Superior Court Of Delaware Rules That Delaware Public Policy Does Not Prohibit Indemnification For Breach Of Duty Of Loyalty Based On Fraud
03/27/2018On March 1, 2018, Judge Eric M. Davis of the Superior Court of the State of Delaware denied in part and granted in part the summary judgment motion brought by plaintiff-insurers, which provided directors and officers liability insurance coverage to Dole Food Company, Inc. (“Dole”) and sought a declaratory judgment that they were not obligated to fund the settlement of fiduciary duty claims against the defendant-insureds. Arch Ins. Co. v. Murdock, No. N16C-01-104 EMD CCLD (Del. Super. Mar. 1, 2018). The Court rejected the insurers’ argument that Delaware public policy prohibited indemnification for liability resulting from breaches of fiduciary duty based on fraudulent conduct, the basis of the claims against the insureds (including David Murdock, Dole’s former CEO who took the company private in 2013, and Michael Charter, Dole’s former COO) litigated in the Delaware Court of Chancery in In re Dole Food Co., Inc. Stockholder Litigation., C.A. No. 8703-VCL, 2015 WL 5052214 (Del. Ch. Aug. 27, 2015) (“In re Dole”). The Superior Court also found that the parties were collaterally estopped from re-litigating factual matters decided in In re Dole, declined to rule on plaintiffs’ breach of contract defenses and defendants’ bad faith counterclaims, and dismissed defendants’ fraudulent inducement claims.
Plaintiff-insurers brought the Superior Court action following Vice Chancellor Laster’s ruling in In re Dole that Murdock and Carter breached their fiduciary duty of loyalty by engaging in fraudulent activity and assessed liability of nearly $150 million against the defendants, which led to a settlement for 100% of the liability, plus interest, in lieu of an appeal. Defendants advised the insurers that they intended to negotiate a settlement and asked that the insurers fund the settlement. Shortly thereafter, defendants also mediated and settled (with notice to and involvement of plaintiffs) a separate litigation arising from claims similar to In re Dole. The parties dispute whether, as to these matters, defendants complied with their obligations under the insurance policies to (i) obtain written consent of the insurers before entering into a settlement, and (ii) cooperate with the insurers. Following a subsequent indemnification demand, plaintiffs sought declaratory relief excusing them from funding the settlements and in June 2017 moved for summary judgment.
Regarding plaintiffs’ assertion that Delaware public policy prohibited indemnification for fraud, the Court first found that the Court of Chancery’s rulings in its post-trial In re Dole decision were “sufficiently definite to be a final judgment on the merits” and therefore collaterally estopped defendants from relitigating those findings. After determining that Delaware law applied because Dole was incorporated in Delaware (and the conduct of its officers and directors was the key issue), the Court then ruled that no Delaware public policy prohibited payment for an insured’s fraud. The Court noted that no “Delaware decision  holds that a corporation cannot obtain directors and officers liability insurance that covers breach of loyalty based on fraud.” As to the breach of contract arguments asserted by plaintiffs, as well as the bad faith counterclaims asserted by defendants, the Court concluded that material issues of fact precluded summary judgment. The Court, however, dismissed defendants’ fraudulent inducement counterclaims as “bootstrapped” contract claims.CATEGORY: D&O Insurance