Modell v. Argonaut Insurance Company

Background

Mitchell B. Modell, the former Chief Executive Officer of Modell’s Sporting Goods, Inc. (MSGI), sued Argonaut Insurance Company, also referred to in the opinion as Argo, and Eric Spiel, MSGI’s former Chief Financial Officer. The dispute concerns a directors-and-officers insurance policy that Argonaut issued to MSGI and that covered Modell, Spiel, and other insured persons.

MSGI filed for Chapter 11 bankruptcy, and a liquidating trust was created under the confirmed bankruptcy plan. The Liquidation Trustee later brought an adversary proceeding against Modell, Spiel, and others in their capacities as former MSGI officers and directors. Argonaut accepted coverage obligations for Modell, Spiel, and others, subject to a reservation of rights, and paid defense costs.

During preparations for a September 2022 mediation, Spiel and the Liquidation Trustee exchanged informal discovery and position papers. Modell alleged that Spiel made admissions against his own interests and Modell’s interests without Modell’s or Argonaut’s consent. The Liquidation Trustee and Spiel later entered into a settlement requiring Spiel to cause Argonaut to pay $2.8 million to the Liquidation Trustee in exchange for Spiel’s dismissal from the adversary proceeding and mutual releases. Modell alleged that Argonaut’s funding of the settlement and continued defense of Spiel breached or would anticipatorily breach the policy.

Motions and Legal Standard

Argonaut moved to strike certain allegations from the complaint and moved to dismiss the complaint under Federal Rule of Civil Procedure 12(b)(6), which tests whether a complaint states a legally sufficient claim. Spiel joined both motions. The court stated that it could consider the insurance policy because it was attached to and incorporated into the complaint.

The parties’ briefs assumed that New York law governed. The court explained that under New York law, an unambiguous insurance policy is interpreted according to its plain meaning and as a whole. The court also stated that outside evidence may be considered to interpret a contract only when the contract is ambiguous.

Endorsement 1: Consent to Settlements

Modell relied on Endorsement 1, which states that the insureds may select or consent to defense counsel, participate in directing a defense, and consent to a settlement, with consent not to be unreasonably withheld. Modell argued that because he was an insured, he had the right to consent to—or block—a settlement involving Spiel.

The court rejected that interpretation. It held that the policy’s clear language gave each insured the right to consent to a settlement concerning that insured’s own claim. It did not give other insureds the right to veto settlements involving someone else. The court reasoned that Modell’s interpretation would also allow every insured to select counsel for, or direct the defense of, claims against every other insured, an interpretation the court found unreasonable and illogical.

The court also declined to consider alleged statements by Argonaut representatives about Modell’s rights because the policy was unambiguous. It concluded that Endorsement 1 did not give Modell the right to block Spiel’s settlement and that Argonaut did not breach or anticipatorily breach the policy by proceeding without Modell’s consent.

Endorsement 22: Cooperation Provision

Modell also relied on Endorsement 22, the policy’s cooperation provision. That provision requires insureds to cooperate with the insurer, prohibits conduct that prejudices the insurer’s position or recovery rights, and generally requires the insurer’s prior written consent before an insured settles a claim, incurs defense costs, assumes certain contractual obligations, admits liability, or stipulates to a judgment. It also states that one insured person’s failure to comply is not imputed to another insured person.

The court held that Modell had not shown a viable claim based on Spiel’s alleged noncooperation. First, Modell cited no authority establishing that he could object to Spiel’s alleged failure to cooperate with Argonaut under a provision intended to benefit the insurer. Second, the complaint acknowledged that Argonaut consented to Spiel’s settlement. Third, the complaint did not allege that Spiel formally assumed a contractual obligation, admitted liability, or stipulated to a judgment without Argonaut’s consent.

The court further held that statements made during confidential mediation, which applicable bankruptcy rules made confidential and inadmissible, did not amount to a breach of the cooperation provision in this case. Modell also did not plead that Argonaut was prejudiced or explain how Spiel’s statements after Argonaut consented to the settlement prejudiced Argonaut’s position.

Disposition

The court held that Modell failed to state a claim and dismissed the complaint. It did not grant leave to amend because Modell had not requested it or explained how an amendment would cure the complaint’s defects. Judge Jennifer L. Rochon granted the motion to dismiss, denied the motion to strike as moot, directed the Clerk of Court to terminate the motions, and directed that the case be closed.