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AMERICAN INTER. SPECIAL. v. NAT. ASSO.

March 28, 2003

AMERICAN INTERNATIONAL SPECIALITY LINES INSURANCE COMPANY, PLAINTIFF,
v.
NATIONAL ASSOCIATION OF BUSINESS OWNERS AND PROFESSIONALS, THE UNITED STATES OF AMERICA, DAVID W. SILVERMAN, VERSUSLAW KING, ST. ANDREWS EPISCOPAL CHURCH, DONNA HICKMAN, DOUG GRAY, TERRELL GLENN, BRADY JOHNSON, DAVE JOHNSON, LYNN MITCHELL, CARYL RANDAZZO, GREG SHORE, ANDY TYRRELL, CANTEY WRIGHT, PEDERSEN & SCOTT, P.C., WILLIAM A. SCOTT, VINCENT & BOSTIC, LLP, CURTIS BOSTIC, THAD VINCENT, SANDY SCOTT, CAROL MURPHY, P. BRANDT SHELBOURNE, NUTLOCKER, INC. D/B/A WARM HARDWARE, DAR MACHINE & METALWORKS, INC., PALMETTO PEDIATRICS, INC., RICHARD B. MACDONALD D/B/A BEST GOLF CARS, FIDLER CORPORATION D/B/A MAIL BOXES ETC., TAMARA MICHELLE TRUEL, ROBERT TRUEL, MELISSA G. COLE, MICHAEL COLE, ROBIN DUNBAR, RAYMOND DUNBAR, STANLEY SCHARF, KENT D. MCPHAIL, BARRE C. DUMAS, SUSIE M. NELSON, CYNTHIA MULLINAX, W&W TRUCK & TRACTOR CO., INC., MARY B. GUNNELLS, WILLIAM A. GUNNELLS, TELE TECH CORPORATION, D'S JEWLERS, INC., HARVEY W. RUMPH, MICHELE HASTINGS, FRANCIS H. WALPOLE, PETER HASTINGS AS GUARDIAN FOR ERIN HASTINGS (A MINOR CHILD), FORM-A-TOOL, INC., JAMES E. MUSACCHIA, DAVE LOUDIN, CAROL HIGHTOWER, DON SIEVERT, THOMAS WOOTEN, DAVID C. FLEMING, JIMMY R. SULLIVAN, SR., ROGER L. BOWMAN, LEWIS L. HENSLEE, WILLIAM J. PRICE, TROY T. SWEET, DAVID L. WILLIAMS, BILLY L. CROWE, CURTIS WILBURN, CHARLES GINTHER, JAMES K. BRADBERRY, HAROLD STEWART, ROBERT G. COX, GARY EDENS, DOUGLAS AUSTIN, LAURIE LAMBERT, CHRISTINE A. AUGHTMAN, NEW RIVER HEALTH ASSOCIATION, INC., AND DONNA M. WILSON, AND ALL OTHER EMPLOYERS, AND EMPLOYEES OF SUCH EMPLOYERS, SIMILARLY SITUATED, DEFENDANTS. NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA., PLAINTIFF, V. CHARLES L. BRADLEY, TERENCE E. RHUE, NOEL SHAW, JR., PAUL D. ASKEW, INTERNATIONAL WORKERS GUILD HEALTH AND WELFARE FUND, THE UNITED STATES OF AMERICA, DAVID W. SILVERMAN, MARY B. GUNNELLS, WILLIAM A. GUNNELLS, TELE TECH CORPORATION, CYNTHIA MULLINAX, AND W&W TRUCK & TRACTOR CO., INC., AND ALL OTHER EMPLOYERS AND EMPLOYEES OF SUCH EMPLOYERS, SIMILARLY SITUATED, DEFENDANTS.



The opinion of the court was delivered by: Arthur D. Spatt, United States District Judge.

MEMORANDUM OF DECISION AND ORDER

The plaintiffs American International Specialty Lines Insurance Company ("AISLIC") and National Union Fire Insurance Company of Pittsburgh, PA. ("National Union") bring separate interpleader actions to resolve multiple and conflicting claims regarding insurance policies that they issued to the defendant National Association of Business Owners & Professionals ("NABOP"). Presently before the Court are two motions, one to approve proposed settlements in the two actions and the second to disqualify or otherwise limit the recommendation of NABOP's independent fiduciary concerning the settlements.

I. BACKGROUND

Initially, it is helpful to set forth the history leading to the two interpleader actions. On December 15, 1998, the then United States Secretary of Labor, Alexis M. Herman, commenced an action against NABOP, among others, in the United States District Court for the Eastern District of New York, alleging breaches of fiduciary duty concerning the International Workers' Guild Health and Welfare Trust Fund (the "Fund") in violation of the Employee Retirement Income Security Act of 1974 ("ERISA"), 29 U.S.C. § 1001 et seq. See Herman v. Fidelity Group, No. 98CV7683 (JM) (E.D.N.Y. filed Dec. 15, 1998).

In Herman, the complaint alleges that the Fund was created to provide group health and welfare benefits to the employees of contributing employers; that NABOP acted in various capacities in connection with the Fund, including management, and as a fiduciary and third-party administrator; that the International Workers' Guild ("IWG") was the labor union representing employees of employers participating in the Fund under a collective bargaining agreement with NABOP; and that Fidelity Group, Inc. ("Fidelity") acted as the third-party administrator of the Fund.

The complaint alleges further that during the period 1995 to the present NABOP, IWG, the trustees and the administrator of the Fund, and the officers and the employees of NABOP caused or permitted the improper diversion of assets of the Fund through various schemes, including sham union and association fees paid to IWG and NABOP and improper salaries paid to NABOP officers. As a result of these schemes, the Fund became insolvent causing millions of dollars of health claims to go unpaid.

On December 24, 1998, the Honorable Jacob Mishler froze the assets of NABOP and the other defendants; appointed David W. Silverman ("Silverman") as Independent Fiduciary and Receiver of NABOP, IWG, the Fund and Fidelity; and directed Silverman to develop a plan for the fair adjudication and payment of outstanding claims to participants in the Fund. On January 8, 1999, Judge Mishler amended the December 24, 1998 order adding the following provision:

Unless otherwise permitted by this Court, all pending actions, whether state and/or federal, against the Fund, its trustees, fiduciaries, participants or beneficiaries are stayed. Excluded from this Order are any actions, whether legal, equitable or administrative in nature, by the Secretary of Labor or any other federal governmental authority and any state or state agency. Any action filed after the filing of this Order would also be stayed pursuant to the All Writs Act, 28 U.S.C § 1651.
Herman v. Fidelity Group, No. 98CV7683 (JM) (E.D.N.Y. Jan. 8, 1999). On January 29, 1999, Judge Mishler terminated the Fund as of January 31, 1999 and directed Silverman to notify all participants and contributing employers. Since then, Silverman has entered into a number of stipulations of settlement with various defendants and Judge Mishler has dismissed the actions against those settling defendants. On January 9, 2003, the Herman action was reassigned to this Court and remains pending against certain defendants.

A. AISLIC v. NABOP, 99CV1108

On February 26, 1999, AISLIC filed an interpleader action against NABOP, the United States of America, Silverman, Christine A. Aughtman, Barre C. Dumas, Susie Nelson and the South Carolina Defendants to resolve multiple and conflicting claims concerning an insurance policy AISLIC issued to NABOP. The complaint alleges that AISLIC issued an errors and omissions liability insurance policy to NABOP (the "AISLIC Policy"). The AISLIC Policy insured NABOP against any claims of "Wrongful Acts" made against it that arose solely out of the conduct of its business as an association during the policy period of March 6, 1998 to March 6, 1999. Wrongful Act is defined as

[A]ny actual or alleged: (a) negligent act, breach of duty, error, omission, misstatement or misleading statement, or; (b) infringement of copyright or trademark, or unauthorized use of title; (c) plagiarism, piracy or misappropriation of ideas, or; (d) the publication or utterance of libel, slander or other defamatory or disparaging material or remark, or; (e) invasion or infringement of the right of privacy.
The AISLIC Policy's limit of liability was $1,000,000 aggregate inclusive of defense costs, charges and expenses.

On July 10, 1998, the limit of liability under the AISLIC Policy was amended as follows:

Item 3. Limit[] of Liability: (Including Defense Costs, Charges, and Expenses):
$3,000,000 Each Wrongful Act or series of continuous, repeated or interrelated Wrongful Acts.
$3,000,000 Aggregate.
It is further understood and agreed that the above stated Limit[] of Liability apply to any claim for: a Wrongful Act which first occurs; or, a series of continuous, repeated or interrelated Wrongful Acts where the first Wrongful Act occurs; on or after July 10, 1998 and before the end of the policy period.
It is further understood and agreed that the Limit[] of Liability remain as $1,000,000 per Wrongful Act and $1,000,000 in the Aggregate for any claim for: a Wrongful Act which first occurs; or, a series of continuous repeated or interrelated Wrongful Acts where the first Wrongful Act occurred; before July 10, 1998 and before the end of the policy period.
The complaint also alleges that NABOP made material misrepresentations to AISLIC in procuring the AISLIC Policy and therefore no coverage exists. On February 26, 1999, Judge Mishler approved AISLIC's interpleader bond in the sum of $1,000,000, the purported amount of the AISLIC Policy.

On May 24, 1999, Judge Mishler denied the South Carolina Defendants' motion to dismiss the interpleader complaint for lack of subject matter and personal jurisdiction and to change venue to the District of South Carolina. On June 17, 1999, Judge Mishler enjoined the named defendants and all persons required to interplead their claims, from instituting or prosecuting any proceeding against AISLIC in state or federal court with respect to the AISLIC Policy during the pendency of this action or the Herman action.

On March 8, 2000, the South Carolina Defendants moved to lift the stay to allow them to file a motion to dismiss pursuant to Rule 12(b) and for failure to comply with Rule 23(c)(1). They also moved for leave to take depositions of AISLIC representatives pursuant to Rule 30(b)(6). On January 18, 2001, Judge Mishler denied the South Carolina Defendants' motion to lift the stay in order to file a motion to dismiss and to take depositions. In denying that motion, Judge Mishler noted that proceeding with this action would impair the ability of the parties in the Herman action to reach a satisfactory resolution of that matter.

On January 29, 2002, AISLIC, NABOP and Eugene Duncan, Yvonne Duncan, Carl Samuels and Dwayne Samuels (collectively, the "NABOP Individuals") and Silverman filed a stipulation of settlement in the 99CV1108 action (the "AISLIC Stipulation"). The NABOP Individuals were officers or directors of NABOP; were insured under the AISLIC Policy; and have been named as defendants in the Herman action. The AISLIC Stipulation provides that AISLIC, NABOP and the NABOP Individuals, after consultation with the United States, have decided "to resolve their dispute as to the Policy's coverage and consequently as to entitlement to the Policy's proceeds in order to avoid the risks, costs and inconvenience of further litigation. . . ."

The relevant terms of the AISLIC Stipulation are: (1) AISLIC agrees to pay $500,000 to Silverman, minus the cost of notice to all named defendants and known potential claimants, for distribution to the participants and other claimants of the AISLIC Policy pursuant to a formula set forth by the Court; (2) NABOP and the NABOP individuals agree to accept AISLIC's $500,000 payment to Silverman as complete satisfaction of AISLIC's obligations under the AISLIC Policy and, upon final judgment, they agree to release AISLIC from any further claims under the AISLIC Policy and consent to AISLIC's discharge from the interpleader action; (4) the AISLIC Stipulation is conditioned on the Court's entry of judgment in the second interpleader action National Union v. Bradley, No. 99CV1109 (E.D.N.Y. filed on Feb. 26, 1999); and (5) Silverman, as receiver and Independent Fiduciary of NABOP, releases AISLIC from any claims relating to the AISLIC Policy.

Submitted with the AISLIC Stipulation is a proposed judgment and order of discharge of stakeholder which provides in pertinent part: (a) the AISLIC Stipulation is fair and reasonable; (b) "AISLIC is hereby discharged from any and all liability arising out of, relating to, or in connection with the Policy"; (c) all claims asserted against AISLIC in this proceeding are dismissed with prejudice; and (d) "[a]ll Participants, members of NABOP, parties hereto and all other individuals and entities having notice of the hearing with respect to entry of this judgment are hereby permanently ...


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