United States District Court, D. Colorado
ORDER ON MOTIONS FOR SUMMARY JUDGMENT
Michael E. Hegarty, United States Magistrate Judge.
“duty to defend and indemnify” action, Plaintiff
Denver Investment Advisors, LLC (“DIA”) seeks
damages from Defendant St. Paul Mercury Insurance Company
(“Travelers”) for Travelers' alleged failure
to pay insurance benefits with respect to two underlying
claims against DIA. At a conference before the Court on May
4, 2017, the parties expressed their interest in moving for
summary judgment on the issue of whether insurance coverage
existed for the claims before proceeding with discovery in
the case. The Court stayed the action, and the present
motions followed. The Court finds no genuine issues of
material fact exist as to DIA's second, third, and fourth
claims for relief; however, factual issues exist as to a
portion of DIA's first claim for relief and, thus, the
Court will grant in part and deny in part the cross motions.
for summary judgment are examined under the usual Rule 56
standards, Saieg v. City of Dearborn, 641 F.3d 727,
733-34 (6th Cir. 2011), with the court viewing all facts and
reasonable inferences in the light most favorable to the
nonmoving party. See Edwards v. Briggs & Stratton
Ret. Plan, 639 F.3d 355, 359 (7th Cir. 2011).
is a Denver-based limited liability company that manages
investment assets for clients. Affidavit of Glenn T. Rippey,
May 25, 2017 (“Rippey Aff.”) ¶ 5. DIA's
clients entrust DIA to invest their assets in stocks, bonds,
and other financial investment vehicles. Id.
Travelers issued its SelectOne for Investment Adviser and
Funds Insurance Policy No. ZPL-14T25283-12-N2 (the
“2012 Policy”) to DIA for the policy period of
October 31, 2012 to October 31, 2013. ECF No. 46-1. Travelers
also issued its SelectOne for Investment Adviser and Funds
Insurance Policy No. ZPL-61M18413-14-N2 (the “2014
Policy”) to DIA for the policy period of October 31,
2014 to October 31, 2015. ECF Nos. 46-2, 46-3.
August 27, 2013, an attorney representing several retired
members of DIA sent a demand letter to the Management
Committee of DIA seeking damages for amounts allegedly due to
the claimants for breach of contract, by changing the method
in which the “Aggregate Payout Limit” (set forth
in a governing Operating Agreement described below) may be
calculated and by creating “false retirements”
(the “Beserra Claim”). ECF No. 49-1. That is,
“[s]tarting around 2007, certain active Members of DIA
began to partially withdraw with respect to small percentages
of their Membership Economic Interest” and “[a]s
a result of these partial retirements by active Members of
DIA, the Earnout Payments going to the active Members instead
of the true retired Members, including Claimants, grew from
20% to over 50% of the aggregate Earnout Payments.”
Beserra Amended Arbitration Demand ¶¶ 94, 99, 107,
113, ECF No. 49-3. The claimants also alleged that DIA
breached its fiduciary duty to them in numerous ways,
including failing to act with the utmost care to avoid
self-dealing at the expense of the claimants. Id.
After arbitration of the claims by an American Arbitration
Association (“AAA”) panel, the panel issued a
final award in favor of the claimants concluding that (1)
“DIA breached § 12.5.8 of the Operating Agreements
in effect before the retirement of Claimants . . . when it
applied the 50% Rule amendment to determine their shortfall
payments. . . . DIA further breached by failing to pay
[Claimants] their tangible capital accounts at the time of
their last earnout payments.”; and (2) “DIA's
disproportionate and methodical use of partial retirements
and/or reductions for its incumbent members of less than .8%
had the effect of severely compromising the ability of all of
the Claimants to receive their shortfall payments and the
repayment of their tangible capital accounts, ” which
was “inconsistent with the reasonable expectations of
the Claimants and constituted a contractual breach of the
actual and implied duties of good faith in the Operating
Agreements signed by all of the Claimants.” Final
Award, ECF No. 49-5 at 14, 17.
panel awarded damages of $7, 791, 526.25, plus interest of
$2, 768, 812, and claimants' attorney's fees and
costs of $2, 335, 328.37, as well as AAA costs and fees of
$135, 919.46, for a total of $13, 031, 586.88. Id.
Thereafter, DIA and the remaining claimants entered into a
settlement agreement for the exact amounts awarded by the
incurred $1, 268, 429.00 in defense costs for the Beserra
Claim, which Travelers refused to pay. Rippey Aff.
¶¶ 10, 27-28.
September 2015, the same attorney who represented the Beserra
claimants made a second demand to DIA on behalf of four
additional former members of DIA (the “Kidd
Claim”). October 2015 email correspondence between Kris
Kostolansky and DIA's defense counsel, ECF No. 49-6.
After discussions and negotiations failed to resolve the Kidd
Claim, two of the four claimants filed an arbitration demand
against DIA on January 20, 2016. ECF No. 49-7. The Kidd
claimants made substantially similar allegations as the
Beserra claimants and brought claims for breach of contract
and breach of fiduciary duty against DIA. Id.
Shortly after the Kidd Arbitration Demand was filed, the
parties agreed to settle the Kidd Claim for $3, 800, 000.
Rippey Aff. ¶ 16. Of that amount, $3, 051, 715.05 was
for damages and the remaining $748, 284.95 was for interest
and the claimants' attorney's fees. Id.
incurred approximately $332, 000.00 in defense costs in
connection with the Kidd Claim. Rippey Aff. ¶ 17.
2012 and 2014 insurance policies at issue in this case
(“Policies”) each include a “General Terms,
Conditions and Limitations” section, as well as two
Insuring Agreement Sections pertinent here: (1) the
Management Liability Insuring Agreement for Privately Held
Investment Advisers and Private Equity Firms (the
“Management Liability Insuring Agreement”) (ECF
No. 46-1 at 38-42; ECF No. 46-2 at 34-35; ECF No. 46-3 at
1-3); and (2) the Employment Practices Liability Insuring
Agreement (the “EPL Insuring Agreement”) (ECF No.
46-1 at 44-46; ECF No. 46-3 at 4-6). 12. The Policies contain
a number of endorsements that modify, amend, or replace
certain provisions of the foregoing sections; however, the
relevant provisions of the Policies are largely the same.
Management Liability Insuring Agreements have limits of
liability of $10 million and the EPL Insurance Agreements
have limits of liability of $1 million. ECF 46-1 at 18; 46-2
“Company Liability Coverage Part” of the
Management Liability Insuring Agreement provides as follows:
Company Liability Coverage
The Insurer shall pay on behalf of the Company Loss for which
the Company becomes legally obligated to pay on account of
any Claim first made against the Company during the Policy
Period or, if exercised, the Additional Extended Discovery
Period, for a Management Practices Act taking place before or
during the Policy Period.
ECF No. 46-1 at 38.
term “Wrongful Act” noted generally in the
Policies is defined in the Management Liability
Insuring Agreement to mean “Management Practices Act,
” which in turn is defined as follows:
Management Practices Act means:
(a) any error, misstatement, misleading statement, act,
omission, neglect, or breach of duty actually or allegedly
committed or attempted by any Insured Person in their
capacity as such, or in an Outside Position or, with respect
to the Company Liability Coverage, by the Company; or
(b) any matter claimed against the Insured Persons solely by
reason of their serving in such capacity or in an Outside
Position; provided that Management Practices Act does not
include any Employment Practices Act, Fiduciary Act, or
Errors and Omissions Act.
* * *
Id. at 39-40.
Paragraph 9 of the “Exclusions Applicable to All
Coverages of This Insuring Agreement” provides that
Travelers “shall not be liable for Loss on account of
any Claim made against any Insured” . . . “for
dividends or distributions of profits of the Company;
provided that this exclusion shall not apply to Defense
Costs.” Id. at 40, 42.
Paragraph 1 of the “Exclusions Applicable to Company
Liability Coverage” provides that Travelers
“shall not be liable under the Company Liability
Coverage for Loss on account of any Claim made against the
for liability of the Company under any contract or agreement,
either oral or written; provided that this exclusion shall
not apply to the extent that the Company would have been
liable for such Loss in the absence of such contract or
agreement; . . .
Id. at 42.
EPL Insuring Agreement's sole Coverage Part provides as
Practices Liability Coverage
The Insurer shall pay on behalf of the Insureds Loss for
which the Insureds become legally obligated to pay on account
of any Claim first made against them, individually or
otherwise, during the Policy Period, or, if exercised, the
Additional Extended Discovery Period, for an Employment
Practices Act taking place before or during the Policy
Period, provided that such Claim is brought by or on behalf
of any federal, state, provincial or local governmental body,
or any Employee, or Director or Officer.
Id. at 44.
19. “Employment Practices Act” is defined as
“any actual or alleged”:
* * *
(d) wrongful discharge or termination, whether actual or
* * *
related to the actual or prospective employment of any person
by the Company and: (i) committed or attempted by any of the
Insureds, in their capacity as such, or (ii) for which any of
the Insureds are held legally liable, in their capacity as
such, or related to the actual or prospective employment of
any person by any entity in which any Director or Officer
services in an Outside Position and committed or attempted by
such Director or Officer in their capacity in such Outside
* * *
Id. at 44-45.
20. The Policies define “Claim” to include
(a) a written demand against any Insured for monetary
* * *
(d) an arbitration proceeding against any Insured, which
shall be deemed commenced by such Insured's receipt of an
* * *
Id. at 23.
Each Policy contains an “Allocation” provision
If on account of any Claim . . . the Insureds incur an amount
consisting of both Loss covered by this Policy and loss not
covered by this Policy because the Claim includes both
covered and uncovered matters, the Insureds and the Insurer
shall allocate such amount between covered Loss and uncovered
loss, including any defense costs and judgments, using their
best efforts to determine a fair and proper allocation of all
such amounts based upon the relative legal exposures of the
parties to covered and uncovered matters.
Id. at 28.
Policies also state that the “Insurer shall advance, on
behalf of the Insureds, Defense Costs which the Insureds have
incurred in connection with Claims made against them, before
disposition of such Claims, provided that to the extent that
it is finally established that any such Defense Costs are not
covered under this Policy, the Insureds . . . agree to repay
the Insurer such Defense Costs.” Id. at 28.
referenced above, the Beserra and Kidd Claims arose from
allegations related to an “Amended and Restated
Operating Agreement” executed by DIA and its members,
including the claimants (“Operating
Section 12 of the Operating Agreement, particularly
subsections 12.4 and 12.5, pertained to the withdrawal of
members from DIA and accompanying payments that would result
12.4 provided as follows:
12.4 WITHDRAWAL OF MEMBER.
A Member is eligible to withdraw at any time, as long as such
withdrawal does not constitute a breach of this Operating
Agreement or any existing employment contract between the
Member and the Company. A Member's Resignation3 or
Retirement4 shall be a withdrawal from the Company. The
Withdrawing Member's Membership Economic Interest and
other Membership Rights will be terminated and the
Withdrawing Member shall be entitled to the Earnout Payments
according to the Member's Membership Earnout Interest as
described in Section 12.5. A Member may partially withdraw
and work a reduced work schedule with the prior consent of
and upon terms determined by the Management Committee.
ECF No. 46-4 at DIA 00000200.
Section 12.5 provided for payment of certain amounts to
withdrawn/former members as follows, in pertinent part:
a. Section 12.5.6 provided for “Earnout Payments”
to be made over sixteen quarters post-withdrawal,
“calculated by multiplying the Member's Membership
Earnout Interest or the reduction in the Member's
Membership Earnout Interest by that period's Excess
b. Section 12.5.7 defined “Excess Earnings” as
45% of DIA's total quarterly revenue, to the extent that
total quarterly revenue exceeded $6.25 million; and
proportionately lower than 45% to the extent total quarterly
revenue was less than $6.25 million;
c. Section 12.5.8 established an Aggregate Payout Limit,
which placed a cap on the total amount of Earnout Payments
that could be made in a given quarter of 20% of DIA's
total quarterly revenue;
d. Section 12.5.9 established the process by which
“Shortfall Payments” would be paid, where such
payments reflected Earnout Payments that would have been paid
in prior quarters but for exceeding the Aggregate Payout
Limit during that quarter;
e. Section 12.5.10 provided for the return of the balance of
a withdrawn member's Tangible Capital Account (containing
the capital contribution of that member) at the time of the
Final Earnout Payment; and
f. Section 12.5.11 stated that “[t]he Recipient of
Earnout Payments shall have no Membership Economic Interest,
no Membership Voting Interest and no other Membership Rights,
including the ability to participate in the Company's
profits or management in any way, except to ...