Mericle Appeal Argument Transcript

7/31/2019 Mericle Appeal Argument Transcript

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1 UNITED STATES COURT OF APPEALS FOR THE THIRD CIRCUIT

2

3

4

5 No. 10-3887

6

7

8 TRAVELERS PROPERTY CASUALTY COMPANY OF AMERICA,

9 f/k/a The Travelers Indemnity Company of Illinois

10 V.

11 ROBERT K. MERICLE; MERICLE CONSTRUCTION, INC,

12 Appellants

13

14

15 Present: SCIRICA, RENDELL and SMITH, Circuit Judges

16

17

18 TRANSCRIPTION OF

19 ORAL ARGUMENT

20 (January 10, 2012)

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22

23

24

25

Case: 10-3887 Document: 003110787264 Page: 1 Date Filed: 01/24/2012


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1 JUDGE SCIRICA: ...is Travelers Property

2 Casualty Company of America versus Robert Mericle.

3 Mr. Cruz.

4 MR. CRUZ: May it please the Court.

5 There are many bad actors in this case.

6 That undeniable fact produced the District Court opinion

7 here. But the District Court made a fundamental error.

8 It asked the wrong question. It asked whether

9 Plaintiffs had pleaded any claim that would fall outside

10 of the coverage. Of course they have. Travelers

11 likewise in its briefing devotes virtually all of its

12 briefing to making the case that Plaintiffs, if they

13 were able to prove a willful criminal violation by

14 Mericle, could fall outside coverage --

15 JUDGE SCIRICA: Well, don't -- we look at

16 the facts that are alleged in the Complaint.

17 MR. CRUZ: Absolutely. But on the facts

18 that are alleged, Plaintiffs also pleaded a theory that

19 would not require the proof of a willful criminal

20 conduct that caused their harm.

21 JUDGE SMITH: What was the claim?

22 MR. CRUZ: A negligence claim. And they

23 pleaded it in multiple places.

24 JUDGE RENDELL: Where?

25 JUDGE SMITH: Where?



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1 MR. CRUZ: Well, for example, Count 8 of

2 the Master Individual Complaint, which is at Joint

3 Appendix 312, it's a civil conspiracy claim. That civil

4 conspiracy claim, the Plaintiffs pleaded a civil

5 conspiracy among all -- all the Defendants specified

6 included Mericle, and they go on to say that Mericle and

7 the others --

8 JUDGE RENDELL: Sorry, you are at 312?

9 I -- maybe I just pulled the wrong section, but I have

10 A42. Starting at A42?

11 JUDGE SMITH: This is Count 8, the civil

12 conspiracy claim?

13 MR. CRUZ: Yes, Count 8, civil --

14 JUDGE SMITH: A312?

15 MR. CRUZ: Yes.

16 JUDGE RENDELL: Okay.

17 MR. CRUZ: Yes, A312. There what they

18 allege is that the parties paid bribes/kickbacks. Now,

19 that's contrary to the colloquy, and what the federal

20 prosecutor said, but we're going to assume the facts are

21 true in the Complaint.

22 JUDGE SMITH: How do you -- how do you

23 conspire negligently, if that is the count that you are

24 referring to, Count 8 civil conspiracy?

25 MR. CRUZ: Because what the Complaint



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1 describes, the complaints are subject to potentially two

2 interpretations. There's broad language that would have

3 Mericle in bed with Powell and everyone else conspiring

4 and aware of the ends of the conspiracy. Now, that's

5 contrary to what the federal prosecutors told the court,

6 but --

7 JUDGE SMITH: Okay. The entering into the

8 conspiracy, i.e. the agreement is an intentional act.

9 So what you're suggesting is that what is not

10 intentional is the consequences of the agreement.

11 MR. CRUZ: That's exactly right. And

12 under the insurance policy, the consequences have to be

13 intentional.

14 Conspiracy law allows imputed intent. And

15 because of the District Court's mistake, asking are

16 there -- the wrong question, the District Court imputed

17 the intent of other more culpable Defendants to Mericle.

18 The facts here suggest --

19 JUDGE SCIRICA: Well, it says -- it says

20 in order to conceal the first payment, Mericle signed

21 and back dated a registration and commission agreement

22 as an attempt to hide the payment as a broker's fee.

23 MR. CRUZ: Yes, Your Honor. And Mericle

24 pleaded guilty to not -- to --

25 JUDGE SCIRICA: Well, that's a different



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1 matter -- what they pleaded guilty to or not.

2 MR. CRUZ: What the -- the facts pleaded

3 in the complaint allow is the interpretation conceivably

4 of two crimes. One, they could present to the Court

5 that Mericle bribed the judges to build the facilities

6 but had no knowledge, no awareness of the quid pro quo

7 of the ongoing bribes by Powell to wrongfully sentence

8 juveniles.

9 Now, under that interpretation, which is

10 entirely consistent with the facts and is consistent

11 with how they pleaded it, Mericle would be held liable

12 not for willfully violating the rights of the juveniles,

13 because what Mericle pleaded guilty to, which was paying

14 the judges and then not affirmatively telling the IRS

15 that he was aware the judges had mischaracterized their

16 income for tax purposes, the victim of that crime was

17 the IRS. It was the federal treasury. It wasn't the

18 kids.

19 So Mericle's theory, one of their

20 theories, look, one of their theories is Mericle

21 participated directly in a criminal conspiracy. But

22 another theory is Mericle did a bribe at the outset that

23 made it part of the whole broader conspiracy and as they

24 say, here in Paragraph 163, Defendants knew or should

25 have known that the natural consequences of those acts



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1 would be Plaintiffs being unlawfully detained. Knew it

2 or should have known is not willful violation of a penal

3 statute, it's not a knowing criminal conduct, it's --

4 it's negligence. And that theory --

5 JUDGE RENDELL: But I'm still confused.

6 Under the policy there had to have been an occurrence,

7 which there wasn't here. Now, there had -- or there had

8 to have been false imprisonment with either a knowledge

9 that it was violating the rights of others or violations

10 of the penal statute. How do we -- how do you -- how do

11 you then fit within coverage? I mean, the exception

12 is -- for false imprisonment -- is if there is knowledge

13 of violating the rights of others or a penal statute.

14 Clearly that falls under one of these two

15 categories. So how -- I still don't see how, just by

16 saying, oh, knew or should have known, therefore there's

17 coverage. It doesn't fit.

18 MR. CRUZ: Let me take the different

19 pieces of your question one at a time.

20 You first asked about coverage A -- the

21 coverage for bodily injury which requires an

22 occurrence --

23 JUDGE RENDELL: An occurrence.

24 MR. CRUZ: The case law is clear that an

25 occurrence is --



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1 JUDGE RENDELL: An accident.

2 MR. CRUZ: -- is defined as something

3 unintentional --

4 JUDGE RENDELL: It's an accident.

5 MR. CRUZ: -- or unintended.

6 JUDGE RENDELL: An accident.

7 MR. CRUZ: But it's not an accident, it's

8 something that you did not intend to those consequences.

9 That's what the Pennsylvania case law is clear, that's

10 what an occurrence is.

11 In this instance, if it were the case,

12 that Mericle, let's assume, contrary to the actual

13 facts, let's assume Mericle bribed the judges to build

14 the facilities, but had no knowledge, had -- was

15 completely unaware that Powell was going to bribe the

16 judges to wrongfully sentence juveniles there.

17 JUDGE RENDELL: But if the initial act was

18 intentional --

19 MR. CRUZ: But the initial act didn't

20 cause any harm to the kids. The only person defrauded

21 was the IRS, under that theory.

22 Now, it's worth -- I would urge the Court

23 to read carefully the colloquy, which is part of this

24 record where the U.S -- the U.S. Attorney's Office came

25 into open court and --



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1 JUDGE RENDELL: That -- that's a different

2 matter. We're talking about what is pled in the

3 Complaint, it's the four corners of the Complaint. You

4 make that argument and it sounds appealing, but the

5 guilty plea colloquy has nothing to do with --

6 MR. CRUZ: Judge Rendell, with --

7 JUDGE RENDELL: -- what's before us.

8 MR. CRUZ: -- with respect, under

9 Pennsylvania case law, the guilty plea colloquy is very

10 relevant. The Pennsylvania Supreme Court has relied on

11 it in Minnesota Fire v. Greenfield. The Pennsylvania

12 Supreme Court looked to the parallel criminal proceeding

13 and to the colloquy to determine what was being pled in

14 the complaints and they looked to it and said it's

15 relevant for insurance coverage.

16 So under Pennsylvania state law --

17 JUDGE RENDELL: But that's as to what

18 was -- what he did plead to. Here, you're arguing that

19 the colloquy said that somebody didn't do something and

20 you're saying that is fact.

21 JUDGE SMITH: Yes, and so --

22 JUDGE RENDELL: We can't take that as

23 fact.

24 JUDGE SMITH: I'm sorry. And to -- to

25 follow up on that, irrespective of the appropriateness



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1 of considering what may be in a guilty plea colloquy,

2 what value is that colloquy here where obviously what

3 took place was a plea arrangement to account, which did

4 not include the conspiracy with which the Defendant was

5 originally charged. So it would be of very limited, if

6 any, applicability here, wouldn't it?

7 MR. CRUZ: The colloquy is relevant for a

8 couple of reasons. One, the prosecutor explicitly

9 states there is no evidence, zero, none that Mericle

10 knew of the quid pro quo. The colloquy also states --

11 JUDGE SMITH: Well, that gets back --

12 MR. CRUZ: -- that the payments --

13 JUDGE SMITH: -- that gets back to Judge

14 Rendell's question in point, however, that even if the

15 prosecutor said that, that's not what guides us here.

16 A, it's not within the four corners of the

17 Complaint; B, it's a prosecutor's statement, it's not an

18 admission by your client or a finding that has been made

19 from any record before the Court at the time of the

20 plea.

21 MR. CRUZ: Judge Smith, as I said, the

22 Pennsylvania Supreme Court has looked to the colloquy

23 and I will point out in this case the four corners

24 includes the Bill of Information because the Complaints

25 explicitly incorporate the Bill of Information into the



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1 four corners. So that's part of the four corners.

2 And the point is to say, if there are 49

3 theories Plaintiffs have pleaded that are based on

4 conduct that would fall outside of the insurance

5 coverage, and one theory that -- one theory that would

6 fall within, it's black letter law that Travelers has a

7 duty to defend.

8 In this case, Plaintiffs were trying the

9 boot -- the belts and suspenders. And so a theory that

10 they argued to the District Court, they argued on pages

11 12 and 13 of their supplemental Rule 12 opposition, and

12 this is in the record, it's not in the Joint Appendix, I

13 apologize for this, but it's their briefing to the

14 District Court on the Rule 12 issue. Plaintiffs argued:

15 Once a private individual becomes jointly engaged with

16 state officials and therefore is a willful participant

17 in joint activity, the question is whether the

18 prohibited action subjected or caused the deprivation of

19 constitutional rights within the meaning of 1983 and

20 what Plaintiffs argue is that all that is necessary is

21 if Plaintiff sets into motion a series of actions by

22 which the actor knows or reasonably should have known

23 would cause others to inflict the constitutional injury.

24 So Plaintiffs argued, look, it's entirely

25 possible Mericle committed a crime and he was negligent



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1 in not anticipating that Powell and others would commit

2 the violations that caused the Plaintiffs' injuries

3 here.

4 JUDGE RENDELL: But that's -- that's not

5 averred in the Complaint that he was negligent in not.

6 MR. CRUZ: With respect, Your Honor, it is

7 averred repeatedly. And we -- we cite over and over

8 again where the Plaintiffs -- that they plead multiple

9 theories, but the question I would ask, Judge Rendell,

10 would they be permitted to go to the jury and present

11 evidence that Mericle committed a crime in paying the

12 referral fee and to argue that was a kickback and that

13 he was negligent in not knowing what happened next?

14 I'll point out, the District Court in

15 Footnote 4 of its opinion explicitly said yes,

16 negligence is enough. That's what the Plaintiffs

17 pleaded, it's what they argued and the District Court

18 agreed it was a viable theory. And if that's a viable

19 theory, coverage lies.

20 JUDGE SCIRICA: Okay. Let's -- let's hear

21 from your opponent, then we'll have you back on

22 rebuttal, Mr. Cruz. Mr. Arena?

23 Morning.

24 MR. ARENA: Good morning, Your Honors.

25 May it please the Court. Sam Arena on



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1 behalf of Travelers Casualty Insurance Company of

2 America.

3 With my time this morning, in addition to

4 answering Your Honors' questions, I would like to

5 address several of the more creative arguments made on

6 behalf of the Mericle Defendants -- you just got to hear

7 some of those -- as well as what we see are the gross

8 mischaracterizations of the underlying facts as set

9 forth in the -- the three Complaints that are at issue

10 here.

11 Because Pennsylvania law, as Judge Rendell

12 said, under Pennsylvania law the duty to defend is based

13 solely upon the allegations -- the factual

14 allegations -- set forth in the four corners of the

15 Complaint, and since what these complaints actually

16 allege cuts across and is at the heart of all of the

17 issues before the Court, that's where I would like to

18 begin.

19 There should be no dispute that the duty

20 to defend turns on the four corners of the Complaint.

21 And I say should because throughout Mericle's briefs,

22 Mericle attempts to have this Court, as you just heard,

23 go outside the four corners.

24 JUDGE SCIRICA: Well, they claim that

25 your -- you've in effect alleged negligence in the



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1 Complaint. Why is that not the case?

2 MR. ARENA: The Complaints do not allege

3 negligence. As Judge Caputo, who's lived with the

4 underlying cases, he's the sitting judge on both these

5 coverage cases and the underlying cases, as he's clearly

6 laid out in his opinions, the underlying complaints

7 don't set forth claims for negligence, they set forth

8 claims for -- arising out of a criminal conspiracy to

9 deprive the minor Plaintiffs, the juveniles, of their

10 constitutional rights.

11 JUDGE SMITH: Was the opinion in this case

12 the last of the three opinions that Judge Caputo wrote

13 chronologically? It seems --

14 MR. ARENA: This one was.

15 JUDGE SMITH: Yes. So he was able to rely

16 upon his adjudications in the earlier --

17 MR. ARENA: Yes. He had not only been

18 through those, but he is also the sitting judge in the

19 underlying cases and I submit he's very well familiar,

20 perhaps better than anyone else in terms of what these

21 underlying complaints actually allege.

22 JUDGE SCIRICA: How do we -- how do we

23 define or how does Pennsylvania law define "arising

24 under" or "arising out of"?

25 MR. ARENA: I would only point to Your



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1 Honor's opinion in Essex: "but for." It's but for with

2 respect to the insuring agreement and, as Your Honor

3 found in Essex, it's but for causation with respect to

4 the exclusions. That's the law of Pennsylvania.

5 But in terms of the -- the four corners

6 rule in Pennsylvania, as I said, there really should be

7 no dispute as to the fact that that's the law of

8 Pennsylvania, but Mericle would ask this Court to go

9 outside the four corners and ask the Court to consider,

10 as you just heard, Mericle's version of the underlying

11 facts, what Mericle contends the evidence is going to

12 show at trial, what Mericle believes are the true facts.

13 JUDGE SMITH: Well, but Mericle is also

14 making a legal point, a purely legal point in arguing

15 that while it may be intentional -- it is intentional

16 conduct to enter into an agreement -- that is the

17 requisite of a conspiracy, at the same time what was not

18 intended were the actual consequences here of that

19 agreement.

20 Now, that's a legal point. Is that the

21 law? Is that the law of Pennsylvania?

22 MR. ARENA: That -- that would be nice if

23 that's -- if the actual allegations in the underlying

24 complaints supported that argument. But they don't. We

25 have, I believe, over 1,200 paragraphs of allegations



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1 across these three complaints. The Master Class

2 Complaint, which Your Honor should be aware, has no

3 allegations in it at all of reckless conduct or knew or

4 should have known, there's nothing in the Master

5 Complaint at all.

6 JUDGE RENDELL: Well, all right. But even

7 if it did, let's say that the theory was, as stated by

8 Judge Smith, that there's an intentional act but lack of

9 knowledge of the consequences, are you conceding that

10 that, therefore, means it is a negligence cause of

11 action?

12 MR. ARENA: Not at all. Not at all. And

13 in fact, that's not what the Complaints allege. The

14 Complaints allege an intentional criminal conspiracy to

15 deprive the minors of their rights --

16 JUDGE SMITH: Isn't knew or should have

17 known language the language of negligence?

18 MR. ARENA: It can be, but you have to

19 look at the consequences -- the context in which it's

20 presented. In the civil conspiracy count, you cannot

21 have a negligent conspiracy. It requires intent. And

22 if the allegations is that the parties -- and this is

23 the overarching allegation throughout all of these

24 complaints -- that the -- all of the defendants,

25 including Mericle, and one of the points I wanted to get



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1 to was the fact that they say Mericle is not

2 specifically identified. But we quote the paragraphs

3 where they specifically identify Mericle by name.

4 But the overarching allegations here

5 across these three Complaints are that the -- that the

6 Defendants, including Mericle, engaged in this

7 intentional criminal conspiracy to deprive the minors of

8 their rights and part of that conspiracy comes with it

9 the -- the execution and the consequences of the entire

10 conspiracy. You can't, under Pennsylvania law -- or the

11 law of any jurisdiction that I'm aware of -- have a

12 negligent conspiracy. You just can't have that happen.

13 JUDGE SMITH: Where --

14 MR. ARENA: And the fact that sprinkled

15 throughout these Complaints are a reckless allegation, a

16 knew or should have knew allegation -- the Clark

17 Complaint has one reckless allegation. As I said, the

18 Master Complaints have none. There are a handful, just

19 a handful, in the Master Individual Complaint.

20 And the law of Pennsylvania is quite

21 clear, and we cite the cases -- the so-called artful

22 pleading cases -- that if you sprinkle through a

23 Complaint that otherwise sets forth an intent-based

24 claim, intent-based claims here, they don't change

25 the -- the type of claims that are presented. The fact



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1 that there's scattered through a Complaint a reckless

2 allegation here, a negligence-type allegation there,

3 does not change that equation.

4 JUDGE RENDELL: So you're saying if I give

5 you a concoction of club soda and antifreeze, and you

6 die and yet, I say well, you know, I had -- had no idea,

7 you know, that this was going to cause you death, it

8 doesn't convert it -- even though I knew or should have

9 known, it doesn't convert it into a negligent act on my

10 part?

11 MR. ARENA: Absolutely.

12 JUDGE SMITH: Judge Rendell, if you

13 thought the antifreeze was Scotch, I can assure you

14 that's a mistake I would not make.

15 JUDGE RENDELL: [Laughing.]

16 MR. ARENA: Also responding to Your

17 Honor's point: One thing that I think has to be focused

18 on, here as well, is that each of the claims against

19 Mericle, and there are three types of claims -- 1983

20 Civil Rights violations, civil conspiracy we were just

21 talking about, and RICO claims -- each of those three,

22 as with respect to Mericle as a non-state actor, it's an

23 important point, require intent.

24 The Plaintiffs cannot recover against

25 Mericle on any of those theories through negligence.



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1 The 1983 case, Mericle is a non-state actor and as a

2 non-state actor he must conspire -- Plaintiffs must

3 prove that he conspired with a state actor. Again,

4 there's no such thing as a negligent conspiracy.

5 With respect to the RICO claims, they

6 require fraud, intentional conduct, the predicate acts

7 or crimes that require intentional fraudulent conduct,

8 so they can't recover against Mericle on the RICO --

9 civil RICO claims on -- with respect to negligent

10 conduct.

11 And we already talked about the civil

12 conspiracy. You can't have a negligent conspiracy.

13 So as a matter of law, with respect to

14 each of the claims against Mericle, they all require

15 intentional conduct.

16 JUDGE SCIRICA: What about --

17 MR. ARENA: And with respect to this knew

18 or should have known, we cited this in our first trial

19 court brief, but in cutting things down to the -- the

20 point to meet the requirements here for the word count,

21 one citation was left on the cutting room floor, one

22 footnote. With respect to the 1983 aspect of this, I'm

23 not an expert on 1983 actions, but the knew or should

24 have known allegations, as I understand it, are pretty

25 much boilerplate pleading in 1983 cases against state



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1 actors because the issue of whether qualified immunity

2 applies in those cases turns on whether a reasonable

3 official, government official, knew or should have known

4 that the alleged action violated the Plaintiffs' rights

5 and the case we cited in trial court was Walter v. Pike

6 County, 544 F.3d 182 (3d Cir. 2008).

7 So I submit that another reason why you

8 may very well see in these Complaints some knew or

9 should have known allegations, particularly in the --

10 JUDGE SCIRICA: Well, does that --

11 MR. ARENA: -- 1983 claims --

12 JUDGE SCIRICA: Does that cross the line

13 then into a viable claim?

14 MR. ARENA: I don't believe so at all. A

15 negligence claim? Absolutely not.

16 Again, 1983, there can be no recovery

17 against a non-state actor without proof of a conspiracy.

18 JUDGE SCIRICA: The -- the coverage under

19 the policy is excluded for knowing violation of rights

20 of another under -- under coverage B here. So I gather

21 your position is that knowledge means actual knowledge,

22 not constructive knowledge?

23 MR. ARENA: I would go back to -- Your

24 Honor, I would go back to the allegations in the

25 complaint. And here they allege that Mericle knew.



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1 They allege that as part of the conspiracy all of the

2 Defendants knew. That's what they say and I believe

3 that's inescapable. They also allege that this was

4 intentional conduct.

5 That cuts across all of the counts in the

6 complaint.

7 JUDGE SMITH: Taking you back to the

8 occurrence question, how should we read the Gene's

9 Restaurant decision? Does it suggest, does it require

10 us to conclude that all non-intentional conduct is an

11 occurrence?

12 MR. ARENA: I'm not sure that I'm

13 following your question, Your Honor.

14 JUDGE SMITH: Well, if you're not

15 following the question, then it probably doesn't warrant

16 a response. My recollection is that -- that opinion was

17 discussed in -- I thought in both of the briefs and it's

18 a Pennsylvania --

19 MR. ARENA: It is cited.

20 JUDGE SMITH: -- Pennsylvania Supreme

21 Court case. Very brief one, if I recall.

22 MR. ARENA: May I hear Your Honor's

23 question again?

24 JUDGE SMITH: I asked how we should -- how

25 we should regard that decision and whether it requires



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1 us to conclude that if it's non-intentional conduct,

2 any -- any non-intentional conduct, it's an occurrence?

3 MR. ARENA: I don't believe that --

4 intentional conduct certainly is -- does not support a

5 finding that there is an occurrence. I guess I --

6 taking it in a vacuum, I don't know that I can answer

7 Your Honor's question.

8 JUDGE SMITH: All right.

9 JUDGE SCIRICA: Okay. Anything else you

10 want to tell us?

11 MR. ARENA: A comment was made by Mr. Cruz

12 regarding the -- the footnote in Judge Caputo's Clark

13 and Wallace opinions. Those footnotes, first of all, I

14 don't believe they have any impact with respect to the

15 issues that are before this Court whatsoever for several

16 reasons.

17 Number one, they are dicta in the context

18 of the Clark and the Wallace cases. Judge Caputo had

19 already found that the complaints on the 12(b)(6)

20 motions set forth claims for intentional conspiratorial

21 conduct. So number one, they're dicta -- but the short

22 answer is, as I said before, they have no application to

23 Mericle. They were -- to the extent they had any effect

24 at all -- they would have effect with respect to the

25 state actors.



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1 JUDGE SCIRICA: All right. What about the

2 penal exclusion, public policy?

3 MR. ARENA: With respect to the public

4 policy, we've laid out in our brief that there are

5 sufficient grounds here for a finding that there should

6 be no coverage for this type of intentional criminal

7 conspiracy to violate constitutional rights under the

8 public policy of Pennsylvania. We lay that out in our

9 brief, but one point that I would like to note with

10 respect to that, more of a response to what was set

11 forth in the reply brief on behalf of the Mericle

12 defendants, the Mericle defendants attempt to convince

13 the Court that it's premature to consider the duty to

14 defend issue in the context of a public policy argument

15 at this point in the case.

16 In support of their position, they cite

17 three trial court -- three federal trial court

18 positions -- three federal trial court opinions. Those

19 opinions are -- don't have any factual basis in terms of

20 analysis and they certainly don't cite to any

21 Pennsylvania law in support of those positions.

22 They cite Perlberger, CGU, and Sedicum in

23 support of their positions. And I would ask that the

24 Court take a close look at those opinions because they

25 are simply not grounded in Pennsylvania law.



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1 Perlberger contains no analysis whatsoever

2 and it's based on the Court's assumption that the

3 carrier there did not intend to pursue the public policy

4 argument at the duty to defend stage.

5 CGU, the next opinion, simply cites to

6 Perlberger, with no analysis.

7 And Sedicum did find that the public

8 policy issue was not ripe, but stated that "again,

9 because of prior statements to this effect, it must be

10 emphasized that Sedicum's State Court complaint alleges

11 both negligent and intentional conduct," which is not

12 the situation we have here.

13 So, those cases stand, I think, in stark

14 contrast to other decisions of the Pennsylvania Supreme

15 Court, later decisions -- Perlberger was 1995, CGU was

16 2001, and Sedicum in 1993 -- but along comes the

17 Pennsylvania Supreme Court in Greenfield and finds at

18 the duty to defend stage of the case, there was no

19 coverage, no duty to defend and no duty to indemnify as

20 a matter of public policy. So the earlier federal trial

21 court cases have no analysis in them whatsoever. They

22 rely on each other and are at odds with the

23 later-decided case by the Pennsylvania Supreme Court.

24 Thank you.

25 JUDGE SCIRICA: Good. Any -- any further



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1 questions? Thank you, Mr. Arena. Mr. Cruz?

2 MR. CRUZ: Your Honor, I'd like to make

3 three points in rebuttal.

4 JUDGE SCIRICA: Surely.

5 MR. CRUZ: The first point is, my learned

6 colleague, in answering a question from Judge Scirica,

7 gave an answer that was in error, in that Your Honor

8 asked what the law of arising out of was under

9 Pennsylvania and my learned colleague said that

10 Pennsylvania law is absolutely clear, it is but for

11 causation, and he cited this Court to the Essex case.

12 Pennsylvania law is anything but clear on

13 this question, the cases are all over the map, and

14 indeed, the Essex case is an unpublished opinion of this

15 Court, authored by Judge Scirica and joined by Judge

16 Smith.

17 There is another unpublished opinion of

18 this Court authored by Judge Smith and joined by Judge

19 Scirica that says precisely the opposite in a different

20 context, and that's the National Casualty v. Wyomissing

21 case, where it says arising out of in an exclusionary

22 clause means proximate causation.

23 Likewise, the Pennsylvania case law, the

24 best case is the Eichelberger case, in our opinion, that

25 concludes it means proximate causation, but there are



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1 cases on the other side and what the courts have said is

2 it depends on the context. So it is not absolutely

3 clear, the cases are on both sides of it.

4 JUDGE RENDELL: Judge Caputo said causally

5 connected. He was giving it a fairly broad reading.

6 MR. CRUZ: He read it as -- as but for,

7 and my point is the Pennsylvania case law, if you look

8 at the Eichelburg -- Eichelberger case, the Pennsylvania

9 Superior Court is very explicit that in an exclusionary

10 clause where there is any ambiguity, and in this

11 instance we would submit there's considerable ambiguity,

12 that it should be read against the insurer, and so

13 should require more than -- than just but for causation.

14 A second point, Judge Smith asked about

15 whether Pennsylvania law was whether the insured

16 intended the consequences, and that is precisely

17 Pennsylvania law under coverage A under the bodily

18 injury standard. And I would point this Court to the

19 Elitzky case, where the Pennsylvania Supreme Court

20 discusses that at considerable length and says that the

21 damage caused has to be of the same general type. So if

22 you commit one crime, in this instance, the alleged

23 bribes dealing with construction of the prison, the

24 damage there is defrauding the IRS, it's not the same

25 general type as anticipating that there would be a



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1 subsequent corrupt bargain to misuse the judicial powers

2 and improperly send juveniles to --

3 JUDGE SMITH: A subsequent corrupt

4 bargain. Your entire position depends, does it not, on

5 the notion that there are two separate conspiracies.

6 One to build the building, the other to unlawfully

7 detain juveniles in that building, doesn't it?

8 MR. CRUZ: With one tweak --

9 JUDGE SMITH: And that's not what's

10 pleaded.

11 MR. CRUZ: With one tweak, two separate

12 crimes. And that is what's pleaded --

13 JUDGE SMITH: But what's pleaded is one

14 conspiracy, isn't it?

15 MR. CRUZ: With respect, Your Honor, it's

16 pleaded both ways. The Plaintiffs wanted belt and

17 suspenders, so they tried to do it one way but they also

18 pleaded -- if you look at paragraph 656 of the Master

19 Class Complaint, Plaintiffs plead on or before January

20 2003 Defendants agreed that Powell and Mericle will pay

21 the money. Powell understood the payments to be a quid

22 pro quo for the judge's exercise of judicial authority

23 to send the juveniles. The complaint explicitly pleads

24 just Powell. It doesn't say Mericle understood it to be

25 a quid pro quo, and I would suggest the reason is



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1 Plaintiffs were aware there was considerable evidence,

2 in fact, that Mericle didn't know that. And that's the

3 third and final point.

4 Look, Plaintiffs would be thrilled to

5 recover. If they could prove Mericle could do this

6 stuff, they'd be thrilled. But the question is not

7 that. It's are they also trying to recover if the

8 evidence shows Mericle didn't know about Powell's

9 corrupt part, and they unequivocally are. If you look

10 to -- you know, my learned brother says there are a few

11 stray references to knew or should have known. The

12 Master Individual Complaint uses that language in

13 Paragraph 109, Paragraph 113, Paragraph 114, Paragraph

14 124, Paragraph 126, Paragraph 136, Paragraph 139,

15 Paragraph 163, Paragraph 164. And the Clark complaint

16 uses it in Paragraph 248.

17 This is not one stray reference. And he

18 says well, it's artful pleading. The pleading is that

19 the Plaintiffs are trying to get maximum liability. So

20 one of the theories they're pursuing, which they

21 affirmatively argued to the District Court, is that we

22 can get recovery against Mericle under 1983 if he simply

23 knew or should have known what Powell and Ciavarella

24 were doing and the District Court explicitly agreed.

25 Remember the --



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1 JUDGE SMITH: Let me take you back to

2 Paragraph 109 that you just cited to us. I looked at

3 this before. This is a paragraph that avers 1983

4 violations.

5 MR. CRUZ: Yes.

6 JUDGE SMITH: There are numerous

7 subparagraphs there. And all of them begin with

8 "Defendants" plural. All of them. It doesn't single

9 anybody out, it doesn't limit them. All of them are

10 "Defendants" plural. Everybody, including Mericle.

11 MR. CRUZ: Precisely --

12 JUDGE SMITH: And they are -- they -- they

13 are, as I see them, allegations of intentional conduct

14 relative to conspiratorial conduct.

15 MR. CRUZ: With respect, Judge Smith, it

16 says "unlawfully and/or recklessly." Recklessness is

17 one of the basis they're trying to prove and it's belt

18 and suspenders. And if you look at the Pennsylvania

19 Supreme Court, they say look, if there are lots of

20 theories and one that would fall within coverage, then

21 it's got to be covered. The standard is, is it possibly

22 covered and, you know, my learned colleague dismisses

23 Footnote 4 of Judge Caputo's decision, as that was

24 dicta.

25 Judge Caputo explicitly --



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1 JUDGE SMITH: So does your position for

2 coverage come down to the import of the averment of

3 recklessness?

4 MR. CRUZ: Recklessness and negligence.

5 Many of those I gave are not just recklessness.

6 JUDGE SMITH: All right.

7 MR. CRUZ: They're knew -- knew or should

8 have known.

9 JUDGE RENDELL: Have you given us your

10 discrete list of everywhere in the complaint where you

11 alleges --

12 MR. CRUZ: Yes, Your Honor.

13 JUDGE RENDELL: -- or your brief outlines

14 specifically every -- every paragraph?

15 MR. CRUZ: I believe the brief does and

16 I've listed them here in the argument, the ones that say

17 either recklessness or knew or -- knew or should have

18 known.

19 And it's not artful pleading, it's they're

20 trying to get our client to pay them damages and they

21 understand -- remember, the Bill of Information is

22 explicitly incorporated into the Complaint. They know

23 that there isn't evidence that Mericle knew about the

24 bargain, but that -- but Mericle, they want Mericle to

25 pay damages. That's why they pleaded it this way. It's



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1 not because they were trying to impact the insurance

2 litigation. It's because they're trying to get a

3 recovery for what they think Mericle knew or should have

4 known. And under Pennsylvania law that satisfies the

5 test of possibly falling within the coverage.

6 JUDGE SCIRICA: Okay. Any other

7 questions?

8 Thank you very much. The case was very

9 well argued.

10 We'd like to have a transcript made of the

11 oral argument. Ask the parties share in its cost. And

12 if you would check with the Clerk's office, they'll tell

13 you how to do that.

14 Thank you very much.

15 Take the case under advisement.

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1 THE STATE OF TEXAS )I certify that the foregoing is a true and correct

2 transcription, to the best of my ability, of thefollowing .wav files: CL-MARISCRTRM_1-10-12: 9-32,

3 9-37, 9-42, 9-47, 9-52, 9-57 and 10-02.I further certify that I am neither counsel for,

4 related to, nor employed by any of the parties orattorneys in the action in this these .wav files were

5 recorded, and further that I am not financially orotherwise interested in the outcome of this action.

6 Dated: January 24, 2012.

7 /s/ Angela L. Key_________________________

8 Angela L. KeyCornerStone Documents and

9 Reporting808 Travis Street, Suite 440

10 Houston, Texas 77002

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CERTIFICATE OF ACCURACY

I hereby certify that the foregoing transcript is a true and accurate

transcription of the recording provided by the Court of the January 10, 2012 oral

argument.

/s/R. Ted Cruz

R. Ted Cruz



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CERTIFICATE OF SERVICE

The transcript was filed electronically through the Courts electronic filing

system according to the Courts instructions on January 24, 2012. Additionally,

three paper copies were sent to the court pursuant to the Courts instructions.

/s/R. Ted Cruz

R. Ted Cruz
