Two Pleadings Contain “Interrelated Wrongful Acts” Despite the Inclusion of New Parties and Caus

A directors and officers liability insurance policy’s definition of “Interrelated Wrongful Acts” included both an original cross-complaint and the first amended cross-complaint despite the fact that the amended pleading asserted new causes of action and added new cross-defendants. Feldman v. Illinois Union Insurance Co., 2011 Cal. App. LEXIS 116 (Cal. Ct. App. Sept. 6, 2011)

 
 
In this case, the underlying lawsuit was filed by ZF Micro Solutions, Inc. (“ZF Solutions”) against National Semiconductor Corporation (“NSC”) on April 25, 2002. On May 28, 2002, NSC filed a cross-complaint against both ZF Micro Devices, Inc. (“ZF Devices”) and ZF Solutions, which was the successor to ZF Devices. One year later, on April 25, 2003, NSC filed a first amended cross-complaint, which added David Feldman, the president and chief executive officer of ZF Solutions, and two other cross-defendants and also asserted new causes of action against the cross-defendants. 
 
 
Illinois Union Insurance Company (“Illinois Union”) issued a policy that provided coverage for ZF Solutions and its directors from July 1, 2002, to July 1, 2003. Feldman tendered the defense of NSC’s amended cross-complaint to Illinois Union, but Illinois Union denied coverage on the grounds that NSC’s claim had originally been made on May 28, 2002, which was prior to the inception of the Illinois Union policy. Id. As a result, ZF Solutions, ZF Devices, and Feldman subsequently filed suit against Illinois Union regarding its obligations under the policy.
 
 
The Illinois Union policy provided that “[m]ore than one Claim involving the same Wrongful Act or Interrelated Wrongful Act shall be deemed to constitute a single Claim and shall be deemed to have been made at the earliest of the following times: (a) the time at which the earliest Claim involving the same Wrongful Act or Interrelated Wrongful Act is first made . . . .” Additionally, the policy defined “Interrelated Wrongful Acts” as “more than one Wrongful Act which have as a common nexus any fact, circumstance, situation, event or transaction or series of facts, circumstances, situations, events or transactions.” The issue before the court was whether NSC’s claims involved “Interrelated Wrongful Acts” such that NSC’s first amended cross-complaint would be deemed to have been made at the time NSC filed its original cross-complaint, which was before the Illinois Union policy incepted.
 
 
In its analysis, the court examined and compared the allegations within NSC’s original cross-complaint with the allegations in the amended cross-complaint. Notably, while the original cross-complaint only included two causes of action – breach of contract and successor liability – the amended cross-complaint expanded NSC’s theories of recovery and also added Feldman and two other cross-defendants. Specifically, while the amended cross-complaint again alleged that the “fraudulent transfer” of ZF Devices’ assets to Feldman and ZF Solutions, via the purported foreclosure and assignment to the Kennedy Trust, was made to “hinder, delay or defraud” creditors, including NSC, the amended cross-complaint also added causes of action for fraudulent conveyance and conspiracy, violations of Business and Professions Code Section 17200, breach of fiduciary duty, and invasion of privacy.
 
 
Despite the addition of new defendants and causes of action, the court concluded that based on its comparison of the two pleadings, while the amended cross-complaint included many new details of the events contributing to the alleged liability of the cross-defendants, all of those details pertained to the alleged fraudulent assignment and transfer of ZF Devices’ assets to ZF Solutions, made with the intent of avoiding the company’s obligation to NSC. Accordingly, the court found that while the amended cross-complaint expanded NSC’s theories of recovery, “three of the four new causes of action asserted against Feldman . . . had ‘as a common nexus any fact, circumstance, situation, event or transaction or series of facts, circumstances, situations, events or transactions’ in relation to the original cross-complaint.” The court therefore concluded that these claims constituted a single claim, which was originally made in April 2002, before the inception of the Illinois Union policy; thus, Illinois Union did not have a duty to defend NSC’s cross-complaint.
 
 
The court did note, however, that the fifth cause of action for invasion of privacy “arguably pertained to a different set of circumstances.” However, the court did not definitively address this issue since the Illinois Union policy contained an exclusion which precluded coverage for illegally recorded conversations (the subject of the invasion of privacy cause of action), and thus, there was no duty to defend NSC’s cross-complaint.
 
 

Tressler Comments

 

This case serves as another illustration of how California courts are inclined to relate claims. Specifically, the Feldman court broadly interpreted the meaning of the phrase “common nexus any fact, circumstance, situation, transaction . . .” within the policy’s definition of “Interrelated Wrongful Acts.” In particular, while the amended cross-complaint added new defendants and causes of action, the court refused to focus on those factors in determining whether the claims constituted “Interrelated Wrongful Acts.” Rather, the court focused on the fact that both cross-complaints stemmed from the same alleged fraudulent conveyance, which was designed to avoid the former company’s obligations to NSC.
 
 
Accordingly, to the extent a professional liability policy includes an “interrelated wrongful act” definition similar to that within the Illinois Union policy, we can expect the California courts to broadly interpret that definition to encompass all claims that derive from the same set of facts, circumstances, situations or transactions.
 
 
Monica Mendes is an associate in the Los Angeles office of Tressler LLP (http://www.tsmp.com/monica-mendes/; 310-203-4863;

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