United States District Court, D. Minnesota
Todd A. Duckson, Plaintiff,
Continental Casualty Company, Chicago Insurance Company, Nautilus Insurance Company, and Hinshaw & Culbertson, LLP, Defendants.
Scott R. Carlson, Esq., DC Law Chartered, for Plaintiff;
Joseph R. Menning, Esq., McCullough Campbell & Lane LLP, Chicago, Illinois, for Defendants Continental Casualty Company, Chicago Insurance Company, and Nautilus Insurance Company; and
Russell S. Ponessa, Esq., Hinshaw & Culbertson LLP, for Defendant Hinshaw & Culbertson LLP.
REPORT AND RECOMMENDATION ON DEFENDANTS' MOTIONS TO DISMISS AND FOR SANCTIONS
JEFFREY J. KEYES, Magistrate Judge.
This matter is before the Court, Magistrate Judge Jeffrey J. Keyes, on a joint motion to dismiss pursuant to Fed.R.Civ.P. 12(b)(6) on behalf of all Defendants (Doc. No. 7), and a joint motion for sanctions on behalf of all Defendants (Doc. No. 14). The motions have been referred to this Court for Report and Recommendation under 28 U.S.C. §636(b)(1). A hearing was held on August 20, 2014, at the U.S. Courthouse, 316 North Robert Street, St. Paul, Minnesota 55101.
It is this Court's conclusion that Defendants' joint motion to dismiss should be granted, and Defendants' joint motion for sanctions should be denied. The Court specifically recommends that Plaintiff's Count I claim for judgment declaring that an attorney malpractice insurance policy provides Plaintiff defense and indemnification coverage should be dismissed; Plaintiff's Count II claim for breach of contract should be dismissed; and Plaintiff's Count III claim for breach of fiduciary duty should be dismissed.
I. Background and Claims
Plaintiff Todd Duckson is an attorney who was employed by Defendant Hinshaw & Culbertson LLP ("Hinshaw") during times pertinent to this action. Plaintiff alleges that Defendants Continental Casualty Company, Chicago Insurance Company, and Nautilus Insurance Company (collectively "Insurers") failed to meet obligations under a legal malpractice insurance policy issued to Hinshaw that required the Insurers to provide Duckson a defense and indemnification for claims in a lawsuit brought against Plaintiff, Hinshaw and others in August 2012, in California state court ("Shoor Action").
The complaint in the Shoor Action alleged Duckson's misconduct between March 2008 and April 2009 in regards to his involvement in the sale of interests in a real estate investment fund, Capital Solutions Monthly Income Fund, LP (the "Fund"), in which members of the Shoor family had participated. The Shoor family alleged that Duckson made false or misleading statements or omissions about the Fund in his capacity as a Fund member and manager, as well as through a separate investment management company, Transactional Finance Fund Management, LLC, that he owned or controlled.
To put Duckson's claim that he is entitled to malpractice coverage for his defense in the Shoor Action into context, it is necessary to review the fraud action against Duckson brought by the SEC in the District of Minnesota, which resulted in a five-week jury trial and a verdict finding Duckson liable for securities fraud. The SEC suit alleged that Duckson, along with several other defendants, misled investors by misrepresenting the financial condition of the Fund. According to the SEC, Duckson's involvement in the fraudulent scheme started when he was an attorney at the Hinshaw law firm, doing securities work for the Fund. For example, Duckson, as the Fund's outside counsel, participated in drafting a private placement memorandum ("PPM") in March 2008 which allegedly misled investors as to the Fund's financial condition. The SEC charged that as the Fund's financial condition deteriorated after March 2008, the Fund lacked meaningful income-generating investments and began paying off existing investors out of proceeds from new investors, in classic Ponzi-scheme fashion. And, as these events unfolded, Duckson began taking on a business role, eventually controlling the Fund and profiting from its fraudulent operation. During or around the fall of 2008, while he was still at the Hinshaw firm, Duckson agreed to become the Fund's investment advisor. In November 2008, Duckson used a company named Transactional Finance Fund Management, LLC ("TFFM"), which he owned and controlled, to serve as the Fund's investment advisor. At the SEC trial Duckson testified that as of October 26, 2008, TFFM was the general partner of the Fund and he had "total control over the Fund." (Doc. No. 16-6, Menning Aff., Ex. F.) Around that time, Duckson announced his intention to leave the Hinshaw law firm at the end of 2008, which he did. In November 2008, however, after he took control of the Fund, Duckson participated in drafting another PPM to raise more money for the Fund. Like the earlier PPM in March 2008, this PPM, according to the SEC, fraudulently misrepresented the financial condition of the Fund.
The SEC claimed that Duckson's fraudulent activity continued after he left Hinshaw on January 1, 2009. For example, it accused Duckson of preparing yet another fraudulent PPM in February 2009, that, among other things, failed to disclose to potential investors that the offering proceeds would not be sufficient for the fund to make new investments. And, the SEC accused Duckson of continuing the fraud by, for example, causing the Fund to stop paying investors in late 2009, but continuing to reap millions of dollars in fees through his investment advisory firm. Ultimately, after the jury verdict, Judge Frank ordered disgorgement of fees that TFFM (and thus Duckson) took in from November 2008 through March 2012, plus prejudgment interest, in the total amount of $2, 960, 771.
As he has done in this case, Duckson sought insurance coverage for the SEC action under Hinshaw's malpractice policy with Continental Casualty Insurance Company. Continental brought a declaratory judgment action in Illinois. Continental Cas. Co. v. Duckson, 826 F.Supp.2d 1086 (N.D. Ill. 2011). The Illinois court concluded that the insurer had no duty to defend Duckson in the SEC action with respect to the monetary claims for "ill-gotten gains" and civil fines, sanctions, penalties or forfeiture, because these claims were specifically excluded under the policy's "damages" definition.
Piggybacking on the SEC action, a number of plaintiffs from the Shoor family (who also made investments at issue in the SEC action) filed an amended complaint in California state court in August 2012, naming a number of parties, including Duckson and his former employer, Hinshaw, as defendants. The Shoor complaint contains 42 paragraphs that are copied, verbatim, from the allegations in the SEC complaint. (Menning Aff., Ex. A.)
In those copied paragraphs, the Shoors allege misconduct by Duckson with respect to the following: (1) a materially misleading March 2008 PPM, drafted, in part, by Duckson, as the Fund's outside counsel; (2) a materially misleading November PPM, drafted, in part, by Duckson as the Fund's member and manager, and Duckson's own company, TFFM, which was the Fund's investment manager, while Duckson was still employed by Hinshaw; and (3) a materially misleading February 2009 PPM that was drafted, in part, by Duckson as the Fund's member and manager, and Duckson's own company, TFFM, which was the Fund's investment manager, after Duckson left Hinshaw on December 31, 2008. ( Id. ¶¶ 19-21, 26-37.) The Shoor complaint also alleges that Duckson and TFFM made a number of materially false or misleading statements or material omissions about the Fund in various written documents throughout 2008 and into early 2009. ( Id. ¶ 30.)
In the Shoor complaint, the Shoors discuss two sets of investments for which they now seek damages. ( Id. ¶¶ 58-82.) Counts One through Four, which are not brought against Duckson, deal with investments made by the Shoors between 2005 and 2007 which pre-date any alleged misconduct against Duckson. ( Id. ¶¶ 58-77.) Count Five, which is brought against Duckson, relates to a March 2009 investment made by the Shoors after Duckson had left Hinshaw. ( Id. ¶¶ 78-82.)
In November 2013, the Hinshaw law firm settled with the Shoor plaintiffs. As part of the settlement, the Shoor plaintiffs released all claims against Duckson arising during the time Duckson was employed by Hinshaw. The Shoor plaintiffs specifically did not release Duckson "in connection with any acts, errors, omissions, events or wrongdoing that occurred or may have occurred after he withdrew from Hinshaw on January 1, 2009." (Menning Aff., Ex. C, p. 5.) Although the defendant Insurers undertook the defense of the Shoor action at its inception on behalf of Hinshaw and Duckson, with a reservation of rights, the Insurers advised Duckson after the Hinshaw/Shoor settlement that they would no longer defend or indemnify him in the Shoor action as a result of the settlement dismissing all claims against Hinshaw and Duckson for the period of time when Duckson was employed at Hinshaw.
Claims in this Action
In his complaint, Duckson brings causes of action for: (1) declaratory judgment; (2) breach of contract; and (3) breach of fiduciary duty. As to the declaratory judgment count, "Duckson seeks a declaration of the Insurer Defendants' obligations under the Policy pursuant to 28 U.S.C. §§ 2201(a) and 2202 that the Policy provides Duckson defense and indemnification coverage." ( Id. Ex. B.) As to the declaratory judgment count, Duckson does not request that the Court make any declarations as to Hinshaw. ( Id. ¶¶ 24-25.)
In the breach of contract count, Duckson alleges that the Policy issued by the Insurers obligates them to provide him with a defense and indemnification, and the Insurers have breached the Policy. ( Id. ¶¶ 227-28.) With respect to the breach of fiduciary duty count, Duckson alleges that the Insurers breached fiduciary duties when they "approved a settlement with the Shoor Plaintiffs without Duckson's participation or consent, settled covered claims leaving alleged uncover[ed] claims for Duckson to defend, and for failing to discharge their duty to defend Duckson in good faith." ( Id. ¶¶ 31-32.) Duckson does ...