Milwaukee Notions, Inc. v. Erie Ins. Exch., No. 06-25918-svk; No. 07-2292, 2009 WL 1351101 (Bankr. E.D. Wis. May 11, 2009)
The court found no breach of Erie’s duty to defend as it defended under reservation of rights and there has been no determination of the underlying claims. Various expenses within the bankruptcy court in the court’s view were not recoverable.
The underlying complaint alleged that the Debtors and others distributors counterfeit diabetic test strips, including causes of action for federal trademark infringement, federal false advertising, federal dilution of mark, common law unfair competition and unjust enrichment.
Conceding that a defense was owed in the underlying New York action, Erie urged that the defense did not cover motions in the early stages of the bankruptcy case.
The court concluded otherwise, finding that the bankruptcy case and related hearings were subject to reimbursement.
Unresolved was the issue of whether Erie breached its duty to defend under the policy by not agreeing to pay the bankruptcy-related defense fees, triggering thereby a foreclosure from raising any further challenges to coverage.
[N]one of the cases considers an insurer's duty to defend an insured in the bankruptcy court after a pending lawsuit is stayed by the insured's bankruptcy petition. However, bankruptcy proceedings are civil proceedings, and to the extent LifeScan pressed its claims in the underlying litigation in this Court, the same principles would apply to make the coverage determination.
Id. at *3.
In the November Memorandum, LifeScan alleged that the Debtor continued to sell test strips in violation of the previous injunction, and alleged violations of the Lanham Act for selling purportedly harmful products. Concerning the Lanham Act claims, LifeScan made identical allegations of copyright and trademark infringement as it did in its complaint in the New York action. Moreover, the November Memorandum discusses the New York litigation in detail, specifically LifeScan's seizure of test strips and the temporary restraining order issued in that action. The November Memorandum is replete with allegations of trademark and copyright violations, seizure orders under the Lanham Act, and harm LifeScan allegedly suffered due to the Debtor's actions. . . . The claims made in the October Motion and November Memorandum are virtually identical to the allegations in the complaint in the New York action, and those claims constitute a “suit” against the Debtor just as the New York complaint did.
In the same way, LifeScan's bankruptcy pleadings allege “personal and advertising injuries” as defined in the Policy, and also allege that LifeScan suffered damages from these injuries. LifeScan claims that the Debtor infringed upon its copyrights and trademarks, violated the Lanham Act, and engaged in advertising that caused injury to LifeScan. . . . the policy arguably provides coverage, meeting the requisite standard. Acuity v. Bagadia, 310 Wis. 2d 197, 750 N. W. 2d 817 (2008).
Id. at *5.
Citing Johnson Controls, 264 Wis. 2d at 89 the court concluded that there was no narrow and technical meaning for the term “damages” under Wisconsin law as urged by the insurer based on the rejection of earlier case authority in Sch. Dist. of Shorewood v. Wausau Ins. Co., 170 Wis. 2d 347, 368, 488 N.W. 2d 82, 89 (1992).
Giving the term “damages” its ordinary meaning as interpreted by a reasonable insured, the Court finds that the pleadings filed by LifeScan in this Court do allege damages as defined by Wisconsin insurance law.
Id. at *6.
The court did not agree that the Rule 2004 examinations were Erie’s legal responsibility noting that even though they LifeScan with discovery in the underlying litigation, Rule 2004 examinations were a right given to creditors under the Bankruptcy Code to investigate the affairs of the debtor.
It also concluded that an insurer was not required to fund an insured’s affirmative claims. See, e.g., Wis. Prof’l Baseball Park Dist. v. Mitsubishi Heavy Indus. Am., Inc., 304 Wis. 2d 637, 738 N.W.2d 87 (Ct. App. 2007) (apportioning costs between offensive and defensive claims). Under this principle, an action initiated by an insured is, by it nature, not a defense cost properly covered under a policy. Towne Realty, Inc. v. Zurich Ins. Co., 201 Wis. 2d 260, 273, 548 N.W.2d 64, 69 (1996) (policy's language providing for defense of claims “clearly precludes” recovery for offensive actions).
The court parted company with case law nationally which finds that offensive litigation activity can serve the defensive end and thus, where reasonably related to a defense in some jurisdictions and others where it is conducted against liability be recoverable as noted in Adobe Systems, Inc. v. St. Paul Fire & Marine Ins. Co., No. C 07-00385 JSW, 2007 WL 3256492 (N.D. Cal. Nov. 5, 2007):
Adobe contends that it initiated the London and California actions as a necessary legal strategy to defend itself against an impending claim from Agfa/ITC. The Court finds persuasive the reasoning in IBP, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, which held that even though an insured initiates a lawsuit, that fact does not automatically preclude coverage for defense-type legal fees and expenses where the insured is resisting a contention of liability for damages. 299 F.Supp.2d 1024, 1031 (D.S.D.2003) (citing Simon v. Maryland Cas. Co., 353 F.2d 608, 613 (5th Cir.1965) (holding that sub-contractor insured was entitled to recover legal fees and expenses from insurer for bringing a declaratory judgment action asserting it was not negligent and was entitled to be paid funds withheld by the general contractor, despite a “defense” clause in policy); Potomac Elec. Power Co. v. California Union Ins. Co., 777 F.Supp. 980, 984-85 (D.D.C.1991) (finding that an affirmative suit brought by an insured is not per se unrecoverable as a defense cost)). Id. at *9.
The court then stated:
To be clear, the Policy does not cover the fees the Debtor incurred to file bankruptcy, prepare Schedules, negotiate a cash collateral agreement, or any other general bankruptcy matters, because those costs do not relate to the defense of the LifeScan's claims. If the Debtor objects to LifeScan's proof of claim, Erie would be responsible for the costs of “defending” the Debtor against that proof of claim. However, to date, the Policy covers only the Debtor's fees and costs associated with defending against the October Motion and November Memorandum.
Id. at *7.
The defense of the underlying New York action under reservation of rights was sufficient under Wisconsin law to maintain Erie’s coverage defenses, especially where separate bankruptcy counsel was retained in order to deal with issues therein.
Id. at *8.
The refusal to assist argument was rejected by the court because of the defense under reservation of rights as no estoppel arose respectively under Wisconsin law.
