D&O Claim Deemed Related to Prior Suit Brought by Different Parties

The United States District Court for the District of Connecticut, applying Connecticut law, has found no coverage under a director and officers liability policy for a claim alleging the fraudulent conveyance of a company because it was “related to” a claim challenging the conveyance made prior to the policy period.  See Alexbay LLC v. QBE Ins. Corp., 2020 WL 5501233 (D. Conn. Sept. 11, 2020).  The court declined to decide whether a specific litigation exclusion also barred coverage.

In 2011, a law firm sued its client, a family business owned by the founder’s son and the heirs of his two sisters, and obtained a judgment for unpaid legal fees.  The son formed the insured and transferred the family business’s assets to it, leaving the family business essentially a shell, using a complex series of transactions for which the insured obtained judicial approval via a lawsuit filed in 2012.  In 2014, the law firm sued the insured claiming that the transfer of assets was a fraudulent conveyance made, in part, to avoid debts like its judgment against the family-owned business.  As a result of that lawsuit, the heirs of the two sisters first learned that the son had transferred the family business assets to his own company, and they filed a fraudulent conveyance action in 2016 making many of the same allegations as, and attaching as an exhibit, the 2014 fraudulent conveyance action by the law firm.

The policy incepted in March 2016, just before the heirs filed their fraudulent conveyance action.  The insurer denied coverage for the lawsuit on the basis that the claim was “related to” the law firm’s 2014 fraudulent conveyance action and under a specific litigation exclusion barring coverage for claims “arising out of” the law firm’s suit.

In coverage litigation, the court held that the claim was barred by the policy’s related claims provision but declined to decide whether the specific litigation exclusion applied.  According to the court, the related claims provision – applicable to claims “based upon, arising out of or resulting from the same or related, or having a common nexus of, facts” – contained broader language than the specific litigation exclusion, which barred coverage for claims “arising out of” the law firm’s suit.  Although the lawsuit brought against the insured shared a common nexus of facts with the 2014 law firm suit because both challenged the insured’s conveyance, the court was uncertain that the claim had a sufficient causal connection to the prior suit to satisfy the “arising out of” standard.  The court concluded that because the related claims provision precluded coverage, the court “need not and does not resolve the issue of whether the 2016 [lawsuit] falls within the scope of the Specific Litigation Exclusion.”