FindLaw | Legal News & Information

Litigation Strategy in D&O Dispute Is Not Bad Faith

Even if an insurer used the litigation process to vex a corporate officer and delay his collection of a judgment in an underlying D&O insurance dispute, the insurer's alleged ulterior motive for using legitimate legal tactics does not constitute bad faith, a federal judge in Phoenix has ruled.

U.S. District Judge Mary Murguia of the District of Arizona dismissed the officer's bad-faith and abuse-of-process claims against National Union Fire Insurance Co. and refused to allow him to come back with an amended version.

In the underlying litigation, Thomas Grabinski, an officer of the Baptist Foundation of Arizona, sought reimbursement from National Union for his defense of criminal charges. Those charges related to an alleged $550 million fraud by Grabinski and other officers that led to the bankruptcy of the foundation.

When the insurer declined to provide coverage, he brought suit in state court and won a judgment of $2.5 million, but he has not been able to collect because of a series of motions and appeals by National Union.

In the instant federal court action, Grabinski charged that National Union abused the litigation process and breached a duty of good faith by employing a series of delaying tactics in an attempt to force him to use up all his assets and accept a meager settlement.

The insurer argued that Grabinski cannot make out a case for bad faith simply by ascribing dark motives to normal litigation tactics. The court agreed with National Union.

"It is not enough to establish a defendant's ulterior purpose in the use of process, since some goals, like a purpose of settlement, are 'includable in the goals of proper process,'" Judge Murguia wrote. "To sustain an abuse-of-process action, the claimant must show that the use of process 'could not logically be explained without reference to ... improper motives.'"

The judge dismissed the complaint with prejudice because she said she saw no potential benefit to allowing Grabinski to amend the suit. However, the judge turned down National Union's motion for sanctions, because while the claims did not state a "cognizable claim for relief," they were not patently frivolous.