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MACMILLAN, INC. v. FEDERAL INS. CO.

May 16, 1991

MACMILLAN, INC., PLAINTIFF,
v.
FEDERAL INSURANCE COMPANY, DEFENDANT, V. EDWARD P. EVANS AND WILLIAM P. REILLY, THIRD-PARTY DEFENDANTS.



The opinion of the court was delivered by: Robert P. Patterson, Jr., District Judge.

OPINION AND ORDER

This is an action by a Delaware corporation against an insurer for reimbursement of litigation expenses incurred in defending lawsuits brought against former directors of the corporation. The third-party defendants, two former directors and officers of plaintiff Macmillan, Inc. ("Macmillan"), move pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure to dismiss the insurer's third-party complaint against them for failure to state a claim upon which relief can be granted. For the reasons set forth below, the third-party defendants' motion is granted.

BACKGROUND

In October 1987, Federal Insurance Company ("Federal") issued an Executive Liability and Indemnification Policy ("the Policy"), to Macmillan, Inc. ("Macmillan"). The Policy, commonly known as a director and officer liability policy, requires Federal (1) to pay on behalf of Macmillan all amounts Macmillan is "permitted or required by law" to pay to its officers and directors and/or to reimburse to them for costs and expenses they incur in defense of claims asserted against them in their capacity as officers and directors and (2) to pay on behalf of the officers and directors all amounts they become obligated to pay in defense of such claims. Amended Complaint ¶¶ 2-3. The Policy covers claims alleging "wrongful acts" including "breaches of duty" committed or attempted by any "Insured Person, individually or otherwise in his Insured Capacity." Policy ¶¶ 1.1, 1.2 & 9.1. See Amended Complaint ¶¶ 18-20. The Policy excludes from coverage any claims:

  brought about by or contributed to by the
  dishonesty of such Insured Person if a judgment or
  other final adjudication adverse to such Insured
  Person establishes that acts of active and
  deliberate dishonesty were committed or attempted
  by such Insured Person with actual dishonest
  purpose and intent and were material to the cause
  of action so adjudicated;

Policy ¶ 3.2(d), or any claims:

  based upon or attributable to such Insured Person
  having gained any personal profit or advantage to
  which he was not legally entitled regardless of
  whether or not (1) a judgment or other final
  adjudication adverse to such Insured Person
  establishes that such Insured Person in fact
  gained such personal profit or other advantage to
  which he was not legally entitled, or (2) the
  Insured Person has entered into a settlement
  agreement to repay such unentitled personal profit
  or advantage to the Insured Organization.

Policy ¶ 3.2(e). See Third-Party Complaint ¶¶ 42-45.

In this action, Macmillan, Inc. ("Macmillan") seeks to recover $8 million in litigation fees it expended to defend eleven former independent directors in four lawsuits brought in state court in New York and Delaware in 1987-88. The lawsuits challenged the conduct of Macmillan's board of directors in responding to offers to acquire control of Macmillan made by The Robert M. Bass Group, Kohlberg Kravis Roberts & Co. and affiliates of Robert Maxwell.*fn1 In an opinion and order dated July 6, 1990 the Court dismissed Macmillan's complaint for failure to state a claim on the grounds that Macmillan had not indemnified the directors for whose expenses recovery was sought under the Policy. See Macmillan, Inc. v. Federal Ins. Co., 741 F. Supp. 1079 (S.D.N.Y. 1990). Thereafter, Macmillan indemnified eleven independent directors pursuant to Macmillan's by-laws and the Delaware Corporation Law and made a timely demand for reimbursement under the Policy. On August 8, 1990 Macmillan filed an amended complaint.

On October 26, 1990 Federal filed a third-party complaint against two other directors, Edward Evans ("Evans"), Chairman of the Board and Chief Executive Officer of Macmillan, and William Reilly ("Reilly"), Macmillan's President and Chief Operating Officer. In the third-party action, Federal seeks contribution and subrogation from Evans and Reilly for any liability Federal may have to Macmillan in the main action for litigation expenses of the eleven independent directors. Federal also seeks a declaratory judgment that it is not obligated to reimburse or indemnify Evans and Reilly under the Policy. The theory behind Federal's third-party complaint is that Evans and Reilly committed acts of deliberate dishonesty which caused Macmillan's board, including the eleven independent directors, to take the actions challenged in the Delaware and New York lawsuits. Federal relies on findings in those lawsuits that (1) a board-proposed restructuring of Macmillan was a disproportionate response to a takeover bid by the Robert M. Bass Group which would "entrench" the management group, including Evans and Reilly, and would eliminate the opportunity of public shareholders to realize a takeover premium without first obtaining management's consent, see Robert M. Bass Group, Inc. v. Evans, 552 A.2d 1227, 1243-44 (Del. Ch. 1988), and (2) that Evans and Reilly had committed "fraud upon the board" in connection with a board of directors meeting at which they "deliberately conceal[ed]" the fact that they had tipped a corporate bidder to its competitor's bid. Mills Acquisition Co. v. Macmillan, Inc., 559 A.2d 1261, 1277, 1283 (Del. 1988).

Although Evans and Reilly are "Insured Persons" under the Policy, Macmillan has made no claim in the main action for reimbursement of any legal fees paid on their behalf. Amended Complaint ¶ 7. In papers filed on May 14, 1991 Macmillan stated that it will not indemnify Evans and Reilly and therefore will not seek to recover from Federal under the Policy for legal fees incurred on their behalf. Submission by Plaintiff Macmillan, Inc. in Further Response to the Motion of Third-Party Defendants to Dismiss (hereinafter "Pl. Subm.") at 2.

DISCUSSION

A complaint should not be dismissed for failure to state a claim unless it appears beyond doubt that the plaintiff can prove no set of facts in support of his claim which would entitle him to relief. See Conley v. Gibson, 355 U.S. 41, 45-46, 78 S.Ct. 99, 101-02, 2 L.Ed.2d 80 (1957). When passing on a motion to dismiss, the court must accept the allegations in the complaint as true and construe them in favor of the pleader. ...


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