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Kupchak Hastert v. Westport Insurance Corp.

United States District Court, D. Hawaii

October 10, 2019



          Deirick K. Watson, United States District Judge

         In this insurance coverage dispute, the law firm of Damon Key Leong Kupchak Hastert (“Damon Key”) filed suit against its insurer, claiming that the company wrongfully denied coverage and failed to defend the law firm in an underlying proceeding where the plaintiffs sought to hold the non-party firm in contempt for allegedly violating a federal court injunction order. Defendant Westport Insurance Corporation avers that the underlying action did not present a “Claim” for “Loss” covered by the terms of the policy and accordingly has moved under Rule 12(b)(6) to dismiss the complaint. Dkt. No. 10. Firm in its position, Damon Key filed a counter motion for partial summary judgment. Dkt. No. 17.

         As set forth below, the Court concludes that the unambiguous terms of the policy did not obligate Westport to defend Damon Key in the underlying action. Westport's motion to dismiss is therefore GRANTED, and the complaint is DISMISSED with prejudice.


         Because the dispute here centers on the meaning of policy terms that both parties acknowledge, the material facts set forth below are uncontested.

         A. Terms of the Policy

         Westport issued a Lawyers Professional Liability Insurance Policy (the “Policy”) (Dkt. No. 1-1) to Damon Key, effective March 31, 2015 to March 31, 2016. Dkt. No. 1, ¶ 7. The Policy states that Westport will pay for “all LOSS . . . as a result of CLAIMS” made against Damon Key. Dkt. No. 1-1 at 1. The Policy further provides that Westport has “the right and duty to select counsel and arbitrators and to defend any CLAIM for LOSS” against Damon Key “even if such CLAIM is groundless, false or fraudulent . . .” Id. at 8. As defined in the Policy, a CLAIM is “a demand made upon [Damon Key] for LOSS, including . . . service of suit, or institution of arbitration proceedings or administrative proceedings, ” id. at 2, and a “LOSS” is “the monetary and compensatory portion of any judgment, award, or settlement.” Id. at 4. A “LOSS, ” however, does not include, inter alia, “civil or criminal fines, penalties, fees or sanctions” or “any form of non-monetary relief.” Id.

         B. The Underlying Litigation in Takiguchi v. MRI International, Inc.

         Triggering this coverage dispute is Takiguchi v. MRI International, Inc., a securities fraud class action filed in Nevada federal district court on July 5, 2013, alleging that the defendants operated a “massive Ponzi scheme.” See 47 F.Supp.3d 1100, 1107-08 (D. Nev. 2014); Dkt. No. 1, ¶ 15. Among the defendants named in Takiguchi were certain members of the Suzuki family, including Junzo, Paul, Keiko, and Catherine Suzuki (collectively, the “Suzukis”).[1] See Dkt. No. 1, ¶ 16. Since 2013, the Suzukis have been clients of Damon Key, and the law firm has held several million dollars for the Suzukis in its client trust accounts, separately accounting for each individual's funds. See Dkt. No. 1, ¶¶ 17, 29.[2] Damon Key, however, did not represent the Suzukis in the Takiguchi litigation, nor was Damon Key a party. See Dkt. No. 15 at 2.

         On September 18, 2014, the federal district court in Nevada entered an injunction order, essentially freezing the assets of the Suzukis (“Asset Freeze Order”) (Dkt. No. 18-3). Dkt. No. 1, ¶ 15. The Asset Freeze Order specifically prohibited “Junzo Suzuki, Paul Musashi Suzuki, their agents and representatives, and all persons and entities under the control of or acting in concert with either of them” from “[d]irectly or indirectly transferring, converting, selling, . . . or otherwise disposing of any assets, wherever located . . .” Dkt. No. 18-3 at 17.[3]

         1. The First “Show Cause” Application Against Damon Key

         On February 25, 2016, the Takiguchi plaintiffs filed, under seal, an “Application for Order to Show Cause Why the Suzuki Defendants and the Law Firm Damon Key . . . Should Not Be Held in Contempt” (“First Application”) (Dkt. No. 15). Dkt. No. 1, ¶ 24. As the caption implies, the Takiguchi plaintiffs asserted that Damon Key “defied” the Asset Freeze Order in October 2014 when the firm transferred a total of $1.75 million in Suzuki family funds to bank accounts in Japan that belonged to Keiko and Catherine Suzuki. Dkt. No. 15 at 2-3. In terms of relief, the plaintiffs sought an order requiring the Suzuki defendants and Damon Key to “show cause” why they should not be “adjudged in civil contempt of the orders of the court.” If defendants, including Damon Key, could not, the First Application asked the federal court to “find each of them in contempt and order” Damon Key to “deliver the sum of $1.75 million into a trust account . . . to fund any judgment . . . against Junzo or Paul Suzuki” and “provide an accounting” of funds covered by the Asset Freeze Order. Dkt. No. 15 at 1-3, 9.[4]

         On September 16, 2016, the court denied the First Application, without prejudice, because the Takiguchi plaintiffs had failed to submit “evidence as to the origin of the funds allegedly transferred in violation of [the Asset Freeze Order].” Dkt. No. 18-8 at 1-2; see Dkt. No. 1, ¶ 27.

         2. The Second “Show Cause” Application Against Damon Key

         Undeterred by the court's ruling, on January 22, 2017, the Takiguchi plaintiffs renewed their civil contempt motion-but only as to Damon Key-and captioned the sealed motion: “Application for Order to Show Cause Why the Law Firm Damon Key . . . Should Not Be Held in Contempt” (“Second Application”) (Dkt. No. 18-9 at 1, 3). Dkt. No. 1, ¶ 28. Like its predecessor, the Second Application alleged that Damon Key covertly transferred $1.75 million in Suzuki funds to overseas accounts in violation of the Asset Freeze Order. Dkt. No. 18-9 at 9. The Takiguchi plaintiffs requested that Damon Key “now be ordered to show cause why it should not be adjudicated in contempt.” If Damon Key could not do so, the plaintiffs asked the court to “then find the firm in contempt and order” Damon Key to “pay and deliver the sum of $1, 809, 569 into a trust account . . . to fund any judgment . . . against the Suzuki defendants or their affiliates” and “provide an accounting” of funds covered by the Asset Freeze Order. Dkt. No. 18-9 at 3-4; Dkt. No. 1, ¶¶ 28-29.[5]

         On August 31, 2017, the court denied the Second Application because the Takiguchi plaintiffs had “failed to make a sufficient evidentiary showing to justify an order to show cause.” Order at 9, Takiguchi, No. 2:13-cv-1183 (D. Nev. Aug. 31, 2017), ECF No. 723; Dkt. No. 1, ¶ 30.

         C. Westport Denies Coverage Under the Policy

         The day after the First Application was filed, Damon Key sent a copy of the Application to Westport. Dkt. No. 1, ¶ 24. By letter dated March 29, 2016, Westport denied that it had a duty to defend or indemnify Damon Key under the Policy. Westport allegedly reasoned that because the Takiguchi plaintiffs sought to hold Damon Key in contempt, the matter was a request for “sanctions” expressly excluded from the definition of a “LOSS” under the Policy. See Id. at ¶ 32. Westport accordingly informed Damon Key that it would make no further payments to Alston Hunt, the law firm Damon Key had retained for its defense of the contempt order Applications. See Id. at ¶ 32; see also Dkt. Nos. 18-6 at 1; Dkt. No. 18-7 at 2.[6]

         This action followed on February 27, 2019. Dkt. No. 1.


         I. Rule 12(b)(6)

         A complaint may be challenged for failure “to state a claim upon which relief can be granted.” Fed.R.Civ.P. 12(b)(6). To withstand such a challenge, a complaint must contain enough facts “to state a claim to relief that is plausible on its face.” Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007); Fed.R.Civ.P. 8(a)(2). Even though a “complaint attacked by a Rule 12(b)(6) motion to dismiss does not need detailed factual allegations, a plaintiff's obligation to provide the grounds of his entitlement to relief requires more than labels and conclusions, and a formulaic recitation of the elements of a cause of action will not do.” Twombly, 550 U.S. at 555 (citations omitted).

         On a Rule 12(b)(6) motion to dismiss, a court “must accept as true all of the factual allegations contained in the complaint, ” Erickson v. Pardus, 551 U.S. 89, 94 (2007), and draw “any reasonable inferences” in favor of the plaintiff. Johnson v. Riverside Healthcare Sys., 534 F.3d 1116, 1122 (9th Cir. 2008). To that end, a court must judge the sufficiency of a complaint under a two-pronged approach: (1) disregard all “legal conclusions” and “conclusory statements”; and (2) determine whether the remaining “well-pleaded ...

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