Scottsdale Insurance Company v. McGrath

Background

Scottsdale Insurance Company issued a Business and Management Indemnity Policy to Watershed Ventures, LLC. The dispute arose from the failure of Rocky Aspen, LLC, a restaurant venture in which AH DB Kitchen Investors LLC and a Watershed subsidiary each initially owned half of the voting and economic units. Patrick McGrath was connected to AH DB and Castlegrace Equity Investors, LLC, and served as a co-manager of Rocky Aspen until January 5, 2016.

After Rocky Aspen entered bankruptcy and related litigation followed, McGrath and the other defendants sought coverage under the policy. Scottsdale denied coverage, asserting, among other things, that the defendants were not insureds, that the claims did not allege covered wrongful acts, that a subsidiary exclusion applied, and that notice was untimely. McGrath’s remaining counterclaim seeks damages for Scottsdale’s alleged breach of its duty to defend. The case was scheduled for trial.

The opinion concerns motions in limine, which are requests for advance rulings about whether particular evidence may be used at trial. Scottsdale also sought judicial notice of filings from other court proceedings.

Statements Made in the Earlier Appeal

McGrath argued that statements by Scottsdale’s lawyers in a brief and during oral argument before the United States Court of Appeals for the Second Circuit were judicial admissions. A judicial admission is a clear, intentional factual statement that binds the party making it. The court held that Scottsdale’s statements were not judicial admissions because they expressed legal conclusions about the effect of earlier orders, whether claims remained viable, and whether the policy provided coverage. The statements were also conditional and referred to circumstances that did not occur or agreements that had been vacated.

The court did not decide whether the statements were excluded under Federal Rule of Evidence 408, which generally concerns settlement-related evidence. It held that Rule 403 independently required exclusion because the statements had little value in proving the policy’s contents, McGrath’s acts, or the notice given to Scottsdale, while creating a substantial risk of prejudice, confusion, and wasted time. Scottsdale’s motion to exclude the statements was therefore granted on that basis, and the statements could not be used as judicial admissions.

Consequential Damages and the Personal Guaranty Action

McGrath sought to introduce evidence of costs from defending a separate state-court lawsuit concerning a personal guaranty. The court held that those costs were consequential damages because McGrath claimed they resulted from Scottsdale’s failure to cover him in another lawsuit, rather than from a direct contractual duty to defend the state-court action.

The court had previously ruled that McGrath could not recover consequential damages because he had not shown bad faith by Scottsdale or that the damages were within the parties’ reasonable contemplation when they contracted. Applying the law-of-the-case doctrine, the court declined to revisit that ruling and denied McGrath’s request to introduce evidence supporting those damages.

Evidence About Wrongful Acts

The court ruled that whether McGrath actually committed the alleged wrongful acts was not relevant to the coverage issue. The policy defined a wrongful act to include an actual or alleged wrongful act, and the duty to defend turns on comparing the allegations in the underlying complaint with the policy—not on deciding whether the insured actually committed the alleged misconduct.

Scottsdale therefore could not introduce evidence that McGrath actually committed wrongdoing, and McGrath could not introduce evidence, including documents concerning the Centaur matter, that he did not commit wrongdoing. However, McGrath could not exclude the allegations in the Hanford complaint because those allegations were relevant to determining whether the underlying claims involved covered occurrences. The court stated that jury instructions could address any potential prejudice from hearing the allegations.

Scottsdale’s Other Evidentiary Motions

The court excluded evidence or references to Scottsdale’s or McGrath’s financial condition, the size of Scottsdale or Nationwide Mutual Insurance Company, and Nationwide’s advertising slogans or references such as “Nationwide is on your side.” The court found those matters irrelevant to Scottsdale’s contractual duties and potentially prejudicial. It also excluded evidence of settlements and judgments to the extent McGrath offered them to support unavailable consequential damages.

The court excluded evidence of both parties’ general claims-handling practices. McGrath could, however, present facts about when he learned of the policy and when he received it, because those facts could bear on whether any delay in giving notice was excusable. He could not characterize Scottsdale’s conduct as deceptive or in bad faith, or offer evidence that Scottsdale violated discovery rules, because bad faith was not part of the remaining duty-to-defend issue and such evidence risked inflaming the jury.

As to attorney’s fees, the court held that legal costs McGrath incurred in the bankruptcy proceeding and the Hanford Litigation could be introduced as potential damages for breach of the duty to defend, subject to the policy and the facts developed at trial. Fees from the state-court personal-guaranty proceeding were excluded because they were consequential damages. Fees incurred in this case would not be presented to the jury and, if appropriate, would be addressed by the court. Fees incurred by Castlegrace, AH DB, or other entities were excluded because McGrath alone claimed insured status under the policy. The court reserved decision on whether the duty to defend, if established, covered the bankruptcy proceeding generally or only the trustee’s demand and related adversary proceeding. It also reserved decision on McGrath’s fee-summary charts pending supporting affidavits.

McGrath’s Other Motions

The court did not preclude Michael Zartman, Paul Tomasi, or Eric Weissman from testifying as lay witnesses because Scottsdale represented that they would testify based on personal knowledge rather than as experts. McGrath could object if any witness offered impermissible expert testimony.

The court granted McGrath’s motion to preclude Scottsdale from presenting an advice-of-counsel defense. The court questioned whether that defense could apply to a breach-of-duty-to-defend claim and found that allowing it would be prejudicial without related discovery. The court denied McGrath’s request for an adverse-inference instruction or another sanction based on Scottsdale’s allegedly late production of its claim file, relying on an earlier order resolving that issue.

Judicial Notice and Disposition

The court took judicial notice of the actual filings in several bankruptcy, federal, and state proceedings, but only to establish that the proceedings and filings existed—not to establish that statements in those filings were true. The court did not at that time take judicial notice of the stipulated conditional judgment or the related Second Circuit materials because it had ruled those materials inadmissible.

The conclusion states that Scottsdale’s motions in limine were GRANTED IN PART and DENIED IN PART, McGrath’s motions in limine were GRANTED IN PART and DENIED IN PART, and the motion for judicial notice was GRANTED IN PART and DENIED IN PART. The court directed the Clerk to close Docket Nos. 132, 135, and 137.