NOT PRECEDENTIAL

UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT ____________

No. 22-2242 ____________

LIBERTY INSURANCE UNDERWRITERS, INC.

v.

COCRYSTAL PHARMA, INC., Appellant

Appeal from the United States District Court for the District of Delaware (D.C. Civil Action No. 1-19-cv-02281) District Judge: Honorable Joshua D. Wolson

Argued on March 8, 2023

Before: SHWARTZ, BIBAS, and AMBRO, Circuit Judges

(Opinion filed: March 29, 2023)

Tamara D. Bruno (Argued) Pillsbury Winthrop Shaw & Pittman 909 Fannin Suite 2000, Two Houston Center Houston, TX 77010

Peter M. Gillon Jesse N. Vazquez Pillsbury Winthrop Shaw & Pittman 1200 17th Street, NW Washington, DC 20036 Brandon R. Harper Carla M. Jones Jennifer C. Wasson Potter Anderson & Corroon 1313 North Market Street Hercules Plaza, 6th Floor P. O. Box 951 Wilmington, DE 19801

Counsel for Appellant

Robert L. Ebby Ronald P. Schiller (Argued) Hangley Aronchick Segal Pudlin & Schiller One Logan Square 18th & Cherry Streets, 27th Floor Philadelphia, PA 19103

Counsel for Appellee

OPINION *

AMBRO, Circuit Judge

Cocrystal Pharma Inc. (“Cocrystal”) appeals the District Court’s grant of summary

judgment for its insurer, Liberty Insurance Underwriters, Inc. (“Liberty”). Because we part

from its holding that the insurance policy here does not require Liberty to pay Cocrystal’s

defense costs associated with an investigation by the Securities and Exchange Commission

(“SEC”), we vacate the Court’s order and remand for further proceedings. There is a

* This disposition is not an opinion of the full Court and pursuant to I.O.P. 5.7 does not constitute binding precedent.

2 genuine issue of material fact whether the SEC was investigating Cocrystal’s wrongful acts

(and thus whether Liberty must pay the defense costs under the policy), so the case must

proceed to trial.

I.

Cocrystal is a publicly traded biotechnology company. It was formed following a

merger of Biozone Pharmaceutical, Inc. (“Biozone”) and Cocrystal Discovery, Inc. in

January 2014. After the merger, Biozone ceased to exist.

The Insurance Policy

Cocrystal then purchased director and officer liability insurance from Liberty to

cover claims made between January 2, 2015, and May 21, 2018 (the “Policy”). Under the

Policy, Cocrystal is the “Insured Organization,” and its directors and officers are “Insured

Persons.” App. 88, 97. Its coverage focuses mostly on claims made against the Insured

Persons but also includes certain claims against Cocrystal. Relevant here, “[t]he Insurer

shall pay on behalf of the Insured Organization all Loss which it shall become legally

obligated to pay as a result of a Securities Action first made during the Policy Period . . .

against the Insured Organization for a Wrongful Act which takes place before or during

the Policy Period.” App. 90.

The Policy defines the bolded terms as follows:

• Loss includes “Defense Costs,” meaning the reasonable and necessary attorneys’ fees incurred defending a Claim. App. 96-97.

• Securities Action “means any Claim, under federal, state, or common law, against the . . . Insured Organization, if such Claim [a]rises from the purchase or sale of, or offer to purchase or sell, any securities issued by the Insured Organization.” App. 125. 3 • Claim includes “a written demand for . . . non-monetary relief” and “a formal . . . regulatory investigation against” the Insured Organization. App. 128.

• Wrongful Act means “any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty, actually or alleged[ly] committed or attempted by the Insured Persons in their capacities as such.” App. 107.

The Policy also provides that the “Insurer shall . . . advance covered Defense Costs

incurred by the Insureds.” App. 91. But “[i]f it is determined by negotiation, litigation, or

arbitration that any such Defense Costs are not covered under this Policy, the Insureds

agree to repay the Insurer the amount of such Defense Costs not covered.” Id.

The last relevant provision in the Policy is its “batching clause,” which says that

“[a]ll Claims arising from . . . Interrelated Wrongful Acts shall be deemed one Claim.”

App. 93. Interrelated Wrongful Acts are those that “have as a common nexus any fact,

circumstance, situation, event, transaction, cause or series of causally connected facts,

circumstances, situations, events, transactions or causes.” App. 97. When multiple claims

are batched together, Liberty considers all the claims to have been made on the date the

earliest claim was made.

The SEC Subpoena

On October 2, 2015, the SEC subpoenaed Cocrystal, requesting documents about it

and its predecessor Biozone from the relevant period of January 1, 2011, to October 2,

2015. The SEC did not state which entity was the target of the investigation. It could have

been Biozone, Cocrystal, both, or neither. Based on the requested documents, it appeared

the SEC was mainly interested in Biozone. See, e.g., App. 511 (Request 9: “All Documents

concerning any relationship or communications between Biozone and any individual or 4 entity engaged in the promotion of Biozone’s common stock during the time period that

Cocrystal was known as Biozone.”); id. at 512 (Request 12: “All Documents and

Communications concerning the trading of Biozone stock with broker-dealers.”); id.

(Requests 13-16, 19-20: seeking documents concerning statements made in Biozone’s

Form 8-K filings).

That said, some requests sought documents about Cocrystal, suggesting the SEC may

have thought it participated in Biozone’s bad acts or in a coverup of those acts after the

merger. For example, the SEC asked for the following:

• Request No. 1: Documents sufficient to identify all principals, officers, directors, shareholders and other persons with a direct or indirect beneficial ownership interest in, or who have exercised direct or indirect control over, Biozone, including but not limited to after Biozone became known as Cocrystal. App. 511 (emphasis added).

• Request No. 5: Documents sufficient to identify by last known home address and telephone number, all members of Cocrystal’s Board of Directors, including, but not limited to, the time period that Cocrystal was known as Biozone. Id. (emphasis added).

• Request No. 23: All Documents and Communications concerning the merger between Biozone and Cocrystal, as disclosed in a November 27, 2013 press release titled “Biozone Pharmaceuticals Announces Executed Letter of Intent to Merge with Cocrystal Discovery Inc.” Id. at 513 (emphasis added).

• Request No. 24: All Documents and Communications concerning the merger between Biozone and Cocrystal, as disclosed in a January 3, 2014 press release titled “Biozone Completes Acquisition of Cocrystal Discovery and Begins Transformation to High Growth Biotech Company.” Id. (emphasis added).

• Request No. 25: Copies of all statements for all bank accounts in the name of Biozone or Cocrystal or over which Biozone or Cocrystal had any control at any time during the Relevant Period. Id. (emphasis added).

5 And other requests sought post-merger documents that necessarily involved Cocrystal even

if they did not mention the company by name:

• Request No. 6: Documents Concerning the Board of Directors’ meetings, including but not limited to meeting minutes (including drafts), notes, agendas, and lists of attendees. Id. at 511.

• Request No. 28: All Documents and Communications concerning any complaints (formal or informal) from clients, investors or others received during the period from January 1, 2012 through the present. Id. at 513 (emphasis added).

Cocrystal hired defense counsel, launched its own investigation, and provided

notice of the subpoena to Liberty. It denied coverage in April 2016 asserting that the

subpoena did not satisfy the Policy’s definition of a “Claim.” It reiterated this denial in a

December 2016 letter.

In January 2017, however, Cocrystal’s counsel gave Liberty more information about

the investigation based on further conversations with the SEC. In an email dated January

25, 2017 (“January 2017 Email”), counsel wrote:

In subsequent conversations between the SEC attorneys handling the investigation and Cocrystal’s outside counsel, the SEC attorneys indicated that [they] had concerns regarding representations [Cocrystal] had been making and its relationships with certain individuals, and that these concerns go to the bona fides of the company and the legitimacy of its operations and the possibility that the company’s stock was being used for manipulative purposes.

App. 293. Apparently satisfied that the SEC’s investigation was a claim related to

Wrongful Acts committed by Cocrystal, Liberty agreed to cover subpoena-related defense

costs. Liberty said it would send a “supplemental reservation of rights letter,” but never

did so. App. 832. It paid Cocrystal $1.1 million for defense costs incurred in responding

to the SEC’s subpoena. 6 The Post-Policy Lawsuits

In September 2018, after the Policy expired, the SEC filed an enforcement action

against former Biozone directors and officers. The complaint alleged the defendants had

perpetrated a “pump and dump” stock manipulation scheme. App. 296. But the SEC did

not sue Cocrystal or its directors or officers.

Prompted by the enforcement action, private plaintiffs filed three lawsuits—one

securities class action against Cocrystal and two derivative actions on Cocrystal’s behalf

against its officers and directors. The complaints in the lawsuits alleged not only that

Biozone engaged in pre-merger stock manipulation but also that Cocrystal and its officers

failed to alert its stockholders of the manipulated value and made false and misleading

statements to the SEC for years after the merger.

The enforcement action and the three private lawsuits were filed after the Policy

ended. Still, Cocrystal provided Liberty notice of the claims and sought coverage because

it argued they stemmed from the same “Interrelated Wrongful Acts” investigated by the

SEC in the subpoena. App. 393-97; 878-84. Per the Policy’s batching clause, Cocrystal

argued the post-Policy actions should merge into one claim deemed made on the date of

the subpoena (which was within the policy period).

Liberty denied coverage. And the revelation that the SEC brought an enforcement

action against Biozone directors and officers also made Liberty rethink its decision to cover

Cocrystal’s defense costs for the earlier subpoena. It wrote: “Based upon new information

received by Liberty, . . . it is clear that the SEC Investigation relates to alleged Wrongful

Acts regarding certain individual directors and officers, investors and outside individuals 7 and [Biozone], commencing in 2010 and continuing through the end of 2013. . . . [I]t has

become clear that the SEC Investigation, in light of the timing of the Wrongful Acts at

issue, falls outside the coverage of the Policy.” App. 404-06; 886-89; 891-93. It requested

that Cocrystal pay back the $1.1 million already paid because the policy provides for

repayment “[i]f it is determined by negotiation, litigation[,] or arbitration that any such

Defense Costs are not covered under this Policy.” App. 405 (quoting id. at 91). Cocrystal

refused to refund the defense costs Liberty paid and instead demanded it cover the defense

costs for the post-Policy lawsuits.

Procedural History

Liberty sued Cocrystal in the District Court for the District of Delaware seeking a

declaration of no coverage and recoupment of the $1.1 million paid to cover Cocrystal’s

defense costs. Cocrystal counterclaimed for a declaration of coverage and bad-faith denial

of coverage, as well as to prevent Liberty’s recoupment of defense costs paid. Both parties

filed motions for summary judgment. The Court granted summary judgment for Liberty,

deciding the costs were not covered by the Policy and ordering Cocrystal to return the $1.1

million. Cocrystal timely appealed.

The District Court had diversity jurisdiction under

. We have

appellate jurisdiction under

.

II.

The parties first dispute whether the Policy covers the defense costs associated with

the SEC’s 2015 subpoena, which turns on whether the SEC was investigating Cocrystal’s

8 Wrongful Acts as well as Biozone’s. We afford a fresh review to the District Court’s grant

of summary judgment in Liberty’s favor. See Sec’y U.S. Dep’t of Labor v. Kwasny,

(3d Cir. 2017). “Summary judgment is appropriate where, construing all

evidence in the light most favorable to the nonmoving party, ‘there is no genuine dispute

as to any material fact and the movant is entitled to judgment as a matter of law.’”

(quoting Fed. R. Civ. P. 56(a) and Daniels v. Sch. Dist. of Phila.,

(3d

Cir. 2015)).

Under Delaware law, 1 the “obligation to advance defense costs arises when the

underlying action states a claim covered by the insurance policy.” Guaranteed Rate, Inc.

v. ACE Am. Ins. Co.,

, at *2 (Del. Super. Ct. Aug. 18, 2021) (citing

Ferrellgas Partners L.P. v. Zurich Am. Ins. Co.,

, at *9 (Del. Super. Ct.

Jan. 21, 2020)). Applying this standard, the insurance company must advance defense

costs if “the facts alleged and the reasonable inferences to be drawn from them . . ., when

read as a whole, assert a risk within the policy’s coverage.” Legion Partners Asset Mgmt.,

LLC v. Underwriters at Lloyds London,

, at *7 (Del. Super. Ct. Sept. 25,

2020) (citation omitted). This determination is made from the perspective of the outset of

the case, not the outcome.

(“How the [decisionmaker] ultimately resolved the

[claim] is not relevant to this analysis.”). The insured bears the burden of proving that the

claim is covered.

. Delaware courts construe the duty to advance defense costs

“broadly in favor of the policyholder.”

(citation omitted).

1 At the District Court, Cocrystal argued Washington law should apply. The Court explained why Delaware law applies, and neither party challenges that decision on appeal. 9 When the claim is a subpoena or other investigative demand (rather than a complaint

in a civil litigation), we consider whether the government is investigating the insured for a

legal violation that falls within the policy’s coverage instead of whether the complaint

states a claim that does the same. Conduent State Healthcare, LLC v. AIG Specialty Ins.

Co.,

, at *4-6 (Del. Super. Ct. June 24, 2019) (“[T]he Court is not

persuaded that investigating an alleged unlawful act by the insured[] is different from

actually alleging an unlawful act.”); see also Guaranteed Rate,

, at *2

(“For purposes of determining coverage, there is no distinction between the investigation

of, or actually alleging, an unlawful act.”).

Here, there are factual disputes regarding whether the SEC was investigating

Cocrystal’s wrongful acts that preclude summary judgment for either party. Some of the

document requests indicate that the SEC was investigating Cocrystal. For example, the

SEC sought information about Cocrystal from the period “after Biozone became known as

Cocrystal.” App 511-13. It asked about the principals, officers, directors, and shareholders

who exercised control over Cocrystal (Request 1); the contact information for “all members

of Cocrystal’s Board of Directors” (Request 5); Cocrystal’s Board meeting minutes

(Request 6); purchases and sales of stock by Cocrystal’s directors or officers (Request 8);

documents about the merger between Biozone and Cocrystal (Requests 23-24); bank

accounts in Cocrystal’s control during the relevant period (Request 25); and complaints

Cocrystal received from clients and investors (Request 28). App. 511-13. From these

10 requests, a reasonable jury could decide that the SEC’s investigation was one that falls

within the policy’s coverage. 2

The District Court held that the SEC was not investigating a possible Wrongful Act

by Cocrystal. It decided the SEC investigation was limited to the Wrongful Acts of

Biozone, not Cocrystal. The decision had two justifications: (1) the subpoena requested

documents that predated the merger; and (2) the resulting SEC Enforcement Action only

charged former Biozone directors and officers with securities fraud and did not charge

Cocrystal or its directors and officers.

Neither reason supports that decision.

First, that the subpoena requested some pre-merger documents means little because

it also requested post-merger documents from after Biozone no longer existed. See, e.g.,

App. 513 (Request No. 28: “All Documents and Communications concerning any

2 Cocrystal also relies on the January 2017 Email to show that the SEC was investigating its own Wrongful Acts because the email said the SEC “had concerns regarding representations [Cocrystal] had been making” and thought there was a “possibility that the company’s stock was being used for manipulative purposes.” App. 293. Although Cocrystal relied on this email in its appellate briefs and at oral argument, it cited the January 2017 Email only for separate propositions in its briefing to the District Court. See Cocrystal’s Brief in Support of Its Motion for Summary Judgment at 8, 20, Liberty Ins. Underwriters, Inc. v. Cocrystal Pharma, Inc., No. 1:19-2281 (D. Del. Feb. 8, 2022), ECF No. 87 (citing the January 2017 Email as contained in Exhibits G and I to show that Cocrystal “made the SEC investigator available to Liberty for an interview about the substance of the claim, but Liberty declined”). The District Court did not need to consider the email if Cocrystal did not cite it properly. See Fed. R. Civ. P. 56(c)(3). Given the weak citations, there is a question whether Cocrystal waived this use of the January 2017 Email. But we need not rely on the email because the subpoena’s requests alone create a factual dispute, and Cocrystal cited the requests throughout its briefing. See, e.g., Cocrystal’s Brief in Support of Its Motion for Summary Judgment at 7, Liberty Ins. Underwriters, Inc. v. Cocrystal Pharma, Inc., No. 1:19-2281 (D. Del. Feb. 8, 2022), ECF No. 87 (explaining the subpoena sought information about “actions taken by Cocrystal and its D&Os after the reverse merger . . . up through the date of the subpoena (in 2015)”). 11 complaints (formal or informal) from clients, investors or others received during the period

from January 1, 2012 through the present.” (emphasis added)). If anything, the requests

for both pre- and post-merger documents suggest the SEC thought Biozone and Cocrystal

had violated securities laws.

Second, and more importantly, the resulting SEC enforcement action was not

decisive under Delaware law. We determine the duty to defend based on the possibility of

liability at the beginning of the case, not based on its outcome. Legion,

,

at *6. Hindsight does not color that call. The subpoena issued in 2015, so the District

Court should not have relied heavily on this extrinsic evidence from three years after the

SEC served it.

Viewing the evidence in the light most favorable to the nonmovant Cocrystal, there

is a genuine dispute of material fact whether the SEC was investigating its Wrongful Acts.

We thus vacate the District Court’s grant of summary judgment for Liberty on this

coverage issue and remand for the case to proceed to trial.

III.

The parties’ remaining two disputes turn on whether the claim for the subpoena is

covered, so they should be resolved on remand as well.

As for the first, Cocrystal challenges the District Court’s decision awarding Liberty

$1.1 recoupment of defense costs already paid. Because the Court determined that the

costs of defending the subpoena were not covered by the Policy, it followed logically that

Liberty was entitled to recoupment. But now that we have vacated the Court’s judgment

12 on coverage, it is unclear whether Liberty should be paid back. If the SEC was

investigating Cocrystal for a Wrongful Act at the outset, then Liberty had a duty to pay

defense costs and is not entitled to recoupment. If the SEC was not investigating Cocrystal

for such an act, then Liberty may be able to recoup the defense costs paid.

Next, Cocrystal urges that Liberty pay the costs of defending the three private

lawsuits even though the Policy ended before they were filed. The basis for coverage, it

argues, is that the lawsuits stem from the same Wrongful Acts that the SEC investigated in

2015, such that they batch together and are all deemed filed within the policy period. If it

is found that the SEC investigated a Wrongful Act by Cocrystal—making the subpoena a

proper claim under the policy—then the 2018 Lawsuits may relate back and be covered.

If the subpoena is not a proper claim, there is no claim to which the 2018 Lawsuits can

relate back.

Because these two questions depend on the outcome of the coverage issue, they

must proceed to trial as well.

* * *

We thus vacate the District Court’s grant of summary judgment and remand for

further proceedings consistent with this opinion.

13