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Maui Land & Pineapple Co., Inc. v. Liberty Insurance Underwriters Inc.

United States District Court, D. Hawaii

April 3, 2018




         This insurance coverage dispute arises out of a residential development project located in West Maui, funded and controlled, in part, by Plaintiff Maui Land & Pineapple Company (“MLP”). Before the Court are (1) MLP's Motion for Partial Summary Judgment (“MPSJ”) on both its Complaint for Declaratory Judgment and on Defendant Liberty Insurance Underwriter's Counterclaim for the same; and (2) Liberty's Motion for Summary Judgment (“MSJ”) on its Counterclaim for the same (collectively “Cross-MSJs”). For the reasons set forth below, Liberty's MSJ (Dkt. No. 62) and MLP's MPSJ (Dkt. No. 64) are GRANTED IN PART AND DENIED IN PART.


         I. Underlying Lawsuit

         On June 7, 2012, a group of litigants (“Underlying Plaintiffs”) commenced an action against twenty-two defendants-including MLP and Ryan L. Churchill- in the Circuit Court of the Second Circuit, State of Hawai‘i, Narayan, et. al. v. Marriott Int'l, Inc., et al., Civil No. 12-1-0586(3) (“Underlying Lawsuit”). The Underlying Lawsuit concerns a residential development project formerly known as The Ritz-Carlton Club & Residences in Kapalua Bay, Maui, Hawaii (the “Project”). See Esaki Decl., Ex. A [Second Am. Compl. in Underlying Lawsuit] ¶ 1, Dkt. No. 65-2 [hereinafter Underlying SAC].

         According to the Underlying Plaintiffs, MLP “directly or indirectly through wholly owned subsidiaries exerts control” over defendant in the Underlying Lawsuit, Kapalua Bay, LLC (Underlying SAC ¶ 26(d)), which is a “Delaware limited liability company” (“LLC”) that was “created by a joint venture between Marriott International, Inc. ([which has a] 34% [joint-venture interest]), MLP (51%), and Exclusive Resorts, LLC (15%)” (Underlying SAC ¶ 20). “Kapalua Bay is ‘member driven' in that no major decision can be made without both Marriott and [MLP]'s agreement and/or consent.” Underlying SAC ¶ 20, Dkt. No. 65-2. MLP “exerts control” in a variety of ways, including via Churchill, who is “a senior executive officer of [MLP], President of Kapalua Bay, an officer of Kapalua Bay Holdings, the ‘point person' for the Joint Venture, and an executive officer of Kapalua Realty” who “ participated in all aspects of the Project, including financing, development, construction, pricing, marketing and sales and was one of [MLP]'s two representatives” on the Association of Apartment Owners of Kapalua Bay Condominium (“AOAO”) Board. Underlying SAC ¶¶ 26(d), 38.

         In their Second Amended Complaint filed June 13, 2013, Underlying Plaintiffs bring nine Counts against the defendants in the Underlying Lawsuit, including: (i) “Breach of Fiduciary Duty (Against All Defendants)” (Underlying SAC ¶¶ 96-99, Dkt. No. 65-2); (ii) “Access to Books and Records of the Association (Against All Defendants)” (id. ¶¶ 100-01); (iii) “Injunctive/Declaratory Relief (Against All Defendants)” (id. ¶¶ 102-03); (iv) “Unfair and Deceptive Acts and Practices (By All Purchaser Plaintiffs, Against All Developer Defendants)” (id. ¶¶ 104-07); (v) “Intentional Misrepresentation and/or Concealment (By All Purchaser Plaintiffs, Against All Developer Defendants)” (id. ¶¶ 108-14); (vi) “Negligent Misrepresentation and/or Concealment (By All Purchaser Plaintiffs, Against All Developer Defendants)” (id. ¶¶ 115-21); (vii) for “Violations of Hawaii Condominium Statute-[Hawai‘i Revised Statutes (‘HRS')] Chapter 514B, or, to the extent applicable, HRS Chapter 514A (By All Purchaser Plaintiffs, Against All Developer Defendants)” (id. ¶¶ 122-24); (viii) “Unjust Enrichment (By All Purchaser Plaintiffs, Against All Developer Defendants)” (id. ¶¶ 125-30); and (ix) “Civil Conspiracy (By All Purchaser Plaintiffs Against All Developer Defendants)” (id. ¶¶ 131-33). The “Developer Defendants” include MLP, Kapalua Bay, and other entities, but do not include individuals like Churchill. See Underlying SAC ¶ 32, Dkt. No. 65-2.

         In the allegations supporting the claim for breach of fiduciary duty, the Underlying Plaintiffs assert the following:

92. Inasmuch as every past and present director on the AOAO Board is employed by and/or is an agent for the joint venture entities that control and hold the beneficial interests in Kapalua Bay, each has conflicts of interest. Consequently, these directors have not reasonably exercised the fiduciary duties that they owe to Plaintiffs and other owners, and must be precluded from taking any action regarding the management of the Project or the expenditure of Association funds except to the specific extent agreed to by Plaintiffs. The Plaintiffs and other independent owners must be allowed to access the information held by the Board to meaningfully participate in the Board's deliberations and actions.
93. The conflicted directors and managing Agent have already breached their fiduciary duties to the Association and to the owners by, inter alia, failing to timely inform Plaintiffs or to otherwise take action regarding the dire financial condition of the Project, failing to take any action to compel the joint venture to make the payments owed by Kapalua Bay, failing to stop MVW/MORI and/or Marriott from stripping funds out of the Association's accounts, intentionally keeping the owners in the dark regarding the current situation, failing to adequately respond to the owners' requests for information, and failing to exercise oversight duties with respect to the operation of the Project and the cost thereof, particularly since Marriott's management fee was 10% of the total cost to run the Project thereby incentivizing Marriott et al to make the Project operations as expensive as possible.
97. Defendants owe fiduciary duties, including duties of utmost good faith, loyalty, full disclosure, and care to Plaintiffs. By their acts and omissions, both directly, through their respective affiliated entities, and through the representatives that served as directors on the Board, Defendants have breached these duties, consistently failing to act in good faith, with the care that an ordinarily prudent person in a like position would exercise under similar circumstances, and in a manner that one would reasonably believe to be in the best interests of the Association and Plaintiffs.

         Underlying SAC ¶¶ 92, 93, 97, Dkt. No. 65-2. Several allegations in the Underlying SAC also name Churchill individually and describe his alleged material misrepresentations to Underlying Plaintiffs regarding the Project's financing. E.g., Underlying SAC ¶¶ 62 (“Churchill . . . misrepresented to prospective purchasers that Ritz-Carlton and Marriott were fully committed to the Project.”); 65 (“The Statements made by Mr. Churchill . . . regarding the strength of the Developer and the commitment of the [joint venture] partners were false and deceptive.”); 66 (discussing Churchill's specific misrepresentations to, and material omissions from, an Underlying Plaintiff in 2009); 67 (describing Churchill's misrepresentations, as part of the “Ritz-Carlton sales staff, ” in connection with an Underlying Plaintiff's purchase of a unit at the Project); 68 (alleging misrepresentations and material omissions based on conversations with Churchill and another “between the end of 2010 and the close of [the Underlying Plaintiff's] purchase in August of 2011”); 69 (describing alleged misrepresentations stemming from discussions with Churchill and others prior to the closing of an Underlying Plaintiff's unit in May 2010). Underlying Plaintiffs also allege that the AOAO Board was itself wrongful in failing to engage in effective financial oversight of the Project. Underlying SAC ¶ 82, Dkt. No. 65-2.

         After years of litigation-including appeals reaching the Supreme Court of the United States-the Hawai‘i Supreme Court affirmed the denial of a motion to compel arbitration by defendants in the Underlying Lawsuit and “remand[ed] the case to the circuit court for further proceedings” on July 14, 2017. Narayan v. The Ritz-Carlton Dev. Co., Inc., 400 P.3d 544, 547, recon. denied, 400 P.3d 581 (Haw. 2017), and cert. denied, No. 17-694, ___ S.Ct.___ (2018).

         II. Contracts & Insurance Documents

         The Cross-MSJs before the Court implicate the parties' various insurance and other agreements, the relevant portions of which are described below.

         MLP-Churchill Indemnification Agreement

         On August 3, 2009, MLP entered into an Indemnification Agreement (Dkt. No. 65-8) with its then-“officer and/or director” Churchill. Section 2 of the Indemnification Agreement obligates MLP to indemnify Churchill for costs “actually and reasonably incurred by [Churchill] in connection with a Proceeding . . . if [Churchill] acted in good faith and in a manner [Churchill] reasonably believed to be in or not opposed to the best interests of [MLP][.]” Indemnification Agreement § 2(a), Dkt. No. 65-8 at 2. “[MLP] shall not be obliged” under the agreement, however, “[t]o indemnify [Churchill] for Expenses or liabilities of any type whatsoever . . . which have been paid directly to or on behalf of [Churchill] by an insurance carrier under a policy of directors' and officers' liability insurance maintained by [MLP] . . . .” Indemnification Agreement § 3(d), Dkt. No. 65-8 at 3. MLP is also obligated to “use its best efforts to obtain and maintain, or have an affiliate obtain and maintain, in full force and effect directors' and officers' liability insurance . . . which provides [Churchill] the same rights and benefits as are accorded to the most favorably insured of [MLP]'s directors.” Indemnification Agreement § 8(a), Dkt. No. 65-8 at 3. The insurance policy described below is MLP's effort to fulfill this obligation.

         Liberty-MLP Executive Advantage Policy

         Liberty issued an Executive Advantage insurance policy to Churchill and MLP, Policy No. DOSF-190257-210 (the “Policy”), that spans the policy period from September 1, 2011 to September 1, 2012. See Policy, Dkt. Nos. 10-4 at 1-21 (Part 1), 10-5 at 1-21 (Part 2). The Policy generally obligates Liberty to provide coverage to “Insured Persons” for “all Loss which they shall become legally obligated to pay as a result of a Claim” and to “Insured Organizations” for “all Loss which it is permitted or required by law to indemnify the Insured Persons as a result of a Claim” so long as the claim is “first made during the Policy Period . . . against the Insured Persons for a Wrongful Act which takes place before or during the Policy Period[.]” Policy §§ 1.1 (Insured Persons), 1.2 (Insured Organizations), as amended by Endorsement No. 9, Dkt. No. 10-5 at 2. The Policy also provides MLP with coverage for its own wrongful conduct occurring “as a result of a Securities Action.” Policy § 1.3, as amended by Endorsement No. 9, Dkt. No. 10-5 at 2-3.

         With respect to the costs of defending against a legal action, the Policy provides both that “[i]t shall be the duty of the Insureds, not [Liberty], to defend any Claim” (Policy § 3.1, Dkt. No. 10-5 at 3), and that Liberty “shall not be liable for any Defense Costs incurred or any admissions, obligations, agreements, or settlements made by the Insureds without [Liberty]'s prior written consent” (Policy § 3.2, Dkt. No. 10-5 at 3). Moreover, “[Liberty] shall . . . advance on a current basis covered Defense Costs incurred by the Insureds” (Policy § 3.3, Dkt. No. 10-5 at 3), and “Insured Organizations agree to indemnify the Insured Persons and/or advance Defense costs to the fullest extent permitted or required by law” (Policy § 11.2, as amended by Endorsement No. 9, Dkt. No. 10-5 at 7 (stating further that “If [Liberty] pays under this Policy any indemnification or advancement owed to any Insured Person by an Insured Organization within the applicable Retention, then that Insured Organization shall reimburse [Liberty] for such amounts and such amounts shall become immediately due and payable as a direct obligation of the Insured Organization to the Insurer”)). Defense Costs are “reasonable and necessary fees (including attorneys' fees and experts' fees) and expenses incurred in the defense of a Claim and cost of attachment or similar bonds, but shall not include the wages, salaries, benefits or expenses of any directors, officers, or employees of the Insured Organization[.]” Policy § 25.4(a), as amended by Endorsement No. 9, Dkt. No. 10-5 at 9.

         Under “Exclusions, ” the Policy specifies that coverage does not include “any error, misstatement, misleading statement, act, omission, neglect or breach of duty by any Subsidiary or such Subsidiary's Insured Persons if such error, misstatement, misleading statement, act, omission, neglect or breach of duty actually or allegedly occurred, in whole or in part, when such entity was not a Subsidiary.” Policy § 5.2, Dkt. No. 10-4 at 5. The Policy also excludes coverage for any Loss “based upon, arising from, or in any way related to an Insured Person serving as a director, officer, trustee, regent, governor, volunteer, employee, or similar position of any entity other than the Insured Organization[.]” Policy § 5.8, Dkt. No. 10-4 at 6 [hereinafter Outside Service Exclusion]. Coverage for losses “based upon, arising from, or in any way related to any deliberately fraudulent act or omission or any willful violation of law by any Insured if a final judgment or other final adjudication in the underlying action against Insured establishes such an act, omission, or willful violation” is also excluded. Policy § 5.10, as amended by Endorsement No. 9, Dkt. No. 10-5 at 5.

         And with regard to “Allocation, ” the Policy specifies that where “a Claim gives rise to Loss covered under this Policy and loss not covered under this Policy, either because a Claim includes both covered and uncovered matters or both covered and uncovered parties, ” Liberty and the Insureds will “use their best efforts to determine a fair and appropriate allocation” of funds. Policy § 13.1, as amended by Endorsement No. 9, Dkt. No. 10-5 at 7. “If there can be no agreement between [Liberty] and the Insured as to the amount of Defense Costs to be advanced in connection with any such Claim, [Liberty] shall advance Defense Costs which it reasonably believes to be covered under this Policy until a different allocation is negotiated or determined.” Policy § 13.2, as amended by Endorsement No. 9, Dkt. No. 10-5 at 7.

         III. Procedural Background

         MLP initiated the instant lawsuit in the Circuit Court of the Second Circuit, State of Hawai‘i, on May 6, 2016. See Notice of Removal, Ex. 1 [Compl. for Declaratory J.] at 2-6, Dkt. No. 1-1. Liberty removed the case to this Court on May 31, 2016 (Dkt. No. 1) and filed its Answer to MLP's claims on June 7, 2016 (Dkt. No. 6).[1]

         The parties filed their Cross-MSJs on October 11, 2017. Liberty MSJ, Dkt. No. 62; MLP MPSJ, Dkt. No. 64. Liberty seeks summary judgment against MLP arguing that the Policy does not entitle MLP to coverage in the Underlying Lawsuit. Liberty MSJ, Dkt. No. 62. Liberty principally asserts that because the Underlying Plaintiffs have sued Churchill for breaching duties owed in Churchill's capacity as director of the AOAO, rather than in his capacity as an officer of MLP, the Outside Service Exclusion is triggered. See Liberty Mem. in Supp. of MSJ at 10-13, 17-23, Dkt. No. 62-3. Liberty additionally contends that because Underlying Plaintiffs are condominium owners/purchasers, rather than shareholders to whom certain securities-based fiduciary duties would be owed, the Underlying Lawsuit is not a “Securities Action” for which the Policy provides coverage to MLP. See Liberty Mem. in Supp. at 16-17, Dkt. No. 62-3. In MLP's MPSJ (Dkt. No. 64), MLP seeks advanced defense costs and a declaration of indemnity regarding the Underlying Lawsuit. In support, MLP asserts that it has “a prima facie claim that the Underlying Lawsuit is covered by the Policy” and “leaves Liberty to its proof as to any policy exclusions” that may apply. MLP Mem. in Supp. of MPSJ at 14, Dkt. No. 64-1.

         This Court heard oral argument on the Cross-MSJs on December 15, 2017 (see EP, Dkt. No. 75) and took matters under advisement. The instant disposition follows.


         I. Summary Judgment

         Pursuant to Federal Rule of Civil Procedure (“FRCP”) 56(a), a party is entitled to summary judgment “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” The moving party is entitled to judgment as a matter of law when the nonmoving party fails to make a sufficient showing on an essential element of a claim in the case on which the nonmoving party has the burden of proof. Celotex Corp. v. Catrett, 477 U.S. 317, 323 (1986). To meet its burden, “the moving party must either produce evidence negating an essential element of the nonmoving party's claim or defense or show that the nonmoving party does not have enough evidence of an essential element to carry its ultimate burden of ...

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