Scott Kelly v. Starr Indemnity & Liability Co

• Court: Court of Appeals for the Ninth Circuit
• Decided: April 29, 2019
• Docket: 17-56334
• Status: Unpublished

Opinion

NOT FOR PUBLICATION FILED UNITED STATES COURT OF APPEALS APR 29 2019 MOLLY C. DWYER, CLERK U.S. COURT OF APPEALS FOR THE NINTH CIRCUIT

SCOTT G. KELLY; JOHN T. DEWALD, No. 17-56334

Plaintiffs-Appellants, D.C. No. 3:15-cv-02900-JM-AGS v.

STARR INDEMNITY & LIABILITY MEMORANDUM* COMPANY, a Texas Corporation,

Defendant-Appellee.

Appeal from the United States District Court for the Southern District of California Jeffrey T. Miller, District Judge, Presiding

Argued and Submitted March 7, 2019 Pasadena, California

Before: M. SMITH and OWENS, Circuit Judges, and SETTLE,** District Judge.

Plaintiffs-Appellants Scott G. Kelly and John T. DeWald (“Plaintiffs”)

appeal the district court’s order denying their motion for summary judgment and

granting the motion for summary judgment filed by Defendant-Appellee Starr

* This disposition is not appropriate for publication and is not precedent except as provided by Ninth Circuit Rule 36-3. ** The Honorable Benjamin H. Settle, United States District Judge for the Western District of Washington, sitting by designation. Indemnity & Liability Company (“Starr”). We have jurisdiction pursuant to 28

U.S.C. § 1291, and we affirm in part and reverse in part.

Plaintiffs operated a real estate investment and development firm that

created numerous subsidiary entities to manage projects, assets, and liabilities.

One of their investors, Kenneth Brehnan, loaned Plaintiffs’ companies

approximately $359,875 and received promissory notes in exchange. On August

12, 2010, Brehnan emailed Plaintiffs a demand letter (the “Brehnan Demand”) in

which he provided “a reminder of Notes that are due” and conveyed the following

warning: “I expect all of these Notes to be paid off at [the] beginning of September

2010. . . . I would like to try not to proceed with legal remedy . . . as being

recommended by my legal team. . . .” Importantly, Brehnan demanded payment

on contracts with the companies and did not allege or assert misconduct by

Plaintiffs as directors and officers of those companies.

In May 2011, DeWald applied for a claims-made directors and officers

insurance policy (the “Policy”) with Starr. Based on the application, Starr issued

the Policy effective May 11, 2011 to May 11, 2012. In November 2011, Brehnan’s

attorney sent a more detailed demand letter and warned that Brehnan may bring

claims of “breach of contract, breach of fiduciary duties, fraud, and securities

fraud” against Plaintiffs. Plaintiffs contacted Starr to obtain defense. Starr, which

at that time did not know of the Brehnan Demand, agreed to defend the claim

2 subject to a reservation of rights while it investigated. In April 2012, Brehnan

provided Plaintiffs with a draft complaint. In August 2012, he formally filed suit.

Both complaints specifically mentioned the Brehnan Demand. After reviewing the

April draft complaint, Starr disclaimed coverage, a position it reaffirmed after

reviewing the finalized complaint that was filed in August. Plaintiffs settled with

Brehnan for $350,000, and subsequently filed suit against Starr, alleging breach of

contract and negligence and claiming that Starr had a duty to defend them in the

action against Brehnan. On opposing motions for summary judgment, the district

court concluded that the Brehnan Demand was a claim first made prior to inception

of the Policy and therefore Starr had no duty to defend or indemnify the claim.

“Interpretation of an insurance policy is a question of law and follows the

general rules of contract interpretation.” MacKinnon v. Truck Ins. Exch., 73 P.3d

1205, 1212 (Cal. 2003). “The language of a contract is to govern its interpretation,

if the language is clear and explicit, and does not involve an absurdity.” Cal. Civ.

Code § 1638. The Policy provides indemnification for losses “arising from a

Claim first made during the Policy Period . . . against such Insured Person for any

Wrongful Act . . . .” The Policy defines a “wrongful act” as “any actual or alleged

act, error, omission, neglect, breach of duty, breach of trust, misstatement, or

misleading statement by [Plaintiffs].” Under this clear language, the district court

erred in concluding that the Brehnan Demand constituted a claim made for a

3 wrongful act. Instead, Brehnan demanded money owed pursuant to contracts with

Plaintiffs’ companies, which at most establishes a question of fact whether the

claim would be covered by the Policy. Therefore, we reverse the district court’s

grant of summary judgment in favor of Starr.

“In reviewing decisions of the district court, we may affirm on any ground

finding support in the record. If the decision below is correct, it must be affirmed,

even if the district court relied on the wrong grounds or the wrong reasoning.”

Jackson v. S. Cal. Gas. Co., 881 F.2d 638, 643 (9th Cir. 1989) (citations omitted).

Starr argues that we should uphold the district court’s judgment because (1)

Plaintiffs made a material misrepresentation in the application for insurance and

(2) multiple exclusions bar coverage. Starr, however, fails to show that any one of

these theories is dispositive as a matter of law based on the current record. For

example, because it is unclear whether the Brehnan Demand constituted a claim

that would be covered by the Policy, we cannot conclude that DeWald made a

material misrepresentation when he failed to disclose it in the application despite

being asked about circumstances that might lead to potential claims. Brehnan

alleged that Plaintiffs created fake companies to hide money from investors and

that they repeatedly misrepresented their companies’ financial affairs to influence

additional investments—alleged activities that predate the Policy and would form a

stronger basis for a finding of material misrepresentation—but the record before us

4 does not establish these facts such that we can conclude that Starr has presented an

adequate ground to uphold the district court’s decision as a matter of law.

Finally, we also conclude that Plaintiffs have failed to establish that they are

entitled to a ruling on the duty to defend. If Starr obtains evidence of nonexistent

companies or material misrepresentations that predate the Policy, then Starr could

potentially establish an entitlement to equitable reformation of the contract to

exclude any claim made by Brehnan. See, e.g., Resure, Inc. v. Superior Court, 49

Cal. Rptr. 2d 354, 357–58 (Ct. App. 1996) (“It has long been held that rescission is

not the sole remedy for an insurer who has been subjected to misrepresentations

and concealment of material facts by an applicant.”). We therefore affirm the

district court’s denial of Plaintiffs’ motion for summary judgment and find no

reason to enter either full or partial judgment for either party.

Each party shall bear its own costs on appeal.

AFFIRMED IN PART; REVERSED IN PART; and REMANDED.