United States District Court, D. Alaska
ALPS PROPERTY & CASUALTY INSURANCE COMPANY, f/k/a Attorneys Liability Protection Society, Inc., A Risk Retention Group, Plaintiff,
v.
MERDES & MERDES, P.C.; MERDES LAW OFFICE, P.C.; and WARD M. MERDES, Defendants.
ORDER RE CROSS MOTIONS FOR SUMMARY JUDGMENT
SHARON
L. GLEASON UNITED STATES DISTRICT JUDGE
Before
the Court are Plaintiff's and Defendants Merdes &
Merdes, P.C. and Ward M. Merdes's Cross-Motions for
Summary Judgment, at Dockets 151 and 153 respectively. The
motions are fully briefed.[1] Oral argument on the motions was held
on October 12, 2017.[2] For the reasons set forth below, the Court
will deny Merdes & Merdes and Ward M. Merdes's Motion
for Summary Judgment and will grant ALPS's Motion for
Summary Judgment.
BACKGROUND
This is
the second time in this case that summary judgment is before
the Court. In light of the Court's decision to grant the
motion for summary judgment in favor of ALPS, the facts as
construed in the light most favorable to Merdes & Merdes
and Ward M. Merdes are as follows:
ALPS brought this action against Ward M. Merdes, Merdes &
Merdes, P.C., and the law firm Merdes Law Office, P.C.
(collectively “the Defendants”), seeking a
declaration that the two professional liability insurance
policies issued by ALPS to the Defendants did not require
ALPS to defend or indemnify the Defendants with respect to an
underlying state court lawsuit brought by Leisnoi, an Alaska
Native corporation, against the Defendants in May
2013.[3]
On
April 15, 2014, ALPS moved for summary judgment in this
case.[4] On December 29, 2014, the Court granted
summary judgment to ALPS on the Merdes Law Office's
policy, and held that ALPS had no duty to defend or indemnify
under that policy.[5]However, the Court denied ALPS's motion
for summary judgment at that time as to the second policy,
the policy for Merdes & Merdes, which also accorded
coverage to Ward M. Merdes (collectively “the Merdes
Firm”).[6] The Court held “ALPS is not entitled
to summary judgment that it has no duty to defend Mr. Merdes
and the Merdes Firm under the Merdes Firm Policy because
Leisnoi's suit creates the possibility of covered
liability under that policy.”[7] The Court held that based on
the “sparse record” then before the Court, Mr.
Merdes and the Merdes Firm “would not have had enough
information prior to the effective date of the Merdes Firm
Policy to alert a reasonable person that their unrestricted
use of the 2010 payment might be the basis for a failure to
safeguard claim.”[8]
The
Merdes Firm Policy was effective from July 18, 2012 through
July 18, 2013.[9]It is a “claims-made and
reported” policy, extending coverage to claims first
made against the insured and reported to the insurer during
the effective period of the policy.[10] ALPS asserts in its
renewed motion for summary judgment motion that it has no
duty to defend or indemnify under the Merdes Firm Policy
because prior to the effective date of the policy the Merdes
Firm knew, or reasonably should have known, that Leisnoi had
a potential claim for safeguarding against the Merdes Firm
but did not report it to ALPS until February
2013.[11] The record is now considerably more
developed than when the first summary judgment motion was
before the Court in 2014. In particular, the Leisnoi state
court case has now been fully concluded, with the recent
issuance of an opinion by the Alaska Supreme Court in the
case in November 2017.[12]
The
Leisnoi state court case arises from a state court judgment
entered in 1995 against Leisnoi, Inc. for attorney's fees
in favor of Merdes & Merdes, P.C. On January 13, 2010,
the Alaska Superior Court granted the Merdes Firm's
motion for a writ of execution against Leisnoi for the
balance then owing on the judgment, which was $643,
760.[13] That same month, Mr. Merdes filed a new
action in Alaska state court against Leisnoi alleging
negligent infliction of emotional distress (“the NIED
case”).[14]
On
February 22, 2010, Leisnoi appealed the writ of execution to
the Alaska Supreme Court.[15] However, while the appeal was
pending, on July 28, 2010, Leisnoi paid the Merdes Firm the
entire remaining balance due of $643, 760.[16] Within a few
months after receiving the funds from Leisnoi, Ward Merdes
contacted Steve Van Goor, the ethics attorney at the Alaska
Bar Association, to discuss his receipt of the funds. Mr.
Merdes testified that he called bar counsel because
“Leisnoi was making noises” about whether the
funds had to be kept separate.[17] Mr. Merdes testified that Mr.
Van Goor informed him that the funds were not a client fee;
rather, they were a “judgment collection, ” and
Mr. Van Goor told Mr. Merdes to “[t]ake the money if
you want it.”[18]
The
Merdes Firm initially deposited the money received from
Leisnoi into its office trust account. Mr. Merdes testified
at deposition that the money was deposited into the trust
account because there was “a swirling mess of whatever
is going on.”[19] Mr. Merdes also testified that the funds
probably went into the trust account because he was aware of
Leisnoi's pending appeal of the writ at that
time.[20]
Later
in 2010, $543, 480.17 of the funds were deposited into a new
account listed as “Ward M. Merdes or Lori D. Merdes,
FBO Case Number 3AN-85-16520.”[21] FBO stands for “for
the benefit of.” The case number was from the original
lawsuit from which the 1995 judgment arose.[22] Lori Merdes,
the law firm's office manager, testified that the firm
sets up FBO accounts for clients who “[w]ould like us
to help them keep track of their money until they can figure
out what to do next.”[23] Ms. Merdes testified that she
told the bank that she “wanted this money set aside
with the maximum interest that they could put on
it.”[24]
In
October 2012, Mr. Merdes moved $248, 652.60 out of the FBO
account to his own personal account.[25] He testified that he
transferred these funds because he had determined, after
consulting with another attorney, that this amount
constituted the value of the NIED case against Leisnoi. He
had earlier dismissed that case.[26] sr. Merdes testified that
the balance of the money in the FBO account was
“rolled, incrementally, into [the Merdes Firm account]
as needed.”[27]
On
February 1, 2013, the Alaska Supreme Court held that the writ
of execution was unlawful because it violated the Alaska
Native Claims Settlement Act's prohibition against
contingency fee agreements.[28] The court held that Leisnoi
was entitled to recover the $643, 760 it had paid in July
2010 plus interest.[29] On February 13, 2013, Ward Merdes
notified ALPS of a demand letter he had received from Leisnoi
that same day as well as the Alaska Supreme Court
decision.[30] ALPS denied coverage on February 21,
2013.[31]
On May
20, 2013, Leisnoi sued the Merdes Firm in state court,
asserting breach of contract, fraudulent conveyance,
conspiracy to fraudulently convey assets, unfair trade
practices, punitive damages, and unjust enrichment (the
“Underlying Suit”).[32] Leisnoi's complaint
included an allegation that the Merdes Firm “had a duty
to safeguard those disputed funds under the contractual
agreement with Leisnoi and under the Alaska Rules of
Professional Conduct.”[33] On July 11, 2013, Ward Merdes
again notified ALPS that Leisnoi had filed the Underlying
Suit, and again ALPS denied coverage.[34]
In
early 2014, Mr. Merdes filed an amended 2012 tax return in
which he declared all of the $643, 670 as income and paid
income taxes on it.[35]
On
January 15, 2016, the Alaska Superior Court entered a final
judgment in the Underlying Suit against the Merdes Firm,
finding “actual damages amount to $643, 760 that [the
Merdes Firm] owed [Leisnoi], but avoided paying by
fraudulently transferring assets . . . and should be the
bas[is] for treble damages, which equals $1, 931,
280.”[36]The trial court's Findings of Fact
and Conclusions of Law focused on transactions after the
Supreme Court's February 1, 2013 opinion, and held that
all transfers out of the Merdes Firm after February 1, 2013
were void.[37]
Leisnoi
then sought prejudgment interest on the judgment. The state
court initially found that the date the Merdes Firm first
became aware of a possible claim was “either on May 23,
2013 (the date when Leisnoi served process on the Merdes
Defendants) or on the date of the demand letter that Leisnoi
sent to the Merdes Defendants” (February 13,
2013).[38] However, on January 15, 2016, the trial
court ultimately decided that “prejudgment interest
[totaled] $643, 760 (computed at the annual rate of 3.75%
from 7/28/2010 to date of judgment).”[39] Thus, the
trial court commenced the prejudgment interest on the date
that Leisnoi had paid the $643, 760 to the Merdes Firm-July
28, 2010.
The
Merdes Defendants appealed, raising, among other issues, the
starting date for the prejudgment interest. On November 9,
2017, the Alaska Supreme Court affirmed the superior
court's starting date for the prejudgment
interest.[40] The court held that “Merdes had
actual notice in July 2010 that Leisnoi continued to contest
Merdes's entitlement to the money and would demand
repayment, with interest, if Leisnoi prevailed on
appeal.”[41] Thus, the court held, “[t]here is
no unfairness in holding Merdes & Merdes to that
date.”[42]
On
January 3, 2018, this Court requested the parties to submit
supplemental briefing on the import of the Alaska Supreme
Court decision on this case.[43] The Merdes Firm asserts that
the Alaska Supreme Court did not address the “purported
failure to safeguard client disputed funds in
2010.”[44] Rather, it maintains that the only claim
before the Alaska Supreme Court was Leisnoi's demand for
the return of its 2010 payment if it prevailed on appeal-not
a failure to safeguard claim. ALPS responds that “[t]he
elements of collateral estoppel are met here” such that
this Court must apply the Alaska Supreme Court's holding
that the Merdes Firm was aware of Leisnoi's potential
claim for safeguarding in 2010.[45]
DISCUSSION
I.
Jurisdiction
The
Court has jurisdiction pursuant to 28 U.S.C. §
1332(a)(1) because there is complete diversity of citizenship
between ALPS and the Merdes Firm, and the amount in
controversy exceeds the sum of $75, 000.[46]
II.
Standard for Summary Judgment
Federal
Rule of Civil Procedure 56(c) directs a court to grant
summary judgment if the movant “show[s] that there is
no genuine issue as to any material fact and that [the
movant] is entitled to a judgment as a matter of law.”
When considering a motion for summary judgment, a court views
the facts in the light most favorable to the non-moving party
and draws “all justifiable inferences” in the
non-moving party's favor.[47] When faced with cross-motions
for summary judgment, the court “review[s] each
separately, giving the non-movant for each motion the benefit
of all reasonable inferences.”[48] To reach the level of a
genuine dispute, the evidence must be such “that a
reasonable jury could return a verdict for the non-moving
party.”[49] If the evidence provided by the
non-moving party is “merely colorable” or
“not significantly probative, ” summary judgment
is appropriate.[50]
III.
Analysis
ALPS
asserts that it “has no duty to defend the Underlying
Suit because Defendants should have reasonably foreseen or
did actually know that Leisnoi might make a claim against
them prior to the effective date of the Merdes & Merdes
Policy.”[51]The Merdes Firm maintains that they
“did not know of and could not reasonably anticipate
Leisnoi's false and fraudulent claims prior to 02/13/13,
” the date of Leisnoi's demand
letter.[52] The Merdes & Merdes policy was in
effect from July 18, 2012 to July 18, 2013.[53]
The
Alaska Supreme Court recently ruled in the Underlying Suit,
affirming the superior court's holding that the Merdes
Firm fraudulently conveyed assets to the Merdes Law Office
and Ward Merdes and holding that prejudgment interest on the
judgment commenced as of July 28, 2010 as to Merdes &
Merdes, the date of Leisnoi's $643, 760 payment to that
law firm.[54]
The
court's discussion of the prejudgment interest issue was
as follows:
Under AS 09.30.070(b), prejudgment interest accrues from the
day process is served on the defendant or the day the
defendant received written notification that an injury has
occurred and that a claim may be brought against the
defendant for that injury, whichever is earlier . . . .
Leisnoi contends that Merdes had actual notice that Leisnoi
demanded return of the money at the time Leisnoi paid it-July
28, 2010-because Leisnoi had already appealed the writ
requiring Leisnoi to pay that amount. Although initially
siding with Merdes on this issue, the superior court
ultimately adopted Leisnoi's position, and we agree that
it was correct. Merdes had actual notice in July 2010 that
Leisnoi continued to contest Merdes's entitlement to the
money and would demand repayment, with interest, if Leisnoi
prevailed on appeal.[55]
This
Court requested supplemental briefing on the import of the
Alaska Supreme Court decision on this case.[56] ALPS asserts
that collateral estoppel applies to this case and
“Merdes is bound here by the Alaska Supreme Court's
holding” that it was aware in July 2010 that Leisnoi
bring a claim against it if it prevailed on the
appeal.[57]
Collateral
estoppel, or issue preclusion, “bars relitigation, even
in an action on a different claim, of all issues of fact or
law that were actually litigated and necessarily decided in a
prior proceeding.”[58] As a matter of full faith and credit,
28 U.S.C. § 1738 requires courts to apply the collateral
estoppel principles of the state from which the judgment was
entered.[59] Under Alaska law, there are four
elements for the application of collateral estoppel:
“(1) the party against whom the preclusion is employed
was a party to or in privity with a party to the first
action; (2) the issue precluded from relitigation is
identical to the issue decided in the first action; (3) the
issue was resolved in the first action by a final judgment on
the merits; and (4) the determination of the issue was
essential to the final judgment.”[60]
Although
ALPS was not a party to the Leisnoi state action, the Merdes
Firm was a party to that action and is the party against whom
preclusion is sought; therefore the first element is
satisfied.[61] The issue to be precluded is also
identical to the issue decided in the state court action-the
date on which the Merdes Firm first became aware of a
potential claim by Leisnoi against it. Alaska Statute §
09.30.070(b) provides “prejudgment interest accrues
from the day process is served on the defendant or the day
the defendant received written notification that an injury
has occurred and that a claim may be brought against the
defendant for that injury, whichever is earlier.” The
Merdes Firm Policy contains virtually the same language, as
it extends coverage when:
the claim arises from or is in connection with: . . . a
personal injury arising out of the professional services of
the Insured, and further provided that at the effective date
of the policy, no Insured knew or reasonably should
have known or foreseen that the act, error, omission or
personal injury might be the basis of a claim.[62]
Thus,
the statute commences prejudgment interest on the date that
the defendant has received written notice “that a claim
may be brought, ” while the policy excludes coverage
when the Insured had prior knowledge of an act that
“might be the basis of a claim.” The Alaska
Supreme Court determined that “Merdes had actual notice
in July 2010 that Leisnoi continued to contest Merdes's
entitlement to the money and would demand
repayment.”[63] Thus, the issue that the Alaska Supreme
Court determined-when the Merdes Firm received written notice
from Leisnoi that a claim may (or might) be brought against
it-is substantively identical to the issue before this Court.
The
third element for collateral estoppel is also met: the issue
was resolved by the state court after the appeal of a final
judgment. The Alaska Supreme Court has held that “the
accurate definition of ‘finality' in the offensive
collateral estoppel context is ‘fully
litigated.'”[64] For an issue to be fully and fairly
litigated in the first action, it requires “[(1)] that
the issue has been effectively raised in the prior action,
either in the pleadings or through development of the
evidence argued at trial or on motion; and [(2)] that the
losing party has had ‘a fair opportunity procedurally,
substantively, and evidentially' to contest the
issue.”[65]
The
issue of when the Merdes Firm first became aware of a
potential lawsuit was fully litigated before the state
courts, most recently on appeal to the Alaska Supreme Court.
The Merdes Firm asserted in its opening brief to that court
that “Leisnoi was only entitled to prejudgment interest
from the date of its 02/13/2013 demand
letter.”[66] It further asserted that “the
Superior Court's calculation of prejudgment interest from
07/28/2010 is contrary to AS 09.30.070(b) and the Superior
Court's own ...