15‐495
XL Specialty Ins. Co. v. Knox, LLC
UNITED STATES COURT OF APPEALS
FOR THE SECOND CIRCUIT
SUMMARY ORDER
RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURTʹS LOCAL RULE 32.1.1.
WHEN CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST
CITE EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
ʺSUMMARY ORDERʺ). A PARTY CITING A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.
At a stated term of the United States Court of Appeals for the Second
Circuit, held at the Thurgood Marshall United States Courthouse, 40 Foley Square, in
the City of New York, on the 8th day of December, two thousand fifteen.
PRESENT: ROBERT D. SACK,
DENNY CHIN,
RAYMOND J. LOHIER, JR.,
Circuit Judges.
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XL SPECIALTY INSURANCE COMPANY,
Plaintiff‐Counter‐Defendant‐Appellee,
v.
JOHN R. LAKIAN, DIANE W. LAMM,
Defendants‐Appellees,
KOBRE & KIM LLP, 15‐495
Defendant‐Counter‐Claimant‐Appellee,
MERRILL COMMUNICATIONS, EISEMAN LEVINE
LEHRHAUPT & KAKOYIANNIS, P.C., BRIEF CARMEN &
KLEIMAN, LLP,
Intervenors‐Appellees,
v.
KNOX, LLC, dba Knox, LLC of New York, DJW ADVISORS,
LLC,
Intervenors‐Appellants.
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FOR INTERVENORS‐APPELLANTS: HOWARD S. BONFIELD, Philip M. Halpern,
Collier, Halpern, Newberg & Nolletti, LLP,
White Plains, New York.
FOR PLAINTIFF‐COUNTER‐ DAVID H. TOPOL, Leland H. Jones IV, Wiley
DEFENDANT‐APPELLEE XL Rein LLP, Washington, D.C., and Jonathan A.
SPECIALTY INSURANCE CO.: Wexler, Vedder Price P.C., New York, New
York.
DEFENDANTS‐APPELLEES JOHN R. BRIAN J. OSIAS, Kelly A. Lloyd, McCarter &
LAKIAN & DIANE W. LAMM: English LLP, Newark, New Jersey.
Appeal from the United States District Court for the Southern District of
New York (Torres, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the order of the district court is REVERSED, and
the case is REMANDED for further proceedings.
Appellants Knox, LLC (ʺKnoxʺ), and DJW Advisors, LLC (ʺDJWʺ), appeal
from a January 15, 2015 memorandum and order of the United States District Court for
the Southern District of New York denying their motion to intervene as of right or by
permission in an interpleader action filed by plaintiff‐appellee XL Specialty Insurance
Co. (ʺXLʺ). Knox and DJW contend, inter alia, that the district court erred by concluding
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that under Federal Rule of Civil Procedure 24(a)(2) they do not have a direct,
substantial, and legally protectable interest in XLʹs insurance payouts that are the
subject of the interpleader action. We assume the partiesʹ familiarity with the
underlying facts, the procedural history of the case, and the issues on appeal.
In February 2011, Knox purchased $2 million in shares and DJW
purchased $50,000 in shares of Capital L Group, LLC (ʺCapital Lʺ), a financial services
company, allegedly after CEO John R. Lakian and COO Diane W. Lamm represented
that the investments would further Capital Lʹs business operations. Instead, Lakian and
Lamm allegedly diverted those funds for their personal gain.
On May 31, 2012, Knox and DJW sued Capital L, Lakian, and Lamm in
New York state court. Though Lakian and Lamm defended the action, Capital L
defaulted by failing to answer or appear, and on March 27, 2014, the state court entered
judgment for Knox and DJW against Capital L in the amounts of $2,573,918.63 and
$64,566.10, respectively.
Prior to the state court action, Capital L, Lakian, and Lamm had
purchased a financial services liability policy from XL for the period from November 11,
2011, to November 11, 2012 (the ʺPolicyʺ). The Policy includes a $3 million liability limit
and provides that XL ʺshall pay on behalf of the Insured Persons Loss resulting from
Claims first made against the Insured Persons during the Policy Period.ʺ App. at 70.
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The Policy defines ʺʹLossʹʺ as ʺdamages, judgments, settlements or other amounts . . .
and Defense Expensesʺ in excess of the insurance deductible. Id. at 48.
On July 14, 2014, XL filed the instant interpleader action against Lakian,
Lamm, and their attorneys, alleging that it was potentially subject to inconsistent
obligations that exceeded the remaining $1,372,596.10 payable under the Policy. Those
obligations included Lakianʹs and Lammʹs expenses and fees from defending the state
court action. On September 8, 2014, Knox and DJW moved to intervene, contending
that they had a legally protectable interest in XLʹs insurance payouts because they had
obtained a judgment against one of the insured persons, namely Capital L.
The district court disagreed. In its January 15, 2015 memorandum and
order, the district court concluded that Knox and DJW had not claimed a legally
protectable interest in the interpleaded insurance proceeds, as required by Rule 24(a)(2),
because their judgment against Capital L was not covered by the Policy. The district
court reached that conclusion only after determining that Capital Lʹs failure to appear in
state court gave rise to ʺmultiple and material breachesʺ of the Policy that were
sufficient to vitiate coverage of the subsequent judgment. Id. at 218. That determination
was premature, and we therefore reverse.
We review a district courtʹs denial of a motion to intervene for abuse of
discretion. Floyd v. City of New York, 770 F.3d 1051, 1057 (2d Cir. 2014). Under Rule
24(a)(2), the district court must permit a party to intervene if it establishes that ʺ(1) the
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motion is timely; (2) the applicant asserts an interest relating to the property or
transaction that is the subject of the action; (3) the applicant is so situated that without
intervention, disposition of the action may, as a practical matter, impair or impede the
applicantʹs ability to protect its interest; and (4) the applicantʹs interest is not adequately
represented by the other parties.ʺ MasterCard Intʹl Inc. v. Visa Intʹl Serv. Assʹn, Inc., 471
F.3d 377, 389 (2d Cir. 2006). We require for intervention that the ʺinterest be direct,
substantial, and legally protectable.ʺ Wash. Elec. Co‐op., Inc. v. Mass. Mun. Wholesale Elec.
Co., 922 F.2d 92, 97 (2d Cir. 1990).
This test, however, is ʺone of inclusion rather than exclusion.ʺ 7C Charles
Alan Wright et al., Federal Practice & Procedure § 1908.1, at 309 (3d ed. 2007). ʺ[E]xcept
for allegations frivolous on their face, an application to intervene cannot be resolved by
reference to the ultimate merits of the claims which the intervenor wishes to assert
following intervention . . . .ʺ Oneida Indian Nation of Wisc. v. State of New York, 732 F.2d
261, 265 (2d Cir. 1984). We have thus found that a defense to an intervenorʹs claims
ʺcarries no weight in the determination of whether an interest is sufficient for
intervention under Rule 24(a).ʺ Brennan v. N.Y.C. Bd. of Educ., 260 F.3d 123, 129‐30 (2d
Cir. 2001).
The district court, in deciding the instant motion, reached the merits of
Knox and DJWʹs claims and XLʹs defenses. In doing so, the district court abused its
discretion. Knox and DJW have obtained a legal judgment against Capital L for over
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$2.5 million, and on the face of the Policy, XL is obligated to pay for Capital Lʹs losses,
including its ʺjudgments.ʺ App. at 48, 70. Knox and DJW thus claim a direct interest in
XLʹs insurance payouts, because any payouts obtainable by Capital L from XL would go
directly toward satisfying their judgment. This claim, grounded in the language of XLʹs
Policy, is by no means frivolous. Indeed, XL filed its interpleader expressly to bring in
ʺall parties who currently assert entitlement to Policy proceeds.ʺ Id. at 27. Knox and
DJW appear to be two such parties. See United States v. Alisal Water Corp., 370 F.3d 915,
920 (9th Cir. 2004) (holding that ʺan economic interest [that is] concrete and related to
the underlying subject matter of the actionʺ may permit a ʺcreditor of a defendant to
intervene in a lawsuitʺ).
The district court denied Knox and DJWʹs motion, concluding that Capital
L could never have obtained insurance payouts from XL because Capital L breached the
Policy by not obtaining XLʹs consent before conceding liability and by increasing XLʹs
exposure. Whether Capital L breached, however, is a merits question. Whether Capital
L asked XL for consent, whether XL consented, and whether Capital Lʹs actions
increased XLʹs exposure are better addressed after Knox and DJW have been permitted
to participate in the suit.
Indeed, as to consent, it appears that XL at least knew about the state court
action for almost two years before Knox and DJW obtained a judgment against Capital
L. As to exposure, Capital L may have conceded to liability, but it is unclear on this
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record how Capital L increased the risk that XL was exposed to from the commencement
of the state court action. These are questions that we cannot (and should not) answer so
easily at the motion‐to‐intervene stage. Indeed, the only practical way to answer these
questions appears to be through litigation with Knox and DJW intervening in an
adversarial proceeding. We therefore conclude, contrary to the district courtʹs order,
that Knox and DJW claimed a direct, substantial, and legally protectable interest in the
subject of the interpleader action.
Knox and DJW also satisfied the remaining requirements for intervention
as of right under Rule 24(a)(2). The district court correctly held that their motion to
intervene was timely, and it is clear that Knox and DJWʹs interest in the insurance
proceeds would not be protected by the other parties (who opposed Knox and DJWʹs
intervention) and might be impaired if the interpleader were resolved without their
intervention. Accordingly, we REVERSE the district courtʹs order, and we REMAND
the case for further proceedings consistent with this order.
FOR THE COURT:
Catherine OʹHagan Wolfe, Clerk
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XL Specialty Ins. Co. v. Knox, LLC
Combined Opinion