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Stockholder settlement deemed covered claim under D&O policy.

Byline: Barry Bridges

A $5.6 million payment by the owner of Twin River Casino to settle a dispute over stockholder values was a covered claim under its directors and officers insurance policy, requiring the insurer to reimburse the company, a federal judge has held.

The case arose when Twin River announced its intentions to pay its post-bankruptcy holders of "contingent value rights" a fair value for their shares before those rights expired. However, the common stock shareholders objected and filed suit, arguing that such a plan would constitute a breach of fiduciary duty.

Twin River ultimately paid the CVR holders and agreed on a $5.6 million settlement with its stockholders after first notifying its insurer, National Union Fire Insurance Co., of a potential claim under its D&O policy.

When Twin River later sought reimbursement, National Union balked, asserting that the settlement was not for a covered claim.

Twin River took the insurer to court and found favor with U.S. District Court Judge John J. McConnell Jr., who in an Aug. 1 ruling concluded that the settlement was a covered claim for a wrongful act under the policy.

McConnell also found that Twin River gave the required notice to National Union.

The 13-page decision is Twin River Worldwide Holdings, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA., Lawyers Weekly No. 52-063-18. The full text of the ruling can be found here.

Notice of potential claim

Robert C. Shindell of Barton Gilman said the circumstances surrounding Twin River's notice of its claim made the case unusual.

"If there is a dogfight about notice of a potential claim or of circumstances likely to give rise to a claim, it's more typically because the carrier believes its insured did not give timely notice," the Providence attorney said. "This case differs because it appears the dispute was less about the timing of the notice, but rather the breadth of the notice provision as applied to the changing nature of the claim over time."

Shindell also pointed out that from the "four corners" of the opinion, the insurer was at least apprised of the general nature of the dispute and that there would be some effort to resolve it.

"It appears from the court's decision that Twin River communicated to the insurer regarding a potential claim and that there would be settlement negotiations," he added. "National Union knew there was a settlement effort underway, though it did not itself participate in the negotiations or request allocation."

As for the underlying dispute, Shindell said the plaintiff found itself between a rock and a hard place.

"The Bankruptcy Court required Twin River to file a declaratory judgment action to resolve the dispute about its obligation to the CVRs and then proceeded to find that Twin River did indeed have a duty," he explained. "But the shareholders claimed that Twin River's filing of the DJ was itself a breach of fiduciary duty."

David P. Whitman of Providence's Hanson Curran said McConnell's ruling offered a thoughtful analysis on directors and officers insurance.

"The purpose of this type of insurance is to protect corporations and their directors as they make determinations they think are appropriate, but for whatever reason there is a claim that what they did violated someone else's rights. In this case, that's the shareholders," he said.

McConnell properly determined there was a claim for a wrongful act, Whitman said, adding that the ruling reminded him of a decision McConnell issued in November 2014, Lifespan Corporation v. National Union Fire Insurance Company of Pittsburgh, PA, et al. In that case, there was a question of whether exclusions to coverage in a D&O policy were applicable. Lifespan was determined to have coverage, similar to Twin River in the present case, Whitman said.

"D&O policies are quintessentially for breach of fiduciary duty claims, and these two holdings remind us that once a breach is established, there should be coverage unless there are applicable exclusions," he said. "And apparently there were none raised by National Union in the Twin River case."

Neither Twin River's attorney, William M. Russo of Ferrucci Russo in Providence, nor National Union's counsel, Michael P. Duffy of Peabody & Arnold in Boston, responded to requests for comments.

Contingent value rights

Pursuant to Twin River's court-approved reorganization plan as it emerged from bankruptcy in 2010, pre-petition first lien lenders received 100 percent of the casino's common stock and $300 million in new first lien debt, while pre-petition second lien lenders received contingent value rights.

The CVR holders would receive a portion of the consideration that Twin River would otherwise pay to the common stock shareholders if a "CVR payment event" (such as a sale of the company) occurred before Nov. 5, 2017; otherwise, those holders would receive nothing.

The company did well in the years following its bankruptcy and in June 2014 announced a potential buyback of the CVRs. Two holders of common stock, Solus Alternative Asset Management and Wingspan Asset Management, thereupon sent a letter to Twin River asserting that the company owed no fiduciary duty to the CVR holders and threatening legal action.

In turn, Twin River sent a letter in October 2014 to its insurer, National Union, reporting that Solus and Wingspan were alleging a potential breach of fiduciary duty to stockholders because the company was considering paying the CVRs and was overvaluing the share price.

When Twin River returned to Bankruptcy Court to clarify its obligations to the CVR holders, the court required the company to file a declaratory judgment action against the complaining stockholders. In that adversary proceeding, the court agreed with Twin River that it had obligations to the CVR holders.

Solus then sent a letter to Twin River asserting that the company would be in further breach of its fiduciary duties if it made a tender offer to the CVR holders, citing the adversary proceeding as the first breach. And when Twin River went forward with that tender offer, a third shareholder filed suit in Delaware against the company's board of directors and its chief financial officer.

Facing that suit as well as an appeal of the Rhode Island Bankruptcy Court's earlier decision, Twin River, with National Union's consent, met with representatives of the CVR holders and stockholders to attempt to resolve the dispute. The stockholders outlined their terms in a settlement demand letter sent to Twin River in January 2016.

National Union, which did not participate in the negotiations, was provided with the letter and expressed its doubts about insurance coverage for the proposed settlement.

But a settlement was reached in February 2016 whereby Twin River paid the stockholders $5.6 million to reimburse their legal expenses and agreed to limit the CVR price to $425 per share. In return, the stockholders would drop their lawsuits.

National Union thereafter denied the claim. Twin River filed the present suit seeking reimbursement for the $5.6 million payment.

'Claim' for 'wrongful act'

McConnell began his analysis by examining the language of the D&O insurance contract and homed in on the pertinent language: "This policy shall pay the loss of any company arising from a claim made against such company for any wrongful act of such company."

The policy further defined a "claim" as "a written demand for monetary or non-monetary relief" and a "wrongful act" as "any breach of duty, neglect, error, misstatement, misleading statement, omission or act by a company."

The policy also required an insured to give written notice to National Union when it became aware that a claim may arise.

McConnell therefore framed the issue as whether Twin River gave notice of a "claim" for a "wrongful act."

The judge quickly dispatched with the question of notice, noting that it was undisputed that the October 2014 letter to National Union served that purpose.

"But, did that notice of circumstance referencing a wrongful act ultimately evolve into the claim for a related wrongful act that Twin River alleges merits coverage?" he asked.

McConnell answered the question in the affirmative, finding that the January 2016 settlement demand letter was "the final iteration of the claim that Twin River flagged in the notice."

As for the "wrongful act" prong, the judge wrote that it was clear that the stockholders' concern "all along the way was that Twin River had a superior duty to them over the CVRs by virtue of the language in the Bankruptcy Plan of Reorganization and that any plan to not only compensate the CVRs before their interest evaporated, but also to pay an inflated price per share, was a breach of that duty."

He added that the stockholders did not abandon their position that Twin River should not be using company monies to pay CVRs that would expire in 20 months, but made a demand for monetary relief to settle the issue.

"Therefore, the court finds that the settlement demand is a claim for a wrongful act under the applicable policy," he said in granting Twin River's motion for summary judgment establishing coverage for the $5.6 million payment.

CASE: Twin River Worldwide Holdings, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA., Lawyers Weekly No. 52-063-18

COURT: U.S. District Court

ISSUE: Was an insured's payment to stockholders to settle a dispute concerning contingent value rights a covered claim requiring reimbursement under its D&O insurance policy?

DECISION: Yes

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Title Annotation:Twin River Worldwide Holdings, Inc. v. National Union Fire Insurance Company of Pittsburgh, U.S. District Court, District of Rhode Island
Author:Bridges, Barry
Publication:Rhode Island Lawyers Weekly
Date:Aug 9, 2018
Words:1568
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