Robert R. McCormick Found. v. Arthur J. Gallagher Risk Mgmt. Servs., Inc.

• Decision Date: 31 March 2016
• Docket Number: No. 2–15–0303.,2–15–0303.
• Parties: ROBERT R. McCORMICK FOUNDATION and Cantigny Foundation, Plaintiffs–Appellants, v. ARTHUR J. GALLAGHER RISK MANAGEMENT SERVICES, INC., Defendant–Appellee.
• Court: United States Appellate Court of Illinois

52 N.E.3d 649
402 Ill.Dec. 728

ROBERT R. McCORMICK FOUNDATION and Cantigny Foundation, Plaintiffs–Appellants
v.
ARTHUR J. GALLAGHER RISK MANAGEMENT SERVICES, INC., Defendant–Appellee.

No. 2–15–0303.

Appellate Court of Illinois, Second District.

March 31, 2016.

52 N.E.3d 650

Patrick T. Nash, Matthew C. Wolfe, and John R. McCambridge, all of Shook, Hardy & Bacon L.L.P., Chicago, for appellants.

Richard J. Prendergast, Michael T. Layden, and Lionel W. Weaver, all of Richard J. Prendergast, Ltd., and Kevin M. Forde and Joanne R. Driscoll, both of Forde Law Offices LLP, Chicago, for appellee.

OPINION

Justice HUTCHINSON delivered the judgment of the court, with opinion.

402 Ill.Dec. 729

¶ 1 Plaintiffs, the Robert R. McCormick Foundation and the Cantigny Foundation (the Foundations) filed suit against their former insurance broker, Arthur J. Gallagher Risk Management Services, Inc. (Gallagher), for the loss of defense coverage under the Foundation's directors' and officers' (D & O) liability insurance policy. The trial court determined that an exclusion in the D & O policy would have prevented coverage altogether. Because the trial court erred in interpreting the exclusion by failing to see it as ambiguous, we reverse and remand.

¶ 2 Since the parties filed cross-motions for summary judgment, we take as true the facts alleged in the underlying complaints. The Foundations were formerly the second-largest shareholders of the Tribune Company, a large publicly traded media corporation that, at one point, owned its namesake newspaper, The Chicago Tribune, as well as The Los Angeles Times, Newsday, The Sun Sentinel, The Baltimore Sun, WGN–TV, WGN–AM radio, and the Chicago Cubs. The Foundations sold the last of their Tribune stock when the company was sold in a leveraged buyout, or LBO, in 2007. In an LBO, an investor buys the stock of a corporation with the proceeds of a loan secured by the corporation's assets; the company is thus “leveraged” to buy out its shares. In this instance, however, the company was highly leveraged. Prior to the LBO, Tribune had a market capitalization of around $8 billion and was carrying $5 billion in debt. Though Tribune stock was trading around $27 a share, the LBO purchasers offered stockholders $34 a share in order to gain control of the company. Once the LBO closed in December 2007, the company was saddled with an additional $8.5 billion in debt. Then, the 2007–08 financial crisis resulted in, among other things, the single worst performing year in the newspaper industry's financial history. In December 2008, within a year of the LBO, Tribune entered bankruptcy.

¶ 3 The LBO and the bankruptcy left Tribune's unsecured creditors—that is, various holders of debt from bonds Tribune had issued over the years prior to the LBO—holding the proverbial bag. First, the LBO itself subordinated the unsecured creditors' debt to secure financing for the buyout. Meanwhile, the extended pendency of the Tribune bankruptcy proceeding left the unsecured creditors unable to collect. In December 2011, the bankruptcy court confirmed a plan that enabled the unsecured creditors to pursue or resume the pursuit of their claims outside of the bankruptcy proceedings. In re Tribune Co., 464 B.R. 126 (Bankr.D.Del.2011), on reconsideration, 464 B.R. 208 (Bankr.D.Del.2011). Soon after, the various creditors had on file nearly 50 separate lawsuits challenging the LBO in state and federal

402 Ill.Dec. 730

52 N.E.3d 651

courts around the country. Although the LBO suits were filed by different groups of bondholders and were based on a number of different legal theories, they all had the same objective: to unwind the LBO and claw back the sale's proceeds from the company's former shareholders. Many of the suits named as defendants all former Tribune stockholders who had sold more than $25,000 worth of Tribune stock. As a result, the suits collectively were brought against thousands of defendants. The Foundations were named as defendants in three of these suits.

¶ 4 All of the LBO suits were transferred to and remain pending in the United States District Court for the Southern District of New York and some, including the three against the Foundations, were dismissed and are presently before the Second Circuit Court of Appeals. See generally In re: Tribune Co. Fraudulent Conveyance Litigation, 831 F.Supp.2d 1371 (J.P.M.L.2011) ; In re Tribune Co. Fraudulent Conveyance Litigation, Nos. 1:12–mc–02296, 13–3992 (2d Cir. Mar. 16, 2016). Of the three LBO suits against the Foundations, the first was brought by the former creditors' committee, whose claims were assigned to a litigation trustee (Kirschner v. FitzSimons, No. 1:12–cv–02652 (S.D.N.Y.)); the second by a successor indenture trustee (Deutsche Bank Trust Co. Americas v. Ohlson Enterprises, No. 1:12–cv–00064 (S.D.N.Y.)); and the third by 189 retired Tribune employees (Niese v. ABN AMRO Clearing Chicago LLC, No. 1:12–cv–00555 (S.D.N.Y)).

¶ 5 In 2008, several years before the LBO lawsuits were filed, the Foundations purchased through Gallagher a $15 million D & O policy issued by Chubb Insurance and a $10 million excess policy issued by a separate company. (For convenience we refer to it as a single $25 million Chubb D & O policy.) In 2010 Gallagher advised the Foundations that instead of renewing the Chubb policy they could obtain identical “apples-to-apples” D & O coverage at a reduced premium with a $25 million policy from Chartis Insurance. The Foundations followed their broker's advice; they purchased the Chartis policy and let the Chubb policy lapse. Soon after, the three LBO suits were filed against the Foundations. The Foundations tendered the suits to Chartis, but Chartis refused them under a securities exclusion in its D & O policy. The Foundations began to pay their own defense costs (which counsel indicated at oral argument were substantial) and sued Gallagher for malpractice.

¶ 6 In the complaint in this case, the Foundations allege that they would have received both defense and indemnification coverage for the three LBO suits under the Chubb policy. The Foundations also allege that they would have maintained the Chubb policy but for Gallagher's erroneous advice that the coverage provided by the Chubb and Chartis polices was identical. Gallagher, which stands in the insurer's shoes for the purpose of this malpractice action (Skaperdas v. Country Casualty Insurance Co., 2013 IL App (4th) 120986, ¶ 23, 374 Ill.Dec. 1071, 996 N.E.2d 766, aff'd, 2015 IL 117021, 390 Ill.Dec. 94, 28 N.E.3d 747 ; Lake County...