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Grigg v. Aarrowcast, Inc.

Court of Appeals of Wisconsin, District III

February 27, 2018

Paula M. Grigg, as Special Administrator of the Estate of Raymond B. Grigg, Plaintiff-Appellant,
Aarrowcast, Inc., AXIS Insurance Company and IOP Cast Iron Holdings, LLC, Defendants, Hudson Specialty Insurance Company and Hudson Insurance Company, Defendants-Respondents.

         APPEAL from an order of the circuit court for Shawano County No. 2015CV208, WILLIAM F. KUSSEL, JR., Judge.

          Before Stark, P.J., Hruz and Seidl, JJ.

          HRUZ, J.

         ¶1 Paula Grigg, as special administrator of the Estate of Raymond Grigg ("Grigg"), [1] appeals an order granting various dispositive motions in favor of Hudson Insurance Company ("Hudson Insurance") and Hudson Specialty Insurance Company ("Hudson Specialty").[2] Grigg, a business executive and shareholder until his company was sold, brought this declaratory judgment action to establish his rights under a liability policy Hudson had issued to his former company. The policy included coverage for directors and officers ("D & O") liability, which insured against loss caused by "wrongful acts" committed by a person acting in his or her capacity as a director or officer of the business. Grigg challenges the circuit court's determination that Hudson had no duty to defend him in a lawsuit filed in New York.

         ¶2 Specifically, Grigg argues the circuit court improperly granted summary judgment to Hudson because the factual allegations forming the basis for the claims in the New York lawsuit, including his alleged failure to disclose certain information during the sale of his former company, plainly fault Grigg's conduct as an executive of his former company. Hudson's primary argument is that it had no duty to defend Grigg because the legal claims advanced in the New York lawsuit were expressly directed at Grigg's alleged conduct as an individual shareholder and seller of his own stock, not as a company executive.

         ¶3 Based upon our comparison of the relevant policy language with the allegations contained within the New York complaint, we conclude Hudson has failed to demonstrate it had no duty to defend Grigg. The duty-to-defend analysis turns on the facts pled, not the plaintiff's theory of liability. The factual allegations forming the basis for the claims in the New York lawsuit plainly fault Grigg's conduct as an executive of his former company (even while also faulting his conduct as a shareholder), which appears to us sufficient to trigger Hudson's duty to defend. We reach no further conclusion regarding the duty to defend because Grigg has explicitly abandoned his argument that he is entitled to a judgment as a matter of law on the duty to defend and breach issues.

         ¶4 As a corollary, we hold that a third-party complaint does not eliminate a defendant's liability insurance coverage by purportedly limiting its legal claims to acts or omissions the defendant-insured made in a non-covered capacity, when those same alleged acts or omissions were also made in a covered capacity. In such "concurrent capacity" cases, the insured is entitled to a defense from the insurer if the alleged facts supplying the basis for the claims arguably involve acts or omissions falling within the scope of coverage.

         ¶5 We also reject several other arguments Hudson advances in support of the circuit court's decision. First, we conclude that, given the state of the record, Hudson Insurance was not properly dismissed as a party. Second, we conclude that, even assuming Grigg failed to provide Hudson with a timely notice of claim, he has satisfied his burden of showing Hudson was not prejudiced by the delay. Third, we reject Hudson's argument that issue preclusion bars Grigg from pursuing the present appeal against Hudson. Hudson provides no applicable legal authority for its assertion that Grigg cannot appeal the circuit court's determination as to Hudson without also maintaining an appeal against other defendants concerning Grigg's claims for indemnification and insurance coverage from those entities.

         ¶6 In all, we conclude Hudson has failed to demonstrate it was entitled to summary judgment as a matter of law. We therefore reverse the grant of summary judgment and remand this matter to the circuit court for a determination of whether Hudson had a duty to defend Grigg and other further proceedings. If, as it appears to us, Hudson did have such a duty and breached that duty, the circuit court must hold further proceedings to determine any damages that may have resulted from that breach.


         ¶7 This case arises from a complex business transaction and various, subsequent litigation. In 2010, J.H. Whitney Capital Partners, LLC ("J.H. Whitney"), a Connecticut private equity firm, acquired Aarrowcast, Inc. ("Aarrowcast"). Aarrowcast is a foundry business located in Shawano, Wisconsin; it manufactures gray and ductile iron castings for government, defense, agricultural and manufacturing purposes. J.H. Whitney owned the vast majority of Aarrowcast's authorized and outstanding shares of stock through its subsidiary holding companies, JHW ACast, LLC ("JHW") and Aarrowcast Holdings, LLC ("Aarrowcast Holdings").[3] The remaining shares were owned by members of Aarrowcast's management team and board of directors.

         ¶8 IOP Cast Iron Holdings, LLC ("IOP") purchased Aarrowcast on August 14, 2014, from Aarrowcast Holdings and Aarrowcast's other shareholders, including Grigg.[4] At the time of the sale, in addition to being a shareholder, Grigg was Aarrowcast's chief executive officer and a member of the company's board of directors. IOP's purchase of Aarrowcast was memorialized by a stock purchase agreement dated August 4, 2012. Grigg was a signatory to this agreement under the heading "Rollover Seller." It is undisputed Grigg did not sign the stock purchase agreement on Aarrowcast's behalf, but rather as a seller of his own stock.

         ¶9 Subsequent to its acquisition of Aarrowcast, IOP discovered information that caused it to suspect it had been misled about the company's sales projections during the negotiations leading to the purchase. On December 2, 2013, IOP sent a demand letter to Aarrowcast Holdings, in care of J.H. Whitney, requesting indemnification for alleged damages attributable to false or inaccurate representations and warranties in the stock purchase agreement. Specifically, the demand letter accused Aarrowcast, Aarrowcast Holdings, and the other selling shareholders of failing to disclose that Aarrowcast's largest customer planned to substantially reduce its orders.

         ¶10 Grigg and other members of Aarrowcast's management team responded to IOP's demand letter with their own letter to Aarrowcast and Aarrowcast Holdings on January 21, 2014. The management team asserted they were, at all times during IOP's acquisition, acting within the scope of their employment. They also asserted that Aarrowcast maintained insurance policies containing D & O coverage that could potentially apply to IOP's claims. Accordingly, the management team requested that Aarrowcast immediately notify its D & O insurers of IOP's claims "[t]o avoid any prejudicial delay with respect to the insurer(s)' right to prompt notice of facts and circumstances relating to any claim."[5] It is undisputed that either Hudson Insurance or Hudson Specialty had issued to Aarrowcast an insurance policy that included D & O coverage.[6]

         ¶11 In late 2014, IOP filed an amended complaint in the United States District Court for the Southern District of New York. That action had been filed against J.H. Whitney, JHW, and Aarrowcast Holdings. The amended complaint asserted those defendants had, during the purchase negotiations, sold IOP on a "growth story, " when in fact Aarrowcast knew prior to closing that key customers were planning to significantly reduce their orders. Although Grigg was not named as a defendant in that lawsuit, IOP specifically alleged he knew prior to the transaction's closing that orders from Aarrowcast's largest customer would significantly diminish. IOP asserted the defendants' failures to disclose the adverse sales information breached the stock purchase agreement and constituted common law fraud.

         ¶12 The parties to the Southern District of New York litigation subsequently settled that lawsuit. On September 21, 2015, they entered into a joint stipulation for dismissal with prejudice that released J.H. Whitney, JHW, and Aarrowcast Holdings from any liability for the claims alleged. Grigg was not included in the release, and IOP remained free to pursue its claims against him.

         ¶13 Believing he was intentionally "cut … out of the release" contained within the joint stipulation, Grigg preemptively filed the present lawsuit in Shawano County, Wisconsin, on October 12, 2015. The complaint initially named IOP, Aarrowcast, Hudson Specialty, and Axis Insurance Company ("Axis") as defendants. Grigg alleged that although Aarrowcast had notified its insurance carriers-Hudson Specialty and Axis-of Grigg's demand for coverage, neither insurer had accepted coverage, tendered a defense, or reimbursed Grigg for any defense costs. Grigg therefore asserted Hudson Specialty and Axis had breached their contractual duties under the relevant insurance policies to defend him.[7]

         ¶14 Shortly after Grigg filed the present action, IOP commenced a new state-court action against Grigg in New York (the "New York state litigation"). The factual allegations in the New York state litigation were generally the same as those that had been asserted in the Southern District of New York litigation. That is, IOP alleged Grigg made false representations and warranties regarding Aarrowcast's sales information in connection with Aarrowcast's sale to IOP. IOP's claims against Grigg were for breach of the stock purchase agreement and common law fraud. Notably, in its complaint, IOP purported to bring suit against Grigg only "in his capacity as a shareholder but not as an officer and director."

         ¶15 Meanwhile, Hudson Insurance answered Grigg's complaint on Hudson Specialty's behalf, asserting that Hudson Specialty had not issued the relevant policy and had been wrongly named as a party. Grigg then filed an amended complaint adding Hudson Insurance as a party. Hudson again answered, but this time denied that Hudson Insurance was a proper party. Instead, the answer admitted that Hudson Specialty had issued a policy containing D & O liability coverage to Aarrowcast. Hudson claimed its initial assertion that Hudson Insurance was the proper party was a mistake. Hudson Insurance then filed a motion to dismiss it as a party on the basis that it had not issued an insurance policy to Aarrowcast.

         ¶16 Grigg and Hudson Specialty filed cross-motions for declaratory judgment regarding Hudson Specialty's alleged duty to defend Grigg in the New York state litigation.[8] Grigg argued that despite IOP's attempt to limit Grigg's liability to his acts as an individual shareholder, IOP's complaint in the New York state litigation had effectively alleged that Grigg had committed misconduct while acting in his capacity as an Aarrowcast executive and that he was therefore entitled to coverage. Hudson Specialty, on the other hand, argued Grigg was not entitled to a defense under its D & O policy because IOP's complaint had not alleged Grigg was liable for anything he had done as an Aarrowcast officer or executive. Rather, Hudson Specialty emphasized IOP's allegation that it was making claims against Grigg only in his capacity as a seller of his individual stock. Hudson Specialty alternatively argued Grigg had failed to provide a proper notice of the claim.

         ¶17 At a motion hearing, the circuit court ruled in favor of Hudson Specialty. Although the court acknowledged that Grigg was only alleged to have learned of the negative future sales information through his position as an Aarrowcast officer, it nonetheless concluded IOP's claims against him in the New York state litigation arose solely by virtue of his alleged acts or omissions as an individual shareholder and seller of stock. Accordingly, the court determined Hudson Specialty's defense duties were not triggered. Although the court did not directly address at the hearing Hudson Insurance's argument that it was not a proper party, the court apparently accepted this argument and granted Hudson Insurance's motion to dismiss.

         ¶18 At the hearing, the circuit court also resolved various motions that disposed of the other parties in the Shawano litigation. IOP and Aarrowcast had filed a joint motion to dismiss the amended complaint on procedural and substantive grounds, which the circuit court granted. Grigg, in conjunction with his motion for declaratory judgment against Hudson Specialty, had also filed a motion for declaratory judgment against Axis, claiming it too was required to indemnify him. The circuit court denied that motion and granted judgment to Axis, dismissing all of Grigg's claims against it. Although Grigg's notice of appeal identified these determinations as matters for appeal, he subsequently settled with IOP, Aarrowcast, and Axis, and Grigg voluntarily dismissed his appeal as to those parties. Thus, only the circuit court's determinations regarding Hudson are under review in this appeal.

         ¶19 Grigg filed a motion for reconsideration, challenging, among other things, the circuit court's decision to grant summary judgment in Hudson's favor. Grigg's brief in support of his reconsideration motion quoted extensively from IOP's complaint in the New York state litigation, emphasizing several paragraphs in which IOP specifically mentioned Grigg's duties as Aarrowcast's chief executive officer and that he learned of the adverse sales estimates in that capacity. The most notable of these paragraphs-paragraph 48-alleged that, "[a]s Chief Executive Officer of the Company, it was incumbent upon Grigg to immediately make known to the [sic] IOP Holdings the material information regarding the foreseen pending declines in Company performance."[9] Grigg asserted that, taken in its totality, the IOP complaint "necessarily and exclusively" implicated Grigg's actions as an officer and director, and the facts pled "involve[d] actions that occurred prior to the sale, when Grigg owed no duty to IOP as a minority shareholder."

         ¶20 Hudson opposed the reconsideration motion, which the circuit court ultimately denied. Grigg now appeals the court's determination regarding Hudson's duty to defend him in connection with the New York state litigation.


         ¶21 As an initial matter, Hudson appears to argue we should apply Connecticut law in some fashion. Its argument-relegated to a footnote in its response brief-is that although Aarrowcast is located in Wisconsin, the insurance policy was issued to Aarrowcast Holdings, Inc., in Connecticut, and therefore Connecticut law should apply to the extent there is any conflict with Wisconsin law.

         ¶22 However, "[t]he threshold determination in a conflict of laws case is whether a genuine conflict exists." Gavers v. Federal Life Ins. Co., 118 Wis.2d 113, 115, 345 N.W.2d 900 (Ct. App. 1984). Because Hudson merely raises the specter of such a conflict, but fails to elaborate upon what (if any) conflicting principles of law are relevant to this appeal, we assume Wisconsin law applies. See Herder Hallmark Consultants, Inc. v. Regnier Consulting Grp., Inc., 2004 WI.App. 134, ¶16, 275 Wis.2d 349, 685 N.W.2d 564 (holding the court of appeals will not ordinarily address undeveloped arguments).

         ¶23 Grigg's appeal is a challenge to the circuit court's ruling on cross- motions for summary judgment. We review a grant of summary judgment de novo, using the same, well-established methodology as the circuit court. Jones v. Baecker, 2017 WI.App. 3, ¶23, 373 Wis.2d 235, 891 N.W.2d 823; see also Palisades Collection LLC v. Kalal, 2010 WI.App. 38, ¶9, 324 Wis.2d 180, 781 N.W.2d 503 (stating the summary judgment methodology). 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." WIS. STAT. § 802.08(2) (2015-16). [10]

         ¶24 The central question in this appeal is whether Hudson has established as a matter of law that it did not have a duty to defend Grigg against IOP's claims in the New York state litigation. Neither Grigg nor Hudson contends there are any disputed issues of material fact regarding this issue, at least regarding the issue of IOP suing Grigg in his capacities as either shareholder or an officer or director. For the reasons that follow, we conclude the factual allegations contained in IOP's complaint were sufficient to state a claim against Grigg for actions he took or failed to take in his capacity as an insured officer or director of Aarrowcast. We therefore conclude Hudson failed to demonstrate that it was entitled to judgment as a matter of law. It follows that the circuit court erred by granting Hudson summary judgment.

         ¶25 Hudson also presents other arguments supporting the circuit court's decision, irrespective of whether Hudson had a duty to defend Grigg. Hudson argues that: (1) Hudson Insurance is not a proper party; (2) Hudson received untimely notice of Grigg's claim; and (3) Grigg's claims against Hudson should be dismissed based on issue preclusion relating to Grigg's settlement with, and the subsequent the dismissal from this appeal of, the other defendants to this lawsuit. We reject these arguments and remand to the circuit court for further proceedings consistent with this opinion, including a determination of whether Hudson had a duty to defend Grigg. If, as we believe, there was such a duty, the circuit court must ascertain whether Hudson breached that duty and what damages Grigg sustained as a result of that breach.

         I. Duty to Defend

         A. Relevant General Principles

         ¶26 To ascertain an insurer's duty to defend, we interpret the applicable insurance contract, which presents a question of law that we review de novo. Marks v. Houston Cas. Co., 2016 WI 53, ¶36, 369 Wis.2d 547, 881 N.W.2d 309. "The same rules of construction that govern general contracts are applied to the language in insurance policies." Folkman v. Quamme, 2003 WI 116, ¶12, 264 Wis.2d 617, 665 N.W.2d 857. If the meaning of the policy language is clear, we apply that language as written. Id., ¶13.

         ¶27 Whether an insurer has a duty to defend its insured against a lawsuit is determined using the "four-corners rule." Marks, 369 Wis.2d 547, ¶39. The rule is so named because the duty to defend is triggered by comparing the policy language against the allegations contained within the four corners of the complaint. Estate of Sustache v. American Family Mut. Ins. Co., 2008 WI 87, ¶20, 311 Wis.2d 548, 751 N.W.2d 845. Thus, only two documents are relevant to the determination of the duty to defend: the insurance policy and the complaint against the insured.[11] Marks, 369 Wis.2d 547, ¶39.

         ¶28 Our supreme court has repeatedly stated that the "four-corners rule" is designed for the insured's protection. See, e.g., id., ¶41; Estate of Sustache, 311 Wis.2d 548, ¶21. Without such a rule, insurers could refuse to defend in the hopes that the facts ultimately proved in the litigation would reveal that there was no coverage. Marks, 369 Wis.2d 547, ¶41 (citing Olson v. Farrar, 2012 WI 3, ¶32, 338 Wis.2d 215, 809 N.W.2d 1). The four-corners rule generally "ensure[s] that insurers do not frustrate the expectations of their insureds by resolving the coverage issue in their own favor while coverage remains fairly debatable." Baumann v. Elliott, 2005 WI.App. 186, ¶10, 286 Wis.2d 667, 704 N.W.2d 361.

         ¶29 To achieve this purpose, an insured benefits from several interpretive rules that govern our review of the insurance policy and the complaint. In general, we resolve any doubt regarding the duty to defend in the insured's favor. Fireman's Fund Ins. Co. of Wis. v. Bradley Corp., 2003 WI 33, ¶20, 261 Wis.2d 4, 660 N.W.2d 666. Specifically, our supreme court has "consistently explained that a court must liberally construe the allegations contained in the underlying complaint, assume all reasonable inferences from the allegations made in the complaint, and resolve any ambiguity in the policy terms in favor of the insured." Water Well Sols. Serv. Grp. v. Consolidated Ins. Co., 2016 WI 54, ¶15, 369 Wis.2d 607, 881 N.W.2d 285. In addition, if an insurance policy provides coverage related to even one claim made in the lawsuit, the insurer must defend the entire action. Fireman's Fund Ins. Co., 261 Wis.2d 4, ¶21. ...

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