The opinion of the court was delivered by: PETER LEISURE, District Judge Page 2
These actions arise out of the acquisition by Hannover
Ruckversicherungs-Aktiengesellschaft ("Hannover Re"), a German
reinsurance company, of Lion Holding, Inc. ("Lion"). Plaintiffs were
officers, directors, and shareholders of Lion at the time of the
acquisition in 1999, and remained as executives of Lion after the
acquisition through the end of 2001. Defendants are Hannover Re and Lion.
Plaintiffs bring these actions for breach of contract, alleging that
defendants failed to pay "Earnouts" due under a Stock Purchase Agreement
and Employment Agreements executed when Hannover Re acquired Lion.
Plaintiffs contend that defendants owe them the maximum Earnouts as
provided in the agreements between the parties, which total $100 million.
Defendants counterclaim that any damages caused by defendants' alleged
breach of contract must be set off against monies allegedly owed to them
by plaintiffs pursuant to an indemnification provision in the Stock
Purchase Agreement. Defendants also counterclaim that plaintiffs breached
their fiduciary duty to Lion and Hannover Re.
Plaintiffs now bring a motion for partial summary judgment. Plaintiffs
contend that there is no genuine issue of material fact in dispute as to
one of four Earnouts at issue, that for the year 1999, and ask the Court
to grant summary judgment that defendants owe plaintiffs $25 million.
Defendants respond that genuine issues of material fact remain in dispute
about whether plaintiffs should receive the 1999 Earnout. Defendants also
contend that genuine issues of material fact relating to their
counterclaims remain in dispute, and that this should prevent summary
judgment. For the reasons set forth below, plaintiffs' motion for partial
summary judgment is denied.
The current summary judgment motion concerns two actions. In the first
action (docket number 02-4258), plaintiffs Robert Ferguson and Ralph Milo
assert a breach of contract claim against defendant Lion Holding, Inc.
("Lion"). Lion is an insurance company for which Ferguson and Milo served
as executives from at least 1996 to the end of 2001. (Plaintiffs' Local
Rule 56.1 Statement of Material Facts, ¶ 2 ("Plaintiffs' 56.1");
Affidavit of Joseph W. Jacobs, ¶ 11 ("Jacobs Aff.").) Plaintiffs also
served as officers of Lion's subsidiary, Clarendon.*fn1 (Plaintiffs'
56.1, ¶ 2-4; Answer and Counterclaim of Defendant Lion Holding, ¶
60-61 ("Lion Answer").) In this first action, the operable agreements
between plaintiffs Ferguson and Milo and defendant Lion are those that
govern plaintiffs' employment as executives of Lion. Plaintiffs claim
that defendant Lion owes them $50 million pursuant to these agreements.
In the second action (docket number 02-4261), plaintiffs Ferguson and
Milo LP*fn2 assert a breach of contract claim against defendant Hannover
Re. Hannover Re is a German reinsurance
company that acquired Lion early in 1999. (Plaintiffs' 56.1, ¶
1.) Plaintiffs Ferguson and Milo LP bring this second action as the
shareholders who sold Lion to Hannover Re. The central agreement between
the selling shareholders and Hannover Re in this action is a Stock
Purchase Agreement ("Purchase Agreement") dated February 16, 1999.
(Jacobs Aff., Exh. E.) Plaintiffs claim that Hannover Re owes them $50
million pursuant to this agreement.
The substance of plaintiffs' claims, defendants' counterclaims, the
applicable contract provisions, and the facts underlying the disputes are
essentially the same for both actions. Plaintiffs move for partial
summary judgment on both actions for identical reasons, and defendants
likewise oppose summary judgment without distinguishing between the
actions. Unless otherwise indicated, references below to the parties
denote the plaintiffs or defendants in both actions collectively.
Likewise, references to agreements and obligations between the parties
refer to the actions and contracts between the parties collectively,
unless the Court indicates otherwise.
Four agreements between the parties, governing extensive, competing
obligations for each side, give rise to plaintiffs' breach of contract
claims and plaintiffs' current motion for summary judgment. First,
Hannover Re acquired Lion from the selling shareholders pursuant to a
Purchase Agreement dated February 16, 1999. Second, plaintiff Ferguson
remained employed as an executive of Lion and Clarendon after Hannover Re
acquired Lion, pursuant to an amended employment agreement. (Jacobs Aff.,
Exh. F.) Third, plaintiff Milo also remained employed as an executive of
Lion and Clarendon after Hannover Re acquired Lion, pursuant to an
amended employment agreement. (Jacobs Aff. Exh. G.) The terms of
Ferguson's and Milo's amended
employment agreements are the same for the purposes of this motion,
and are referred to in this opinion collectively as the "Employment
Agreements." Fourth, the parties reached a letter agreement, dated
February 24, 2000 (the "February Letter"), that addresses some of the
parties' obligations that arise out of the Purchase Agreement and the
Employment Agreements. (Jacobs Aff. Exh. I.) The first three agreements
largely provide the basis for the contractual relationship between the
parties, and thus largely provide the basis for plaintiffs' breach of
contract claims. It is upon the fourth agreement, however, that
plaintiffs seek partial summary judgment.
A. The Purchase Agreement
Defendant Hannover Re acquired Lion pursuant to a Purchase Agreement
dated February 16, 1999. (Plaintiffs' 56.1, ¶ 1; Jacobs Aff. Exh. E.)
Article 2 of the Purchase Agreement includes a provision titled
"Additional Purchase Price." (Jacobs Aff. Exh. E, ¶ 2.3.) This
provision entitles Ferguson and Milo LP, the selling shareholders, to
receive additional compensation if Lion's subsidiary, Clarendon, achieves
particular profitability levels for any or all of four periods: 1999,
2000, 2001, and the combined period 1999-2001. (Plaintiffs' 56.1, ¶
3-4; Defendants' Statement of Disputed Material Facts, ¶ 1
("Defendants' 56.1"); Declaration of Herbert Haas, ¶ 6-7 ("Haas
Decl.").) The additional compensation is called an "Earnout." Under the
Purchase Agreement, the maximum Earnout payable to Ferguson and Milo LP
for any one year period is $12,500,000, of which Milo LP would receive
70% and Ferguson 30%. (Plaintiffs' 56.1, ¶ 8.)
The criteria used to determine whether Ferguson and Milo LP would
receive some or all of the maximum Earnout for any time period is
Clarendon's "Combined Ratio." (Jacobs Aff.
Exh. E, ¶ 2.3.) The Combined Ratio measures Clarendon's
profitability.*fn3 If Clarendon attained a Combined Ratio of 75% or less
for any one year period then the maximum Earnout became due to Milo LP
and Ferguson. (Plaintiffs' 56.1, ¶ 5, 9; Defendants' 56.1, ¶ 1.)
Thus, for example, if Clarendon's Combined Ratio for 1999 was 75% or
less, then Hannover Re is obligated under the Purchase Agreement to pay a
$12,500,000 Earnout to Ferguson and Milo LP. Hannover Re was obligated to
pay any Earnout due under the Purchase Agreement by May 15, 2002.
(Plaintiffs' 56.1, ¶ 6, 9.)
Article 7 of the Purchase Agreement, titled "Indemnification," includes
separate provisions governing the selling shareholders' obligation to
indemnify Hannover Re in certain circumstances. (Jacobs Aff., Exh. E,
¶¶ 7.1-7.6; Plaintiffs' 56.1, ¶ 17; Defendants' 56.1, ¶ 6, 7.)
For the purposes of this motion it is useful to note the distinction in
Article 7 between two particular indemnity obligations incumbent upon
Ferguson and Milo LP. First, Article 7 imposes general indemnification
obligations upon the selling shareholders. Article 7 further provides
that, should the selling shareholders become obligated to make payments
pursuant to the general indemnification provisions, that funds for the
payments should be taken from a prioritized list of sources. (Jacobs Aff.
Exh. E, ¶ 7.4(B).) Article 7 includes in this list of sources "any
amount of Additional Incentive Compensation (as defined under the
Employment Agreement Amendments) payable at such time or paid to Milo or
Ferguson after the Closing Date," and "any amounts payable at such time
or paid to Milo or Ferguson under Section 2.3 of this Agreement [the
Earnout provision]." In sum, Article 7 of the Purchase Agreement
specifies that in the event the selling shareholders become obligated to
indemnify Hannover Re, Earnouts payable or paid to Ferguson, Milo LP, and
Milo pursuant to Article 2 or the Employment Agreements are an eligible
source of funds to pay the indemnity.
In February 2001, defendant Hannover Re made a claim for
indemnification from the selling shareholders pursuant to these general
indemnification provisions. (Plaintiffs' 56.1, ¶ 18; Defendants'
56.1, ¶ 6; Jacobs Aff. Exh. J.) Hannover Re claims that the selling
shareholders owe hundreds of millions of dollars in payments for
indemnification pursuant to Article 7 of the Purchase Agreement. The
selling shareholders dispute this claim for indemnification. (Plaintiffs'
56.1, ¶ 18; Defendants' 56.1, ¶ 7; Jacobs Aff. Exh. K.) The
parties are currently engaged in litigation in the Supreme Court of New
York to resolve this dispute. (Defendants' 56.1, ¶ 7.)
The second indemnity obligation incumbent upon the selling shareholders
is described in paragraphs 7.1(C) and 7.4(D) of the Purchase Agreement,
which govern Ferguson and Milo LP's indemnification obligations with
respect to the "LMX Business." (Jacobs Aff. Exh. E, ¶¶ 7.1(C), 7.4(D);
see Defendants' Opposition, at 5 n.4.) The parties have not
developed the substance of this obligation on the current record, as its
substance is largely irrelevant at this stage. It is important to note,
however, that the parties came to dispute the extent of the selling
shareholders' indemnity obligations with respect to the LMX Business. The
February letter, discussed below, reflects an effort by the parties to
address this dispute.
B. The Employment Agreements
Prior to Hannover Re's acquisition of Lion, plaintiffs Ferguson and
Milo served as executives of Lion pursuant to Employment Agreements.
(Plaintiffs' 56.1, ¶ 2; Jacobs Aff. Exh.
F (Ferguson Agreement), Exh. G (Milo Agreement).) When Hannover Re
acquired Lion, it agreed with Ferguson and Milo to keep them employed as
executives of Lion, and agreed to execute amendments to the Employment
Agreements. (Id.) The Employment Agreements between plaintiffs
and Hannover Re, as amended, include provisions titled "Payment of the
Additional Incentive Compensation." These provisions require the payment
of Earnouts to Ferguson and Milo, largely on the same terms as under the
Purchase Agreement. If Clarendon attained a Combined Ratio of 75% or less
for any one year period, then, under the Employment Agreements, Hannover
Re would owe Milo and Ferguson a $12,500,000 Earnout payment.
(Plaintiffs' 56.1, ¶ 5; Defendants' 56.1, ¶ 1.) As with the
Purchase Agreement, under the Employment Agreements Milo would receive
70% of the Earnout and Ferguson would receive 30%, and any Earnout must
be paid by May 15, 2002. The only material difference between the
conditions for the Earnout under the Employment Agreements and the
Purchase Agreement is that the Employment Agreements also required that
Ferguson and Milo still be employed by Lion as of December 30, 2001.
(Plaintiffs 56.1, ¶ 7.) The parties do not dispute that Ferguson and
Milo remained employed by Lion through the end of 2001. (Plaintiffs 56.1,
The compensation provisions in the Employment Agreements were included
to keep Ferguson and Milo on as executives of Lion after its acquisition
by Hannover Re. (Jacobs Aff. ¶ 6; Haas Decl., ¶ 6.) As Ferguson
and Milo were involved in operating Lion's subsidiary, Clarendon, the
Earnout provisions in both the Employment Agreements and Purchase
Agreement provided an incentive for plaintiffs to manage Clarendon at a
profitable level. (Id.) Having acquired Lion, Hannover Re of
course would itself profit by plaintiffs' profitable management of
Clarendon. If, for example, Ferguson and Milo managed Clarendon to a
Combined Ratio of less than 75% in 1999, then Hannover Re would profit,
and in turn would pay Ferguson, Milo, and
Milo LP a combined $25 million in Earnouts pursuant to the Purchase
Agreement and Employment Agreements.
While the Purchase Agreement and Employment Agreements are the focus of
plaintiffs' breach of contract claims and defendants' counterclaims, a
letter agreement, dated February 24, 2000 (the "February letter"), is the
subject of plaintiffs' current summary judgment motion. (Jacobs Aff.
¶ 17 & Exh. I.) The February letter was written by plaintiff
Ferguson and sent to Herbert Haas, then the Chief Financial Officer of
Hannover Re. Haas countersigned the February letter on behalf of Hannover
Re. (Haas Decl., ¶ 8.) The February letter describes an agreement
between the selling shareholders of Lion, Ferguson and Milo in their
personal capacities, and Hannover Re. In general, the February letter
memorializes an agreement between the parties on two issues: the
temporary, or immediate payment for indemnity by the selling shareholders
with respect to the LMX business; and the payment of the 1999 Earnout by
Hannover Re to Ferguson, Milo, and Milo LP. The parties dispute virtually
any and all possible implications of the February letter. As plaintiffs
move for partial summary judgment on the February letter, and defendants
contend that the letter is unenforceable for lack of consideration and
because it was procured by fraud, the Court must assess the February
letter's import to resolve the current motion.
1. Plaintiffs' Description of the February Letter
Plaintiffs contend that the February letter is an enforceable contract.
It reflects an agreement between the selling shareholders and Hannover
Re. After entering the Purchase Agreement, the selling shareholders and
Hannover Re came to dispute the selling shareholders' indemnity
obligation with respect to the LMX Business, and particularly the "LMX
The parties apparently agreed that the selling shareholders owed some
payment for indemnity to Clarendon (Hannover Re's newly acquired
subsidiary) in association with the LMX Settlement, but disagreed as to
the proper amount of the payment. According to plaintiffs, prior to the
entry of the February letter, defendants sought a payment of $17.183
million for the LMX Settlement, whereas the selling shareholders asserted
that they owed roughly $4 million less than that. The February letter
purports to resolve, at least temporarily, this discrepancy. Under the
terms of the February letter, the selling shareholders agreed to pay
$17.183 million, but also agreed to continue good faith negotiations with
Hannover Re to resolve the dispute over the proper payment, and to
arbitrate the dispute if the negotiations failed. As defendants argue
that the February letter lacks consideration, plaintiffs stress that the
$17.183 million payment essentially includes a $4 million credit or
temporary forfeiture, which would be returned to the selling shareholders
should negotiations or arbitration eventually vindicate plaintiffs'
position. (See Plaintiffs' Reply Memorandum of Law in Support of Their
Motions for Partial Summary Judgment, at 5 ("Plaintiffs' Reply").)
The selling shareholders also agreed in the February letter to exclude
the $17.183 million from Clarendon's financial statement for the purpose
of calculating Ferguson and Milo's 1999 bonus. Plaintiffs contend that
the Employment Agreements provide that Milo and Ferguson were entitled to
a bonus, separate from the Earaouts, that would be calculated as a
percentage of Clarendon's profits. (Plaintiffs' Reply, at 6; Jacobs Aff.
Exhs. F & G.) By agreeing to exclude the $17.183 million payment from
Clarendon's profits, plaintiffs thus diminished the funds from which
their bonus would be calculated.
Plaintiffs contend that in exchange for these considerations,
defendants agreed to pay the 1999 Earnout. Section 4 of the February
letter written by Ferguson, titled "Earn out," reads as follows:
Section 2.3 of the Stock Purchase Agreement
obligates Hannover to pay to Milo L.P. and me
Additional Purchase Price as calculated in that
provision. Ralph and I are separately entitled to
receive Additional Incentive Compensation
calculated on the same basis under our Employment
Agreement Amendments. Hannover has agreed with
Ralph, Milo L.P., and me that (i) Milo L.P. and I
have qualified for and are entitled to receive our
respective shares of the maximum $12.5 million
dollar Additional Purchase Price for 1999 and (ii)
Ralph and I have separately qualified for and are
entitled to receive (subject only to Section II of
Exhibit B of the Existing Employment Agreement, as
amended) the maximum $8.75 million and $3.75
million, respectively, of Additional Incentive
Compensation for 1999 under our respective
Existing Employment Agreement, as amended, in each
case payable as provided in such documents.
(Jacobs Aff., Exh. I, § 4.) In other words, Hannover Re agreed
in the February letter to pay the 1999 Earnout to plaintiffs. (Haas
Decl., ¶ 9.)
2. Defendants' Description of the February Letter
Defendants offer a separate account of the February letter and its
implications. Defendants contend that sections 7.1(C) and 7.4(D) of the
Purchase Agreement required the selling shareholders to indemnify
Clarendon for $17.163 million for the LMX Settlement. Thus the February
letter simply noted the selling shareholders' pre-existing obligation.
Defendants also assert that plaintiffs' agreement to exclude the $17.183
million from the calculation of their bonus "would have had little or no
effect on Ferguson and Milo's bonus for 1999." (Defendants' Opposition,
at 19-20 n. 11.) The February letter, ...