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Kostin v. Pacific Indemnity Co.

United States District Court, D. Connecticut

April 10, 2018

SUSAN KOSTIN, Plaintiff,



         Plaintiff Susan Kostin brings this action for breach of contract and bad faith, claiming that Defendants Pacific Indemnity Company and Federal Insurance Company have wrongfully refused to defend and indemnify her. Plaintiff's family company had an investment account with Bernard Madoff, and Plaintiff withdrew $3.75 Million from the company's Madoff account in 2007-2008. After the discovery of Madoff's fraud, the Bankruptcy Trustee commenced an adversary proceeding against Plaintiff and others for recovery of withdrawn funds, and settled with Plaintiff for $3.375 Million. Plaintiff alleges that her losses were caused by Madoff making “wrongful entries in the [Kostin] Company Account in order to perpetuate [his] Ponzi Scheme[, ]” and that the Primary Policy and Excess Policy at issue here define covered personal injuries to include “wrongful entry.” For the reasons set forth below, Defendants' Motion to Dismiss is GRANTED.

         I. Background

         Plaintiff is a resident of Darien, Connecticut, while Defendants maintain their principal place of business in New Jersey. (Compl. [Doc. # 1-2] ¶¶ 1-4.) Plaintiff's late husband, Edward Kostin, purchased from Defendants a Masterpiece Homeowner's Insurance Policy (the “Primary Policy”) and a Masterpiece Excess Liability Policy (the “Excess Policy”). (Id. ¶¶ 7-9.) The Primary Policy insured the Kostins' home and personal property and provided personal liability coverage to covered persons. (Id. ¶ 12.) The Excess Policy provided coverage excess to the Primary Policy. (Id. ¶ 13.)

         Edward Kostin formed the Kostin Company, a family partnership, to manage the family assets. (Id. ¶ 15.) Beginning in approximately 1972, Mr. Kostin, through the Kostin Company, maintained an account with Bernard L. Madoff Investment Securities, LLC (“Madoff”). (Id. ¶ 16.) Federal law enforcement and regulatory authorities subsequently discovered that Madoff was perpetrating a massive Ponzi scheme. (Id. ¶ 17.) When members of the Kostin Company withdrew funds that they believed to be investment returns from Madoff, these funds were in fact money that other customers had given to Madoff. (Id. ¶ 20-21.) At the time that the Madoff fraud was revealed by federal authorities in December 2008, the Kostin Company Account had a purported net asset value of approximately $121 Million. (Id. ¶ 22.)

         As a result of the pyramid scheme, Plaintiff “lost” the $121 Million she believed was in the account, as well as her family's principal-the real money that they had actually put in. (Id. ¶ 23.) Between April 2, 2007 and October 1, 2008, Plaintiff withdrew a total of $3.75 Million from the Company's Madoff account. (Id. ¶ 24.) Plaintiff claims that Madoff during this time period “made wrongful entries into the Personal Account of [Plaintiff], to disburse to her money belonging to other [Madoff] customers in order to further the goals of the Ponzi scheme[.]” (Id. ¶ 25.)

         As a result of the public disclosure of the Ponzi scheme perpetrated by Madoff, Plaintiff learned that the account entries made by Madoff evidencing profits were wrongful in that the entries actually consisted of fictitious profits and that the funds transferred by Madoff into Plaintiff's personal account consisted of other people's money. (Id. ¶ 27.) In the aftermath of the revelation of the fraudulent scheme, a bankruptcy proceeding focused on the liquidation of Madoff's company and Madoff's personal assets was commenced in the United States Bankruptcy Court for the Southern District of New York. (Id. ¶ 28.) Irving H. Picard was appointed as Bankruptcy Trustee. (Id.) In November 2010, the Trustee commenced an adversary proceeding in the United States Bankruptcy Court against Plaintiff, the Kostin Company, and other Kostin family members, denominated as Picard v. Kostin Company, Adversary Proceeding No. 10-04950 (BRL). (Id. ¶ 29.) The Trustee's complaint did not allege that Plaintiff or the Kostin Company had any knowledge of the fraud. (Id. ¶ 30.)

         Plaintiff alleges that she timely notified Defendants of the claims being made against her and sought coverage. (Id. ¶ 34.) The Primary Policy requires the insurer to “cover damages a covered person is legally obligated to pay for personal injury or property damage which take place anytime during the policy period and are caused by an occurrence.” (Id. ¶ 35.) Defendants denied Plaintiff's claim. (Id. ¶ 44.) Plaintiff secured counsel at her own expense, who contested the Trustee's claim over the course of four years. (Id. ¶ 46.) Following a mediation, Plaintiff settled the Trustee's claim, agreeing to return $3.375 Million. (Id. ¶ 48.) Plaintiff's attorney's fees and litigation costs exceeded $799, 000. (Id. ¶ 47.) Defendants refused to reimburse Plaintiff for the costs of her legal defense or for the settlement amount. (Id. ¶¶ 51-52.)

         II. Discussion

         A. Legal Standard

         “To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to ‘state a claim to relief that is plausible on its face.' ” Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). Although detailed allegations are not required, a claim will be found facially plausible only if “the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for the misconduct alleged.” Id. Conclusory allegations are not sufficient. Id. at 678-79; see also Fed. R. Civ. P. 12(b)(6). “[A] complaint ‘is deemed to include any written instrument attached to it as an exhibit or any statements or documents incorporated in it by reference.' ” Holloway v. King, 161 Fed.Appx. 122, 124 (2d Cir. 2005) (quoting Chambers v. Time Warner, Inc., 282 F.3d 147, 152 (2d Cir. 2002)).

         B. Breach of Contract

         Plaintiff claims that Defendants' “refusal, neglect, and failure to defend [her] and to indemnify her constitutes a breach of the Primary Policy and Excess Policy.” (Compl. ¶ 59.)

         “[T]he interpretation of an insurance contract presents a question of law . . . .” Misiti, LLC v. Travelers Prop. Cas. Co. of Am., 308 Conn. 146, 154 (2013) (citations omitted). This interpretation “involves a determination of the intent of the parties as expressed by the language of the policy[.]” Id. (internal quotation marks and citations omitted). An insurance contract “must be viewed in its entirety” with the words of the policy given “their natural and ordinary meaning . . . [and construing] any ambiguity ...

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