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Judge Davis Considers Issues of Collateral Estoppel in Insurance Coverage Dispute Resulting from Court of Chancery Litigation

April 26, 2018

In Arch Insurance Co. v. David H. Murdock, C.A. No. N16C-01-104 EMD CCLD, Judge Davis granted in part and denied in part the plaintiff insurers’ motion for summary judgment arguing that the insurers did not have a duty to indemnify the insureds.

This dispute arose in connection with a settlement agreement reached in In re Dole Food Company, Inc. Stockholder Litigation, a Court of Chancery case in which the shareholders of Dole alleged that the directors and officers of the company engaged in fraud. The insurers provided liability insurance coverage to Dole’s directors and officers. Based on the allegations in the Court of Chancery action, the insurers sought a declaration in the Superior Court that the applicable insurance agreements did not require indemnification in light of the actions of the insureds. The insureds filed counterclaims and contended that the insurers had acted in bad faith by not paying the insurance policies.

Several months after the counterclaims were filed, the insurers moved for summary judgment on five grounds: (1) indemnification is not permitted under Delaware and California law; (2) written consent was not obtained prior to settling as required by the insurance agreements; (3) the insureds did not cooperate with the insurers in litigating the underlying action; (4) the fraud in the inducement counterclaim failed as a matter of law; and (5) the bad faith counterclaim also failed as a matter of law. The insurers also requested that Judge Davis prevent the insureds from relitigating factual issues raised in the Court of Chancery under the doctrine of collateral estoppel. Ultimately, Judge Davis granted the motion with respect to the fraudulent inducement counterclaim and found that collateral estoppel should apply. However, Judge Davis denied summary judgment on the other issues after finding that further development of the factual record was required.

First, Judge Davis considered whether collateral estoppel was applicable. In considering the issue, Judge Davis noted the distinction between the doctrines of res judicata and collateral estoppel. While res judicata refers to claim preclusion, collateral estoppel refers to issue preclusion. Here, Judge Davis found that collateral estoppel should apply to certain factual issues decided by the Court of Chancery because the Vice Chancellor’s rulings were “sufficiently firm,” and the settlement between the parties following issuance of the opinion “rendered the Memorandum Opinion final for collateral estoppel.”

Second, Judge Davis held that Delaware law applied to the action and neither Delaware law nor Delaware public policy precluded indemnification. In considering this issue, Judge Davis first conducted a choice of law analysis under Delaware’s substantial relationship test. The insureds argued for Delaware law because it was the place of incorporation, while the insurers argued for California law because it was Dole’s principal place of business and the location of the fraudulent acts. The insurers apparently favored California law because a California statute provides that indemnification for willful acts that cause loss is not permitted in insurance contacts. Judge Davis, however, determined that Delaware law applied because the policies at issue provided directors and officers with insurance coverage, and Mr. Murdock and Mr. Carter, the individual defendants covered by the policies, were directors and officers in a Delaware corporation. The underlying suit was also brought by stockholders of Dole in the Court of Chancery, the situs of Dole’s stock was Delaware, and the Court of Chancery applied Delaware law in holding that the duty of loyalty had been breached. Accordingly, Delaware had a more significant relationship to the dispute, and Judge Davis found that Delaware law did not prohibit the insurers from indemnifying for the insureds’ fraud.

Finally, Judge Davis considered the insurers’ remaining arguments and found summary judgment was premature on the issues of prior written consent, cooperation, and the bad faith counterclaim. On the other hand, Judge Davis did dismiss the insureds’ fraudulent inducement counterclaim with prejudice. In so holding, Judge Davis found that consent to settlement provisions similar to those in the applicable policies do not provide an insurer an absolute right to veto a reasonable settlement, but are designed to protect the insurer from prejudice. Although the insurers established that they did not provide written consent to settle, they failed to show prejudice. Accordingly, summary judgment was denied. Similar reasons were used to reject the insurers’ cooperation clause argument. In sum, Judge Davis found that the insureds’ notification of settlement discussions but failure to involve the insurers in such discussions created a material issue of fact regarding breach of the cooperation clause.

With respect to the bad faith and fraudulent inducement counterclaims, Judge Davis held that summary judgment was premature on the bad faith claim. Although the insurers advanced a well-reasoned argument as to why coverage was denied, Judge Davis held that the insureds were still entitled to discovery to test that basis. On the fraudulent inducement claim, Judge Davis held that it was a contract claim “bootstrapped” into a fraud claim. Because Delaware law prohibits claimants from recasting breach of contract claims as fraud claims, Judge Davis dismissed the fraud claim and required the insureds to pursue contractual theories.

Analysis: This case highlights the relationship between the CCLD and the Court of Chancery. Here, the Court of Chancery’s decision in connection with a stockholder dispute spawned ancillary litigation in the Superior Court. This case also demonstrates that Delaware courts are not inclined to relitigate factual issues decided by sister courts. Even though the Court of Chancery’s decision was not appealed to the Delaware Supreme Court, Judge Davis considered it a final judgment on the merits for purposes of collateral estoppel because the parties settled the Chancery action shortly after the Vice Chancellor’s decision was released. Accordingly, there was an element of finality in the decision, and Judge Davis was comfortable applying the doctrine of collateral estoppel.

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