International Ins. Co. v. Johns

Decision Date07 June 1989
Docket NumberNo. 88-5530,88-5530
Parties, Fed. Sec. L. Rep. P 94,490 INTERNATIONAL INSURANCE CO., a corporation, Plaintiff-Appellant, v. Alfred M. JOHNS, James W. McFadden, Thomas V. Ogletree, Richard W. Sherman, and G. Paul Whorton, Defendants-Appellees.
CourtU.S. Court of Appeals — Eleventh Circuit

Bruce G. Hermelee, Hermelee, Coward & Minkin, P.A., Todd A. Cowart, Miami, Fla., for plaintiff-appellant.

Lewis R. Mills, Audrey G. Fleissig, St. Louis, Mo., Jerome A. Pivnik, Miami, Fla., for defendants-appellees.

Appeal from the United States District Court for the Southern District of Florida.

Before VANCE and COX, Circuit Judges, and KING *, Chief District Judge.

JAMES LAWRENCE KING, Chief District Judge:

In this appeal we examine golden parachutes 1 and corporate control from an insurance law perspective. A Florida corporation's board of directors adopted golden parachutes for several key executives. After change in corporate control opened the parachutes, a disgruntled shareholder instituted a derivative action, alleging that the parachute payments were corporate waste. The directors settled the action, and sought payment for this compromise under their corporate liability insurance policy. The insurance company denied coverage and filed this declaratory action to justify its refusal to honor the claim. After a three-day trial, the district court found coverage. 685 F.Supp. 1230. We now affirm.

FACTS

Southwest Florida Banks, Inc. ("Southwest") was incorporated under the laws of Florida in 1972. From 1972 until 1975, the bank assembled a management group which included the appellees. 2 Under this management, Southwest experienced substantial financial growth and rapid expansion. The consolidated total assets of Southwest grew from $226 million in 1972 to $1.4 billion in 1982. The net income of the company also increased from $1.9 million in 1972 to $14.2 million in 1982. 3

As a result of this growth, Southwest became an attractive takeover target by the end of 1982. The First Boston Corporation ("First Boston"), Southwest's investment banker, informed the management group late in 1982 that the bank easily could be acquired. First Boston told the board that a large amount of Southwest's common stock was held by institutions that were likely to approve a change in management for modest improvements in earnings. First Boston also informed Southwest's management that a recent substantial increase in the number of banking acquisitions had occurred.

A number of key officers and employees expressed considerable concern about the likelihood and consequences of a merger. Southwest's previous executive bonus system On March 21, 1983, Southwest's board of directors established the Performance Incentive Plan ("PIP"). 4 PIP provided for the creation of 400,000 units, each valued at $10.00. Payment of the dollar value of the units would be made to the participants five years after the award of the units, or immediately if a change in the control of Southwest occurred. A specially appointed committee of three directors ("PIP Committee") was to administer PIP by awarding units to the chairman of the board, and recommending to the chairman the other recipients. Only officers and full-time employees of Southwest or its subsidiaries were eligible for PIP payments.

                had expired.  Southwest's board of directors adopted this plan, linking bonuses to earnings per share, for key executives in 1977.  These executives remained with the company during the five years this plan was in operation.     Southwest's management believed that if the same executives were to remain in the future, a new compensation system was needed
                

PIP's stated purpose was to induce uniquely important officers and management employees of the company to remain in its employ during the critical next five years. To accomplish this purpose, PIP was to minimize their concerns about the impact a potential acquisition would have on their future employment. Accordingly, PIP offered "additional, but contingent and deferred compensation. 5

The board adopted PIP by unanimous vote on July 20, 1983, with all fifteen directors voting. Of these fifteen, only three board members were eligible and actual recipients under PIP. The other directors were not eligible because they were not officers or employees of Southwest or its subsidiaries. Although the board believed a merger was probable within the next five years, no particular merger was contemplated when the board voted.

The PIP Committee 6 recommended the following awards: appellees Johns and Sherman were to receive 100,000 units each; appellee McFadden was to receive 50,000 units; appellees Ogletree and Whorton were to be awarded 40,000 units each. 7 Johns, the chairman, made all the recommended awards.

On October 25, 1983, Southwest approved, subject to regulatory and shareholder approvals, a merger of Southwest into Landmark Banking Corporation of Florida ("Landmark"). A key provision of this merger agreement, approved by the board of directors of both Southwest and Landmark, authorized Southwest to enter into a consulting agreement with its former chairman, Johns. The contract provided for a five-year term with annual compensation of $225,000. Both boards intended to accomplish two purposes through this consultation agreement. First, the merged corporation wanted Johns to be available for consultation and to serve as a director when needed. Second, the agreement assured that Johns would not establish any employment relationship with another bank or savings institution without the approval of the merged company. Around April 25, 1984, Southwest and Johns officially entered into the consulting agreement.

In December 1983, Southwest and Landmark mailed a joint proxy statement to their shareholders. The joint proxy statement described the terms of the merger, as well as PIP and the consulting agreement. On January 19, 1984, the shareholders of both Southwest and Landmark voted to approve the merger. Subsequently, the requisite regulatory approval was obtained.

Southwest and Landmark, therefore, merged, and the separate existence of Southwest ended.

On January 10, 1984, Southwest made the monetary awards that the PIP Committee specified. 8 This disbursement of PIP funds gave rise to a lawsuit. A disgruntled Southwest shareholder filed a derivative action in United States District Court contending that PIP and the consulting agreement were a waste of corporate assets. The shareholder sued all of Southwest's directors and the other PIP recipients. On July 12, 1984, Southwest's board convened a special meeting to address the merits of this lawsuit. At the meeting, the board again ratified PIP and the PIP awards, noting that PIP had achieved its purpose of keeping the management group together until the time of the merger.

In February 1985, the parties to the derivative action settled the litigation and the court approved the settlement on April 30, 1985. The settlement provided for the shareholder to dismiss the action in exchange for the return to Landmark of $600,000 awarded under PIP, as well as a reduction in the term of John's consulting agreement from five years to two and one-half years. The directors did not admit liability in the settlement agreement.

The officers and directors, who were sued as defendants in the derivative action, filed a claim against their liability insurance policy seeking to recover this repayment. The policy, issued in December 1982 by International Insurance Company ("International"), covered the directors and officers for all losses (including damages and settlements) resulting from their "wrongful acts" (actual or alleged) committed within the scope of their employment. The policy also contained two key exclusion clauses. 9 The first provision, paragraph 5(c), excluded any loss resulting from any illegal remuneration that the director or officers received without required shareholder approval. The second condition, paragraph 5(b), excluded any loss resulting from any illegal personal gain by the officer or director.

International received timely notice of the claims asserted in the derivative action. When the terms and conditions of the compromise were disclosed to International, it expressed no objection to the settlement, reserving only a right to contest coverage. 10

International paid the pro rata share of the cost of defending the derivative action of those defendants not named in the case at bar, 11 denied coverage for the settlement payments, and brought this declaratory action to interpret the policy. The appellees counterclaimed for payment pursuant to the policy terms.

DISCUSSION

We agree with the district court that this case involves two contractual interpretation inquiries. 12 First, we must ascertain whether the settlement in the derivative action falls within the policy's definition of "loss." Second, if a loss exists, we need to determine whether the policy's exclusions bar coverage. We will determine the appropriate standard of review before examining each of these interpretation questions in turn.

I. PLENARY REVIEW GOVERNS THIS APPEAL.

Because both interpretation inquiries are mixed questions of fact and law, 13 the district court's findings here are subject to plenary review. See Atlantic Land and Improvement Co. v. United States, 790 F.2d 853, 855 (11th Cir.1986) (citing Pullman-Standard v. Swint, 456 U.S. 273, 102 S.Ct. 1781, 72 L.Ed.2d 66 (1982)). Within this context, the district court's findings of fact are deferentially treated, and may be reversed only if clearly erroneous. See Anderson v. Bessemer City, 470 U.S. 564, 573, 105 S.Ct. 1504, 1511, 84 L.Ed.2d 518 (1985). Moreover, certain mixed questions of law and fact that involve assessments peculiarly within the province of the trier of fact are also reviewable under the clearly erroneous rule. See Lucas v. Florida Power & Light Co., 765 F.2d 1039, 1041 (...

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