Nodaway Valley Bank v. Continental Casualty Co., 86-6098-CV-SJ-6.

• Decision Date: 23 June 1989
• Docket Number: No. 86-6098-CV-SJ-6.,86-6098-CV-SJ-6.
• Citation: 715 F. Supp. 1458
• Parties: The NODAWAY VALLEY BANK, Plaintiff, v. CONTINENTAL CASUALTY COMPANY, Defendant.
• Court: U.S. District Court — Western District of Missouri

715 F. Supp. 1458

The NODAWAY VALLEY BANK, Plaintiff, v. CONTINENTAL CASUALTY COMPANY, Defendant.

No. 86-6098-CV-SJ-6.

United States District Court, W.D. Missouri, St. Joseph Division.

June 23, 1989.

Paul E. Vardeman, Miriam Glueck, Polsinelli, White & Vardeman, Kansas City, Mo., for plaintiff.

Austin F. Shute, Kansas City, Mo., Michael Tone, Peterson, Ross, Schloerb & Seidel, Chicago, Ill., for defendant.

REVISED OPINION^*

SACHS, District Judge.

Plaintiff Bank (Nodaway Valley) seeks recovery on an officers and directors liability insurance policy for expenses and settlement funds advanced by it in underlying litigation. Bank officials had successfully defeated another bank's takeover attempt by using a "squeeze-out" merger, and were thereafter sued by the disgruntled raider who was also dissatisfied with the appraised value of forfeited stock.

The court has heretofore, in orders entered June 21, 1988, and December 12, 1988, denied various legal defenses advanced by defendant insurer after approval by it of the settlement of the underlying litigation against officers, directors and uninsured entities. The court concluded that defendant cannot now litigate, subsequent to the settlement, the applicability of a dishonesty exclusion in its policy. See Pepsico, Inc. v. Continental Casualty Co., 640 F.Supp. 656 (S.D.N.Y.1986), and subsequent cases cited in Doc. 57. The court also concluded that a loss had occurred as a matter of law, based on expenses of litigation and the $500,000 settlement. Summary judgment was therefore granted in favor of plaintiff as to liability (Doc. 81); summary judgment was denied, however, as to damages, and the remainder of the case was tried to the court on the question of allocation both of the settlement sum and litigation expenses, together with other related damage issues. Such allocation is required, as between insured and uninsured parties in the underlying litigation, according to Pepsico, supra, and other authorities.

As will appear in more detailed findings adapted from those supplied by the parties, the Stinson, Mag & Fizzell law firm, as counsel for the insured and uninsured defendants in the underlying case (but not the insurer), treated the settlement as entirely attributable to Count IX of the underlying case, which was directed against the officers and directors and prayed recovery of $5,000,000 as compensatory damages and $1,000,000 as punitive damages against each of nine individual defendants. The great bulk of the $300,000 expenses of the underlying and associated litigation, some $226,816, was also attributed by those counsel to the defense of Count IX. By contrast, expert legal testimony offered at trial on behalf of defendant (the Bates testimony) would attribute 70% to 80% of the exposure to a corporate holding company (Bancshares) on a theory that the principal claim is one against majority shareholders, of which Bancshares was one, for engaging in collective conduct in breach of fiduciary duty; that is, squeezing out the plaintiff in the underlying case, United Missouri Bancshares, Inc. (owned and controlled from Kansas City), and forcing it to take the appraised value of its stock. The appraised value turned out to be some $835,000 below what United Missouri had paid for the stock in a speculative venture seeking ultimate control over plaintiff Bank.

Other trial testimony of significance included that of Mr. Beyer, the insurer's manager of professional liability claims, who contended that a 50-50 allocation would be "more than fair" to plaintiff.¹ The testimony of the dominant stockholder and officer of United Missouri (Kemper), identified the leaders of the group opposing him as Theodore G. (Ted) Robinson, president of Nodaway Valley, and E.L. Burch, a director of Nodaway Valley and formerly executive vice president of United Missouri, both of whom were stockholders as well as directors and officers named as defendants in Count IX. Defendants' attorneys in the underlying litigation (Mick, Aisenbrey, Foster and Wood) testified in support of the allocation made at the time of settlement of the underlying case.

Based on the testimony heard by me I agree with defendants' attorneys in the underlying litigation that United Missouri was probably acting in a predatory manner as a corporate raider, that a defensive squeeze-out was probably justified in law and fact, and that United Missouri had no more than a 10% to 30% chance of prevailing. Branch banking was formerly forbidden by Missouri law. I am very doubtful that public policy in the State has entirely reversed itself, so that defenders of local control must remain immobilized when a takeover is imminent. Either as a matter of law or on submission to a jury the evidence presented satisfies me that defendants in the underlying case were reasonably likely to prevail.² The hazards of litigation, and the potential additional expenses and exposure, fully justified the $500,000 settlement. After all, $300,000 had been spent in the early rounds of the controversy.

While it is difficult to allocate exposure in a defense that seemed probably headed for success, I conclude that trial testimony in the underlying trial would have followed the thrust of the Kemper testimony, making Robinson and Burch the primary targets.³ It should not have been difficult to minimize or eliminate consideration of the role of Bancshares, a holding company rather than an operating entity, which owned about 23% of the stock during the period of exposure. Bancshares would likely have been viewed by the jury as essentially a basket for holding stock or a collection of legal papers used by the leading individual defendants but not a target of animosity or even a deep pocket.⁴ If the underlying case had gone to trial, the jury would probably have understood that Bancshares at the time of trial held assets of many innocent shareholders (including aged and infirm persons) whose identity was dramatized by being present as defendants in the lawsuit. The vulnerability of corporate defendants as such is not in my judgment a serious factor here, and would not have been so viewed by objective and fully knowledgeable counsel at the time of settlement.

The Bates testimony was convincing and sound in the ordinary situation, where allocation might be needed between co-defendants who could be a fully operational corporate employer and an employee. The "widow and orphan" shareholder argument occasionally made by zealous counsel is an unconvincing abstraction. In this I would agree with Mr. Bates. Here the sympathetic shareholders are real and the corporation is an abstraction. Under the particular circumstances of this case, I am thus in general agreement with trial counsel for defendants in the underlying case. Their opinion is, however, probably somewhat affected by advocacy in favor of their original clients rather than the insurer. A realistic and fair appraisal, as of the time of settlement, would in my judgment have allocated about 10% of the exposure to the uninsured defendants (principally Bancshares, according to the Bates analysis) and 90% to the insured defendants in Count IX; thus $50,000 of the settlement sum should be treated as uninsured and not recoverable by plaintiff Nodaway Valley.

With respect to allocation of expenses, I agree with the Bates testimony that a practical and fair method of allocation would be according to exposure, which would allow recovery by plaintiff of some 90% of the expenses of the underlying litigation. The allocation by Mr. Wood attempts to be more precise, but needs adjustment. There are arguments for reducing it to exclude counterclaim work and some $25,000 incurred prior to the filing of the damage claim, but such work developed issues usable in defense of the damage claim and was fairly included. There are also arguments for adding to the sum to include all work done in defense of the underlying litigation, including work for individual shareholders, before making the 90% allocation. The best approximation of expenses allocable to uninsured parties and work and not recoverable here would be to reduce the expense claim by 10% or $22,682.

I conclude that plaintiff is entitled to prejudgment legal interest on recoverable sums expended; but the novelty and debatable aspect of the issues justified the insurer in litigating. Penalties and fees for vexatious refusal to pay will not be awarded.

Additional particularized findings of fact and conclusions of law are as follows:

FINDINGS OF FACT

1. Plaintiff Bank is a citizen of the State of Missouri. It is a banking corporation organized and existing under the laws of the State of Missouri with its principal place of business in Maryville, Missouri. It is the surviving Bank of the merger on March 31, 1984, of the Interim Bank of Nodaway Valley (the "Interim Bank") and the original Nodaway Valley Bank (the "Old Bank").

2. Defendant Continental Casualty Company (Continental) is a citizen of the State of Illinois. It is a corporation organized and existing under the laws of the State of Illinois with its principal place of business in Chicago, Illinois. Continental is admitted as an insurance company in the State of Missouri.

3. On March 11, 1982, MGIC Indemnity Corporation ("MGIC") issued a Directors and Officers Liability Insurance Policy Including Bank Reimbursement No. 02531 DA01 (the "Policy") to Old Bank for the Policy period March 11, 1982, to March 11, 1985. The Policy was in full force and effect during the times of this controversy and covers plaintiff's losses up to an aggregate limit of liability for each policy year of three million dollars.

4. Effective November 1, 1983, defendant Continental assumed the duties and obligations of MGIC under the Policy.

5. Effective November 4, 1983, the Policy was amended to include Nodaway Valley Bancshares, the Interim Bank and the Bank as insureds under the Policy. On and before that date, while...