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Pierce v. Atlantic Specialty Insurance Co.

United States District Court, D. New Mexico

July 26, 2017

MARK PIERCE, WILLIAM C. ENLOE, and JILL COOK, TRINITY CAPITAL CORPORATION and LOS ALAMOS NATIONAL BANK, Plaintiffs,
v.
ATLANTIC SPECIALTY INSURANCE COMPANY, FEDERAL INSURANCE COMPANY, and CONTINENTAL CASUALTY COMPANY, Defendants.[1]

          MEMORANDUM OPINION AND ORDER

         On July 18, 2016, Atlantic Specialty Insurance Company (ASIC) removed to this Court three consolidated cases from the First Judicial District Court in the County of Los Alamos (“consolidated state court proceeding”).[2] NOTICE OF REMOVAL (Doc. No. 1).[3] The sole basis for removal was federal question jurisdiction. Id. at 1 (citing 28 U.S.C. §§ 1331 and 1441(a)).

         On July 19, 2016, ASIC filed DEFENDANT [ASIC'S] MOTION TO REALIGN PARTIES, stating that while ASIC had removed the consolidated state court proceeding just one day earlier on the sole ground of federal question jurisdiction, ASIC believed that realignment of the parties was warranted “based upon their real (as opposed to their claimed) interests.” ASIC Motion to Realign (Doc. No. 6). In the Motion to Realign, ASIC did not expressly argue that realignment of the parties would result in the Court having diversity jurisdiction as well as federal question jurisdiction, but that was the gist of ASIC's request for realignment. See Id. at 2 (citing case law discussing realignment of parties in the context of removal based on diversity jurisdiction). ASIC's Motion to Realign Parties was fully briefed as of August 18, 2016.

         On August 19, 2016, Continental filed DEFENDANT [CONTINENTAL'S] NOTICE OF ADDITIONAL GROUNDS FOR REMOVAL (Doc. No. 232), in which Continental expressly raised diversity jurisdiction as an additional basis for federal court jurisdiction. Also on August 19, 2016, Continental filed DEFENDANT [CONTINENTAL'S] MOTION TO REALIGN PARTIES (Doc. No. 233), arguing that complete diversity of citizenship between the parties would exist if the Court realigned the Insureds (TCC/LANB, [4] Enloe, Pierce, and Cook) as Plaintiffs and the Insurers (ASIC, Travelers/St. Paul, Continental, and Federal) as Defendants. Id. at 6. ASIC joined in Continental's Motion to Realign Parties (Doc. No. 236). However, LANB and the other “Insureds” gave notice they would not respond to Continental's Motion to Realign because it was filed in violation of the Court's earlier August 17, 2016 Order staying non-remand matters (Doc. Nos. 237-40). Continental's Motion to Realign Parties was not briefed.

         The four Plaintiffs identified in the above caption each filed a Motion to Remand in August 2016: (1) PLAINTIFF PIERCE'S MOTION TO REMAND TO STATE COURT (Doc. No. 158) (Pierce Motion to Remand); (2) [LANB'S] MOTION TO REMAND (Doc. No. 225) (LANB Motion to Remand); (3) JILL COOK'S MOTION TO REMAND (Doc. No. 226) (Cook Motion to Remand); and (4) ENLOE'S MOTION TO REMAND (Doc. No. 227) (Enloe Motion to Remand).

         In August 2016, ASIC filed separate responses to the four Motions to Remand: (1) DEFENDANT [ASIC'S] RESPONSE IN OPPOSITION TO PLAINTIFF MARK PIERCE'S MOTION TO REMAND (Doc. No. 223) and SUPPLEMENT TO DEFENDANT [ASIC'S] RESPONSE IN OPPOSITION TO PLAINTIFF MARK PIERCE'S MOTION TO REMAND (Doc. No. 228); (2) DEFENDANT [ASIC'S] RESPONSE IN OPPOSITION TO PLAINTIFF[ LANB'S] MOTION TO REMAND (Doc. No. 243); (3) DEFENDANT [ASIC'S] RESPONSE IN OPPOSITION TO PLAINTIFF WILLIAM ENLOE'S MOTION TO REMAND (Doc. No. 245); and (4) DEFENDANT [ASIC'S] RESPONSE IN OPPOSITION TO PLAINTIFF JILL COOK'S MOTION TO REMAND (Doc. No. 244).

         On September 16, 2016, LANB, Ms. Cook, Mr. Pierce, and Mr. Enloe each filed a Reply in support of the Motions to Remand (Doc. Nos. 247, 249, 251, and 253).

         On September 28, 2016, Continental requested leave to file a combined response to the four Motions to Remand, which was granted. See DEFENDANT [CONTINENTAL'S] RESPONSE TO REMAND ARGUMENTS BY PLAINTIFFS JILL COOK, MARK PIERCE, [LANB], AND WILLIAM ENLOE (Doc. No. 263) (Continental's Consolidated Response).

         On October 19, 2016, LANB separately filed a reply to Continental's Consolidated Response in which Ms. Cook, Mr. Pierce, and Mr. Enloe joined (Doc. Nos. 265, 266, and 267). [LANB'S] REPLY TO DEFENDANT [CONTINENTAL'S] RESPONSE TO REMAND ARGUMENTS BY JILL COOK, MARK PIERCE, [LANB] AND WILLIAM ENLOE (Doc. No. 264) (LANB Reply to Continental's Consolidated Response).

         Background[5]

         A. Parties

         LANB is a national banking association organized under the National Bank Act, with its principal place of business in Los Alamos and with branch offices in White Rock, Santa Fe, and Albuquerque. TCC is the sole owner of the outstanding shares of LANB.

         William C. Enloe served as Chief Executive Officer and as a member of the Board of Directors of both TCC and LANB at the time of the 2012 bank examination conducted by the Office of the Comptroller of the Currency (OCC). Mr. Enloe resigned his positions at TCC and LANB in February 2013.

         Jill Cook formerly served as Senior Vice President and Chief Credit Officer for the Loan Department at LANB. In December 2012, LANB terminated Ms. Cook's employment.

         Mark Pierce was a loan officer in LANB's loan department during the 2012 OCC examination. Mr. Pierce continued in that position until he tendered his letter of resignation on April 4, 2013.

         OneBeacon Insurance Group (OneBeacon) is a Bermuda domiciled holding company that is publicly traded on the New York Stock Exchange. On May 1, 2012, OneBeacon issued LANB a Management and Professional Liability Insurance Policy with policy number 474-00-08-14-0003 for the period 5/1/12 to 5/1/13. The policy was placed with ASIC, [6] one of several insurance company subsidiaries of OneBeacon (hereafter, referred to as the ASIC policy). Coverage was renewed for the 5/1/13 to 5/1/14 policy year.

         Travelers/St. Paul and Continental provided excess umbrella insurance coverage above the ASIC policy issued for the 5/1/12 to 5/1/13 policy period. LANB Motion to Remand at 2-4.

         Federal provided excess umbrella insurance coverage above the ASIC policy issued for the 5/1/13 to 5/1/14 policy year. Federal also issued a primary “ForeFront Portfolio for Community Banks” insurance policy for the 5/1/14 to 5/1/15 policy year, when ASIC declined to renew its coverage for that policy year. Id.

         B. Insurance Policies

         The ASIC policy is a specialty policy designed for financial institutions like LANB, and it provides coverage for a variety of risks and exposures typically faced in financial institutions. One such risk is the cost associated with responding to regulatory investigations. The ASIC policy defines a “claim” to include “a formal regulatory proceeding commenced by the filing of a notice of charges, formal investigative order or similar document.” LANB Motion to Remand at 4. An “Insured Person” under the ASIC policy “means any past, present or future director, member of the board of trustees, officer, employee, etc.” Id. The ASIC policy promises to pay on behalf of Insured Persons “loss” for which the Insured Persons are not indemnified by LANB. The ASIC policy also promises to pay on behalf of LANB a “Loss” for which LANB grants indemnification to Insured Persons.

         The excess umbrella policies issued by Federal, Travelers/St. Paul, and Continental are “follow form” policies that provide the same coverage as the primary ASIC policies conditioned on exhaustion of the underlying policy limits.

         C. OCC and SEC Investigations[7]

In 2012, the [OCC] conducted an examination of LANB as of June 30, 2012. The 2012 OCC examination found unsafe or unsound banking practices relating to management and board supervision, credit underwriting, credit administration and deficiencies in internal controls. As a consequence, on November 30, 2012, LANB entered into a formal written agreement with the OCC in which LANB agreed to take certain actions to address and rectify the deficiencies uncovered in the 2012 OCC examination.
As a further consequence, the deficiencies identified by the OCC were ultimately determined to have resulted in Trinity and/or LANB misstating their financial condition and net income in filings with various federal regulatory agencies, including the OCC and United States Securities and Exchange Commission (“SEC”). On December 6, 2012, Trinity filed a Form 8-K Current Report with the SEC in which it disclosed the deficiencies uncovered by the 2012 OCC examination. That same day, LANB sent an e-mail to ASIC's claims department giving notice of circumstances that could give rise to a claim under the ASIC policy and attached copies of the November 30, 2012 OCC agreement and the December 6, 2012 8-K Current Report. ASIC did not acknowledge receipt of this notice until February 14, 2013 and then only advised that it would “simply reserve all rights and defenses under the policy provisions, and at law, with regard to future developments in the matter.”
On or about December 8, 2012, an attorney for Jill Cook sent a letter to the President of LANB, demanding, inter alia, that LANB indemnify her for attorney fees she incurred in responding to the OCC investigation and a so-called “Fifteen Day Letter.” LANB forwarded Ms. Cook's demand letter to ASIC's claims department on January 16, 2013 and ASIC acknowledged receipt of the demand letter and LANB's notice of claim on January 17, 2013.
In late 2012 or early 2013, the SEC opened an investigation captioned In the Matter of Trinity Capital Corporation (D3320), which related to the circumstances surrounding the restatement of Trinity's financial statements following the 2012 OCC examination. Beginning in January, 2013, and continuing into 2014 and 2015, the SEC issued numerous subpoenas to Trinity, LANB and to various current and former officers, directors and employees of Trinity and LANB, requesting production of documents and in some instances, commanding the recipients to appear and give sworn testimony at the SEC's regional offices in Denver, Colorado. Copies of the subpoenas received in 2013 were forwarded to ASIC's claims department in December of 2013. [Additional subpoenas followed].
Mr. Enloe, Ms. Cook and Mr. Pierce have been targets of these ongoing regulatory investigations and had requested that LANB indemnify them for legal fees and costs incurred in responding to the investigations. LANB denied their requests because it determined that it was prohibited from indemnifying these individuals under the provisions of 28 U.S.C. part 359 and the New Mexico Business Corporations Act ….
On January 7, 2015, ASIC's claims adjuster advised LANB for the first time that ASIC was reserving its rights to deny coverage for the ongoing regulatory investigations on the basis that ASIC had not been provided adequate or timely notice of a claim or circumstances that could give rise to a claim during the 2012-2013 ASIC policy period. However, the ASIC claims adjuster did not accept or deny coverage but requested additional documents. On April 30, 2015, ASIC's claims adjuster sent a letter to counsel for Jill Cook denying coverage for Ms. Cook's claim for reimbursement of her defense costs in responding to the regulatory investigations. ASIC's denial of coverage was premised [on] LANB's alleged failure to give timely or adequate notice of claims or circumstances that could give rise to a claim during the 2012-2013 policy period.

LANB Motion to Remand at 4-7.

         D. Procedural History

         1. William C. Enloe's underlying lawsuits

         On May 11, 2015, Mr. Enloe filed an initial Complaint for Declaratory Relief Regarding Insurance and Indemnity Agreements against LANB and ASIC in the First Judicial District Court (County of Los Alamos) (D-132-CV-2015-00047) and on July 1, 2015, LANB removed D-132-CV-2015-00047 to federal court on the basis of federal question jurisdiction. Doc. No. 1- 3 in Civ No. 15-567 WPL/KBM. On July 30, 2015, Mr. Enloe filed a Rule 41 Notice of Dismissal Without Prejudice of Civ. No. 15-567.

         On September 1, 2015, Mr. Enloe filed a Complaint for Declaratory Relief, Breach of Insurance Contract, Insurance Bad Faith, Breach of the New Mexico Insurance Practices Act, and Negligence against ASIC, OneBeacon, Federal, and LANB in the First Judicial District Court (County of Los Alamos) (D-132-CV-2015-00082). LANB states that unlike Mr. Enloe's initial and amended complaints that he filed in May 2015, this September 1, 2015 Complaint did not include a claim for indemnity against LANB. LANB Motion at 9 n.4.[8]

         On October 7, 2015, Mr. Enloe filed a Verified Waiver and Disclaimer with prejudice disclaiming his right to pursue a declaratory judgment action against LANB to indemnify Mr. Enloe for fees related to the regulatory and enforcement litigation.

         On October 15, 2015, the New Mexico Superintendent of Insurance accepted service on behalf of ASIC and OneBeacon. On November 16, 2015, ASIC and OneBeacon answered the September 1, 2015 Complaint.

         On February 1, 2016, the First Judicial District Court in the County of Los Alamos entered an Order consolidating Mr. Enloe's lawsuit against ASIC, Federal, and LANB with LANB's lawsuit against ASIC, Federal, Enloe and Cook (see below). Thus, State Court Cause Nos. D-132-CV-2015-00082 and D-132-CV-2015-00083 were consolidated for all purposes and filings were entered in the lead case, D-132-CV-2015-00082. See Doc. No. 94 (attached state court filings).

         On April 28, 2016, the First Judicial District Court in the County of Los Alamos entered a second Order of Consolidation upon LANB's unopposed motion, consolidating the three state court actions, i.e, the Enloe, LANB, and Pierce lawsuits (see below). Thus, State Court Cause Nos. D-132-CV-2015-00082, D-132-2015-00083, and D-101-CV-2015-0231 were all consolidated under the lead case, D-132-CV-2015-00082. The caption used for the consolidated cases included all three cases.[9]

         On May 31, 2016, Mr. Enloe filed a First Amended Complaint for Declaratory Relief, Breach of Insurance Contract, Insurance Bad Faith, Breach of the New Mexico Insurance Practices Act, and Negligence in the consolidated state court proceeding against ASIC, Federal, LANB, Travelers/St. Paul, and Continental in the First Judicial District Court in the County of Los Alamos. This is the first time Mr. Enloe named Travelers/St. Paul and Continental as Defendants. The Enloe First Amended Complaint is the operative Enloe Complaint in this removed action.

         2. LANB's Related Underlying Lawsuits

         On July 1, 2015, LANB filed in federal court a Complaint for Declaratory Relief, Bad Faith Breach of Insurance Contracts and Violations of the New Mexico Unfair Insurance and Unfair Trade Practices Act against ASIC, Federal, Mr. Enloe and Ms. Cook. Doc. No. 1 in Civ. No. 15-564 WPL/KBM. On September 1, 2015, LANB filed a Rule 41 Notice of Voluntary Dismissal Without Prejudice of CIV No. 15-564 WPL/KBM.

         Also on September 1, 2015, LANB filed in the First Judicial District Court (County of Los Alamos) (D-132-CV-2015-00083) a Complaint for Declaratory Judgment, Bad Faith Breach of Insurance Contracts, and Violations of the New Mexico Unfair Insurance Practices Act and Unfair Trade Practices Act against ASIC, Federal, Mr. Enloe and Ms. Cook.

         On September 22, 2015, counsel for ASIC entered an appearance and accepted service of the LANB state court action on behalf of ASIC. On October 22, 2015, ASIC filed its Answer in the LANB state court action.

         On February 2, 2016, LANB and Mr. Enloe filed a Stipulated Motion to Dismiss all Declaratory Claims against Defendant [Enloe] Re Indemnification. See Doc. No. 186 (attached state court filings). This Stipulated Motion related to Mr. Enloe's October 7, 2015 disclaimer, filed in Mr. Enloe's state court lawsuit, that there was no actual controversy under NMSA § 44-6-2 (Declaratory Judgment Act). Thus, LANB agreed to dismiss its claim for declaratory relief against Mr. Enloe as to indemnification. See Stipulated Order.

         3. Mark Pierce's Related Underlying Lawsuits

         On November 2, 2015, Mr. Pierce filed a “Complaint for Declaratory Relief on Coverage under an Insurance Policy or Policies, for Declaratory Relief on Employer's Duty to Indemnify Employee for Defense Costs Incurred in Defense of Authorized Actions Done in the Scope and Course of Employment Duties, and for Damages for Bad Faith Breach of Insurance Policy or Policies, for Common Law and/or Statutory Bad Faith by an Insurance Company or Companies, for Violations of the New Mexico Unfair Practices Act, and for Bad Faith Breach of Employer's Duty of Good Faith Indemnification under Respondent (sic) Superior Liability” against ASIC, LANB, and Federal in the First Judicial District Court (County of Santa Fe). (D-101-CV-2015-02381).

         On November 25, 2015, Mr. Pierce filed an Amended Complaint (with the same title as above) against the same Defendants in the same state court. On February 22, 2016, ASIC filed its Answer.

         As stated above, the First Judicial District Court (County of Los Alamos) consolidated the Enloe, LANB, and Pierce lawsuits on April 28, 2016.

         On July 7, 2016, Mr. Pierce filed another Amended Complaint with a slightly different title than both the original Complaint and the (first) Amended Complaint. The July 7, 2016 pleading is identified as an “Amended Complaint for Declaratory Relief on Coverage Under an Insurance Policy or Policies and for Damages Resulting from Breach of Insurance Policy or Policies, Willful Breach of Insurer's Covenant of Good Faith, Violations of the New Mexico Insurance Trade Practices and Frauds Act, and Violations of the New Mexico Unfair Trade Practices Act” against the same Defendants in the First Judicial District Court in the County of Los Alamos. The July 7th Amended Complaint was filed in the consolidated state court proceeding and is the operative Pierce Complaint in this removed action.

         4. Jill Cook's Related Underlying Claims

         Ms. Cook did not file a lawsuit against any of the parties. Instead, in her January 8, 2016 Answer to LANB's Complaint (D-132-CV-2015-00083), Ms. Cook filed a Cross Claim against ASIC and Federal. See Doc. Nos. 102-103 (attached state court filings). The Cross Claim alleged, in part, that ASIC and Federal owed Ms. Cook a duty to defend and indemnify her for costs related to the federal regulatory investigations of LANB. Cook Answer and Cross Claim ¶¶ 84, 92.

         On February 3, 2016, Ms. Cook and LANB filed a Stipulated Motion to Dismiss all Declaratory Claims against Defendant Jill Cook Re Indemnification, stating that Ms. Cook had agreed not to pursue claims against LANB for defense and indemnity related to the federal regulatory investigations. Ms. Cook and LANB stipulated and agreed that LANB's request for declaratory relief regarding Ms. Cook could be dismissed, without prejudice. Doc. No. 187 (attached state court filings). On February 17, 2016, the First Judicial District Court in the County of Los Alamos entered a corresponding Stipulated Order dismissing LANB's claim regarding indemnification of Ms. Cook. See Doc. No. 136.

         5. ASIC's Removal of the Consolidated State Court Proceeding

         On July 18, 2016, ASIC filed its Notice of Removal relying on Mr. Pierce's July 7, 2016 Amended Complaint. ASIC states that it was served electronically with Mr. Pierce's Amended Complaint on July 7, 2016 and that it filed the Notice of Removal within 30 days of receipt of the Pierce Amended Complaint. Notice of Removal ¶¶ 2, 6. ASIC asserts that the July 7, 2016 Amended Complaint “raised for the first time allegations from which the defendant could ascertain that the case had become removable pursuant to 28 ...


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