No. 2-15-0303 Opinion filed March 31, 2016 ______________________________________________________________________________

IN THE

APPELLATE COURT OF ILLINOIS

SECOND DISTRICT ______________________________________________________________________________

ROBERT R. McCORMICK FOUNDATION ) Appeal from the Circuit Court and CANTIGNY FOUNDATION, ) of Du Page County. ) Plaintiffs-Appellants, ) ) v. ) No. 13-L-481 ) ARTHUR J. GALLAGHER RISK ) MANAGEMENT SERVICES, INC., ) Honorable ) Kenneth L. Popejoy, Defendant-Appellee. ) Judge, Presiding. ______________________________________________________________________________

JUSTICE HUTCHINSON delivered the judgment of the court, with opinion. Justices Jorgensen and Hudson concurred in the judgment and opinion.

OPINION

¶1 Plaintiffs, the Robert R. McCormick Foundation and the Cantigny Foundation (the

Foundations) filed suit against their former insurance broker, Arthur J. Gallagher Risk

Management Services, Inc. (Gallagher), for the loss of defense coverage under the Foundation’s

directors’ and officers’ (D&O) liability insurance policy. The trial court determined that an

exclusion in the D&O policy would have prevented coverage altogether. Because the trial court

erred in interpreting the exclusion by failing to see it as ambiguous, we reverse and remand.

¶2 Since the parties filed cross-motions for summary judgment, we take as true the facts

alleged in the underlying complaints. The Foundations were formerly the second-largest

shareholders of the Tribune Company, a large publicly traded media corporation that, at one

point, owned its namesake newspaper, The Chicago Tribune, as well as The Los Angeles Times,

Newsday, The Sun Sentinel, The Baltimore Sun, WGN-TV, WGN-AM radio, and the Chicago

Cubs. The Foundations sold the last of their Tribune stock when the company was sold in a

leveraged buyout, or LBO, in 2007. In an LBO, an investor buys the stock of a corporation with

the proceeds of a loan secured by the corporation’s assets; the company is thus “leveraged” to

buy out its shares. In this instance, however, the company was highly leveraged. Prior to the

LBO, Tribune had a market capitalization of around $8 billion and was carrying $5 billion in

debt. Though Tribune stock was trading around $27 a share, the LBO purchasers offered

stockholders $34 a share in order to gain control of the company. Once the LBO closed in

December 2007, the company was saddled with an additional $8.5 billion in debt. Then, the

2007-08 financial crisis resulted in, among other things, the single worst performing year in the

newspaper industry’s financial history. In December 2008, within a year of the LBO, Tribune

entered bankruptcy.

¶3 The LBO and the bankruptcy left Tribune’s unsecured creditors—that is, various holders

of debt from bonds Tribune had issued over the years prior to the LBO—holding the proverbial

bag. First, the LBO itself subordinated the unsecured creditors’ debt to secure financing for the

buyout. Meanwhile, the extended pendency of the Tribune bankruptcy proceeding left the

unsecured creditors unable to collect. In December 2011, the bankruptcy court confirmed a plan

that enabled the unsecured creditors to pursue or resume the pursuit of their claims outside of the

bankruptcy proceedings. In re Tribune Co.,

(Bankr. D. Del. 2011), on

reconsideration,

(Bankr. D. Del. 2011). Soon after, the various creditors had on

file nearly 50 separate lawsuits challenging the LBO in state and federal courts around the

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country. Although the LBO suits were filed by different groups of bondholders and were based

on a number of different legal theories, they all had the same objective: to unwind the LBO and

claw back the sale’s proceeds from the company’s former shareholders. Many of the suits named

as defendants all former Tribune stockholders who had sold more than $25,000 worth of Tribune

stock. As a result, the suits collectively were brought against thousands of defendants. The

Foundations were named as defendants in three of these suits.

¶4 All of the LBO suits were transferred to and remain pending in the United States District

Court for the Southern District of New York and some, including the three against the

Foundations, were dismissed and are presently before the Second Circuit Court of Appeals. See

generally In re: Tribune Co. Fraudulent Conveyance Litigation,

(J.P.M.L.

2011); In re Tribune Co. Fraudulent Conveyance Litigation, Nos. 1:12-mc-02296, 13-3992 (2d

Cir. Mar. 16, 2016). Of the three LBO suits against the Foundations, the first was brought by the

former creditors’ committee, whose claims were assigned to a litigation trustee (Kirschner v.

FitzSimons, No. 1:12-cv-02652 (S.D.N.Y.)); the second by a successor indenture trustee

(Deutsche Bank Trust Co. Americas v. Ohlson Enterprises, No. 1:12-cv-00064 (S.D.N.Y.)); and

the third by 189 retired Tribune employees (Niese v. ABN AMRO Clearing Chicago LLC, No.

1:12-cv-00555 (S.D.N.Y)).

¶5 In 2008, several years before the LBO lawsuits were filed, the Foundations purchased

through Gallagher a $15 million D&O policy issued by Chubb Insurance and a $10 million

excess policy issued by a separate company. (For convenience we refer to it as a single $25

million Chubb D&O policy.) In 2010 Gallagher advised the Foundations that instead of renewing

the Chubb policy they could obtain identical “apples-to-apples” D&O coverage at a reduced

premium with a $25 million policy from Chartis Insurance. The Foundations followed their

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broker’s advice; they purchased the Chartis policy and let the Chubb policy lapse. Soon after, the

three LBO suits were filed against the Foundations. The Foundations tendered the suits to

Chartis, but Chartis refused them under a securities exclusion in its D&O policy. The

Foundations began to pay their own defense costs (which counsel indicated at oral argument

were substantial) and sued Gallagher for malpractice.

¶6 In the complaint in this case, the Foundations allege that they would have received both

defense and indemnification coverage for the three LBO suits under the Chubb policy. The

Foundations also allege that they would have maintained the Chubb policy but for Gallagher’s

erroneous advice that the coverage provided by the Chubb and Chartis polices was identical.

Gallagher, which stands in the insurer’s shoes for the purpose of this malpractice action

(Skaperdas v. Country Casualty Insurance Co. of Libertyville, Inc.,

, aff’d,

; Lake County Grading Co. v. Great Lakes Agency, Inc.,

(1992)), answered that a securities exclusion in section 5(k) of the Chubb policy

would also have prevented coverage.

¶7 At the trial court’s direction, the parties filed motions for summary judgment on the

exclusion in section 5(k) of the Chubb policy. The Foundations’ motion, however, was for partial

summary judgment and was confined to the question of whether the exclusion would have

negated the insurer’s duty to pay the Foundations’ defense costs. (Since the underlying LBO

litigation is still pending, a determination concerning either indemnification or the total for

defense costs would be premature. See Central Illinois Light Co. v. Home Insurance Co.,

(2004); Outboard Marine Corp. v. Liberty Mutual Insurance Co.,

(1992).) In contrast, Gallagher’s motion was for complete summary judgment because, according

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to Gallagher, the exclusion in section 5(k) of the Chubb policy would have prevented coverage

altogether.

¶8 In a memorandum order, the trial court determined that the exclusion applied. It denied

the Foundations’ motion for partial summary judgment and granted Gallagher’s motion for

complete summary judgment. The Foundations appeal.

¶9 In this appeal, we consider the limited question of whether the exclusion in section 5(k)

of the Chubb policy would have precluded coverage of the Foundations’ defense costs for the

underlying LBO suits. The controlling principles are well settled. To determine whether the

insurer would have had a duty to defend, we look first to the allegations in each of the underlying

complaints and compare those allegations to the relevant provisions of the insurance policy.

Pekin Insurance Co. v. Wilson,

(2010); Outboard Marine Corp.,

. If the facts alleged in the underlying complaint fall within, or potentially within,

the policy’s zone of coverage, then the insurer is obligated to defend the insured for the entire

action. Outboard Marine Corp.,

. The policy is interpreted in the light most

favorable to the insured.

. Thus, if the policy’s provisions are ambiguous, i.e.,

susceptible to more than one reasonable interpretation, we are obligated to choose the

interpretation that favors coverage. Central Illinois Light Co.,

. This principle of

liberal construction also applies to exclusions, which must be construed narrowly in favor of

coverage. Gillen v. State Farm Mutual Automobile Insurance Co.,

(2005).

“If recovery is premised on several theories of liability, some of which are excluded from

coverage, the insurer is still obligated to defend as long as one theory might possibly fall within

the scope of the policy coverage.” Pekin Insurance Co. v. Richard Marker Associates, Inc.,

(1997) (citing Maryland Casualty Co. v. Peppers,

, 194

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(1976)). We review de novo the trial court’s grant of summary judgment, as well as its

interpretation of the complaints and the policy. Pekin Insurance Co.,

.

¶ 10 The Chubb D&O policy in question provided coverage for any claim against the

Foundations, unless under the exclusion in section 5(k) the claim was based on a “violation of

any Securities Laws ***.” In the policy’s definitions section, “Securities Laws” is defined as

follows (we have added numbers for clarity):

“[(1)] the Securities Act of 1933, Securities Exchange Act of 1934, Investment Company

Act of 1940, [(2)] any state ‘blue sky’ securities law, or [(3)] any other federal or state, or

local securities law or any amendments thereto or any rules or regulations promulgated

thereunder or [(4)] any other provision of statutory or common law used to impose

liability in connection with the offer to sell or purchase, or the sale or purchase, of

securities.”

¶ 11 The federal and state laws alluded to in the definition’s first three clauses protect

investors against stock-price manipulation by regulating transactions upon securities exchanges

and by imposing reporting requirements. None of the allegations in the complaints in the three

LBO suits, however, accuse the Foundations of having violated any federal or state securities

regulation akin to those listed in the first three clauses of the definition. Instead, the complaints

allege that the Foundations breached their fiduciary duty as Tribune’s “controlling shareholders”

(a label the Foundations tell us they vigorously dispute) and were principals in an LBO that was

a sham transaction in violation of various states’ fraudulent-conveyance laws. With this in mind,

the issue before us then is whether each of the LBO suits fits within the fourth and final clause in

the definition of “Securities Laws”:

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“[(4)] any other provision of statutory or common law used to impose liability in

connection with the offer to sell or purchase, or the sale or purchase, of securities.”

¶ 12 Each party submits a different interpretation of the last clause. Gallagher contends that

the phrase “any other provision” means “any other provision” in all of the law. Thus, according

to Gallagher, the exclusion bars coverage for any litigation—based on any “statutory or common

law used to impose liability”—in any way arising “in connection with” a stock sale. Under this

interpretation, since the LBO suits arose “in connection with” the sale or offer of Tribune’s

stock, they would have been excluded. Gallagher asserts that its interpretation of the final clause

is the only reasonable one and that therefore the clause is not ambiguous.

¶ 13 The Foundations contend that the definition of “Securities Laws” is narrow, appealing to

the principle of ejusdem generis (“of the same kind”): that a list of like items creates a context

such that any catch-all term in the list has a generic resemblance to the other terms. Accordingly,

the Foundations assert that the phrase “any other provision *** used to impose liability” means

any other provision of the same sort as those enumerated—i.e., “any other provision” like the

federal and state securities regulations alluded to in the definition’s first three clauses. The

Foundations do not acknowledge that there is another reasonable interpretation of the definition’s

final clause, which would render it ambiguous, but they do assert that if there is any ambiguity in

the definition it should be construed in their favor.

¶ 14 The clause is ambiguous. That is, it is susceptible to more than one reasonable

interpretation, despite the fact that “each party insists that the language unambiguously supports

its position.” Central Illinois Light Co.,

. Therefore, the Foundations are

right; the narrow interpretation of the clause is the one that controls. See

(“if the words

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used in the policy are reasonably susceptible to more than one meaning, they are ambiguous and

will be strictly construed against the [insurer]”).

¶ 15 We note also that the narrow construction of the final clause is also the most plausible

one. Id.; see also Pekin Insurance Co.,

. The narrow construction leads, as the

Foundations assert, to a reading of “Securities Laws” that is limited to what one would ordinarily

think of as “securities laws,” i.e., state and federal laws that regulate securities. Moreover, we

can think of no reason (and Gallagher suggests none) why Chubb, when drafting the D&O

policy, would set forth a detailed list of securities laws only to render it irrelevant with a

concluding phrase like “any other provision” that has no connection to the list that preceded it. It

stands to reason that, if the policy drafters intended to exclude any lawsuit arising in connection

with a stock sale (as Gallagher suggests), they would have omitted altogether the definition’s

first three clauses listing securities laws, leaving only the fourth clause. That is the language used

in the Chartis exclusion, which excludes any claim “in any way relating to any purchase or sale

of securities”—full stop.

¶ 16 Keeping in mind the narrow interpretation of the Chubb policy’s definition of “Securities

Laws,” we can easily determine that the exclusion in section 5(k) would not have prevented the

Foundations from receiving defense coverage in the three LBO suits. None of the suits is based

on an alleged violation of either “Securities Laws” or “securities laws” (e.g., insider trading or

fraudulent registration or reporting (see Wilgus v. CyberSource Corp.,

(2009))) and each contains allegations that would fall outside the exclusion. The Kirschner

complaint alleges, among other things, that the Foundations breached their fiduciary duty as

Tribune’s controlling shareholders by forcing the company to pursue and ultimately accept a

ruinous sale. The Deutsche Bank and Niese complaints allege that the LBO was a fraudulent

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conveyance in violation of Illinois, New York, and Massachusetts law because either the

transaction left the company insolvent or the stockholders’ shares were not worth what the

purchasers paid for them. Securities laws are not intended to “ ‘provide a broad *** remedy for

all fraud’ ” (Gavin v. AT&T Corp.,

(7th Cir. 2006) (quoting Marine Bank v.

Weaver,

(1982))), and there is no way to characterize the allegations in the

foregoing complaints as violations of “Securities Laws.” Accordingly, we determine that each of

the three complaints would not have been excluded from defense coverage by virtue of section

5(k) of the Chubb policy.

¶ 17 We emphasize that our holding is limited to the issue of the language in section 5(k) and

how to interpret it. We make no determination as to whether defense coverage was actually

triggered, an inquiry that will require the trial court to determine whether the LBO suits arose

during the coverage period and were tendered in a time and manner consistent with the policy.

The trial court’s order granting summary judgment to Gallagher on the basis of the exclusion in

section 5(k) is reversed and the cause is remanded to the trial court with directions to enter

summary judgment in favor of the Foundations on the exclusion and for further proceedings.

¶ 18 Reversed and remanded with directions.

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