American Annuity v. Guaranty Reassurance, No. C-1-95-454.
| Decision Date | 18 April 2001 |
| Docket Number | No. C-1-95-454. |
| Citation | 140 F.Supp.2d 859 |
| Parties | AMERICAN ANNUITY GROUP, INC., et al., Plaintiffs, v. GUARANTY REASSURANCE, CORPORATION, Defendant. |
| Court | U.S. District Court — Southern District of Ohio |
James Eugene Burke, Daniel E. Izenson, Paul D. Dorger, Keating Muething & Klekamp, Cincinnati, OH, for American Annuity Group Inc., Great American Life Insurance Company, plaintiffs.
Kenneth Joseph Schneider, Wood & Lamping, David Alan Caldwell, Eric Carl Holzapfel, Wood & Lamping, Cincinnati, OH, for Guaranty Reassurance Corporation, defendants.
This matter is before the Court on Plaintiffs' Combined Motion to Dismiss, or in the Alternative, Motion for Summary Judgment, Motion to Strike, and Motion for Judgment on the Pleadings, and a Memorandum in Support of Judgment (doc. 52); Defendant's Response (doc. 55); Plaintiffs' Reply (doc. 56); Defendant's Motion to Extend the Discovery Deadline (doc. 59) and Plaintiffs' Response (doc. 60). In addition, the Court held a Hearing in this matter on June 18, 2001 (doc. 57).
This case arises out of a Stock Purchase Agreement (the "Agreement") between Plaintiffs American Annuity Group, Inc. and Great American Life Insurance Company (hereinafter, collectively referred to as either "Plaintiffs" or "GALIC") and Defendant Guaranty Reassurance Corporation (hereinafter, collectively referred to as either "Defendant" or "GRC") (see doc. 1).
In late 1994, GALIC agreed to purchase the stock of Western Pacific Life Insurance Company (hereinafter, referred to as "Western Pacific") from GRC (Id.). After the deal was closed, a disagreement arose over the interpretation of certain price provisions in the Purchase Agreement (Id.). Plaintiffs claim that GRC breached the contract by improperly refusing to reduce the purchase price under the Price Adjustment Clause of the Agreement (Id.). Plaintiffs filed suit in federal court seeking to be awarded for the contractual adjustment in the purchase price.
The following factual and procedural histories are taken directly from the Sixth Circuit's decision in the case of American Annuity Group, Inc. v. Guaranty Reassurance Corp., 211 F.3d 1268, No. 98-4337, 2000 WL 572021, at *1-3 (6th Cir. May 5, 2000) (unpublished opinion):
The defendant, Guaranty Reassurance Corporation (GRC), is a Florida corporation based in Jacksonville which operates troubled insurance companies on behalf of state guaranty associations, managing their asset portfolios until the policies and assets can be sold to another life insurance company. In March 1994, GRC began managing the assets of the Western Pacific Life Insurance Company, a California life insurance company. Western had been in conservatorship under the supervision of the California Department of Insurance since August 1991. Although Western had never been insolvent, it had been placed in conservatorship because of the insolvency of its parent corporation, the Guaranty Security Life Insurance Corporation.
In April 1994, GRC conducted a nationwide direct mail solicitation in an effort to find a high bidder for the stock of Western. To prepare Western for sale, GRC purchased all of Western's "below investment grade" securities, and placed its entire asset portfolio in low-yield Treasury securities. Western necessarily absorbed certain losses associated with this change, intended to allow the prospective purchaser easily to reinvest Western's assets in accordance with its own risk, yield, and diversity needs, thus reducing Western's capital and surplus for valuation purposes.
In May 1994, the plaintiffs, American Annuity Group, Inc., and its wholly owned subsidiary, Great American Life Insurance Company, (collectively GALIC), requested a bid package and performed a preliminary due diligence assessment of Western. The bid package included an audited annual financial statement for 1993, disclosing, among other things, that no "cash flow testing" had been done with regard to Western's assets, and that, therefore, no "cash flow testing reserve" had been established; this had not been required while Western was in conservatorship.
GALIC was among several companies submitting bids for Western. GALIC's bid, the highest, was accepted in July 1994, subject to further due diligence and the signing of a purchase agreement. On September 19, 1994, GALIC and GRC executed a Stock Purchase Agreement for the acquisition of Western by GALIC. The agreement used the following formula to calculate the purchase price:
1.2 Purchase Price; Payment. The aggregate purchase price ("Purchase Price") for the Shares shall be an amount equal to the sum of (i) $540,000 and (ii) the capital and surplus of Western determined as of the Closing Date (as defined in Section 1.3) in accordance with Section 1.4....
1.4 Capital and Surplus. The amount of capital and surplus of Western, for purposes of calculating the Purchase Price under Section 1.2 shall be Western's capital and surplus (including its Asset Valuation Reserve and Interest Maintenance Reserve) as stated on Western's regularly prepared statutory accounting statements.
On December 12, 1994, the California Department of Insurance granted approval for the acquisition, contingent upon GALIC contributing $500,000 to Western's capital, which it did. The transaction closed on December 30, 1994.
Immediately before closing, because "Western's regularly prepared statutory financial statements" "determined ... as of the Closing Date" were not available, the parties entered into an Agreement as to Post Closing Adjustment. Under the terms of this agreement, GALIC would pay an estimated purchase price calculated on the basis of Western's September 30, 1994, financial statement, which price would be adjusted later when a purchase price based on "Western's regularly prepared statutory financial statements as of December 31, 1994, prepared by Western," became available. Both parties knew at this time that the September 30 financials, upon which the estimated price would be based, did not provide any cash flow test reserve.
Including $50,000 earnest money already paid, the estimated purchase price paid on December 30 totaled $6,102,842.
On January 9, 1995, GALIC and GRC entered into an agreement whereby GRC would prepare Western's year-end statement for 1994. This statement, prepared in the same manner as the previous statements GRC had prepared for Western during the period of its conservatorship, revealed that GALIC was entitled to a $144,412 reduction in the purchase price, representing expenses incurred in excess of income received between September 30 and December 31, 1994.
GALIC then prepared its own version of the financial statement, adding a cash flow testing reserve of $1,500,000. This reduced Western's capital and surplus by $1,500,000, and thus also the purchase price by a like amount. This move would also have brought the value of Western below a cut-off value specified by California's regulatory agency, so the new statement also included an asset of the same value, described as a "receivable" from GALIC-that is, the $1,500,000 claim GALIC felt it had against GRC for a purchase price refund.
Subsequently GALIC's actuary consulted an outside auditor concerning the size of the cash reserve required, and modified the size of the reserve to $1,200,000. The $1,500,000 receivable was left unchanged.
Based upon these numbers, GALIC calculated that it was owed $1,359,412 as a purchase price reduction, plus interest on that amount from December 30, 1994, at the rate of 8.5%. After unsuccessfully demanding that GRC voluntarily remit the funds, GALIC brought suit against GRC on May 18, 1995, to recover that amount. On June 14, 1995, GRC removed the case to the United States District Court. The parties agree that their agreement is governed by Florida law, as provided in the choice of law provision of the September 19, 1994, Stock Purchase Agreement.
The district court found that the term "regularly prepared statutory financial statements," while facially unambiguous, contained a latent ambiguity-whether those statements were to include a cash flow testing reserve. The district court acknowledged that GALIC, responsible as of December 30 to prepare the year-end statement, was required by California law to perform cash flow testing. However, the court noted that GRC, which had operated Western during the previous nine months, had not been required to perform cash flow testing because Western had been in conservatorship, and that therefore a valuation reflecting cash flow testing "provided an inaccurate picture of Western Pacific's financial strength."
On October 8, 1998, the district court entered judgment in GALIC's favor. However, the court awarded GALIC only $109,412 plus interest at the annual rate of 8.5%, rather than the $1,359,412 it sought. The district court resolved the latent ambiguity that it found in the phrase "regularly prepared statutory financial statements" in favor of GRC, finding that it had not been the intent of the parties to base Western's purchase price on a calculation using cash flow testing.
American Annuity Group, 2000 WL 572021, at *1-3 (emphasis in the original).
GALIC appealed this Court's judgment in their favor and award of only $109,412 plus interest at the annual rate of 8.5%, rather than the $1,359,412 plus interest that Plaintiffs had originally sought, to the Sixth Circuit Court of Appeals (see doc. 42). GALIC advanced three arguments to support its appeal of this Court's damages award decision to the Sixth Circuit: "(1) that the district court erred in failing to account for plaintiffs' earnest money payment in its final award of damages; (2) that the district court erred in finding that the purchase price formula in the Agreement as to the Post-Closing Adjustment...
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