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AT&T Corp. v. Certain Underwriters at Lloyd's London

August 3, 2009

AT&T CORP., PLAINTIFF-APPELLANT,
v.
CERTAIN UNDERWRITERS AT LLOYD'S LONDON, CERTAIN LONDON MARKET INSURANCE COMPANIES, FEDERAL INSURANCE COMPANY, GULF INSURANCE COMPANY, CONTINENTAL CASUALTY COMPANY, NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURGH, PA, XL SPECIALTY INSURANCE COMPANY, ZURICH AMERICAN INSURANCE COMPANY, ST. PAUL MERCURY INSURANCE COMPANY, LIBERTY MUTUAL INSURANCE COMPANY, ARCH INSURANCE COMPANY AND AXIS SPECIALTY INSURANCE COMPANY, DEFENDANTS-RESPONDENTS.



On appeal from the Superior Court of New Jersey, Law Division, Middlesex County, Docket No. L-6606-07.

Per curiam.

NOT FOR PUBLICATION WITHOUT THE APPROVAL OF THE APPELLATE DIVISION

Argued: June 3, 2009

Before Judges Cuff, Fisher and C.L. Miniman.

Plaintiff AT&T Corp. (AT&T) appeals from the dismissal with prejudice of its claims against defendants Those Certain London Market Insurers Subscribing to Policy No. 509/QB 05501, incorrectly sued as Certain Underwriters at Lloyd's London and Certain London Market Insurance Companies (collectively, London); Federal Insurance Company (Federal); Travelers Indemnity Company, as successor in interest by merger with Gulf Insurance Company (Gulf); and Continental Casualty Company (Continental) (collectively, the 2001 Insurers); and defendants National Union Fire Insurance Company of Pittsburgh, PA (National Union); XL Specialty Insurance Company (XL); Zurich American Insurance Company (Zurich); St. Paul Mercury Insurance Company (St. Paul); Liberty Mutual Insurance Company (Liberty Mutual); Arch Insurance Company (Arch); and Axis Specialty Insurance Company (Axis) (collectively, the 2004-2005 Insurers). We affirm.

I.

In this insurance coverage action, AT&T sought coverage under two primary policies issued by London and National Union and multiple policies that were excess to them for five underlying actions against AT&T relating to a stock-option plan. Those actions were: (1) a pending action in the Delaware Court of Chancery, filed on September 24, 2004, captioned Lillis v. AT&T Corp. (the Lillis action); (2) a pending action in the District Court for the City and County of Denver, Colorado, filed on May 19, 2006, captioned Munoz v. AT&T Corp. (the Munoz action); (3) an arbitration filed on August 29, 2007, with the Judicial Arbiter Group Inc., captioned Allen v. AT&T Corp. (the Allen action); (4) an arbitration filed on August 31, 2007, with the American Arbitration Association, captioned Pardun v. AT&T Corp. (the Pardun Action); and (5) an action brought in the Delaware County Court of Chancery, filed on September 14, 2007, captioned Johnson v. AT&T Corp. (the Johnson action).

AT&T alleged that all five actions were covered by both primary policies and all excess policies, triggering the duty to defend and causing damages for the failure to do so. AT&T also alleged that a judgment had been entered against it in the Lillis action. AT&T sought indemnification for the Lillis judgment and a declaration of coverage for all sums AT&T might become legally obligated to pay in connection with the claims asserted in the Munoz, Allen, Pardun, and Johnson actions.

On November 19, 2007, all of the 2001 Insurers filed a joint motion to dismiss AT&T's amended complaint pursuant to Rule 4:6-2(e). On that same date, all of the 2004-2005 Insurers, except St. Paul, filed a similar motion to dismiss. Defendant St. Paul separately filed a motion to dismiss on its own behalf and in support of the joint motion to dismiss filed by the other 2004-05 Insurers. The moving parties submitted supporting certifications to which they attached true copies of the relevant insurance policies and copies of documents relevant to the underlying actions, such as complaints, claims, and orders.

The judge heard oral argument on January 18, 2008. By order dated May 30, 2008, he granted both the 2001 Insurers' joint motion to dismiss with prejudice AT&T's amended complaint and the motion to dismiss with prejudice as to National Union, XL, Zurich, Liberty Mutual, Arch, and Axis. On June 10, 2008, the judge entered an order dismissing the complaint as to defendant St. Paul. The undisputed facts derived from the submitted documents on which the dismissals were predicated follow.

A. The Lillis Action

The Lillis action was filed by former officers and directors of either MediaOne Group, Inc. (MediaOne), a broadband communications provider, or its former parent corporation, U S West, Inc. AT&T had acquired MediaOne in 2000. Prior to this acquisition, the Lillis plaintiffs had received stock options under the Amended MediaOne Group, Inc. 1994 Stock Plan (the 1994 Plan).*fn1 The Lillis plaintiffs alleged that the 1994 Plan provided, in the event of certain corporate transactions such as consolidations and spin-offs, "the number or kind of shares of interests subject to an Award and the per share price of value thereof shall be appropriately adjusted . . . provided that each Participant's economic position with respect to the Award shall not . . . be worse than it had been immediately prior to such event."

In the May 6, 1999, MediaOne-AT&T Merger Agreement, AT&T agreed, in part, to honor the terms of the 1994 Plan and promised to make no changes to it. Closing was scheduled for 2000. The 1994 Plan participants exchanged their MediaOne options for AT&T options of equivalent value.

In June 2001, AT&T "spun-off" its wireless business unit, AT&T Wireless Services, Inc. (Wireless). This transaction required an adjustment to the AT&T stock options subject to the 1994 Plan in order to avoid a diminution in the value of the options. The Lillis plaintiffs received new Wireless options as well as adjusted AT&T options. At the time of the spin-off, AT&T assured the Lillis plaintiffs that these stock options would continue to be governed by the 1994 Plan.

On May 19, 2004, Wireless's shareholders approved a plan to merge with Cingular Wireless LLC (Cingular), which closed on October 26, 2004. At that time, options were adjusted into the right to receive the merger consideration of $15 per share upon exercise. Subsequently, the Lillis plaintiffs alleged they were paid less than full value for certain stock options and other stock options were cancelled without compensation. They argued that the 1994 Plan required that they receive the full economic value of their stock options.

This economic value consisted of both the "intrinsic value" of the option (the market value of the option at a specific moment in time) and the "time value" (the value attributable to the option's potential to appreciate in the future). See generally Custom Chrome, Inc. v. Comm'r of Internal Revenue, 217 F.3d 1117, 1125 (9th Cir. 2000) (explaining difference between intrinsic value and time value of stock option). The Lillis plaintiffs alleged that the Wireless merger with Cingular violated the terms of the 1994 Plan insofar as it deprived them of the time value of their stock options.

The Lillis complaint set forth four causes of action. The first count was for breach of contract, alleging that AT&T and Wireless had breached their contractual obligations by failing to pay the plaintiffs for the full value of their Wireless stock options upon their cancellation, as required by the 1994 Plan. The second count was also for breach of contract, alleging that both AT&T and Wireless had breached their contractual obligations for failing "to ensure the continued efficacy of the 1994 Plan following the split-off from AT&T in July 2001." The third count alleged that, to the extent AT&T and Wireless had repudiated the plaintiffs' contractual rights, they were liable for negligently misrepresenting those rights. The fourth count sought to recover legal fees and expenses.

In July 2007, after trial, the Delaware Court of Chancery found AT&T liable for breach of contract on the first count of the Lillis complaint (the 2007 Order). The Court of Chancery interpreted the 1994 Plan to require payment of both the "intrinsic value" and "time value" of the stock options, and found that AT&T remained contractually bound to honor the 1994 Plan under the terms of the merger agreement because it did not secure a novation or assignment of its contractual obligations. As to count two, the court found that Wireless was not contractually bound to perform the 1994 Plan, and therefore that Wireless "cannot be found liable to the plaintiffs." The Court of Chancery did not address count three of the Lillis complaint.

AT&T appealed the 2007 Order. The only issue raised on appeal "was whether Wireless breached the terms of the 1994 plan." Ultimately, on March 9, 2009, the Delaware Supreme Court affirmed the chancery judgment "granting relief to the Option Holders based on the conclusion that 'economic position' in Section XVIII.A of the 1994 Plan means intrinsic value and time value."

B. The Munoz, Pardun, Allen, and Johnson Actions

The plaintiffs in the Pardun, Allen, and Johnson actions are former employees of MediaOne who acquired wireless stock options from MediaOne in a manner similar to the Lillis plaintiffs. The plaintiffs in the Munoz action are employees of AT&T, MediaOne, and U S West, and received stock options directly from AT&T. These actions all allege that AT&T failed to compensate plaintiffs for the full value of their options or to make Wireless liable to do so. However, these complaints allege only breach of contract claims or seek declaratory relief regarding plaintiffs' contractual rights. None of these actions alleges negligent misrepresentation or negligence of any kind. The Allen, Pardun, and Johnson actions remain pending against AT&T. According to AT&T's brief, the Munoz action settled after the trial court dismissed AT&T's amended complaint in this declaratory action.

C. 2001 Insurance Polices

After AT&T sold Wireless to Cingular, AT&T became insured by a primary fiduciary liability insurance policy from London, Policy No. 509/QB405501, covering claims made from July 9, 2001, through July 9, 2007 (the London primary policy). The London primary policy provided $25 million in coverage in excess of a $500,000 deductible.

AT&T also purchased three excess fiduciary liability policies for that policy period (collectively, the 2001 excess policies): (1) Federal Policy No. 8146-24-07, providing $25 million in excess coverage over the London primary policy; (2) Gulf Policy No. GA2846071, providing $10 million in excess coverage over the London primary policy and the Federal excess policy; and (3) Continental Policy No. DOX 167982943, providing $10 million in excess coverage over the London primary policy and the Federal and Gulf excess policies. The 2001 excess policies contain terms similar to the London primary policy for all relevant purposes and the following discussion is limited to the terms of the London primary policy.

Item 1(a) of the London primary policy Declarations identified "assured" as all "Employee Benefit Plans," as provided by Endorsement Number 1, and Item 1(b) identified AT&T and its subsidiaries as "assureds." Endorsement Number 1 limited assured "Employee Benefit Plans" to qualified ERISA plans. Thus, the 1994 Plan, which was nonqualified under ERISA, was not an "assured" under the policy and AT&T's claim is predicated only on its status as an assured under the London primary policy.

Under Insuring Agreements, ยง I.1, London agreed to: pay on behalf of the Assured all sums which the Assured shall become legally obligated to pay [for] a loss because of any Breach of Fiduciary Duty (as herein defined) . . . and arising solely out of the Assured's capacity as a fiduciary ...


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