17-3022
Patriarch Partners, LLC v. Axis Insurance Company
                                 UNITED STATES COURT OF APPEALS
                                    FOR THE SECOND CIRCUIT

                                        SUMMARY ORDER

RULINGS BY SUMMARY ORDER DO NOT HAVE PRECEDENTIAL EFFECT. CITATION TO A
SUMMARY ORDER FILED ON OR AFTER JANUARY 1, 2007 IS PERMITTED AND IS GOVERNED BY
FEDERAL RULE OF APPELLATE PROCEDURE 32.1 AND THIS COURT’S LOCAL RULE 32.1.1. WHEN
CITING A SUMMARY ORDER IN A DOCUMENT FILED WITH THIS COURT, A PARTY MUST CITE
EITHER THE FEDERAL APPENDIX OR AN ELECTRONIC DATABASE (WITH THE NOTATION
“SUMMARY ORDER”). A PARTY CITING TO A SUMMARY ORDER MUST SERVE A COPY OF IT ON
ANY PARTY NOT REPRESENTED BY COUNSEL.

       At a stated term of the United States Court of Appeals for the Second Circuit, held at
the Thurgood Marshall United States Courthouse, 40 Foley Square, in the City of New York,
on the 6th day of December, two thousand eighteen.

PRESENT:
                 JON O. NEWMAN,
                 SUSAN L. CARNEY,
                              Circuit Judges,
                 RICHARD J. SULLIVAN,
                              District Judge.*

_________________________________________

PATRIARCH PARTNERS, LLC,

                 Plaintiff–Counter-Defendant–Appellant,

                         v.                                                          No. 17-3022

AXIS INSURANCE COMPANY,

           Defendant–Counter-Claimant–Counter-Defendant–Appellee.
_________________________________________




 *Judge Richard J. Sullivan, of the United States District Court for the Southern District of New York, sitting
by designation.
FOR APPELLANT:                                     FINLEY T. HARCKHAM, (Luma S.
                                                   Al-Shibib on the brief) Anderson Kill, P.C.,
                                                   New York, NY.

FOR APPELLEE:                                      JOHN R. GERSTEIN, (Gabriela Richeimer,
                                                   Elizabeth Jewell on the brief), Clyde & Co
                                                   US LLP, Washington, D.C.

       Appeal from a judgment of the United States District Court for the Southern District
of New York (Caproni, J.).

       UPON DUE CONSIDERATION WHEREOF, IT IS HEREBY ORDERED,
ADJUDGED, AND DECREED that the judgment entered on September 25, 2017, is
AFFIRMED.

       Plaintiff-Appellant Patriarch Partners, LLC (“Patriarch”) appeals from a judgment
entered in the United States District Court for the Southern District of New York (Caproni,
J.), granting summary judgment under Federal Rule of Civil Procedure 56 in favor of
Defendant-Appellee Axis Insurance Company (“Axis”) on Patriarch’s claims for breach of
contract and declaratory relief. The central question presented to the District Court and on
appeal is whether a lengthy Securities and Exchange Commission (“SEC”) investigation into
Patriarch ripened into a “claim” before the Axis insurance policy inception date, thereby
excluding related defense costs from coverage under the terms of the policy and a related
warranty provided by Patriarch to Axis. In an opinion resolving cross-motions for summary
judgment, the District Court ruled that coverage was excluded under the Axis policy’s “prior
or pending claims” endorsement. We assume the parties’ familiarity with the underlying
facts, procedural history, and arguments on appeal, to which we refer only as necessary to
explain our decision to affirm the District Court’s decision in Axis’s favor. Because we
conclude that Patriarch’s claims are foreclosed by the language of the warranty statement
signed by its only officer, we need not reach the grounds relied on by the District Court. See
Figueroa v. Mazza, 825 F.3d 89, 99 (2d Cir. 2016) (court of appeals may affirm district court
decision on any ground supported by record).




                                               2
       We review de novo a district court’s decision to grant summary judgment. Miller v.
Wolpoff & Abramson, L.L.P., 321 F.3d 292, 300 (2d Cir. 2003). Summary judgment may be
awarded only if “there is no genuine dispute as to any material fact and the movant is
entitled to judgment as a matter of law.” Fed. R. Civ. P. 56(a). Unless otherwise noted, the
facts below are either undisputed, or the objecting party has not pointed to any contradictory
evidence in the record. On review of an award of summary judgment, “all factual inferences
must be drawn in favor of the non-moving party.” Miller, 321 F.3d at 300. In this case, that
party is Patriarch.
                                              I.
       Patriarch is a private equity investment firm that, among other things, bundles
distressed loans to sell to investors as Collateralized Loan Obligations (“CLOs”). Patriarch
employs numerous professionals, but Lynn Tilton (“Tilton”) is Patriarch’s founder, sole
director, and sole officer.

       In December 2009, the SEC sent Patriarch a letter captioned “In the Matter of
Patriarch Partners LLC (HO-11245),” notifying the company that the SEC was conducting
an “informal inquiry” into the company and requesting that Patriarch voluntarily provide
information and produce documents. App’x at 490. The December 2009 letter, addressed to
Patriarch’s chief administrative officer, was accompanied by an SEC Form 1662—a standard
agency form that provides information on the rights of persons subject to voluntary or
mandatory information requests. Advised by Susan Brune of Brune & Richard, LLP—
outside counsel retained in connection with the SEC inquiry—Patriarch voluntarily complied
with the December 2009 request, as well as with follow-up requests received by it in June
and September 2010.

       One and one-half years later, by letter dated May 27, 2011, and addressed to Brune,
the SEC again contacted Patriarch. The letter, this time captioned “In the Matter of
Patriarch Partners, HO-11665,” described the SEC proceeding as an “informal
investigation,” as opposed to the earlier “inquiry.” Like the December 2009 letter, the May
2011 letter enclosed a Form 1662. In the May 2011 letter, the SEC requested extensive
information and documents relating to Patriarch’s organization and business practices. It


                                              3
also requested information about particular “Patriarch Structures,” which the agency defined
to include any CLO that Patriarch had provided investment advice on from 2002 until the
date of the letter, and certain other funds marketed by Patriarch, including the “Zohar”
CLOs. App’x at 507.

        On June 3, 2011, the SEC internally issued an “Order Directing Private Investigation
and Designating Officers to Take Testimony” (the “Order of Investigation” or “Order”)
against Patriarch.1 It bore the same caption as the May 2011 letter. The Order of
Investigation authorized certain SEC enforcement officers for the first time to issue
subpoenas and take sworn testimony under oath in the Patriarch matter. The Order stated
that “[t]he Commission has information that tends to show” that Patriarch had acted in
“possible violation” of the Securities Act of 1933 and the Securities and Exchange Act of
1934 in the “structuring and marketing” of certain Patriarch CLOs—largely the same CLOs
that had been the subject of the May 27, 2011 information request. App’x at 519-520. The
Order was not published or publicly available. Although Patriarch maintains that it did not
see a copy of the Order until October 2012, Patriarch concedes that Brune, its outside
counsel, “became aware” of the Order on June 13, 2011. App’x at 1980.

        Also in or about June 2011, the SEC requested interviews with two former Patriarch
executives, Todd Kaloudis and Meric Topbas. Kaloudis and Topbas each retained counsel
for assistance in responding to the SEC requests. In June and July of 2011, they turned to
Patriarch for indemnification of their legal expenses, and Patriarch agreed to their requests.

        In addition to an interview, the SEC requested that Topbas produce documents
created during his employment with Patriarch. On June 13, 2011, Topbas’s counsel
requested a copy of the Order of Investigation from the SEC and reviewed it before


 1 The SEC refers to such orders as “Formal Orders of Investigation” or “formal orders.” SEC Division of

Enforcement, Enforcement Manual, 2.3.3 (November 28, 2017). Under the Enforcement Manual, Division
Directors at the SEC may issue formal orders when, in their discretion, they believe that a formal
investigation is necessary to determine whether a violation of federal securities laws has occurred. Id. at 2.3.4
Formal orders generally describe the nature of the investigation and identify the specific staff officers
authorized to subpoena witnesses, administer oaths, and otherwise compel the production of evidence. Id.


                                                        4
contacting Patriarch’s outside counsel the next day. Topbas eventually submitted to the
interview without demanding a subpoena, but his counsel took the position with the SEC
that the documents would be “more appropriately provided” in response to a subpoena.
App’x at 1661. On July 1, invoking its authority under the Order, the SEC issued a formal
subpoena to Topbas (the “Topbas Subpoena”). The Topbas Subpoena bore the same
caption as the May 2011 letter and the Order.

       On July 5, 2011, Patriarch’s outside counsel (Brune and other Brune & Richard
attorneys) met with SEC officials in Washington, D.C., and provided information on
Patriarch’s structure, operations, and certain of its CLOs. On August 11, an SEC officer who
had attended the July meeting emailed Brune requesting, among other things, extensive
information and documents related to the “Zohar” CLOs. In the email, the SEC officer
referred to the July 5 meeting as a “proffer” and asked the firm to respond to certain
substantive questions that had been raised at that meeting about the “Ark” and “Zohar”
CLOs. Notably, the email also advised that the SEC “will follow this voluntary request with a
subpoena that may seek more information,” and directed Patriarch to preserve certain
communications. App’x at 1917-19 (emphasis added). Brune’s associate forwarded this email
to Tilton within an hour of receiving it, and Tilton responded minutes later. That evening,
Patriarch’s chief compliance officer sent out an office-wide “Retention Policy Reminder,”
directing employees to retain certain of their communications and documents.

       Meanwhile, Patriarch was in the process of renewing its directors and officers (D&O)
professional liability insurance portfolio. Its existing policies expired and were renewed
annually on or about July 31. In previous years, Patriarch had maintained a “tower” of D&O
insurance comprised of several policies totaling $20 million in policy limits. As of June 2011,
the existing tower consisted of (1) a primary policy with a $10 million limit issued by
Continental Casualty Company (the “CNA Policy”), (2) a $5 million first-level excess policy
issued by the Great American Insurance Company, and (3) a $5 million second-level excess
policy issued by Illinois National Insurance Company.




                                                5
        On August 9,2 Patriarch’s insurance broker, Steve Blount, recommended to Patriarch
that it purchase a third excess layer of $5 million, extending Patriarch’s policy limit to $25
million. The same day, Axis gave Blount a quote for a third $5 million excess layer. Patriarch
accepted the Axis quote on August 12, at which point the Axis Policy became “bound.” 3
Coverage under the Axis Policy was made effective as of July 31. The Axis Policy, like the
other two excess policies, was a “follow-form” policy that rested on the CNA Policy.
According to industry practice, this meant that the excess policies adopted the terms of the
primary CNA Policy, except as modified by certain “endorsements.”

        Following the terms of the CNA Policy, the policies in Patriarch’s insurance tower—
including Axis—provided coverage for “any Claim first made against an Insured . . . during
the Policy Period.” App’x at 181. The policies defined a “Claim” to include, among other
things, “an Investigation of an Insured alleging a Wrongful Act.” Id. at 183. An
“Investigation” was defined to include “a formal . . . regulatory investigation or inquiry,”
including specifically “an order of investigation or other investigation by the [SEC].” Id. at
186.

        In August, before Patriarch accepted the Axis quote, Blount notified Patriarch’s
insurance team that Axis had made its quote contingent upon Patriarch’s execution of a
warranty statement (the “Warranty”). Blount wrote in an email dated August 12 that Axis
intended the Warranty to “eliminate the potential for Axis to come on the program and be
immediately hit with a claim that the client knew was close but hadn’t been filed yet.” App’x
at 847. Patriarch and Axis negotiated the text of the Warranty between approximately


 2Although the 2010-2011 policies were due to expire on July 31, they were briefly extended and the
negotiations over quotes for the 2011-2012 policy period occurred in early August. All D&O policies for the
2011-2012 policy period were retroactively made effective as of July 31, 2011.
 3 The Axis policy was “bound” through the execution of policy “binders,” which Blount forwarded from

Axis to Patriarch on August 22. Binders are temporary, unintegrated insurance contracts that provide
coverage to the insured pending the issuance of a full policy. See 1A Couch on Insurance § 13:6 (3d ed.). For
reasons that the parties dispute and that are unclear from the record, the full Axis Policy was not issued until
March 2012. Whether the Axis binders differed in substance from the full Axis Policy presented an important
and disputed issue in the District Court decision. Because we decide this case on different grounds, however,
we do not elaborate on any potential distinctions here.


                                                       6
August 22 and September 9. Axis received an executed copy of the Warranty on the latter
date. At Patriarch’s request the Warranty was dated August 12, 2011.

       Signed by Tilton, the Warranty provided as follows:
              This letter is provided pursuant to a request by Axis Insurance
              Company (“Insurer”). The information contained herein applies
              only to the captioned policies to be provided to the Insureds by
              the Insurer. It is understood and agreed that this letter is and shall
              be deemed to be submitted to the Insurer and material to the
              underwriting and acceptance of risk for the Captioned Policy.
              The undersigned, on behalf of Patriarch and all of its directors
              and officers, hereby represents that as of the date of this letter
              neither the undersigned nor any other director or officer of Patriarch is aware
              of any facts or circumstances that would reasonably be expected to result in a
              Claim under the Captioned Policy. It is understood that the Captioned
              Policy and any renewal thereof does not provide coverage for
              Claims relating to facts or circumstances that, as of the date of
              this letter, Patriarch was aware of and would reasonably have
              expected to result in a Claim covered by such Captioned Policy (or
              future renewal thereof).
              By executing this letter, I confirm that I understand that the
              Insurer is relying upon this warranty in order to incept the
              proposed coverage.
App’x at 131 (emphasis added). The Warranty header defined the “Captioned Policy” as
“Axis Excess Policy No. MNN762262/01/2011 ($5mm limit excess $20mm).”

       On February 27, 2012, just over six months after the Axis Policy became effective,
the SEC served the subpoena that it had advised Patriarch in August would be forthcoming
(the “Patriarch Subpoena”). The Patriarch Subpoena was issued under the same SEC
numbered caption as the May 27, 2011 letter, the Order of Investigation, and the Topbas
Subpoena: “In the Matter of Patriarch Partners (HO-11665).” It required Patriarch to
produce all emails or instant messages from Tilton, Kaloudis, and Topbas from January 1,
2008, through the subpoena’s date.

       On March 5, 2012, in a letter to all of its D&O insurers, Patriarch tendered notice of
the Patriarch Subpoena as a “new matter.” CNA responded to Patriarch in a letter dated
March 7, 2012, that Patriarch Subpoena “appears to qualify as a ‘Claim’ for a ‘Wrongful


                                                    7
Act.’” App’x at 1027. Axis also acknowledged Patriarch’s notice of the SEC investigation as
a Claim but, in a letter dated October 7, 2013, expressly reserved its rights to deny coverage
under the Axis Policy.

       In March 2015, more than three years after it issued the Patriarch subpoena, the SEC
filed an administrative enforcement action against Patriarch. In the intervening years, the
costs of defending the SEC proceeding had depleted nearly all of Patriarch’s underlying $20
million in D&O coverage. In August 2015, Patriarch notified Axis that it had exhausted its
underlying policy limits, and asked Axis to assume the obligation to cover defense costs.
Axis denied coverage on the basis (among others) that the SEC investigation was not a
Claim “first made” against Patriarch during the Axis Policy period, because the investigation
had begun before the policy inception date of July 31, 2011. This lawsuit followed.

       Following extensive discovery at the District Court, the parties filed cross-motions
for summary judgment. Axis argued that it was excused from coverage on at least two bases:
First, that the SEC investigation was a “Claim” first made before the Axis policy incepted
and was therefore not covered by the Axis Policy; second, that the Warranty relieved Axis of
its obligations because the SEC investigation constituted “facts or circumstances” of which
Patriarch was aware that could reasonably have been expected to result in the Claim.

       In a thorough opinion, the District Court ruled that the SEC investigation was a
“Claim” that was “pending prior to the inception of the Axis policy,” and was therefore
excluded under the binder’s “pending or prior claim” endorsement. Because this ground was
dispositive, the District Court did not address Axis’s alternative arguments or Patriarch’s
cross-motion.

       Patriarch timely appealed.

                                              II.

       Patriarch concedes that the Warranty effects an exclusion from coverage but disputes
that it excluded coverage for the SEC investigation Claim. Patriarch makes two arguments
against applying the Warranty exclusion. First, it argues that the Warranty excluded coverage



                                               8
only for Claims relating to facts or circumstances of which Tilton herself was aware as of
August 12, since Tilton was the sole officer or director of Patriarch. Tilton made sworn
statements that she was not aware of the Order of Investigation before August 12, 2011;
Patriarch contends accordingly that, whether the Claim is excluded under the Warranty is a
disputed question of fact that must be decided by a jury. Second, Patriarch contends that the
Warranty phrases “Claim under the Captioned Policy” and “Claim covered by such
Captioned Policy” referred only to Claims giving rise to losses in excess of $20 million
because the Axis Policy provided coverage only after the underlying policies were exhausted
by a particular Claim. Thus, under Patriarch’s interpretation, the Warranty excludes coverage
only for Claims relating to circumstances of which Tilton herself was aware before August
12 and which Tilton would reasonably have expected to result in a Claim with losses
exceeding $20 million.

       The parties agree that New York law governs this case. In New York, “[t]he tests to
be applied in construing an insurance policy are common speech and the reasonable
expectation and purpose of the ordinary businessman.” Ace Wire & Cable Co., v. Aetna Cas.
& Sur. Co., 60 N.Y.2d 390, 398 (1983) (internal citations omitted). Insurance coverage
exclusions must be stated in “clear and unmistakable” language and are subject to a “strict
and narrow construction.” Seaboard Surety Co. v. Gillette Co., 64 N.Y.2d 304, 311 (1984). Any
ambiguities are to be construed in favor of the insured. See Parks Real Estate Purchasing Grp. v.
St. Paul Fire & Marine Ins. Co., 472, F.3d 33, 42-43 (2d Cir. 2006).

       Patriarch’s position that the Warranty applies only to facts or circumstances
subjectively known by Tilton is unsupported by the text of the Warranty, which explicitly
refers to facts or circumstances that “Patriarch was aware of.” Moreover, “under traditional
principles of agency [an] attorney’s knowledge must be imputed to [her client].” Veal v.
Geraci, 23 F.3d 722, 725 (2d Cir. 1994). Thus, at a minimum, we consider that facts and
circumstances that were known not only to Tilton, but to Patriarch’s outside counsel and
Patriarch’s in-house counsel are facts and circumstances that “Patriarch was aware of” for
purposes of analyzing the Warranty.



                                                9
        Patriarch’s position that the Warranty applies only to known facts or circumstances
that Patriarch would reasonably have expected to result in a Claim with losses exceeding the
$20 million in underlying policies is also not established by the text of the Warranty. The
Warranty’s use of the capitalized term “Claim” indicates that it is a defined term and thus
means “Claim” as defined in the CNA Policy. The CNA Policy definition of “Claim” is not
limited in the manner Patriarch urges. It is true that the Warranty refers both to Claims
“under” the Axis Policy—a term best understood to mean “defined by”—and to Claims
“covered by” the Axis Policy. Patriarch insists that the Axis Policy “covers” only Claims
whose losses exceed $20 million. Reading the Warranty as a whole, however, and taking into
consideration its context and purpose, we are not persuaded by Patriarch’s interpretation.
Because the Axis Policy is a “follow-form” policy, the same Claims that are “covered by” the
CNA Policy are also “covered by” the Axis Policy and other underlying excess policies. That
Axis provides excess insurance does not change or limit the class of Claims that it provides
coverage for; it changes only the circumstances under which Axis must pay for losses
resulting from such Claims.4 The only reasonable interpretation of the Warranty, in our view,
is that it excludes claims arising from facts or circumstances of which Patriarch was aware as
of August 12 and that Patriarch would reasonably have expected to result in a Claim as
defined by the CNA Policy.

        Patriarch urges us to consider deposition testimony that, it contends, demonstrates
that Axis employees involved in the drafting of the Warranty intended Patriarch’s limiting
interpretation. But this Court may consider extrinsic evidence only to resolve ambiguities



 4 Our decision in Lumbermens Mut. Cas. Co. v. RGIS Inventory Specialists, LLC, 628 F.3d 46 (2d Cir. 2010), does
not require a different conclusion. Lumbermens involved materially different policies with materially different
terms. The excess policy in Lumbermens, which did not follow the primary policy, required notice “whenever it
appears likely it will result in a claim involving this Coverage Part.” Id. at 54 (Kearse, J., dissenting) (emphasis
added). Because the excess policy had its own notice provision, it was clear that “involving this Coverage
Part” meant “involving excess coverage.” Relying on caselaw from Michigan—the law under which the
contract was construed—we concluded that “involving excess coverage” had previously been interpreted to
mean “actually being implicated through liability,” and thus that notice was required under the excess policy
only when it was likely that a claim would exceed the underlying policy. Id. at 51-52. The textual differences—
“covered by” or “under” as opposed to “involving”—and the fact that the excess Axis Policy follows the
underlying policies and therefore defines “Claim” identically, renders Lumbermens largely inapposite.


                                                        10
that exist on the face of an agreement. W.W.W. Assocs., Inc. v. Giancontieri, 77 N.Y.2d 157,
162-163 (1990). Whether such ambiguities exist is a question of law to be resolved by courts.
Id. at 162. For the reasons set out above, we conclude that the Warranty, “read as a whole to
determine its purpose and intent,” id., contains no ambiguity. We therefore decline to
consider the extrinsic evidence that Patriarch offers to support its interpretation of the
Warranty.

          By August 12, 2011, the effective date of the Warranty, Patriarch “was aware” of the
SEC Order of Investigation, the escalating severity and focus of the SEC investigation, the
subpoena of a former employee, and notice of an impending subpoena to be issued to
Patriarch itself. It also “was aware” of the SEC’s focus on at least the Zohar CLOs. Further,
Patriarch had accrued over $390,000 in legal expenses for outside counsel in responding to
the SEC’s requests of it by the time Tilton executed the Warranty. These sums were in
addition to the retainers and legal expenses that Patriarch had committed to provide for
Kaloudis and Topbas, which, when billed in late September, amounted to nearly $200,000.

          We conclude that, contrary to the representations made in the Warranty, Patriarch
was “aware” that the SEC had become more—not less—insistent in its demands of
Patriarch, despite Patriarch’s accrual of hundreds of thousands of dollars in legal costs to
prevent such escalation. These are “facts and circumstances” that could reasonably be
expected to give rise to a Claim under the Axis Policy. Indeed, Patriarch conceded in its
briefing on appeal that “[t]he SEC’s contacts with Patriarch and two former employees prior
to the effective date of the AXIS Policy were an indication that a Claim might be asserted
against Patriarch in the future.” Appellant’s Br. at 50. The Warranty thus excludes Patriarch’s
losses arising from its defense of the SEC investigation Claim from coverage under the Axis
Policy.




                                               11
                                            * * *

       We have considered Patriarch’s remaining arguments and conclude that they are
without merit. For the reasons set forth above, the judgment of the District Court is
AFFIRMED.

                                                    FOR THE COURT:

                                                    Catherine O’Hagan Wolfe, Clerk of Court




                                             12
