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US HF Cellular Communications, LLC v. Scottsdale Insurance Co.

United States District Court, S.D. Ohio, Eastern Division

June 12, 2018

US HF CELLULAR COMMUNICATIONS, LLC, et al., Plaintiffs,
v.
SCOTTSDALE INSURANCE COMPANY, Defendant.

          OPINION & ORDER

          ALGENON L. MARBLEY UNITED STATES DISTRICT JUDGE

         This matter is before the Court on three Cross-Motions for Summary Judgment: Motion for Partial Summary Judgment by Plaintiffs ShipCom, LLC (“ShipCom”), U.S. HF Cellular Communications, LLC (“USHFCC”), and Virsenet, LLC (“Virsenet”) (collectively, the “US HF Plaintiffs”) (ECF No. 38); Motion for Partial Summary Judgment by Plaintiff Global Wideband HF Net LLC (“Global Wideband”) (ECF No. 39); and Motion for Summary Judgment by Defendant Scottsdale Insurance Company (“Scottsdale”) (ECF No. 40). For the reasons set forth below, the Court GRANTS Scottsdale's Motion for Summary Judgment (ECF No. 40), DENIES the U.S. HF Plaintiffs' Motion for Partial Summary Judgment (ECF No. 38), and DENIES Global Wideband's Motion for Partial Summary Judgment (ECF No. 39). Further, Plaintiffs' Motion for Leave to File Post-Submission Brief (ECF No. 66) is DENIED.

         I. BACKGROUND

         A. Factual Background

         This is a case about the obligation of an insurance company-Scottsdale-to defend Plaintiffs in an ongoing lawsuit in Alabama, captioned Robert Stiegler, III, et al., v. ShipCom, LLC, et al., No. 2-CV-2015-901469 (the “Alabama Lawsuit”). Plaintiffs can be grouped into two categories: (1) the U.S. HF Plaintiffs (ShipCom, USHFCC, and Virsenet); and (2) Global Wideband. Both sets of plaintiffs had insurance contracts with Scottsdale, and the issue is whether, under those policies, Scottsdale has a duty to defend Plaintiffs in the Alabama Lawsuit.

         1. The Alabama Lawsuit

         The plaintiffs in the underlying Alabama Lawsuit (“Alabama Plaintiffs”) are minority shareholders of ShipCom. (ECF No. 35-6 at ¶¶ 1-2). ShipCom is a limited liability company that operates a maritime communications network that facilitates ship-to-ship and ship-to-shore communications using a spectrum of high frequency (“HF”) radio waves. (Id. at ¶¶ 3, 7). The Federal Communications Commission (“FCC”) requires ShipCom to own licenses for the HF spectrum ShipCom uses. (Id. at ¶ 10). ShipCom's FCC licenses initially restricted ShipCom's use of the HF radio spectrum to maritime communications and prohibited it from using its frequencies for land-based communication. (Id. at ¶ 11).

         After Hurricane Katrina, however, the FCC granted ShipCom a waiver to allow it to use its HF radio frequencies for “emergency backup communications for first responders in the event of a catastrophic event that disrupts normal local wired and wireless communications.” (Id. at ¶¶ 14, 17, 18). After ShipCom was granted the waiver, in addition to maintaining its usual ship-to-ship and ship-to-shore business, it began assembling equipment used in hospitals, nursing homes, and other similar entities that could be activated as a means of back-up communication when a catastrophe disabled other forms of communication-an “emergency button” of sorts. (Id. at ¶¶ 22, 23). ShipCom entered into contracts with customers for its “emergency button” service and charged the customers a monthly fee. (Id.).

         Around October 2011, USHFCC[1] was formed to acquire an 80% interest in ShipCom. (Id. at ¶ 26). USHFCC is wholly owned and managed by Virsenet. (Id. at ¶¶ 4, 5). Virsenet's managing member is Mr. Edward Bayuk. (Id. at ¶ 5). In 2012, USHFCC and ShipCom entered into a Membership Interest Purchase Agreement and a First Amended Membership Interest Purchase Agreement (collectively, the “Purchase Agreements”), under which USHFCC acquired an 80% interest in ShipCom. (ECF No. 45-1). The Alabama Plaintiffs, who had previously owned 100% of ShipCom, retained a 20% interest in the company. (Id.). After the companies entered into the Purchase Agreements, Mr. Bayuk purported to be the manager of ShipCom. (ECF No. 35-6 at ¶ 29).

         In December of 2012, USHFCC, Virsenet, and ShipCom, through Mr. Bayuk, entered into a Network Management Agreement with Intrado, Inc. (“Intrado”), under which Intrado became the “Manager of the Maritime Services and the Emergency Land-Based HF Services” in exchange for a Management Fee. (ECF No. 45-1 at Ex. 3). According to the Alabama Plaintiffs, USHFCC, Virsenet, and Mr. Bayuk, through Intrado, then cancelled all of ShipCom's “emergency button” contracts and fired all of ShipCom's employees, though they later attempted to rehire them. (ECF No. 35-6 at ¶¶ 33, 34).

         The Alabama Plaintiffs subsequently filed the Alabama Lawsuit in the Circuit Court of Mobile County, Alabama on May 29, 2015, against various defendants including ShipCom, Virsenet, USHFCC, Mr. Bayuk, and Intrado.[2] (ECF No. 35 at ¶¶ 7-12). In their initial Complaint, the Alabama Plaintiffs allege that Virsenet, USHFCC, and Mr. Bayuk never intended ShipCom to benefit from the Intrado contract, despite the fact that ShipCom's FCC HF radio spectrum licenses and related waiver “are the cornerstone of USHFCC's . . . [and] Intrado's . . . service.” (Id. at ¶ 39). They further allege that USHFCC wrongfully claimed to own the ShipCom FCC licenses and waiver itself. (Id. at ¶ 40). They thus brought various claims individually and on behalf of ShipCom, including: breach of fiduciary duties, self-dealing/usurpation of corporate opportunity, unjust enrichment, squeeze out, conversion, negligence, fraud, state law trademark infringement, and state law deceptive trade practices. (ECF No. 35-6).

         On August 19, 2015, the Alabama Plaintiffs filed a First Amended Complaint, which was followed by a Second Amended Complaint on November 25, 2015. (ECF No. 35 at ¶¶ 13, 21, Ex. 8, 15). The Second Amended Complaint added Mr. John Richmond as an individual defendant. (ECF No. 35-15). Mr. Richmond is the Chief Operating Officer of Global Wideband. (ECF No. 39-1at ¶ 1). The Second Amended Complaint alleges that Mr. Richmond purported to be the Chief Executive Officer of ShipCom following the execution of the Purchase Agreements. (ECF No. 35-15 at ¶ 30). In addition to the factual allegations alleged in the Complaint, the Second Amended Complaint also alleges the following:

. USHFCC, Virsenet, Mr. Bayuk, and Mr. Richmond entered into an agreement with Globe Wireless Radio Services Inc. (“Globe”)-a direct competitor of ShipCom-for purchase of Globe's business and assets (including licenses) to be combined with ShipCom, but the transaction did not close, resulting in USHFCC paying a $500, 000 penalty to Globe;
. USHFCC, Virsenet, Mr. Bayuk, Mr. Richmond, and others associated with them, formed Global Wideband, “a sham entity formed for the improper purpose of usurping ShipCom's corporate opportunity” and Global Wideband then purchased Globe;
. The USHFCC entities ceased paying one of the Alabama Plaintiffs his salary for work at ShipCom; and
. Mr. Bayuk allowed valuable ShipCom FCC licenses to expire.

(Id. at ¶¶ 46-50). The Second Amended Complaint brought the same causes of action as the Complaint.

         On April 4, 2016, the Alabama Plaintiffs filed a Third Amended Complaint, adding Global Wideband as a defendant. (ECF No. 35 at ¶¶ 25-26). In addition to the allegations in the Second Amended Complaint, the Third Amended Complaint alleges:

. On June 23, 2015 (before Global Wideband purchased Globe's assets), the USHFCC Board of Directors voted to file suit against the Alabama Plaintiffs, put financial pressure on one of them by no longer paying him his salary and forcing him to pay certain expenses;
. Global Wideband entered into a Network Management Agreement with USHFCC/ShipCom giving Global Wideband access to the ShipCom frequencies and effectively transferring 325 HF channels to Global Wideband; and
. In August of 2015 USHFCC filed suit in Delaware against the Alabama Plaintiffs, stopped paying one of them his salary, and demanded he pay certain expenses.

(ECF No. 35-16 at ¶¶ 48, 50, 51). The Third Amended Complaint contains the same causes of action as the previous complaints (not all are alleged against Global Wideband) and one additional cause of action seeking an equitable or constructive trust on Globe's assets because of alleged insufficient transfers that violated fiduciary duties. A Fourth Amended Complaint was filed on November 23, 2016. (ECF No. 35 at ¶ 28, Ex. 17).

         2.The Insurance Policies

         The USHF Plaintiffs were insured under three consecutive insurance policies from Scottsdale: (1) Business Management and Indemnity Insurance Policy EKS31107211, covering the policy period of July 31, 2013 to July 31, 2014 (the “First USHF Policy”); (2) Business Management and Indemnity Insurance Policy EKS3135588, covering the July 31, 2014 to July 31, 2015 policy period (the “Second USHF Policy”); and (3) Business Management and Indemnity Insurance EKS3165937 for the July 31, 2015 to July 31, 2016 policy period (the Third USHF Policy.”). (ECF No. 35, Ex. 3, 5, 13). The Continuity Date of the U.S. HF Plaintiffs' Policies is July 31, 2014. (Id. at Declarations, Item 3). Global Wideband had insurance with Scottsdale through the Business and Management and Indemnity Policy No. EKS3169277 for the September 24, 2015 to September 24, 2016 policy period (the “Global Policy”). (Id. at Ex. 14). The Global Policy also covers Jon Richmond, as the Chief Operating Officer of Global, and Edward Bayuk, as the Director of Global. The Continuity Date of the Global Policy is July 31, 2015. (Id. at Declarations, Item 3).

         Each of the four relevant policies contains an identical duty-to-defend provision which provides: “[i]t shall be the duty of the Insurer and not the duty of the Insureds to defend any Claim. Such Duty shall exist even if any of the allegations are groundless, false, or fraudulent.” (ECF No. 35, Ex. 3, 5, 13, 14). Each policy also states that it “cover[s] only claims first made against the insured during the policy period or, if elected, the extended period and reported to the insurer pursuant to the terms of the relevant coverage section.” (Id. at Declarations). The relevant coverage section is the Directors and Officers (“D&O”) Coverage Section which, subject to certain exclusions, provides coverage to the Insureds for “Loss” that the companies or their respective D&Os have become legally obligated to pay because of a “Claim” made during the policy period and properly reported. (Id. at D&O Coverage Section ¶ A). “Claim” is defined in relevant part as:

a. a written demand against any Insured for monetary damages or non-monetary or injunctive relief; . . .
c. a civil proceeding against any Insured seeking monetary damages or non-monetary or injunctive relief, commenced by the service of a complaint or similar pleading.

(Id. at D&O Coverage Section ¶ B(1).). The policies require the Insureds to give Scottsdale written notice of any Claim as soon as practicable, but in no event later than sixty (60) days after the end of the respective Policy Period. (Id. at D&O Coverage Section ¶ E(1).). A Claim is “deemed to have been first made against the Insured on the date an Insured who is an executive officer, director or general counsel becomes aware of such Claim.” (Id.).

         Section D(3) of the D&O Coverage Section further provides that:

         All claims arising out of the same Wrongful Act and Interrelated Wrongful Acts shall be deemed to constitute a single Claim and shall be deemed to have been made at the earliest of the following times, regardless of whether such date is before or during the policy period:

a. the time at which the earliest Claim involving the same Wrongful Act or Interrelated Wrongful Act is first made; or
b. the time at which the Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to have been made pursuant to Section E.2 below.

(Id. at D&O Coverage Section ¶ D(3). “Wrongful Act” means:

         any actual or alleged error, omission, misleading statement, misstatement, neglect, breach of duty or act ...


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