Law360 (June 30, 2021, 5:22 PM EDT) — A Florida panel on Tuesday, June 29, 2021, said Carolina Casualty Insurance Co. is on the hook for a bankrupt medical device distributor’s $17 million arbitration award against its policyholder, finding that a breach of contract exclusion does not bar coverage.
The First District Court of Appeal panel held that the award is covered under a management liability policy that the Jacksonville, Florida-based insurer issued to Santa Barbara Medical Innovations Inc. because claims brought by Primcogent LLC bankruptcy trustee John D. Spicer did not arise solely from an asset purchase agreement between the two companies, but rather misrepresentations SMBI made to Primcogent about the profitability of the Zerona cosmetic surgery laser.
“The claim did not arise from or relate to SBMI’s duties under the APA; it arose from misrepresentations SBMI told Primcogent before the APA existed and for the very purpose of inducing Primcogent to enter into an agreement,” Chief Judge Stephanie W. Ray wrote for the panel.
SBMI was the exclusive distributor for medical equipment made by McKinney, Texas-based Erchonia Corporation. The deal soured after SBMI could no longer satisfy its purchase requirements due to customer complaints about the equipment, and it sold the distribution rights to Primcogent in 2011.
Primcogent filed for Chapter 7 bankruptcy protection two years later. Spicer, the company’s bankruptcy trustee, then sued SBMI over misrepresentations made during the APA negotiations about the revenue potential for Erchonia’s products. The device maker was later added to the suit and the claims went to arbitration.
The arbitration panel entered an award of $18.3 million in favor of the trustee for out-of-pocket expenses as well as a $1.2 million credit for a settlement between Erchonia and Spicer. The award was upheld by a Texas federal court.
Despite numerous requests, Carolina Casualty refused to pay the arbitration award to Spicer, prompting the trustee to file suit in Duval County Circuit Court. The insurer asked Judge Adrian G. Soud to toss the suit, arguing that it is not required to cover the award under the breach of contract exclusion. Spicer filed his own motion, saying the claims were based on SBMI’s misrepresentations prior to executing the APA, so the exclusion does not apply.
The judge granted the trustee’s motion and Carolina Casualty appealed.
The appeals court agreed with the lower court judge that the exclusion did not apply. The panel pointed out that the arbitration panel’s rejection of SBMI’s defense under the “economic loss” rule — which precludes a party from recovering purely economic losses such as lost profits in a breach-of-contract case — demonstrated that Primcogent’s claim did not sound in contract.
The panel further found that references in sections of the APA to representations made by SMBI only memorialized statements made prior to the execution of the APA and did not trigger the exclusion.
“The arbitration panel’s citation to those sections does not transform the Trustee’s claims into an award for breach of contract, and the trial court properly granted the Trustee’s motion for partial summary judgment,” Judge Ray concluded.
Judges Joseph Lewis Jr. and Timothy D. Osterhaus were also on the panel.
Counsel for Spicer declined Law360’s request for comment on the ruling.
Counsel for Carolina Casualty did not immediately respond to a request for comment on Wednesday.
Carolina Casualty is represented by Peter D. Webster of Carlton Fields and Sina Bahadoran and Michele A. Vargas of Clyde & CO US LLP.
The trustee is represented by John S. Mills, Thomas E. Bishop and Jonathan Anthony Martin of Bishop & Mills PLLC.
The case is Carolina Casualty Insurance Company v. John D. Spicer, case number 1D20-916, in the First District Court of Appeal for the state of Florida.