CAMERON McGOWAN CURRIE, Senior District Judge.
This matter is before the court for resolution of six issues that raise predominantly legal questions. The issues are as follows:
The parties seek declaratory relief as to each of the issues listed above.
Prior to filing their memoranda, the parties agreed Defendants would bear the burden of proof on the first issue and Companion would bear the burden of proof on the remaining five issues. See ECF No. 409-1 Joint Submission; ECF No. 379 (docket text order noting agreement and setting briefing schedule).
The parties have stipulated the court may resolve the non-jury issues on the written submissions even if it becomes necessary to determine a dispute of fact or draw inferences from the facts. ECF No. 409.
1. The AMS Defendants are professional employer organizations ("PEOs"), entities that provide leased employees to other businesses, primarily in the construction industry. The AMS Defendants provide workers' compensation coverage for the leased employees.
2. Wood owns the AMS Defendants. Wood also owns Defendants Aspen Administrators, Inc. ("Aspen"), and Highpoint Risk Services, LLC ("Highpoint").
3. Companion is a business that provides, inter alia, workers' compensation insurance in a number of states including but not limited to Texas and Florida.
4. Companion and AMS (as well as other entities) are parties to the 2006 Coverage Agreement (ECF No. 340-1 at 3-9). That agreement established a relationship through which Companion provided certain forms of insurance to AMS, including workers' compensation insurance for AMS employees. The insurance provided pursuant to the 2006 Coverage Agreement is governed by separate policies ("Policies"). The relationship established was not, however, a traditional insurance relationship. It was, instead, what the parties have described as a "fronting" arrangement, meaning Policies were issued in Companion's name but all risk was to be borne by the other contracting parties through a combination of high-deductibles, reinsurance, and other protections.
5. Companion and Wood are parties to the Wood Guaranty. Id. at 28-46. The Wood Guaranty included both a Guaranty Provision and an Indemnity Provision. The Guaranty Provision (Wood Guaranty ¶ I) guaranteed performance under "Subject Agreements" that include the 2006 Coverage Agreement, Policies, and a related third-party claims administration agreement ("TPA Agreement").
6. In general terms, the 2006 Coverage Agreement provided for establishment of two distinct accounts, a "Claims Operating Account" and a "Claims Reserve Fund."
7. In mid-2011, Companion entered a consent order with the Florida Office of Insurance Regulation (respectively, "Florida Consent Order" and "Florida OIR"). ECF No. 310; see also ECF No. 384 at 3, 4 (Defendants' memorandum addressing changes resulting from Florida Consent Order). Certain aspects of the relationship established by the 2006 Coverage Agreement and TPA Agreement were modified as a result of the Florida Consent Order. Most critically, at least as to Florida Policies, (1) Companion took over claims processing and payment duties for Aspen and (2) AMS's Claims Reserve Fund was moved from the Bank of America account where funds deposited by AMS were held in common with other collateral to a separate trust account at State Street Bank. See, e.g., Id. ¶¶ 6.(c), (d), (g); ECF No. 398-15 (Nov. 29, 2011 letter from Companion's president to Florida OIR); ECF No. 411-2 (Dec. 1, 2011 email from Florida OIR to Companion's vice-president and CEO advising a trust account was required).
8. In or around July 2013, Companion terminated AMS's authority to write new business or renew policies under the 2006 Coverage Agreement. The relationship between the parties was not, however, ended as claims continued to be processed and paid during the run-off period that followed ("Run-Off"). See generally ECF No. 258 at 3, 13-17 (Order on cross motions for partial summary judgment ("Summary Judgment Order") discussing handling of claims during Run-Off and resulting disputes); ECF No. 384 at 4-5 (Defendants' memorandum addressing Run-Off period).
9. In October 2013, AMS refused to continue making payments to Companion to cover claims as they were incurred. See generally ECF No. 258 at 11. AMS, instead, directed Companion to pay future claims from the Claims Reserve Fund. Companion, thereafter, paid (and continues paying) claims from the Claims Reserve Fund held in the State Street Account.
10. The present litigation ensued.
11. By agreement, whether the Claims Reserve Fund is over or underfunded, as well as certain related issues, will be resolved through independent accounting and actuarial review (collectively "Initial Review"). ECF No. 409-1. The Initial Review will cover the period ending April 30, 2017, and the initial report is due on or about July 31, 2017. See ECF Nos. 386, 387 (orders appointing experts). Thereafter, the independent experts are to conduct quarterly reviews ("Quarterly Reviews"). The parties have agreed to "abide by the Required Reserve determinations made by the independent actuarial firm" and that "the independent accounting firm shall calculate the amount of AMS collateral needed" based on the actuary's Required Reserve determinations. ECF No. 409-1 § IV.A & B. They further agree additional funds will be contributed if these determinations demonstrate underfunding or excess funds will be refunded if the Required Reserve is found to be overfunded based on the Initial Review and subsequent Quarterly Reviews. Id.
The six non-jury issues raised by the parties are addressed seriatim below.
In their opening memorandum, Defendants also argue "Companion should be required [to] consult with AMS prior to settling any remaining claims using AMS funds." Id. at 10; see also id. at 9 (asserting "Companion must consult with AMS regarding the settlement of any AMS claims using AMS funds" (emphasis added)). Defendants modified their position on reply, explaining "AMS does not seek to insert itself into the resolution of open claims[.]" ECF No. 402 at 3. Defendants, instead, argue they are entitled to notification "prior to [Companion] entering into a lump-sum (i.e., non-routine) settlement using AMS funds[.]" Id. at 8 (emphasis added). Defendants argue this notification as to non-routine settlements is appropriate because lump-sum settlements are outside the normal course and may pose a conflict of interest between Companion and AMS. Id. The potential conflict identified is the risk Companion may favor immediate payment of a higher amount within AMS's deductible over the risk of future payments that may become Companion's sole responsibility because they exceed the deductible. Id. AMS also argues immediate payment of an amount that might otherwise be paid over a period of years may harm AMS because of the effect on cash flow and a risk Companion may fail to reduce anticipated future payments to present value.
Companion addresses Defendants' argument for entitlement to information (as opposed to a right of consultation), only in its concluding paragraph. As to this issue, Companion states it "remains willing to work with Defendants regarding providing closed claims data for auditing purposes, as has been done in the past." Id. at 9. It does not otherwise address what information might be covered by the requested declaration.
Defendants' modified request for declaratory relief, seeking a declaration Companion owes a prior duty of notification before settling certain categories of claim, is denied for much the same reasons. No counterclaim predicts a request for such relief and it is not supported by any language in the governing contracts, certainly none that has been drawn to the court's attention. The argument for prior notification has, moreover, not been properly raised or adequately briefed because Defendants first raised this request on reply. For all of these reasons, the court denies Defendants' request for a declaration Companion must either consult or notify AMS prior to settlement of any claim, whether in the ordinary course or the lump-sum settlements addressed in Defendants' reply.
This leaves Defendants' request for a declaration Companion must "timely provide claims data, collateral statements, and updated claims records to AMS for open claims under the AMS policies." ECF No. 384 at 10. Defendants concede the requested relief has largely been resolved by agreement or prior order. Id. at 8 ("Companion has already been ordered to produce, or has voluntarily agreed to provide, claims data, claims files, reserve information, and information regarding its use of AMS collateral."). They fail to identify any specific information or document sought through their request for declaratory relief that is not covered by prior agreement or order and also fail to direct the court to the source of any duty of disclosure. This leaves the court with a request for a declaration that lacks necessary specificity and support. The court, therefore, denies this aspect of Defendants' request for declaratory relief.
While the court denies the requested relief, it does not modify other orders or agreements that are in place. Most critically, as previously ordered and agreed by the parties, the court appointed both an independent accounting expert ("Independent Accountant") and an independent actuarial expert ("Independent Actuary") who will prepare reports covering a multiyear period ending April 30, 2017. ECF Nos. 386, 387. These reports will be based on extensive documentation compiled by the parties relating to claims and dealings between the parties through April 30, 2017. See generally ECF No. 396-1 (letters and attachments sent to experts explaining how to access documents and data, delineating tasks to be performed, and providing instructions for preparation of initial and final reports).
The data and documentation provided to the experts is and will be equally available to both sides. The experts' reports shall, likewise, be equally available. Indeed, the plan for preparation of final reports, developed jointly by the parties, anticipates each side will have an opportunity to provide feedback to the experts between preparation of the experts' initial and final reports. Id. Both experts will, moreover, prepare subsequent quarterly reports on an ongoing basis after the first report is final.
In sum, Defendants' request for declaratory relief is denied because Defendants have failed to (1) specifically identify any documentation or information that Companion has not previously produced (including through discovery or pursuant to court order) or agreed to provide in the future (including in connection with the Initial Reviews and future Quarterly Reviews), or (2) identified the source of any duty to provide information or documentation beyond that already ordered or agreed to be produced. To the extent Defendants seek to impose any duty of consultation before claims are settled, the relief sought is also denied because it is not predicted by any counterclaim.
As a factual threshold, Companion asserts AMS has refused to pay or reimburse any belowdeductible claims since October 28, 2013, forcing Companion to use collateral to pay claims, and "leaving the collateral account underfunded under the actuarial methodologies contractually approved by Companion." ECF No. 328 at 5, 6. As to the status of the collateral, Companion notes Defendants have taken the position since December 10, 2013, that the collateral is overfunded. Id. at 6. Companion further asserts it has demanded but Wood has refused to pay claims and make up the alleged collateral shortfall for a period of over two-and-a-half years. Id. at 10.
Companion argues Wood should be directed to pay the claims as they come due and make up any collateral shortfall under the Wood Guaranty, which (1) defines "Subject Agreements" to include the 2006 Coverage Agreement and Policies issued pursuant to that agreement; (2) provides Wood "absolutely and unconditionally guarantees . . . full and prompt performance and payment when due, of all obligations of each OBLIGOR under the Subject Agreements[,]" (3) provides the guaranty "is direct and unconditional and may be enforced by [Companion] without first resorting to any right or remedy against any OBLIGOR or any other person[.]" and (4) also provides Wood will "indemnify and hold harmless [Companion] . . . from and against any and all claims, suits, hearings, proceedings, actions, damages, liabilities, fines, penalties, losses, costs or expenses . . . arising out of or otherwise related to, directly or indirectly, the Subject Agreements." Id. at 9 (quoting 2006 Coverage Agreement ¶ 15 and Wood Guaranty, Background, ¶¶ 1.A. & B, II.A.). Companion notes the express purpose of the Wood Guaranty is to "ensure [Companion] incurs no pecuniary liability whatsoever in entering into the Subject Agreements." Id. at 10 (quoting Wood Guaranty, Background and noting 2006 Coverage Agreement characterizes the Wood Guaranty as an essential inducement).
Companion argues the relief sought is neither premature nor advisory. It relies in particular on the age and stage of the litigation. Id. (noting litigation has been pending for nearly three years). Companion notes the parties' agreed to submit this issue, among others, to the court for non-jury resolution. Id. at 2 (quoting Joint Submission). Finally, Companion notes the very purpose of declaratory relief is to clarify respective obligations going forward. Id. at 3.
Companion contends Defendants' argument that Wood is entitled to notice and presentment prior to incurring any obligation under the Wood Guaranty is inconsistent with the agreement as expressed in the Joint Submission (setting out agreement for resolution of jury and non-jury issues). Id. Relying on the Guaranty Provision's statement Wood's liability "is direct and unconditional and may be enforced . . . without first resorting to any right or remedy against any [AMS Entity] or any other person," Companion argues Wood's obligations are not secondary to those of AMS and, consequently, do not require prior demand. Id. at 4 (quoting Wood Guaranty ¶ I.B.). Finally, Companion points to evidence of prior demands, including one sent by counsel on September 29, 2014, addressing claims in this and related litigation. Id.
This is particularly true in light of the April 17, 2017 Joint Submission through which the parties agreed the court would resolve, non-jury, "whether, as a matter of law, under the Guaranty and Indemnity Agreement . . . Wood must pay deductibles and/or below deducible collateral, if any, owed by AMS to Companion in connection with the AMS Policies in the amount determined by the independent actuary and accountant." Joint Submission ¶ III.A. (ECF No. 409-1) (emphasis added). The same document addresses how the relative financial responsibilities will be determined. See Joint Submission § IV.A. (agreeing parties will "abide by the Required Reserve Determinations made by the independent actuarial firm"); id. § IV.B. (agreeing, "[b]ased on the independent accounting firm's examination, and the Required Reserve determined by the independent actuarial firm . . ., the independent accounting firm shall calculate the amount of AMS collateral needed as of April 30, 2017, and shall advise the parties and court of the same."). It also addresses how the resulting financial responsibility will be resolved: "If additional collateral is needed for AMS, AMS and Wood will promptly assure that the collateral account is funded. On the other hand, if Companion is holding excess collateral on behalf of AMS, Companion will promptly assure that the excess collateral is refunded to AMS." Id. § IV.B. Finally, it provides the process will be repeated after future Quarterly Reviews, after which "the parties shall continue to fund (or refund) as described above." Id.
Both are, in some respects, correct. As Companion notes, Section I of the Wood Guaranty provides Wood "absolutely and unconditionally guarantees . . . the full and prompt performance and payment when due of all obligations of all OBLIGORS [e.g., AMS] under the Subject Agreements [e.g., 2006 Coverage Agreement]." Wood Guaranty ¶ I.A. It further provides the guaranty is "a guaranty of performance and of payment and not of collection, and the liability of [Wood] is direct and unconditional and may be enforced . . . without first resorting to any right or remedy against any OBLIGOR or any other person." id. ¶ I.B.; see also 2006 Coverage Agreement ¶ 15 (characterizing Wood Guaranty as an "essential inducement"). This, at the least, means Companion is not required to pursue collection or legal proceedings against AMS before invoking its rights under the Wood Guaranty. Read in isolation, it might also suggest Companion may seek payment from Wood without first seeking payment from AMS. However, that reading is precluded by Section III of the Wood Guaranty ("Demand"), which reads as follows:
Wood Guaranty ¶ III (emphasis added); see also Wood Guaranty ¶ I.A. (stating Wood guarantees "full and prompt performance and payment when due and defining "prompt" as "unconditionally, without request for extension, and within thirty (30) days of [Companion's] written demand for payment.").
The second subparagraph's reference to amounts owing "that ha[ve] not been timely paid," presumes a prior request to an Obligor for payment and failure of that Obligor (e.g. AMS) to make payment in a timely manner under the relevant contract. AMS's obligation to pay claims and fund collateral arises under the 2006 Coverage Agreement (and related Policies). The court, therefore, looks to the 2006 Coverage Agreement to determine what constitutes a failure of timely performance of either obligation.
As to claims payments, the 2006 Coverage Agreement provides the claims administrator "shall invoice the appropriate AMS Entity for all incurred claims on a periodic basis and terms acceptable to [Companion.] All invoice payments shall be deposited into the [claims administrator's] Claims Operating Account . . . and all claims shall be paid from such account." 2006 Coverage Agreement ¶ 12 (emphasis added). While this paragraph does not expressly state how quickly the invoices must be paid, it envisions claims payments will be made using AMS funds, thus, it envisions payments deposited before claims are paid. It follows that payment is due at some point prior to the earlier of when claims should be or actually are paid.
The collateral provision requires an initial deposit of $1,000,000 and provides for quarterly reviews to determine future reserve needs. Rather than indicating payments (or refunds) will be made based on those quarterly reviews, it provides for monthly contributions based on the value of incurred claims and calls for payment by the tenth of the month. Id. ¶ 13 ("As actual claims are incurred the AMS Entities shall deposit into the Claims Reserve Fund the amount of such claims on a monthly basis by the 10th day of the month."). While not explicit, this appears to envision a deposit within ten days of notification of claims incurred. Lacking any other guide, the court finds collateral deposits are timely if made within ten days of notification or invoicing of claims or collateral obligations (such as through quarterly reports).
Sufficiency of collateral as of April 30, 2017, is being determined by the Initial Review by an the Independent Actuary and Independent Accountant. The Initial Review is being conducted by agreement and will take into account certain adjustments agreed to based on settlement of jury issues, claims that have been paid since October 2013, rulings in this order and certain other agreed adjustments. The parties have agreed to abide by the results of the Initial Review. If the Initial Review establishes the collateral account is underfunded, Wood will be responsible for the underfunded amount (jointly with AMS) because AMS's sole basis for refusing to pay claims will be resolved against it. For reasons explained above, there is no need for further demand of AMS and failure of timely payment before a demand may be made under the Wood Guaranty. The Initial Review itself, when final, will suffice as the demand and Wood will be jointly responsible with AMS for funding any deficiency that must be paid within thirty days of entry of judgment as contemplated by the Demand language quoted above.
Companion relies on the first subparagraph of the Indemnity Provision of the Wood Guaranty (¶ II.A.). ECF No. 382 at 12-13. Companion notes this provision is broadly worded, promising to indemnify and hold Companion harmless "from and against any and all claims, suits hearings, proceedings, actions, damages, liabilities, fines, penalties, losses, costs or expenses, including without limitation reasonable attorney's fees, at any time arising out of or otherwise related to, directly or indirectly, the Subject Agreements[.]" Id. at 13 (quoting Wood Guaranty ¶ II.A.).
Companion relies on the legally recognized distinctions between a guaranty and an indemnity agreement, with the latter creating a "primary liability" protecting "the promisee against loss or liability to a third person." Id. (quoting 38 Am. Jur. 2d Guaranty § 11). It notes indemnity agreements, like other contracts, should be enforced based on the language chosen by the parties. Id.
Anticipating Defendants' argument that prior rulings on the parties' cross-motions for partial summary judgment foreclose the relief sought, Companion asserts the court has not previously addressed the Indemnity Provision of the Wood Guaranty. Thus, the court's prior ruling that Wood is not required to fulfill Dallas National's collateral-funding obligation and related ruling on Companion's motion for clarification are not dispositive. ECF No. 382 at 15 (citing ECF No. 258 at 39, ECF No. 286).
On the merits, Defendants argue Companion's interpretation of the Indemnity Provision is "contrary to South Carolina law" because indemnity provisions "are presumed to only apply to third-party liability claims, not first- or second-party breach of contract claims." Id. (quoting Laurens Emerg. Med. Specialists, PA v. M.S. Bailey & Sons Bankers, 584 S.E.2d 375, 378 (S.C. 2003) ("Laurens") for proposition "the default rule of interpretation for indemnity clauses is that third party claims are a prerequisite to indemnification."). Defendants assert "Companion cannot credibly contend that AMS — which Companion named as a co-defendant in this case with Wood — is a `third-party' to this dispute or the applicable agreements." Id. at 17.
Defendants also argue the court should reject Companion's argument because it would lead to an absurd result. Id. at 18. Defendants note the parties' intent "must be gathered from the contents of the entire agreement" and the agreement should be interpreted "to give effect to all of [its] provisions, if practical." Id. at 18. They argue the intent drawn from the documents would be defeated and the benefit of the insurance arrangement would be illusory, if the Indemnity Provision was given the effect sought by Companion. More specifically, Defendants argue:
ECF No. 398 at 19, 20.
Finally, Defendants argue the court should reject Companion's argument because Companion has received more than enough collateral from Dallas National to cover all abovedeductible obligations. Defendants assert Dallas National collateral was overfunded by approximately $8.6 million as of September 30, 2013, and Companion still held $17,897,436 in collateral as of June 30, 2015.
As to existing collateral, Companion argues the collateral it holds is "irrelevant to the legal issue before the court." Id. at 10. It asserts Wood either is or is not "contractually obligated as a matter of law to indemnify Companion for allegedly unreimbursed above-deductible claims payments[.]" Id. ("This is a purely legal determination based on the parties' contracts and applicable law. The Wood indemnity does not turn on, and has nothing to do with, the amount of collateral Defendants say Companion holds, or for that matter, any other funding source[.]"). Companion asserts Dallas National collateral is, in any event, underfunded.
The court did not construe any other provision of the Wood Guaranty in ruling on Companion's subsequent motion for clarification. It did not, in fact, focus on the Wood Guaranty itself. Rather, the court considered whether the 2006 Coverage Agreement imposed all obligations of any AMS Entity on all AMS Entities, such that the AMS Entities still subject to the 2006 Coverage Agreement would remain responsible for Dallas National's collateral obligation. The court rejected this interpretation and, consequently, held Wood was not obligated to fund Dallas National's collateral obligation as the collective obligation of all AMS Entities.
Companion did rely on the Indemnity Provision in one of its summary judgment arguments. Much as it does here, Companion argued the Indemnity Provision requires Wood to indemnify Companion if Companion is held liable to AMS for unreimbursed above-deductible claims. That argument was, however, raised as a defense to AMS's claim for reimbursement. The court declined to reach the merits of the argument because the AMS Entities are distinct legal entities from Wood. Thus, even if Wood is required to indemnify Companion for damages paid to AMS, the court held it would not provide a defense to AMS's claim. ECF No. 258 at 9 (concluding Companion's position "fails to recognize that, despite common ownership, Wood and AMS are separate entities. Thus, even if Wood must ultimately reimburse Companion for any amount Companion owes to AMS, it would not defeat this counterclaim.").
In sum, while the court has previously construed the Guaranty Provision of the Wood Guaranty, it has not construed the Indemnity Provision. The court, therefore, addresses the effect of the Indemnity Provision on a clean slate.
ECF No. 340-1 at 29 (Wood Guaranty ¶ II).
Language in the preceding "Background" section explains the intent of the Wood Guaranty as follows:
Id. at 28 ("Background") (emphasis added).
Given AMS's status as a third party to the Wood Guaranty, the court need not decide whether the broad indemnification language used in the Wood Guaranty would reach first-party claims. The court notes, nonetheless, that the indemnification language used in the Wood Guaranty is broader than that applied in Laurens (a case on which Defendants rely), particularly when read in the context of the Background's statement of intent (quoted supra at 28).
The relationship created by the Subject Agreements was not a typical insurer-insured relationship. It was, instead, a "fronting" arrangement that allowed issuance of insurance policies on Companion's paper but contemplated claims would be processed and paid in full by the various Wood-owned entities.
This is particularly true because Defendants' counterclaim for unreimbursed abovedeductible payments made from AMS funds and Companion's corresponding claim for declaratory relief do not require a determination that Companion was at fault for causing any improper payments or failure of reimbursement. For this reason, it does not raise a concern that the indemnification provision is being used to immunize a party from its own conduct.
To the contrary, the Independent Accountant has been instructed to review claims for the duration of the parties' relationship, from 2005 through 2013, to determine the amount of any unreimbursed above-deductible payments made from AMS funds. For the majority of this period (through mid-2011), Defendants' affiliate Aspen handled claims processing for all Policies at issue. See ECF No. 241 at 7 (Defendants' response to Companion's motion for partial summary judgment, asserting Companion took over claims processing from Aspen for Florida policies in mid-2011). Also for the majority of the period (until June 2013), Defendants' affiliate Dallas National reimbursed AMS for the above-deductible payments. See ECF No, 241 at 14 (conceding Dallas National provided credits to reimburse AMS for above-deductible payments until June 2013, though suggesting not all payments were fully reimbursed during this period). This leaves only a portion of the period (from mid-2011 to October 2013), during which Companion might be "responsible" for paying above-deductible amounts from AMS funds and an even shorter period (June to October 2013), when no entity affiliated with Defendants was providing (or expected to provide) AMS with corresponding credits. See id. (asserting Companion continued the practice of making above-deductible payments from AMS funds from June to October 2013 and Dallas National did not provide credits during this period). As the period under review by the Independent Accountant is not limited to this shorter period, resolution of this issue is "fundamentally not a fault-based determination." See Ashley II, 763 S.E.2d at 20.
Companion, in reply, argues the availability of collateral is irrelevant because the Indemnity Provision must be interpreted without regard to whether Companion might seek relief from a different source. It further argues the collateral is not sufficient to cover all of Dallas National's obligations intended to be secured by that collateral.
Because nothing in the Indemnity Provision requires Companion to resort to other means of satisfying a claim or liability before seeking indemnity from Wood, the court finds the possible existence of sufficient collateral does not avoid coverage under the Indemnity Provision. This is the natural result of the broad language the parties chose for the Indemnity Provision. It is also consistent with the obvious intent of the Indemnity Provision at the time the Wood Guaranty was signed, given Wood's control over all AMS Entities (including Dallas National).
While ownership of Dallas National and some responsibilities have changed, the Wood Guaranty has remained the same. Nothing in the subsequent changes persuades the court that it would be improper to construe the Indemnity Provision to cover Companion's liability for AMS's claim for unreimbursed above-deductible payments.
Accordingly, the court grants Companion's request for a declaration that Wood must indemnify Companion for liability Companion incurs for unreimbursed above-deductible claims payments made from AMS funds.
2006 Coverage Agreement ¶ 13. Companion argues this language is unambiguous and, given its plain, ordinary and popular meaning, "makes clear that Companion is contractually entitled to all earnings—which necessarily include reinvested earnings" on funds held in the State Street Account. ECF No. 382 at 16 (citing, e.g., Blakely v. Rabon, 221 S.E.2d 767, 769 (S.C. 1976)).
In the alternative, Companion argues if AMS "successfully claims an interest in these earnings or otherwise demands that Companion must credit those earnings to AMS," Wood must indemnify Companion for "any such claim, liability or loss." ECF No. 382 at 17. This argument rests on the Indemnity Provision of Wood's Guaranty.
In support of the first argument, Defendants cite deposition testimony relating to Companion's ownership and control over the Bank of America collateral account ("Bank of America 4866 Account") and distinctions between that account and the State Street Account. Id. at 22, 23 n.65. Defendants note the State Street Account is "a separate account, at a separate institution, in which Companion holds funds in trust solely for AMS." Id. at 23 (citing Letter from G. Reeth to A. Gillie dated Nov. 29, 2011).
In support of their second argument, Defendants rely on Companion's sworn financial statements. Those statements describe the State Street Account as "a segregated, off-balance sheet collateral account held in trust" and state "the trust account is used to settle paid losses associated with Florida large deductible workers' compensation policies." ECF No. 398 at 24 (quoting Companion's 2012 Annual Statement, ECF No. 398-1). Noting the same value is reported as the "balance of the trust account" in this Annual Statement and on the bank statement, Defendants assert "Companion reported all AMS funds in the State Street [A]ccount as collateral held in trust not as `earnings' that belonged to Companion." ECF No. 398 at 24. Defendants note Companion used the same or similar language and followed the same reporting practice in its 2013 and 2014 Annual Reports and has never withdrawn earnings from the account. Id. (citing ECF Nos. 398-2, 398-11). Defendants argue these and similar reports to Dallas National (reporting the full account value as "collateral" held) support their interpretation. ECF No. 398 at 25 (quoting Farr v. Duke Power Co., 218 S.E.2d 431, 433 (S.C. 1975) for proposition "[t]he practical interpretation of the contract by the parties to it for any considerable period of time before it becomes the subject of controversy is entitled to great, if not controlling, influence.").
Defendants oppose Companion's alternative indemnification argument, incorporating earlier arguments as to non-availability of indemnification (for unreimbursed above-deductible payments). In addition, Defendants argue there is nothing to indemnify because there is "nothing to change [in the account value] if the Court rejects Companion's request for declaratory relief."
Companion challenges Defendants' characterization of Companion's financial statements as contradicting its position on earnings. ECF No. 400 at 12. It asserts the only point made in those statements is "the collateral held in the State Street account is in fact collateral," but does "not disavow Companion's right to earnings[.]"
Finally, Companion argues its prior failure to withdraw funds is not probative. It relies on the 2006 Coverage Agreement's statement Companion has "the right to exercise its remedies in any order and forbearance in the exercise of any remedy shall not constitute a waiver of the right to exercise such remedy at a future time or a waiver of the right to exercise any other remedy." Id. (quoting 2006 Coverage Agreement ¶ 16).
Trust Agreement § 5 (ECF No. 383-9 at 4). The parties' supplemental briefs on these issues are summarized below. ECF Nos. 410, 411.
Responding to a related inquiry from the court, Companion states the Florida OIR has neither formally approved nor disapproved the Trust Agreement and was not required to do so by the Consent Order. ECF No. 410 at 5. It notes that office has been provided a fully executed copy of the Trust Agreement and did not lodge any subsequent objection. Id.
Turning to the merits, Defendants argue the requirement Companion establish a separate income account was a condition precedent to receiving interest and dividend payments. Id. at 4. Based on this premise, they argue if such an account was not established, and there is no evidence it was, the failure bars receipt of interest and dividends. Id. Alternatively, if an account was established but funds were not deposited, Companion's remedy is to seek recovery from State Street Bank directly, not through a reduction of assets in the State Street Account. Id. Rather than offering an interpretation of the account statements, Defendants suggest they are unclear as to whether funds were disbursed. Id. at 4-8.
As to the Florida OIR's approval or non-approval, Defendants cite communications demonstrating the Florida OIR responded to Companion' November 11, 2011 letter (ECF No. 398-15), advising that a trust account (rather than a segregated custodial account as proposed in Companion's letter) was required and requesting a copy of the trust agreement once the account was set up. ECF No. 411-2 (Dec. 1, 2011 email from Florida OIR to Companion). The Trust Agreement was entered into thereafter and was fully executed on March 5, 2012, on which date Companion sent a copy to the Florida OIR. ECF No. 411-3 (Mar. 5, 2012 email from Companion to Florida OIR). There is no indication the Florida OIR objected to the Trust Agreement despite acknowledging receipt in subsequent communications. ECF No. 411-4 (Oct. 10, 2012 email from Florida OIR referring to receipt of Trust Agreement in March 2012). Thus, the Florida OIR appears to have accepted the Trust Agreement as written.
Companion is not asserting a "damages" claim or any claim "based on" the Trust Agreement. The Trust Agreement (like the Florida Consent Order) is, nonetheless, a document that must be considered in determining the effect of the transfer, at the insistence of the Florida OIR, of a portion of the Claims Reserve Fund previously held in the Bank of America 4866 Account to a separate trust account at State Street Bank.
It is clear from the sequence of events (and no party disputes) the State Street Account was established to comply with the Florida Consent Order and the AMS Claims Reserve Fund previously held in the Bank of America 4866 Account was transferred to the State Street Account as a result of that order. The Florida Consent Order includes the following relevant provision:
Florida OIR Consent Order ¶ 6(c) (ECF No. 310 (signed and filed March 18, 2011). The State Street Account was opened and related Trust Agreement executed to comply with this paragraph. See ECF No. 398-15 (Nov. 29, 2011 letter from Companion to Florida OIR stating Companion was using a "segregated custodial account" rather than a "designated trust account" as the "most expedient method of maintaining the funds in a separate manner.");. ECF No. 411-2 (Dec. 1, 2011 email from Florida OIR to Companion responding that trust account was required and requesting a copy of the trust agreement once the account was established); ECF No. 411-3 (Mar. 5, 2012 email from Companion to Florida OIR enclosing copy of Trust Agreement); ECF No. 383-9 (Trust Agreement effective January 31, 2012, but fully executed on March 5, 2012).
Thus, as Companion argues, the State Street Account is, at least in part, a "replacement" for the Bank of America account referenced in paragraph 13 of the 2006 Coverage Agreement. See ECF No. 398-8 at 10, 11 (Simpson dep. at 73, 74 stating "I believe prior to the State Street account [Bank of America 4866 Account] held some of the below deductible Florida collateral" as well as collateral for other states and some Dallas National collateral). Given its status as a (partial) replacement account, the terms in paragraph 13 of the 2006 Coverage Agreement remain in effect as to the State Street Account unless modified by the Florida Consent Order, Trust Agreement, or some other controlling document.
The Florida Consent Order does not address how earnings will be treated. Its language as to funding and use of funds is ambiguous on whether earnings belong to Companion or the policyholder(s). For example, while the Consent Order states funds "shall only [be] used by COMPANION to settle paid losses," the preceding language states the account will "be funded by the policyholder," which may suggest the only "funds" restricted in use are those the policyholder contributes. Id. at 4. Because the language is ambiguous, it is not sufficient to overcome the clear language of the 2006 Coverage Agreement, at least absent some other indication of intent.
The only record evidence of the Consent Order's intent as to earnings is the Florida OIR's failure to object to any provision of the Trust Agreement.
Section 4(a) states "[t]he Trustee shall surrender for payment all maturing Assets and all Assets called for redemption and deposit the principal amount of the proceeds of any such payment to the Trust Account." Trust Agreement § 4(a). This supports the premise the Grantor (AMS) is entitled only to principal. Section 5 provides "[a]ll payments of interest and dividends actually received in respect of Assets in the Trust Account shall be deposited by the Trustee [subject to certain deductions] in a separate account (the "Income Account") established and maintained by the Beneficiary at an office of the Trustee." Trust Agreement § 5. It also provides "[t]he Trustee shall treat the Beneficiary [Companion] as tax owner of all Trust Account Income." Id.
Defendants do not challenge Companion's right to interest and dividends under Section 5 if the funds are transferred immediately to a separate account. They, instead, argue Companion's failure to establish an Income Account and enforce this provision by immediate transfer constitutes a waiver of the right to earnings. The court disagrees. Defendants' position would work a forfeiture of Companion's rights and windfall to Defendants. Defendants point to no authority that would support such a result.
The court is, likewise, not persuaded by Defendants' argument Companion waived its present claim, or at least indicated a contrary intent, by listing the full account value of the State Street Account (which included earnings) on its annual reports as the value of the collateral account. The reports are accurate as to the value of the account, which is a collateral account, though arguably misleading or at least incomplete because they fail to disclose that some portion of the account is earnings Companion claims a right to withdraw. This may require a future correction of earlier reports or explanation of reduction in value when the funds are withdrawn, but does not warrant a finding of forfeiture.
In sum, (1) the 2016 Coverage Agreement provides Companion is entitled to all earnings on the Claims Reserve Fund; (2) the Florida Consent Order and subsequent directions from the Florida OIR required a portion of the Claims Reserve Fund be transferred to a trust account but did not address earnings; (3) the Trust Agreement subsequently entered establishing the required account gave Companion the right to "interest and dividends" as well as "trust account income," specified Companion was the owner for purposes of taxes on income, and indicated only principal would be returned to the account upon the sale of assets; and (4) the Florida OIR did not object to any term in the Trust Agreement. Thus, the only documents addressing earnings support the conclusion Companion is entitled to earnings on funds deposited by or on behalf of AMS in the Claims Reserve Fund. While the Trust Agreement is most express as to interest and dividends, it may be read as entitling Companion to all earnings. At the least, it does not preclude that interpretation. Thus, it does not override the broad earnings provision in the 2006 Coverage Agreement. Accordingly, the court finds Companion is entitled to all earnings on AMS funds held in the State Street Account.
Companion characterizes AMS's position, that all funds in the account belong to AMS, as based on a legal fiction the Trust Agreement between Companion, AMS, and State Street Bank converts PPS funds into AMS funds. Id. As Companion notes, the Trust Agreement defines "Assets" in Section I as follows:
Trust Agreement § I (b) (emphasis added). Companion relies on this language to argue the Trust Agreement defines the "Assets" covered by the Trust Agreement as only those Assets Grantor (AMS) transferred to the Trustee. Id. at 21.
On the first point, Defendants point to events leading to establishment of the Trust Account, including Companion's concession in the Florida Consent Order that it had improperly co-mingled large deductible collateral funds from AMS with "other company funds." See Id. at 26, 27 (discussing Companion's November 29, 2011 letter to the Florida OIR stating Companion had established a separate segregated account for the AMS Staff Leasing collateral and indicating a belief this was sufficient to satisfy the trust account requirements of the Consent Order, and subsequent execution of the Trust Agreement governing the State Street Account).
On their second point, Defendants argue Companion has failed to produce "any bank records, wire transfer receipts, or other original documentation to substantiate" its claim that the Trust Account includes PPS funds. Defendants assert the records on which Companion relies consist primarily of an actuary's report on collateral requirements and communications relating to premiums rather than collateral. Id. at 28. Defendants also point to evidence PPS collateral was deposited in the Bank of America 4866 Account and absence of evidence PPS has asserted any rights to the funds in the State Street Trust Account. Finally, Defendants point to documents in which Companion has referred to the State Street Account as holding AMS funds or as the "AMS State Street Account." Id.
To the extent any language addresses the source of funds, it is in defining "Assets" in a paragraph that refers to securities and other assets the "Grantor shall transfer to the Trustee, for deposit in the Trust Account[.]" This and other language relating to use of funds supports the conclusions (1) the account should have been used solely for AMS collateral and (2) PPS funds should not have been placed into the account. It does not address the proper remedy if non-AMS funds are deposited. Thus, it does not support the extraordinary remedy AMS proposes, conversion of funds, as opposed to the more routine remedy of return of the improperly deposited funds so that they might be deposited into the proper claims reserve account. AMS's preferred approach would, in any event, be improper without first joining the entity whose funds would be taken (PPS).
Though minimal, the evidence to which Companion points suggests PPS funds were or may have been deposited into the State Street Account due to Companion's mistaken belief PPS was an AMS entity. See Simpson dep. at 128 (ECF No. 382-4 at 2). While the source of this apparent confusion is unclear, emails between employees of Wood-owned entities indicate a level of common treatment at least in January 2013. See ECF No. 383-4 (stating "at the end of the day we should have 3 Entity Buckets" and listing "AMS/PPS" as one of three entities, the other two being Dallas National and Redwood, but noting there were "line of business buckets" within the entities). In contrast, emails in May and June 2013 address these entities' relative responsibilities referring to what may have been a recent division of clients between the entities See, e.g., ECF Nos. 400-1 (email from Lisa Lott to Kristin Wynn stating "[t]his is the shortfall in collateral required related to the staff leasing AMS/PPS policies and we discussed that it was truly PPS costs" and Wynn's response stating "[a]ll things for [PPS] should be in the related party account[.] . . . There is no money to be had at all. It simply will go into the what [R]ich owes [D]ave bucket[,]" explaining future "transactions" should be split based on who kept the clients, and indicating the relative responsibilities would be resolved by a future accounting between PPS and AMS); ECF No. 383-1 (June 2013 email from Wynn stating an attachment from Companion "breaks [premium obligations] down nicely into AMS and PPS").
Accordingly, the court grants Companion's request for declaratory relief that funds held in the State Street Account are not automatically the property of AMS simply by virtue of their deposit into that account. Funds in the account may, instead, be found to be improperly deposited funds belonging to a different entity. Whether funds were deposited on behalf of another entity and, if so, the amount of such funds will be resolved by the Independent Accountant.
Companion argues these provisions provide for broader relief than under a fee-shifting statute because they do not impose a requirement Companion be the prevailing party or incorporate any requirement Companion not be at fault for events giving rise to a claim for indemnification. Companion relies on the "expansive" language used, which covers claims, damages, and losses (etc.) "arising out of or otherwise relating to, directly or indirectly, the Subject Agreements." ECF No. 382 at 23, 24 (citing, e.g., Am Recovery Corp. v. Computerized Thermal Imaging, 96 F.3d 88, 93 (4th Cir. 1996)). It argues the clause "directly or indirectly" supports a particularly broad reading. Id. at 24, 25 (citing Chevron USA, Inc. v. Aker Maritime Inc., 689 F.3d 497, 506 (5th Cir. 2012) for proposition the word "indirectly" may reach the entire litigation if the Subject Agreements are "indirectly related to . . . actions that resulted in the obligation to indemnify"). Companion also points to the nature of the relationship (a fronting program) and the parties' stated intent in both the 2006 Coverage Agreement and the Wood Guaranty to protect Companion from all liabilities and expenses as a basis for construing the Fees and Expenses provisions broadly. Id. at 25, 26.
Companion maintains "all of its attorney's fees and expenses `aris[e] out of or otherwise relate[] to, directly or indirectly,' the 2006 Coverage Agreement and/or the Policies, and/or have been `paid or incurred by [Companion] in collecting amounts owed [under the Wood Guaranty] or otherwise enforcing'" the 2006 Coverage Agreement and Policies. Id. at 26-28. It also aserts each of the non-jury issues now before the court relates directly or indirectly to the 2006 Coverage Agreement or Policies and maintains the same is true for "any other claims made, liabilities incurred and losses suffered [that] have been substantially litigated in this case." Id.
Companion argues Fees and Expenses should be awarded, even for its claim for breach of fiduciary duty (seeking recovery from Highpoint and Wood for damages flowing from dualcoverage policies), which failed to survive summary judgment, because that claim arose out of or relates, directly or indirectly, to the Subject Agreements. Id. at 29. In furtherance of this argument, Companion asserts the below-deductible portions of these claims must be funded by AMS pursuant to ¶ 12 of the 2006 Coverage Agreement, collateral must be funded under ¶ 13, premiums must be remitted pursuant to ¶ 11, and fronting policy issuance fees must be paid pursuant to ¶¶ 9 and 10.
Finally, Companion argues claims associated with PayGo Policies are covered, despite being stayed and ultimately dismissed. It asserts the Fees and Expenses relating to these claims "are relatively insignificant" as a result of the stay, but argues they are recoverable because they, also, arise from or relate to the 2006 Coverage Agreement. ECF No. 382 at 29, 30 n.63.
Second, Defendants argue attorney's fees and expenses should not be awarded to the extent Companion was unsuccessful on its claims and defenses. Defendants assert "Companion exerted substantial time and energy . . . pursuing meritless claims against Wood and AMS" that were ultimately rejected including by adverse summary judgment rulings on Companion's attempt to recover for Dallas National collateral shortfall under the Wood Guaranty and breach of fiduciary duty action (for dual coverage) against Highpoint and Wood. They argue, in effect, that allowing recovery for failed claims would encourage pursuit of frivolous claims.
The second fee-shifting provision, found in paragraph II.B., requires Wood to "pay all reasonable expenses, including without limitation, attorney's fees and other legal expenses, paid or incurred by Company in collecting amounts owed hereunder or otherwise enforcing this Agreement." Unlike the first sub-paragraph, this paragraph presumes Companion is the party seeking relief rather than defending a claim and requires an element of success as it refers to expenses incurred "in collecting amounts owed" or "otherwise enforcing this Agreement." As "this Agreement" covers both the Guaranty Provision and Indemnity Provision, Companion may obtain Fees and Expenses from Wood under paragraph II.B. in two circumstances: (1) Companion successfully pursued a claim against Wood under the Guaranty Provision (with incorporated Fees and Expenses necessary to prove the underlying failure of an AMS Entity to perform its contractual obligations under the Subject Agreements); or (2) Companion successfully pursued enforcement of paragraph II.A. (thus, successfully pursued a claim for Fees and Expenses for defending a counterclaim in this action).
Neither subparagraph indemnifies Companion for Fees and Expenses it incurred pursuing claims that did not result in any recovery for Companion (at least absent a corresponding counterclaim). Thus, neither supports an award of Fees and Expenses in pursuing claims (without corresponding counterclaims) that were resolved against Companion on summary judgment.
Beyond the limited rulings provided above, the court makes no ruling as to entitlement to Fees and Expenses here. That determination must await resolution of claims following receipt of the reports of the Independent Actuary and Independent Accountant.
For the reasons set forth above, the court:
1. Denies Defendants' request for declaratory relief as to Companion's obligation to provide information and notification or consultation;
2. Grants Companion's request for a declaration Wood is obligated to guarantee AMS's below-deductible payment and collateral obligations and to do so within the timeframes addressed in Section II of this order;
3. Grants Companion's request for a declaration Wood is obligated under the Wood Guaranty to indemnify Companion for liability Companion incurs for unreimbursed above-deductible claims payments made from AMS funds;
4. Grants Companion's request for a declaration Companion is entitled to all earnings, including reinvested earnings, accrued on the Claims Reserve Fund in the State Street Account.
5. Grants Companion's request for a declaration funds in the State Street Account do not automatically become the property of AMS simply by virtue of their deposit into that account;
6. Grants in part and denies in part Companion's request for a declaration Companion is entitled to attorney's fees and expenses incurred in this action, with the determination of the propriety and amount of any award being reserved until after completion of the Initial Reviews by the Independent Actuary and Independent Accountant.
ECF No. 398-15 (Companion letter dated Nov. 29, 2011). Other documents submitted with supplemental briefing (discussed below) indicate the State Street Account was established after the Florida OIR advised Companion a segregated custodial account did not satisfy the requirements of the consent order.
Emails between employees of Wood-owned entities support Companion's position the parties treated PPS and AMS obligations relating to the underlying policies separately, at least in and after June 2013, although those emails refer to premium payments rather than collateral. See ECF No. 383 (June 21, 2013 email string between Kara Childress and Kristin Wynn distinguishing between premiums for AMS Florida and PPS Florida policies); ECF No. 383-1 (Kristin Wynn email from later the same day referring to spreadsheet prepared by Companion employee as the "better sheet to use" because it "breaks it down nicely into AMS and PPS."). On the other hand, communications between employees of Wood-owned entities may acknowledge the collective holding of AMS and PPS collateral. See ECF No. 383-4 (Wood-owned entity employee referring, in January 30, 2013 email, to various collateral accounts as falling into three buckets, one of which was "AMS/PPS"). These emails support both the separateness of AMS and PPS and the view they are at least affiliated entities if not co-owned as of January 30, 2013.
