International Ins. Co. v. Johns
| Decision Date | 09 May 1988 |
| Docket Number | No. 85-0391-CIV.,85-0391-CIV. |
| Citation | 685 F. Supp. 1230 |
| Parties | INTERNATIONAL INSURANCE CO., Plaintiff, v. Alfred M. JOHNS, et al., Defendants. |
| Court | U.S. District Court — Southern District of Florida |
Bruce G. Hermelee, Karon, Morrison & Savikas, Miami, Fla., Deborah J. Fish, Karon, Morrison & Savikas, Ltd., Chicago, Ill., for plaintiff.
Jerome A. Pivnik, Britton, Schantz & Schatzman, Miami, Fla., Lewis R. Mills, Peper, Martin, Jensen, Maichel & Hetlage, St. Louis, Mo., for defendants.
FINAL ORDER, FINDINGS OF FACT AND CONCLUSIONS OF LAW
This action was brought by Plaintiff, International Insurance Company, seeking a declaratory judgment that it has no obligation in connection with a claim under a director's and officer's liability insurance policy. The Defendants, insureds under the insurance policy, have counterclaimed seeking a declaration that Plaintiff is liable under the policy as well as reimbursement for their losses. Specifically, the Defendants seek to be reimbursed under the insurance policy for the amount that was expended in the settlement of a shareholder's derivative action brought against the directors of Southeast Florida Banks, Inc., alleging corporate waste in the creation of a "Golden Parachute" plan, and consulting agreement which provided for payments to certain individuals upon the merger or acquisition of Southwest Florida Banks, Inc. This matter was tried before the Court without a jury, and pursuant to Rule 52(a), Federal Rules of Civil Procedure, we make the following Findings of Fact and Conclusions of Law.
1. The Plaintiff, International Insurance Company ("International") is a corporation organized under the laws of the State of Illinois and has its principal place of business in that state.
2. Each Defendant is a citizen and resident of the State of Florida, and a former director and/or officer of Southwest Florida Banks, Inc. ("Southwest").
3. The amount in controversy, exclusive of interest and costs, exceeds the sum of ten thousand dollars.
4. On or about December 10, 1982, the Plaintiff issued its policy number XXX-XXXXXX-X (the "Policy"), in which it agreed to indemnify Southwest and its officers and directors against certain losses and expenses, subject to certain exclusions.
5. During all relevant periods prior to June 1, 1984, the Defendants Alfred M. Johns, James W. McFadden and Richard W. Sherman were officers and directors of Southwest. Defendants Thomas v. Ogletree and G. Paul Whorton were officers of Southwest. All Defendants are insureds within the meaning of the Policy.
6. The claims asserted in this action arose during the policy period, and timely notice of the claims was given to International.
7. Southwest was incorporated under the laws of Florida in 1972. During the years 1972 through 1975, the bank assembled a management group which included Mr. Johns, the chairman and chief executive officer; Mr. Sherman, the president and chief operating officer; Mr. Ogletree, the treasurer and chief financial officer; Mr. McFadden, chairman of the finance committee and president of the First National Bank in Fort Meyers, Florida; and Mr. Whorton, Mr. Sherman's principal assistant.
8. Under the direction of this management group, Southwest experienced substantial financial growth, a high rate of return and rapid expansion. The consolidated total assets of Southwest was $226,000,000 in 1972; $311,000,000 in 1975; and $1,400,000,000 in 1982. The net income of the company increased from $1,900,000 in 1972 to $2,400,000 in 1975 to $14,200,000 in 1982. Net income declined to $12,200,000 in 1983.
9. In 1977 Southwest's board of directors adopted a five-year bonus plan for key executives. The payment of the bonuses were linked to the earnings per share of the corporation. Payments were made pursuant to this plan during each of the five years that it was in operation.
10. In 1982 the board of directors of Southwest authorized a new Management Incentive Compensation Plan for two of its key executives, Messrs. Johns and Sherman. Although 50,000 units were awarded to each recipient, the payments were never made, and the Management Incentive Compensation Plan was canceled in 1983 when the Performance Incentive Plan was adopted.
11. By the end of 1982 Southwest's management recognized that Southwest had become an attractive takeover target and that someone could acquire a controlling block of Southwest's stock by an unfriendly tender offer. The management was informed by its investment banker, the First Boston Corporation, late in 1982 that the bank could be acquired easily because a large amount of its common stock was held by institutions likely to approve a change for modest improvements in earnings, and because there had been a recent substantial increase in the number of banking acquisitions. These views were communicated to Southwest's directors in early 1983. A number of key officers and employees expressed considerable concern about the likelihood and consequences of a merger.
12. On March 21, 1983, the Board of Directors of Southwest resolved to establish a Performance Incentive Plan (the "Plan").
a. The Plan provided for the creation of 400,000 "units" which had the value of $10.00 per unit.
b. Officers and full-time employees of Southwest and/or Southwest's subsidiaries were eligible to be awarded units.
c. Payment of the dollar value of the units would be made under the following conditions:
3. The Chairman had the power to authorize payments of up to 100,000 units after three years from the date of the award.
d. The Plan was administered by a committee of three directors (the "Committee"), which made the award of units to the Chairman of the Board and recommended to the Chairman other persons to receive awards.
f. The Chairman made the award of units to all participants except himself.
13. At the time the Plan was adopted there was no agreement to merge Southwest with any other corporation. However, the management believed that a merger or acquisition was very probable within five years.
14. The stated purpose of the Plan was that "by providing additional but contingent and deferred compensation, it is intended to induce officers and management employees of unique importance to the Company to remain in its employ during the critical next five years, and to minimize their concerns about the impact on their own financial futures of any potential acquisition of the Company." Defendants' Exhibit 7.
15. The Plan was adopted by unanimous vote on July 20, 1983, with fifteen directors voting. Messrs. Johns, Sherman and McFadden voted to approve the Plan, and they were also recipients under the Plan. The other directors were neither officers nor employees of Southwest or its subsidiaries.
16. The following awards were made under the Plan:
Alfred M. Johns 100,000 units
Richard W. Sherman 100,000 units
James W. McFadden 50,000 units
Thomas V. Ogletree 40,000 units
G. Paul Whorton 40,000 units
Mario Marchese 25,000 units
John W. Gibbs 25,000 units
Wayne Stanhouse 20,000 units
17. No provision in the articles of incorporation or in the bylaws of Southwest limited the power of its board of directors to fix the compensation of its officers or directors.
18. On October 25, 1983, the board of directors of Southwest approved, subject to regulatory and shareholder approvals, a merger of Southwest with and into Landmark Banking Corporation of Florida ("Landmark").
19. One of the provisions of the Agreement and Plan of Merger approved by the board of directors of both corporations authorized Southwest to enter into a consulting agreement (the "Agreement") with Mr. Johns for a five-year period with annual compensation of $225,000. Defendants' Ex. 10 ¶ 8(d).
20. The Agreement was proposed to accomplish two purposes. First, the merged corporation wanted Mr. Johns to be available for consultation and to serve as a director for five years. Second, the Agreement was meant to assure that Mr. Johns would not establish any employment relationship with another bank or savings institution without the approval of the board of directors of the merged corporation.
21. On or about December 12, 1983, Southwest and Landmark mailed a joint proxy statement to their shareholders. The joint proxy statement described the two corporations and the terms of their proposed merger, including the proposed consulting agreement between Southwest and Mr. Johns. It also described the Plan and the payments to be made thereunder.
22. On January 10, 1984, each of the participants in the Plan, in accordance with the terms of the Plan, were paid by Southwest an amount equal to $10 for each unit previously awarded to that participant. These amounts were placed in escrow to be returned to Southwest if its merger with Landmark failed to be consummated, or to be paid to the participants upon the completion of that merger.
23. On January 12, 1984, a special meeting of the board of directors was held to address the concern raised by one of Southwest's shareholders, Mr. Cyrus G. Bispham. At that meeting, the Board affirmed, approved, and ratified the Plan and the awards made under it. Specifically, the Board noted at that time that the Plan had achieved its purpose in keeping the management group together up to the time of the merger; that a change in the Plan at this point might result in litigation initiated by those who relied upon the payment of the awards; and that a withdrawal of the Plan could effect the company's credibility with its present and future employees, as well as making the recruitment of highly qualified executives more difficult in the future.
24. On January 19,...
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