MPM Holdings Inc. v. Federal Insurance Company ( 2022 )

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE
MPM HOLDINGS INC., )
)
Plaintiff, )
)
v. )
)C.A. No. N20C-07-014 MMJ CCLD
FEDERAL INSURANCE COMPANY, )
XL SPECIALTY INSURANCE )
COMPANY, ENDURANCE )
AMERICAN INSURANCE COMPANY, )
AXIS INSURANCE COMPANY, )
BERKLEY INSURANCE COMPANY, )
and ACE AMERICAN INSURANCE )
COMPANY, )
)
Defendants. )
)
Submitted: December 14, 2021
Decided: March 17, 2022
On Cross-Motions for Summary Judgment
GRANTED IN PART and DENIED IN PART
CORRECTED OPINION
David J. Baldwin, Esq., Peter C. McGivney, Esq., Berger Harris LLP, Wilmington,
DE, Bernard P. Bell, Esq. (Argued), Tab R. Turano, Esq., Miller Friel PLLC,
Washington, D.C., Attorneys for Plaintiff
Gregory F. Fischer, Esq., Cozen O’Connor, Wilmington, DE, Angelo G. Savino,
Esq. (Argued), Rafael Rivera, Jr., Esq., Cozen O’Connor, New York, NY,
Attorneys for Defendants
JOHNSTON, J.
1
FACTUAL AND PROCEDURAL CONTEXT
Underlying Litigation
MPM Holdings Inc. (“MPM”) seeks insurance coverage for defense costs
and indemnification. MPM further alleges that Federal Insurance Company
(“Federal”), its primary D&O insurer, has breached its duty of good faith and fair
dealing.
Plaintiffs in the underlying litigation contended that MPM and certain
officers and directors acted improperly in connection with a merger that closed on
May 15, 2019. Defendants in the merger action are alleged to have breached their
fiduciary duties by negotiating the merger to further their own interests and those
of private equity investors in a manner that failed to maximize the value of MPM
shares. MPM shareholders filed a pre-closing Section 220 books and records
action; three consolidated post-merger appraisal actions; and a putative
stockholders’ class action (“SCA”), all in the Delaware Court of Chancery.
Following consolidation of the appraisal and SCA, the appraisal complaints were
amended to add breach of fiduciary duty claims. The resulting consolidated action
remains pending and is captioned In re Appraisal of MPM Holdings Inc. Appraisal
and Stockholder Ligitation (“Consolidated Action”).1
1
No. 2019-0519-JTL (Del. Ch.).
2
Federal Insurance Policy
The Federal Primary Directors & Officers and Entity Securities Liability
Insurance Policy provides $10 million in coverage for “Claims” first made during
the policy period of July 1, 2018 to July 1, 2019, subject to a $1 million retention
(“Policy”). The Policy Endorsement/Rider No. 38 expanded coverage for
“Securities Claims” to include any “Merger Objection Claim” defined as:
a Claim based upon, arising from, or in consequence of any proposed
or actual acquisition of an Organization, or of all or substantially all of
the Organization’s assets by another entity, or the merger or
consolidation of the Organization into or with another entity such that
the Organization is not the surviving entity, or the obtaining by any
person, entity or affiliated group of persons or entities of the right to
elect, appoint or designate more than 50% of the directors,
management committee members, or members of the management
board of the Organization, or similar transaction.
The Policy defines “Claim” to include any demand for monetary or non-
monetary relief, or any proceeding against the Insured for a “Wrongful Act.”
“Wrongful Act” includes “any act, error, misstatement, misleading statement, act
omission, neglect, or breach of duty committed, attempted, or allegedly committed
or attempted by...the Organization.” “Loss” includes amounts the Insured
“becomes legally obligated to pay as a result of any claim,” as well as “Defense
Costs.” The Policy obligates Federal to advance Defense Costs.
“Related Claims” are “deemed a single Claim made in the Policy Period in
which the earliest of such Related Claims was either first made or deemed to have
3
been made....” The Policy’s run-off endorsement covers “that portion of any such
Claim based upon, arising from or in consequence of the same or related facts,
circumstances or Wrongful Acts first occurring prior to the Run-Off Date.” The
“Run-Off Date” is the effective date of the “Acquisition.” The “Run-Off Period”
is 6 years “commencing as of the Run-Off Date.” “Organization” includes
“Successor Company” to MPM.
MPM provided Federal with notice of the various cases involved in the
underlying litigation. Federal acknowledged coverage for the Section 220 case and
the proposed class action (pursuant to a reservation of rights). Federal denied
coverage for the appraisal actions on the grounds that seeking “to assert a
shareholder’s statutory right to appraisal [does] not allege a Wrongful Act....”
Federal subsequently denied coverage for the filed SCA, stating that “none
of the individual defendants...are Insured persons under the Policy....”
MPM filed this Superior Court case on July 2, 2020. MPM requests
declaratory judgment and relief for breach of contract and bad faith. On August 6,
2020, Federal changed its position and agreed to advance defense costs for the
SCA. Federal filed a Counterclaim seeking declaratory relief that MPM is not
entitled to defense or indemnity coverage under the Policy for the appraisal
actions.
4
SUMMARY JUDGMENT STANDARD
Summary judgment is granted only if the moving party establishes that there
are no genuine issues of material fact in dispute and judgment may be granted as a
matter of law.2 All facts are viewed in a light most favorable to the non-moving
party.3 Summary judgment may not be granted if the record indicates that a
material fact is in dispute, or if there is a need to clarify the application of law to
the specific circumstances.4 When the facts permit a reasonable person to draw
only one inference, the question becomes one for decision as a matter of law.5 If
the non-moving party bears the burden of proof at trial, yet “fails to make a
showing sufficient to establish the existence of an element essential to that party’s
case,” then summary judgment may be granted against that party.6
Superior Court Rule 56(h) provides:
Where the parties have filed cross motions for summary judgment and
have not presented argument to the Court that there is an issue of fact
material to the disposition of either motion, the Court shall deem the
motions to be the equivalent of a stipulation for decision on the merits
based on the record submitted with the motions.7
2
Super. Ct. Civ. R. 56(c).
3
Burkhart v. Davies, 602 A.2d 56, 58–59 (Del. 1991).
4
Super. Ct. Civ. R. 56(c).
5
Wooten v. Kiger, 226 A.2d 238, 239 (Del. 1967).
6
Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986).
7
Super. Ct. Civ. R. 56.
5
The Court will evaluate any contested facts pursuant to Rule 56(c). All facts
are viewed in a light most favorable to the non-moving party.8 The Court will
evaluate the facts relating to each precise issue. The Court will take all reasonable
inferences into consideration.
ANALYSIS
MPM seeks an order declaring that Federal is obligated to reimburse or
advance MPM’s attorneys’ fees and costs incurred in defense of the Appraisal
Action. MPM argues that the Appraisal Action: is a Merger Objection Claim
arising from alleged Wrongful Acts; and triggers coverage under the Run-Off
Endorsement. MPM requests an amount to be determined by the Court through
further proceedings, as appropriate, and subject only to any applicable retention or
limit in the Policy.
MPM further requests that the Court deny Federal’s Cross-Motion for
Summary Judgment, and grant declaratory judgement. MPM contends that:
(1) MPM has not made a claim under Insuring Clause (C);
(2) If MPM’s motion is granted, Federal’s cross-motion is moot; or
(3) If MPM’s motion is denied, MPM’s claims in regard to the underlying
Class Action remain justiciable and questions of fact preclude summary
judgment; and
(4) Questions of fact preclude summary judgment on MPM’s claim for bad
faith claims handling.
8
Burkhart v. Davies, 602 A.2d 56, 58–59 (Del.).
6
Federal seeks an Oder denying MPM’s Motion for Partial Summary
Judgment, and granting its own Cross-Motion for Summary Judgment. Federal
asserts that:
(1) Federal has no obligation to pay defense or indemnity to MPM in
connection to the Consolidated Appraisal Action;
(2) Federal does not have an obligation to indemnify or advance defense
costs to MPM under the Policy’s Entity Coverage Section in connection
with the underlying stockholder breach of fiduciary duty lawsuit;
(3) MPM’s coverage claims in the underlying stockholder breach of
fiduciary duty lawsuit against Federal as to its former directors are
nonjusticiable; and
(4) Federal did not engage in bad faith regarding its handling of both the
consolidated appraisal action and the stockholder breach of fiduciary
duty lawsuit.
Federal argues that the Appraisal Action does not constitute a “Securities
Claim” or a “Wrongful Act.” Therefore, the Appraisal Action is not a Merger
Objection Claim. Federal also asserts that the Run-Off endorsement bars coverage
because the Appraisal Action does not address pre-closing wrongdoing.
Federal argues that MPM’s claim for bad faith should be dismissed. Federal
states that MPM is not a named defendant in the SCA. There is not yet any
settlement agreement regarding the SCA. Federal currently is providing coverage
for defense costs for MPM’s former directors subject to a reservation of rights.
Federal asserts that based on the foregoing, Federal’s actions do not constitute bad
faith.
7
Coverage for Appraisal Action
In November 2018, certain stockholders sent appraisal demands to MPM
under Title 8, Section 262 of Delaware’s General Corporation Law. On February
8, 2019, prior to the effective date of the Merger Agreement, a beneficial holder of
MPM common stock filed a verified complaint against MPM for inspection of
books and records under Title 8, Section 220, of the Delaware General Corporation
Law.
The Merger became effective on May 15, 2019. In July 2019, MPM began
filing actions in the underlying litigation, including the Appraisal Action.
Subsequently, Federal denied coverage for the Appraisal Action on the basis
that because “appraisal actions merely seek to assert the shareholder’s statutory
right to appraisal and do not allege a Wrongful Act against the Insured, the
appraisal actions do not trigger coverage under the Policy.”
The dispositive question in this Superior Court case is whether the Appraisal
Action is a claim for a Wrongful Act.
The Policy defines “Securities Claim” as a “Claim:”
(A) against an Insured for a violation of any United States securities law,
but solely in connection with the securities of an Organization;
(B) against an Insured for a common law cause of action, pled in tandem
with, or in lieu of, any securities law violation described in Subsection
(A) above and brought by:
(1) a securityholder of an Organization with respect to his interest
in the securities of such Organization; or
8
(2) any person or entity in connection with the purchase, sale or
offer to purchase or sell securities of an Organization; or
(C) brought as a derivative action, on behalf of an Organization against
an Insured Person, including an action brought by or on behalf of the
Organization seeking to dismiss a derivative action that a committee
of such Organization’s Board of Directors has concluded is not in the
best interest of the Organization.
The Policy also defines “Securities Claim” to include “Merger Objection
Claim.” A Merger Objection Claim is:
a Claim based upon, arising from, or in consequence of any proposed
or actual acquisition of an Organization, or of all or substantially all
of the Organization’s assets by another entity, or the merger or
consolidation of the Organization into or with another entity such that
the Organization is not the surviving entity, or the obtaining by any
person, entity or affiliated group of persons or entities of the right to
elect, appoint or designate more than 50% of the directors, management
committee members, or members of the management board of the
Organization, or similar transaction.
Under the Policy, “Wrongful Act” means:
(A) any error, misstatement, misleading statement, act, omission,
neglect, or breach of duty committed, attempted or allegedly
committee or attempted by: (1) an Insured Person in his
capacity as such; or (2) for purposes of any coverage afforded
under Insuring Clause (C), Entity Securities Coverage, by the
Organization; or
(B) any other matter claimed against an Insured Person solely by
reason of serving in his capacity as such.
“An appraisal proceeding is a limited legislative remedy intended to provide
shareholders dissenting from a merger on grounds of inadequacy of the offering
price with a judicial determination of the intrinsic worth (fair value) of their
9
shareholdings.”9 “A determination of fair value does not involve an inquiry into
claims of wrongdoing in the merger.”10
In In re Solera Ins. Coverage Appeals,11 the Delaware Supreme Court
addressed whether an appraisal action constitutes a securities claim. The Supreme
Court reasoned that a securities claim is “for any actual or alleged violation of any
federal, state, or local statute, regulation, or rule or common law regulating
securities, including but not limited to the purchase or sale of, or offer to purchase
or sell, securities. ...”12 The Supreme Court found that an appraisal action is not a
securities claim because it does not involve a “violation” of law. 13
We agree that the Appraisal Action is not a Securities Claim because
it does not involve a “violation.” We believe, as explained below, that
this conclusion is compelled by the plain meaning of the word
“violation,” which involves some element of wrongdoing, even if
done with an innocent state of mind. It is also compelled by section
262’s historical background, its text, and by a long, unbroken line of
cases that hold that an appraisal under section 262 is a remedy that
does not involve a determination of wrongdoing. Rather, it is a
remedy limited to the determination of the fair value of the dissenters’
shares as of the effective date of the merger or consolidation. 14
The Delaware General Assembly created the appraisal remedy to allow for
the sale of a corporation upon the consent of a majority of its stockholders, rather
9
Cede & Co. v. Technicolor, Inc., 542 A.2d 1182, 1186 (Del. 1988).
10
Id. at 1189.
11
240 A.3d 1121 (Del. 2020).
12
Id. at 1130–31 (emphasis added).
13
Id. at 1134.
14
Id.
10
than necessitating unanimous approval.15 Thus, “an appraisal is entirely a creature
of statute.”16
In Jarden, LLC v. ACE American Insurance Company,17 this Court
specifically addressed whether an appraisal action is for a wrongful act. The Court
held that the conclusion—that an appraisal action is not for a wrongful act—is a
logical extension of Solera. The Court reiterated that an appraisal action is a
creature of statute. An appraisal action is “neutral in nature” and does not seek
redress or relief in response to any corporate act.18
The Court finds that the reasoning articulated in Jarden controls. The
Appraisal Action is not a claim for a Wrongful Act. The Appraisal Action does
not seek redress or reprisal for any wrongful conduct by MPM.
MPM is seeking coverage for alleged wrongdoing by its directors in
connection with MPM’s merger negotiations. As in Jarden, MPM relies on a broad
interpretation of the term Wrongful Act to encompass the underlying “complained-
of process.” “Although evidence of a flawed negotiation process generally is
admissible in an appraisal proceeding, that evidence is relevant to what weight, if
any, the Court accords the negotiated merger price.”19 It is not required that an
15
Id.
16
Id.
17
2021 WL 3280495 (Del. Super.), aff'd sub nom. Jarden LL, v. Ace American Ins. Co., et al.,
2022 WL 618962 (Del.).
18
Id. at 5.
19
Id. at 6.
11
appraisal petitioner plead or establish a flawed process in order to seek an
appraisal.20
Therefore, the Court finds that Federal is not obligated to reimburse or
advance MPM’s attorneys’ fees and costs incurred in defense of the Appraisal
Action. MPM’s Motion for Summary Judgement is denied on this issue. Federal’s
Cross-Motion for Summary Judgment is granted. The Court need not address
coverage issues relating to the Policy’s Run-Off Endorsement.
Entity Liability Coverage
MPM has not made a claim for entity liability coverage under the insuring
agreement. The Court finds that the Appraisal Action is not a covered claim.
Therefore, the issue of Entity Liability Coverage is moot.
Coverage for Frank Funds SCA Litigation
The Appraisal Action was filed on July 3, 2019 and consolidated on August
14, 2019. The Frank Funds SCA was filed on February 25, 2020—seventeen
months after the Appraisal Action.
Federal currently is providing coverage for MPM’s former directors
regarding the Frank Funds SCA, subject to reservation of rights. Federal has
advanced defense costs incurred by the Insured Persons backdated to the date on
which the SCA was tendered. MPM is not a named defendant in the SCA action.
20
Id.
12
The Court finds that questions of fact remain. Under the “Larger Settlement
Rule,” “responsibility for any portion of a settlement should be allocated away
from the insured party only if the acts of the uninsured party are determined to
have increased the settlement.”21 Determining whether the acts of the insured
party have increased the settlement is a question of fact. Further, “all expenses
reasonably necessary to conduct the defense are covered, whether or not they have
an ancillary benefit to the insured.” 22 Whether the fees are “reasonably necessary”
to minimize litigation expenses and develop strategies for subsequent SCA
litigation, presents genuine issues of material fact or a need for clarification. 23
The Court finds that questions of fact prevent finding as a matter of law that
MPM’s coverage claims regarding former director are not justiciable at this time.
MPM’s Motion for Summary Judgment as to coverage for MPM’s former directors
is denied.
For purposes of clarity, the Court reiterates that MPM is not a named
defendant in the Frank Funds SCA litigation. Therefore, Federal has no duty to
advance, defend, or indemnify costs for MPM. This ruling only addresses
coverage for MPM’s former directors.
21
RSUI Indem. Co. v. Murdock, 248 A.3d 887, 909 (Del. 2021)(quoting Nordstrom, Inc. v.
Chubb & Son, Inc., 54 F.3d 1424, 1432 (9th Cir. 1995))(internal citations omitted).
22
Northrop Grumman Innovation Sys., Inc. v. Zurich Am. Ins. Co., 2021 WL 347015, at *12
(Del. Super.).
23
Id.13
Bad Faith Claims
Bad-faith claims involve issues of fact. MPM asserts that “[i]In order to
establish ‘bad-faith’ the plaintiff must show that the insurer's refusal to honor its
contractual obligation was clearly without any reasonable justification.”24 Thus,
“[t]he ultimate question is whether at the time the insurer denied liability, there
existed a set of facts or circumstances known to the insurer which created a bona
fide dispute and therefore a meritorious defense to the insurer's liability”25
MPM argues that Federal denied coverage for the Frank Funds SCA without
reasonable justification, and failed to timely and adequately investigate the claim.
Although Federal subsequently retracted its denial—and then provided coverage,
MPM asserts that it is entitled to further develop facts pertaining to the alleged
“wrongful denial.”
MPM further argues that it is entitled to develop facts surrounding the
investigation and consideration of coverage for the Appraisal Action. MPM states
that discovery is necessary to determine whether Federal complied with its duty of
good faith and fair dealing.
The Court finds that questions of fact prevent summary judgment. Federal’s
cross-motion to dismiss MPM’s bad faith claim is denied.
24
Casson v. Nationwide Ins. Co., 455 A.2d 361, 369 (Del. Super.).
25
Id.14
CONCLUSION
The Court finds that the Appraisal Action in not a claim for a Wrongful Act.
Federal is not obligated to reimburse or advance MPM’s attorneys’ fees and costs
incurred in defense of the Appraisal Action. THEREFORE, MPM’s Motion for
Summary Judgment on this issue is hereby DENIED. Federal’s Cross Motion for
Summary Judgment is hereby GRANTED.
The Court finds that the entity liability coverage issue is moot. The Court
has found that the Appraisal Action is not a covered claim.
The Court further finds that questions of fact prevent finding as a matter of
law that MPM’s coverage claims regarding former directors are not justiciable at
this time. THEREFORE, MPM’s Motion for Summary Judgment as to coverage
for MPM’s former directors is hereby DENIED.
The Court finds that questions of fact prevent a summary judgment on the
issue of bad faith. THEREFORE, Federal’s Cross-Motion to Dismiss MPM’s bad
faith claims is hereby DENIED.
IT IS SO ORDERED.
/s/ Mary M. Johnston
The Honorable Mary M. Johnston
15