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Old Berliner Liquidating Trust, A Trust Organized Under the Laws of v. North River Insurance Company


May 24, 2012


On appeal from the Superior Court of New Jersey, Law Division, Bergen County, Docket No. L-1584-11.

Per curiam.


Submitted May 8, 2012

Before Judges Fisher and Carchman.

Following the filing of an amended complaint in the Supreme Court of New York (the New York action or complaint) alleging a breach of contract based, in part, on an allegation of bad faith, plaintiff Old Berliner Liquidating Trust (plaintiff) brought an action against its insurer defendant North River Insurance Company (defendant), seeking coverage under a Platinum Management Protection Policy (the policy) issued by defendant to plaintiff. Plaintiff asserted that the New York action was covered as a breach of a fiduciary duty, while defendant responded that there was no coverage under the breach-of-contract exclusion contained in the policy. Judge Charles E. Powers, Jr., granted summary judgment to defendant and concluded that coverage was excluded. Plaintiff appeals, and we affirm.

There is no dispute as to the relevant facts.*fn1 As part of the consideration for a loan transaction between plaintiff and Critical Capital Growth Fund, L.P. (Critical Capital),*fn2 plaintiff provided Critical Capital with: the right to purchase at any time from January 29, 1999[,] until . . . January 28, 2006, up to 800,000 shares of [Old Berliner's common stock] . . . (subject to adjustment as provided in Section 8 hereof) at an initial exercise price (subject to adjustment as provided in Section 8 hereof) of $1.50 per share.

This agreement was subsequently amended to provide Critical Capital with "additional warrants to purchase another 100,000 shares of Old Berliner's common stock."

Critical Capital "sought to exercise its rights pursuant to the [w]arrant [a]greement." However, Old Berliner delivered only a small fraction of the common shares Critical Capital had expected to receive (i.e., 330,882 shares, rather than 9,924,505). This discrepancy prompted the New York complaint.

The New York complaint was initially dismissed by a Justice of the New York Supreme Court, who opined that since the contract between the plaintiff and Critical Capital required a good faith valuation of stock by plaintiff's board of directors, Critical Capital's initial complaint was flawed because it contained "no allegations that the [Old Berliner] Board violated the agreement by failing to act in 'good faith[.]'"

Critical Capital amended its complaint,*fn3 and plaintiff asserted that it was entitled to coverage under the Directors and Officers Liability provisions of the policy. Defendant denied coverage. In so doing, it relied on exclusion 7(a) in the parties' insurance agreement, which provides:

The [i]nsurer shall not be liable to make any payment for [l]oss resulting from any [c]laim based upon, arising out of, or directly or indirectly resulting from a [c]ompany [w]rongful [a]ct in connection with any . . . breach of written or oral contract, agreement, warranty, or guarantee if such [c]laim is brought by or on behalf of a party to such contract, agreement, warranty, or guarantee.

The insurance agreement defines a "[c]ompany [w]rongful [a]ct" as: any actual or alleged error, omission, neglect, breach of duty, misstatement, or misleading statement committed or attempted by, attributable to, or allegedly committed or attempted by the [c]ompany.

Defendant claimed that these provisions exclude coverage of the Critical Capital suit, which it considered to be "predicated upon a breach of [a] contract[ual]" duty to act in good faith.

In his decision, Judge Powers concluded that the underlying cause of action in New York was "an ordinary breach[-]of[-] contract claim. Although the Amended Complaint includes allegations of bad faith during [plaintiff's] valuation process, the bad faith relates to a provision in the contract between Critical Capital and [plaintiff]."

On appeal, plaintiff asserts that: the judge erred by failing to distinguish the nature of the claim; the policy was intended to cover the risks and claims arising from the New York action; and the claim was properly covered as a claim against the directors and officers.

We commence our analysis by restating general principles regarding an insurer's obligation to its insured. An insurer is contractually obligated "to provide the insured with a defense against all actions covered by the insurance policy." Abouzaid v. Mansard Gardens Assocs., LLC, 207 N.J. 67, 79 (2011). The insurer's duty to defend, which is "broader than the duty to indemnify," Jolley v. Marquess, 393 N.J. Super. 255, 274 (App. Div. 2007), is triggered by the filing of a complaint alleging a covered claim. Voorhees v. Preferred Mut. Ins. Co., 128 N.J. 165, 173 (1992) (quoting Danek v. Hommer, 28 N.J. Super. 68, 77 (App. Div. 1953), aff'd o.b., 15 N.J. 573 (1954)). Furthermore, a given complaint must be read liberally to determine whether it "raises allegations that fall within a risk covered by the insurance contract," thereby triggering "the duty to defend." Abouzaid, supra, 207 N.J. at 79. Ambiguity as to whether the insurance contract encompasses the complaint is resolved preliminarily in favor of the insured: "if 'the complaint comprehends an injury which may be within the policy,' a duty to defend will be found." Id. at 80 (quoting Danek, supra, 28 N.J. Super. at 78). We interpret the policy as written, and if the terms are clear, we "avoid writing a better policy than the one purchased." Passaic Valley Sewerage Comm'ers v. St. Paul Fire & Marine Ins. Co., 206 N.J. 596, 608 (2011) (citations omitted).

In asserting that defendant owed a defense to plaintiff, plaintiff argues that the focus of the inquiry should be on the true "nature" of the allegations, see Flomerfelt v. Cardiello, 202 N.J. 432, 444 (2010), rather than a "label." Plaintiff notes that the dispute focuses on the Board's calculation of the exercise price. Plaintiff relies on Jolley, where we recognized that "facts outside the complaint may trigger a duty to defend" in the same way the complaint's language itself may require the insurer to cover its client, the defendant. Supra, 393 N.J. Super. at 271 (quoting SL Indus. v. Am. Motorists Ins. Co., 128 N.J. 188, 198 (1992)). Our comment that where "the complaint is ambiguous, doubts should be resolved in favor of the insured and thus in favor of coverage," Jolley, supra, 393 N.J. Super. at 272 (quoting Voorhees, supra, 128 N.J. at 173-74), must be considered within the context of the facts of Jolley. Moreover, the Court has commented, in addressing coverage, "[m]ost important, the rule that contracts of insurance will be construed in favor of the insured and against the insurer will not be permitted to have the effect of making a plain agreement ambiguous and then construing it in favor of the insured." Passaic Valley, supra, 206 N.J. at 608.

Here, the trial judge was not compelled to consider facts "outside the complaint." The complaint is rooted in compliance with the warrant agreement rather than the Board's adherence to its general fiduciary duties; no facts exist "outside the complaint" capable of triggering North River's duty to defend.

Critical Capital's amended complaint states an unambiguous breach of contract action. Specifically, the complaint explains Critical Capital now sues for breach of the [w]arrant [a]greement alleging that (i) defendant's untimely calculation of the [w]arrant's adjusted exercise price is contrary to the express terms of the [w]arrant and (ii) defendant's Board has acted in bad faith in setting purported market values years after the events in question.

The reference to "bad faith" addresses the requirements of a specific contractual provision in the parties' warrant agreement. Critical Capital's claim against plaintiff is nothing more than an allegation of a breach of contract.

We likewise reject plaintiff's claim that a defense is mandated by plaintiff's reasonable expectation of coverage. We also reject plaintiff's reliance on Voorhees. In Voorhees, the Court recognized the ambiguous term "bodily injury" as reflecting the inartfully drafted complaint and the claim that "negligent infliction of emotional distress" triggered coverage under the bodily injury provisions of the policy. No ambiguity in the policy exists here that could raise the expectation level of the insured.

The policy's exclusion applies only to company wrongful acts that occur "in connection with any . . . breach of written or oral contract, agreement, warranty, or guarantee." Critical Capital's complaint alleges plaintiff violated section 8.1 of the parties' warrant agreement, which provides that non-cash consideration in a stock transaction shall be determined by the Board in good faith.

The alleged wrongful act, plaintiff's Board's breach of its duty in calculating the share, or "non-cash," consideration to be delivered to Critical Capital, is a breach of a contractual obligation under section 8.1. The nexus between the alleged company wrongful act and the breach of a contractual duty triggers the North River policy's 7(a) exclusionary clause. Unlike Voorhees, a case in which both the complaint and the exclusionary clause were ambiguous, this exclusionary provision is clear and unambiguous, and Critical Capital's complaint properly described a breach of contract claim.

We question whether the concept of reasonable expectation is relevant here. In Flomerfelt, the Court explained that judges need only consider the insured's "reasonable expectations" and construe the policy against the insurer when the policy's "terms are not clear, but instead are ambiguous[.]" Supra, 202 N.J. at 441. We have noted, as did Judge Powers, that the exclusionary provision is not unambiguous. Courts enforce the "plain and ordinary" meaning of the policy, rather than accommodate one party's subjective expectations. Ibid. (quoting Voorhees, supra, 128 N.J. at 175).

Finally, we reject plaintiff's reliance on Sealed Air Corp. v. Royal Indem. Co., 404 N.J. Super. 363, 375 (App. Div. 2008), where we recognized "those well-settled principles governing the interpretation of contracts of insurance that mandate broad reading of coverage provisions . . . ." These principles, do not, however, abrogate a court's responsibility to "enforce the policy as it is written." Hebela v. Healthcare Ins. Co., 370 N.J. Super. 260, 269 (App. Div. 2004) (quoting Royal Ins. Co. v. Rutgers Cas. Ins. Co., 271 N.J. Super. 409, 416 (App. Div. 1994)). We are also bound by the admonition to "be careful not to disregard the 'clear import and intent' of a policy's exclusion." Flomerfelt, supra, 202 N.J. at 442 (internal quotation marks and citations omitted).

We conclude that Judge Powers correctly granted summary judgment to defendant, and we affirm substantially for the reasons set forth in his written opinion of May 31, 2011.


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