Harbinger F&G, LLC v. Om Grp. (Uk) Ltd.
| Decision Date | 18 March 2015 |
| Docket Number | 12 Civ. 05315 (CRK) |
| Parties | HARBINGER F&G, LLC, Plaintiff, v. OM GROUP (UK) LIMITED, Defendant. |
| Court | U.S. District Court — Southern District of New York |
Plaintiff, Harbinger F&G, LLC ("Harbinger"), commenced this breach of contract action against Defendant, OM Group (UK) Limited ("OM"), to secure payment of a post-closing purchase price adjustment pursuant to the First Amended and Restated Stock Purchase Agreement ("SPA").2 Under the SPA, Harbinger purchased all of the outstanding shares of capital stock of Old Mutual Financial Life Insurance Company ("OMFLIC") from OM.3 Joint Pretrial Order App. 1 ¶ 4, Oct. 16, 2014, ECF No. 90 ("JPTO Stipulated Facts"). After its acquisition (the "Acquisition") by Harbinger, OMFLIC was renamed Fidelity & Guaranty Life Insurance Company ("F&G Life").4 JPTO Stipulated Facts ¶ 7. Under the SPA, OMFLIC was to enter intoa post-closing reinsurance transaction ("Reinsurance Transaction") with Front Street Re Ltd. ("Front Street"), an insurance company owned indirectly by Harbinger. JPTO Stipulated Facts ¶ 7; Defendant's Counter-Statement to Plaintiff's Statement of Undisputed Material Facts ¶ 4, Nov. 5, 2013, ECF No. 51 (undisputed). This transaction required the approval of Maryland regulators. The SPA provided that if such approval was not obtained and Harbinger fulfilled other certain contractual conditions precedent, Harbinger would be entitled to a post-closing purchase price reduction ("PP Reduction") that is the subject of dispute in this action. In response to Harbinger's claim for the PP Reduction, OM asserted nine affirmative defenses and counterclaimed for breach of contract, arguing (1) that Harbinger breached several of its obligations under the SPA; (2) that Harbinger breached its representations and warranties under the SPA by failing to disclose any pending or written threats of action against Harbinger or its affiliates; and (3) that Harbinger breached the SPA § 5.14(c) by failing to pay the full amount of a quarterly facility fee owed to OM for OM's continued maintenance of an existing letter of credit.
On May 27, 2014, the court denied the parties' motions for summary judgment on Harbinger's breach of contract claim and OM's first counterclaim for Harbinger's breach of its obligations under the SPA. The court granted summary judgment in favor of Harbinger on OM's second counterclaim for breach of representation and warranty, and granted partial summary judgment in favor of OM on its third counterclaim for Harbinger's failure to pay the full amount of the quarterly facility fees. Thereafter, the court held a bench trial, from October 20, 2014 to October 27, 2014, to resolve all remaining issues. The court finds that Harbinger has demonstrated it is entitled to the PP Reduction amount it seeks under the SPA. OM is entitled to the monies claimed for the full amount of the quarterly facility fees. OM did not provide any legal theory in its Post-Trial Proposed Findings of Fact and Conclusions of Law regarding its affirmative defensesthree through eight (respectively, waiver and estoppel, impossibility, unclean hands, good faith and fair dealing, prevention, and the duty to mitigate).5 To the extent that OM proffered factual evidence at trial regarding its affirmative defenses three through eight, the court finds that OM has failed to meet its burden to prove any of these defenses by a preponderance of the evidence.
Harbinger and OM dispute OM's obligation to pay the $50 million PP Reduction provided for in the SPA. The parties agreed to the PP Reduction in the event that the Reinsurance Transaction contemplated by the SPA was not approved by the relevant regulators, here the Maryland Insurance Administration ("MIA").
The PP Reduction would only be due if certain conditions under the SPA were met. First, the SPA § 5.21(b) and § 5.21(c) required Harbinger to prepare and file approval documentation for a Reinsurance Transaction between OMFLIC, who entered into the transaction as F&G Life, and Front Street, specifically a Form D,6 substantially on the terms set forth in the term sheet agreed to by the parties. Second, the SPA § 5.21(d) required Harbinger to use reasonable best efforts to obtain governmental approval for the Reinsurance Transaction, required both parties to cooperate with any reasonable requests from each other in pursuit of MIA approval, and preventedboth parties from taking any action that would materially delay, impair or impede governmental approval. PTX 1.062.7 Third, if obtaining government approval of the Reinsurance Transaction were to require a change to the transaction that would materially and adversely affect the economic benefits Harbinger reasonably expected to receive, the SPA § 5.21(d) required Harbinger and OM to engage in Remedial Efforts. Remedial Efforts required both Harbinger and OM to use their "reasonable best efforts and cooperate and negotiate in good faith to agree to alternative terms that are acceptable to such Governmental Entity and provide benefits substantially similar to the benefits provided under the existing terms thereof . . . ." PTX 1.063.
Despite these conditions, the SPA Remedial Efforts provision did not require Harbinger to accept any alternate terms containing an Adverse Reinsurance Transaction Condition or Restriction ("Adverse Condition"). PTX 1.063. Relevant here, the SPA § 5.21(d)(C) defined an Adverse Condition to include anything "that restricts, precludes or conditions the appointment by Front Street (or OMFLIC, if applicable) of Harbinger . . . as investment manager of assets to be deposited into the Trust Account or the Funds Withheld Account as contemplated in the Reinsurance Transaction Term Sheet with an aggregate value of at least $750,000,000," and in § 5.21(d)(D), anything "that requires any substantive change to the investment guidelines applicable to the assets in the Trust Account or Funds Withheld Account as set forth in the Reinsurance Transaction Term Sheet." PTX 1.063.
PTX 2.002. The Term Sheet further stated that "the division of Premium between the Trust Account and the Funds Withheld shall be mutually agreed by [F&G Life] and [Front Street]." PTX 2.002.
The types of assets permitted in the Trust Account were "limited to assets of the types which qualify as admitted assets and . . . which are 'Trust Account Eligible Assets' under the Trust Investment Guidelines set forth as Exhibit A [("Investment Guidelines")]." PTX 2.002. The Investment Guidelines ranked the eligible asset categories based on the asset's investment grade. PTX 2.006. Investment grade is rated by the National Association of Insurance Commissioners ("NAIC") on a scale of 1 to 6, with NAIC 1-2 being investment grade, while NAIC 3-6 are belowinvestment grade. PTX 2.006; Marhoun Direct, Trial Tr. 262:13-19, Oct. 21, 2014, ECF No. 95; Gass Direct, Trial Tr. 306:3-19, Oct. 21, 2014, ECF No. 95; Bannigan Direct, Trial Tr. 685:15-22, Oct. 23, 2014, ECF No. 99. The maximum percentage-value Harbinger was permitted to invest in each category was a percentage of F&G Life's entire asset portfolio, not only the assets in the Trust Account. Bannigan Cross, Trial Tr. 794:10-795:4, Oct. 24, 2014, ECF No. 101; Marhoun Direct, Trial Tr. 276:9-277:25. F&G Life's entire asset portfolio was valued at roughly $15 billion. PTX 269; Marhoun Direct, Trial Tr. 277:21-25. Harbinger could invest up to 5% of F&G Life's entire $15 billion portfolio in the Trust Account in the below investment grade category NAIC 5 to 6 and, of that 5%, could invest up to 3% in the below investment grade category NAIC 6. PTX 2.006.
Harbinger submitted the Form D application to the MIA on July 26, 2011. PTX 54. The Reinsurance Transaction was not approved by the MIA. See PTX 149. The MIA's January 10, 2012 letter denying the Reinsurance Transaction provided two reasons for the rejection. First, the MIA pointed to a "significant increase in the amount of below-investment-grade assets ultimately supporting F&G Life's policyholder obligations under the proposed transaction." PTX 149.004. Second, the MIA articulated a concern that Front Street's sale of certain assets transferred to it as part of the Reinsurance Transaction would "produce a realized gain of approximately $230 million," and that this would be "an unreasonable profit given the valuation range on the transferred...
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