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Transched Systems Limited v. Federal Insurance Co.

United States District Court, D. Rhode Island

December 22, 2014

TRANSCHED SYSTEMS LIMITED, Plaintiff,
v.
FEDERAL INSURANCE COMPANY, Defendant

Page 524

For Transched Systems Limited, Plaintiff: Christine K. Bush, Eric E. Renner, LEAD ATTORNEYS, Scott & Bush Ltd., Providence, RI; Matthew J. Ginsburg, LEAD ATTORNEY, PRO HAC VICE, Gilbert & Renton, LLC, Andover, MA; Rickey G. Glover, Robert J. Gilbert, PRO HAC VICE, Gilbert and Renton LLC, Andover, MA.

For Federal Insurance Company, Defendant: Thomas C. Angelone, LEAD ATTORNEY, Hodosh, Spinella & Angelone, Providence, RI; Michael O. Kassak, White and Williams LLP, Cherry Hill, NJ.

Page 525

MEMORANDUM & ORDER

John J. McConnell, Jr., United States District Judge.

The dispute in this case centers on whether a Federal Insurance Company insurance policy, which contains exclusions for breach of contract and deliberate fraud claims, covers a judgment awarded to TranSched Systems Limited on a jury's verdict for the tort of intentional misrepresentation against a Federal insured. TranSched and Federal have filed cross motions in this case, each seeking summary judgment on these insurance policy coverage issues.[1] (ECF Nos. 31, 32). For the reasons articulated below, Federal's motion is DENIED IN PART and GRANTED IN PART and TranSched's motion is GRANTED IN PART and DENIED IN PART.

I. FACTS AND TRAVEL

In 2004, TranSched began negotiations with Versyss Transit Solutions, LLC, Versyss Commercial Systems, LLC, and Holbrook Systems Inc. (collectively " Versyss" ) in an effort to acquire Versyss' transportation software assets, including the Titan software product. (ECF No 33 at ¶ 2; ECF No. 31-2 at ¶ ¶ 4-5). TranSched and Versyss completed the transaction for the software assets in February 2005 and executed a Bill of Sale, a General Conveyance, an Intellectual Property Assignment, an Assignment and Assumption Agreement, a Receipt that transferred ownership from Versyss to TranSched, and an Asset Purchase Agreement (" APA" ). (ECF No. 33 at ¶ ¶ 2-3).

The software assets were not delivered as expected and, at some point after the deal closed, TranSched realized that Versyss breached the APA. Specifically, TranSched learned that Versyss' Vice President, Sheryl Miller and its Vice President of Product Development and Chief Technology Officer, Lorin Miller had made material misrepresentations about the time frame and viability of the Titan software during the negotiations and execution of the transaction. (ECF No. 31-2 at ¶ 13; ECF No. 33 at ¶ ¶ 20-22). In light of the misrepresentations and breach of the APA, TranSched sued Versyss in Delaware Superior Court (" Underlying Suit" ). (ECF No. 33 at ¶ 19). Federal Insurance Company, with whom Versyss had an insurance policy,[2] retained counsel for Versyss in the Delaware case. ( Id. at ¶ 50). The parties attempted to settle the case prior to trial, but were not successful. ( Id. at ¶ ¶ 52-54).

At trial, TranSched presented evidence that Sheryl Miller lied and concealed information concerning the progress of Titan. ( Id. at ¶ ¶ 33-35, 38). The jury heard evidence that Ms. Miller provided TranSched with a project plan that misrepresented the time line for Titan's completion though

Page 526

it also appears from the record that Ms. Miller gave conflicting testimony at trial about the information that she provided to TranSched about Titan and whether she in fact made misrepresentations about Titan's progress. ( Id. at ¶ ¶ 33-34, 38). The jury heard other witnesses testify that, despite Ms. Miller's indication in her December 2004 project plan that Titan would be ready for beta testing within three months, very little code had been written as of the transaction closing date. ( Id. at ¶ ¶ 71 34-36). Ms. Miller also testified that she knew that some Titan customers were unhappy and planned to stop using Titan software. ( Id. at ¶ 38).

TranSched obtained a jury verdict in the Underlying Suit against Versyss. The jury found against Versyss on three grounds: (1) intentional misrepresentation, (2) breach of contract regarding misrepresentation and warranties under the APA, and (3) breach of the covenant of good faith and fair dealing. ( Id. at ¶ 41). The jury awarded TranSched $500,000 in damages and, upon motion, the trial judge awarded TranSched $19,874.25 in costs and $170,268.75 in prejudgment interest. ( Id. at ¶ ¶ 42-43). The court entered final judgment in the Underlying Suit and there are no appeals pending. ( Id. at ¶ 47). Versyss failed to pay the judgment and is no longer in business. ( Id. at ¶ 49). TranSched attempted to collect the judgment from Versyss' insurance carrier, Federal. Federal denied any duty to pay, claiming that the damages awarded were not covered because the two exclusions in the Policy preclude coverage. ( Id. at ¶ 48-49).

TranSched then brought this suit, seeking satisfaction of the judgment in the Underlying Suit. Count I of TranSched's complaint alleges that the Policy provides coverage and Count II alleges that TranSched is entitled to additional damages, interest, and fees under R.I. Gen. Laws § 27-7-2.2, Rhode Island's " rejected settlement offer" statute, because Federal failed to respond to TranSched's pre-trial settlement demands for a demand within the Policy limits. Federal moved to dismiss under Rule 12 of the Federal Rules of Civil Procedure, arguing that TranSched failed to state a claim upon which relief could be granted. The Court denied Federal's motion, finding that TranSched's complaint, when read in the light most favorable to TranSched, adequately pled the two legal claims. TranSched System Ltd. v. Federal Ins. Co., 958 F.Supp.2d 331, 338 (D.R.I. 2013). Discovery ensued and now both parties now seek summary judgment as to Counts I and II.

II. STANDARD OF REVIEW

Rule 56(a) of the Federal Rules of Civil Procedure directs courts to " grant summary judgment if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law." Fed.R.Civ.P. 56 (a). When evaluating " 'cross-motions for summary judgment, the standard does not change; [courts] view each motion separately and draw all reasonable inferences in favor of the respective non-moving party.'" Bonneau v. Plumbers & Pipefitters Local Union 51 Pension Trust Fund, 736 F.3d 33, 36 (1st Cir. 2013) (quoting Roman Catholic Bishop of Springfield v. Springfield, 724 F.3d 78, 89 (1st Cir. 2013)). " The court need consider only the cited materials, but it may consider other materials in the record." Fed.R.Civ.P. 56 (c)(3). A summary judgment motion " cannot be defeated by relying upon conclusory allegations, improbable inferences, acrimonious invective, or rank speculation." Ahern v. Shinseki, 629 F.3d 49, 54 (1st Cir. 2010).

Page 527

III. ANALYSIS

The first issue in this case is whether Federal has proven that any exclusion in the Policy is applicable to the damages verdict on TranSched's intentional misrepresentation claim in the Underlying Suit.[3] When an exclusion in an insurance policy is at issue, the analysis typically follows two steps. First, the insured " bears the burden of proving a prima facie case, including but not limited to the existence and validity of a policy, the loss as within the policy coverage, and the insurer's refusal to make payments as required by the terms of the policy." Gen. Accident Ins. Co. of Am. v. Am. Nat. Fireproofing, Inc., 716 A.2d 751, 757 (R.I. 1998).[4] " [A]ny doubts as to the adequacy of the pleadings to encompass an occurrence within the scope of the policy must be resolved in the insured's favor." Allstate Ins. Co. v. Russo, 641 A.2d 1304, 1306 (R.I. 1994). Second, if the insured sustains its initial burden, and where an insurer seeks to deny coverage under a policy exclusion, " [t]he insurer then bears the burden of proving the applicability of policy exclusions...." Gen. Accident, 716 A.2d at 757; see also Am. Title Ins. Co. v. East West Fin., 16 F.3d 449, 455 (1st Cir. 1994).

A. COVERAGE

Federal provided claims-made coverage to all of the Versyss entities for claims made during the policy period. Coverage C (the Corporate Liability Coverage) provides that " [Federal] shall pay Loss on behalf of the Insured Organization resulting from any Insured Organization Claim first made against such Insured Organization during the Policy Period, or any applicable Extended Reporting Period for Wrongful Acts." (ECF No. 33 at ¶ 10). The Policy goes on to define " Wrongful Acts" (Section (U)(1)) as " any error, misstatement, misleading statement, act, omission, neglect, or breach of duty committed, attempted, or allegedly committed or attempted by: [. . .] (b) for purposes of coverage under Insuring Clause (c): any Insured Organization." ( Id. at ¶ 10). Thus, Coverage C read together with section (U)(1)(b) reveals the existence of coverage for claims against Versyss for errors and other negligent acts Versyss committed. It is undisputed that Federal refused to pay the damages that the jury imposed on Versyss. As such, TranSched has established a prima facie case for coverage and, as there are two exclusions in the Policy, the burden shifts to Federal to prove that either or both of the exclusions apply. See Gen. Accident, 716 A.2d at 757.

B. THE EXCLUSIONS

Under long-standing and definitive Rhode Island law, an " exclusion from coverage in [an] ... insurance policy must be clear and unambiguous." Am. Commerce Ins. Co. v. Porto, 811 A.2d 1185, 1192 (R.I. 2002) (internal quotation marks and citation omitted). It is also well established that " exclusionary clauses which are subject to more than one interpretation are to be construed in the manner most ...


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