Any time a civil lawsuit settles for a combined total of $310 million, it is noteworthy, if for no other reason than the sheer size of the deal. But a $310 class action settlement recently preliminarily approved in Jefferson County (Alabama) Circuit Court is noteworthy not just for its size, but also for the nature of the allegations involved.
In the recently settled case, the plaintiffs alleged that in connection with the 1999 settlement of the MedPartners Securities Litigation, the defendant company and its primary D&O insurer had misrepresented the amount of insurance available in connection with the litigation, and more particularly, failed to disclose that the company had obtained a post-litigation “unlimited” excess insurance policy (known as an “LMU”) from the primary D&O insurer. After the details of the LMU came to light in subsequent unrelated litigation, a plaintiff from the prior securities lawsuit class filed a new lawsuit alleging misrepresentation in connection with the securities lawsuit settlement. The details of the plaintiffs’ allegations in the misrepresentation lawsuit — most of which the defendants dispute — make for some interesting reading.
The plaintiffs’ class motion for preliminary approval of the settlement of the misrepresentation lawsuit, to which the parties’ stipulation of settlement is attached, can be found here. The Alabama Court’s June 1, 2016 order preliminarily approving the settlement can be found here. The settlement is subject to the Court’s final approval.
I want to emphasize at the outset that there were no factual determinations in the misrepresentation lawsuit, and further that while I refer below to the plaintiffs’ allegations in the case, the defendants dispute the plaintiffs’ allegations. Among other things, the settlement papers recite that the settlement is entered in resolution of disputed claims.
The Securities Litigation Settlement
In 1997 and 1998, a total of 21 securities class action lawsuits and shareholders derivative lawsuits were filed in state and federal court against MedPartners, Inc. and certain of its directors and officers. The securities lawsuits arose of alleged misrepresentations the company allegedly made with respect to a planned merger between the company and PhyCor, Inc., as well as with respect to MedPartners’ overall financial condition. In January 1999, the parties to the consolidated MedPartners Securities Settlement agreed to settle the litigation for $56 million. (The court documents elaborate that the total amount of the agreed settlement was $65 million, but that $9 million of that larger amount was intended to settle a separate proceeding in California.) MedPartners later became Caremark RX, Inc., which subsequently merged with CVS to form CVS Caremark Corporation.
The Misrepresentation Lawsuit
In October 2003, a plaintiff from the prior securities lawsuit filed the first of several related actions in which it was alleged that the defendant company and its primary D&O insurer had misrepresented to the plaintiffs’ counsel in the prior case the total amount of insurance that the company had available to put toward settlement.
Specifically, the plaintiffs allege that, despite a duty to disclose all available insurance, the company and its insurer had not disclosed the existence of a separate excess policy of insurance the company had purchased from its primary D&O insurer (known as an “LMU” policy) providing “unlimited” insurance. The claimants alleged that in light of the potential damages sought in the prior lawsuit, they would never have settled the securities lawsuit for $56 million had the existence of the LMU been disclosed. (The plaintiffs’ damages expert in the securities lawsuit estimated class damages in excess of $3 billion.) The claimants further allege that the insurer and the company deliberately withheld information about the LMU precisely because they knew that if the plaintiffs’ counsel learned of the LMU, it would be much more difficult and expensive to settle the case. The plaintiffs’ allegations are outlined in their First Amended Class Action Complaint, which can be found here.
Because the misrepresentation lawsuit was filed in state court, not all of the pleadings in the case are available online. However, many of the pleadings filed in connection with the misrepresentation lawsuit plaintiffs’ motion for class certification can be found here. The parties’ various pleadings in connection with the class certification proceedings detail their allegations.
As detailed in the Plaintiffs’ Brief in Support of Motion for Class Certification (here), the plaintiffs’ allege that the company defendant in the underlying case as well as representatives of the company’s primary D&O insurer represented to the plaintiffs’ counsel in the securities lawsuit that the total amount of insurance available to resolve the case was $50 million (arranged in two layers: a primary layer of $25 million and an excess layer of $25 million) and that the $56 million securities lawsuit settlement exhausted all remaining insurance.
The plaintiffs allege further that representatives of the company were present in Court when plaintiffs’ counsel represented to the court at the settlement hearing that the settlement exhausted all available insurance, but did not correct or clarify the statements. Subsequent notice of the settlement approved by the court and submitted to the settlement class recited that the settlement exhausted the company’s insurance, but the defendant company’s representatives did not correct the statements. The plaintiffs also allege that the D&O insurer was a signatory to the settlement documents.
The plaintiffs further allege that in the course of discovery in a subsequent unrelated lawsuit, it came to light that in October 1998, after the securities litigation had commenced but before it was settled, MedPartners paid $22.5 million to purchase from an insurer affiliated with its primary D&O insurer an excess insurance policy designed to pay any settlement or judgment in the MedPartners Securities Litigation, regardless of the amount. The LMU policy also waived all of the policy exclusions except the insured vs. insured exclusion.
In their brief in opposition to the motion for class certification (here), the defendants contended that the plaintiffs’ counsel in the securities lawsuit had been informed of the existence of a subsequently purchased excess policy; that the plaintiffs’ counsel had had the opportunity to conduct confirmatory discovery in connection with the settlement, including discovery regarding the insurance, but failed to do so; and that the plaintiffs’ counsel, more concerned about securing their fees than protecting the plaintiff class, failed to learn about the existence of the LMU through lack of diligence.
The plaintiffs’ amended complaint in the misrepresentation action and the plaintiffs’ brief in support of class certification quote deposition testimony of various representatives of the insurer that issued the LMU, to the effect that the insurer affirmatively did not want the plaintiffs’ counsel to find out about the LMU. (The deposition testimony was taken in connection with a separate unrelated lawsuit.)
For example, paragraph 54 of the amended complaint quotes an attorney for the insurer as testifying in deposition that “if the plaintiffs were to suddenly realize that there was this insurance above the $50 million … that was going to cause them to drive the settlement value to a much higher level than they would otherwise….We were not going to let them know that there was this insurance on top.”
Similarly, on page 11 of the Plaintiffs’ Brief in Support of Their Class Certification Motion, the plaintiffs’ quote the deposition testimony of an executive for the insurer taken in connection with an unrelated proceeding as having said about the MedPartners transaction that “we were concerned that the existence of the additional insurance would change the motivation of the plaintiffs’ attorneys, potentially the settlement value of the case would be driven up, and we wouldn’t have the opportunity to settle the case at a reasonable number.”
The brief in support of the plaintiffs’ certification motion contains additional allegations allegedly supporting their contention that the information about the existence of LMU was withheld from the plaintiffs in the securities litigation.
The misrepresentation lawsuit ground on for years. Issues surrounding class certification made their way to the Alabama Supreme Court (about which refer here). The case was poised to go to trial earlier this year. However, counsel for the parties were able to negotiate a settlement.
The Misrepresentation Lawsuit Settlement
Pursuant to the details of the settlement, the insurer agreed to pay $230 million and Caremark (as successor in interest to MedPartners) agreed to pay $80 million, for a total settlement value of $310 million. The settlement funds must be deposited in escrow within 30 days of the Court’s final approval of the proposed settlement.
There are many interesting details to this litigation beyond those expressly cited above. Among other things, the cast of characters includes many names that will be familiar to those in the industry who were around at the time of the original litigation and settlement in 1999.
The plaintiffs’ attorneys involved in the negotiation of the underlying securities lawsuit settlement separately obtained notoriety of their own; two of the key plaintiffs’ attorneys involved, Gene Cauley and Bill Lerach, wound up going to jail in connection with unrelated matters. My May 11, 2009 blog post entitled “$9 Million Missing and Plaintiffs’ Lawyer Takes the Fifth – OK, That’s Not Good” and describing the circumstances that led to Cauley’s incarceration can be found here. My September 2007 post about Lerach’s guilty plea can be found here.
The tale behind this settlement is a trip down memory lane in other ways as well. Those of us who were around at the time know all about the LMUs. It was a different time and place in the insurance industry. Anybody who had anything to do with LMUs probably will find the details of this situation to be very interesting, and a reminder of what things were like at the time. It was a very long time ago.
Beyond that, I will say no more, except to note that the insurer’s contribution to the misrepresentation lawsuit settlement was more than nine times greater than the amount it paid in defense and settlement of the securities lawsuit, and that despite the “unlimited” insurance policy for which it paid $22.5 million, the company defendant (or, rather, its successor in interest) wound up having to make an $80 million contribution to the misrepresentation lawsuit settlement as well.