Delaware Superior Court Rules Pursuit of Affirmative Claims Was Strategically Defensive
Delaware Superior Court Rules Pursuit of Affirmative Claims Was Strategically Defensive
By David A. Gauntlett*
Introduction
On February 8, 2022, the Delaware Commercial Court, in Legion Partners Asset Management, LLC v. Underwriters at Lloyds of London, ordered payment of the principal amount of $1, 186, 946.08 plus prejudgment interest for defense fees at the legal rate of 5.25% pursuant to Delaware statute, 6 Del. C. sec. 2301(a) for a total sum of $1, 249, 260.75 accruing from the date of presentment of the fees to Underwriters.[1]
In so ruling, it brought to a conclusion a coverage dispute addressing claims for wrongful conduct by an ex-employee held compensable after a counterclaim in the employment arbitration dispute incorporated mirror image fact allegations to those addressed in a stayed state court action for “breach of fiduciary” duty by an ex-employee. Although captioned as a “whistleblower complaint”, the “breach of fiduciary” duty fact allegations in the stayed LASC action were defensible because the insured’s argument that they were not being actively pursued in a lawsuit outside the arbitration elevated form over substance given that the identical fact allegations at issue in both proceedings.
Insurer’s Arguments Against Affirmative Pursuit as Defensive Activity
In its 2020 order[2], the court concluded that defense fees for resistance of the counterclaim allegations in the arbitration required the same legal analysis at work as to resist the stayed LASC action. It was of no moment that the stay precluded the parties from litigating issues beyond the employment dispute because the ex-employee complaint introduced the same legal arguments in the stayed action as part of its defense of the claims filed against legion in the employment arbitration. As Judge LEGROW explained:
“After the LASC action was stayed, Albert filed Counterclaim against Legion in the Arbitration Proceeding (the “Arbitration”). The counter claim asserted the following counts against Legion: (1) Violation of California’s Whistleblower Statute; and (2) Wrongful Termination in Violation of Public Policy. Specifically, Albert alleged that he engaged in protected activity under California’s whistleblower statute by disclosing information related to conduct that violated or that Albert believed violated state laws, federal laws or regulations and Albert averred that Legion’s adverse employment actions were taken as a result of his engagement in protected activity. Finally, Albert also alleged that Legion’s employment actions disregarded California’s public policy, were authorized or ratified by an officer, director, or managing agent, and directly and proximately harmed Albert.”[3]
In so finding, the court rejected narrower constructions of the “conducted against liability” duty that suggests “inextricably intertwined” relationships between the litigation activity and fact proof to the action that was being legally defensive in accord with applicable California authority.[4]
“Conducted Against Liability”
In its critical ruling on the cross-motions for summary judgment, Judge LeGrow of the Delaware Commercial Court clarified that it had not ruled on whether affirmative claims were strategically defensive when they were pursued in an arbitration because they were “conducted against liability.” The court concluded that Delaware court decisions, as well as a number of cases from other jurisdictions, had concluded that the affirmative claims were defensive. The court also noted the applicable test for whether defensive act strategy was employed require inquiry into “the reasonableness and the necessity of the defense strategy to minimize liability, expenses and a cost benefit analysis of that strategy.”[5]
As Legion’s Affirmative claims were “conducted against liability” Underwriters “reasonable best efforts” argument was moot since allocation between the parties was not necessary given the courts holding that all Legion’s defense costs are covered Loss.
The court denied reconsideration of that order[6] reasoning that:
As the Opinion explains at length, the factual allegations in the arbitration counterclaim substantively were the same as those underlying the claims lodged against Plaintiff's principals in the pending California litigation. In defending the counterclaim, Plaintiff necessarily had to defend its principals' actions, both in order to defeat the counterclaim and because it was at least possible the arbitration award would have a preclusive effect in the California litigation.
A request for review to the Delaware Supreme Court was, also, denied.[7]
“Conducted Against Liability” Coverage law in Other States
Current New York law does not address the “inextricably intertwined” language used in other states.[8] As such, the court, in VR Optics, relied on the language “two cases are mirror images of each other” used in prior New York cases and applied the standard which “requires more than ‘common facts’ and ‘related’ legal theories.”[9] Using this interpretation, the court, in VR Optics, awarded reimbursement of attorney fees to VR Optics.
Nonetheless the mirror image test is too restrictive and not in accord with prior New York case authority. The “mirror image” standard the court applied in VR Optics follows a more restrictive rule that is in minority to the standard set in Ultra Coachbuilders, Inc. v Gen. Sec. Ins. Co.[10] which applies California law holding that “an insurer has a duty under the insurance policy to defense the insured in any proceeding initiated against any insured.”[11]
Prejudgment Interest Was Awarded from Date of Fee Presentment to Insurer
In its opinion filed January 31, 2022,[12] the court determined that Underwriters had breached its contractual duty to defend Legion and, as such, must pay prejudgment interest as a matter of right under Delaware law.[13] As such, Legion was awarded prejudgment interest on a floating rate basis[14] at the applicable 5.25% rate in Delaware which is computed from the date the payment was due.[15]
Conclusion
The Delaware Commercial court’s thoughtful ruling in Legion is important for three separate reasons:
First, the Orders clarified that Delaware law would adopt the in “conducted against liability” standard articulated in Hewlett-Packard with its carefully orchestrated test to determine which fees qualify and what which do not as defensive;
Second, the court clarifies that proceedings other than the label at first articulated lawsuit against a policyholder might compel an insurer to defend a “related action” (here an arbitration) while the “related action” (the LASC Action) was stayed.
Third, the ruling notes supporting authority out of state for this expansive insurer defense concept. It sets forth a rationale for its application to other settings.
Fourth, the strategically defensive test for fee reimbursement reflects the modern trend nationally.
Fifth, notably, this standard is not inconsistent with New York which have not had occasion to face these issues head on to address the minimum required to obtain defensive affirmative relief coverage.
If you enjoy this content, you can find my full list of blogs here: https://docs.google.com/document/d/1N3YsMmn0Ii1GqHWSBEE1pPzh1jQbU6htkJZ2e55Y2eM/edit?usp=sharing
*David A. Gauntlett is a principal of Gauntlett & Associates who represents Legion Partners, LLC as coverage counsel. For more information, visit Gauntlett & Associates at www.gauntlettlaw.com.
[1] Legion Partners Asset Management, LLC v. Underwriters at Lloyds of London, C.A. NO. N19 C-08- 305 AML CCLD, Granted Proposed Order Re: Prejudgment Interest and Entry of Final Judgment (Del. Super. Ct. February 8, 2022).
[2] Legion Partners Asset Mgmt., LLC v. Underwriters at Lloyd’s London, 2020 Del. Super. 2804 (Sept. 25, 2020)
[3]Id. at *5-6
[4] See, David A. Gauntlett, When Is Offensive Activity Compensable As Part of An Insurer’s Duty to Defend, Gauntlett Law, p. 3-4 (April 2021)
[5] Legion Partners, 2020 Del. Super. LEXIS 618, *21 (Sept. 30, 2021) citing Hewlett-Packard Co. v. Ace Prop. & Cas. Co., 2006 U. S. LEXIS 109538 at 217 (N.D. Cal. June 12, 2008)
[6] Legion Partners Asset Mgmt., LLC v. Underwriters at Lloyd’s London, 2020 Del. Super. 2859, *6 (October 29, 2020)
[7] Legion Partners Asset Mgmt., LLC v. Underwriters at Lloyd’s London, 2020 Del. Super. 2930 (Nov. 23, 2020)
[8] VR Optics v. Peloton Interactive, Inc., 2021 U.S. LEXIS 60901, *9 (E.D.N.Y. Mar. 30, 2021) citing St. Paul Fire & Marine Ins. Co. v. Scopia Windmill Fund, LP, No. 14-cv-8002(JSR), 2015 LEXIS 123189 (S.D.N.Y. Sept. 9, 2015) (“[A]cknowledging that "other jurisdictions" use the inextricably-intertwined standard to identify covered affirmative claims but that ‘[t]he Court has not come across any case applying New York law that has considered this standard.’”)
[9] VR Optics at *8-9 (“To implicate the duty to defend, a party's affirmative claims cannot be ‘separable from the main action on any coherent grounds’ and cannot go ‘further than merely seeking the opposite of the relief demanded" of the party.’”)
[10] 229 F. Supp.2d 284, 289 (S.D.N.Y. 2002)
[11] See, David A. Gauntlett, When Is Offensive Activity Compensable As Part of An Insurer’s Duty to Defend, Gauntlett Law, p. 4-5 (April 2021).
[12] Legion Partners Asset Mgmt, LLC v. Underwriters at Lloyd London, 2022 Del. Super LEXIS 57 (January 31, 2022)
[13] Id. at *6 citing Citadel Holding Corp. v. Roven, 603 A.2d 818, 826 (Del. 1992) (“In Delaware, prejudgment interest is awarded as a matter of right…from the date payment is due.”); see also, Moskwitz v. Mayor & Council of Wilmington, 391 A.2d 209, (Del. Super. 1978).
[14] See, 6 Del. C. § 2301(a) (“Any lender may charge and collect from a borrower interest at any rate agreed upon in writing not in excess of 5% over the Federal Reserve discount rate including any surcharge thereon.”)
[15] See, Dyncorp v. Certain Underwriters at Lloyd’s, 2011 Del. Super. LEXIS 6892, *3-4 (Apr. 17, 2012) (“[p]rejudment interest is computed from the date payment is due…In insurance cases, prejudgment interest will be awarded where the policyholder has timely demanded indemnification and where it has incurred and paid monies that should have been paid by the insurer.”)