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**PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT**
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Dear Robert,
I am writing to introduce myself and to begin coordinating with you on D&O coverage matters in connection with the defense of Belmont Ridge Bank NA ("BRB") in the above-referenced litigation. I am a litigation partner at Calderwood & Harkness LLP, and BRB retained our firm on November 4, 2024 to defend the bank against counterclaims asserted in *Belmont Ridge Bank NA v. Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel*, Index No. 654871/2024, New York Supreme Court, New York County, Commercial Division (Justice Althea Marchetti). Our internal matter number is 1022-00005.
Margaret Linden, BRB's SVP and General Counsel, suggested that I reach out to you directly. I understand that Crane, Alcott & Shire is handling the D&O coverage notice and reservation-of-rights process with Pinnacle Omnivrel Insurance Co. under Policy No. PF-DO-2023-08811. Given the nature of the counterclaims — and certain coverage issues I will flag below — I believe it is important that defense counsel and coverage counsel stay closely aligned throughout this matter.
**1. Summary of the Underlying Counterclaims**
On October 18, 2024, Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel (collectively, the "Counterclaim Plaintiffs") filed counterclaims against BRB asserting four causes of action: (1) fraudulent inducement; (2) negligent misrepresentation; (3) breach of the implied covenant of good faith and fair dealing; and (4) rescission of the Forbearance and Modification Agreement dated October 6, 2023 and the amended personal guaranties executed in connection therewith.
The Counterclaim Plaintiffs seek compensatory damages of not less than $12,500,000 plus unspecified punitive damages.
While BRB is the sole named counterclaim defendant, I want to flag that the counterclaims contain specific and detailed allegations directed at the conduct of three individual BRB officers: Derek Whitmore (SVP, Head of Special Assets Group), Joanna Reeves (VP, Special Assets Group), and Philip Aaronson (EVP, Chief Credit Officer). Although these individuals are not separately named as counterclaim defendants at this time, that possibility cannot be ruled out — particularly if the Counterclaim Plaintiffs seek leave to amend — and their exposure is relevant to the coverage analysis.
BRB's Answer to Counterclaims is being finalized and will be filed on November 22, 2024. The Answer will deny all material allegations and assert affirmative defenses, which I discuss further in Section 4 below.
**2. Pinnacle Fidelity Reservation-of-Rights Letter**
Margaret Linden forwarded to me the reservation-of-rights letter issued by Pinnacle Fidelity in response to BRB's notice of claim under the D&O policy. I have reviewed the letter carefully and would like to discuss several points with you. In particular, I have identified the following coverage concerns — some raised explicitly in the reservation letter and others that I anticipate based on standard D&O policy terms:
(a) *Fraud/Intentional Conduct Exclusion.* The policy presumably contains an exclusion for claims arising from fraudulent, dishonest, or intentionally wrongful acts. Because the counterclaims allege fraudulent inducement, this exclusion is squarely implicated. I need to understand Pinnacle Fidelity's position on the operative trigger: Is coverage maintained during the pendency of the litigation — i.e., until there is a final adjudication of actual fraud — or is Pinnacle Fidelity taking the position that the mere allegation of fraud activates the exclusion and suspends or eliminates the duty to advance defense costs? This is, as you know, a critical distinction, and one on which the case law varies by jurisdiction.
(b) *Insured-vs.-Insured Exclusion.* I would like confirmation that this exclusion does not apply here. The counterclaims are brought by a third party — Triton Harbor and the Kappels — and not by BRB or its directors and officers against one another. If Pinnacle Fidelity has raised or reserved on this point, please let me know.
(c) *Entity Coverage vs. Individual Coverage.* The counterclaims are directed at BRB as an entity, but the underlying factual allegations concern the conduct of individual officers (Whitmore, Reeves, and Aaronson). I need clarity on whether defense costs are covered for the entity, for the individuals (should they be named or become the subject of indemnification claims), or both, and how the policy draws that distinction.
**3. Defense Cost Reimbursement Procedures**
I would appreciate your guidance on the specific procedures Pinnacle Fidelity requires for the submission and reimbursement of defense costs. Calderwood & Harkness is currently billing BRB directly — our billing partner on the matter is Priya Anand (copied here) — and I want to understand whether Pinnacle Fidelity will reimburse BRB on a current, ongoing basis or whether a different mechanism applies.
Additionally, please advise on the following:
(a) Has Pinnacle Fidelity designated panel counsel for this matter, or does it have any objection to Calderwood & Harkness serving as defense counsel? Is a separate coverage determination required before defense cost reimbursement begins?
(b) Does Pinnacle Fidelity impose litigation management guidelines that defense counsel must follow? I am thinking specifically of billing rate caps, staffing restrictions, requirements for prior approval of depositions or motions, or similar conditions. If such guidelines exist, please forward them to me at your earliest convenience so that we can ensure compliance from the outset.
**4. Preserving Coverage — Avoiding Prejudicial Admissions**
Robert, this is the point I want to flag with particular emphasis, because I see it as the area of greatest tension between the litigation defense and coverage preservation.
BRB's primary affirmative defenses to the fraud counterclaims include: (i) the integration clause set forth in Section 12(a) of the Forbearance and Modification Agreement; (ii) the explicit "no commitment to extend credit" disclaimer in Section 9(c) of that Agreement; (iii) the sophistication of the borrower and guarantors; and (iv) the parol evidence rule. Taken together, these defenses establish that no actionable misrepresentation occurred and that the Counterclaim Plaintiffs cannot, as a matter of law, demonstrate reasonable reliance.
Critically, none of these defenses concede any fraudulent intent. To the contrary, BRB's position is — and will remain — that no fraud occurred and that the bank's officers acted in good faith and in the ordinary course of their responsibilities at all times.
However, I am acutely aware that in the course of defending this litigation — through pleadings, discovery responses, deposition testimony, and motion briefing — there is a risk of inadvertently making admissions or characterizations that Pinnacle Fidelity could later construe as establishing conduct falling within the fraud/intentional conduct exclusion. I want to guard against that.
To that end, I would ask that you advise me on any specific language, positions, or characterizations that should be avoided or carefully framed to protect coverage. This is particularly important in connection with the upcoming depositions of the three BRB officers:
- Derek Whitmore: February 18, 2025 - Joanna Reeves: February 25, 2025 - Philip Aaronson: March 4, 2025
I also want to flag the particular sensitivity surrounding the internal memorandum dated August 22, 2023, authored by Philip Aaronson (which I will refer to as the "disposition strategy memo"). The Counterclaim Plaintiffs will almost certainly argue that this document demonstrates that BRB's officers acted with scienter — that they knew the bank had no intention of extending further credit while allegedly representing otherwise to induce execution of the Forbearance Agreement and amended guaranties. Any characterization of this memorandum in our litigation filings, discovery responses, or deposition testimony needs to be carefully coordinated with you so that we do not create an evidentiary record that Pinnacle Fidelity could use to invoke the fraud exclusion. I would welcome your thoughts on how best to handle this document.
**5. Allocation Between Covered and Non-Covered Claims**
The counterclaims assert both fraud-based claims (fraudulent inducement, negligent misrepresentation) and contract-based claims (breach of the implied covenant of good faith and fair dealing, rescission). I would like to understand Pinnacle Fidelity's position on allocation of defense costs between covered and potentially non-covered claims. Specifically, does Pinnacle Fidelity intend to allocate, and if so, on what basis?
Separately, we are planning to file a motion to dismiss the Counterclaim Plaintiffs' punitive damages demand. We anticipate filing that motion on or about January 28, 2025. To the extent punitive damages are not insurable as a matter of law — whether under Connecticut law (Pinnacle Fidelity's state of domicile) or New York law (the forum state) — I would appreciate your views on how that affects the overall coverage analysis and any allocation determination.
**6. Upcoming Litigation Milestones**
For your awareness, the key dates in the litigation are as follows:
- November 22, 2024: Filing of BRB's Answer to Counterclaims - December 6, 2024: Preliminary Conference before Justice Marchetti - January 15, 2025: Initial document production deadline (approximately 34,000 documents in BRB's production universe) - January 28, 2025 (anticipated): Motion to dismiss punitive damages demand - February–March 2025: Depositions of key BRB personnel (Whitmore, Reeves, Aaronson) and adverse party witnesses (Marcus J. Kappel and Elaine D. Kappel) - April 30, 2025: Close of fact discovery - September 15, 2025: Summary judgment motions due
Given the December 6 preliminary conference, I would like to suggest that we schedule a call — ideally with Margaret Linden participating — in the next week or two to discuss coverage coordination in advance of that conference. Please let me know your availability.
**7. Request for Copies of Policy and Correspondence**
Finally, I would be grateful if you could provide Calderwood & Harkness with the following materials:
(a) A complete copy of the D&O policy — Policy No. PF-DO-2023-08811 — including all endorsements, amendments, and schedules; and
(b) Copies of all correspondence between Crane, Alcott & Shire (or BRB) and Pinnacle Omnivrel Insurance Co. regarding the claim notice and reservation of rights.
Having these materials in our files will allow us to conduct our own coverage review and ensure that our litigation strategy remains aligned with the policy terms.
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Robert, thank you for your time and attention to this. I recognize there is a good deal to discuss, and I am happy to do so by phone at your convenience. Please do not hesitate to reach out.
Margaret and Priya are copied for their awareness.
Best regards,
Linda Osei Partner Calderwood & Harkness LLP 600 Lexington Avenue, 30th Floor New York, NY 10022 Tel: (212) 804-6130 Email: losei@calderwoodharkness.com
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