CNL Hotels & Resorts, Inc. v. Twin City Fire Insurance , 291 F. App'x 220 ( 2008 )

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT FILED
________________________ U.S. COURT OF APPEALS
ELEVENTH CIRCUIT
No. 07-12706 AUGUST 18, 2008
________________________ THOMAS K. KAHN
CLERK
D. C. Docket No. 06-00324-CV-ORL-31-UAM
CNL HOTELS & RESORTS, INC.,
a Maryland Corporation,
Plaintiff-Counter
Defendant-Appellant,
versus
TWIN CITY FIRE INSURANCE COMPANY,
a Connecticut Corporation,
Defendant-Counter
Claimant-Appellee.
HOUSTON CASUALTY COMPANY,
a Texas Corporation,
LANDMARK AMERICAN INSURANCE COMPANY,
an Oklahoma Corporation,
Defendants-Appellees.
________________________
Appeal from the United States District Court
for the Middle District of Florida
_________________________
(August 18, 2008)
Before BIRCH, PRYOR and KRAVITCH, Circuit Judges.
PER CURIAM:
CNL Hotels and Resorts appeals two summary judgments in favor of
Houston Casualty Company and Landmark American Insurance Company. CNL
argues that the district court erred when it concluded that various payments CNL
made were not covered under the insurance policies issued by Houston and
Landmark. We affirm in part and reverse and remand in part.
I. BACKGROUND
CNL was incorporated in 1996 and was managed by CNL Hospitality
Corporation. CNL raised 3.1 billion dollars in capital between 1996 and 2004 by
selling shares directly to the public at a split-adjusted cost of $20 a share. CNL
was a public corporation subject to federal securities laws, but it was not listed on a
national stock exchange. Under the terms of its corporate charter, CNL either had
to list its shares on a national stock exchange or liquidate its assets and distribute
the proceeds to its shareholders by December 31, 2007.
On April 30, 2004, CNL announced that it would be beneficial to become
self-advised. CNL obtained shareholder approval through a proxy statement dated
June 21, 2004, of a merger between Hospitality and a wholly-owned subsidiary of
CNL. Under the terms of the merger, CNL, through its subsidiary, would pay 308
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million dollars for all of the outstanding shares of Hospitality. On July 30, 2004,
Green Street Advisors issued a report that suggested that CNL was worth
approximately $12 a share.
After the Green Street report, consolidated lawsuits involving two classes of
plaintiffs were filed against CNL. The Purchaser Class, composed of shareholders
of CNL, sought a refund of $8 to compensate them for the difference between the
price that they paid for the stock and the price at which Green Street valued the
stock. The Purchaser Class relied on section 11 of the Securities Act of 1933. 15
U.S.C. §77k. The Proxy Class, composed of shareholders of CNL that relied on
the proxy statement to approve the merger, alleged that the proxy statement was
misleading and the 308 million dollar purchase price of Hospitality was excessive.
CNL reached a settlement with both classes. CNL agreed to pay 35 million
dollars to the Purchaser Class to settle their complaint. CNL settled with the Proxy
Class by restructuring the merger between CNL and Hospitality. The restructuring
lowered the fees owed by CNL to Hospitality and CNL paid the counsel for the
Proxy Class 5.5 million dollars.
CNL sought reimbursement for its expenses related to this litigation from its
several insurance carriers based on policies of CNL that covered directors’ and
officers’ liability. Twin City Fire Insurance Company issued the primary policy of
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CNL, which was limited to 10 million dollars and included a self-insured retention
of $500,000. Houston issued a policy with a limit of 10 million dollars that
provided coverage after the Twin City policy was exhausted. Landmark issued
another policy with a limit of 10 million dollars that provided coverage after both
the Twin City and Houston policies were exhausted. The policies issued by
Houston and Landmark were “follow-form” policies and provided coverage
identical to the Twin City policy.
CNL filed this action against Twin City, Houston, and Landmark after Twin
City reserved its right to deny coverage of both the payment of 35 million dollars
to the Purchaser Class and the payment of 5.5 million dollars to the counsel for the
Proxy Class. Twin City and CNL settled their dispute for 9.5 million dollars. The
settlement agreement allocated 3.3 million dollars for the defense costs of CNL;
$700,000 for reimbursement of the payment to the Purchaser Class; and 5.5 million
dollars for the payment of the counsel for the Proxy Class. CNL continued to
prosecute this action against Houston and Landmark for reimbursement for the
balance of the payment of the Purchaser Class and 5.5 million dollars in defense
costs.
The district court resolved several motions for summary judgment in favor
of Houston and Landmark. The district court granted summary judgment to both
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Houston and Landmark regarding liability for the payment to the Purchaser Class,
and the district court granted summary judgment to Houston regarding the 5.5
million dollars in defense costs paid by CNL.
II. STANDARD OF REVIEW
We review a summary judgment de novo. Shuford v. Fid. Nat’l Prop. &
Cas. Ins. Co., 508 F.3d 1337, 1341 (11th Cir. 2007).
III. DISCUSSION
We evaluate the arguments of CNL in two parts. First, we consider whether
the payment to the Purchaser Class was covered by the Twin City policy. Second,
we consider whether the payment to the counsel for the Proxy Class was covered
by the Twin City policy.
A. The Payment to the Purchaser Class Was Not a Loss Covered By the Twin City
Policy.
CNL argues that the payment to the Purchaser Class was a loss covered by
the Twin City policy instead of the return of money wrongly-acquired by CNL.
CNL argues that the record does not support the conclusion that the money was
wrongly-acquired, section 11 of the Securities Act of 1933 does not provide for
restitutionary damages, and the settlement agreement between the Purchaser Class
and CNL explicitly stated that the payment was not restitutionary. These
arguments fail.
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We agree with the district court that the payment to the Purchaser Class is
not covered by the Twin City policy. The policy covers a “loss” that the insured is
obligated to pay. “The interpretive principle . . . that a ‘loss’ within the meaning of
an insurance contract does not include the restoration of ill-gotten gains—is clearly
right.” Level 3 Commc’ns, Inc. v. Fed. Ins. Co., 272 F.3d 908, 910 (7th Cir. 2001).
Because we conclude that the payment to the Purchaser Class was restitutionary in
nature, the payment was not a loss covered by the Twin City policy. Houston and
Landmark are not liable for that payment.
The argument of CNL that there is “no basis in the record of the [action
between CNL and the Purchaser Class] to support the notion that the plaintiffs’
claims were for the return of ill-gotten gains” is based on the premise that the
Purchaser Class did not attempt to prove and Section 11 does not require proof of
fraud. CNL contends that, without a finding of fraud, it is impossible to conclude
that the money was wrongly-acquired. This argument misunderstands the idea of
restitution.
The return of money received through a violation of law, even if the actions
of the recipient were innocent, constitutes a restitutionary payment, not a “loss.” It
is immaterial whether CNL committed fraud. CNL received money directly from
the Purchaser Class through the sale of shares, and CNL returned some of the
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money after the Purchaser Class alleged that the sale of shares by CNL violated the
law.
The record supports the conclusion that the payment to the Purchaser Class
was the return of money that CNL acquired in violation of law. CNL does not
dispute that the Purchaser Class alleged that it purchased shares from CNL for $20
a share when the shares were actually worth only $12 a share. CNL benefitted
directly from this alleged violation of section 11 and returned some of this benefit
to the Purchaser Class through a settlement. CNL instead argues that, under
section 11, damages can never be restitutionary.
CNL argues that damages under section 11 cannot be restitutionary because
the amount of damages permitted by statute focuses on the loss suffered by the
plaintiff instead of the gain of the defendant. Section 11 provides for an award of
damages when a registration statement contains an “untrue statement of material
fact or omitted to state a material fact required to be stated.” 15 U.S.C. § 77k(a).
Damages are measured under section 11 by the difference between the price the
plaintiff paid for the security and the value of the security when the suit was
brought. 15 U.S.C. §77k(e).
The argument of CNL fails. CNL is correct that the measure of damages
under section 11 is concerned with the loss to the plaintiff, but in this appeal the
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loss to the plaintiff is equal to the gain of the defendant. Section 11 does not
preclude restitutionary relief.
CNL also contends that the payment to the Purchaser Class was not
restitutionary because the settlement agreement states that the payment was not
“restitution or disgorgement.” The agreement between CNL and the Purchaser
Class is not binding on any third party or this Court. The policy, not the settlement
agreement, governs our resolution of this appeal. We agree with the district court
that this argument is “too lacking in merit to warrant discussion.”
B. The Payment to the Counsel for the Proxy Class May Be Covered Under the
Twin City Policy.
The district court granted Houston summary judgment on the ground that the
5.5 million dollars in legal fees paid to the counsel for the Proxy Class was not
covered under the Twin City policy. The policy issued by Houston covers only a
“loss” not paid by Twin City because of the exhaustion of the limits of the
underlying policy:
This Policy does not provide coverage for any Loss not covered by the
Underlying Policies except and to the extent that such Loss is not paid
under the Underlying Policies solely by reason of the reduction or
exhaustion of the Underlying Limit(s) of Liability through actual
payments of Loss thereunder.
The district court interpreted the underlying policy as not covering the loss. The
district court relied on Endorsement 17 of the Twin City policy, which exempts
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from the definition of “loss” payments to the counsel for plaintiffs in a lawsuit
about the price paid for corporate ownership:
In the event of a Claim alleging that the price or consideration paid or
proposed to be paid in any transaction involving all or substantially all
the ownership interest in or assets of an entity is inadequate or
excessive, Loss with respect to such Claim shall not include . . . any
plaintiff’s counsel fees and costs arising out of such Claim; provided,
however, that this paragraph shall not apply to Claims Expenses
incurred in the defense or appeal of such Claim.
Because the payment of 5.5 million dollars to the counsel for the Proxy Class was
not a covered loss and CNL had not exhausted the limit of 10 million dollars of the
Twin City policy, the district court concluded that Houston was not liable for any
other loss.
CNL presents two arguments that the district court erred when it concluded
that Endorsement 17 removed the payment to the counsel for the Proxy Class from
the definition of loss in the Twin City policy. CNL argues that the payment was a
covered loss under the Twin City policy because the settlement agreement between
CNL and Twin City allocated 5.5 million dollars for the payment. CNL argues
that, even if the payment is not a “loss” under Endorsement 17, the endorsement is
void because neither Houston nor Twin City complied with Florida insurance law.
We reject the first argument of CNL, but conclude that the second argument may
have merit.
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CNL argues that, because the settlement agreement allocated 5.5 million
dollars to the payment to the counsel for the Proxy Class, that payment is a covered
loss under the Twin City policy. We disagree. The agreement between CNL and
Twin City is not binding on a third party or this Court. Whether the payment to the
counsel for the Proxy Class is a covered “loss” under the Twin City policy depends
on the language of the policy, not the settlement agreement. The language of
Endorsement 17 clearly removes the payment from the definition of “loss” under
the Twin City policy.
Although Endorsement 17 would remove the payment from the definition of
“loss,” that endorsement may be void. Florida law requires the filling with and
approval of certain forms by the Office of Insurance Regulation before the forms
can be used in insurance policies in Florida. Fla. Stat. § 627.410(1). If a form is
not filed with the Office, the form is void. Am. Mut. Fire Ins. Co. v. Illingworth,
213 So. 2d 747, 749 (Fla. Dist. Ct. App. 1968).
The district court declined to resolve factual questions regarding whether
Endorsement 17 was filed with the Office of Insurance Regulation because the
court concluded that Endorsement 17 was exempt from filing. The court
interpreted section 627.021(2)(e) of the Florida statutes, which states that “[t]his
chapter does not apply to: . . . (e) Surplus lines insurance,” Fla. Stat. § 627.021(2),
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as exempting surplus lines insurance from the filing requirements of section
627.410(1). The Supreme Court of Florida recently rejected that interpretation.
Essex Ins. Co. v. Zota, No. SC06-2031, slip op. 1 (Fla. June 26, 2008).
The exemptions of section 627.021 only apply to part 1 of chapter 627.
Essex, No. SC06-2031, at 7. In Essex, the Supreme Court of Florida answered a
question certified by this Court regarding the applicability of section 627.428 to
surplus lines insurance. Essex Ins. Co. v. Zota, 466 F.3d 981, 988–90 (11th Cir.
2006). The Supreme Court of Florida stated that it had “previously held that-under
a full statutory analysis-section 627.021(2) applies exclusively to part I of chapter
627.” Essex, No. SC06-2031, at 7 (citing Nat’l Corp. Venezolana v. M/V Manaure
V., 511 So. 2d 968, 970–71 (Fla. 1987)). The decision of the Supreme Court of
Florida compels our conclusion that section 627.410(1), which is in part II of
chapter 627, applies to surplus lines insurance. The district court erred, and a
remand is necessary to determine whether Endorsement 17 is void.
IV. CONCLUSION
We AFFIRM the summary judgment in favor of Houston and Landmark
concerning the payment to the Purchaser Class. We REVERSE the summary
judgment in favor of Houston concerning the payment to the counsel for the Proxy
Class, and we REMAND for further proceedings.
AFFIRMED in part, REVERSED in part, and REMANDED.
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