy as no longer in force, receives and accepts a premium on a policy, is es-topped to take advantage of the forfeiture. The insurer cannot treat the policy as void for the purpose of defense to an action to recover for a loss thereafter accruing, and at the same time treat it as valid for the purpose of earning and collecting further premiums.
English v. National Cas. Co.,
The UAT contends that by March 28, 2003 Great American either knew or should have known that the financial statements Poulsen submitted with the proposal form were false. National Century filed for bankruptcy on November 18, 2002, and the debtors’ January 2003 schedules of assets and liabilities filed in the bankruptcy proceedings laid bare that National Century’s prepetition financial statements were false. See In re Nat’l Century Fin.
The court agrees that there is a genuine issue of material fact concerning whether Great American waived its right to rescission by accepting payment for tail coverage. There is a triable issue as to what Great American knew about National Century’s bankruptcy and the reports of the company’s falsification of financial records when the debtors purchased tail coverage. At the summary judgment stage, Great American did not submit any evidence suggesting that its agents knew nothing of National Century’s collapse and alleged falsification of records.
If Great American knew at the time it accepted payment for tail coverage that Poulsen had submitted false financial statements in the proposal form, then it was fully aware of its grounds for rescinding the policy as void ab initio. Under English, a party to an insurance contract waives its right to rescission if it “receives and accepts a premium on a policy” when it has “knowledge of the facts which would entitle it to treat the policy as no longer in force.” English,
In English, the insured sought to renew his automobile insurance. His original policy application disclosed that he had turned 65 years old by the time he sought to renew. Even though the insurance policy stated that individuals over the age of 65 years would not be covered, the insurer accepted the insured’s premium and issued him a receipt of renewal coverage. When the insured suffered a loss during the renewal period, the insurer attempted to rescind on the basis of the insured’s age. The Ohio Supreme Court held that the insurer had waived its right to rescind coverage for a loss during the renewal period because it had accepted the premium despite knowing of the insured’s age. A critical factor in the court’s reasoning was that the insurer had elected to treat the policy as “a subsisting obligation” and led the insured “to believe the contract was still in effect.” English,
Great American puts much emphasis on the fact that the purchase of tail coverage is not a renewal of coverage, as in English, but merely an extension of the time for the insured to file a claim. The court finds this argument unpersuasive. If Great American knew of its grounds for voiding the policy when the debtors tendered payment for tail coverage, then the act of accepting payment was inconsistent with Great American’s position that the policy was void ab initio. From that position’s point of view, there was no tail coverage to be purchased because the policy was void from its inception, as if it never existed. Accepting payment signaled to the debtors that the tail coverage was in effect, or, as the English court put it, a “subsisting obligation.” See also Automated Solutions Corp. v. Paragon Data Sys., Inc.,
Accordingly, the court finds that Great American is not entitled to summary judgment on the grounds that the policy is void ab initio because there remains a genuine issue of material fact concerning whether Great American waived its right to rescission.
C. The Dishonesty Exclusion
1. Applied to the Principals
Great American argues in the alternative in its motions for summary judgment that the Gulf policy’s dishonesty exclusion prevents Poulsen, Ayers, Dierker, and Faulkenberry from coverage eligibility. The central argument is not complex. The Great American policy follows form to the Gulf policy, which contains a dishonesty exclusion for criminal conduct. See Gulf Policy, § 4.1.1. This means that Great American’s policy contains the dishonesty exclusion. Great American argues that the criminal convictions of the Principals triggers the dishonesty exclusion and excludes them from coverage.
The court agrees and finds as a matter of law that the plain language of the dishonesty exclusion is satisfied. See Saunders v. Mortensen, 101 Ohio St.3d 86, 88,
brought about or contributed to by any deliberately fraudulent or deliberately dishonest act or omission or any purposeful violation of any statute or regulation by such Insured if a judgment or other final adjudication adverse to such Insured establishes such a deliberately fraudulent or deliberately dishonest act, omission, or purposeful violation.
Gulf Policy, § 4.1.1. The language is clear. If a “judgment or other final adjudication” establishes that the insured party committed a “deliberately fraudulent or dishonest act,” then he will not receive coverage for any claim brought about by his fraudulent or dishonest act.
Applied to the current facts, the policy language describes the Principals’ wrongdoing exactly, and none of them argue otherwise. Putting aside the money laundering charges that were reversed on appeal, the Principals were convicted of crimes having fraudulent conduct as an element of the offense, namely securities fraud, wire fraud, and conspiracy to commit securities and wire fraud. See 15 U.S.C. §§ 77q(a) and 77x (securities fraud); 18 U.S.C. § 1343 (wire fraud); 18 U.S.C. § 371 (conspiracy). The jury specifically found that these violations were knowing and willful. See U.S. v. Poulsen, No. 2:06-cr-129 (S.D.Ohio) (jury verdicts, docs. 531, 857).
Further, there is no dispute that the defense costs for which the Principals seek coverage directly relate to claims against them that were brought about by their deliberately fraudulent and dishonest conduct. First, each of the Principals seek defense costs expended in their criminal cases, and the policy plainly relieves Great American from liability for such losses. Second, Poulsen and Ayers further seek costs incurred in defending themselves in the National Century multidistrict litigation. Here too, it is beyond dispute that the civil claims against Poulsen and Ayers arise from their defrauding of investors. See In re Nat’l Century Fin. Enterprises, Inc., Inv. Litig.,
The Principals’ counter-argument fails to persuade. They argue that their convictions are not “final,” meaning that Great American must pay until the cases are resolved in a final adjudication. At the time they filed their briefs, they argued that “final” meant that “the judgment of conviction was rendered, the availability of appeal exhausted, and the time for petition for certiorari elapsed or [was] ... denied.” Ayers Reply Br., p. 4 (quoting Tehan v. United, States,
Even by the Principals’ own definition, the convictions of Ayers, Faulkenberry, and Dierker are now final. The Sixth Circuit has affirmed their convictions for securities fraud, wire fraud, and conspiracy, and the time has lapsed for them to petition for a writ of certiorari from the United States Supreme Court. U.S. v. Faulkenberry,
That leaves Poulsen, whose conviction and sentence was affirmed by the Sixth Circuit on August 25, 2011, such that he still has time to seek review by the Supreme Court. But the language of the policy makes clear that the type of finality espoused by the Principals — exhaustion of appellate review — is not required to trigger the dishonesty exclusion. Rather, the policy requires simply “a judgment or other final adjudication adverse to such Insured” establishing deliberately fraudulent or deliberately dishonest acts, omissions, or purposeful violations. Gulf Policy, § 4.1.1 (emphasis added). The policy speaks nothing of exhaustion of appellate review. The conviction, sentence, and judgment rendered by this court against Poulsen was a final judgment that imposed criminal penalties upon him. See Berman v. United States,
The court notes that Dierker submitted a brief opposing Great American’s motion against him. He argues that he should not be held accountable for Lance Poulsen’s criminal conviction, nor for facts stemming from Poulsen’s criminal trial. And he attempts to dispute facts from his and Lance Poulsen’s criminal trials. The court need not go through a detailed summary of Dierker’s assertions, as he presents no additional theories having any legal merit. Particularly fatal to his position is that all of his arguments fail to address one important point: that he too was convicted, with finality on direct appeal of a crime involving willful dishonesty and fraud. See Dierker,
2. Applied to the UAT
Great American argues that the dishonesty exclusion applies to the UAT by imputation. Generally, a principal is liable for the knowledge received and the conduct committed by an agent within the scope of employment. Losito v. Kruse,
The UAT agrees to the facts concerning the Principals’ fraudulent conduct. It argues that their conduct, however, cannot be imputed to the UAT because of the adverse interest exception, whereby conduct is not imputed if the agent acted adversely to the principal and entirely for his own, or another’s, purpose. First Nat’l Bank of New Bremen v. Burns,
Great American in turn contends that the adverse interest exception is overcome by the sole actor rule. Under this rule, an agent’s wrongdoing is directly at
This legal terrain is well-traveled by the court. See, e.g., In re Nat’l Century Fin. Enterprises, Inc., Inv. Litig.,
The same conclusion must be reached in the present ease, but with a few wrinkles. The UAT here stands not only in the shoes of NPF VI and NPF XII but also of National Century. See Debtors’ Second Am. Compl., filed in Bankruptcy Ct. on Sept. 17, 2003 (complaint of the debtors asserting a claim for coverage under the Gulf and Great American policies on behalf of National Century and its subsidiaries, including NPF VI and NPF XII). One might argue that a finding that Poulsen, Ayers, and Parrett dominated the subsidiaries does not necessarily extend to a finding that they so dominated National Century. However, there are three reasons why this argument fails. For one, the facts proved beyond a reasonable doubt in the criminal proceedings thoroughly establish that Poulsen and those under him dominated and controlled National Century. As Judge Marbley stated to Poulsen at his sentencing hearing, “nothing happen[ed] without your blessing at NCFE, and when you didn’t have the authority to ... do the improper advances yourself, you conferred that authority upon others.... [Y]ou were the puppet master.” U.S. v. Poulsen, No. 2:06-cr-129 (S.D.Ohio) at doc. 989, p. 45; see also at pp. 40-44 (summarizing the evidence as to the nature and circumstances of the offense and noting that Poulsen conceived of and directed the fraud for seven years).
Second, to the extent National Century’s ring of management was larger than that of NPF VI and NPF XII, those additional individuals in authority — Faulkenberry, Dierker, Sherry Gibson, John Snoble, Randolph Speer, Jon Beacham, Brian Stucke — all have been proved in criminal proceedings to have knowingly participated in the fraud. See U.S. v. Faulkenberry, 2:06-cr-129-4 (S.D.Ohio); U.S. v. Dierker, 2:06-cr-6 (S.D.Ohio); U.S. v. Gibson, 2:03-cr-119 (S.D. Ohio); U.S. v. Snoble, 2:04-cr-193 (S.D.Ohio); U.S. v. Speer, 2:06-cr-129-5 (S.D.Ohio); U.S. v. Beacham, 2:06-r-129-7 (S.D.Ohio); U.S. v. Stucke, 2:03-cr-207 (S.D.Ohio). And application of the sole actor rule is not negated because multiple wrongdoers committed the fraud. See Dublin Securities,
Third, the claim for insurance coverage pursued by the UAT arises from the wrongful acts of fraud committed by National Century through NPF VI and NPF XII. The harm done was to the holders of NPF VI and NPF XII notes, and it was against these creditors’ claims that the debtors had to defend themselves, thereby causing them to seek entity coverage under the D & 0 policies. See Debtors’ Second Am. Compl. Even after the bankruptcy court narrowed the universe of outstanding bankruptcy claims against the debtors down to what was known as the Noteholder Deficiency Claim, what remained was the $2.6 billion in tort claims that the holders of NPF VI and NPF XII notes had against the debtors.
In opposing application of the sole actor rule, the UAT looks to the “innocent insider” exception, arguing that National Century’s Outside Directors could have stopped the fraud had they known about it.
What is lacking from the UAT’s innocent insider argument is any explanation or proof of what the Outside Directors could have done to prevent the fraud. They did not occupy a majority position on the board, and there is no evidence that they had any meaningful control or influence. Nor is it obvious that they were “innocents.” See In re Nat’l Century Fin. Enterprises, Inc., Inv. Litig.,
Accordingly, the court finds that the Principals’ fraudulent conduct must be imputed to National Century and its subsidiaries for purposes of excluding those entities from coverage under the policy’s dishonesty clause.
V. Conclusion
For the reasons set forth above, the Principal’s motions for summary judgment (docs. 56, 63) are DENIED. Great American’s motion for summary judgment that Ayers, Faulkenberry, and Dierker are excluded from coverage under the dishonesty exclusion (doc. 89) is GRANTED. Great American’s second motion for summary judgment (doc. 96) is DENIED with respect to Great American’s claim that it may rescind the policy as void ab initio, but GRANTED with respect to its claim that Poulsen and the UAT are excluded from coverage under the dishonesty exclusion.
This leaves the Outside Directors and Barbara Poulsen as potential claimants to the D & O policy proceeds. The remaining parties will have until December 31, 2011 to complete discovery. A notice of the final pretrial conference and trial dates is forthcoming.
Notes
. Another of National Century’s original founders, Rebecca Parrett, is not a party in this litigation. The district court found her guilty of multiple counts of securities fraud, wire fraud, and conspiracy to commit securities fraud. See U.S. v. Poulsen, No. 2:06-cr-129 (S.D.Ohio) at doc. 531. She fled the country after her conviction and has been barred by the fugitive disentitlement doctrine from making any further claims in this litigation. See In re Nat'l Century Fin. Enterprises, Inc., Inv. Litig., No. 2:03-md-1565,
. As of the bankruptcy petition date, the outstanding amount owed to NPF VI and NPF XII noteholders was about $3 billion. There was $400 million recovered in collateral, which was used to settle the noteholders’ contractual claims against the debtors. The note-holders’ tort claims were allowed in bankruptcy court as a Noteholder Deficiency Claim in the amount of $2.6 billion.
. The UAT also argues that the existence of certain internal controls — put in place to supposedly keep the operations of NPF VI and NPF XII in check — prevents a conclusion that Poulsen and the other wrongdoers had complete control and domination over those note programs. The court has rejected this argument for reasons fully explained in In re Nat’l Century Fin. Enterprises,