Ferguson v. Lion Holding, Inc.
| Citation | 478 F.Supp.2d 455 |
| Decision Date | 01 March 2007 |
| Docket Number | No. 02 Civ. 4261(PKL).,No. 02 Civ. 4258(PKL).,02 Civ. 4258(PKL).,02 Civ. 4261(PKL). |
| Parties | Robert D. FERGUSON and Ralph Milo, Plaintiffs, v. LION HOLDING, INC., Defendant. Robert D. Ferguson and Milo Family Limited Partnership, Plaintiffs, v. Hannover Rückversicherungs-Akteiengesellschaft, Defendant. |
| Court | United States District Courts. 2nd Circuit. United States District Courts. 2nd Circuit. Southern District of New York |
Willkie Farr & Gallagher, Francis J. Menton, Jr., New York City, for Plaintiffs.
Clifford Chance U.S. LLP, Steven C. Schwartz, James M. Ringer, Thomas Teige Carroll, New York City, for Defendants.
In 1999 defendant Hannover Rückversicherungs-Akteiengesellschaft ("Hannover" or "defendant"), a German reinsurance company, purchased defendant Lion Holding, Inc. ("Lion"). Lion was an insurance holding company whose principal asset was Clarendon Insurance Group, Inc. ("CIGI"). The purchase was executed pursuant to a Stock Purchase Agreement dated February 16, 1999 (the "SPA"). Both plaintiffs are former senior officers of CIGI and were the majority shareholders of Lion prior to the sale; they continued to work for CIGI post-acquisition pursuant to certain employment agreements, which were later modified by a letter agreement dated March 5, 1999 (the "Letter Agreement"). (Carroll Aff. Ex 6 (hereinafter "Letter Agreement").)
This action arises out of plaintiffs' claim that Hannover breached a term of the Letter Agreement that obligated Hannover to pay plaintiffs certain deferred compensation in the event CIGI met certain underwriting goals between 1999 and 2001. While plaintiffs were paid deferred compensation in the amount of $25 million, they claim that they are entitled to the full $100 million payment contemplated by the provision. Defendant Hannover now moves for partial summary judgment, arguing that plaintiffs failed to meet requirements in the Letter Agreement that would have made them eligible for payment of the entire $100 million, thus foreclosing their claims as a matter of law. For the reasons set forth below, Hannover's motion is GRANTED in part and DENIED in part.
Hannover purchased Lion, which owned CIGI, from Lion's shareholders in 1999 pursuant to the SPA. (Def.'s 56.1 ¶¶ 1-2.) At that time, Lion also entered into Amended and Restated Executive Employment Agreements with plaintiffs Robert D. Ferguson and Ralph Milo (the "Employment Agreements"). (Def.'s 56.1 ¶ 3.) Section 2.3 of the SPA and section X of the Employment Agreements provide for the payment to plaintiffs of certain deferred compensation, collectively known as the "Earnout."1 (Def.'s 56.1 ¶ 4.) The terms of the Earnout provide that plaintiffs could earn up to $25 million each year for 1999, 2000, and 2001, and an additional payout for those years combined, resulting in a final amount of up to $100 million. (Def.'s 56.1 ¶ 5.) The Employment Agreements call for any payment of the Earnout to be made on or before May 15, 2002. (Carroll Aff. Ex. 1 at Ex. B, § 2.)
Under the SPA and the Employment Agreements, the Earnout is based on CIGI's "Combined Ratio" for 1999, 2000, and 2001, and also based on a "Weighted Average Combined Ratio" for the three years combined. (Def.'s 56.1 ¶ 6.) The Combined Ratio is the sum of CIGI's Net Expense Ratio and CIGI's Net Loss Ratio.2 (Def.'s 56.1 ¶ 7.) If the Combined Ratio was 80% or greater in any Earnout year, defendant owed no Earnout; if the Combined Ratio was between 75% and 80%, defendant owed a partial Earnout; and if the Combined Ratio was 75% or less, defendant owed the maximum Earnout for that year. The final Earnout payment is calculated in the same manner, except that it is based on a weighted average of CIGI's Combined Ratio for the three individual years. (Def.'s 56.1 ¶ 8.)
The parties agree that CIGI's Combined Ratio for 1999 was 67.7%, and, accordingly, defendant paid the full $25 million Earnout payment for that year. (Def.'s 56.1 ¶ 9; Pl.'s 56.1 ¶ 9.) However, the parties disagree as to whether the Earnout payment obligation has been triggered for the other three time periods: defendant claims that CIGI's Combined Ratio for 2000 and 2001 was 101.6% and 82.2%, respectively, and the weighted three-year average was 82.6%. Consequently, Hannover has not paid plaintiffs any additional Earnout payment.
The Letter Agreement entered into by defendant and Messrs. Ferguson and Milo amends certain terms of their prior agreements3 by providing "Special Operating Rules" regarding the Earnout. (Def.'s 56.1 ¶ 11.) These rules were included because the parties understood that as plaintiffs would continue to "operate [CIGI] after closing" they would be expected to work toward achieving "both the Combined Ratio necessary to trigger payment of the earn-out and a level of profits reflecting an adequate return on Hannover Re's investment." (Letter Agreement 2.) The Special Operating Rules are "designed to reconcile" any conflict that might arise should plaintiffs be asked to effectuate Hannover board decisions or take action in running the company that might negatively impact plaintiffs' ability to achieve the Combined Ratio necessary to trigger payment of the Earnout. (Letter Agreement 2.)
The operational rules are broken into two key provisions,4 sections 5(b) and 5(c). Section 5(b) provides the general rule that (Letter Agreement 2-3; Def.'s 56.1 ¶ 12.) Section 5(c) then sets forth more specific rules governing the level of reserves carried by Hannover or its subsidiaries, including CIGI, to cover future liabilities:
(i) If management disagrees with the level of reserves carried by the Insurance Subsidiaries for any of the accounting periods ending December 31, 1999, 2000, or 2001, then they may give notice to Hannover Re that they demand a neutral determination of the appropriate level of carried reserves for the relevant period
. . .
(ii) If management objects with the level of reserves als [sic] provided above, then the level of reserves shall be established by a neutral expert chosen substantially in the same manner as the party chosen to resolve any disagreement concerning the Closing Reserve Statements in accordance with the last paragraph of Section 5.19.
(Letter Agreement 3; Def.'s 56.1 ¶ 13.) The rules go on to state that the parties assume that the insurance subsidiaries will have an average retention' level of between ten and fifteen percent. (Letter Agreement 3.) It then sets out two illustrative examples of the application of the general rule:
The following two examples help illustrate the general rule. First, if management wishes to retain only 5% of the risk on a particular book of business, and the board of directors decides that the relevant Insurance Subsidiary must retain 15%, then the effect of the Insurance Subsidiary's retention of the additional 10% shall be excluded from the calculation of each Shareholder Item, whether or not the exclusion hurts or benefits management. As a second example, the board of directors shall be free to direct that certain expenses and other charges be allocated from Hannover Re to the Company for financial statement purposes. However, management may disagree with any of these allocations, in which case their effect would not be included when the Shareholder Items are calculated.
(Letter Agreement 3.)6
Certain correspondence referencing the Special Operating Rules followed the execution of the Letter Agreement. Defendant points first to an email sent by Ferguson to Hannover on November 29, 2000, which noted that, "[a]s written, [the Special Operating Rules] contemplate the rather awkward process of the Clarendon board voting to increase retentions, with Ralph and I formally disagreeing." (Def.'s 56.1 para; 15.) Defendant next points to a letter sent to defendant February 5, 2001, in which Ferguson invoked plaintiffs' rights under the Letter Agreement to object to "the Board's decision to cause Clarendon to enter into the new deal with Acceptance and ICH." (Def.'s 56.1 ¶ 17(a).)
In a letter dated July 17, 2001, Ferguson wrote to Herbert Haas, Hannover's CEO and the Chairman of its Board of Directors, to request
a schedule of any changes in retentions or inter-company expense allocations made or contemplated to be made during the year 2001. As you know[,] under Section 5(b) of the side letter dated March 5, 1999, we have the right to disagree with changes in these items. In order to know whether to register an election to exclude such items, I of course must know what the items are.
(Def.'s 56.1 ¶ 16.) On September 19, 2001, Ferguson wrote a letter to defendant informing it that "I hereby give formal notice pursuant to Section 5(c)(i) of the Letter Agreement dated March 5, 1999 ... that management ... disagrees with and objects to the level of carried reserves for the year ending December 31, 2000." (Def.'s 56.1 ¶ 18(a).) By letter dated September 20, 2001, Ferguson stated that he and Milo
formally object[s] to any indemnity claim which arises in whole or in part from losses occurring on or after July 1, 1999, on Clarendon policies issued by Eton Management and further formally object to the inclusion of any loss resulting from the write-off of the reinsurance recoverable associated with the premium portfolio transfer in the calculation of both the earn-out and of the management bonuses.
(Def.'s 56.1 ¶ 17(c).) Finally, on September 21, 2001, Ferguson advised de...
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