16‐3548‐cv
Intelligent Dig. Sys., LLC v. Beazley Ins. Co.
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 19th day of September, two thousand seventeen.
PRESENT: RALPH K. WINTER,
DENNY CHIN,
SUSAN L. CARNEY,
Circuit Judges.
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INTELLIGENT DIGITAL SYSTEMS, LLC, RUSS &
RUSS PC DEFINED BENEFIT PENSION PLAN, JAY
EDMOND RUSS, all individually and as assignees of
Jack Jacobs, Robert Moe, Michael Ryan and Martin
McFeely, and Jason Gonzalez,
Plaintiffs‐Appellants,
v. 16‐3548‐cv
BEAZLEY INSURANCE COMPANY, INC.,
Defendant‐Appellee.
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FOR PLAINTIFFS‐APPELLANTS: IRA LEVINE, Law Office of Ira Levine, Esq.,
Massapequa, New York.
FOR DEFENDANT‐APPELLEE: CHRISTOPHER M. STRONGOSKY (Joseph G.
Finnerty III, Neal F. Kronley, on the brief), DLA
Piper LLP (US), New York, New York.
Appeal from the United States District Court for the Eastern District of
New York (Spatt, J.).
UPON DUE CONSIDERATION, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment of the district court is AFFIRMED.
Plaintiffs‐appellants Intelligent Digital Systems, LLC (ʺIDSʺ), Russ & Russ
PC Defined Benefit Pension Plan (the ʺPlanʺ), and Jay Edmond Russ, all individually
and as assignees of insured individuals Jack Jacobs, Robert Moe, Michael Ryan, Martin
McFeely, and Jason Gonzalez, appeal from the district courtʹs October 5, 2016 judgment
dismissing the amended complaint and resolving this insurance action in favor of
defendant‐appellee Beazley Insurance Company, Inc. (ʺBeazleyʺ). The primary issue is
Beazleyʹs disclaimer of coverage for Russʹs claims against the insured directors of Visual
Management Systems, Inc. (ʺVMSʺ). We assume the partiesʹ familiarity with the
underlying facts, procedural history, and issues on appeal.
A. Background
Russ is a New York attorney who founded IDS, a technology company in
the digital recording industry. Directly and indirectly (through another wholly‐owned
company), Russ is the sole officer of IDS. He is also the fiduciary of the Plan.
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In January 2008, IDS agreed to sell its assets to non‐party VMS, a
company, now dissolved, in the video technology business. VMS agreed to pay IDS
$1.5 million over time and issued a promissory note to that effect, and it agreed also to
add Russ to its Board of Directors and to hire him as a consultant. On February 26,
2008, the VMS Board of Directors met and, after a motion was made and seconded,
approved the transaction and Russʹs appointment, conditioned upon completion of the
transaction. The transaction closed on April 2, 2008. VMSʹs general counsel confirmed
to Russ that Russ would be a director as of its May 2008 meeting. Russ participated in
three board meetings and was paid for his services as a board member.
Beazley is a Connecticut company that provided insurance coverage to
VMS under a directors and officers liability insurance policy (the ʺPolicyʺ). The Policy
provides that ʺ[t]he Insurer shall pay on behalf of the Directors and Officers all Loss
which is not indemnified by the Company resulting from any Claim first made against
the Directors and Officers during the Policy Period for a Wrongful Act.ʺ Suppl. Appʹx
553 (emphasis omitted). The Policy defines ʺDirectors and Officersʺ to include ʺall
persons who were, now are, or shall be duly elected or appointed directors.ʺ Suppl.
Appʹx 556. Section III(F) of the Policy contains what the parties refer to as an ʺinsured v.
insured exclusion,ʺ which excludes coverage for ʺany Claim . . . by, on behalf of, or at
the direction of any of the Insureds, except and to the extent such Claim . . . is
employment‐related and brought by or on behalf of any of the Directors and Officers.ʺ
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Suppl. Appʹx 559, 561 (emphasis omitted). The Policy defines ʺInsuredsʺ as ʺthe
Directors and Officers and the Company.ʺ Suppl. Appʹx 556 (emphasis omitted).
In December 2008, Russ announced that he was resigning from the board
and might sue VMS for payments owed under the promissory note. Plaintiffs initiated
an action against VMS and the other five directors in March 2009. Beazley denied VMS
coverage under the Policy and cited the insured v. insured exclusion. The litigating
parties settled the action, with four directors agreeing to pay a total of $75,000, all five
directors agreeing to the entry of judgments against them in amounts exceeding $2
million, plaintiffs agreeing to ʺunconditionally forbear collectionʺ of the judgments
against the five directors, and all five directors assigning their rights under the Policy to
plaintiffs. S. Appʹx 59, 60.
On March 12, 2012, plaintiffs commenced this diversity action against
Beazley and sought indemnification for the unpaid amounts of the judgments. On
November 27, 2012, the court converted Beazleyʹs motion to dismiss the complaint to a
summary judgment motion, denied the motion, and denied Beazleyʹs subsequent
motion for reconsideration. On June 23, 2015, the court denied the partiesʹ cross‐
motions for summary judgment as to the amended complaint and narrowed the issues
for trial to: (1) whether Russ was duly elected or appointed to the Board and thus not
entitled to indemnification because of the insured v. insured exclusion and (2) if not,
whether Beazley could assert equitable estoppel as a defense against Russʹs coverage
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claim. The jury found at trial that Russ had been duly elected or appointed within the
meaning of the Policy and therefore it did not reach the estoppel defense. Final
judgment was entered in Beazleyʹs favor on October 5, 2016. This appeal followed.
B. Discussion
Two principal issues are presented: (1) whether the insured v. insured
clause applies to this case, and (2) assuming it does, whether Russ was duly elected or
appointed a director.
1. Applicability of the Insured v. Insured Clause
Under New York law, which the parties agree applies to the Policy,
ʺinsurance policies are interpreted according to general rules of contract interpretation.ʺ
Olin Corp. v. Am. Home Assurance Co., 704 F.3d 89, 98 (2d Cir. 2012). This initial
interpretation of the contract and whether its terms are ambiguous are questions of law
for the court, Morgan Stanley Grp. Inc. v. New England Ins. Co., 225 F.3d 270, 275 (2d Cir.
2000), and so we review the district courtʹs interpretation of the contract and its terms de
novo, see U.S. Fid. & Guar. Co. v. Fendi Adele S.R.L., 823 F.3d 146, 149 (2d Cir. 2016). The
court must interpret the contract ʺto give effect to the intent of the parties as expressed
in the clear language of the contract,ʺ Morgan Stanley, 225 F.3d at 275 (quoting Vill. of
Sylvan Beach v. Travelers Indem. Co., 55 F.3d 114, 115 (2d Cir. 1995)), and give words and
phrases in the contract their plain meaning, Olin, 704 F.3d at 99. A term is ambiguous if
its language ʺcould suggest ʹmore than one meaning when viewed objectively by a
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reasonably intelligent person.ʹʺ Morgan Stanley, 225 F.3d at 275 (quoting Lightfoot v.
Union Carbide Corp., 110 F.3d 898, 906 (2d Cir. 1997)).
By limiting the trial to the issue of whether Russ was duly elected or
appointed, the district court essentially ruled as a matter of law that the insured v.
insured clause applied to this case, rejecting plaintiffsʹ contention that at a minimum
there was ambiguity in the clause and that the exclusion could be read as applying only
to claims brought by directors in their capacities as directors.
We agree with the district court. The insured v. insured exclusion, on its
face, exempts from coverage ʺanyʺ claim brought by, on behalf of, or at the direction of
an insured director, unless the claim is employment‐related. Suppl. Appʹx 559, 561.
The exclusion is not limited to claims brought by an insured in his ʺcapacityʺ as a
director. On its face, the exclusion applies to all claims (except employment‐related
claims) regardless of whether the director brings the claims in an individual or fiduciary
capacity.1 Moreover, the employment‐related exception to the exclusion applies only to
claims brought by employees ‐‐ not by consultants, like Russ. Indeed, his consultantʹs
agreement specified that he was an independent contractor and not an employee.
1 In contrast, in Trs. of Princeton Univ. v. Natʹl Union Fire Ins. Co. of Pittsburgh, Pa.,
839 N.Y.S.2d 437, 2007 WL 1063870 (N.Y. Sup. Ct. Apr. 10, 2007) (unreported disposition), a case
plaintiffs relied on heavily, the policyʹs insured v. insured clause did contain limiting language,
and the court noted that the exclusion there was ʺnarrower in scope than typical ʹinsured versus
insuredʹ exclusions.ʺ Id. at *1 n.1.
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Accordingly, plaintiffsʹ challenge to the application of the insured v. insured exclusion
to Russʹs claims fails on the merits.
2. Whether Russ Was Duly Elected or Appointed
Assuming the insured v. insured clause applies, the next question is
whether Russ was ʺduly elected or appointedʺ as a director within the meaning of the
Policy. While this question was put to the jury and the jury resolved it against
plaintiffs, plaintiffs argue in essence that summary judgment should have been granted
in their favor. They contend that the district court should have determined that the
Policy language was ambiguous and the ambiguity should have been resolved in their
favor. See Belt Painting Corp. v. TIG Ins. Co., 100 N.Y.2d 377, 383 (2003) (ʺ[P]olicy
exclusions are given a strict and narrow construction, with any ambiguity resolved
against the insurer.ʺ). Specifically, plaintiffs allege that the Policy language was
ambiguous as to the process required for directors to be considered duly elected or
appointed.
Our de novo review indicates that no such ambiguity exists in the Policy.
The plain meaning of the phrase ʺduly elected or appointedʺ in the Policyʹs definition of
ʺDirectors and Officersʺ is that directors must be duly selected, by vote or appointment,
in accordance with proper procedures. There is nothing in the language of the Policy to
support plaintiffsʹ argument that the omission of references to ʺʹde factoʹ director[s],ʺ
Appellantsʹ Br. at 30, renders the otherwise unambiguous language ambiguous.
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Plaintiffsʹ reliance on the VMS bylaws is also misplaced. They argue that
§§ 2.1, 2.2, and 2.6 of the bylaws required the board to formally vote to expand its
membership in addition to voting to appoint Russ as a new director, and that the
district court erred in not reaching this conclusion as a matter of law. We are not
persuaded.
Under Nevada law, which the parties agree applies to the bylaws, 2
whether a contract is ambiguous is a question of law that the court may decide on
summary judgment. Galardi v. Naples Polaris, LLC, 301 P.3d 364, 366 (Nev. 2013). ʺ[A]
contract is ambiguous if its terms may reasonably be interpreted in more than one way.ʺ
Id. The court may admit expert evidence of industry custom or trade usage to provide
context for its legal decision about whether a contract is ambiguous. Id. at 366‐67. If the
contractual language is ambiguous, the court may admit extrinsic evidence to allow a
jury to assess the partiesʹ intent, clarify ambiguities, or fill omissions. Ringle v. Bruton,
86 P.3d 1032, 1039 (Nev. 2004).
As an initial matter, we tend to disagree with the district courtʹs
conclusion that the bylaws were ambiguous: we doubt that the bylaws can be read to
require a separate, formal vote to increase the number of directors from five to six.
While the bylaws provide that the number of directors was to be determined by the
Board ʺfrom time to time,ʺ Appʹx 780, the bylaws do not specify that a formal vote was
2The parties agree that the Nevada law on contracts governs this issue because
VMS was a Nevada corporation.
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needed to set or change the number. By voting unanimously to appoint Russ as its sixth
director, the board implicitly ‐‐ if not explicitly ‐‐ ʺdetermined,ʺ see Appʹx 780, that it
would increase its membership to six. Cf. Redl v. Secʹy of State, 85 P.3d 797, 800‐01 (Nev.
2004) (finding sufficient ʺsubstantial complianceʺ with statutory requirements for
corporate filings). Contrary to plaintiffsʹ suggestion, the bylawsʹ reference to ʺnewly‐
created directorships resulting from any increase in the authorized number of directors,ʺ
Appʹx 780 (emphasis added), does not explicitly require more formal action by the
board.
Even assuming that the district court correctly held that the bylaws were
ambiguous, the question of whether Russ was duly elected or appointed as a director
was put to the jury, and the jury determined that he was. That decision was well
supported by the largely undisputed evidence: all of VMSʹs five directors were present
at the February 26, 2008 board meeting; Russ thereafter began serving as a director and
sought confirmation that he was indeed covered by the Policy; he attended three board
meetings and was paid for his service; and in various filings with government agencies,
VMS represented that Russ was a director. All of the parties treated Russ as a duly
elected or appointed director.
As we agree with the district court as to the applicability of the insured v.
insured exclusion, we need not address plaintiffsʹ claims of error in the district courtʹs
rulings on Beazleyʹs equitable estoppel defense, as to which we express no view.
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We have considered plaintiffsʹ remaining arguments and find them to be
without merit. Accordingly, we AFFIRM the judgment of the district court.
FOR THE COURT:
Catherine OʹHagan Wolfe, Clerk
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