Fs Investments, Inc. v. Asset Guar. Ins. Co.

• Decision Date: 12 March 2002
• Docket Number: No. Civ.A. 01-20-KSF.,Civ.A. 01-20-KSF.
• Citation: 196 F.Supp.2d 491
• Parties: FS INVESTMENTS, INC., Plaintiff, v. ASSET GUARANTY INSURANCE CO. and Van American Companies, Inc., Defendants.
• Court: U.S. District Court — Eastern District of Kentucky

196 F.Supp.2d 491

FS INVESTMENTS, INC., Plaintiff, v. ASSET GUARANTY INSURANCE CO. and Van American Companies, Inc., Defendants.

No. Civ.A. 01-20-KSF.

United States District Court, E.D. Kentucky, Lexington.

March 12, 2002.

Kevin M. McGuire, Jackson & Kelly, Lexington, KY, for Plaintiff.

Gregory P. Parsons, Ryan S. Quinn, Stites & Harbison, Lexington, KY, for Defendants.

OPINION & ORDER

FORESTER, Chief Judge.

Presently before the Court are various motions of the plaintiff and defendants. Having been full briefed, these matters are ripe for review and will each be addressed accordingly.

I. FACTUAL AND PROCEDURAL BACKGROUND

This diversity action arises from an extended series of negotiations between the plaintiff, FS Investments, Inc. ("FSI") and the defendants, Asset Guaranty Insurance Company ("AGI") and Van-American Companies, Inc. ("VAC")¹, an agreed letter of intent between the parties, and the actions taken thereon. In early 2000, VAC decided to phase out its surety business by selling it to a third party or by engaging in a runoff plan. In January of 2000, FSI expressed an interest in purchasing certain VAC subsidiaries, specifically Van American Insurance Company, Inc. ("VAIC") and Van American Insurance Agency, Inc. ("VAIA"). In February of 2000, the parties entered into a Confidentiality Agreement, permitting FSI to review certain business information concerning VAIC and VAIA as well as certain of AGI's reinsurance portfolios related to that business. Shortly thereafter, FSI representatives and agents met with VAC and AGI representatives and agents in Lexington, Kentucky and began reviewing the books and records of VAIC and VAIA.

After this meeting, FSI determined that it was interested in pursuing negotiations regarding a potential acquisition of VAIC and VAIA through a stock purchase. To that end, FSI forwarded the first of many letters of intent to an AGI representative. AGI rejected this initial proposal, but the parties continued to negotiate. Throughout the spring, the parties exchanged term sheets and FSI tendered numerous acquisition proposals. Each new proposal was more detailed than the former proposal.

On June 2, 2000, these negotiations culminated in FSI's final proposal setting forth the principal terms and conditions upon which FSI was prepared to enter into an agreement (the "Purchase Agreement") with VAC pursuant to which FSI would acquire certain of the business assets of VAIC and VAIA by acquiring all capital stock of those subsidiaries. Many of the terms and requirements of the purchase agreement and TPA agreements were outlined in great detail while other terms were left open for completion to the satisfaction of the parties thereto.

In addition to the purchase agreement and TPA agreement terms contained in the letter, FSI also expressed its intention to move forward with the agreement expeditiously. Specifically, FSI stated that it was interested in entering into a definitive Purchase Agreement and TPA Agreement II (collectively the "transaction documents") with VAC and AGI as soon as practicable, and in any event within sixty (60) days after VAC and AGI accepted of the terms of this letter. FSI also outlined temporal stages at which the parties would be able to exercise limited termination rights after accepting the terms of the letter. VAC or AGI could terminate the letter within thirty (30) days of acceptance if FSI had not obtained a written commitment for the guaranty, security agreement or pledge of collateral as described in the letter or if VAC or AGI decided not to proceed based upon its due diligence or the inadequacy of collateral. In addition, VAC or AGI could terminate the letter if FSI's board of directors had not approved the terms and conditions therein by June 15, 2000. FSI could terminate the letter within thirty (30) days of acceptance by VAC and AGI if the board of directors of VAC or AGI had not approved the terms and conditions of the acquisition as reflected in the letter. Finally, and in unconditional terms, FSI stated that, "[o]nce executed, the provisions of this letter shall expire upon the earlier of (a) the execution and delivery of a definitive Purchase Agreement by the parties hereto and (b) ninety (90) days after [VAC's and AGI's] acceptance of the terms of this letter, unless the parties shall otherwise agree." Thomas Aff., Letter of Intent, Exhibit 1 at 12, 15..

On June 2, 2000, FSI, VAC and AGI signed the agreed letter of intent. The parties immediately began due diligence, worked toward satisfaction of the express terms in the letter and began negotiating the open terms in the letter. On June 26, 2000, AGI and VAC requested a thirty (30) day extension of the right to terminate the letter of intent based upon its due diligence or with respect to the collateral to be provided in support of FSI's payment obligations. Jacobs Aff., Exhibit 15. AGI and VAC also requested a thirty (30) day extension of "the date by which the letter of intent shall have been approved by the board of directors of VAC and AGI after which date FSI may terminate the letter of intent. Absent such an agreement of extension of these provisions in paragraph 7 of the letter of intent, AGI and VAC may need to terminate the letter of intent in accordance with the provisions of paragraph 7(i)(C)." Id. Noting the importance of the deadlines, FSI reluctantly extended the period for satisfaction of the conditions² with the understanding that VAC and AGI would promptly complete whatever diligence was necessary. Id. at Exhibit 16.³

The parties discussed the collateral and exchanged correspondence throughout the next month in an effort to determine whether to proceed with the acquisition or terminate the letter of intent under the provisions in paragraph 7. In mid July, AGI and VAC asked FSI to identify the chief executive officer slated to run the business upon acquisition and expressed a need to review FSI's detailed business plan to quell apprehensions about the collateral. Id. at Exhibit 19. Citing confidentiality concerns, FSI refused to introduce the CEO candidates, but agreed to provide a detailed business plan. Id. at Exhibit 20. However, the thirty (30) day extension for due diligence and termination of the letter was about to expire. Once again, the parties agreed to extend the termination deadlines as well as the target and expiration dates as expressed in the agreed letter of intent. FSI proposed the following changes:

FSI agrees to the following modifications of the Letter of Intent:

1. The 60 days following the date of the Letter of Intent within which Transaction Documents are targeted to be completed in paragraph 6 of the Letter of intent shall be extended to 87 days, meaning the close of business, August 28, 2000.

2. Each of the periods referred to in clauses (i)(A), (i)(B) and (i)(C) as well as clause (ii) of paragraph 7 of the Letter of Intent shall be extended to 70 days following acceptance of the Letter of Intent, meaning the close of business Friday, August 11, 2000.

3. The expiration date referred to in clause (b) of paragraph 15 of the Letter of Intent shall remain as previously last agreed under our letter of June 28, 2000, i.e., the close of business, Monday, October 2, 2000.

If the foregoing accurately describes our understanding with respect to modifications of the dates referred to in the Letter of Intent, please so indicate by signing and returning a copy of this letter.

Id. at Exhibit 21. VAC and AGI signed and returned the letter, extending the deadlines as outlined therein.

FSI subsequently forwarded its business plan to AGI and VAC. The defendants carefully reviewed the plan, and on August 4, 2000, informed FSI that at this juncture, "the business plan appears to remove most of the concerns of VAC and AGI regarding the collateral." Id. at Exhibit 25. "While VAC and AGI are not waiving any rights under the June 2, 2000 Letter of Intent, as amended, ... VAC and AGI believe it would be appropriate for ... FSI to `re'-initiate and move forward as quickly as possible with any and all necessary approvals with the Kentucky Department of Insurance (`KDOI')." Id. AGI also stated that it cannot seek its own approval "from the New York Department of Insurance until the KDOI has signed off on the transaction and restructuring, and as you know, both of those steps are necessary pre-cursors to proceeding to close the contemplated transaction." Id.

As soon as FSI learned that the collateral issues were for the most part resolved, it continued efforts to achieve KDOI approval. To that end, FSI requested initial drafts of the transaction documents (including the stock purchase and TPA agreements) which were to be prepared by VAC and AGI. Id. at Exhibit 27. FSI hoped to include those draft transaction documents in its KDOI approval application. Id. On August 11 2000, VAC suggested that the draft transaction documents were not required for KDOI approval and it would be imprudent to invest time and money in those documents prior to application for approval. Id. at Exhibit 28. Instead, VAC believed that the detailed letter of intent coupled with supplementary information would be sufficient for the KDOI approval application. Id. Subsequently, AGI and VAC reviewed FSI's draft application. Jacobs Aff., ¶ 22.

On August 22, 2000, representatives of FSI, AGI and VAC met with members of the KDOI to discuss the filing and approval process. Id. at ¶ 23. At the meeting, VAC confirmed with the KDOI that the letter of intent could be attached to the application in lieu of transaction document drafts. Id. With this information in hand, FSI filed the final approval application on August 25, 2000. Id.

On September 14, 2000, Frank Dempsey, counsel for the KDOI, informed FSI that the public hearing was tentatively scheduled for October 25, 2000. Id. Recognizing that the letter of intent would expire on October 2, 2000 if the parties had not yet executed a...