Monday, May 11, 2020
Ninth Circuit Reverses Judgment That Company Must Return $5 Million Paid by Insurer
By a MetNews Staff Writer
The Ninth U.S. Circuit Court of Appeals has vacated a summary judgment which declares that a company must repay the $5 million its insurer provided for the defense of a former company executive in two matters, holding that the District Court erred in interpreting the word “contemplate” according to its dictionary definition, while disregarding an expert’s testimony as to what it means in an insurance context.
Applying California law in a diversity case, a three-judge panel on Thursday said that under a state Civil Code provision, “trade usage” of the term in question should have been considered.
The controversy centered on Question 8 in a Scottsdale Insurance Company form titled “Renewal Application for Business and Management Indemnity Insurance”: “Does the Company contemplate transacting any mergers or acquisitions in the next 12 months where such merger or acquisition would involve more than 50% of the total assets of the company?”
Tamara Brandt, at the time, general counsel for a Santa Monica start-up technology company, then known as ServiceMesh, Inc., on June 26, 2013, filled out and submitted the application, answering “no.”
Scottsdale, in later disclaiming liability under the policy, argued that the response to Question 8 was untruthful. Its assertion was based on ServiceMesh having been, when the application was filed and for months before that, in heavy negotiations with the multinational technology giant Computer Sciences Corporation, which was seeking to purchase it.
That company on Nov. 15, 2013, did acquire ServiceMesh for more than $260 million. It became known as CSC Agility Platform, Inc.
In 2015, Computer Sciences sued Eric Pulier, who had been ServiceMesh’s CEO, for alleged fraud in his representations as to the company’s revenues, thus bolstering the purchase price. Pulier then sued Computer Sciences and CSC Agility, claiming that, under Scottsdale policy, he was entitled to receive reimbursement for his attorney fees and costs.
The court, in Delaware, ordered that the reimbursement be made.
The U.S. Department of Justice and Securities and Exchange Commission undertook a probe of Pulier’s role in the merger, as did authorities in Australia, given that a bank in that nation was implicated in the alleged distorting of the value of ServiceMesh. Pulier made claim for his defense costs.
Scottsdale paid out $5 million—the policy limit—subject to a reservation of rights.
District Court Judge Philip S. Gutierrez of the Central District of California on Feb. 4, 2019, granted Scottdale’s motion for summary judgment in its action to recoup the $5 million and denied summary judgment on the cross claims by Computer Sciences Corporation and CSC Agility Platform, Inc.
Guiterrez was unpersuaded by the declaration of an expert, Evan Rosenberg. He opined that no reasonable underwriter of a directors and officers (“D&O”) liability policy issued to a company like ServiceMesh “would interpret an application question asking whether the applicant ‘contemplate[d]’ being merged out or acquired as requiring the company to answer ‘Yes’ if the company executive was simply thinking whether the company might be purchased.”
Rosenberg also said:
“In the context of underwriting a D&O policy for a technology start-up, ‘contemplating being acquired’ is a term we use to mean ‘actively considering an offer to buy the company.’ ”
He expressed the view that Question 8 “could only have been asking whether ServiceMesh’s Board of Directors had considered an offer to buy the company.”
In discounting Rosenberg’s declaration, Gutierrez said it “is arguably irrelevant to the question before the Court” because his views are “all based on how a reasonable underwriter would interpret the term ‘contemplate.” He pointed to the California Supreme Court’s 1971 opinion in Crane v. State Farm Fire & Casualty Cos.” in which Justice Stanley Mosk said that a “policy should be read as a layman would read it and not as it might be analyzed by an attorney or an insurance expert.”
Gutierrez continued that “even if Rosenberg’s opinions are relevant, the Court believes that they create a false dichotomy that skirts the facts of this case.” He said the expert’s “conclusion the Question 8 could only be asking ‘whether ServiceMesh’s Board of Directors had considered an offer to buy the company’…elides the fact that acquisition discussions can have varying levels of seriousness that can fall somewhere between brief, informal discussions and a final, formal offer.”
The judge continued:
“While it may be true, as Rosenberg states, that it is pointless to ask whether a start-up company’s executives have ever thought about an acquisition in the abstract because such thoughts are ubiquitous, he has not explained why an insurer would care only whether a company has received a formal offer and not whether it was engaged in serious and sustained conversations with a single partner that appeared at least somewhat likely to lead to a formal acquisition offer but had not yet ripen into one. As Defendants acknowledge, it appears that Question 8 was intended to determine ServiceMesh’s potential for being taken over….Given the intent of the question, the Court can see no reason why Scottsdale would care only about a final offer but not about serious discussions that meaningfully increased ServiceMesh’s takeover risk.”
He invoked the dictionary definition of “contemplate”—“to view mentally with continued thoughtfulness, attention or reflection”—said the “plain-meaning definition clearly encompasses ServiceMesh’s actions with regard to a potential acquisition by Computer Sciences”; rejected “expert opinions about how a reasonable underwriter would view the language” of the application, and declared:
“…Question 8 is capable of only one interpretation, and that under that interpretation, ServiceMesh clearly contemplated being acquired by Computer Sciences at the time it filled out the insurance application in late-June 2013. Therefore, ServiceMesh’s answer to Question 8 was inaccurate.”
Ninth Circuit’s Opinion
Reversal came Thursday in a memorandum opinion by a three-judge panel, comprised of Circuit Judges Bridget Shelton Bade, Daniel Aaron Bress, and Milan D. Smith Jr.
Referring to Computer Sciences Corporation and CSC Agility Platform, Inc. collectively as “CSC,” they said:
“CSC argues that this testimony constitutes evidence of trade usage in the technology start-up industry. We agree with CSC that the trade usage evidence could be relevant.”
Viewing the policy renewal application as being part of the parties’ insurance contract, the judges cited California Civil Code §1644 which says:
“The words of a contract are to be understood in their ordinary and popular sense...unless a special meaning is given to them by usage, in which case the latter must be followed.”
The panel remanded the case “for the district court to consider CSC’s trade usage argument under the foregoing legal standards.”
The parties also briefed the significance of Question 7 on the application, which asked:
“Has the Company in the past 18 months been involved with any actual, negotiated or attempted merger, acquisition or divestment?”
Gutierrez did not consider the relevance of Brandt’s “no” answer to that question, explaining that his discussion in connection with Question 8 was “dispositive.”
The memorandum opinion leaves it to the District Court to deal with Question 7 if the need arises.
Although the Ninth Circuit panel rejected Gutierrez’s view that the answer to Question 8 was necessarily false, it endorsed his conclusion that the matter of whether it was true or not was material, providing guidance to the court on remand. The memorandum opinion says:
“CSC’s own expert testified that the answer to Question 8 was material, and Scottsdale’s underwriter described the many ways in which a ‘yes’ answer to Question 8 may have affected Scottsdale’s underwriting decision. Furthermore, under California law, ‘[t]he fact that the insurer has demanded answers to specific questions in an application for insurance is in itself usually sufficient to establish materiality as a matter of law.’ ”
The case is Scottsdale Insurance Co. v. CSC Agility Platform, Inc., 19-55249.
On Dec. 20, 2018, District Court Judge André Birotte Jr. of the Central District of California. acting at the request of the U.S. Department of Justice, dismissed with prejudice criminal charges against Pulier “in the interests of justice.”
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