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CONTINENTAL COPPER & STEEL INDUS. v. JOHNSON

May 22, 1980

CONTINENTAL COPPER & STEEL INDUSTRIES, INC., Plaintiff, against HENRY RALPH ROKEBY JOHNSON, EXCESS INS. CO., H.S. WEAVERS, ENGLISH AND AMERICAN, STRONGHOLD INS. CO., TUREGUM INS. CO. and ASSICURAZIONI GENERALI, Defendants.


The opinion of the court was delivered by: SWEET

This is a diversity action by Continental Copper & Steel Industries, Inc. ("Continental") seeking reimbursement of funds expended by Continental to indemnify five of its directors under a directors and officers liability insurance policy (the "Policy") issued by the defendants (the "Issuers"). The parties have filed a stipulation of material facts and have cross-moved for summary judgment on the issue of liability. Continental's motion is granted, and the Issuers' motion is denied.

The claims in this action arise out of expenses incurred by Continental in a prior action in this court. International Halliwell Mines, Ltd. v. Continental Copper & Steel Industries, Inc., 70 Civ. 1400, district court opinion entered January 13, 1976 (S.D.N.Y. Bonsal, J.), aff'd, 544 F.2d 105 (2d Cir. 1976) (the "Halliwell action"). The complaint in that action alleged that Continental and five of its directors had breached a fiduciary duty to Halliwell Mines, Ltd. ("Halliwell") by coercing it to enter into improvident contracts with Continental. In 1959, Continental had contracted with Halliwell for the supply of copper by Halliwell's wholly owned subsidiary, whose acronym is Sedren. When Sedren was unable to perform the contract, Continental stepped in to help obtain financing. In exchange, Continental, through its president Mortimor S. Gordon, demanded price and supply concessions. Later, Halliwell agreed to permit five directors of Continental to sit on its own board, which consisted of eleven members. In 1964, Halliwell, Sedren and Continental entered into an agreement extending Halliwell's time to comply with the 1959 agreement to deliver copper and requiring Sedren to deliver all of its output to Continental. In 1967, the parties executed new agreements further extending Halliwell's time to comply and containing new price concessions. Halliwell alleged that, by forcing it to execute the 1964 and 1967 agreements, Continental and its five directors who sat on Halliwell's board had breached their fiduciary duties to Halliwell. Halliwell claimed that the 1964 and 1967 agreements contained unfair price concessions and supply rights, and that the inequitable terms of these agreements resulted from the domination of Halliwell by Continental and five Continental directors, Mortimor Gordon, Walter H. Knorr, Samuel Ungerleider, Arthur Wheeler and Harry Harris (the "individual defendants") who sat on Halliwell's board as Continental's nominees.

Following a trial, Judge Bonsal ruled that a settlement agreement executed by Halliwell and Continental in 1968 had released all claims arising out of the 1964 and 1967 agreements against both Continental and the individual defendants whose alleged breaches of fiduciary duty had been performed while "acting as agents or servants of Continental" rather than seeking personal benefit.

 The Court of Appeals affirmed Judge Bonsal's findings as to both the validity and the scope of the release. 544 F.2d at 108-110. With respect to the latter point, the Court of Appeals stated,

 
Sympathetic as one may be to the enforcement of claims of breach of fiduciary duty against individuals who purport to serve two masters with conflicting interests during a process of sensitive negotiation, New York law is well settled that the release of one wrongdoer releases all those who acted as its agents, absent an express reservation to the contrary. . . . In the case at bar there is insufficient evidence to differentiate between the claims against the individual defendants and the claims against Continental, and plaintiffs failed to reserve a right to seek recovery from the individual defendants. The individual defendants are therefore released from liability.

 Id. at 109-110 (citations omitted).

 Continental alleges that the individual defendants in the Halliwell action incurred $ 315,000 in defending the Halliwell action. *fn1" The defendants were indemnified for this expense by Continental in accordance with a provision in its charter. *fn2"

 Continental then sought reimbursement for its indemnity payments pursuant to the Policy, which covered 95% of liabilities in excess of $ 20,000 incurred in defending certain legal actions against Continental's officers and directors during the pertinent time periods. Continental claimed reimbursement for $ 299,250. The Issuers refused to reimburse Continental for the legal expenses incurred by the individual defendants in Halliwell, and Continental then commenced this action.

 Continental claims that the Policy covers the individual defendants' legal expenses in Halliwell, since they were sued for their activities while serving as directors of Continental. The Issuers contend that the causes of action asserted against the individual defendants in the Halliwell action arose out of their duties as directors of Halliwell, not their positions as directors of Continental. In the alternative, the Issuers argue that the individual directors were sued not in their individual capacities as directors of Continental, but merely as agents of Continental as to whom Continental was primarily liable as principal. Under either theory, the Issuers argue that the Policy is inapplicable to the legal fees incurred.

 The coverage clause in the Policy provides as follows:

 
This Policy shall, subject to its terms, conditions and limitations as hereinafter provided, indemnify the Company for loss (as hereinafter defined) arising from any claim or claims which may be made during the Policy period against each and every person, jointly or severally, who was or now is or may hereinafter be a Director or Officer . . . of the Company . . ., by reason of any Wrongful Act (as hereinafter defined) in their respective capacities of Directors or Officers of the Company for damages, judgments, settlements, costs, charges or expenses incurred in connection with the defense of any action, suit or proceeding to which the Directors may be a party . . . or in connection with any appeal therefrom, pursuant to the law, common or statutory, or the Charter or By-Laws of the Company duly effective under such law, which determines and defines such rights of indemnity.

 The Policy contains the following definition of "Wrongful Act:"

 
The term "Wrongful Act" shall mean any breach of duty, neglect, error, mis-statement, misleading statement, omission or other act done or wrongfully attempted by the Directors or any of the foregoing so alleged by any claimant or any matter claimed against them solely by reason of their being such Directors.

 The issue in this case is whether the allegations against the individual defendants constitute "wrongful acts" as defined in the Policy so that the legal expenses incurred in resisting those claims are "losses" ...


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