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Allegis Investment Advisors v. Certain Underwriters At Lloyd's London

United States District Court, D. Utah, Central Division

August 14, 2018

ALLEGIS INVESTMENT ADVISORS, HEATH BOWEN, and PETER KLAASS, Plaintiffs,
v.
CERTAIN UNDERWRITERS AT LLOYD'S LONDON, subscribing to Policy No. BDL-0000028-02, Defendant.

          JILL N. PARRISH DISTRICT JUDGE

          REPORT AND RECOMMENDATION TO DENY DEFENDANT'S REVISED MOTION FOR LEAVE TO FILE FIRST AMENDED COUNTERCLAIM (ECF NO. 25)

          EVELYN J. FURSE UNITED STATES MAGISTRATE JUDGE

         On September 19, 2017, Allegis Investment Advisors, Heath Bowen, and Peter Klaass (collectively, the “Allegis Plaintiffs”) filed a Complaint against Defendant Certain Underwriters at Lloyd's London, Subscribing to Policy No. BDL-0000028-02 (“Underwriters”). (Compl., ECF No. 2.) This action arose because on May 1, 2017, the Securities Commissioner for the State of Colorado sued the Allegis Plaintiffs on behalf of a group of Colorado investors alleging that the Allegis Plaintiffs “failed to fully disclose investment risks” to the investors and “made material misrepresentations in the course of providing investment advisory services” (the “Colorado Action”). (Id. at ¶¶ 14-15.) The Allegis Plaintiffs maintained an insurance policy (the “Policy”) with Underwriters and made a claim against the Policy based on the Commissioner's suit. (Id. at ¶¶ 16, 18.) Eventually, Underwriters denied coverage. (Id. at ¶ 22.)

         The Allegis Plaintiffs sued Underwriters over the denial asserting six causes of action: (1) declaratory judgment; (2) breach of contract; (3) breach of implied covenant of good faith and fair dealing of contract; (4) bad faith denial of claim; (5) failure to conduct a reasonable and full investigation of the claim; and (6) punitive damages. (Id. ¶¶ 25-52.)

         Underwriters responded to the Complaint with ten counterclaims. (Def. Certain Underwriters at Lloyd's London, Subscribing to Policy No. BDL-0000028-02 Answer with Affirmative Defenses & Countercls. (“Answer & Countercls.”) ¶¶ 73 -153, ECF No. 10.) Underwriters' first six causes of action seek declaratory judgments that the Policy does not cover the Allegis Plaintiffs for the claims asserted because (1) the Colorado Action relates to a claim made prior to the Policy period (id. at ¶¶ 73-83), (2) the Policy excludes coverage because the Allegis Plaintiffs gave notice of this claim under a prior policy (id. at ¶¶ 84-89), (3) the Policy excludes coverage because the Allegis Plaintiffs had knowledge of the potential for this claim prior to the Policy period (id. at ¶¶ 90-95), (4) the Policy excludes coverage of options (id. at ¶¶ 96-101), (5) the Policy excludes coverage for claims based on promises of investment performance (id. at ¶¶ 102-05), and (6) the Allegis Plaintiffs failed to satisfy a condition precedent for coverage when they did not notify Underwriters of the Colorado Action as soon as they knew of the Commissioner's complaint (id. at ¶¶ 106-14). Underwriters' four remaining causes of action allege breach of contract. The seventh cause of action alleges the Allegis Plaintiffs breached the Policy when they rejected the defense counsel selected. (Id. at ¶¶ 115-24.) The eighth cause of action alleges the Allegis Plaintiffs breached the Policy when they “incurred attorney fees and other expenses without Underwriters' knowledge or written consent.” (Id. at ¶¶ 125-34.) The ninth breach of contract claim alleges the Allegis Plaintiffs breached the Policy when they failed to cooperate with Underwriters “by delaying and failing to provide Underwriters with information and assistance reasonably requested in order to investigate, defend and settle the Colorado Action.” (Id. at ¶ 139.) The final breach of contract claim alleges the Allegis Plaintiffs breached by offering to settle the Colorado Action without Underwriters' written consent. (Id. at ¶¶ 145-53.)

         On December 6, 2017, Underwriters moved for Leave to File First Amended Counterclaim and Third-Party Complaint. (Revised Mot. for Leave to File First Am. Countercl. & Third Party Compl. (“Revised Mot.”), ECF No. 25.) Specifically, Underwriters sought leave to file counterclaims against the Allegis Plaintiffs, and file a Third-Party Complaint against Allegis Investment Services, LLC (“Allegis Services”) under Federal Rules of Civil Procedure (“Rules”) 14 and 15. (Id. 2-7.)

         On April 25, 2018, the undersigned[1] held a hearing on the Motion where Underwriters changed its basis for adding Allegis Services from Rule 14 to Rule 20. Underwriters conceded that in could not join Allegis Services under Rule 14. Thus, that request became moot. Because the Allegis Plaintiffs had not received advanced notice of this change of position, the undersigned instructed Underwriters to file a proposed amendment under its new theory of permissive joinder and permitted an additional opposition and reply brief. (Minute Entry, ECF No. 43.)

         In that additional briefing, the Allegis Plaintiffs argue this Court should deny Underwriters' proposed amendment because it fails to satisfy the “two-prong conjunctive test” required to permit joinder. (Pls.'s Resp. to Def.'s Proposed Am. Under Theory of Fed.R.Civ.P. 20 Joinder to Add Claims (“Pls.'s Response to R. 20 Joinder”) 3-4, ECF No. 45.) The Allegis Plaintiffs further argue this Court should not exercise its discretion and grant Underwriters leave to file its counterclaims because joinder runs counter to the interest of justice and judicial efficiency. (Id. at 5-6.) In the interest of judicial efficiency, the undersigned considers Underwriters' Proposed First Amended Answer and Counterclaims docketed at ECF No. 44-1 as the requested amendment under the pending Motion.

         After considering the parties' briefing, oral argument, and the applicable law, the undersigned RECOMMENDS the District Judge DENY Underwriters' Revised Motion to add claims related to actions other than the Colorado Action because it would unduly prejudice the Allegis Plaintiffs by significantly expanding the scope of litigation and delaying resolution of the case. Further, the undersigned RECOMMENDS the District Judge DENY Underwriters' Revised Motion for leave to file its proposed eleventh cause of action requesting a declaratory judgment regarding any future claims arising out of an alleged “Options Strategy” because amendment would prove futile as the counterclaim does not meet the case or controversy requirement, thus depriving the Court of jurisdiction. Lastly, the undersigned RECOMMENDS the District Judge DENY Underwriters' Revised Motion to add Allegis Services as a party because Underwriters cannot use Rule 20(a)(1) to force Allegis Services to become a plaintiff in this case.

         FACTUAL AND PROCEDURAL HISTORY

         The Colorado Action, filed on May 1, 2017, focused on “a net credit spread strategy which allegedly resulted in certain [investors] sustaining los[s]es on August 20, 2015 (the “Strategy”).” (Compl. ¶¶ 14-15, ECF No. 2.) Allegis Investment Advisors, LLC, a registered investment adviser, provide the investment advice from which the claims arose. (Id. ¶¶ 1, 15.) On June 5, 2017, the Allegis Plaintiffs notified Underwriters of the Colorado Action and sought coverage under the Policy. (Id. at ¶ 16.) The Policy period ran from March 3, 2017 to March 3, 2018. (Id.) The Policy “is a renewal of the same coverage” that Underwriters issued “for the previous March 3, 2016 to March 3, 2017 policy period.” (Id. at ¶ 19.) On June 27, 2017, Underwriters' counsel wrote Allegis Plaintiffs “advising them that Underwriters agreed, subject to a reservation of rights, to provide a ‘provisional defense' [for the Colorado Action].” (Id. at ¶ 21; Answer & Countercls. ¶ 58, ECF No. 10.) Underwriters asked the Allegis Plaintiffs to provide additional information, which the Allegis Plaintiffs “promised” to provide. (Compl. ¶ 22, ECF No. 2; Answer & Countercls. ¶¶ 62, 65-66, ECF No. 10.) On July 27, 2017, Underwriters denied the Allegis Plaintiffs coverage. (Compl. ¶ 22, ECF No. 2; Answer & Countercls. ¶ 69, ECF No. 10.) On August 17, 2017, Underwriters “refused to reverse the coverage denial.” (Compl. ¶ 23, ECF No. 2; Answer & Countercls. ¶ 72, ECF No. 10.) Underwriters' counterclaims set forth its reasons for denying coverage to the Allegis Plaintiffs.

         On November 10, 2017, Underwriters moved for leave to amend its counterclaims to include four other lawsuits (the “Subsequent Actions”) submitted for coverage after Underwriters filed its original counterclaims. (Mot. for Leave to File 1st Am. Countercl. (“1st Mot. for Leave”) 2, ECF No. 20.) Underwriters alleges that the Subsequent Actions involve the Strategy that resulted in losses in August 2015 and that Underwriters denied coverage for the same reasons. (Id.) Mr. Bowen and/or Allegis Advisors submitted requests for coverage for all four Subsequent Actions. (Proposed 1st Am. Compl. ¶¶ 90, 100, ECF No. 20-1.) The Subsequent Actions include the Nelson Matter, the Rodebush Matter, the Kelsey Matter, and the Tilt Matter. The Nelson Matter involves FINRA claims against “Allegis Investment Services, LLC a/k/a and d/b/a Allegis Investment Advisors LLC f/k/a BowenGroup Advisors, ” Mr. Bowen, and Mr. Klaass. (Id. ¶ 27.) The Rodebush Matter involves FINRA claims against Allegis Services and Charles Sorenson. (Id. ¶ 31.) The Kelsey Matter involves a FINRA claim against Allegis Services and Brandon Stimpson. (Id. ¶ 35.) The Tilt Matter involves a AAA claim made against Allegis Investment Advisors LLC and Mr. Bowen. (Id. ¶ 39.) As a result, Underwriters sought “to amend their Counterclaims to include a coverage determination for the Subsequent Actions” and also included “a request for declaratory relief in connection with any future claim submissions under the Policy arising out of the same options strategy and investor losses in August 2015.” (1st Mot. for Leave 2, ECF No. 20.)

         The Allegis Plaintiffs opposed Underwriters' Motion because, among other reasons, Underwriters sought to adjudicate claims against “[p]arties who are not parties to this action…, ” particularly Allegis Services. (Opp'n to Mot. for Leave to File 1st Am. Countercl. (“Opp'n”) 5-6, ECF No. 21.) Indeed, the Allegis Plaintiffs note that the Kelsey and Rodebush matters do not involve claims against Allegis Investment Advisors, LLC at all. (Id.) Furthermore, the Kelsey, Rodebush, and Nelson matters all involve other unnamed insureds in addition to the Allegis Plaintiffs and Allegis Services-Brandon Curt Stimpson, Charles Elmer Sorensen, and BowenGroup Advisors LLC. (Id.)

         On December 6, 2017, Underwriters withdrew its Motion (Notice of Withdrawal of Mot. for Leave to File 1st Am. Countercl., ECF No. 24.), and subsequently filed its pending Motion for Leave to File First Amended Counterclaim and Third-Party Complaint. (Revised Mot., ECF No. 25.) In its Revised Motion, Underwriters seeks leave to file a proposed Third-Party Complaint against Allegis Services “to bring Allegis Investment Services, LLC into the existing coverage litigation.” (Revised Mot. 3, ECF No. 25.) Allegis Services is a broker dealer. (Opp'n to Revised Mot. for Leave to File 1st Am. Countercl. & 3rd Party Compl. (“Opp'n to Revised Mot.”) 8, ECF No. 27.) Underwriters asserts largely identical claims in its Proposed Revised Amended Counterclaim. (Compare Proposed 1st Am. Compl., ECF No. 20-1 with Proposed 1st Am Countercl. & 3rd Party Compl., ECF No. 25-1.). However, the Proposed Revised ...


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