64 F.3d 1282 (9th Cir. 1995), 94-15241, Safeway Stores, Inc. v. National Union Fire Ins. Co. of Pittsburgh, Pa.

Docket Nº:94-15241, 94-15273.
Citation:64 F.3d 1282
Party Name:D.A.R. 11,421 SAFEWAY STORES, INC., Plaintiff-Appellant-Cross-Appellee, v. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., Defendant-Appellee-Cross-Appellant.
Case Date:August 23, 1995
Court:United States Courts of Appeals, Court of Appeals for the Ninth Circuit

Page 1282

64 F.3d 1282 (9th Cir. 1995)

D.A.R. 11,421

SAFEWAY STORES, INC., Plaintiff-Appellant-Cross-Appellee,




Nos. 94-15241, 94-15273.

United States Court of Appeals, Ninth Circuit

August 23, 1995

Argued and Submitted July 13, 1995.

Page 1283

Fredric J. Zepp, Charles S. Treat, Latham & Watkins, San Francisco, CA, for plaintiff-appellant-cross-appellee.

Thorn Rosenthal, Cahill Gordon & Reindel, New York City; David B. Paynter, Lewis, D'Amato, Brisbois & Bisgaard, San Francisco, CA, for defendant-appellee-cross-appellant.

Appeals from the United States District Court for the Northern District of California.

Before: SNEED, CANBY, and FERNANDEZ, Circuit Judges.

Page 1284

SNEED, Circuit Judge:

Safeway Inc. ("Safeway") appeals and National Union Fire Insurance Company of Pittsburgh ("National Union") cross-appeals from the district court's judgment in this insurance coverage dispute over the settlement of several class actions against Safeway. Safeway contends that the district court erred by (i) holding that a large dividend paid out as part of the settlement was not a loss covered by Safeway's insurance policy, (ii) allocating one-quarter of the settlement and defense costs to Safeway, (iii) dismissing Safeway's other claims against National Union, and (iv) denying Safeway prejudgment interest. National Union argues that, for a number of reasons, all of Safeway's claims should be barred.

For reasons explained below, we reverse the district court's allocation of one-quarter of the settlement and defense costs to Safeway and its denial of prejudgment interest. In all other respects, the district court's judgment is affirmed.



Safeway filed this suit against National Union seeking reimbursement under its directors and officers liability insurance policy ("D & O policy") for the costs of defending against and settling five class-action lawsuits. The suits were brought as a result of the leveraged buyout ("LBO") of Safeway by Kohlberg Kravis Roberts & Co. ("KKR"). The D & O policy contains a corporate reimbursement provision, which covers Safeway for expenditures incurred through indemnification of its officers and directors for the defense and settlement of claims against them.

  1. The LBO

    The Dart Group Corp. ("Dart") launched a hostile takeover attempt by acquiring 5.9 percent of Safeway's stock in May 1986. On July 9, Dart commenced a tender offer for all shares of Safeway stock at $58 per share. Safeway in turn sought a white knight in the form of KKR, and the two companies entered into negotiations regarding the possibility of an LBO. Safeway's board of directors provided confidential business information to KKR, but, at KKR's insistence, withheld it from Dart. On July 21, Dart raised its offer to $64 per share. Dart refused to up its price further without access to Safeway's confidential business information and protested the board's favoritism towards KKR in the bidding process.

    Safeway's board rejected Dart's initial $58 per share tender offer on July 22. The board then voted to approve KKR's proposal, and on July 25, Safeway and KKR executed a Merger Agreement that set out the terms of the LBO. 1 Under the agreement's terms, KKR was to purchase up to 73 percent of Safeway's stock in a tender offer at $69 per share; the remaining shares would later be exchanged for debt securities and warrants. Safeway was required to pay a $15 million signing fee to KKR and agreed that, if the deal fell through, it would pay a $45 million termination fee as well.

    The Merger Agreement authorized Safeway to pay its regular quarterly dividend of $26.2 million. Because the anticipated record date would fall after the closing date of KKR's tender offer, KKR was expected to receive 73 percent of that dividend.

  2. The Lawsuits and the Settlement

    Following announcement of the LBO, six class-action lawsuits were filed against Safeway on behalf of its shareholders, four in state court in California and one in Maryland, and one in federal district court in California. The complaints all alleged that Safeway's directors and officers had breached their fiduciary duty to the shareholders by their conduct in approving the KKR merger, and that KKR had aided and abetted their breach of fiduciary duty. 2

    Page 1285

    In the course of settlement negotiations, Safeway and the plaintiffs in five 3 of the class actions entered into a Memorandum of Understanding. Under its terms, Safeway agreed to change its Merger Agreement with KKR so that the record date for a portion of Safeway's quarterly dividend would occur prior to the closing of KKR's tender offer, thereby resulting in payment to current shareholders rather than to KKR. Safeway also agreed not to oppose the class attorneys' application for fees and disbursements of up to $1.825 million. In return, all claims against Safeway and KKR would be dismissed with prejudice. The final settlement, however, remained subject to plaintiffs' completion of discovery.

    As agreed, KKR and Safeway modified their Merger Agreement so that the dividend was paid early, and their merger deal closed in November 1986. After the plaintiffs completed discovery, the parties entered into a formal settlement agreement in May 1987, which was approved by the California state court in September. 4 The agreement reflected the terms set out in the Memorandum of Understanding.

  3. Safeway's Suit Against National Union

    Thereafter, Safeway demanded coverage of the settlement by National Union, which refused it. Safeway brought suit in federal district court seeking reimbursement of $11.5 million 5 for the early dividend, approximately $1.8 million in plaintiffs' attorney's fees and costs (the "settlement costs"), and approximately $230,000 6 in defense costs and attorney's fees (the "defense costs"). Safeway also alleged breach of contract, breach of the covenant of good faith and fair dealing, and violation of California Insurance Code Sec. 790.03, and requested punitive damages.

    In a series of orders, 7 the district court, presided over by District Judge Jensen, ruled on the parties' summary judgment motions as follows. The court granted National Union's motion for summary judgment on the $11.5 million dividend, finding that Safeway could not show that it constituted a covered loss under the D & O policy. Summary judgment was also granted in favor of National Union on Safeway's claims of breach of good faith and fair dealing and violation of California's insurance code, and Safeway's prayer for punitive damages was stricken. The district court denied National Union's motion to bar recovery by Safeway for failure to indemnify its officers and directors, finding that National Union had not shown that Safeway failed to comply with the indemnification procedures required by Maryland law.

    The court granted Safeway's motion on the settlement and defense costs, holding that both were covered losses. Nevertheless, the court ruled that the $1.8 million in settlement costs and $230,000 in defense costs would be allocated three-quarters to the covered directors and officers (and thus paid for by National Union under the D & O policy) and one-quarter to Safeway and KKR. The result was approximately $1.5 million payable by National Union, minus the $1 million policy deductible, resulting in judgment for Safeway of about $500,000.

    Safeway timely appeals and National Union timely cross-appeals. The district court entered a final judgment in the case on January 5, 1994. Accordingly, this court has jurisdiction under 28 U.S.C. Sec. 1291.



    All of the issues in this case were decided on summary judgment. A grant of summary judgment is reviewed de novo. Jesinger v. Nevada Fed. Credit Union, 24 F.3d 1127, 1130 (9th Cir.1994). Viewing the evidence in the light most favorable to the nonmoving

    Page 1286

    party, this court must determine whether there are any genuine issues of material fact and whether the district court correctly applied the relevant substantive law. Id.

  4. $11.5 Million Dividend

    Safeway contends that the $11.5 million early dividend is a loss covered by the terms of the D & O policy. We agree with the district court that the dividend is not so covered.

    It is difficult to see how a corporation's payment of a dividend could ever be a "loss" under the terms of an insurance policy. 8 Neither the owners of that corporation nor its directors suffered a loss. The effect of a dividend is simply to transfer corporate profits from one part of the corporation to another, that is, from the purse of the corporate entity into the pockets of the corporation's owners, the shareholders. See 11 Timothy P. Bjur & James Solheim, Fletcher Cyclopedia of the Law of Private Corporations Sec. 5318, at 624-25 (1995). In this context, it is absurdly formalistic to view the corporation and its shareholders as separate entities:

    [C]orporateness signifies not a fictitious legal entity which is separate and apart from the body of shareholders, but rather that a corporate personality has been attributed to that body of shareholders. Their joint property is owned by them in their corporate personality, and their joint obligations arising out of the corporate business are owned by them in their corporate personality.

    Robert S. Stevens, Handbook on the Law of Private Corporations 789 (2d ed. 1949). Safeway is not entitled to reimbursement for a payment made, in essence, to itself.

    Furthermore, the fact that Safeway, by action of its directors, arranged to pay the dividend to its shareholders, rather than to KKR as originally anticipated, is of no relevant...

To continue reading