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Marks v. Houston Casualty Co.

Supreme Court of Wisconsin

June 30, 2016

David M. Marks, Plaintiff-Appellant-Cross-Respondent-Petitioner,
v.
Houston Casualty Company, Defendant-Respondent-Cross-Appellant, Bedford Underwriters, Ltd., Defendant-Respondent.

          ORAL ARGUMENT: March 16, 2016

         REVIEW OF A DECISION OF THE COURT OF APPEALS (Reported at 363 Wis.2d 505, 866 N.W.2d 393) (Ct. App. 2015 – Published) PDC No: 2015 WI App. 44

         Circuit Court, Milwaukee County (L.C. No. 2009CV18145) Richard J. Sankovitz, Judge

          For the plaintiff-appellant-cross-respondent-petitioner, there were briefs by Jon E. Fredrickson, Brian T. Fahl, Aaron H. Aizenberg, Stuart J. Check, and Kravit, Hovel & Krawczyk, S.C., Milwaukee, and oral argument by Jon E. Fredrickson.

          For the defendant-respondent-cross-appellant, there was a brief by John D. Finerty, Adam E. Witkov, and Michael Best & Friedrich LLP, Milwaukee and Aidan M. McCormack, Robert C. Santoro, and DLA Piper LLC (US), New York. Oral argument by Aidan M. McCormack.

          There was an amicus curiae brief by James A. Friedman, Todd G. Smith, Linda S. Schmidt, and Godfrey & Kahn, S.C., Madison on behalf of Wisconsin Insurance Alliance and American Insurance Association. Oral argument by James A. Friedman.

          ANNETTE KINGSLAND ZIEGLER, J.

         ¶1 This is a review of a published decision of the court of appeals, Marks v. Houston Casualty Co., 2015 WI App. 44, 363 Wis.2d 505, 866 N.W.2d 393, which affirmed the Milwaukee County circuit court's[1] grant of summary judgment in favor of Houston Casualty Company ("Houston Casualty") and Bedford Underwriters, Ltd.[2]

         ¶2 In July of 2009, trustee David Marks ("Marks") asked his professional liability insurer, Houston Casualty, to defend him in six lawsuits filed in 2007, 2008, and 2009 in five different states. Houston Casualty informed Marks that it had no duty to defend him in any of those lawsuits, and Marks then brought suit against Houston Casualty. Both the circuit court and the court of appeals agreed with Houston Casualty that a comparison of Marks' policy to the allegations in the complaints against Marks established that Houston Casualty had no duty to defend Marks.

         ¶3 We conclude that the complaints and counterclaim against Marks do not allege facts which, if proven, would constitute claims covered under the insurance policy Marks obtained from Houston Casualty. Houston Casualty therefore did not breach its duty to defend Marks when it declined to defend him in the six lawsuits at issue. Consequently, we affirm the decision of the court of appeals.

         I. FACTUAL AND PROCEDURAL BACKGROUND

         ¶4 David Marks is the trustee of two trusts: the Irrevocable Children's Trust ("ICT") and the Irrevocable Children's Trust No. 2 ("ICT2"). At all times relevant to this dispute, ICT and ICT2 owned a controlling interest in a company known as Titan Global Holdings, Inc. ("Titan").[3] From 2007 to 2009, a number of lawsuits involving Marks and Titan were filed throughout the country. Because the outcome of this case turns on the allegations contained in the five complaints and one set of counterclaims filed against Marks, we will set forth the contents of these documents in some detail.

         ¶5 On or about December 21, 2007, Oblio Telecom, Inc. ("Oblio") filed a lawsuit against Hawaii Global Exchange, Inc. ("Hawaii Global") in the United States District Court for the Northern District of Texas (the "Hawaii Global action").[4] On April 7, 2008, Hawaii Global filed a counterclaim against Oblio, Titan, Frank Crivello ("Crivello"), Marks, Bryan Chance ("Chance"), and Kurt Jensen ("Jensen"). The counterclaim described Marks as a "citizen of the State of Wisconsin" and "a principal shareholder and equitable owner of Titan" and asserted one count of conspiracy to commit fraud against the counterclaim defendants.[5] On October 24, 2008, Hawaii Global filed amended counterclaims against Titan, Oblio, Marks, Chance, and Jensen.[6]

         ¶6 On October 28, 2008, the Professional Liability Errors & Omissions Insurance Policy at issue in this case ("the policy" or "Marks' policy"), issued by Houston Casualty to Marks, took effect. The policy's expiration date was October 28, 2009. The policy provided coverage for

any Loss and Claim Expenses in excess of the Deductible amount and subject to the Limit of Liability as the Insured acting in the profession described in Item 3 of the Declarations shall become legally obligated to pay for Claim or Claims first made against the Insured during the Policy Period by reason of any Wrongful Act by an Insured provided always that the Insured has no knowledge of such Wrongful Act prior to the Inception Date of this Policy and further provided that such Wrongful Act took place subsequent to the Retroactive Date set forth in Item 8 of the Declarations.

         ¶7 "Loss" is defined in the policy to mean, in part, "a monetary judgment, award or settlement for damages including an award by a court of reasonable attorney's fees and costs to a party making [a] Claim." "Claim" is defined in the policy to mean "a demand received by the Insured for compensation of damages, including the service of suit . . . against the Insured." "Claim Expenses" is defined in the policy to mean, in part:

(1) fees charged by an attorney designated by the Company and (2) all other fees, costs or expenses incurred in the investigation, adjustment, defense and appeal of a Claim if incurred by the Company or an attorney designated by the Company, or by the Insureds with the written consent of the Company.

"Wrongful Act" is defined in the policy to mean "any actual or alleged error or omission or breach of duty committed or alleged to have been committed or for failure to render such professional services as are customarily rendered in the profession of the Insured as stated in Item 3 of the Declarations."

         ¶8 "Item 3 of the Declarations" lists Marks' profession as follows: "[s]olely in the performance of services as the Trustee of the Irrevocable Children's Trust (ICT), and/or Irrevocable Children's Trust No. 2 (ICT2), for a fee." Relevant to this appeal, the policy contained the following exclusions:

This Policy does not apply either directly or indirectly to any Claim and Claim Expenses:
a) Based upon or arising out of any dishonest, criminal, fraudulent, malicious or intentional Wrongful Acts, errors or omissions committed by or at the direction of the Insured.
b) For liability arising out of the Insured's services and/or capacity as:
1) an officer, director, partner, trustee, or employee of a business enterprise not named in the Declarations or a charitable organization or pension, welfare, profit sharing, mutual or investment fund or trust; . . . .

         ¶9 Finally, Endorsement Number 10 of the policy reads in part as follows:

c) Defense, Investigation, and Settlement of Claim
1) With respect to the insurance afforded by this Policy, the Company shall have the right and duty to defend any Claim brought against the Insured alleging a covered Wrongful Act.

         ¶10 On December 23, 2008, ILDN West, LLC ("ILDN") filed a lawsuit against Titan, Oblio, Titan Communications, Inc. ("Titan Communications"), Planet Direct, Inc. ("Planet Direct"), Marks, Crivello, and Does 1-50 in the Superior Court of the State of California for the County of Los Angeles (the "ILDN action"). The complaint described Marks as "an individual residing at all material times in or around Dallas, Texas, " and stated that "[a]t all times relevant hereto, Marks was a Chairman of Titan and represented Oblio, Titan Communications and Planet Direct." The complaint asserted seven causes of action: breach of contract against Titan, Titan Communications, and Planet Direct; breach of contract against Oblio, Titan Communications, and Planet Direct; breach of guaranty against Titan; fraud against Titan, Marks, and Crivello; negligent misrepresentation against Titan, Marks, and Crivello; quantum meruit/unjust enrichment against Titan, Oblio, Titan Communications, and Planet Direct; and "account stated"[7] against Titan, Oblio, Titan Communications, and Planet Direct.[8]

         ¶11 On February 2, 2009, George L. Miller, Chapter 7 Trustee of the Estate of USA Detergents, Inc. ("USAD"), filed a lawsuit against Greystone Business Credit II, LLC. ("Greystone"), GBC Funding, L.L.C. ("GBC"), Titan, Frank Orlando ("Orlando"), Chance, R. Scott Hensell ("Hensell"), Marks, Titan PCB West, Inc., n/k/a Titan Electronics, Inc. ("Titan PCB West"), Titan PCB East, Inc., n/k/a Titan East, Inc. ("Titan PCB East"), Oblio, Titan Wireless Communications, Inc. ("Titan Wireless"), StartTalk Inc. ("StartTalk"), Pinless, Inc. ("Pinless"), Appalachian Oil Company ("Appalachian"), Appco-Ky, Inc. ("Appco"), and Crivello in the United States Bankruptcy Court for the District of Delaware (the "USAD action"). The complaint described Marks as "a citizen of Wisconsin, " "Chairman of the Board of Directors of USAD at some point after August 1, 2007, " and, "[a]t all material times hereto, " "Chairman of Titan and a Member of Crivello Group[, LLC]."[9]

         ¶12 The complaint asserted nine counts: to avoid and recover preferential transfers pursuant to 11 U.S.C. §§ 547 and 550 against Greystone and GBC; to avoid and recover preferential transfers pursuant to 11 U.S.C. §§ 547 and 550 against Greystone, GBC, Titan, Titan PCB West, Titan PCB East, Oblio, Titan Wireless, StartTalk, Pinless, Appalachian, and Appco; disallowance of all claims pursuant to 11 U.S.C. § 502(d) against Greystone and GBC; objection to proof of claim pursuant to 11 U.S.C. § 502 against Greystone and GBC; equitable subordination pursuant to 11 U.S.C. § 510(c) against Greystone and GBC; breach of fiduciary duty against Orlando, Chance, Hensell, and Marks; aiding and abetting breach of fiduciary duty against Greystone, GBC, Titan, and Crivello; civil conspiracy against Greystone, GBC, Titan, Orlando, Chance, Hensell, Marks, and Crivello; and for an accounting against Greystone and GBC.

         ¶13 On or about May 4, 2009, Phillip L. Near filed a lawsuit against Titan, Crivello, Marks, Chance, Greystone, and Goldberg, Kohn, Bell, Black, Rosenbloom & Moritz, Ltd. ("Goldberg Kohn") in the United States District Court for the District of Kansas (the "Near action"). The complaint described Marks as "a resident of Wisconsin, " "the Chairman of Titan and, through one or more of his business entities, a shareholder of Titan." The complaint also stated that Marks "claims to be a director of Crescent."[10] The complaint asserted ten counts: fraud against Titan, Crivello, Marks, and Chance; fraudulent inducement against Titan, Crivello, Marks, and Chance; negligent misrepresentation against Titan, Crivello, Marks, and Chance; fraud by silence against Titan, Crivello, Marks, and Chance; breach of contract against Titan; conversion against Titan, Crivello, Marks, and Chance; conversion against Greystone; conversion against Goldberg Kohn; civil conspiracy against all the defendants; and breach of fiduciary duty against Goldberg Kohn[11]

         ¶14 On July 1, 2009, Lanny Houillion filed a lawsuit against Chance, Hensell, Oblio, Titan, and Marks in the County Court of Dallas (the "Houillion action"). The complaint described Marks as "an individual and Chairman of the Board for [Titan]."[12] The complaint asserted three causes of action against the defendants: breach of contract; negligence; and fraud. [13]

         ¶15 On July 10, 2009, Appalachian filed a lawsuit against Titan, Marks, Chance, and Hensell, "individually, and in their capacities as directors of [Appalachian], " in the United States Bankruptcy Court for the Eastern District of Tennessee (the "Appalachian action"). The complaint described Marks as "an individual residing in Milwaukee, Wisconsin, " "a member of [Appalachian's] Board of Directors at all times relevant to this Complaint, " and "an 'Insider' of [Appalachian] as defined in § 101(31) of the Bankruptcy Code."

         ¶16 The complaint asserted six counts: to avoid fraudulent transfers pursuant to 11 U.S.C. § 548(a)(1)(B) and recover fraudulent transfers pursuant to 11 U.S.C. § 550 against Titan; to avoid fraudulent transfers pursuant to 11 U.S.C. § 548(a)(1)(A) and recover fraudulent transfers pursuant to 11 U.S.C. § 550 against Titan; to avoid fraudulent conveyances pursuant to 11 U.S.C. § 544 and applicable state law and to recover fraudulent conveyances pursuant to 11 U.S.C. § 550 against Titan; to avoid preferential transfers pursuant to 11 U.S.C. § 547 and recover preferential transfers pursuant to 11 U.S.C. § 550 against Titan; to avoid wrongful distributions to shareholders pursuant to T.C.A. § 48-16-401(C) [of the Tennessee Code] against Titan; and to recover wrongful distributions to shareholders pursuant to T.C.A. § 48-18-304 [of the Tennessee Code] against the director defendants.[14]

         ¶17 Except as detailed below with regard to certain supplemental counterclaims in the Hawaii Global action, the parties do not point us to any language in the complaints that reference ICT, ICT2, or Marks' position as trustee of ICT and ICT2.

         ¶18 On July 28, 2009, Marks provided notice of each lawsuit--the Hawaii Global action, the ILDN action, the USAD action, the Near action, the Houillion action, and the Appalachian action--to Houston Casualty. In letters to Marks dated July 30, 2009, Professional Indemnity Agency, Inc. ("Professional Indemnity") acknowledged receipt of the six claims on behalf of Houston Casualty and stated that it was "presently in the process of establishing a claim file and reviewing the information provided."

         ¶19 On October 23, 2009, Marks filed a complaint against Houston Casualty in Milwaukee County circuit court alleging, among other things, breach of Houston Casualty's duty to defend Marks in each of the six lawsuits discussed and denial of Marks' six claims in bad faith.[15]

         ¶20 On October 27, 2009, Hawaii Global and TransPac Telecom, Inc. ("TransPac")--parties in the earliest of the lawsuits discussed above, the Hawaii Global action--filed a "Motion for Leave to File Supplemental and Amended Counterclaims."

         ¶21 On October 28, 2009, Marks notified Houston Casualty of Hawaii Global and TransPac's motion. The same day, Marks' policy expired.

         ¶22 In letters dated November 4, 2009, Professional Indemnity informed Marks on behalf of Houston Casualty that Houston Casualty had "determined that it has no obligation under the Policy either to defend or indemnify you . . . in connection with" any of the six lawsuits. Although the letters provided multiple reasons for Houston's refusal to defend or indemnify Marks, two are most relevant to this appeal: (1) the alleged conduct giving rise to the claims did "not arise out of the performance of services by the Insured as the Trustee of the Irrevocable Children's Trust and/or Irrevocable Children's Trust No. 2, for a fee"; and (2) exclusion b)1) (the "business enterprise exclusion") excluded any indemnity obligation for liability arising out of Marks' services and/or capacity as an officer, director, partner, trustee, or employee of a business enterprise not named in the declarations of the policy.[16]

         ¶23 On November 16, 2009, Houston Casualty filed a notice of removal to the United States District Court for the Eastern District of Wisconsin.

         ¶24 On November 17, 2009, Marks voluntarily dismissed his case and again filed a complaint against Houston Casualty in Milwaukee County circuit court alleging, among other things, breach of Houston Casualty's duty to defend Marks in each of the six lawsuits discussed and denial of Marks' six claims in bad faith. This second complaint, unlike the first, named Bedford Underwriters as a defendant.

         ¶25 On December 18, 2009, Houston Casualty again removed the case to federal court. On March 22, 2010, the case was remanded to state court.

         ¶26 On January 21, 2010, the United States District Court for the Northern District of Texas granted Hawaii Global and TransPac's "Motion for Leave to File Supplemental and Amended Counterclaims." On January 25, 2010, Hawaii Global and TransPac Telecom, Inc. filed supplemental counterclaims against

[Crivello], both individually and as settlor, de facto trustee and de facto beneficiary of the Irrevocable Children's Trust and Irrevocable Children's Trust 2, [Marks], both individually and as trustee of the Irrevocable Children's Trust and Irrevocable Children's Trust 2, . . . the Irrevocable Children's Trust[, ] . . . the Irrevocable Children's Trust 2 [, ] . . . Crivello Group LLC[, ] . . . Phoenix Investors LLC[, ] . . . and Farwell Equity Partners LLC.

         The counterclaims collectively refer to these latter five entities as the "Crivello Family Interests, " and assert that they are "a group of trusts, limited liability companies and/or corporations owned or controlled by Crivello and managed by Crivello and Marks."

         ¶27 The supplemental counterclaims described Marks as "a citizen of the State of Wisconsin" and further stated:

According to Titan's 10-K for the fiscal year ending August 31, 2008,
Mr. Marks has served as Trustee of Irrevocable Children's Trust and Irrevocable Children's Trust No. 2 since 1994. Irrevocable Children's Trust and Irrevocable Children's Trust No. 2 currently have an ownership or investment interest in commercial properties, private residences, natural resources, telecommunications, and technology companies, and other business and investment ventures. Mr. Marks has the responsibility in overseeing all investments by Irrevocable Children's Trust and Irrevocable Children's Trust No. 2 with responsibilities beginning at acquisition and continuing through ownership. Mr. Marks generally acts in the capacity of officer or director for all of the operating companies that are vehicles for investments by the Trusts and is involved in strategic planning, and major decision-making.
In addition to his individual capacity, Marks is being added in a representative capacity as ostensible trustee and chairman of Crivello-controlled alter ego entities alleged herein.

         ¶28 Hawaii Global alleges, among other things, that "[i]n their various capacities as settlor, de facto trustee, trustee, de facto beneficiaries, shareholders, board members and/or officers, Crivello and Marks have caused the Crivello Family Interests to intentionally misappropriate and shield assets obtained through fraud and artifice."

         ¶29 The counterclaims asserted three causes of action: alter ego; RICO conspiracy against the Crivello Family Interests; and fraudulent transfer against all counterclaim defendants.[17]

         ¶30 On October 28, 2010, Marks filed an amended complaint.

         ¶31 On February 8, 2013, Houston Casualty and Marks filed motions for summary judgment in Marks' lawsuit against Houston Casualty in Milwaukee County circuit court. Marks made four arguments relevant to this appeal. First, he argued that although his policy covered only liability arising out of his "performance of services as the Trustee of the Irrevocable Children's Trust (ICT), and/or Irrevocable Children's Trust No. 2 (ICT2), for a fee, " the language in Marks' policy does not "define the scope of services that are covered when performed by the trustee." More specifically, "Marks was sued in all six lawsuits because he was a director of Titan, and . . . Marks was on the board of directors of Titan only by virtue of the trusts' controlling investment position in Titan." Second, Marks claimed he was sued in the Hawaii Global action "because of his position as trustee of ICT and ICT2." Third, Marks argued that, in determining whether an insurer has breached its duty to defend an insured, a court may not consider exclusions or limiting language in the insurance policy at issue if the insurer had earlier rejected the insured's tender of defense without having coverage determined by a court. Fourth, Marks asserted that the business enterprise exclusion in the Houston Casualty policy rendered the entire policy illusory, because it excluded coverage for liability arising out of Marks' "services and/or capacity as . . . an . . . trustee . . . of a . . . trust."

         ¶32 On October 4, 2013, the circuit court issued an order granting Houston Casualty's motion for summary judgment and denying Marks' motion for summary judgment. The circuit court determined that Marks' policy, "when construed liberally, . . . can be read to cover the work of a trustee when working as an officer or director of a corporation in which the trust corpus is [invested]." Further, the court found that the "allegations of the six lawsuits against Mr. Marks as presented within the four corners of the pleadings fall within the scope of the insuring [clause]." However, the court also found that the business enterprise exclusion did not render the insurance policy illusory, "is enforceable[, ] and does preclude coverage for the claims in this case." Thus, the court concluded that Houston Casualty had not breached any duty to defend Marks. On October 31, 2013, the court dismissed the case.

         ¶33 On December 13, 2013, Marks filed a notice of appeal. On January 10, 2014, Houston Casualty filed a notice of cross-appeal. On May 7, 2015, the court of appeals "affirm[ed] the circuit court's determination that Houston Casualty did not have a duty to defend Marks." Marks, 363 Wis.2d 505, ¶1. Like the circuit court, the court of appeals concluded that the business enterprise exclusion in the Houston Casualty policy precluded coverage and did not render the policy illusory. Id., ¶¶17-27.[18]The court thus found it unnecessary to consider Houston Casualty's argument that its policy did not even provide an initial grant of coverage. Id., ¶1.

         ¶34 On July 6, 2015, Marks filed a petition for review in this court. On September 15, 2015, we granted the petition.

          II. STANDARD OF REVIEW

         ¶35 "We review summary judgment rulings independently, applying the well-established standards set forth in Wis.Stat. § 802.08" (2013-14).[19] Hirschhorn v. Auto-Owners Ins. Co., 2012 WI 20, ¶20, 338 Wis.2d 761, 809 N.W.2d 529 (citations omitted). Specifically, summary judgment is granted if "the pleadings, depositions, answers to interrogatories, and admissions on file, together with the affidavits, if any, show that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law." § 802.08(2); Hirschhorn, 338 Wis.2d 761, ¶20 (citation omitted).

         ¶36 In this case we interpret an insurance contract. "The interpretation of an insurance contract is a question of law, which this court reviews de novo." Plastics Eng'g Co. v. Liberty Mut. Ins. Co., 2009 WI 13, ¶27, 315 Wis.2d 556, 759 N.W.2d 613 (citation omitted). We also examine the "four-corners rule, " which is relevant in cases where an insured argues that its insurer breached its duty to defend the insured. See Olson v. Farrar, 2012 WI 3, ¶33, 338 Wis.2d 215, 809 N.W.2d 1. "The proper application of the four-corners rule presents a question of law, which we decide independently of the determinations rendered by the circuit court and the court of appeals." Id., ¶22 (determining whether four-corners rule applies).

          III. ANALYSIS

         A. General Principles Regarding an Insurer's Contractual Duty to Defend Its Insured

         ¶37 Liability insurance policies often contractually obligate an insurer both to defend and to indemnify its insured. Maxwell v. Hartford Union High Sch. Dist., 2012 WI 58, ¶53, 341 Wis.2d 238, 814 N.W.2d 484. Generally speaking, what is meant when courts reference an insurer's "duty to defend" its insured is the insurer's "responsibility to defend the insured from all actions brought against the insured based on alleged facts or circumstances falling within the purview of coverage under the policy, regardless of the suit's validity or invalidity." 14 Steven Plitt et al., Couch on Insurance § 200:1 (3d ed. 2015) (citations omitted). An insurer's duty to indemnify its insured, in contrast, is the insurer's duty "to pay all covered claims and judgments against [its] insured." Id. § 200:3 (citations omitted).

         ¶38 When an insurer receives a tender of defense from its insured, it "makes an initial determination about whether it will defend its insured." Olson, 338 Wis.2d 215, ¶33. The insurer must make this determination carefully, because if it refuses to defend and is later found to have "breache[d] a duty to defend its insured, [it] is on the hook for all damages that result from that breach of its duty." Maxwell, 341 Wis.2d 238, ¶54.[20]

         ¶39 Both insurers in making this initial determination and courts in examining whether an insurer has breached its duty to defend its insured use the same analytical framework, known in Wisconsin as the "four-corners rule." See Olson, 338 Wis.2d 215, ¶33. The name derives from the fact that "[t]he duty to defend is triggered by the allegations contained within the four corners of the complaint" against the insured. Estate of Sustache v. Am. Family Mut. Ins. Co., 2008 WI 87, ¶20, 311 Wis.2d 548, 751 N.W.2d 845 (citations omitted). Put differently, "[w]hen a complaint alleges facts that, if proven, would constitute a covered claim, the insurer must appoint defense counsel for its insured without looking beyond the complaint's four corners." Id., ¶27. Thus, only two documents are germane in any four-corners analysis: the insurance policy and the complaint against the insured. No examination of extrinsic facts or evidence takes place. Fireman's Fund Ins. Co. of Wis. v. Bradley Corp., 2003 WI 33, ¶19, 261 Wis.2d 4, 660 N.W.2d 666.

         ¶40 The four-corners rule is "well established" in Wisconsin, Fireman's Fund, 261 Wis.2d 4, ΒΆ18, and is set ...


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