Ferguson v. Lion Holdings, Inc., 02 Civ. 4258(PKL).
| Decision Date | 30 March 2004 |
| Docket Number | No. 02 Civ. 4258(PKL).,No. 02 Civ. 4261(PKL).,02 Civ. 4258(PKL).,02 Civ. 4261(PKL). |
| Citation | 312 F.Supp.2d 484 |
| Parties | Robert D. FERGUSON and Ralph Milo, Plaintiff, v. LION HOLDING, INC., Defendants. Robert D. Ferguson and Milo Family Limited Partnership, Plaintiff, v. Hannover Ruckversicherungs-Akteiengesellschaft, Defendants. |
| Court | U.S. District Court — Southern District of New York |
Willkie Farr & Gallagher, New York City, Francis J. Menton, Jr., for Plaintiffs.
Clifford Chance U.S. LLP, New York City, James M. Ringer, Steven C. Schwartz, Mark A. Weissman, for Defendants.
These actions arise out of the acquisition by Hannover Ruckversicherungs-Aktiengesellschaft ("Hannover Re"), a German reinsurance company, of Lion Holding, Inc. ("Lion"). Plaintiffs were officers, directors, and shareholders of Lion at the time of the acquisition in 1999, and remained as executives of Lion after the acquisition through the end of 2001. Defendants are Hannover Re and Lion. Plaintiffs bring these actions for breach of contract, alleging that defendants failed to pay "Earnouts" due under a Stock Purchase Agreement and Employment Agreements executed when Hannover Re acquired Lion. Plaintiffs contend that defendants owe them the maximum Earnouts as provided in the agreements between the parties, which total $100 million. Defendants counterclaim that any damages caused by defendants' alleged breach of contract must be set off against monies allegedly owed to them by plaintiffs pursuant to an indemnification provision in the Stock Purchase Agreement. Defendants also counterclaim that plaintiffs breached their fiduciary duty to Lion and Hannover Re.
Plaintiffs now bring a motion for partial summary judgment. Plaintiffs contend that there is no genuine issue of material fact in dispute as to one of four Earnouts at issue, that for the year 1999, and ask the Court to grant summary judgment that defendants owe plaintiffs $25 million. Defendants respond that genuine issues of material fact remain in dispute about whether plaintiffs should receive the 1999 Earnout. Defendants also contend that genuine issues of material fact relating to their counterclaims remain in dispute, and that this should prevent summary judgment. For the reasons set forth below, plaintiffs' motion for partial summary judgment is denied.
The current summary judgment motion concerns two actions. In the first action (docket number 02-4258), plaintiffs Robert Ferguson and Ralph Milo assert a breach of contract claim against defendant Lion Holding, Inc. ("Lion"). Lion is an insurance company for which Ferguson and Milo served as executives from at least 1996 to the end of 2001. (Plaintiffs' Local Rule 56.1 Statement of Material Facts, ¶ 2 ("Plaintiffs' 56.1"); Affidavit of Joseph W. Jacobs, ¶ 11 ("Jacobs Aff.").) Plaintiffs also served as officers of Lion's subsidiary, Clarendon.1 (Plaintiffs' 56.1, ¶ 2-4; Answer and Counterclaim of Defendant Lion Holding, ¶ 60-61 ("Lion Answer").) In this first action, the operable agreements between plaintiffs Ferguson and Milo and defendant Lion are those that govern plaintiffs' employment as executives of Lion. Plaintiffs claim that defendant Lion owes them $50 million pursuant to these agreements.
In the second action (docket number 02-4261), plaintiffs Ferguson and Milo LP2 assert a breach of contract claim against defendant Hannover Re. Hannover Re is a German reinsurance company that acquired Lion early in 1999. (Plaintiffs' 56.1, ¶ 1.) Plaintiffs Ferguson and Milo LP bring this second action as the shareholders who sold Lion to Hannover Re. The central agreement between the selling shareholders and Hannover Re in this action is a Stock Purchase Agreement ("Purchase Agreement") dated February 16, 1999. (Jacobs Aff., Exh. E.) Plaintiffs claim that Hannover Re owes them $50 million pursuant to this agreement.
The substance of plaintiffs' claims, defendants' counterclaims, the applicable contract provisions, and the facts underlying the disputes are essentially the same for both actions. Plaintiffs move for partial summary judgment on both actions for identical reasons, and defendants likewise oppose summary judgment without distinguishing between the actions. Unless otherwise indicated, references below to the parties denote the plaintiffs or defendants in both actions collectively. Likewise, references to agreements and obligations between the parties refer to the actions and contracts between the parties collectively, unless the Court indicates otherwise.
Four agreements between the parties, governing extensive, competing obligations for each side, give rise to plaintiffs' breach of contract claims and plaintiffs' current motion for summary judgment. First, Hannover Re acquired Lion from the selling shareholders pursuant to a Purchase Agreement dated February 16, 1999. Second, plaintiff Ferguson remained employed as an executive of Lion and Clarendon after Hannover Re acquired Lion, pursuant to an amended employment agreement. (Jacobs Aff., Exh. F.) Third, plaintiff Milo also remained employed as an executive of Lion and Clarendon after Hannover Re acquired Lion, pursuant to an amended employment agreement. (Jacobs Aff., Exh. G.) The terms of Ferguson's and Milo's amended employment agreements are the same for the purposes of this motion, and are referred to in this opinion collectively as the "Employment Agreements." Fourth, the parties reached a letter agreement, dated February 24, 2000 (the "February Letter"), that addresses some of the parties' obligations that arise out of the Purchase Agreement and the Employment Agreements. (Jacobs Aff., Exh. I.) The first three agreements largely provide the basis for the contractual relationship between the parties, and thus largely provide the basis for plaintiffs' breach of contract claims. It is upon the fourth agreement, however, that plaintiffs seek partial summary judgment.
Defendant Hannover Re acquired Lion pursuant to a Purchase Agreement dated February 16, 1999. (Plaintiffs' 56.1, ¶ 1; Jacobs Aff., Exh. E.) Article 2 of the Purchase Agreement includes a provision titled "Additional Purchase Price." (Jacobs Aff., Exh. E, ¶ 2.3.) This provision entitles Ferguson and Milo LP, the selling shareholders, to receive additional compensation if Lion's subsidiary, Clarendon, achieves particular profitability levels for any or all of four periods: 1999, 2000, 2001, and the combined period 1999-2001. (Plaintiffs' 56.1, ¶ 3-4; Defendants' Statement of Disputed Material Facts, ¶ 1 ("Defendants' 56.1"); Declaration of Herbert Haas, ¶ 6-7 ("Haas Decl.").) The additional compensation is called an "Earnout." Under the Purchase Agreement, the maximum Earnout payable to Ferguson and Milo LP for any one year period is $12,500,000, of which Milo LP would receive 70% and Ferguson 30%. (Plaintiffs' 56.1, ¶ 8.)
The criteria used to determine whether Ferguson and Milo LP would receive some or all of the maximum Earnout for any time period is Clarendon's "Combined Ratio." (Jacobs Aff., Exh. E, ¶ 2.3.) The Combined Ratio measures Clarendon's profitability.3 If Clarendon attained a Combined Ratio of 75% or less for any one year period then the maximum Earnout became due to Milo LP and Ferguson. (Plaintiffs' 56.1, ¶ 5, 9; Defendants' 56.1, ¶ 1.) Thus, for example, if Clarendon's Combined Ratio for 1999 was 75% or less, then Hannover Re is obligated under the Purchase Agreement to pay a $12,500,000 Earnout to Ferguson and Milo LP. Hannover Re was obligated to pay any Earnout due under the Purchase Agreement by May 15, 2002. (Plaintiffs' 56.1, ¶ 6, 9.)
Article 7 of the Purchase Agreement, titled "Indemnification," includes separate provisions governing the selling shareholders' obligation to indemnify Hannover Re in certain circumstances. (Jacobs Aff., Exh. E, ¶¶ 7.1-7.6; Plaintiffs' 56.1, ¶ 17; Defendants' 56.1, ¶ 6, 7.) For the purposes of this motion it is useful to note the distinction in Article 7 between two particular indemnity obligations incumbent upon Ferguson and Milo LP. First, Article 7 imposes general indemnification obligations upon the selling shareholders. Article 7 further provides that, should the selling shareholders become obligated to make payments pursuant to the general indemnification provisions, that funds for the payments should be taken from a prioritized list of sources. (Jacobs Aff., Exh. E, ¶ 7.4(B).) Article 7 includes in this list of sources "any amount of Additional Incentive Compensation (as defined under the Employment Agreement Amendments) payable at such time or paid to Milo or Ferguson after the Closing Date," and "any amounts payable at such time or paid to Milo or Ferguson under Section 2.3 of this Agreement [the Earnout provision]." In sum, Article 7 of the Purchase Agreement specifies that in the event the selling shareholders become obligated to indemnify Hannover Re, Earnouts payable or paid to Ferguson, Milo LP, and Milo pursuant to Article 2 or the Employment Agreements are an eligible source of funds to pay the indemnity.
In February 2001, defendant Hannover Re made a claim for indemnification from the selling shareholders pursuant to these general indemnification provisions. (Plaintiffs' 56.1, ¶ 18; Defendants' 56.1, ¶ 6; Jacobs Aff., Exh. J.) Hannover Re claims that the selling shareholders owe hundreds of millions of dollars in payments for indemnification pursuant to Article 7 of the Purchase Agreement. The selling shareholders dispute this claim for indemnification. (Plaintiffs' 56.1, ¶ 18; Defendants' 56.1, ¶ 7; Jacobs Aff., Exh. K.) The parties are currently engaged in litigation in the Supreme Court of New York to resolve this dispute. (Defendants' 56.1, ¶ 7.)
The second indemnity obligation incumbent upon the selling shareholders is described in paragraphs 7.1(C) and 7.4(D) of the Purchase Agreement, which govern Ferguson and Milo LP's indemnification...
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