On appeal from Superior Court of New Jersey, Law Division, Monmouth County, Docket No. L-1489-08.
NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION
Submitted September 23, 2009
Before Judge C.L. Mininan and Waugh.
Plaintiffs TIG Insurance Company of Michigan (TIG) and those Certain Underwriters at Lloyd's, London Subscribing to Policy No. SIS 107 (Underwriters) appeal the dismissal of their declaratory judgment action against defendant Henry J. Wojtunik (Wojtunik). TIG and Underwriters sought a determination of their rights and obligations with respect to directors' and officers' liability policies (D&O policies) providing two successive excess layers of insurance coverage. Wojtunik had secured a stipulated judgment in the United States District Court for the District of Arizona against the insureds, who assigned him their claims against all D&O carriers for coverage under their policies. The motion judge dismissed this complaint without prejudice on grounds of comity and forum non conveniens. TIG and Underwriters challenge that dismissal as an abuse of discretion. We affirm.
Wojtunik, a New Jersey resident, was the founder, president, and sole shareholder of Anacom Systems, Inc. (Anacom), a fiber-optics company based in New Jersey. He sold Anacom to Arizona-based International FiberCom, Inc. (IFC), in February 2001 in exchange for shares of IFC stock then valued at $8 million. IFC promptly merged Anacom into Arizona-based International FiberCom-ANA, Inc. (FiberCom-ANA), a wholly owned subsidiary of IFC, which thereafter employed Wojtunik.
IFC carried successive layers of D&O policies. The underlying policy was issued by Carolina Casualty Company (Carolina) and provided $2.5 million of coverage over applicable retentions with a policy period of May 22, 2001, to May 22, 2002. TIG issued a first layer excess D&O policy to IFC for the same policy period providing $2.5 million of coverage over the Carolina policy. The Underwriters issued a second layer excess D&O policy to IFC for the same policy period with policy limits of $5 million excess to the Carolina and TIG policies. In many respects, the excess policies followed the form of the Carolina policy. The policies obligated Carolina and plaintiff to pay on behalf of an "Insured" any "Loss" arising out of any "Securities Claim" made during the "Policy Period" against an "Insured" for a "Wrongful Act." The term "Insured" included past, present, and future IFC directors, officers, and employees.*fn1
In the months following the Anacom/IFC merger, massive accounting fraud at IFC was revealed, which ultimately led to IFC filing for bankruptcy in February 2002. Wojtunik's stock in the company became worthless. On November 8, 2002, Wojtunik reacquired the assets of Anacom through New Jersey-based Fiber-Span, then recently founded by him. Then, on November 12, 2002, Wojtunik filed a securities-fraud claim in the United States District Court for the Eastern District of Pennsylvania against ten directors and officers of IFC to recover the lost stock value. He alleged that he relied on IFC's publicly filed financial statements during the Anacom/IFC merger negotiations and that the ten officers and directors of IFC violated generally accepted accounting principles in IFC's SEC filings, causing IFC's stock to trade at inflated prices, to his damage. Wojtunik also alleged fraud and misrepresentation by the ten IFC officers and directors during merger negotiations.
The matter was transferred to the District of Arizona where Anacom was based over defendant's objection that litigation there would be inconvenient for him and his witnesses from Pennsylvania, New Jersey, Florida, Georgia and Virginia. However, the federal judge concluded the action should be transferred to the District of Arizona pursuant to 28 U.S.C.A. § 1404 because, among other reasons, IFC was based in Arizona; the ten officers and directors were Arizona residents; the misrepresentations were made in Arizona; Arizona law governed the merger; and most key witnesses were in Arizona. Carolina denied coverage based on Wojtunik's alleged status as an officer of an IFC subsidiary, i.e., as President of FiberCom-ANA, citing the policy's exclusion of coverage for claims of an insured against another insured. TIG and Underwriters denied coverage in relevant part for the same reasons.
On November 12, 2004, the ten defendant IFC officers and directors instituted a declaratory judgment action against Carolina only in the Arizona Superior Court for Maricopa County. Carolina removed the action to the federal court in Arizona based on diversity of citizenship. While this action was pending, Wojtunik in March 2005 offered Carolina and TIG the opportunity to settle for their coverage limits in return for a promise not to pursue his claims against their insureds, and made a similar offer to Underwriters to settle for $3.5 million. All three insurers reiterated their denials of coverage despite Wojtunik's notice to them that he would attempt to negotiate an assignment of the coverage claims against them.
On September 26, 2005, the judge in the District of Arizona dismissed eight of the IFC officers and directors from Wojtunik's securities-fraud action with prejudice and dismissed the balance of his complaint without prejudice for failure to state a claim. Wojtunik v. Healy, 394 F. Supp. 2d 1149, 1173-74 (D. Ariz. 2005). Wojtunik then filed a second amended complaint against three of the IFC officers. The judge subsequently dismissed some of the claims in the second amended complaint on September 30, 2006, and the remaining claims were deemed actionable.
On December 4, 2006, the three remaining IFC officers and directors settled the securities claims and consented to entry of a stipulated judgment for $8 million plus interest and assignment of their claims against the insurers in exchange for a promise not to execute the judgment against them personally. The IFC officers and directors agreed to cooperate with defendant's efforts to collect the judgment from the insurers. A judgment to that effect was entered on December 18, 2006. The parties to this settlement allegedly did not obtain the consent of the insurers, as required by § VI.A. of the Carolina policy.
Prior to the settlement of the securities claims, Carolina and the IFC directors and officers filed cross-motions for summary judgment in the coverage action pending in federal court in Arizona. However, these motions were heard after the settlement of the securities litigation. On January 16, 2007, the federal judge handling the coverage action determined that Carolina could not decline coverage under the insured-versus-insured exclusion because, although defendant's employment agreement indicated that he would be hired as "president" of FiberCom-ANA, he was not a duly elected officer according to the bylaws of the corporation and never served in that capacity. The judge further concluded that the doctrines of estoppel and waiver precluded Carolina from denying coverage based on defendant's status as an employee, because its notice of denial of coverage did not mention that exclusion. Carolina appealed the summary judgment against it to the United States Court of Appeals for the Ninth Circuit.
While that appeal was pending, Wojtunik sought to collect the stipulated judgment entered in his favor. First, he filed a writ of garnishment against Carolina in the securities-fraud action. Second, he filed an action against Carolina in the District of Arizona on his assigned claims for breach of contract because Carolina failed to pay the judgment. Garnishment was denied on June 5, 2007, because the Ninth Circuit appeal was still pending. However, the judge responsible for the breach of contract action refused to dismiss or stay it. Carolina then agreed to pay its policy limits, resulting in the agreed dismissal of the contract action against Carolina on April 18, 2008. The policy limits were paid on May 7, 2008, permitting Wojtunik to proceed against TIG.
Shortly before Carolina settled with Wojtunik, TIG and Underwriters prepared the complaint in this action on March 19, 2008. Although they had long known of the actions pending in Arizona, they sought a declaration in New Jersey that Wojtunik was not entitled to coverage on the same bases that Carolina unsuccessfully asserted in the coverage litigation against it. On June 3, 2008, Wojtunik filed a writ of garnishment against TIG only in the Arizona securities-fraud action, seeking to litigate the same coverage issues asserted here. On June 24, 2008, Wojtunik moved to dismiss this action on grounds of comity and forum non conveniens. He also alleged the action was premature when filed because the Carolina policy had not yet been exhausted.
Before oral argument on Wojtunik's motion, TIG moved to quash or stay the writ of garnishment in the Arizona securities-fraud action to permit this declaratory judgment action to proceed. TIG also argued that the District of Arizona should abstain under the Colorado River doctrine,*fn2 because joinder of the Underwriters would destroy diversity jurisdiction.*fn3
While TIG's motion in the securities-fraud action was pending, the judge in this action granted Wojtunik's motion to dismiss. In the oral decision he placed on the record, the judge found that the federal court in the securities-fraud action had ancillary jurisdiction to enforce its judgments without regard to diversity jurisdiction pursuant to Peacock v. Thomas, 516 U.S. 349, 356, 116 S.Ct. 862, 867, 133 L.Ed. 2d 817, 826 (1996). He found that the securities-fraud action was first filed, which ordinarily requires a stay or dismissal under Sensient Colors, Inc. v. Allstate Ins. Co., 193 N.J. 373, 386 (2008), where the parties, claims, and legal issues are substantially the same. He further found that garnishees in Arizona may raise substantially the same claims and issues as those raised in this action, citing Able Distrib. Co. v. Lampe, 773 P.2d 504, 508 ...