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ULICO CASUALTY COMPANY v. CLOVER CAPITAL MGT.

May 11, 2001

ULICO CASUALTY COMPANY, PLAINTIFF,
v.
CLOVER CAPITAL MANAGEMENT, INC., DEFENDANT.



The opinion of the court was delivered by: U.S. District Judge, McAvoy, D.J.

MEMORANDUM - DECISION & ORDER

Plaintiff Ulico Casualty Company ("Ulico") commenced the instant action against Defendant Clover Capital Management, Inc. ("Clover"), pursuant to §§ 404(a)(1)(B); 404(a)(1)(D); and 405(a)(2) of the Employee Retirement Income and Security Act ("ERISA"), 29 U.S.C. § 1104(a)(1)(B); 1104(a)(1)(D); and 1105(a)(2), alleging that Clover breached its fiduciary duties and alleging a common law breach of contract arising out of Clover's sale of collateralized mortgage obligation and real estate mortgage investment conduit bonds, known as Z-Bonds, held by certain pension plans. Presently before the Court is Clover's motion for summary judgment pursuant to FED. R. CIV. P. 56 seeking dismissal of the Complaint in its entirety.

I. BACKGROUND

The Laborers International Union of North America Local Union 35 Pension Fund, Laborers International Union of North America Local Union No. 322 Pension Fund, and Carpenters Local No. 120 Pension Plan (collectively the "Funds") are employee pension benefit plans within the meaning of 29 U.S.C. § 1002 (2)(A). At all times relevant hereto, Ulico issued fiduciary liability insurance coverage policies (the "Policies") to the Funds and their trustees.

During the period of 1988 and 1995, certain individuals, whose names are not relevant hereto, were the trustees of the funds. The trustees retained W.J. Nolan & Company ("Nolan") to invest in fixed income securities on behalf of the Funds. Beginning in 1992 and continuing through 1994, Nolan purchased the aforementioned Z-Bonds for each of the funds. By the end of 1994, the Funds' portfolio of investments purchased by Nolan consisted primarily of Z-Bonds. During 1994, the market value of Z-Bonds declined significantly.

Sometime in the first quarter of 1995, the Funds retained Clover as their investment manager. Thereafter, Clover sold the Z-bonds at a substantial loss to the Funds.

The United States Department of Labor ("DOL") investigated the matter and filed lawsuits against the trustees for breaching their fiduciary duties seeking recovery of all losses to the Funds attributable to the investment in the Z-Bonds. The trustees then entered into Consent Decrees with the DOL, pursuant to which the DOL lawsuits were discontinued and the trustees agreed to make payments to the Funds totaling $3 million, plus a 20% penalty under 29 U.S.C. § 1132 (1).

Ulico assumed responsibility for the defense of the DOL lawsuits, the $3 million in settlement payments, and the $600,000 penalty. In connection with these payments, Ulico and the trustees entered into a settlement agreement that provides, in relevant part, as follows:

In consideration for the payments of the sums set forth in Paragraph 1. above and pursuant to Section VII.5 of the Policy, the Pension Fund and the Trustees hereby assign, transfer, and convey to Ulico all claims, causes of action, rights and recoveries to which they are entitled as against any culpable or potentially culpable parties who may be responsible for all or any part of the losses allegedly sustained by the Pension Fund, including, but not limited to Clover Capital Management, Inc. ("Clover") based upon, or arising from Clover's management and sale of the Z-Bonds referred to in the DOL Action, including, but not limited to, the assertion that Clover improperly and/or imprudently sold the Z-Bonds held by the Pension Fund when Clover became an investment manager for the Pension Fund, by making such sales on an overly precipitous basis, and/or at lower than prices available in the market at the time of the sale. Further, also pursuant to Section VII.5 of the Policy, the Pension Fund and the Trustees shall execute all papers required and shall do everything that may be necessary to secure any rights assigned, transferred, or conveyed to Ulico pursuant to this paragraph and the Pension Fund and the Trustees shall do nothing to prejudice any such rights of Ulico.

Setetlement Agr., ¶ 5. Section VII.5 of the Policies referenced in the settlement agreements is entitled "Subrogation and Recourse" and provides as follows:

In the event of any claim or payment under this insurance, the Company shall be subrogated to the extent of such payment to all rights of recovery therefore, and the insureds shall execute all papers required and shall do everything that may be necessary to secure such rights including the execution of such documents necessary to enable the Company to effectively bring suit in the name of the Insureds.

Ulico commenced the instant action against Clover asserting claims on behalf of the Funds and the Trustees pursuant to ERISA for breach of its fiduciary duties and for breach of contract. Presently before the Court is Clover's motion for summary judgment pursuant to FED. R. CIV. P. 56 seeking dismissal of the Complaint in its entirety.

II. DISCUSSION

A. Summary Judgment ...


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