Vulcan Engineering Co. v. XL Insurance America, Inc. , 201 F. App'x 678 ( 2006 )

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 06-12464 OCTOBER 11, 2006
Non-Argument Calendar THOMAS K. KAHN
CLERK
________________________
D. C. Docket No. 05-02103-CV-P-S
VULCAN ENGINEERING COMPANY,
PETER PETRILLO,
RYAN WIERCK, an individual,
Plaintiffs-Appellants,
versus
XL INSURANCE AMERICA, INC.,
Defendant-Appellee.
________________________
Appeal from the United States District Court
for the Northern District of Alabama
_________________________
(October 11, 2006)
Before TJOFLAT, CARNES and MARCUS, Circuit Judges.
PER CURIAM:
Philip S. Zettler is a former shareholder and former officer of Vulcan. In
2005, he sued Vulcan, Peter Petrillo and Ryan Wierck (collectively “the Vulcan
litigants”), among others, in the Circuit Court of Jefferson County, Alabama (“the
Zettler action”). He asserted two of his claims against the individual plaintiffs in
this action. Count III alleged that Petrillo and Wierck breached fiduciary duties
owed to Zettler. Count IV alleged that Petrillo and Wierck engaged in fraud and
suppression of Vulcan’s worsening financial condition.
Zettler brought his claims as direct actions. The Vulcan litigants have a
strong argument that Zettler should have brought those claims derivatively.
Normally defendants are happy when they believe that a plaintiff has incorrectly
plead his case. The Vulcan litigants, however, have directors and officers’ liability
insurance issued by XL Insurance America, Inc. That policy includes both an
“insured vs. insured exclusion” and a “securityholder derivative action” exception
to that exclusion. Because Zettler is a former Vulcan officer, he is an “insured”
under the insured v. insured exclusion. If the Zettler action is direct, the insured
vs. insured exclusion kicks in, and XL Insurance has no duty to defend the Vulcan
litigants. If the Zettler action is a securityholder derivative action, the insured v.
insured exclusion does not apply, and XL Insurance has a duty to defend. XL
Insurance concluded that the securityholder derivative action exception to the
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exclusion did not apply, and refused to pay the Vulcan litigants’ defense costs.
The Vulcan litigants brought this lawsuit to make XL pay.
Both sides filed motions for summary judgment before the district court.
The court granted XL Insurance’s motion, finding that the insured vs. insured
exclusion applies. The Vulcan litigants appealed, contending that the claims
asserted in the Zettler action are shareholder derivative claims as a matter of
Alabama law, and thus the securityholder derivative action exception to the insured
vs. insured exclusion applies. We review de novo a district court's grant of
summary judgment. Witter v. Delta Air Lines, Inc., 138 F.3d 1366, 1369 (11th
Cir. 1998). Here, we agree with the district court.
There are two fundamental problems with the arguments put forward in the
Vulcan litigants’ appellate briefs. First, they never address the actual language of
the underlying insurance policy. Second, they fail to come to grips with the
difference between having a derivative claim and bringing a derivative cause of
action.
The parties agree that coverage turns on whether the securityholder
derivative action exception applies. The Vulcan litigants immediately begin their
attack on the decision below by defining derivative claims under Alabama law.
Hitting the case law is premature, however, because the insurance policy itself
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defines “Securityholder Derivative Action.” The policy reads:
A Securityholder Derivative Action is defined as: any Claim brought on
behalf of, or in the name or right of, the Insured Organization by one or
more securityholders of the Insured Organization in their capacity as such if
such Claim is brought and maintained without the assistance, participation or
solicitation of any Executive.
According to the plain meaning of this clause, whether a claim is derivative turns
on how that claim is brought, rather than on the injury underlying that claim. How
it actually was brought trumps how it might have been brought.
The district court found ample evidence that Zettler brought his claims as
part of a direct action. Zettler himself said as much, alleging in his state court
lawsuit that his “claims are individual rather than derivative because [he] was the
only minority stockholder in Vulcan and his injuries are personal.” The circuit
court adjudicating the Zettler action agreed. It found that Zettler did not have
standing to assert any derivative claims and allowed the case to proceed only to the
extent that Zettler asserted his claims directly. Even the Vulcan litigants
represented to the circuit court that “Zettler seeks recovery for his alleged injuries
through an individual action.” Zettler’s complaint also does not adhere to Rule
23.1 of the Alabama Rules of Civil Procedure, which lays out the procedural
requirements for bringing a derivative action under Alabama law. Ala. R. Civ. Pro.
23.1.
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The Vulcan litigants, however, focus their attention on demonstrating that
each of Zettler’s claims is “derivative in nature.” They argue that the “established
law in Alabama is that claims for self-dealing, mismangement, waste of corporate
assets, and the like are derivative in nature and do not form the proper basis for a
direct action by shareholders.” The Vulcan litigants might be right that “Zettler’s
facts support derivative claims,” but they are wrong to the extent they assert that
Zettler brought those claims derivatively.
The cases that the Vulcan litigants cite to themselves prove that Zettler’s
claims are derivative in nature demonstrate that Alabama draws a distinction
between having a derivative claim and bringing a derivative cause of action. Each
case involves the dismissal of a lawsuit brought directly but alleging injuries that
are derivative in nature. See, e.g., Brooks v. Hill, 717 So. 2d 759, 762 (Ala. 1998);
Pegram v. Hebding, 667 So. 2d 696, 702 (Ala. 1995); Shelton v. Thompson, 544
So. 2d 845, 847 (Ala. 1989). In Hill, for example, the Alabama Supreme Court
found that a claim of waste of corporate assets “could have been brought only as a
derivative claim on behalf of the corporation” but that “the plaintiff did not bring
such a claim.” 717 So. 2d at 762. It thus affirmed a dismissal of the complaint.
Id. at 760. These cases demonstrate that it is possible to bring a derivative claim in
a direct action, although it is procedurally improper and will lead to a dismissal. A
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finding that a particular claim is derivative does not retroactively transform the suit
into a derivative action. If it did, there would be no procedural defect and the
lawsuits could have proceeded in cases like Hill.
Here, Zettler filed a direct action. It may be that any injuries allegedly
caused by the Vulcan litigants are derivative in nature. In that case, damages can
only be recovered by a plaintiff with standing to bring a suit on behalf of Vulcan.
But Zettler did not bring that suit. He brought a direct suit in his own name.
Because his lawsuit was not “brought on behalf of, or in the name or right of, the
Insured Organization,” it is not a “Securityholder Derivative Action” as that term is
defined in the insurance policy. Therefore, the district court correctly found that
the ssecurityholder derivative suit exception does not apply. The insured vs.
insured exclusion is therefore applicable, and XL has no duty to defend the Vulcan
litigants.
The Vulcan litigants make a final argument not directly addressed by the
district court. They contend that XL Insurance’s duty to defend independently
attaches because Zettler’s claims are groundless. The insurance policy, however,
does not provide affirmative coverage against groundless claims. Instead, it
forbids XL Insurance from refusing to defend claims “covered by [the] Policy” if
that refusal is based only on the insurance company’s determination that those
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claims are “groundless, false or fraudulent.” For example, if Zettler had brought
his claims derivatively, XL Insurance could not have denied coverage based on its
determination that Zettler’s claim lacked merit. Here, however, XL Insurance
refused to defend not because it deemed Zettler’s claims to be without merit, but
because it decided the policy did not cover the Zettler action regardless of whether
the action had merit. The company was right about that.
AFFIRMED.
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