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Biochemics, Inc. v. Axis Reinsurance Co.

United States Court of Appeals, First Circuit

May 23, 2019

BIOCHEMICS, INC.; JOHN MASIZ, Plaintiffs, Appellants,
v.
AXIS REINSURANCE COMPANY, Defendant, Appellee. JOHN P. RAUCCI; BROWN & BROWN OF NEW YORK, INC., Defendants.

          APPEAL FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF MASSACHUSETTS [Hon. Rya W. Zobel, U.S. District Judge]

          Steven L. Schreckinger, with whom Anderson & Kreiger LLP were on brief, for appellants.

          Melinda B. Margolies, with whom Kaufman Borgeest & Ryan LLP, William A. Schneider, and Morrison Mahoney LLP were on brief, for appellee.

          Before Thompson, Kayatta, and Barron, Circuit Judges.

          BARRON, CIRCUIT JUDGE.

         This appeal concerns a 2013 suit that BioChemics, Inc. ("BioChemics"), a pharmaceutical company based in Massachusetts, and John Masiz ("Masiz"), its president and chief executive officer, brought in the District of Massachusetts to enforce a directors and officers ("D&O") insurance policy (the "Policy") with AXIS Reinsurance Company ("AXIS"). BioChemics and Masiz seek damages for what they contend is AXIS's breach, under the Policy, of its "duty to defend" them in connection with a Securities and Exchange Commission ("SEC") investigation against the company and its officers.

         BioChemics and Masiz moved for partial summary judgment in 2013, and the District Court denied the motion. BioChemics, Inc. v. Axis Reinsurance Co., 963 F.Supp.2d 64, 70-71 (D. Mass. 2013). They filed a renewed motion for partial summary judgment in 2015, and AXIS cross-moved for summary judgment. AXIS contended in that motion that it did not breach its duty to defend under the Policy because, among other things, BioChemics and Masiz were seeking to enforce that duty in relation to a "Claim" that -- given when the SEC investigation commenced -- was "first made" before the Policy took effect and thus was not "covered" by the Policy. The District Court granted AXIS's motion. BioChemics and Masiz now appeal from the grant of summary judgment to AXIS. We affirm.

         I.

         The undisputed facts are the following. On May 5, 2011, the SEC began a "Non-Public Formal Investigation" by issuing a Formal Order captioned "In the Matter of BioChemics, Inc., B-02641" (the "2011 Order"). The 2011 Order mentioned Masiz by name, described him as the sole officer of the company, and identified several "possible" securities violations. These "possible" violations included instances of fraud and misrepresentation, beginning as early as 2009, that were aimed at distorting the value of BioChemics securities. The 2011 Order also noted that Masiz had been sanctioned for securities violations in the past and that, due to those sanctions, he had been barred from serving as an officer or director of any publicly traded company until 2009.

         On May 9, 2011, and then again on September 12, 2011, the SEC served subpoenas on BioChemics. The 2011 subpoenas requested documents pertaining to, among other things, the company's finances, operations, drugs under development, interactions with pharmaceutical companies, and payments to Masiz. These subpoenas bore the same caption as the 2011 Order and expressly referenced the 2011 Order as authorizing their issuance. In a cover letter that accompanied the September 2011 subpoena, the SEC stated that the "investigation . . . should not be construed as an indication by the [SEC] that any violation of law has occurred."

         After receiving the May 2011 subpoena, BioChemics retained legal counsel and a consulting firm to assist with its response. At that time, BioChemics had a D&O insurance policy with Greenwich Insurance Company. BioChemics did not, at any point, notify that insurer about the ongoing SEC investigation.

         In October of 2011, BioChemics and Masiz, in his individual capacity, applied to have AXIS take over as the D&O insurer for the policy period that ran from November 2011 to November 2012. In that application, BioChemics and Masiz represented that there were no legal claims pending against them. AXIS agreed to provide the D&O insurance for the requested policy period.

         In January of 2012, the SEC served deposition subpoenas on Masiz and other individuals. In March of that same year, the SEC followed up by serving documents subpoenas on BioChemics and Masiz. Each of these 2012 subpoenas -- eight in total -- bore the same caption as the 2011 Order and the 2011 subpoenas. One of these subpoenas was served on Masiz in his individual capacity for deposition testimony and one was served on him in his individual capacity for document production.

         Finally, in December of 2012, the SEC commenced an Enforcement Action ("2012 Action") against BioChemics, Masiz, and two other individuals. The 2012 Action "allege[d]" that, beginning as early as 2009, Biochemics and Masiz had "engaged in a fraudulent scheme" to mislead investors about the company's value. At least one of the "allege[d]" misrepresentations, concerning a topical ibuprofen product, took place after the 2011 Order and the 2011 subpoenas were issued.

         After receiving the March 2012 documents subpoenas, BioChemics and Masiz notified AXIS of them, as well as of the subpoenas that the SEC had issued in January of 2012. AXIS "agree[d] that the SEC Investigation . . . constitute[d] a D&O Claim" under the Policy. AXIS asserted, however, that BioChemics and Masiz were necessarily seeking -- given the terms of the Policy -- "coverage" for a single "Claim" that encompassed the SEC investigation as a whole and that this "Claim" was "first made" in May of 2011 when the SEC issued the documents subpoena to BioChemics and thus that this "Claim" was "first made" "prior to the inception of the Policy Period."[1] On the basis of that assertion, AXIS stated that "because the Claim was not made during the Policy Period, coverage is not available for the SEC Investigation."

         AXIS later took the same position with respect to the 2012 Action. It concluded that the 2012 Action was also part of the same single "Claim" that was "first made" when the SEC issued the May 2011 documents subpoena, which was prior to the start of the policy period.

         In response, on February 27, 2013, BioChemics and Masiz sued AXIS in Massachusetts Superior Court. BioChemics and Masiz alleged breach of contract and breach of fiduciary duty, under Massachusetts law, based on the contention that AXIS had breached its duty to defend under the Policy. The case was subsequently removed to the United States District Court for the District of Massachusetts based on diversity jurisdiction. 28 U.S.C. § 1332. BioChemics and Masiz filed a Motion for Partial Summary Judgment in the District Court on June 5, 2013. They argued that each of what they contended were the "Claim[s]" that triggered AXIS's duty to defend under the Policy -- respectively, each of the 2012 subpoenas and the 2012 Action -- had been brought by the SEC after the policy period began to run and thus was "first made" within the policy period.

         The District Court denied that motion in August of 2013. BioChemics, Inc. v. Axis Reinsurance Co., 963 F.Supp.2d 64 (D. Mass. 2013). In reaching this decision, the District Court did not address the relevance of the 2011 Order, as BioChemics and Masiz had not yet disclosed the 2011 Order to AXIS or the District Court.

         On February 14, 2014, BioChemics and Masiz filed a renewed Motion for Partial Summary Judgment. They again argued that, under the Policy, AXIS had a duty to defend that was triggered by "Claim[s]" -- each of the 2012 subpoenas and the 2012 Action -- that had been "first made" during the policy period. AXIS cross-filed a Motion for Summary Judgment. AXIS argued that it had no such duty because, among other things, the SEC filings were properly treated as a single "Claim" that had been "first made" when the SEC issued the May 2011 documents subpoena and thus that was "first made" prior to the policy period.

         On January 6, 2015, the District Court entered an order granting AXIS's Motion for Summary Judgment and denying BioChemics and Masiz's Motion for Partial Summary Judgment. BioChemics, Inc. v. Axis Reinsurance Co., 83 F.Supp.3d 405 (D. Mass. 2015) [hereinafter BioChemics II]. By that time, the District Court had been made aware of the 2011 Order. Equipped with that knowledge, the District Court held that the 2012 Action, and the multiple 2012 subpoenas, were all part of a "Claim" that had been "first made" when the 2011 Order issued (May 5, 2011). Id. at 408. BioChemics and Masiz then appealed the District Court's order.[2]

         II.

         The Policy incorporates four separate Insuring Agreements: the D&O Corporate Liability Agreement, the Employment Practices Liability Agreement, the Fiduciary Liability Agreement, and the Outside Executive Liability Agreement. The only agreement that is at issue in this appeal is the D&O Corporate Liability Agreement.

         That agreement obligates AXIS to cover "all Loss on behalf of any Insured arising from any D&O Claim for a Wrongful Act . . . first made against such Insured . . . during the Policy Period ."[3] The Policy defines "Loss" as "the amount(s) which the Insureds become legally obligated to pay on account of a Claim, including damages, judgments, any award of pre-judgment and post-judgment interest, settlement amounts, costs and fees awarded pursuant to judgments, and Defense Costs." (Emphasis added). The Policy separately provides that AXIS has "both the right and duty to defend and appoint counsel with respect to any Claim made against the Insureds alleging a Wrongful Act, even if such a Claim is groundless, false or fraudulent."

         The Policy defines a "D&O Claim" as:

a. a written demand against an Insured for monetary or nonmonetary relief;
b. a civil, arbitration, administrative or regulatory proceeding against any Insured commenced by:
(i) the service of a complaint or similar pleading;
(ii) the filing of a notice of charge, investigative order or like document; or
(iii) written notice or subpoena from an authority identifying such Insured as an entity or person against whom a formal proceeding may be commenced; or
c. a criminal investigation or proceeding against any Insured Individual commenced by:
(i) the return of an indictment, information, or similar pleading; or
(ii) written notice or subpoena from an authority identifying such Insured Individual as an individual against whom a formal proceeding may be commenced.

         A "Wrongful Act," in turn, is defined as "any actual or alleged error, misstatement, misleading statement, act, omission, ...


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