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Showing 5 posts from May 2015.

The Insurance Benefits From Early Discovery Of Employee-Caused Losses

Earlier this month, we posted about the U.S. District Court for the Northern District of Ohio’s decision that a credit union’s insurance policy was not invalid from the start because of its employee’s misrepresentations on the application.  The decision, National Credit Union Administration Board, as Liquidating Agent of St. Paul Croatian Federal Credit Union v. CUMIS Insurance Society, Inc., also illustrates other arguments that insurers may make in denying coverage for claims under D&O policies or reserving their rights to litigate later.  In this post, we explore how the court determined whether St. Paul “discovered” the loss more than two years before it filed suit against its insured, in which case its lawsuit would have been barred by a suit limitations period.

To briefly recap the facts of the case, St. Paul Croatian Federal Credit Union (“St. Paul”) and its insurer, CUMIS, agreed that a St. Paul bank manager, Mr. Raguz, had engaged in fraud by creating fake loans and accepting bribes.  St. Paul eventually collapsed and was taken over by regulators. The liquidator appointed to administer St. Paul’s assets made a claim for its losses against CUMIS under a bond policy it had issued in favor of St. Paul.  CUMIS responded not only by claiming that the bond policy was invalid from its inception because Mr. Raguz made material misrepresentations in obtaining and renewing it, but also because the policy stated that “legal proceedings” to recover loss from CUMIS had to be “brought within two years of Discovery of Loss.”  Under the policy, “Discovery occur[ed] when [St. Paul] first become aware of facts which would cause a reasonable person to assume that a loss of a type covered under this Bond has been or will be incurred, regardless of when the act or acts causing or contributing to such loss occurred.”

To support its contention that St. Paul was aware of the loss long before it brought suit, CUMIS argued that the St. Paul board of directors were aware of two “critical facts” about the fraud, which would have led a reasonable person to assume a loss.  First, CUMIS claimed that the delinquency rate of zero for the loan portfolio was unreasonable given its size, and that the directors should have known this fact more than two years before the lawsuit.  In addition, CUMIS claimed that the directors should have known of the fraud more than two years in advance because the loan portfolio included $131.2 million of loans that were purportedly secured by deposits, even though in fact there were only $122.5 million of deposits securing the loans.     Read More ›

The Inbox – When Suits Break Bad

Federal prosecutors recently indicted David Colletti, a former VP of marketing with MillerCoors LLC, on charges relating to a scheme to embezzle $7 million from the beer brewing giant. Mr. Colletti, a thirty-year veteran of the company, allegedly broke bad by conspiring with others to defraud the company through fictitious invoices for promotional and other events that were never held. According to Law 360, MillerCoors sued its former marketing executive for $13.3 million last year in an effort to recover for the alleged fraud. Prosecutors claim that Mr. Colletti and his co-conspirators used the proceeds to purchase collectible firearms, golf and hunting trips, and—perhaps inspired by Pink Floyd—even bought an arena football team. 

Nanoventions Holdings is a Georgia company that designs and manufactures microstructure technology used to prevent the counterfeiting of such things as currency, driver’s licenses, and event tickets. In 2011, $2 million went missing, and an investigation revealed that that its CFO, Steve Daniels, allegedly forged checks and converted funds to his own use as owner of a company called BIW Enterprises. In an interesting twist, BIW is engaged in the business of growing and distributing marijuana in California. According to Courthouse News Service, the company is suing Mr. Daniels for compensatory, treble and punitive damages under Georgia RICO statutes, and related causes of action.  If the allegations are true, one might find a historical equivalent to these events in the 1920s, when the president of the Loft Candy Company stole thousands of dollars to buy Pepsi-Cola out of bankruptcy.  Loft Candy ended up owning Pepsi on the basis that it was a stolen corporate opportunity.  If Georgia shared Colorado’s stance on marijuana legalization, would the court award ownership of the pot business to Nanoventions?  Oh what a difference a century makes. Read More ›

In Reversal of Fortune, Court of Appeals Finds Ambiguity in Executive’s General Release

Last May, we covered a decision by a Michigan federal court that torpedoed Debourah Mattatall’s claims against her former employee, Transdermal Corporation.  Now, thanks to a recent decision by the U.S. Court of Appeals for the Sixth Circuit, Mattatall’s claims have been brought back to life.

To briefly recap the facts, Mattatall used to own a company called DPM Therapeutics Corporation.  She sold it to Transdermal and entered into a Stock Purchase Agreement and Employment Agreement with that company.  According to Mattatall, Transdermal didn’t comply with its obligations, and she sued it in federal court.  But the court quickly granted summary judgment, finding that Mattatall gave up her claims in a settlement agreement that resolved other litigation against her.

In that litigation, DPM’s minority shareholders challenged the sale to Transdermal, and Transdermal countersued those shareholders.  The parties to the litigation, including Mattatall, resolved the dispute and entered into a settlement agreement and a general release.  The release stated that “Transdermal, DPM, [another controlling owner], and Mattatall and each [minority shareholder] … release[d], waive[d] and forever discharge[d] each other” from any claims arising before the agreement was signed.  In Mattatall’s subsequent lawsuit against her employer, Transdermal, the district court ruled that this language released all claims that any party to the agreement had against any other party – even though Transdermal and Mattatall were on the same side in the shareholder litigation, and Transdermal reassured Mattatall that she wasn’t releasing her unrelated claims against it before she signed.  Because her claims against Transdermal fell within the “unambiguous” and “broadly worded” terms of the release, this evidence was irrelevant, and Mattatall was out of court. Read More ›

Faithless Fiduciary: What Happens WhenThe Employee Responsible For The Purchase Of D&O Coverage Also Commits Fraud?

The recent decision in National Credit Union Administration Board, as Liquidating Agent of St. Paul Croatian Federal Credit Union v. CUMIS Insurance Society, Inc., from the U.S. District Court for the Northern District of Ohio, is yet another case illustrating how important the precise terms of a policy can be in determining the coverage.  As we’ve previously discussed on this blog (here and here), a D&O insurance policy is reliable protection for the indemnification rights of the officers and directors in times of financial distress.  Many policies also offer coverage to the entity for injuries caused by misdeeds of its employees.  The St. Paul case illustrates what can happen when the employee charged with procuring the insurance policy on behalf of the entity is also the party engaging in fraudulent conduct. 

St. Paul Croatian Federal Credit Union (“St. Paul”) was established in 1943 to serve members of St. Paul Croatian parish in Cleveland, Ohio.  For more than 53 years it operated from a single branch with about 3 employees.  In 1996, a manager retired and one of the tellers, Anthony Raguz, was promoted to fill his position.  The credit union grew tremendously over the next fifteen years, and by March 31, 2010, St. Paul had total assets of $250 Million and a loan portfolio of $240 Million.  Read More ›

The Inbox – Trends in the C-Suite

Doug Parker, the Chairman and CEO of American Airlines, has just joined a small cadre of executives who earn no salaries. Before anyone starts a GoFundMe page for Mr. Parker, consider that his 2015 compensation consists of 207,672 restricted stock units, the value of which will depend upon the airline’s performance. According to the Wall Street Journal, the stock units could amount to compensation in the range of $10.7 million if calculated using the current stock price of $51.40. By comparison, Mr. Parker earned $12.3 million in 2014, 40% of which was cash in the form of a $700,000 base salary and annual cash incentives. Mark Reilly, head of Verisight, Inc., a firm of executive compensation consultants, told the Journal that this type of compensation structure is more often found in companies facing financial hardship, and the lack of salary is offset by more generous stock awards. In the case of an executive in an established, mature industry, the message seems to be that Mr. Parker believes in the stock and that he is willing to tie his compensation to its performance.  Given US Airways’ performance since its merger with American in 2013, this wouldn’t seem like an incredible risk on his part. The combined company “has soared to record profit and its stock has climbed 42% in the past year.” Read More ›