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Date: 05-29-2010

Case Style: Steve Maritz and Maritz Holdings Inc. v. Federal Insurance Company

Case Number:

Judge: Steven Goldman

Court: Circuit Court, St. Louis County, Missouri

Plaintiff's Attorney: Lawrence Friedman, Matthew S. Darrough, Heather F. Counts, Thompson Coburn, L.L.P., St. Louis, Missouri

Defendant's Attorney: Gerald Greiman, Jonathan A. Constine, Douglas S. Crosno, Spencer Fane Britt & Browne, Clayton, Missouri

Description: This litigation arises from a dispute over the scope of coverage afforded by a director's and officer's (D & O) liability insurance policy issued by Federal to Maritz. Maritz has obtained D & O insurance policies from Federal since 1985. Headquartered in St. Louis County, Maritz is a privately held company that has always been owned by lineal descendants of its founder, Edouard Maritz. Maritz has two classes of stock. The first is Class A common stock which carries voting rights and, since 1999, has been held by members of the Maritz family only. Thus, the only persons entitled to cast votes for the Board of Directors ("the Board") since 1999 have been Maritz family members. The second is Class B common stock which has no voting rights and has been held by Maritz employees, Maritz family members, and non-profit organizations.

A brief history of the Board as well as certain Maritz family disputes is necessary in order to shed light on the current case. As of 1995, the Board was comprised of nine directors: five outside directors with no voting rights and four Maritz family members, all of whom held Class A voting stock. The four Maritz family Board members were William Maritz ("William"), the long-time Chief Executive Officer and Chairman of Maritz, and his sons Stephen Maritz ("Stephen"), Philip Maritz ("Philip"), and Peter Maritz ("Peter"). In 1998 William, suffering from cancer, resigned as CEO and selected his son Stephen to replace him.1 At that point in time, Philip and Peter owned approximately forty percent of the issued outstanding shares of the Class A common stock.2 Stephen and William, together with the trusts and partnerships of which they were trustees or partners, owned approximately sixty percent of the issued and outstanding shares of Class A stock.3 Thus, Philip and Peter remained the minority shareholders.

In 1999, Stephen, with the support of William, announced a plan for an Internet venture called "eMaritz." Without reciting too much detail, it suffices to say that Peter and Philip vehemently disagreed with Stephen and William regarding the wisdom and viability of eMaritz.

In April 2000, after Peter and Philip had made known their views regarding eMaritz, William and Stephen called a special meeting of the Class A stockholders. At the special meeting, majority holders of the Class A stock, i.e. Stephen and William, voted to reduce the size of the Board from nine members to seven. They also voted in favor of resolutions that removed Philip and Peter from the Board and eliminated cumulative voting for directors. Given Philip's and Peter's status as minority shareholders, the resolutions were adopted by a vote of 60.7% for and 39.3% against.

In October 2001, counsel for Peter and Philip sent a demand letter to the Maritz Board stating that the brothers had been wrongfully removed from their positions as directors. The letter claimed, among other things, that William and Stephen had frozen them out of a meaningful role in the Company and had unlawfully orchestrated their removal by eliminating cumulative voting. The letter demanded that Maritz either buy back Philip's and Peter's shares, allow their shares to be sold to a strategic partner, or sell the entire Company.

Pursuant to the terms of the 2001 D & O Policy in effect at that time, Maritz forwarded the demand letter to Federal as Notice of a Potential Claim. In response, Federal stated that it was "accepting this matter as notice of potential claim pursuant to the terms of the June 30, 2001 to June 30, 2002 Policy Period.

Philip and Peter subsequently filed suit against Maritz in August 2002 ("Maritz I"). Maritz I alleged that the events leading up to the filing of the petition had been part of a "longstanding scheme to quash dissent and vest control in Stephen." The petition further claimed that, as a result of action taken at the special Board meeting, Philip and Peter had been deprived of their rights as minority shareholders. Maritz I sought a writ of mandamus that would compel Maritz and Stephen to produce Maritz's books and records of accounts for inspection and copying.

By letter dated August 14, 2002, Maritz officially requested insurance coverage from Federal and informed Federal that Maritz had been served with process in Maritz I. Maritz stated that its letter was intended to update and supplement the previous Notice of a Potential Claim, meaning Philip's and Peter's demand letter, that Maritz had forwarded to Federal in October 2001.

Federal responded to Maritz's request for coverage in October 2002. Federal's reply letter stated that the claim for coverage in Maritz I was "first made against the Insured (Maritz) on October 12, 2001 by letter," and therefore subject to the 2001 Policy. Because Philip and Peter, as former Maritz directors, qualified as "Insured Persons" under the 2001 Policy, Federal denied coverage on the basis that Maritz I was barred by the "Insured vs. Insured" exclusion in the 2001 Policy.4

In September 2003, Philip and Peter dismissed Maritz I without prejudice.

In July 2003, Philip and Peter filed a second lawsuit against Maritz, Stephen, the Board of Directors and a retired director ("Maritz II"). Maritz II contained similar allegations to Maritz I, namely that Philip and Peter had been wrongfully removed from the Board of Directors. Philip and Peter claimed that William and Stephen had used their majority voting positions to unconstitutionally deprive the minority shareholders of their rights as shareholders. They further alleged that William and Stephen had unlawfully eliminated cumulative voting, reduced the size of the Board, and removed Philip and Peter from their positions as directors. Philip and Peter claimed that the removal deprived them of $30,000 per year, health care, and other benefits. Maritz II sought judicial dissolution of the Company, declaratory and injunctive relief, and damages.

Maritz then sought coverage from Federal for Maritz II. Federal again denied coverage for the same reasons it had denied coverage in Maritz I: that claims brought by Philip and Peter, Insured Persons, were barred under the "Insured v. Insured" exclusion.

In December 2004, Alice Maritz Starek ("Alice"), the sister of Philip, Peter and Stephen and the daughter of William, filed a Petition in Intervention in Maritz II "in her capacity as minority shareholder." Alice owned approximately twelve percent of the beneficial interest of the Class A voting stock of Maritz, and she served as an advisory director for a brief period during 1994-5. Alice's Petition made substantially similar claims to those alleged by Philip and Peter in Maritz I and II. Primarily, she contended that Stephen and the other Board members had engaged in a "freezeout" campaign designed to disadvantage the minority shareholders.

In 2005 Federal also denied coverage for Alice's Petition in Intervention. Federal asserted that the 2001 Policy governed Alice's claim and that, as a former "advisory director," she also qualified as an "Insured Person" under the 2001 Policy. Thus, Federal denied Maritz coverage in all three instances on the basis that the suits were barred by the "Insured v. Insured" exclusion.

Maritz and its directors settled with Peter, Philip, and Alice in September 2006.

Federal's refusal to provide insurance coverage in the underlying lawsuits against Maritz gave rise to the instant litigation. Maritz filed suit against Federal5 in the trial court in March 2007 and asserted claims for breach of contract, bad faith, and vexatious refusal to pay, and sought a declaratory judgment. Maritz's Petition asserted that the "Insured v. Insured" exclusion did not preclude coverage in the underlying suits. Maritz first asserted that Philip and Peter had filed Maritz I and Maritz II in their shareholder capacities rather than their capacities as "Insured Persons," and therefore the provision should not exclude coverage. They further argued that "insured v. insured" provisions are designed to prevent collusive lawsuits amongst insureds, and that Maritz I and II were not improperly collusive or friendly suits.

Maritz next argued that, to the extent that the "Insured v. Insured" provision did operate to exclude coverage, an exception should apply. Section 5(c)(ii) of the D & O policies states that the "Insured v. Insured" provision does not bar coverage if the claim is one "brought or maintained by an Insured Person for the actual or wrongful termination of the Insured Person." Maritz contended that Section 5(c)(ii) applied because, in Maritz I and II, Philip and Peter alleged that they had been wrongfully terminated as directors.

Outcome: The jury returned a verdict in favor of Maritz on the issue of liability. With respect to damages, Maritz and Federal had previously stipulated that if the jury found in favor of Maritz, the Court would enter judgment in favor of Maritz in the amount of $9 million. The jury rendered its verdict on May 21, 2010. The Court entered the judgment of $9 million in favor of Maritz on the jury verdict on May 24, 2010.

Plaintiff's Experts: Craig Stanovich, Austin & Stanovich Risk Managers LLC, Holden MA

Defendant's Experts: Thomas Newman, Duane Morris LLP, New York, but did not call him to testify at trial.

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