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Liss v. Federal Insurance Co.

February 3, 2009


On appeal from the Superior Court of New Jersey, Law Division, Morris County, L-1845-01.

Per curiam.


Argued October 15, 2008

Before Judges Fuentes, Gilroy and Chambers.

Defendant Federal Insurance Company (Federal) appeals from the order dated July 16, 2007, that entered judgment against it and in favor of plaintiff John Liss in the sum of $2,401,014. We affirm in part, reverse in part, and remand for further proceedings in accordance with this opinion.

The complex procedural history and factual background of the case are set forth in our opinion of October 6, 2006, and will not be repeated here. Liss v. Fed. Ins. Co., No. A-6863-03 (App. Div. Oct. 6, 2006). In that opinion we remanded for a trial to determine the enforceability of the settlement against Federal. Ibid. We now provide only a brief review of the relevant facts and procedural history necessary to address the issues before us.

Plaintiff was an employee of Grace Technologies, Inc. (Grace Technologies), and in 1998, he was owed $800,000 in commissions from this company. Ilutzi was the president of Grace Technologies. He was also the principal in Grace Consulting, Inc. (Grace Consulting), another company he founded.

In November 1998, plaintiff became the vice president of a newly formed company of Ilutzi named Gracetech, Inc. (Gracetech). As part of his employment agreement with Gracetech, plaintiff waived the $800,000 in commissions owed to him by Grace Technologies, and he received a 9.8 percent interest in Gracetech. While Gracetech did not have any assets at this time, Ilutzi promised plaintiff that the assets of Grace Technologies and Grace Consulting would be transferred to Gracetech.

In January 1999, plaintiff resigned from Gracetech and sought to redeem his shares in that company. However, Ilutzi had not transferred the assets to Gracetech as promised. Instead, he formed another company called Grace Holdings, Inc. (Grace Holdings), and after plaintiff's resignation, he transferred the assets of Grace Technologies and Grace Consulting to this new company. As a result, plaintiff's shares in Gracetech were worthless. Ilutzi and the Grace companies*fn1 contended that plaintiff breached his employment agreement when he resigned and began working for a competitor, and as a result, they had no obligation to redeem plaintiff's shares. Litigation ensued.

Ilutzi sought coverage for plaintiff's claims against him under the executive liability and indemnification policy that the various Grace companies, including Gracetech, had obtained from Federal. Federal denied coverage to Ilutzi, and litigation on the coverage dispute followed.

On May 23, 2003, plaintiff, Ilutzi, and the Grace companies reached a Griggs settlement.*fn2 In full settlement of plaintiff's claims, Ilutzi agreed to pay plaintiff $1.45 million, representing "the redeemable value of those shares [Liss's shares in Gracetech], including interest." Plaintiff agreed not to pursue his claim against Iltuzi's personal assets, but would limit his recovery to proceeds from the Federal policy. Ilutzi assigned to plaintiff his rights in the Federal policy. As a result, in accordance with the terms of the agreement, plaintiff pursued Federal for recovery of the settlement sum.

Thereafter, the trial court granted summary judgment in favor of Federal, and plaintiff appealed. We reversed and remanded, concluding that before the coverage issues could be resolved, a trial was necessary. Liss v. Fed. Ins. Co, supra, No. A-6863-03 (slip op. at 22-23). As we explained, "Liss's coverage claim against Federal would depend upon whether Ilutzi's conduct as a Director or President prevented Liss from recovering the value of his claim." Ibid. Thus, a trial on plaintiff's underlying claim was "required in order to determine whether the Federal policy affords coverage, and if so, for what amount." Id. at 23. The Federal policy provided no coverage for plaintiff's breach of contract claim. Id. at 22. However, the policy would provide coverage for a claim of breach of fiduciary duty against Ilutzi. Ibid. As a result, in order to obtain coverage under the Federal policy, plaintiff had to prove that Ilutzi breached a fiduciary duty to plaintiff. Ibid. Accordingly, plaintiff had to first prove his contract claim against Ilutzi and the Grace companies on the redemption of his shares, and the value of that claim. Id. at 21-22. Plaintiff would then have to prove that he was unable to recover on his contract claim due to Ilutzi's breach of his fiduciary duty to plaintiff. Ibid.

On remand, a bench trial was held. The parties stipulated that plaintiff did have a valid contract claim for stock in the Grace companies. The trial court found that Ilutzi's conduct prevented plaintiff from recovering the value of his shares, and that Ilutzi's actions constituted a breach of his fiduciary duty to plaintiff. The trial court accepted the testimony of plaintiff's expert that plaintiff's shares were worth $1.35 million as of January 29, 1999, the date plaintiff resigned, and that the Grace companies were worth $19.6 million. The trial court further found that the Grace companies had suffered no damage as a result of plaintiff's breach of his employment agreement with the Grace companies. Applying the Griggs analysis, the trial court found that plaintiff had sustained his burden of going forward and providing proofs that the settlement was reasonable and entered in good faith, and that Federal had failed to sustain its ultimate burden of persuasion that the settlement was unreasonable, in bad faith, or the result of collusion.

After the decision was placed on the record, the trial court sent counsel a letter dated June 28, 2007, setting forth the amount of the judgment and allowing prejudgment interest. That letter provides in pertinent part: "I have decided this case in favor of the plaintiff in the amount of $1.35 million as of January 29, 1999 plus 6% per annum to date." Judgment was entered on July 16, 2007, in favor of plaintiff and against Federal in the total sum of $2,401,014, representing the value of plaintiff's shares on January 29, 1999, in the sum of $1.35 ...

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