Judge Carpenter Grants Partial Summary Judgment on Defense Costs and Dismisses Almost All Counterclaims

February 13, 2019

Publication

In AR Capital, LLC v. XL Specialty Insurance Co., et al., C.A. No. N16C-04-154 WCC CCLD, Judge Carpenter resolved several case dispositive motions filed as part of contentious litigation between AR Capital, LLC, intervenor VEREIT, Inc., and several insurers. In 2011, VEREIT and AR Capital entered into an Acquisition and Capital Services Agreement and a Management Agreement, under which AR Capital performed management and advisory services related to VEREIT’s investments and operations. The agreements were terminated in 2013 and 2014, respectively, and shortly thereafter VEREIT’s board of directors’ audit committee began investigating certain reporting irregularities. As a result of the investigation, VEREIT had to issue several financial restatements, the SEC ordered an investigation, and several lawsuits were filed.

AR Capital alerted its primary insurer of the lawsuits. That insurer began providing coverage on behalf of six officers and directors of AR Capital, but denied coverage as to the corporate entity itself. AR Capital subsequently demanded coverage from all insurers and indemnification from VEREIT. Since the policy that covered AR Capital was purchased by VEREIT, defense invoices were initially submitted and reviewed by VEREIT and, upon approval, forwarded to the carrier for payment. At first, this method seemed to work. About a year into the process, however, AR Capital learned that VEREIT had failed to submit additional AR Capital defense invoices for payment. Instead, VEREIT had submitted invoices for their own defense costs and substantially exhausted the limits of the primary and first excess policy in the tower. VEREIT allegedly had told the insurers that it spoke on behalf of all insureds, including AR Capital. Once this was discovered, AR Capital initiated litigation against the insurers, and sought a declaration that it was entitled to be treated fairly and equitably under the primary and excess insurance policies. AR Capital alleged that the insurers had favored VEREIT over AR Capital, leaving AR Capital exposed to catastrophic costs.

The insurers moved to dismiss AR Capital’s claim for failure to add VEREIT as a necessary party, and AR Capital moved for partial summary judgment on the issue of defense costs. Subsequently, VEREIT moved to intervene, and the insurers’ motion to dismiss became moot. VEREIT then filed a complaint against AR Capital for declaratory relief. AR Capital filed several counterclaims against VEREIT.

In deciding the case disposition matters, first, the court granted AR Capital’s motion for partial summary judgment on defense costs and denied VEREIT’s cross-motion for summary judgment. There was no dispute that AR Capital was entitled to “Side B” coverage, covering Wrongful Acts by an Insured Person, for the period before VEREIT became self-managed. The main dispute concerned whether AR Capital was entitled to so-called “Side C” coverage, concerning Company Acts. The court analyzed the insurance coverage under well-settled principles of Delaware contract law and found that the definitions within the policy created an ambiguity that was easily resolved based upon the conduct of the parties. The court determined that the only way to “logically read [the relevant portion of the contract] is to find that AR Capital was entitled to Side C coverage.” Relying on Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 1177 (Del. 1992), to look at the parties’ intent, the court found there was no evidence to suggest that the policy was drafted to prohibit AR Capital from receiving Side C coverage.

Second, the court granted VEREIT’s motion to dismiss AR Capital’s First Amended counterclaims II-VI. AR Capital had alleged six causes of action against VEREIT, including declaratory judgment, fraud, tortious interference, breach of the obligation of good faith and fair dealing, unjust enrichment, and negligence. The court found that even if all these claims could be established, AR Capital would be unable to show that it suffered any damage.

Analysis: This case exemplifies the type of contentious insurance litigation brought in the CCLD and the court’s ability to promptly resolve several different case dispositive motions. It also demonstrates how Delaware courts will hold the parties to the terms of the contract, but in cases of contractual ambiguity will look to the parties’ conduct and intentions to interpret the contract. See Sonitrol Holding Co. v. Marceau Investissements, 607 A.2d 1177 (Del. 1992); In re Mobilactive Media, LLC, 2013 WL 297950 (Del. Ch. 2013).

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