Expectations of D & O Coverage exhaustion have been raised by a "federal judge's decision to allow a securities fraud class-action lawsuit against the former officers and directors of Lehman Brothers to move forward". Wayne State University Law Professor Peter J. Henning, "Legal Fees Keep Surging in Lehman Class-Action Suit" ("Dealbook" Blog Post on August 1, 2011 on New York Times Online). Professor Henning estimates in his blog post that Lehman Brothers' original holding of $250,000,000.00 in Director's and Officer's Liability Coverage that a total of some $85,000,000.00 to $100,000,000.00 of it has been exhausted in paying "legal fees and other settlements." See id. Parenthetically, the Plaintiffs in the class-action securities fraud lawsuit allege that they bought $31,000,000,000.00 -- or $31 Billion -- in Lehman securities. Id.
The "former officers and directors of Lehman Brothers" may never realize how lucky they really are. In an equally recent decision, another Federal Judge in another District held that a D&O Carrier had no Insurance Coverage for directors and officers sued for alleged misdeeds. Download Sandburg Financial Corp. v. National Union Fire Insurance Co. (S.D. Tex. Case No. H.10.2332, Opinion and Order Filed July 25, 2011) PUBLIC ACCESS, also published as 2011 WL 3104406 (S.D. Tex. July 25, 2011)(authorized password required to access Westlaw).
The facts of this case present a complicated puzzle. In brief and general terms, one Murphy was Chairman of the Board and CEO of ERLY Industries. "In 1987, Murphy and/or ERLY loaned Hansen Foods, Inc. ('Hansen') more than $20,000,000.00." Sandburg Financial Corp. v. National Union Fire Insurance Co., 2011 WL 3104406 at *1. The loan was secured partly with an interest in land held by Hansen. Barrington Capital Corporation, Sandburg Financial's predecessor corporation, entered into a purchase agreement with Hansen with Murphy's and Barrington's consent. Not only that, but Barrington received Murphy's and ERLY's agreement to indemnify Barrington if Barrington incurred losses in the sale, in essence.
However, Hansen sold the property to someone else, not Barrington. In 1996, Barrington obtained the first of three Judgments at issue in this D&O Insurance case in 2011: Against Hansen, for $7,414,677.00 plus $211,378.16 in Attorney's Fees. The 1996 Hansen Judgment was entered on February 15.
Soon thereafter, Sandburg was in existence as Barrington's successor corporation. One of the first things that Sandburg did, apparently, was to sue ERLY. In 1998, Sandburg obtained a Judgment: Against ERLY for $9,118,626.00. Murphy, the Chair and CEO of ERLY it will be remembered, assigned all rights including for Bad Faith against ERLY's D&O Carrier, to Sandburg. In 1999, Murphy filed for Bankruptcy.
Ten years after Sandburg obtained the 1998 ERLY Judgment, in 2008, Sandburg sued Murphy for alleged wrongful acts as a Director and Officer of ERLY. In 2009, Sandburg obtained a Judgment for $19,654,779.00 against Murphy.
In 2010, Sandburg filed the instant D&O Insurance Coverage lawsuit. It filed suit against National Union, the D&O Carrier which issued a Policy to ERLY. Unfortunately for Sandburg, as recited by the Federal Court, "[h]ere, the policy claim arose from Barrington's June 1996 Demand that ERLY's officers and directors pay the 1996 Hansen Judgment." Id. at *4. The Endorsement changing the Named Insured is quoted in the Court's Opinon. The Endorsement recites that it would take effect as of April 2, 1996. It will be recalled that the 1996 Hansen Judgment was already entered by that time, or on February 15.
The Federal Court in this case held that, for purposes of Insurance Coverage under the National Union D&O Policy before it, under the enforceable Endorsement changing the Named Insured, ERLY was no longer the Named Insured on the National Union D&O Policy. Instead, an alleged subsidiary of ERLY became the Named Insured on that Policy. The Federal Court held that by the clear terms of the D&O Policy at bar, there was no Coverage available for a parent corporation of the Named Insured. Accordingly, the Federal Court dismissed Sandburg's Breach of Contract Claim against National Union on that ground alone. Id. at *5.
Whew. And that is only a "summary" of the main points leading up to that Order of Dismissal. The Court's holding by which it dismissed Sandburg Financial's Claim for Breach of the Duty of Good Faith and Fair Dealing, without citing any authority for the Dismissal of the Assignee's Bad Faith Claim, is disturbing. The Court held, almost alone in the field of reported cases, that an "anti-assignment" clause in the Insurer's Policy is a bar to assignment of Bad Faith Claims. Id. at *6. Although the case may have been rightly decided for other reasons, the Federal Court's holding that an Assignee of Bad Faith Claims cannot sue for Bad Faith if the Insurance Policy contains a no-assignment clause is, to say again, virtually alone in the field of decided cases on this question. See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 7:2, "Actions by Third Parties -- Assignment" (West Publishing Co. Third Edition 2011).
Will directors and officers in the future engage in activities like the conduct in question that is alleged in these decisions? If so, will future conduct be deterred more by exhaustion of available D&O Coverage, or never having D&O Coverage available in the first place? Results will tell.
The 22nd Annual Bad Faith Litigation Conference of the American Conference Institute is being held in 2011 in Orlando, Florida. The author will be speaking. As a result, the readers of this Blog are invited to a $200.00 discount if they choose to register for the Conference. The authorized Code from the ACI is ICI 200. Here is a link to the American Conference Institute Website Page which features this Conference including registration, if you or anyone you know would like to attend.
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