Before us is a dispute about whether coverage exists under certain management liability insurance policies. A bankruptcy trust seeks a determination that those insurance policies cover potential future expenses and liabilities that might arise out of pre-bankruptcy wrongful acts allegedly committed by the insured debtor company's directors and officers. XL Specialty Insurance Company ("XL Specialty") and certain excess insurance carriers, who are the defendants-below/appellants, appeal from a Superior Court order denying their motion to dismiss the action. They claim that the plaintiff-below/appellee, WMI Liquidating Trust (the "Trust") lacks standing to prosecute its coverage claims, and, moreover, that the dispute does not present a ripe "actual controversy" susceptible of adjudication.
II. FACTUAL AND PROCEDURAL BACKGROUND
(1) The Parties
The plaintiff Trust is a Delaware statutory trust that is the legal successor to the bankruptcy debtor, Washington Mutual, Inc. ("WMI"). In September 2008, WMI filed for bankruptcy. The Trust succeeded to the assets of WMI's bankruptcy estate and to the claims asserted by the Official Committee of Unsecured Creditors of Washington Mutual, Inc., et al. (the "Creditors Committee").
The defendants-below/appellants (collectively, the "Defendants" or "Insurers") are insurance companies that issued management liability insurance policies to WMI covering the period May 1, 2008 to May 1, 2009.
(2) The Downstream Transaction and the Resulting Claim
On September 10, 2008, certain WMI directors and officers (the "D & Os") allegedly caused WMI to make a $500 million "downstream" capital contribution to Washington Mutual Bank ("WMB"),
By letter dated April 27, 2009, the Creditors Committee notified the D & Os of its belief that the D & Os "[had] engaged in certain wrongful acts [including the downstream transaction] that have injured the Debtors [including WMI], the Debtors' estates, and the creditors of the estates, and may result in claims for money damages."
The record discloses that the D & Os have incurred certain defense costs related to the Asserted Claim. To date, however, the Trust has not initiated any formal legal action against the D & Os to enforce the Asserted Claim.
(3) Indemnification Rights and Related Insurance Policies
As is commonplace in many corporations, WMI's governing documents obligated WMI to indemnify its D & Os for liability and certain related expenses that the D & Os might incur in performing their duties as WMI officers and directors. WMI's indemnification obligations included a duty to advance and reimburse litigation expenses, even before the final disposition of the proceeding.
For the following period — May 1, 2008 to May 1, 2009 — WMI obtained $250 million in D & O Insurance coverage constituting a "tower" of twelve insurance policies, consisting of one primary and eleven "excess" policies. Generally, coverage under an excess policy does not become available until the primary policy and all lower-level excess policies have first been exhausted.
The primary 2008-09 policy at the base of the tower is a so-called "ABC" policy, issued by XL Specialty (the "XL Policy"), which provides $25 million of primary coverage. The XL Policy provides coverage of three kinds. "Side A" and "Side B" insurance cover liabilities incurred by Insured Persons (e.g., WMI directors and officers).
The XL "Side A" coverage insures Insured Persons for "Loss" resulting from claims made against them, "except for Loss which the Company [WMI]
The XL "Side B" coverage is subject to a $50 million retention, meaning that WMI first must incur and be legally responsible for $50 million of indemnification liability before "Side B" coverage is triggered. The $50 million retention requirement does not apply, however, if "indemnification is not made by [WMI] solely by reason of [WMI's] financial insolvency. In the event of financial insolvency, the Retention(s) applicable to ["Side A"] shall apply."
The first of the eleven excess policies for the 2008-09 period was issued by National Union Fire Insurance Company of Pittsburgh, Pennsylvania. The National Union policy (also an "ABC" policy) provides excess coverage up to $25 million and follows the terms and conditions of the XL (primary) Policy.
The second 2008-09 excess policy in the tower, issued by Columbia Casualty Company, provides $25 million in "Side A" coverage only. The Columbia policy covers an Insured Person's "Non-Indemnified Loss," which is defined as a "Loss that [WMI] ... fails or refuses to indemnify or advance to or on behalf of any Insured Person for any reason, including Financial Insolvency."
The remaining nine excess policies provide "Side A" coverage only, and generally follow the terms of the Columbia policy. The 2008-09 policies also provide that, if payment under those policies is made, the insurer shall be subrogated to the rights of the insured.
(4) The Coverage Decision
After the Demand Letter was sent to the D & Os, WMI and several of the D & Os submitted claims to the Insurers for coverage, under the 2008-09 policies, of the Asserted Claim. The primary carrier, XL Specialty, denied coverage on various grounds in letters to the D & Os dated December 22, 2011 and January 25, 2012. XL Specialty indicated, however, that the Asserted Claim would be covered under the 2007-08 policies.
(5) The D & O Indemnification Claims and the Bankruptcy Proceedings
On or before March 31, 2009, the D & Os filed proofs of claim in the WMI bankruptcy proceeding, for advancement and indemnification of defense costs and damages relating to, inter alia, the Asserted Claim.
While the reserve was being negotiated, the Trust filed, on March 15, 2012, a complaint against the Insurers in the Bankruptcy Court for breach of contract, tortious breach of the duty of good faith and fair dealing, a declaratory judgment that the Insurers are not subrogated to the D & Os' indemnity rights, and for a declaratory judgment that the Insurers' subrogation claims (if any) must be equitably subordinated.
B. The Superior Court Proceedings and Decision
On October 8, 2012, four days after the Bankruptcy Court dismissed its complaint, the Trust commenced this Superior Court action against the Insurers, contesting their denial of coverage for the Asserted Claim under the 2008-09 policies. The Trust asserted three claims for relief. Count I claims that the Insurers breached their contractual obligations under the 2008-09 policies by denying coverage and failing to pay the D & Os' defense costs associated with (and by not attempting to settle) the Asserted Claim. Count II alleges that, in denying coverage for the Asserted Claim, the Insurers breached their implied duties of good faith and fair dealing under the 2008-09 policies. And, Count III seeks a declaratory judgment that: (i) coverage under the 2008-09 policies is available for the Asserted Claim, (ii) no retention applies to payments for the Asserted Claim under the 2008-09 policies, and (iii) the Insurers are required to pay (for the benefit of the D & Os) any "Loss" under those policies (including defense costs) associated with the Asserted Claim.
The Insurers moved to dismiss the Trust's complaint under Superior Court Civil Rules 12(b)(1) and 12(b)(6). The Insurers argued that the Trust lacks standing to assert its claims, that Counts I and II fail to state claims upon which relief may be granted, and that Count III does not allege an "actual controversy" that is ripe for adjudication. By opinion dated July 30, 2013, the Superior Court denied the Insurers' motion to dismiss. The court determined that the Trust has standing, that the complaint states claims upon which relief can be granted, and that Count III presents a controversy that is
By order dated August 23, 2013, the Superior Court granted the Insurers leave to appeal from its July 30, 2013 interlocutory order.
III. THE CONTENTIONS AND THE STANDARD OF REVIEW
The Insurers raise two claims on this appeal. The first is that the Trust lacks standing, because the Trust has suffered no injury that is traceable to the Insurers, and any ruling in the Trust's favor would not redress any asserted injury. The second is that the Trust's declaratory judgment claim does not implicate an "actual controversy" and therefore is not justiciable, i.e., is not a proper subject for adjudication. The Insurers argue that for Delaware courts to entertain a declaratory judgment action, an actual controversy must exist and no actual controversy exists here.
We first address whether the Trust's complaint presents a controversy that is ripe for judicial determination. Because we find that it does not, the Trust's complaint must be dismissed for lack of ripeness. It therefore becomes unnecessary for us to reach the remaining issues presented on this appeal.
It is well settled that a trial court has discretion in determining whether to entertain a declaratory judgment action.
A. The Trust's Claims Are Not Ripe
(1) The Declaratory Judgment Count
Delaware courts are statutorily authorized to entertain an action for a
The Superior Court determined that the Trust's claim presents a ripe controversy. In so concluding, the Superior Court apparently credited the Trust's assertions that the Asserted Claim seeks potential damages of $500 million (clearly exceeding the $250 million coverage limit of the 2008-09 policies), and that as a result of the coverage denial, the Trust has been compelled to maintain an $18 million reserve for potential defense costs arising out of the Asserted Claim.
Delaware courts decline to exercise jurisdiction over a case unless the underlying controversy is ripe, i.e., has "matured to a point where judicial action is appropriate."
A ripeness determination requires a common sense assessment of whether the interests of the party seeking immediate relief outweigh the concerns of the court "in postponing review until the question arises in some more concrete and final form."
Here, the Trust seeks a judicial determination that, if made, would necessarily be premised on uncertain and hypothetical facts and that ultimately may never become necessary. The declaratory judgment count of the Trust's complaint would require the Superior Court first to determine whether the Insurers correctly interpreted and applied the 2008-09 policies' coverage exceptions when denying coverage for the Asserted Claim.
There are four interrelated coverage claims that might arguably implicate the 2008-09 policies: (i) claims for advancement of defense costs, (ii) claims for payment of a settlement or judgment, (iii) claims made by the D & Os, and (iv) claims made by the Trust. The Trust has not alleged, however, that it has made any claims for coverage. Nor could it: the Trust disclaims any obligation to indemnify the D & Os, and therefore would never have coverage claims to assert in its own right. And although the Trust argues that the Asserted Claim for $500 million in damages implicates the $250 million coverage limits of the 2008-09 policies, no settlement or judgment-related coverage claims have been (or could be) made at this point. The reason is that no litigation that might lead to a judgment — or a settlement — of the Asserted Claim has been commenced. The only presently existing claims that might arguably implicate the 2008-09 policies are the D & Os' claims for defense costs. But, it is undisputed that those defense costs are being covered under the 2007-08 policies, and the Trust has not alleged that any amounts that could implicate
To illustrate why, we discuss four hypothetical scenarios where future events relating to the Asserted Claim might unfold and implicate the 2008-09 policies. Those hypotheticals underscore that any judicial determination at this stage would necessarily amount to an impermissible advisory opinion.
First, the Trust might decide not to initiate legal action against the D & Os with respect to the Asserted Claim. Second, if the Trust decided to bring such an action, the D & Os might ultimately prevail. Third, the D & Os might reach a settlement with the Trust. And fourth, the Trust might obtain a judgment against the D & Os. In the first two hypothetical scenarios, the 2008-09 policies may never be implicated, because the 2007-08 policies might cover any incurred D & O defense costs. Although the Trust alleges that the 2007-08 policies are "nearly exhausted,"
The third and fourth hypothetical scenarios might implicate the 2008-09 policies, but that would depend on whether (or to what extent) full coverage for any resulting claims would be available under the 2007-08 policies. Should either scenario materialize and implicate the 2008-09 policies, any settlement or judgment might — or might not — obligate the Trust to indemnify the D & Os. If the Trust is not permitted to indemnify the D & Os for any settlement or judgment (in which case "Side A" coverage with no retention would apply), any determination about the retention based on WMI's insolvency or bankruptcy proceedings would have been academic. Similarly, any determination made about the retention based on whether indemnification by the Trust is permitted (and whether "Side A" or "Side B" coverage applies) would rest on the court's predicted outcome of any litigation or settlement of the Asserted Claim — predictions that could ultimately turn out to be inaccurate.
What the foregoing hypotheticals do show is that the dispute between the Trust and the Insurers has not yet assumed a "concrete and final form." The pled facts do not demonstrate a "reasonable likelihood" that the 2008-09 policies will be
The Trust argues that it has been harmed because the Insurers' blanket denial of coverage under the 2008-09 policies necessitated the establishment of the $18 million reserve, which in turn prevented the Trust from satisfying the claims of other WMI creditors. But, that claimed harm to the Trust is illusory.
First, the Insurers were not parties to the Stipulation. The Trust's potential indemnification obligations to the D & Os (which form the basis for the D & Os' bankruptcy proofs of claim and the $18 million reserve) exist solely by reason of WMI's governing documents and WMI's contractual agreements with the D & Os. Those potential obligations exist whether or not coverage is available to the D & Os under the 2008-09 policies. Indeed, the Stipulation provides that any amounts paid by the Insurers to the D & Os for defense costs related to the Asserted Claim will not be released from the reserve. Instead, those amounts must be set aside to cover subrogation claims against the Trust that the Insurers may have.
Second, even if the Superior Court ruled that coverage exists under the 2008-09 policies and that no retention applies to any potential D & O coverage claims, as a practical matter that would not operate to release the reserved funds. The D & Os have agreed that the $18 million reserve will be released only upon the entry of a judgment (or an agreement with the Insurers) that (inter alia) the Insurers have no subrogation rights under the 2008-09 policies. Yet, the Trust has never sought any determination of subrogation rights in this proceeding.
The Trust's only interest in having its dispute litigated now is apparently to receive judicial guidance about how much coverage would be available to the D & Os if the Trust were to initiate litigation against them. The Trust seeks that guidance, not as a contractual counterparty seeking to vindicate the D & Os' contractual rights, but rather as a potential claimant against the D & Os. The Trust's desire to receive advice is not a cognizable interest that will justify a Delaware court exercising its jurisdiction to decide this dispute. As noted, our courts do not issue advisory opinions.
(2) The Remaining Counts
Because the Trust's declaratory judgment count is not ripe for adjudication, it follows that the Trust's claims for breach of contract are also unripe. Counts I and II of the complaint arise out of the same controversy that is the subject of the declaratory judgment count (Count III) — the Insurers' denial of coverage under the 2008-09 policies. It would be logically inconsistent for this Court to rule that a dispute is not sufficiently ripe to warrant entertaining a declaratory judgment claim, yet is sufficiently ripe to justify entertaining
(3) The Remaining Arguments
Lastly, the Trust argues that two Delaware cases — Hoechst Celanese Corp. v. National Union Fire Insurance Co. of Pittsburgh, Pennsylvania,
Philips involved a dispute between North American Philips Corporation ("Philips") and its liability insurers over coverage of Philips' environmental liabilities.
Both the Hoechst and the Philips courts concluded that it would be difficult to distinguish between those excess policies that would be triggered and those that would
For the foregoing reasons, the Superior Court judgment is REVERSED. We REMAND the case to the Superior Court with instructions to dismiss the complaint without prejudice. Jurisdiction is not retained.
Stroud v. Milliken Enters., Inc., 552 A.2d 476, 480 (Del. 1989) (citation omitted). We do not regard the above-quoted language as prescribing the standard of review of a ripeness determination. In Stroud, this Court raised the ripeness issue sua sponte, and therefore did not review the trial court's ripeness determination, nor did this Court address the standard of review.