memo-do-coverage-analysis.docx

1045-00004 · Client 1045 · Insurance & Coverage

memo-do-coverage-analysis.docx DOCUMENT Litigation

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CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 30th Floor New York, New York 10022 Telephone: (212) 554-6000 Facsimile: (212) 554-6001

MEMORANDUM

November 18, 2024

TO: Margaret Linden, Senior Vice President & General Counsel Belmont Ridge Bank NA 1200 Avenue of the Americas, 38th Floor New York, New York 10036

FROM: Linda Osei, Partner, Calderwood & Harkness LLP

CC: Thomas Hargreaves, Vice President & Associate General Counsel, Belmont Ridge Bank NA Priya Anand, Partner, Calderwood & Harkness LLP Carlos Espinoza, Associate, Calderwood & Harkness LLP

RE: D&O Coverage Analysis — Counterclaims 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 (Hon. Althea Marchetti)

CALDERWOOD & HARKNESS MATTER NO.: 1022-00005

I. Purpose and Scope of Memorandum

This memorandum analyzes the potential availability of coverage under the directors' and officers' liability insurance policy issued to Belmont Ridge Bank NA ("BRB" or the "Bank") by Pinnacle Omnivrel Insurance Co. ("Pinnacle Fidelity"), Policy No. PF-DO-2023-08811 (the "D&O Policy" or the "Policy"), for defense costs and potential indemnity obligations arising from the counterclaims filed by Triton Harbor Industries, LLC ("Triton Harbor"), Marcus J. Kappel, and Elaine D. Kappel (collectively, the "Counterclaim Plaintiffs") on October 18, 2024, in the above-captioned litigation.

The counterclaims (the "Counterclaims") assert 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 (the "Forbearance Agreement") and the amended and new personal guaranties executed in connection therewith. The Counterclaim Plaintiffs seek compensatory damages of not less than $12,500,000, together with unspecified punitive damages, attorneys' fees, costs, and such other and further relief as the court may deem just and proper.

Although the Counterclaims name BRB as the entity counterclaim defendant, the factual allegations at their core target the conduct of three individual BRB officers: Derek Whitmore, Senior Vice President and Head of the Special Assets Group ("SAG"); Joanna Reeves, Vice President within the Special Assets Group; and Philip Aaronson, Executive Vice President and Chief Credit Officer. Each of these officers is alleged to have played a direct role in the representations and strategic decisions that form the basis of the Counterclaim Plaintiffs' fraud and misrepresentation theories. While these individuals have not yet been named as individual counterclaim defendants, the specificity of the allegations — including attribution of particular oral statements, emails, and internal memoranda to each officer by name — raises the prospect that the Counterclaim Plaintiffs may seek to amend their counterclaims to add individual officer defendants, a possibility that must be monitored and planned for in the coverage context.

This memorandum also addresses coordination with BRB's insurance coverage counsel, Robert Alcott of Crane, Alcott & Shire LLP, 400 Park Avenue, 18th Floor, New York, New York 10022, who has been separately engaged by BRB's in-house legal team to manage the D&O notice and reservation-of-rights process directly with Pinnacle Fidelity. Calderwood & Harkness's role in this engagement is as defense counsel in the underlying litigation; we do not serve as coverage counsel. However, given the interplay between the defense strategy in the underlying action and the preservation of insurance coverage, this memorandum is intended to ensure that BRB's litigation and coverage efforts are properly aligned.

The analysis set forth below is based upon our review of the following materials: (a) the Pinnacle Fidelity D&O Policy (PF-DO-2023-08811), as provided to us by BRB's in-house legal department; (b) the Counterclaims filed October 18, 2024; (c) BRB's Answer to Counterclaims filed November 22, 2024; (d) the reservation-of-rights letter issued by Pinnacle Fidelity; and (e) discussions with Margaret Linden and Thomas Hargreaves regarding BRB's corporate indemnification obligations and the status of the coverage claim. We note that the comprehensive policy review and coverage claim management is being conducted by Robert Alcott at Crane, Alcott & Shire LLP, and this memorandum is intended to supplement rather than supplant that work.

II. Background Summary

A. The Underlying Litigation

BRB commenced this action by filing a Summons and Verified Complaint on August 12, 2024, under Index No. 654871/2024, in the Supreme Court of the State of New York, County of New York, Commercial Division, assigned to the Honorable Althea Marchetti. The original complaint (the "Complaint") asserts claims for breach of the Forbearance and Modification Agreement dated October 6, 2023, enforcement of the amended personal guaranty executed by Marcus J. Kappel (as amended from a limited guaranty in the original principal amount of $4,500,000 to an unlimited personal guaranty), enforcement of the new unlimited personal guaranty executed by Elaine D. Kappel, and recovery of the outstanding deficiency balance on the credit facilities extended to Triton Harbor.

The total accelerated amount sought by BRB in the Complaint is $17,456,212, comprising the following components:

BRB's claims arise from Triton Harbor's failure to satisfy certain financial covenants and operational milestones set forth in the Forbearance Agreement, which was negotiated during the September–October 2023 period and executed on October 6, 2023. BRB declared a default under the Forbearance Agreement and accelerated the indebtedness in May 2024, following Triton Harbor's failure to meet the December 31, 2023 and March 31, 2024 milestone dates for the submission of audited financial statements and the achievement of specified debt service coverage ratios.

On October 18, 2024, the Counterclaim Plaintiffs filed their Verified Answer with Counterclaims (the "Counterclaims"), asserting the four causes of action described in Section I above and seeking both compensatory and punitive damages. The Counterclaims are being prosecuted by Theodore Huang and Natasha Orlov of Kestrel Voss & Huang LLP, who were retained by Triton Harbor and the Kappels in or about September 2024.

Calderwood & Harkness was retained by BRB on November 4, 2024, to assume defense of BRB in connection with the Counterclaims and to continue prosecution of BRB's original enforcement action. Calderwood & Harkness replaced Blakemore & Stern LLP, which had filed the original Complaint and managed the action through the answer stage. The reasons for the substitution of counsel are not relevant to this memorandum, though we note that the transition was orderly and all files have been received and reviewed.

BRB's Verified Answer to the Counterclaims was filed on November 22, 2024, asserting general denials, affirmative defenses (including the statute of frauds, disclaimer of oral representations, the integration clause of the Forbearance Agreement, ratification, estoppel, and documentary defense under CPLR 3211(a)(1)), and reserving all rights to assert additional defenses. A preliminary conference was held on December 6, 2024, before Justice Marchetti, at which a discovery schedule was set and the case was placed on a standard Commercial Division track.

B. The Counterclaim Allegations Relevant to Coverage

The coverage analysis turns on the specific allegations in the Counterclaims, which we summarize in detail below.

Fraudulent Inducement (First Counterclaim). Triton Harbor alleges that BRB, acting through Whitmore and Reeves, made material oral and written misrepresentations during the September–October 2023 workout negotiations that induced Triton Harbor, Kappel, and Elaine Kappel to enter into the Forbearance Agreement, the amended Kappel guaranty, and the new Elaine Kappel guaranty. The specific representations alleged include the following:

(i) At the September 12, 2023 in-person meeting held at BRB's offices at 1200 Avenue of the Americas, Whitmore allegedly stated to Marcus Kappel and Kappel's then-counsel that BRB was "committed to the long-term relationship" with Triton Harbor and would "seriously consider" extending a new $6.5 million revolving credit facility to Triton Harbor upon successful completion of the forbearance milestones. The Counterclaims allege that this statement was made with the intent to induce the Kappels to agree to enhanced collateral and expanded personal guaranties.

(ii) On September 18, 2023, Reeves sent an email to Marcus Kappel stating that BRB was "optimistic about a path forward" for the Triton Harbor relationship. The Counterclaims characterize this email as a further representation that BRB intended to continue the lending relationship, rather than exit it.

(iii) On September 29, 2023, an internal draft term sheet for a proposed $6.5 million revolving credit facility was prepared by Reeves and forwarded to Whitmore for review. Although this draft term sheet was not shared with Triton Harbor or the Kappels at the time, the Counterclaims allege (on information and belief) that the preparation of this term sheet demonstrates that BRB's officers were at least contemplating the extension of additional credit and thus their representations to the Kappels were not entirely fabricated. More significantly, the Counterclaims allege that the draft term sheet was prepared as a "prop" to maintain the appearance of good faith in the negotiations while the true strategy — exit from the relationship — was already determined.

Central to the fraudulent inducement claim is a document that has become a focal point of the litigation: the internal memorandum dated August 22, 2023, authored by Philip Aaronson, EVP and Chief Credit Officer, addressed to Derek Whitmore, with a copy to Margaret Linden (the "Aaronson Memorandum"). The Aaronson Memorandum directed the Special Assets Group to "pursue a structured exit from the Triton Harbor relationship within 120 days" and stated unequivocally that "further extensions of credit are not contemplated under any workout scenario." This memorandum pre-dates the commencement of the forbearance negotiations by approximately five weeks and, according to the Counterclaims, demonstrates that BRB had already decided to terminate the Triton Harbor relationship before the workout negotiations even began.

The Counterclaim Plaintiffs allege that the representations made by Whitmore and Reeves during the September–October 2023 period were knowingly false and made in direct contravention of the strategic directive set forth in the Aaronson Memorandum. The Counterclaim Plaintiffs contend that the purpose of the Forbearance Agreement was not to give Triton Harbor a genuine opportunity to cure its defaults and preserve the lending relationship, but rather to extract enhanced collateral and expanded personal guaranties from the Kappels in advance of a predetermined acceleration.

Negligent Misrepresentation (Second Counterclaim). In the alternative, Triton Harbor alleges that Whitmore and Reeves made careless or reckless statements regarding BRB's willingness to extend future credit without a reasonable basis for such statements, and that Triton Harbor and the Kappels reasonably relied on those statements to their detriment. This cause of action does not require proof of intentional fraud; it requires only that the statements were made without a reasonable basis and that the Counterclaim Plaintiffs justifiably relied upon them.

Breach of the Implied Covenant of Good Faith and Fair Dealing (Third Counterclaim). Triton Harbor alleges that BRB breached the implied covenant of good faith and fair dealing inherent in the Forbearance Agreement by extracting additional collateral — specifically, equipment leases valued at approximately $2,300,000 and a mortgage on the personal residence of Marcus and Elaine Kappel at 14 Birchmont Lane, Westport, Connecticut 06880, valued at approximately $3,100,000 — and by obtaining expanded personal guaranties from the Kappels, all while harboring a concealed intent to accelerate the indebtedness regardless of Triton Harbor's performance under the forbearance milestones. In essence, this claim alleges that BRB acted in bad faith by using the forbearance process as a mechanism to strengthen its position for an inevitable acceleration rather than as a genuine opportunity for the borrower to cure.

Rescission (Fourth Counterclaim). The Fourth Counterclaim seeks rescission of the entire Forbearance and Modification Agreement, together with the amended Marcus Kappel guaranty and the new Elaine Kappel guaranty, on the ground that these agreements were procured through fraud and misrepresentation. If rescission were granted, the practical effect would be to void the enhanced collateral, the expanded guaranties, and potentially the additional concessions made by Triton Harbor and the Kappels, while restoring the parties to their pre-forbearance positions. This claim represents a direct threat to BRB's enforcement action, as it would eliminate the contractual basis for several of BRB's claims.

C. BRB Officers Named or Implicated

As noted above, three individual BRB officers are directly implicated in the Counterclaims:

Derek Whitmore, Senior Vice President, Head of Special Assets Group. Whitmore is the officer alleged to have made the key oral representations at the September 12, 2023 meeting. He is the recipient of the Aaronson Memorandum and the individual responsible for managing the Triton Harbor workout. The Counterclaims characterize Whitmore as the primary actor who personally conveyed BRB's purported commitment to the lending relationship while knowing that the Bank had decided to exit.

Joanna Reeves, Vice President, Special Assets Group. Reeves is the author of the September 18, 2023 email to Marcus Kappel expressing BRB's "optimism" about a path forward. She is also the author of the September 29, 2023 internal draft term sheet for the proposed $6.5 million revolving facility. The Counterclaims portray Reeves as Whitmore's subordinate who participated in and furthered the allegedly fraudulent scheme.

Philip Aaronson, Executive Vice President, Chief Credit Officer. Aaronson is the author of the August 22, 2023 internal memorandum directing the Special Assets Group to pursue a structured exit from the Triton Harbor relationship. The Counterclaims allege that Aaronson set the strategic direction that contradicted the representations subsequently made by Whitmore and Reeves during the workout negotiations. Aaronson is portrayed as the architect of the allegedly contradictory strategy.

All three officers were acting at all relevant times in their official capacities as officers of BRB. There is no allegation in the Counterclaims that any of these individuals was acting outside the scope of their employment or for personal gain unrelated to their duties at the Bank. This is significant for coverage purposes, as D&O policies cover officers acting in their insured capacities.

III. Overview of the Pinnacle Fidelity D&O Policy

A. Policy Identification

The D&O Policy at issue is as follows:

We note at the outset that a full and comprehensive policy review is being conducted by Robert Alcott at Crane, Alcott & Shire LLP in his capacity as BRB's designated insurance coverage counsel. The summary of policy provisions set forth in this memorandum is based upon Calderwood & Harkness's independent review of the policy form as provided to us by BRB's in-house legal department. This memorandum is intended to identify the key coverage issues from the perspective of defense counsel, to ensure that BRB's litigation strategy is consistent with the preservation of coverage, and to facilitate coordination between defense counsel and coverage counsel. It is not intended to constitute a comprehensive coverage opinion, and BRB should rely on the advice of Crane, Alcott & Shire for definitive coverage guidance.

B. Insuring Agreements — Three Standard Coverage Parts

The Pinnacle Fidelity D&O Policy contains three standard insuring agreements, commonly referred to as Side A, Side B, and Side C coverage:

Side A — Individual Coverage (Insuring Agreement I). Side A covers "Loss" (including defense costs) incurred by individual directors and officers of BRB for "Claims" made against them in their capacity as directors or officers, where BRB has not indemnified the individual directors and officers. Side A is designed to serve as a "safety net" for individual directors and officers in situations where indemnification by the company is legally prohibited (for example, where a statute precludes indemnification for certain types of conduct), financially impracticable (for example, in the event of the company's insolvency), or otherwise unavailable. Side A coverage is the broadest form of protection available under the D&O Policy for individual insureds, as it has no entity retention or deductible and provides first-dollar coverage to the individual.

Side B — Corporate Reimbursement (Insuring Agreement II). Side B reimburses BRB for amounts that BRB is required or permitted to pay as indemnification to its directors and officers for covered Claims. In the typical scenario — where BRB fulfills its corporate indemnification obligations to its officers — Side B is the coverage part that will respond. BRB pays the defense costs and indemnification amounts to its officers, and then seeks reimbursement from Pinnacle Fidelity under Side B, subject to the applicable entity retention (deductible) and policy terms. The entity retention under the Policy is $500,000 per Claim, as applicable to Side B and Side C coverage.

Side C — Entity Coverage (Insuring Agreement III). Side C covers BRB as an entity for certain defined "Securities Claims" — that is, claims alleging violations of federal or state securities laws. Because BRB is a publicly traded institution (NYSE: BRMR), Side C is included in the Policy to address the entity's direct exposure in securities litigation. Critically, Side C entity coverage is typically limited to Securities Claims and does not extend to common-law claims such as fraud, negligent misrepresentation, breach of contract, or rescission.

For purposes of this memorandum, the most relevant coverage parts are Side A (to the extent individual officers are not indemnified by BRB or face personal exposure) and Side B (to the extent BRB indemnifies its officers for defense costs and potential liability arising from the Counterclaims, and seeks reimbursement from Pinnacle Fidelity).

C. Definition of "Claim" and "Loss"

"Claim." The Policy defines "Claim" broadly to include, among other things, any written demand for monetary or non-monetary relief, any civil proceeding commenced by the service of a complaint or similar pleading, any arbitration proceeding, and any formal administrative or regulatory proceeding. Importantly, the definition of "Claim" includes counterclaims. The Triton Harbor Counterclaims, which were filed by service of a Verified Answer with Counterclaims seeking both monetary and equitable relief (rescission), should qualify as a "Claim" under the Policy. We do not anticipate a dispute with Pinnacle Fidelity on this threshold issue, although Crane, Alcott & Shire should confirm this in the context of the formal coverage claim.

"Loss." The Policy defines "Loss" to include, among other things, defense costs, judgments, and settlements. Defense costs are specifically defined to include reasonable and necessary fees, costs, and expenses incurred in the investigation, defense, or appeal of a Claim. Notably, the Policy provides that defense costs shall be advanced to the Insured on an as-incurred basis, subject to the standard advancement provision. This is a critical feature, as it means that Pinnacle Fidelity should be paying defense costs as they are billed, rather than requiring the Insured to wait until the conclusion of the litigation for reimbursement. The advancement provision is, however, subject to a final allocation and repayment obligation: if a final adjudication determines that a particular Claim or portion of a Claim is not covered under the Policy, the Insured may be required to repay advanced defense costs attributable to the non-covered portion.

Punitive Damages. The treatment of punitive damages under the "Loss" definition is addressed separately in Section IV.E below. As a preliminary matter, we note that the Policy includes punitive damages within the definition of "Loss" to the extent insurable under applicable law. The question of whether punitive damages are insurable under New York law in the context of intentional fraud allegations is a complex one and is discussed in detail below.

D. Policy Period and Reporting

The Pinnacle Fidelity D&O Policy is a "claims-made" policy, meaning that coverage is triggered by the making of a Claim during the Policy period (or any applicable extended reporting period), rather than by the occurrence of the underlying events giving rise to the Claim. As a claims-made policy, timely reporting is essential to preserving coverage. Failure to provide notice of a Claim within the time required by the Policy could result in a denial of coverage, regardless of the merits of the underlying Claim.

We understand from BRB's in-house legal department that the Counterclaims were filed on October 18, 2024, and that BRB provided notice to Pinnacle Fidelity promptly thereafter. Robert Alcott of Crane, Alcott & Shire has been managing the formal notice process with Pinnacle Fidelity and has confirmed that notice was timely provided. We do not anticipate a late-notice defense from Pinnacle Fidelity. Nevertheless, BRB should ensure that all future developments in the litigation — including the filing of amended pleadings, the assertion of new claims or theories, and any demands or settlement overtures — are promptly reported to Pinnacle Fidelity through Crane, Alcott & Shire to preserve coverage rights on an ongoing basis.

IV. Key Coverage Issues

A. Fraud / Intentional Conduct Exclusion

The most significant coverage issue presented by the Counterclaims is the application of the Policy's fraud and intentional conduct exclusion (the "Conduct Exclusion"). Standard D&O policies contain an exclusion for loss arising from conduct that is fraudulent, dishonest, criminal, or intentionally wrongful. The Pinnacle Fidelity Policy (PF-DO-2023-08811) contains such an exclusion, which is typical of policies in this class.

The Conduct Exclusion in the Policy provides, in substance, that the Policy shall not cover any Loss arising from any Claim based upon, arising out of, or attributable to any deliberately fraudulent act or omission, any willful violation of any statute, rule, or law, or any act of gaining any profit, remuneration, or advantage to which the Insured was not legally entitled. This is a broadly worded exclusion that, on its face, could encompass the fraudulent inducement and rescission claims alleged in the Counterclaims.

Critical Qualifier: The "Final Adjudication" Requirement. However, the Conduct Exclusion contains a critical qualifier that is standard in the D&O insurance market and essential to BRB's coverage position. The exclusion applies only upon a "final adjudication" in the underlying action — or, in some policy formulations, in a related proceeding — that the Insured's conduct was in fact fraudulent, dishonest, or intentionally wrongful. Mere allegations of fraud in a complaint or counterclaim are insufficient to trigger the exclusion. This is a well-established principle in D&O insurance law and has been consistently upheld by courts in New York and other jurisdictions. See, e.g., Westvale Insurance v. Ambassador Grp., Inc., 157 A.D.2d 293, 556 N.Y.S.2d 549 (1st Dep't 1990); see also MBIA Inc. v. Federal Ins. Co., 652 F.3d 152 (2d Cir. 2011) (applying New York law).

Implication for This Case. The Counterclaims allege that Whitmore, Reeves, and Aaronson engaged in intentional misrepresentations in the course of the forbearance negotiations. If these allegations are taken at face value, they describe conduct that would fall within the Conduct Exclusion. However, because the exclusion is triggered only by a final adjudication, and no such adjudication has occurred (or is likely to occur for a considerable period given that the case is in its early stages), the Conduct Exclusion should not bar Pinnacle Fidelity's obligation to advance defense costs at this time. The insurer must fund the defense unless and until a final adjudication establishes that the officers' conduct was actually fraudulent.

Risk Factor: Recoupment. If the case proceeds to trial and a jury or the court ultimately finds that BRB's officers committed fraud, the Conduct Exclusion would be triggered, and Pinnacle Fidelity would be entitled to deny indemnity coverage for the fraud-based claims. Moreover, the Policy contains a standard recoupment provision that would allow Pinnacle Fidelity to seek repayment of defense costs previously advanced in connection with the fraud claims. This recoupment right represents a real financial risk to BRB in the event of an adverse outcome on the fraud allegations, though it would be mitigated by any allocation between covered and non-covered claims (discussed in Section IV.D below).

Consistency with BRB's Defense Strategy. BRB's defense strategy in the underlying litigation is fully consistent with the preservation of coverage under the D&O Policy. BRB vigorously denies all fraud allegations and maintains that no misrepresentations were made to Triton Harbor or the Kappels during the forbearance negotiations. BRB's position is that Section 9(c) of the Forbearance Agreement — which provides that "Nothing herein shall constitute or be deemed to constitute a commitment, agreement, or obligation on the part of Lender to extend additional credit, modify existing facilities, or renew any credit facility" — expressly negates any claim of reliance on oral or informal representations regarding future lending. BRB further relies on the integration clause in Section 12(a) of the Forbearance Agreement, which provides that the Forbearance Agreement constitutes the entire agreement between the parties with respect to the subject matter thereof and supersedes all prior negotiations, representations, warranties, commitments, offers, contracts, and writings.

This defense strategy supports the coverage position in two important ways. First, if BRB prevails on the fraud claims — whether by summary judgment, at trial, or through settlement on favorable terms — the Conduct Exclusion is never triggered, and Pinnacle Fidelity's obligation to cover defense costs (and any indemnity obligations) remains intact. Second, by consistently denying fraud, BRB avoids making any admissions that Pinnacle Fidelity could use to invoke the Conduct Exclusion.

B. Insured-vs.-Insured Exclusion

D&O policies commonly contain an exclusion for Claims brought by one Insured against another Insured, commonly referred to as the "insured-vs.-insured" exclusion. This exclusion is designed to prevent collusive or manufactured lawsuits among corporate insiders — for example, a company suing its own directors to access D&O insurance proceeds — and to ensure that the D&O policy is reserved for genuine third-party claims.

Analysis. The Counterclaims are brought by Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel — none of whom are directors, officers, employees, or insureds under BRB's D&O Policy. The Counterclaim Plaintiffs are a borrower entity and its principals, acting in their capacity as adverse parties in a commercial lending dispute. BRB filed the original enforcement action; the Counterclaim Plaintiffs filed responsive counterclaims. This is not an insured-vs.-insured situation by any reasonable construction of the Policy.

Potential Wrinkle. A theoretical argument could be advanced — and we raise it here for completeness — that because BRB is both the original plaintiff in the enforcement action and the counterclaim defendant, and because the Counterclaims arise "in connection with" BRB's own litigation, the insured-vs.-insured exclusion might be implicated under a broad reading. Specifically, if the exclusion is worded to apply to Claims brought "by, on behalf of, or at the direction of" any Insured, one might argue that the Counterclaims were effectively provoked by BRB's own affirmative decision to sue, creating a circularity. However, this is a strained and unpersuasive reading of the exclusion. The insured-vs.-insured exclusion is directed at the identity and relationship of the parties, not at the procedural posture of the lawsuit. Courts have consistently held that counterclaims by third parties do not implicate the insured-vs.-insured exclusion, even where the insured filed the original action. See, e.g., Sphinx Int'l, Inc. v. Nat'l Union Fire Ins. Co., 412 F.3d 1224, 1232 (11th Cir. 2005) (insured-vs.-insured exclusion inapplicable where counterclaims were filed by non-insured third parties).

Conclusion. The insured-vs.-insured exclusion should not apply to bar coverage for the Triton Harbor Counterclaims. We do not anticipate that Pinnacle Fidelity will assert this exclusion as a basis for denying coverage, and Crane, Alcott & Shire should be prepared to respond to any such assertion if it arises.

C. Side C (Entity Coverage) Limitations

As discussed in Section III.B above, Side C entity coverage under the Pinnacle Fidelity D&O Policy is triggered only for "Securities Claims" — that is, claims alleging violations of federal or state securities laws. The typical Side C insuring agreement covers loss arising from any Securities Claim made against the company, and the Policy's definition of "Securities Claim" is limited to claims brought pursuant to or alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, any state securities statute ("blue sky" laws), or any regulation promulgated thereunder.

The Triton Harbor Counterclaims assert common-law causes of action: fraudulent inducement, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, and rescission. None of these claims alleges a violation of any securities law. The Counterclaims arise entirely from a commercial lending relationship and workout negotiations, not from the purchase or sale of securities or any disclosure obligations under the securities laws.

Conclusion. Side C entity coverage is unlikely to provide coverage for BRB itself as to the Counterclaims. BRB should not rely on Side C as a basis for seeking entity-level coverage for defense costs or indemnity obligations arising from the Counterclaims.

However, this limitation on Side C coverage does not foreclose the availability of coverage under the D&O Policy. To the extent that the individual officers (Whitmore, Reeves, and Aaronson) face personal liability arising from the Counterclaims — whether through the assertion of individual counterclaims, post-judgment indemnification claims, or otherwise — and BRB indemnifies those officers, the relevant coverage part is Side B (Corporate Reimbursement). Side B is not limited to Securities Claims and covers BRB's indemnification obligations to its directors and officers for all covered Claims, including common-law claims. Similarly, if BRB is unable or unwilling to indemnify any individual officer, Side A (Individual Coverage) would be available to the officer directly.

D. Allocation Between Covered and Non-Covered Claims

The Counterclaims present a mixed bag from a coverage perspective. Some of the causes of action may be clearly covered, others may be clearly excluded (upon final adjudication of fraud), and others fall in an intermediate category where coverage is arguable. This situation requires the insurer and the insured to negotiate a reasonable allocation of defense costs between covered and non-covered claims.

The four counterclaims can be categorized as follows for allocation purposes:

Negligent Misrepresentation (Second Counterclaim). This cause of action does not allege intentional or fraudulent conduct. It alleges that Whitmore and Reeves made statements without a reasonable basis and that the Counterclaim Plaintiffs relied on those statements to their detriment. Because negligent misrepresentation is not intentional fraud, the Conduct Exclusion should not apply to this claim regardless of the outcome. Defense costs attributable to the negligent misrepresentation claim should be fully covered under the D&O Policy, subject to the other policy terms and conditions.

Breach of the Implied Covenant of Good Faith and Fair Dealing (Third Counterclaim). This is a contract-based claim alleging that BRB acted in bad faith in its performance of the Forbearance Agreement. Coverage may turn on whether the Policy covers breach-of-duty claims that are based on the performance of contractual obligations rather than traditional director and officer duties. Some D&O policies define "Wrongful Act" broadly enough to encompass claims alleging bad faith in the conduct of the insured's business; others are more narrowly drawn. We recommend that Crane, Alcott & Shire analyze whether the implied covenant claim falls within the definition of "Wrongful Act" under the Policy. If it does, this claim should be treated as a potentially covered claim for allocation purposes, as breach of the implied covenant does not require proof of fraud or intentional misconduct.

Fraudulent Inducement (First Counterclaim) and Rescission (Fourth Counterclaim). These claims are the ones most likely to be affected by the Conduct Exclusion. However, as discussed in Section IV.A above, the Conduct Exclusion is triggered only upon a final adjudication of fraud. Unless and until such a final adjudication occurs, defense costs attributable to these claims should also be advanced. Nevertheless, for allocation purposes, these claims represent the portion of the defense that is most at risk of being deemed non-covered in the event of an adverse outcome.

Allocation Methodology. Under New York law, where a lawsuit involves both potentially covered and potentially non-covered claims, the insurer and the insured are obligated to negotiate a reasonable allocation of defense costs. The allocation should reflect the relative exposure presented by the covered and non-covered claims. Two commonly used allocation methodologies are: (a) the "larger settlement" approach, which allocates defense costs based on the relative magnitude of potential damages exposure attributable to covered versus non-covered claims; and (b) the "relative exposure" approach, which considers the proportionate risk and complexity of the covered versus non-covered claims. In this case, because all four counterclaims arise from the same core set of facts (the forbearance negotiations) and involve substantially overlapping discovery, depositions, and motion practice, a strong argument can be made that the majority of defense costs are attributable to the covered claims (negligent misrepresentation and potentially the implied covenant claim) and should be reimbursed under the Policy.

Recommendation. Calderwood & Harkness recommends that BRB, through Crane, Alcott & Shire, negotiate with Pinnacle Fidelity an allocation formula that attributes the substantial majority of defense costs to the covered claims and only a proportionate portion to the fraud-based claims. In our experience, an allocation of 70% to 80% to covered claims is defensible in circumstances such as these, where the covered and non-covered claims share a common factual nucleus and the defense work product is substantially interchangeable. However, the precise allocation will depend on the specific policy language, the insurer's position, and the outcome of the negotiations conducted by Crane, Alcott & Shire.

E. Coverage for Punitive Damages

The Counterclaims seek punitive damages in addition to compensatory damages of not less than $12,500,000. The availability of D&O coverage for punitive damages presents both policy interpretation and public policy issues.

Policy Language. As noted in Section III.C above, the Pinnacle Fidelity D&O Policy includes punitive damages within the definition of "Loss" to the extent insurable under the law of the applicable jurisdiction. This is a standard formulation that defers the coverage question to the law of the jurisdiction whose law governs the insurability inquiry.

New York Law. Under New York law, the insurability of punitive damages is a nuanced question. There is a strong argument that punitive damages assessed against an entity for its own intentional wrongdoing are uninsurable as a matter of public policy, because allowing insurance coverage for such damages would undermine the deterrent purpose of punitive damages. See Hartford Accident & Indem. Co. v. Village of Hempstead, 48 N.Y.2d 218, 422 N.Y.S.2d 47 (1979). However, New York law also recognizes that punitive damages arising from vicarious liability — that is, where the entity is held liable for punitive damages based on the conduct of its employees or agents, rather than on the entity's own independent wrongful conduct — may be insurable under certain circumstances. See Dunmore Indemnity Co. v. American Home Prods. Corp., 75 N.Y.2d 196, 551 N.Y.S.2d 481 (1990).

In this case, if punitive damages were assessed against BRB on the theory that BRB is vicariously liable for the alleged misrepresentations of Whitmore and Reeves, there may be an argument that such damages are insurable. Conversely, if the court were to find that BRB, as an entity, engaged in a corporate-level scheme to defraud Triton Harbor, punitive damages assessed on that basis would likely be uninsurable under New York public policy.

Motion to Dismiss Punitive Damages. Calderwood & Harkness has prepared a pre-answer motion (now to be filed as a motion for partial summary judgment or a motion to dismiss the punitive damages demand) directed at the Counterclaim Plaintiffs' demand for punitive damages. This motion, which is scheduled to be filed on or before January 28, 2025, will argue that the allegations in the Counterclaims do not support an award of punitive damages under New York law in the context of a private commercial lending dispute. Specifically, we will argue that the Counterclaim Plaintiffs have not alleged conduct that rises to the level of egregious, wanton, or willful conduct directed at the general public or motivated by evil and reprehensible motives — the standard required for punitive damages in New York. See Rocanova v. Equitable Life Assurance Soc'y of U.S., 83 N.Y.2d 603, 612 N.Y.S.2d 339 (1994). If this motion is successful, the punitive damages demand will be eliminated from the case, and the coverage question regarding punitive damages will become moot.

Recommendation. We recommend that BRB defer definitive resolution of the punitive damages coverage question pending the outcome of the motion to dismiss. In the interim, BRB should advise Pinnacle Fidelity, through Crane, Alcott & Shire, that BRB is affirmatively seeking to eliminate the punitive damages exposure through motion practice, which should be favorably viewed by the insurer as a step to mitigate the overall claim.

F. Defense Cost Advancement

Under the Pinnacle Fidelity D&O Policy, defense costs are to be advanced to the Insured on a current basis as they are incurred, subject to the Policy's standard advancement provision. The advancement obligation is a critical feature of the D&O Policy, as it ensures that the Insured does not bear the full financial burden of defending against claims during the pendency of the litigation, when the ultimate outcome — and thus the applicability of any exclusions — remains unknown.

Pinnacle Fidelity has issued a reservation-of-rights letter (discussed in Section V below) in which it acknowledges receipt of BRB's claim notice and reserves its rights to deny coverage based on the Conduct Exclusion. The reservation-of-rights letter also reserves Pinnacle Fidelity's right to seek recoupment of advanced defense costs in the event that a final adjudication establishes that the officers' conduct was fraudulent or intentionally wrongful. This is standard practice, and the issuance of a reservation-of-rights letter does not relieve the insurer of its obligation to advance defense costs pending the outcome of the litigation.

Currently, Calderwood & Harkness's defense costs are being billed to BRB directly. BRB should submit these invoices to Pinnacle Fidelity through Crane, Alcott & Shire for reimbursement under Side B of the Policy. It is important that BRB maintain a disciplined billing and tracking process, separately identifying defense costs attributable to the defense of the Counterclaims (which are potentially covered under the D&O Policy) from costs incurred in prosecuting BRB's original enforcement action (which constitutes an affirmative claim by BRB and is not a covered "Claim" under the D&O Policy). Commingling these costs could create unnecessary disputes with Pinnacle Fidelity regarding the scope of reimbursable expenses.

Privilege and Work Product Considerations. An important practical consideration in the submission of defense cost invoices to Pinnacle Fidelity relates to the preservation of attorney-client privilege and work product protection. Calderwood & Harkness's invoices to BRB will necessarily contain descriptions of the legal services performed, which may include references to litigation strategy, analysis of the strengths and weaknesses of the parties' positions, and other sensitive information. Before any invoices are submitted to Pinnacle Fidelity, they must be carefully reviewed and, where appropriate, redacted to remove any content that could be deemed to waive privilege or that contains admissions or assessments adverse to BRB's defense of the fraud allegations. We recommend that detailed litigation strategy descriptions be redacted from invoices submitted for insurance reimbursement, with only general task descriptions and time entries provided. Crane, Alcott & Shire can advise on the level of detail customarily required by Pinnacle Fidelity for purposes of processing defense cost submissions.

V. Reservation-of-Rights Status

As noted above, Pinnacle Fidelity has issued a reservation-of-rights letter (the "Reservation Letter") in response to BRB's notice of the Counterclaims. The Reservation Letter acknowledges receipt of BRB's claim notice under the D&O Policy, confirms that Pinnacle Fidelity is reviewing the Counterclaims and the Policy, and expressly reserves Pinnacle Fidelity's rights under the Conduct Exclusion. Specifically, the Reservation Letter states that Pinnacle Fidelity reserves the right to deny coverage for any Loss arising from the Counterclaims to the extent that a final adjudication establishes that the Insured's conduct was fraudulent, dishonest, or intentionally wrongful. The Reservation Letter also reserves Pinnacle Fidelity's right to seek recoupment of advanced defense costs attributable to non-covered claims.

It is important that BRB understand the significance — and the limitations — of the Reservation Letter:

The Reservation Letter is not a denial of coverage. A reservation of rights is not a refusal to provide coverage. Rather, it is a formal notice by the insurer that it is preserving its right to deny coverage at a later date, depending on how the facts develop and whether any exclusion is triggered. Until a coverage denial is issued, Pinnacle Fidelity remains obligated to advance defense costs and otherwise perform under the Policy.

The Reservation Letter is standard practice. The issuance of a reservation-of-rights letter is standard practice in virtually all D&O claims involving allegations of fraud or intentional misconduct. It would be unusual for an insurer not to issue a reservation of rights in a case with these types of allegations. BRB should not treat the Reservation Letter as an adversarial development or an indication that Pinnacle Fidelity intends to deny coverage.

Coverage counsel is monitoring. Robert Alcott at Crane, Alcott & Shire is monitoring the reservation-of-rights posture and will respond on BRB's behalf to preserve all coverage arguments. If Pinnacle Fidelity's position changes — for example, if the insurer issues a denial of coverage or seeks to limit the scope of defense cost advancement — Crane, Alcott & Shire will advise BRB of its options, which may include commencing a declaratory judgment action to compel coverage.

VI. Coordination with Coverage Counsel

A. Division of Responsibilities

Effective coordination between defense counsel and coverage counsel is essential to ensure that BRB's litigation strategy does not inadvertently prejudice its coverage rights, and that BRB's coverage position is supported by the developments in the underlying litigation. The division of responsibilities between Calderwood & Harkness and Crane, Alcott & Shire is as follows:

Calderwood & Harkness LLP (Linda Osei, Partner; Priya Anand, Partner; Carlos Espinoza, Associate):

• Defense of the underlying Counterclaims in Belmont Ridge Bank NA v. Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel, Index No. 654871/2024

• Prosecution of BRB's original enforcement action

• All litigation strategy, including pleadings, discovery, depositions, motion practice, and trial preparation

• Engagement and management of expert witnesses, including BRB's retained expert, Dr. Gerald Stokes of Wentworth Risk Advisors LLC, who has been engaged to provide expert testimony on banking industry practices in workout and forbearance transactions

• Communication with opposing counsel (Kestrel Voss & Huang LLP — Theodore Huang and Natasha Orlov)

Crane, Alcott & Shire LLP (Robert Alcott):

• D&O coverage notice and claim management with Pinnacle Omnivrel Insurance Co.

• Negotiation of defense cost advancement and allocation with Pinnacle Fidelity

• Response to the Reservation Letter and any subsequent correspondence from Pinnacle Fidelity

• Monitoring of Pinnacle Fidelity's coverage position and escalation of any coverage disputes

• Potential coverage litigation against Pinnacle Fidelity, if coverage is denied

• Advice to BRB on all coverage-related matters, including the interpretation of Policy terms and conditions

Margaret Linden and Thomas Hargreaves (BRB In-House Legal):

• Coordination between defense counsel and coverage counsel

• Approval of billing submissions to Pinnacle Fidelity

• Internal coordination with BRB management and the Board of Directors regarding the litigation and coverage matters

• Management of BRB's corporate indemnification obligations to its officers

B. Key Coordination Protocols

To ensure effective coordination, Calderwood & Harkness proposes the following protocols:

Periodic Case Status Updates. Calderwood & Harkness will provide Crane, Alcott & Shire with periodic case status updates summarizing material developments in the underlying litigation, including the filing of motions, scheduling of depositions, discovery milestones, and any settlement discussions. These updates will be redacted as needed to protect attorney work product and to avoid sharing detailed litigation strategy that is not necessary for coverage purposes. The purpose of these updates is to ensure that Crane, Alcott & Shire has sufficient information to support BRB's coverage claim and to respond to any inquiries from Pinnacle Fidelity.

Settlement Coordination. Any settlement discussions with Triton Harbor and the Kappels must be coordinated with Pinnacle Fidelity to avoid jeopardizing coverage. Most D&O policies, including the Pinnacle Fidelity Policy, contain a "consent-to-settle" provision that requires the insurer's prior written consent to any settlement. A settlement entered into without the insurer's consent may void coverage for the settlement amount. Calderwood & Harkness will ensure that no settlement is entered into without prior coordination with Crane, Alcott & Shire and, through Crane, Alcott & Shire, with Pinnacle Fidelity.

Avoidance of Prejudicial Admissions. BRB must avoid any admissions in the underlying litigation — whether in pleadings, discovery responses, deposition testimony, or informal communications — that could be used by Pinnacle Fidelity to establish that the Conduct Exclusion applies. Specifically, BRB must maintain its consistent position that no fraud occurred and that the representations attributed to Whitmore and Reeves were not fraudulent. This is fully consistent with BRB's defense strategy and should not require any departure from the approach that Calderwood & Harkness would pursue in any event.

Formal Coordination Letter. Linda Osei will send a separate coordination letter to Robert Alcott on November 19, 2024, formalizing the protocols described above and establishing a framework for ongoing communication. A copy of this letter will be provided to Margaret Linden and Thomas Hargreaves for their records.

VII. Potential Coverage for Individual Officers

Although the Counterclaims currently name BRB as the sole counterclaim defendant, the factual allegations directly implicate the conduct of three individual officers — Derek Whitmore, Joanna Reeves, and Philip Aaronson — and the possibility of individual officer exposure must be anticipated and planned for in the coverage context.

Current Posture. As of the date of this memorandum, Whitmore, Reeves, and Aaronson have not been individually named as counterclaim defendants. However, the Counterclaims identify each of them by name and attribute specific conduct to each. The specificity of these allegations — including direct quotations from the September 12, 2023 meeting, the text of the September 18, 2023 email, and the full text of the critical passage of the Aaronson Memorandum — suggests that the Counterclaim Plaintiffs' counsel at Kestrel Voss & Huang LLP may be laying the groundwork for an amended counterclaim that adds the individual officers as defendants. This is a common litigation tactic in commercial fraud cases, where individual liability can serve as additional leverage and potentially complicate the defense.

Coverage Implications. If the Counterclaims are amended to add Whitmore, Reeves, or Aaronson as individual counterclaim defendants, the coverage landscape would shift meaningfully:

• Side A Coverage would become directly relevant if BRB, for any reason, does not or cannot indemnify the individual officers for their defense costs or any resulting liability. Side A provides first-dollar coverage to the individual officer, without regard to BRB's entity retention, and is the most protective coverage available under the Policy.

• Side B Coverage would be triggered to the extent BRB fulfills its corporate indemnification obligations by paying defense costs and indemnity amounts to the individual officers and then seeks reimbursement from Pinnacle Fidelity. In the typical scenario, BRB would indemnify the officers, and Side B would reimburse BRB.

• Potential Conflict Issues. If individual officers are named as defendants, there may be a question as to whether BRB and the individual officers can be represented by the same defense counsel or whether separate counsel is required to address potential conflicts of interest. For example, if BRB's institutional interest in the litigation (e.g., protecting the enforceability of the Forbearance Agreement) diverges from the personal interests of an individual officer (e.g., avoiding a finding of personal fraud), separate representation may be necessary. The cost of separate counsel for individual officers would be a covered defense cost under Side A or Side B of the Policy, subject to the other Policy terms.

Immediate Steps. In the event that Kestrel Voss & Huang LLP seeks leave to amend the Counterclaims to add individual officer defendants, BRB should immediately notify Pinnacle Fidelity through Crane, Alcott & Shire. Prompt notice is essential to preserve coverage for the individual officers under the claims-made policy. In addition, BRB should confirm with Margaret Linden that BRB's corporate bylaws and any individual indemnification agreements require BRB to indemnify and advance defense costs to officers acting in their official capacities. If BRB is providing indemnification, Side B will be the primary coverage part; if for any reason BRB is not providing indemnification, Side A would be triggered, and the individual officers would have a direct claim against Pinnacle Fidelity.

VIII. Recommendations

Based on the foregoing analysis, Calderwood & Harkness makes the following recommendations:

1. Continue Timely Reporting. BRB should continue to report all material developments in the litigation to Pinnacle Fidelity through Crane, Alcott & Shire on a prompt and ongoing basis. Material developments include, but are not limited to, the filing of motions (including the pending motion to dismiss the punitive damages demand), scheduling of depositions, any amendments to the pleadings, and any settlement overtures or demands by the Counterclaim Plaintiffs. Timely reporting is essential to preserve BRB's coverage rights under the claims-made policy and to maintain BRB's credibility with the insurer.

2. Submit Defense Cost Invoices. BRB should submit Calderwood & Harkness's defense cost invoices (appropriately redacted to protect privilege and work product) to Pinnacle Fidelity for reimbursement on a current basis under Side B of the Policy. BRB should ensure that defense costs attributable to the Counterclaim defense are tracked separately from costs incurred in prosecuting BRB's original enforcement action, which is an affirmative claim by BRB and not a covered "Claim" under the D&O Policy. Calderwood & Harkness will implement appropriate billing codes and task descriptions to facilitate this tracking.

3. Negotiate Allocation. BRB, through Crane, Alcott & Shire, should negotiate with Pinnacle Fidelity a reasonable allocation formula for defense costs between covered and non-covered claims. Calderwood & Harkness recommends an allocation that attributes the substantial majority of defense costs to the covered claims — particularly the negligent misrepresentation and implied covenant claims — and only a proportionate share to the fraud-based claims. Given the substantial overlap in factual and legal issues across all four Counterclaims, an allocation of 70% to 80% to covered claims is a defensible starting point for negotiations.

4. Pursue the Motion to Dismiss the Punitive Damages Demand. Calderwood & Harkness will file the motion to dismiss the Counterclaim Plaintiffs' demand for punitive damages on or before January 28, 2025. If successful, this motion will narrow BRB's potential exposure and eliminate the punitive damages insurability question, which is advantageous from both a litigation and a coverage perspective. BRB should advise Pinnacle Fidelity, through Crane, Alcott & Shire, that BRB is affirmatively pursuing this motion to mitigate the overall claim.

5. Avoid Prejudicial Admissions. BRB must maintain its consistent and unequivocal position that no fraud occurred in connection with the forbearance negotiations. All pleadings, discovery responses, deposition testimony, and court submissions must be reviewed for consistency with this position. BRB should avoid any statements or admissions that could be used by Pinnacle Fidelity to argue that the Conduct Exclusion has been triggered. This is fully consistent with BRB's defense strategy, which is based on the Section 9(c) disclaimer, the Section 12(a) integration clause, and the absence of any actionable misrepresentations.

6. Monitor for Individual Officer Exposure. BRB should closely monitor the litigation for any indication that the Counterclaim Plaintiffs intend to seek leave to amend the Counterclaims to add Whitmore, Reeves, or Aaronson as individual counterclaim defendants. If such a motion is filed, BRB should immediately notify Pinnacle Fidelity through Crane, Alcott & Shire and evaluate whether separate individual defense counsel may be required to address potential conflict-of-interest issues. BRB should also confirm that its corporate indemnification obligations to the individual officers are being fully honored.

7. Preserve All Coverage Rights. BRB must not settle the Counterclaims, consent to any judgment, or enter into any agreement affecting the Counterclaims without Pinnacle Fidelity's prior written consent, as required by the Policy's consent-to-settle provision. Any settlement without insurer consent could void coverage for the settlement amount and potentially for the entire claim. All settlement discussions must be coordinated with Pinnacle Fidelity through Crane, Alcott & Shire.

8. Schedule a Coverage Coordination Call. Calderwood & Harkness recommends that a coordination call be scheduled among Linda Osei, Margaret Linden, Thomas Hargreaves, and Robert Alcott within the next two weeks to establish a regular schedule for coverage coordination meetings and to ensure that all parties are aligned on the division of responsibilities, the billing and reimbursement process, and the approach to any coverage issues that may arise. We suggest that these coordination meetings be held on a monthly basis, or more frequently as developments in the litigation warrant.

IX. Conclusion

Based on our review of the Pinnacle Fidelity D&O Policy (PF-DO-2023-08811) and the Counterclaims filed by Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel, Calderwood & Harkness concludes that the D&O Policy should provide meaningful coverage for defense costs incurred in defending the Counterclaims, subject to the following qualifications:

First, the fraud and intentional conduct exclusion (the Conduct Exclusion) is the primary coverage risk. However, the Conduct Exclusion should not bar defense cost advancement at this stage of the litigation, because the exclusion is triggered only upon a final adjudication that the Insured's conduct was in fact fraudulent or intentionally wrongful. No such adjudication has occurred, and BRB's defense strategy is predicated on the position that no fraud occurred. If BRB prevails on the fraud allegations, the Conduct Exclusion will never be triggered.

Second, the insured-vs.-insured exclusion should not apply to the Counterclaims. The Counterclaim Plaintiffs are third parties — a borrower and its principals — not directors, officers, or insureds under the D&O Policy. The exclusion is designed to prevent collusive suits among corporate insiders, not to bar coverage for responsive counterclaims filed by adverse third parties.

Third, Side C entity coverage is unlikely to apply to the Counterclaims, which assert common-law claims rather than Securities Claims. However, Side A and Side B coverage for individual offic

PRIVILEGED AND CONFIDENTIAL — ATTORNEY-CLIENT COMMUNICATION / ATTORNEY WORK PRODUCT This memorandum is a privileged and confidential communication prepared by Calderwood & Harkness LLP in its capacity as litigation counsel to Belmont Ridge Bank NA. This memorandum constitutes attorney work product and is protected by the attorney-client privilege and the work product doctrine. This memorandum should not be disclosed to any third party without the prior written consent of Calderwood & Harkness LLP and Belmont Ridge Bank NA. Disclosure of this memorandum to any unauthorized person may constitute a waiver of applicable privileges.
CALDERWOOD & HARKNESS LLP 600 Lexington Avenue, 30th Floor New York, New York 10022 Telephone: (212) 554-6000 Facsimile: (212) 554-6001
MEMORANDUM
November 18, 2024
TO: Margaret Linden, Senior Vice President & General Counsel Belmont Ridge Bank NA 1200 Avenue of the Americas, 38th Floor New York, New York 10036
FROM: Linda Osei, Partner, Calderwood & Harkness LLP
CC: Thomas Hargreaves, Vice President & Associate General Counsel, Belmont Ridge Bank NA Priya Anand, Partner, Calderwood & Harkness LLP Carlos Espinoza, Associate, Calderwood & Harkness LLP
RE: D&O Coverage Analysis — Counterclaims 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 (Hon. Althea Marchetti)
CALDERWOOD & HARKNESS MATTER NO.: 1022-00005
I. Purpose and Scope of Memorandum
This memorandum analyzes the potential availability of coverage under the directors' and officers' liability insurance policy issued to Belmont Ridge Bank NA ("BRB" or the "Bank") by Pinnacle Omnivrel Insurance Co. ("Pinnacle Fidelity"), Policy No. PF-DO-2023-08811 (the "D&O Policy" or the "Policy"), for defense costs and potential indemnity obligations arising from the counterclaims filed by Triton Harbor Industries, LLC ("Triton Harbor"), Marcus J. Kappel, and Elaine D. Kappel (collectively, the "Counterclaim Plaintiffs") on October 18, 2024, in the above-captioned litigation.
The counterclaims (the "Counterclaims") assert 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 (the "Forbearance Agreement") and the amended and new personal guaranties executed in connection therewith. The Counterclaim Plaintiffs seek compensatory damages of not less than $12,500,000, together with unspecified punitive damages, attorneys' fees, costs, and such other and further relief as the court may deem just and proper.
Although the Counterclaims name BRB as the entity counterclaim defendant, the factual allegations at their core target the conduct of three individual BRB officers: Derek Whitmore, Senior Vice President and Head of the Special Assets Group ("SAG"); Joanna Reeves, Vice President within the Special Assets Group; and Philip Aaronson, Executive Vice President and Chief Credit Officer. Each of these officers is alleged to have played a direct role in the representations and strategic decisions that form the basis of the Counterclaim Plaintiffs' fraud and misrepresentation theories. While these individuals have not yet been named as individual counterclaim defendants, the specificity of the allegations — including attribution of particular oral statements, emails, and internal memoranda to each officer by name — raises the prospect that the Counterclaim Plaintiffs may seek to amend their counterclaims to add individual officer defendants, a possibility that must be monitored and planned for in the coverage context.
This memorandum also addresses coordination with BRB's insurance coverage counsel, Robert Alcott of Crane, Alcott & Shire LLP, 400 Park Avenue, 18th Floor, New York, New York 10022, who has been separately engaged by BRB's in-house legal team to manage the D&O notice and reservation-of-rights process directly with Pinnacle Fidelity. Calderwood & Harkness's role in this engagement is as defense counsel in the underlying litigation; we do not serve as coverage counsel. However, given the interplay between the defense strategy in the underlying action and the preservation of insurance coverage, this memorandum is intended to ensure that BRB's litigation and coverage efforts are properly aligned.
The analysis set forth below is based upon our review of the following materials: (a) the Pinnacle Fidelity D&O Policy (PF-DO-2023-08811), as provided to us by BRB's in-house legal department; (b) the Counterclaims filed October 18, 2024; (c) BRB's Answer to Counterclaims filed November 22, 2024; (d) the reservation-of-rights letter issued by Pinnacle Fidelity; and (e) discussions with Margaret Linden and Thomas Hargreaves regarding BRB's corporate indemnification obligations and the status of the coverage claim. We note that the comprehensive policy review and coverage claim management is being conducted by Robert Alcott at Crane, Alcott & Shire LLP, and this memorandum is intended to supplement rather than supplant that work.
II. Background Summary
A. The Underlying Litigation
BRB commenced this action by filing a Summons and Verified Complaint on August 12, 2024, under Index No. 654871/2024, in the Supreme Court of the State of New York, County of New York, Commercial Division, assigned to the Honorable Althea Marchetti. The original complaint (the "Complaint") asserts claims for breach of the Forbearance and Modification Agreement dated October 6, 2023, enforcement of the amended personal guaranty executed by Marcus J. Kappel (as amended from a limited guaranty in the original principal amount of $4,500,000 to an unlimited personal guaranty), enforcement of the new unlimited personal guaranty executed by Elaine D. Kappel, and recovery of the outstanding deficiency balance on the credit facilities extended to Triton Harbor.
The total accelerated amount sought by BRB in the Complaint is $17,456,212, comprising the following components:
BRB's claims arise from Triton Harbor's failure to satisfy certain financial covenants and operational milestones set forth in the Forbearance Agreement, which was negotiated during the September–October 2023 period and executed on October 6, 2023. BRB declared a default under the Forbearance Agreement and accelerated the indebtedness in May 2024, following Triton Harbor's failure to meet the December 31, 2023 and March 31, 2024 milestone dates for the submission of audited financial statements and the achievement of specified debt service coverage ratios.
On October 18, 2024, the Counterclaim Plaintiffs filed their Verified Answer with Counterclaims (the "Counterclaims"), asserting the four causes of action described in Section I above and seeking both compensatory and punitive damages. The Counterclaims are being prosecuted by Theodore Huang and Natasha Orlov of Kestrel Voss & Huang LLP, who were retained by Triton Harbor and the Kappels in or about September 2024.
Calderwood & Harkness was retained by BRB on November 4, 2024, to assume defense of BRB in connection with the Counterclaims and to continue prosecution of BRB's original enforcement action. Calderwood & Harkness replaced Blakemore & Stern LLP, which had filed the original Complaint and managed the action through the answer stage. The reasons for the substitution of counsel are not relevant to this memorandum, though we note that the transition was orderly and all files have been received and reviewed.
BRB's Verified Answer to the Counterclaims was filed on November 22, 2024, asserting general denials, affirmative defenses (including the statute of frauds, disclaimer of oral representations, the integration clause of the Forbearance Agreement, ratification, estoppel, and documentary defense under CPLR 3211(a)(1)), and reserving all rights to assert additional defenses. A preliminary conference was held on December 6, 2024, before Justice Marchetti, at which a discovery schedule was set and the case was placed on a standard Commercial Division track.
B. The Counterclaim Allegations Relevant to Coverage
The coverage analysis turns on the specific allegations in the Counterclaims, which we summarize in detail below.
Fraudulent Inducement (First Counterclaim). Triton Harbor alleges that BRB, acting through Whitmore and Reeves, made material oral and written misrepresentations during the September–October 2023 workout negotiations that induced Triton Harbor, Kappel, and Elaine Kappel to enter into the Forbearance Agreement, the amended Kappel guaranty, and the new Elaine Kappel guaranty. The specific representations alleged include the following:
(i) At the September 12, 2023 in-person meeting held at BRB's offices at 1200 Avenue of the Americas, Whitmore allegedly stated to Marcus Kappel and Kappel's then-counsel that BRB was "committed to the long-term relationship" with Triton Harbor and would "seriously consider" extending a new $6.5 million revolving credit facility to Triton Harbor upon successful completion of the forbearance milestones. The Counterclaims allege that this statement was made with the intent to induce the Kappels to agree to enhanced collateral and expanded personal guaranties.
(ii) On September 18, 2023, Reeves sent an email to Marcus Kappel stating that BRB was "optimistic about a path forward" for the Triton Harbor relationship. The Counterclaims characterize this email as a further representation that BRB intended to continue the lending relationship, rather than exit it.
(iii) On September 29, 2023, an internal draft term sheet for a proposed $6.5 million revolving credit facility was prepared by Reeves and forwarded to Whitmore for review. Although this draft term sheet was not shared with Triton Harbor or the Kappels at the time, the Counterclaims allege (on information and belief) that the preparation of this term sheet demonstrates that BRB's officers were at least contemplating the extension of additional credit and thus their representations to the Kappels were not entirely fabricated. More significantly, the Counterclaims allege that the draft term sheet was prepared as a "prop" to maintain the appearance of good faith in the negotiations while the true strategy — exit from the relationship — was already determined.
Central to the fraudulent inducement claim is a document that has become a focal point of the litigation: the internal memorandum dated August 22, 2023, authored by Philip Aaronson, EVP and Chief Credit Officer, addressed to Derek Whitmore, with a copy to Margaret Linden (the "Aaronson Memorandum"). The Aaronson Memorandum directed the Special Assets Group to "pursue a structured exit from the Triton Harbor relationship within 120 days" and stated unequivocally that "further extensions of credit are not contemplated under any workout scenario." This memorandum pre-dates the commencement of the forbearance negotiations by approximately five weeks and, according to the Counterclaims, demonstrates that BRB had already decided to terminate the Triton Harbor relationship before the workout negotiations even began.
The Counterclaim Plaintiffs allege that the representations made by Whitmore and Reeves during the September–October 2023 period were knowingly false and made in direct contravention of the strategic directive set forth in the Aaronson Memorandum. The Counterclaim Plaintiffs contend that the purpose of the Forbearance Agreement was not to give Triton Harbor a genuine opportunity to cure its defaults and preserve the lending relationship, but rather to extract enhanced collateral and expanded personal guaranties from the Kappels in advance of a predetermined acceleration.
Negligent Misrepresentation (Second Counterclaim). In the alternative, Triton Harbor alleges that Whitmore and Reeves made careless or reckless statements regarding BRB's willingness to extend future credit without a reasonable basis for such statements, and that Triton Harbor and the Kappels reasonably relied on those statements to their detriment. This cause of action does not require proof of intentional fraud; it requires only that the statements were made without a reasonable basis and that the Counterclaim Plaintiffs justifiably relied upon them.
Breach of the Implied Covenant of Good Faith and Fair Dealing (Third Counterclaim). Triton Harbor alleges that BRB breached the implied covenant of good faith and fair dealing inherent in the Forbearance Agreement by extracting additional collateral — specifically, equipment leases valued at approximately $2,300,000 and a mortgage on the personal residence of Marcus and Elaine Kappel at 14 Birchmont Lane, Westport, Connecticut 06880, valued at approximately $3,100,000 — and by obtaining expanded personal guaranties from the Kappels, all while harboring a concealed intent to accelerate the indebtedness regardless of Triton Harbor's performance under the forbearance milestones. In essence, this claim alleges that BRB acted in bad faith by using the forbearance process as a mechanism to strengthen its position for an inevitable acceleration rather than as a genuine opportunity for the borrower to cure.
Rescission (Fourth Counterclaim). The Fourth Counterclaim seeks rescission of the entire Forbearance and Modification Agreement, together with the amended Marcus Kappel guaranty and the new Elaine Kappel guaranty, on the ground that these agreements were procured through fraud and misrepresentation. If rescission were granted, the practical effect would be to void the enhanced collateral, the expanded guaranties, and potentially the additional concessions made by Triton Harbor and the Kappels, while restoring the parties to their pre-forbearance positions. This claim represents a direct threat to BRB's enforcement action, as it would eliminate the contractual basis for several of BRB's claims.
C. BRB Officers Named or Implicated
As noted above, three individual BRB officers are directly implicated in the Counterclaims:
Derek Whitmore, Senior Vice President, Head of Special Assets Group. Whitmore is the officer alleged to have made the key oral representations at the September 12, 2023 meeting. He is the recipient of the Aaronson Memorandum and the individual responsible for managing the Triton Harbor workout. The Counterclaims characterize Whitmore as the primary actor who personally conveyed BRB's purported commitment to the lending relationship while knowing that the Bank had decided to exit.
Joanna Reeves, Vice President, Special Assets Group. Reeves is the author of the September 18, 2023 email to Marcus Kappel expressing BRB's "optimism" about a path forward. She is also the author of the September 29, 2023 internal draft term sheet for the proposed $6.5 million revolving facility. The Counterclaims portray Reeves as Whitmore's subordinate who participated in and furthered the allegedly fraudulent scheme.
Philip Aaronson, Executive Vice President, Chief Credit Officer. Aaronson is the author of the August 22, 2023 internal memorandum directing the Special Assets Group to pursue a structured exit from the Triton Harbor relationship. The Counterclaims allege that Aaronson set the strategic direction that contradicted the representations subsequently made by Whitmore and Reeves during the workout negotiations. Aaronson is portrayed as the architect of the allegedly contradictory strategy.
All three officers were acting at all relevant times in their official capacities as officers of BRB. There is no allegation in the Counterclaims that any of these individuals was acting outside the scope of their employment or for personal gain unrelated to their duties at the Bank. This is significant for coverage purposes, as D&O policies cover officers acting in their insured capacities.
III. Overview of the Pinnacle Fidelity D&O Policy
A. Policy Identification
The D&O Policy at issue is as follows:
We note at the outset that a full and comprehensive policy review is being conducted by Robert Alcott at Crane, Alcott & Shire LLP in his capacity as BRB's designated insurance coverage counsel. The summary of policy provisions set forth in this memorandum is based upon Calderwood & Harkness's independent review of the policy form as provided to us by BRB's in-house legal department. This memorandum is intended to identify the key coverage issues from the perspective of defense counsel, to ensure that BRB's litigation strategy is consistent with the preservation of coverage, and to facilitate coordination between defense counsel and coverage counsel. It is not intended to constitute a comprehensive coverage opinion, and BRB should rely on the advice of Crane, Alcott & Shire for definitive coverage guidance.
B. Insuring Agreements — Three Standard Coverage Parts
The Pinnacle Fidelity D&O Policy contains three standard insuring agreements, commonly referred to as Side A, Side B, and Side C coverage:
Side A — Individual Coverage (Insuring Agreement I). Side A covers "Loss" (including defense costs) incurred by individual directors and officers of BRB for "Claims" made against them in their capacity as directors or officers, where BRB has not indemnified the individual directors and officers. Side A is designed to serve as a "safety net" for individual directors and officers in situations where indemnification by the company is legally prohibited (for example, where a statute precludes indemnification for certain types of conduct), financially impracticable (for example, in the event of the company's insolvency), or otherwise unavailable. Side A coverage is the broadest form of protection available under the D&O Policy for individual insureds, as it has no entity retention or deductible and provides first-dollar coverage to the individual.
Side B — Corporate Reimbursement (Insuring Agreement II). Side B reimburses BRB for amounts that BRB is required or permitted to pay as indemnification to its directors and officers for covered Claims. In the typical scenario — where BRB fulfills its corporate indemnification obligations to its officers — Side B is the coverage part that will respond. BRB pays the defense costs and indemnification amounts to its officers, and then seeks reimbursement from Pinnacle Fidelity under Side B, subject to the applicable entity retention (deductible) and policy terms. The entity retention under the Policy is $500,000 per Claim, as applicable to Side B and Side C coverage.
Side C — Entity Coverage (Insuring Agreement III). Side C covers BRB as an entity for certain defined "Securities Claims" — that is, claims alleging violations of federal or state securities laws. Because BRB is a publicly traded institution (NYSE: BRMR), Side C is included in the Policy to address the entity's direct exposure in securities litigation. Critically, Side C entity coverage is typically limited to Securities Claims and does not extend to common-law claims such as fraud, negligent misrepresentation, breach of contract, or rescission.
For purposes of this memorandum, the most relevant coverage parts are Side A (to the extent individual officers are not indemnified by BRB or face personal exposure) and Side B (to the extent BRB indemnifies its officers for defense costs and potential liability arising from the Counterclaims, and seeks reimbursement from Pinnacle Fidelity).
C. Definition of "Claim" and "Loss"
"Claim." The Policy defines "Claim" broadly to include, among other things, any written demand for monetary or non-monetary relief, any civil proceeding commenced by the service of a complaint or similar pleading, any arbitration proceeding, and any formal administrative or regulatory proceeding. Importantly, the definition of "Claim" includes counterclaims. The Triton Harbor Counterclaims, which were filed by service of a Verified Answer with Counterclaims seeking both monetary and equitable relief (rescission), should qualify as a "Claim" under the Policy. We do not anticipate a dispute with Pinnacle Fidelity on this threshold issue, although Crane, Alcott & Shire should confirm this in the context of the formal coverage claim.
"Loss." The Policy defines "Loss" to include, among other things, defense costs, judgments, and settlements. Defense costs are specifically defined to include reasonable and necessary fees, costs, and expenses incurred in the investigation, defense, or appeal of a Claim. Notably, the Policy provides that defense costs shall be advanced to the Insured on an as-incurred basis, subject to the standard advancement provision. This is a critical feature, as it means that Pinnacle Fidelity should be paying defense costs as they are billed, rather than requiring the Insured to wait until the conclusion of the litigation for reimbursement. The advancement provision is, however, subject to a final allocation and repayment obligation: if a final adjudication determines that a particular Claim or portion of a Claim is not covered under the Policy, the Insured may be required to repay advanced defense costs attributable to the non-covered portion.
Punitive Damages. The treatment of punitive damages under the "Loss" definition is addressed separately in Section IV.E below. As a preliminary matter, we note that the Policy includes punitive damages within the definition of "Loss" to the extent insurable under applicable law. The question of whether punitive damages are insurable under New York law in the context of intentional fraud allegations is a complex one and is discussed in detail below.
D. Policy Period and Reporting
The Pinnacle Fidelity D&O Policy is a "claims-made" policy, meaning that coverage is triggered by the making of a Claim during the Policy period (or any applicable extended reporting period), rather than by the occurrence of the underlying events giving rise to the Claim. As a claims-made policy, timely reporting is essential to preserving coverage. Failure to provide notice of a Claim within the time required by the Policy could result in a denial of coverage, regardless of the merits of the underlying Claim.
We understand from BRB's in-house legal department that the Counterclaims were filed on October 18, 2024, and that BRB provided notice to Pinnacle Fidelity promptly thereafter. Robert Alcott of Crane, Alcott & Shire has been managing the formal notice process with Pinnacle Fidelity and has confirmed that notice was timely provided. We do not anticipate a late-notice defense from Pinnacle Fidelity. Nevertheless, BRB should ensure that all future developments in the litigation — including the filing of amended pleadings, the assertion of new claims or theories, and any demands or settlement overtures — are promptly reported to Pinnacle Fidelity through Crane, Alcott & Shire to preserve coverage rights on an ongoing basis.
IV. Key Coverage Issues
A. Fraud / Intentional Conduct Exclusion
The most significant coverage issue presented by the Counterclaims is the application of the Policy's fraud and intentional conduct exclusion (the "Conduct Exclusion"). Standard D&O policies contain an exclusion for loss arising from conduct that is fraudulent, dishonest, criminal, or intentionally wrongful. The Pinnacle Fidelity Policy (PF-DO-2023-08811) contains such an exclusion, which is typical of policies in this class.
The Conduct Exclusion in the Policy provides, in substance, that the Policy shall not cover any Loss arising from any Claim based upon, arising out of, or attributable to any deliberately fraudulent act or omission, any willful violation of any statute, rule, or law, or any act of gaining any profit, remuneration, or advantage to which the Insured was not legally entitled. This is a broadly worded exclusion that, on its face, could encompass the fraudulent inducement and rescission claims alleged in the Counterclaims.
Critical Qualifier: The "Final Adjudication" Requirement. However, the Conduct Exclusion contains a critical qualifier that is standard in the D&O insurance market and essential to BRB's coverage position. The exclusion applies only upon a "final adjudication" in the underlying action — or, in some policy formulations, in a related proceeding — that the Insured's conduct was in fact fraudulent, dishonest, or intentionally wrongful. Mere allegations of fraud in a complaint or counterclaim are insufficient to trigger the exclusion. This is a well-established principle in D&O insurance law and has been consistently upheld by courts in New York and other jurisdictions. See, e.g., Westvale Insurance v. Ambassador Grp., Inc., 157 A.D.2d 293, 556 N.Y.S.2d 549 (1st Dep't 1990); see also MBIA Inc. v. Federal Ins. Co., 652 F.3d 152 (2d Cir. 2011) (applying New York law).
Implication for This Case. The Counterclaims allege that Whitmore, Reeves, and Aaronson engaged in intentional misrepresentations in the course of the forbearance negotiations. If these allegations are taken at face value, they describe conduct that would fall within the Conduct Exclusion. However, because the exclusion is triggered only by a final adjudication, and no such adjudication has occurred (or is likely to occur for a considerable period given that the case is in its early stages), the Conduct Exclusion should not bar Pinnacle Fidelity's obligation to advance defense costs at this time. The insurer must fund the defense unless and until a final adjudication establishes that the officers' conduct was actually fraudulent.
Risk Factor: Recoupment. If the case proceeds to trial and a jury or the court ultimately finds that BRB's officers committed fraud, the Conduct Exclusion would be triggered, and Pinnacle Fidelity would be entitled to deny indemnity coverage for the fraud-based claims. Moreover, the Policy contains a standard recoupment provision that would allow Pinnacle Fidelity to seek repayment of defense costs previously advanced in connection with the fraud claims. This recoupment right represents a real financial risk to BRB in the event of an adverse outcome on the fraud allegations, though it would be mitigated by any allocation between covered and non-covered claims (discussed in Section IV.D below).
Consistency with BRB's Defense Strategy. BRB's defense strategy in the underlying litigation is fully consistent with the preservation of coverage under the D&O Policy. BRB vigorously denies all fraud allegations and maintains that no misrepresentations were made to Triton Harbor or the Kappels during the forbearance negotiations. BRB's position is that Section 9(c) of the Forbearance Agreement — which provides that "Nothing herein shall constitute or be deemed to constitute a commitment, agreement, or obligation on the part of Lender to extend additional credit, modify existing facilities, or renew any credit facility" — expressly negates any claim of reliance on oral or informal representations regarding future lending. BRB further relies on the integration clause in Section 12(a) of the Forbearance Agreement, which provides that the Forbearance Agreement constitutes the entire agreement between the parties with respect to the subject matter thereof and supersedes all prior negotiations, representations, warranties, commitments, offers, contracts, and writings.
This defense strategy supports the coverage position in two important ways. First, if BRB prevails on the fraud claims — whether by summary judgment, at trial, or through settlement on favorable terms — the Conduct Exclusion is never triggered, and Pinnacle Fidelity's obligation to cover defense costs (and any indemnity obligations) remains intact. Second, by consistently denying fraud, BRB avoids making any admissions that Pinnacle Fidelity could use to invoke the Conduct Exclusion.
B. Insured-vs.-Insured Exclusion
D&O policies commonly contain an exclusion for Claims brought by one Insured against another Insured, commonly referred to as the "insured-vs.-insured" exclusion. This exclusion is designed to prevent collusive or manufactured lawsuits among corporate insiders — for example, a company suing its own directors to access D&O insurance proceeds — and to ensure that the D&O policy is reserved for genuine third-party claims.
Analysis. The Counterclaims are brought by Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel — none of whom are directors, officers, employees, or insureds under BRB's D&O Policy. The Counterclaim Plaintiffs are a borrower entity and its principals, acting in their capacity as adverse parties in a commercial lending dispute. BRB filed the original enforcement action; the Counterclaim Plaintiffs filed responsive counterclaims. This is not an insured-vs.-insured situation by any reasonable construction of the Policy.
Potential Wrinkle. A theoretical argument could be advanced — and we raise it here for completeness — that because BRB is both the original plaintiff in the enforcement action and the counterclaim defendant, and because the Counterclaims arise "in connection with" BRB's own litigation, the insured-vs.-insured exclusion might be implicated under a broad reading. Specifically, if the exclusion is worded to apply to Claims brought "by, on behalf of, or at the direction of" any Insured, one might argue that the Counterclaims were effectively provoked by BRB's own affirmative decision to sue, creating a circularity. However, this is a strained and unpersuasive reading of the exclusion. The insured-vs.-insured exclusion is directed at the identity and relationship of the parties, not at the procedural posture of the lawsuit. Courts have consistently held that counterclaims by third parties do not implicate the insured-vs.-insured exclusion, even where the insured filed the original action. See, e.g., Sphinx Int'l, Inc. v. Nat'l Union Fire Ins. Co., 412 F.3d 1224, 1232 (11th Cir. 2005) (insured-vs.-insured exclusion inapplicable where counterclaims were filed by non-insured third parties).
Conclusion. The insured-vs.-insured exclusion should not apply to bar coverage for the Triton Harbor Counterclaims. We do not anticipate that Pinnacle Fidelity will assert this exclusion as a basis for denying coverage, and Crane, Alcott & Shire should be prepared to respond to any such assertion if it arises.
C. Side C (Entity Coverage) Limitations
As discussed in Section III.B above, Side C entity coverage under the Pinnacle Fidelity D&O Policy is triggered only for "Securities Claims" — that is, claims alleging violations of federal or state securities laws. The typical Side C insuring agreement covers loss arising from any Securities Claim made against the company, and the Policy's definition of "Securities Claim" is limited to claims brought pursuant to or alleging violations of the Securities Act of 1933, the Securities Exchange Act of 1934, any state securities statute ("blue sky" laws), or any regulation promulgated thereunder.
The Triton Harbor Counterclaims assert common-law causes of action: fraudulent inducement, negligent misrepresentation, breach of the implied covenant of good faith and fair dealing, and rescission. None of these claims alleges a violation of any securities law. The Counterclaims arise entirely from a commercial lending relationship and workout negotiations, not from the purchase or sale of securities or any disclosure obligations under the securities laws.
Conclusion. Side C entity coverage is unlikely to provide coverage for BRB itself as to the Counterclaims. BRB should not rely on Side C as a basis for seeking entity-level coverage for defense costs or indemnity obligations arising from the Counterclaims.
However, this limitation on Side C coverage does not foreclose the availability of coverage under the D&O Policy. To the extent that the individual officers (Whitmore, Reeves, and Aaronson) face personal liability arising from the Counterclaims — whether through the assertion of individual counterclaims, post-judgment indemnification claims, or otherwise — and BRB indemnifies those officers, the relevant coverage part is Side B (Corporate Reimbursement). Side B is not limited to Securities Claims and covers BRB's indemnification obligations to its directors and officers for all covered Claims, including common-law claims. Similarly, if BRB is unable or unwilling to indemnify any individual officer, Side A (Individual Coverage) would be available to the officer directly.
D. Allocation Between Covered and Non-Covered Claims
The Counterclaims present a mixed bag from a coverage perspective. Some of the causes of action may be clearly covered, others may be clearly excluded (upon final adjudication of fraud), and others fall in an intermediate category where coverage is arguable. This situation requires the insurer and the insured to negotiate a reasonable allocation of defense costs between covered and non-covered claims.
The four counterclaims can be categorized as follows for allocation purposes:
Negligent Misrepresentation (Second Counterclaim). This cause of action does not allege intentional or fraudulent conduct. It alleges that Whitmore and Reeves made statements without a reasonable basis and that the Counterclaim Plaintiffs relied on those statements to their detriment. Because negligent misrepresentation is not intentional fraud, the Conduct Exclusion should not apply to this claim regardless of the outcome. Defense costs attributable to the negligent misrepresentation claim should be fully covered under the D&O Policy, subject to the other policy terms and conditions.
Breach of the Implied Covenant of Good Faith and Fair Dealing (Third Counterclaim). This is a contract-based claim alleging that BRB acted in bad faith in its performance of the Forbearance Agreement. Coverage may turn on whether the Policy covers breach-of-duty claims that are based on the performance of contractual obligations rather than traditional director and officer duties. Some D&O policies define "Wrongful Act" broadly enough to encompass claims alleging bad faith in the conduct of the insured's business; others are more narrowly drawn. We recommend that Crane, Alcott & Shire analyze whether the implied covenant claim falls within the definition of "Wrongful Act" under the Policy. If it does, this claim should be treated as a potentially covered claim for allocation purposes, as breach of the implied covenant does not require proof of fraud or intentional misconduct.
Fraudulent Inducement (First Counterclaim) and Rescission (Fourth Counterclaim). These claims are the ones most likely to be affected by the Conduct Exclusion. However, as discussed in Section IV.A above, the Conduct Exclusion is triggered only upon a final adjudication of fraud. Unless and until such a final adjudication occurs, defense costs attributable to these claims should also be advanced. Nevertheless, for allocation purposes, these claims represent the portion of the defense that is most at risk of being deemed non-covered in the event of an adverse outcome.
Allocation Methodology. Under New York law, where a lawsuit involves both potentially covered and potentially non-covered claims, the insurer and the insured are obligated to negotiate a reasonable allocation of defense costs. The allocation should reflect the relative exposure presented by the covered and non-covered claims. Two commonly used allocation methodologies are: (a) the "larger settlement" approach, which allocates defense costs based on the relative magnitude of potential damages exposure attributable to covered versus non-covered claims; and (b) the "relative exposure" approach, which considers the proportionate risk and complexity of the covered versus non-covered claims. In this case, because all four counterclaims arise from the same core set of facts (the forbearance negotiations) and involve substantially overlapping discovery, depositions, and motion practice, a strong argument can be made that the majority of defense costs are attributable to the covered claims (negligent misrepresentation and potentially the implied covenant claim) and should be reimbursed under the Policy.
Recommendation. Calderwood & Harkness recommends that BRB, through Crane, Alcott & Shire, negotiate with Pinnacle Fidelity an allocation formula that attributes the substantial majority of defense costs to the covered claims and only a proportionate portion to the fraud-based claims. In our experience, an allocation of 70% to 80% to covered claims is defensible in circumstances such as these, where the covered and non-covered claims share a common factual nucleus and the defense work product is substantially interchangeable. However, the precise allocation will depend on the specific policy language, the insurer's position, and the outcome of the negotiations conducted by Crane, Alcott & Shire.
E. Coverage for Punitive Damages
The Counterclaims seek punitive damages in addition to compensatory damages of not less than $12,500,000. The availability of D&O coverage for punitive damages presents both policy interpretation and public policy issues.
Policy Language. As noted in Section III.C above, the Pinnacle Fidelity D&O Policy includes punitive damages within the definition of "Loss" to the extent insurable under the law of the applicable jurisdiction. This is a standard formulation that defers the coverage question to the law of the jurisdiction whose law governs the insurability inquiry.
New York Law. Under New York law, the insurability of punitive damages is a nuanced question. There is a strong argument that punitive damages assessed against an entity for its own intentional wrongdoing are uninsurable as a matter of public policy, because allowing insurance coverage for such damages would undermine the deterrent purpose of punitive damages. See Hartford Accident & Indem. Co. v. Village of Hempstead, 48 N.Y.2d 218, 422 N.Y.S.2d 47 (1979). However, New York law also recognizes that punitive damages arising from vicarious liability — that is, where the entity is held liable for punitive damages based on the conduct of its employees or agents, rather than on the entity's own independent wrongful conduct — may be insurable under certain circumstances. See Dunmore Indemnity Co. v. American Home Prods. Corp., 75 N.Y.2d 196, 551 N.Y.S.2d 481 (1990).
In this case, if punitive damages were assessed against BRB on the theory that BRB is vicariously liable for the alleged misrepresentations of Whitmore and Reeves, there may be an argument that such damages are insurable. Conversely, if the court were to find that BRB, as an entity, engaged in a corporate-level scheme to defraud Triton Harbor, punitive damages assessed on that basis would likely be uninsurable under New York public policy.
Motion to Dismiss Punitive Damages. Calderwood & Harkness has prepared a pre-answer motion (now to be filed as a motion for partial summary judgment or a motion to dismiss the punitive damages demand) directed at the Counterclaim Plaintiffs' demand for punitive damages. This motion, which is scheduled to be filed on or before January 28, 2025, will argue that the allegations in the Counterclaims do not support an award of punitive damages under New York law in the context of a private commercial lending dispute. Specifically, we will argue that the Counterclaim Plaintiffs have not alleged conduct that rises to the level of egregious, wanton, or willful conduct directed at the general public or motivated by evil and reprehensible motives — the standard required for punitive damages in New York. See Rocanova v. Equitable Life Assurance Soc'y of U.S., 83 N.Y.2d 603, 612 N.Y.S.2d 339 (1994). If this motion is successful, the punitive damages demand will be eliminated from the case, and the coverage question regarding punitive damages will become moot.
Recommendation. We recommend that BRB defer definitive resolution of the punitive damages coverage question pending the outcome of the motion to dismiss. In the interim, BRB should advise Pinnacle Fidelity, through Crane, Alcott & Shire, that BRB is affirmatively seeking to eliminate the punitive damages exposure through motion practice, which should be favorably viewed by the insurer as a step to mitigate the overall claim.
F. Defense Cost Advancement
Under the Pinnacle Fidelity D&O Policy, defense costs are to be advanced to the Insured on a current basis as they are incurred, subject to the Policy's standard advancement provision. The advancement obligation is a critical feature of the D&O Policy, as it ensures that the Insured does not bear the full financial burden of defending against claims during the pendency of the litigation, when the ultimate outcome — and thus the applicability of any exclusions — remains unknown.
Pinnacle Fidelity has issued a reservation-of-rights letter (discussed in Section V below) in which it acknowledges receipt of BRB's claim notice and reserves its rights to deny coverage based on the Conduct Exclusion. The reservation-of-rights letter also reserves Pinnacle Fidelity's right to seek recoupment of advanced defense costs in the event that a final adjudication establishes that the officers' conduct was fraudulent or intentionally wrongful. This is standard practice, and the issuance of a reservation-of-rights letter does not relieve the insurer of its obligation to advance defense costs pending the outcome of the litigation.
Currently, Calderwood & Harkness's defense costs are being billed to BRB directly. BRB should submit these invoices to Pinnacle Fidelity through Crane, Alcott & Shire for reimbursement under Side B of the Policy. It is important that BRB maintain a disciplined billing and tracking process, separately identifying defense costs attributable to the defense of the Counterclaims (which are potentially covered under the D&O Policy) from costs incurred in prosecuting BRB's original enforcement action (which constitutes an affirmative claim by BRB and is not a covered "Claim" under the D&O Policy). Commingling these costs could create unnecessary disputes with Pinnacle Fidelity regarding the scope of reimbursable expenses.
Privilege and Work Product Considerations. An important practical consideration in the submission of defense cost invoices to Pinnacle Fidelity relates to the preservation of attorney-client privilege and work product protection. Calderwood & Harkness's invoices to BRB will necessarily contain descriptions of the legal services performed, which may include references to litigation strategy, analysis of the strengths and weaknesses of the parties' positions, and other sensitive information. Before any invoices are submitted to Pinnacle Fidelity, they must be carefully reviewed and, where appropriate, redacted to remove any content that could be deemed to waive privilege or that contains admissions or assessments adverse to BRB's defense of the fraud allegations. We recommend that detailed litigation strategy descriptions be redacted from invoices submitted for insurance reimbursement, with only general task descriptions and time entries provided. Crane, Alcott & Shire can advise on the level of detail customarily required by Pinnacle Fidelity for purposes of processing defense cost submissions.
V. Reservation-of-Rights Status
As noted above, Pinnacle Fidelity has issued a reservation-of-rights letter (the "Reservation Letter") in response to BRB's notice of the Counterclaims. The Reservation Letter acknowledges receipt of BRB's claim notice under the D&O Policy, confirms that Pinnacle Fidelity is reviewing the Counterclaims and the Policy, and expressly reserves Pinnacle Fidelity's rights under the Conduct Exclusion. Specifically, the Reservation Letter states that Pinnacle Fidelity reserves the right to deny coverage for any Loss arising from the Counterclaims to the extent that a final adjudication establishes that the Insured's conduct was fraudulent, dishonest, or intentionally wrongful. The Reservation Letter also reserves Pinnacle Fidelity's right to seek recoupment of advanced defense costs attributable to non-covered claims.
It is important that BRB understand the significance — and the limitations — of the Reservation Letter:
The Reservation Letter is not a denial of coverage. A reservation of rights is not a refusal to provide coverage. Rather, it is a formal notice by the insurer that it is preserving its right to deny coverage at a later date, depending on how the facts develop and whether any exclusion is triggered. Until a coverage denial is issued, Pinnacle Fidelity remains obligated to advance defense costs and otherwise perform under the Policy.
The Reservation Letter is standard practice. The issuance of a reservation-of-rights letter is standard practice in virtually all D&O claims involving allegations of fraud or intentional misconduct. It would be unusual for an insurer not to issue a reservation of rights in a case with these types of allegations. BRB should not treat the Reservation Letter as an adversarial development or an indication that Pinnacle Fidelity intends to deny coverage.
Coverage counsel is monitoring. Robert Alcott at Crane, Alcott & Shire is monitoring the reservation-of-rights posture and will respond on BRB's behalf to preserve all coverage arguments. If Pinnacle Fidelity's position changes — for example, if the insurer issues a denial of coverage or seeks to limit the scope of defense cost advancement — Crane, Alcott & Shire will advise BRB of its options, which may include commencing a declaratory judgment action to compel coverage.
VI. Coordination with Coverage Counsel
A. Division of Responsibilities
Effective coordination between defense counsel and coverage counsel is essential to ensure that BRB's litigation strategy does not inadvertently prejudice its coverage rights, and that BRB's coverage position is supported by the developments in the underlying litigation. The division of responsibilities between Calderwood & Harkness and Crane, Alcott & Shire is as follows:
Calderwood & Harkness LLP (Linda Osei, Partner; Priya Anand, Partner; Carlos Espinoza, Associate):
• Defense of the underlying Counterclaims in Belmont Ridge Bank NA v. Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel, Index No. 654871/2024
• Prosecution of BRB's original enforcement action
• All litigation strategy, including pleadings, discovery, depositions, motion practice, and trial preparation
• Engagement and management of expert witnesses, including BRB's retained expert, Dr. Gerald Stokes of Wentworth Risk Advisors LLC, who has been engaged to provide expert testimony on banking industry practices in workout and forbearance transactions
• Communication with opposing counsel (Kestrel Voss & Huang LLP — Theodore Huang and Natasha Orlov)
Crane, Alcott & Shire LLP (Robert Alcott):
• D&O coverage notice and claim management with Pinnacle Omnivrel Insurance Co.
• Negotiation of defense cost advancement and allocation with Pinnacle Fidelity
• Response to the Reservation Letter and any subsequent correspondence from Pinnacle Fidelity
• Monitoring of Pinnacle Fidelity's coverage position and escalation of any coverage disputes
• Potential coverage litigation against Pinnacle Fidelity, if coverage is denied
• Advice to BRB on all coverage-related matters, including the interpretation of Policy terms and conditions
Margaret Linden and Thomas Hargreaves (BRB In-House Legal):
• Coordination between defense counsel and coverage counsel
• Approval of billing submissions to Pinnacle Fidelity
• Internal coordination with BRB management and the Board of Directors regarding the litigation and coverage matters
• Management of BRB's corporate indemnification obligations to its officers
B. Key Coordination Protocols
To ensure effective coordination, Calderwood & Harkness proposes the following protocols:
Periodic Case Status Updates. Calderwood & Harkness will provide Crane, Alcott & Shire with periodic case status updates summarizing material developments in the underlying litigation, including the filing of motions, scheduling of depositions, discovery milestones, and any settlement discussions. These updates will be redacted as needed to protect attorney work product and to avoid sharing detailed litigation strategy that is not necessary for coverage purposes. The purpose of these updates is to ensure that Crane, Alcott & Shire has sufficient information to support BRB's coverage claim and to respond to any inquiries from Pinnacle Fidelity.
Settlement Coordination. Any settlement discussions with Triton Harbor and the Kappels must be coordinated with Pinnacle Fidelity to avoid jeopardizing coverage. Most D&O policies, including the Pinnacle Fidelity Policy, contain a "consent-to-settle" provision that requires the insurer's prior written consent to any settlement. A settlement entered into without the insurer's consent may void coverage for the settlement amount. Calderwood & Harkness will ensure that no settlement is entered into without prior coordination with Crane, Alcott & Shire and, through Crane, Alcott & Shire, with Pinnacle Fidelity.
Avoidance of Prejudicial Admissions. BRB must avoid any admissions in the underlying litigation — whether in pleadings, discovery responses, deposition testimony, or informal communications — that could be used by Pinnacle Fidelity to establish that the Conduct Exclusion applies. Specifically, BRB must maintain its consistent position that no fraud occurred and that the representations attributed to Whitmore and Reeves were not fraudulent. This is fully consistent with BRB's defense strategy and should not require any departure from the approach that Calderwood & Harkness would pursue in any event.
Formal Coordination Letter. Linda Osei will send a separate coordination letter to Robert Alcott on November 19, 2024, formalizing the protocols described above and establishing a framework for ongoing communication. A copy of this letter will be provided to Margaret Linden and Thomas Hargreaves for their records.
VII. Potential Coverage for Individual Officers
Although the Counterclaims currently name BRB as the sole counterclaim defendant, the factual allegations directly implicate the conduct of three individual officers — Derek Whitmore, Joanna Reeves, and Philip Aaronson — and the possibility of individual officer exposure must be anticipated and planned for in the coverage context.
Current Posture. As of the date of this memorandum, Whitmore, Reeves, and Aaronson have not been individually named as counterclaim defendants. However, the Counterclaims identify each of them by name and attribute specific conduct to each. The specificity of these allegations — including direct quotations from the September 12, 2023 meeting, the text of the September 18, 2023 email, and the full text of the critical passage of the Aaronson Memorandum — suggests that the Counterclaim Plaintiffs' counsel at Kestrel Voss & Huang LLP may be laying the groundwork for an amended counterclaim that adds the individual officers as defendants. This is a common litigation tactic in commercial fraud cases, where individual liability can serve as additional leverage and potentially complicate the defense.
Coverage Implications. If the Counterclaims are amended to add Whitmore, Reeves, or Aaronson as individual counterclaim defendants, the coverage landscape would shift meaningfully:
• Side A Coverage would become directly relevant if BRB, for any reason, does not or cannot indemnify the individual officers for their defense costs or any resulting liability. Side A provides first-dollar coverage to the individual officer, without regard to BRB's entity retention, and is the most protective coverage available under the Policy.
• Side B Coverage would be triggered to the extent BRB fulfills its corporate indemnification obligations by paying defense costs and indemnity amounts to the individual officers and then seeks reimbursement from Pinnacle Fidelity. In the typical scenario, BRB would indemnify the officers, and Side B would reimburse BRB.
• Potential Conflict Issues. If individual officers are named as defendants, there may be a question as to whether BRB and the individual officers can be represented by the same defense counsel or whether separate counsel is required to address potential conflicts of interest. For example, if BRB's institutional interest in the litigation (e.g., protecting the enforceability of the Forbearance Agreement) diverges from the personal interests of an individual officer (e.g., avoiding a finding of personal fraud), separate representation may be necessary. The cost of separate counsel for individual officers would be a covered defense cost under Side A or Side B of the Policy, subject to the other Policy terms.
Immediate Steps. In the event that Kestrel Voss & Huang LLP seeks leave to amend the Counterclaims to add individual officer defendants, BRB should immediately notify Pinnacle Fidelity through Crane, Alcott & Shire. Prompt notice is essential to preserve coverage for the individual officers under the claims-made policy. In addition, BRB should confirm with Margaret Linden that BRB's corporate bylaws and any individual indemnification agreements require BRB to indemnify and advance defense costs to officers acting in their official capacities. If BRB is providing indemnification, Side B will be the primary coverage part; if for any reason BRB is not providing indemnification, Side A would be triggered, and the individual officers would have a direct claim against Pinnacle Fidelity.
VIII. Recommendations
Based on the foregoing analysis, Calderwood & Harkness makes the following recommendations:
1. Continue Timely Reporting. BRB should continue to report all material developments in the litigation to Pinnacle Fidelity through Crane, Alcott & Shire on a prompt and ongoing basis. Material developments include, but are not limited to, the filing of motions (including the pending motion to dismiss the punitive damages demand), scheduling of depositions, any amendments to the pleadings, and any settlement overtures or demands by the Counterclaim Plaintiffs. Timely reporting is essential to preserve BRB's coverage rights under the claims-made policy and to maintain BRB's credibility with the insurer.
2. Submit Defense Cost Invoices. BRB should submit Calderwood & Harkness's defense cost invoices (appropriately redacted to protect privilege and work product) to Pinnacle Fidelity for reimbursement on a current basis under Side B of the Policy. BRB should ensure that defense costs attributable to the Counterclaim defense are tracked separately from costs incurred in prosecuting BRB's original enforcement action, which is an affirmative claim by BRB and not a covered "Claim" under the D&O Policy. Calderwood & Harkness will implement appropriate billing codes and task descriptions to facilitate this tracking.
3. Negotiate Allocation. BRB, through Crane, Alcott & Shire, should negotiate with Pinnacle Fidelity a reasonable allocation formula for defense costs between covered and non-covered claims. Calderwood & Harkness recommends an allocation that attributes the substantial majority of defense costs to the covered claims — particularly the negligent misrepresentation and implied covenant claims — and only a proportionate share to the fraud-based claims. Given the substantial overlap in factual and legal issues across all four Counterclaims, an allocation of 70% to 80% to covered claims is a defensible starting point for negotiations.
4. Pursue the Motion to Dismiss the Punitive Damages Demand. Calderwood & Harkness will file the motion to dismiss the Counterclaim Plaintiffs' demand for punitive damages on or before January 28, 2025. If successful, this motion will narrow BRB's potential exposure and eliminate the punitive damages insurability question, which is advantageous from both a litigation and a coverage perspective. BRB should advise Pinnacle Fidelity, through Crane, Alcott & Shire, that BRB is affirmatively pursuing this motion to mitigate the overall claim.
5. Avoid Prejudicial Admissions. BRB must maintain its consistent and unequivocal position that no fraud occurred in connection with the forbearance negotiations. All pleadings, discovery responses, deposition testimony, and court submissions must be reviewed for consistency with this position. BRB should avoid any statements or admissions that could be used by Pinnacle Fidelity to argue that the Conduct Exclusion has been triggered. This is fully consistent with BRB's defense strategy, which is based on the Section 9(c) disclaimer, the Section 12(a) integration clause, and the absence of any actionable misrepresentations.
6. Monitor for Individual Officer Exposure. BRB should closely monitor the litigation for any indication that the Counterclaim Plaintiffs intend to seek leave to amend the Counterclaims to add Whitmore, Reeves, or Aaronson as individual counterclaim defendants. If such a motion is filed, BRB should immediately notify Pinnacle Fidelity through Crane, Alcott & Shire and evaluate whether separate individual defense counsel may be required to address potential conflict-of-interest issues. BRB should also confirm that its corporate indemnification obligations to the individual officers are being fully honored.
7. Preserve All Coverage Rights. BRB must not settle the Counterclaims, consent to any judgment, or enter into any agreement affecting the Counterclaims without Pinnacle Fidelity's prior written consent, as required by the Policy's consent-to-settle provision. Any settlement without insurer consent could void coverage for the settlement amount and potentially for the entire claim. All settlement discussions must be coordinated with Pinnacle Fidelity through Crane, Alcott & Shire.
8. Schedule a Coverage Coordination Call. Calderwood & Harkness recommends that a coordination call be scheduled among Linda Osei, Margaret Linden, Thomas Hargreaves, and Robert Alcott within the next two weeks to establish a regular schedule for coverage coordination meetings and to ensure that all parties are aligned on the division of responsibilities, the billing and reimbursement process, and the approach to any coverage issues that may arise. We suggest that these coordination meetings be held on a monthly basis, or more frequently as developments in the litigation warrant.
IX. Conclusion
Based on our review of the Pinnacle Fidelity D&O Policy (PF-DO-2023-08811) and the Counterclaims filed by Triton Harbor Industries, LLC, Marcus J. Kappel, and Elaine D. Kappel, Calderwood & Harkness concludes that the D&O Policy should provide meaningful coverage for defense costs incurred in defending the Counterclaims, subject to the following qualifications:
First, the fraud and intentional conduct exclusion (the Conduct Exclusion) is the primary coverage risk. However, the Conduct Exclusion should not bar defense cost advancement at this stage of the litigation, because the exclusion is triggered only upon a final adjudication that the Insured's conduct was in fact fraudulent or intentionally wrongful. No such adjudication has occurred, and BRB's defense strategy is predicated on the position that no fraud occurred. If BRB prevails on the fraud allegations, the Conduct Exclusion will never be triggered.
Second, the insured-vs.-insured exclusion should not apply to the Counterclaims. The Counterclaim Plaintiffs are third parties — a borrower and its principals — not directors, officers, or insureds under the D&O Policy. The exclusion is designed to prevent collusive suits among corporate insiders, not to bar coverage for responsive counterclaims filed by adverse third parties.
Third, Side C entity coverage is unlikely to apply to the Counterclaims, which assert common-law claims rather than Securities Claims. However, Side A and Side B coverage for individual offic

MEMORANDUM

CALDERWOOD & HARKNESS MATTER NO.: 1022-00005

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