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Verto Medical Solutions, LLC v. Allied World Specialty Insurance Co.

United States District Court, E.D. Missouri, Eastern Division

November 4, 2019

VERTO MEDICAL SOLUTIONS, LLC and SETH BURGETT, Plaintiffs,
v.
ALLIED WORLD SPECIALTY INSURANCE COMPANY, Defendant.

          MEMORANDUM AND ORDER

          NOELLE C. COLLINS UNITED STATES MAGISTRATE JUDGE.

         This matter is before the Court on Defendant Allied World Specialty Insurance Company's (“Allied World”) Motion to Dismiss (Doc. 8). The Motion is fully briefed and ready for disposition. The parties have consented to the jurisdiction of the undersigned United States Magistrate Judge pursuant to Title 28 U.S.C. § 636(c) (Doc. 14). For the following reasons, Allied World's Motion will be GRANTED.

         I. Legal Standard

         Federal Rule of Civil Procedure 8(a)(2) requires “a short and plain statement of the claim showing that the pleader is entitled to relief.” Federal Rule of Civil Procedure 12(b)(6) provides for a motion to dismiss based on the “failure to state a claim upon which relief can be granted.” To survive a motion to dismiss a complaint must show “‘that the pleader is entitled to relief,' in order to ‘give the defendant fair notice of what the . . . claim is and the grounds upon which it rests.'” Bell Atlantic Corp. v. Twombly, 550 U.S. 544, 555 (2007) (quoting Conley v. Gibson, 355 U.S. 41, 47 (1957)). “Threadbare recitals of the elements of a cause of action, supported by mere conclusory statements, do not suffice” to defeat a motion to dismiss. Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (citing Twombly, 550 U.S. at 555). “[O]nly a complaint that states a plausible claim for relief survives a motion to dismiss.” Id. at 679 (citing Twombly, 550 U.S. at 556). “The plausibility standard is not akin to a ‘probability requirement,' but it asks for more than a sheer possibility that a defendant has acted unlawfully.” Id. at 678. (citation omitted). The pleading standard of Rule 8 “does not require ‘detailed factual allegations,' but it demands more than an unadorned, the-defendant-unlawfully-harmed-me accusation.” Id. (quoting Twombly, 550 U.S. at 555). “When ruling on a defendant's motion to dismiss, a judge must accept as true all of the factual allegations contained in the complaint.” Erickson v. Pardus, 551 U.S. 89, 94 (2007). All reasonable references from the complaint must be drawn in favor of the nonmoving party. Schaaf v. Residential Funding Corp., 517 F.3d 544, 549 (8th Cir. 1999).

         II. Background [1]

         Plaintiff Seth Burgett (“Burgett”) is the founder, President and Chief Executive Officer of Plaintiff Verto Medical Solutions, LLC (“Verto”) (Doc. 5 at ¶2). Verto manufactured and sold patented sports earphones called “Yurbuds” (Doc. 5 at ¶9). In June 2014, Verto agreed to sell the business and assets of Verto to Harman International Industries, Inc. (“Harman”) (the “Harman Sale Transaction”) (Doc. 5 at ¶11). In August 2014, Burgett entered into a series of written agreements with several Verto shareholders in which Burgett agreed to pay a portion of certain proceeds he personally received from the Harman Sale Transaction to these Verto members (the “Reallocation Agreements”). Burgett subsequently became an employee of Harman and was later terminated. Burgett negotiated a settlement with Harman on behalf of himself, with respect to his employment claims, and on behalf of Verto (the “Harman Settlement”). Burgett distributed $1.6 million of the settlement funds to himself and one other member.

         On January 13, 2016, Defendant Allied World provided Verto director and officer liability insurance with a policy limit of $2, 000, 000 under a ForceField Private Company Management Liability Package Policy, Policy #0309-9667 (the “Policy”) (Doc. 5 at ¶6; Doc. 9-2). The Policy provides that if Verto or its designee tendered the defense of a claim under the Policy, Allied World “shall assume the defense of such claim” (Doc. 5 at ¶¶21, 30(a); Doc. 9-2 at 1, 42). Officers and directors, such as Burgett, are covered for “wrongful acts” which is defined as “any actual or alleged act, error, omission, neglect, breach of duty, breach of trust, misstatement or misleading statement by an Insured Person in his or her capacity as such, or any matter claimed against an insured person by reason of his status as such” (Doc. 5 at ¶30(c); Doc. 9-2 at 49). The provision is subject to several exclusions found in Section III of the Policy titled “Exclusions” (Doc. 9-2 at 49-53). Specifically, Section III states that “This Coverage Section shall not cover any Loss in connection with any Claim:” and then lists exclusions in paragraphs A. to P. (Id.) (emphasis in original). Attached to the Policy are a series of several endorsements all effective as of 12:01 AM on January 13, 2016, purporting to amend, delete, or otherwise modify the Policy (See Doc. 9-2 at 16-31). Relevant to the current motion are Endorsements Nos. 11 and 13.

         Endorsement No. 11 to the Policy provides that the Policy is amended by deleting Exclusion D. in its entirety and replacing it with the following: “D. based upon, arising from, or (internal quotation omitted). in consequence of any actual or alleged liability of any Insured under any express contract or agreement . . .” (Doc. 9-2 at 20) (emphasis in original). Endorsement No. 13 to the Policy provides that the Policy is amended as follows:

3. Section III., Exclusions A., B., C. and D. (including the paragraph immediately following paragraph C.) are deleted in their entirety and replaced with the following:
A. arising out of, based upon or attributable to the gaining of any profit or financial advantage or improper or illegal remuneration by an Insured, if a final judgment or adjudication in the underlying action establishes that such Insured was not legally entitled to such profit or advantage or that such remuneration was improper or illegal;
B. arising out of, based upon or attributable to any deliberate criminal or deliberate fraudulent act or any willful violation of law by an Insured, if a final judgment or adjudication in the underlying action establishes that such act or violation occurred;
C. arising out of, based upon or attributable to the purchase or sale by an Insured of securities of the Company within the meaning of Section 16(b) of the Securities Exchange Act of 1934 and any amendments thereto or similar provisions of any state statutory law if a final judgment or adjudication in the underlying action establishes that such violation occurred[.]

(Doc. 9-2 at 23) (emphasis in original).

         On July 11, 2016, sixty individuals who were investors and owned “membership units” in Verto (hereinafter the “Iowa plaintiffs”) filed a six-count petition in the District Court of Polk County, Iowa against Burgett asserting that the Harman Settlement proceeds paid to Burgett constituted an earn-out under the Reallocation Agreements and thus should be properly distributed to the Iowa plaintiffs (the “Iowa lawsuit”) (Doc. 9-3). See Vander Weide v. Burgett, LACL135549 (Dis. Ct. Polk Cnty. Iowa 2016). In Count I, the Iowa plaintiffs raised a claim of fraud alleging Burgett made “material misrepresentations” upon which they reasonably relied in agreeing to the Harman Settlement (Doc. 9-3 at ¶¶103-108). Specifically, the Iowa plaintiffs asserted that Burgett made “material misrepresentations” including, but not limited to: his “intention to make the Yurbuds investors whole with the proceeds of the Harman settlement;” “Burgett's agreement to re-allocate proceeds received from Harman pursuant to the Re-allocation Agreements;” and “Burgett's representations and promises not to take any funds from the Harman settlement related to his employment claims against Harman” (Id. at ¶104). In Count II, the Iowa plaintiffs brought a claim of breach of fiduciary duties alleging that Burgett, “by virtue of this status as a board member and president of the company, ” owed Yurbuds and the Iowa plaintiffs fiduciary duties of loyalty, candor, and care that he breached when (1) he distributed the Harman Settlement proceeds to himself and other members of the Yurbuds management team without approval from the board and prior to any distributions to the other Yurbuds members and when (2) he claimed that the entire amount fell outside the category of funds covered in the Reallocation Agreements, “in violation of his prior promises and commitments” (Id. at ¶¶ 109-112). In Count III, the Iowa plaintiffs asserted a claim of breach of contract based on the alleged breach of Reallocation Agreements when Burgett did not distribute the Harman Settlement proceeds to the Iowa plaintiffs (Id. at ¶¶113-116). In Count IV, the Iowa plaintiffs brought a claim for promissory estoppel and argued that the parties had “a clear and definite agreement” that certain funds received by Burgett from Harman were subject to reallocation to the Iowa plaintiffs and the Iowa plaintiffs were damaged by Burgett's failure to abide by that agreement (Id. at ¶¶117-120). In Count V, the Iowa plaintiffs raised a claim for unjust enrichment alleging that Burgett was unjustly enriched by the receipt of the Harman Settlement proceeds at the expense and to the detriment of the Iowa plaintiffs (Id. at ΒΆΒΆ121-124). In Count VI, the Iowa ...


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