Zayo Group Holdings, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA, et al.Zayo Group Holdings, Inc. v. National Union Fire Insurance Company of Pittsburgh, PA, et al.
Upon Plaintiff Zayo Group Holding’s Motion for Partial Summary Judgment, DENIED.
MEMORANDUM OPINION AND ORDER
Ryan D. Kingshill, Esquire, and Jennifer C. Wasson, Esquire, POTTER ANDERSON & CORROON LLP, Wilmington, Delaware; Tamara D. Bruno, Esquire (argued), PILLSBURY WINTHROP SHAW PITTMAN LLP, Houston, Texas; Peter M. Gillon, Esquire, PILLSBURY WINTHROP SHAW PITTMAN LLP, Miami, Florida; William C. Miller, Esquire, PILLSBURY WINTHROP SHAW PITTMAN LLP, Washington, District of Columbia, Attorneys for Plaintiff Zayo Group Holdings, Inc.
Robert J. Katzenstein, Esquire, and Julie M. O’Dell, Esquire, SMITH KATZENSTEIN JENKINS LLP, Wilmington, Delaware; Daniel W. London, Esquire, and Jan H. Duffalo, Esquire, LONDON FISCHER LLP, New York, New York; Michael R. Goodstein, Esquire, and James M. Young, Esquire, BAILEY CAVALIERI LLC, Columbus, Ohio, Attorneys for Defendants ACE American Insurance Company, and Arch Insurance Company.
WALLACE, J.
For these reasons, the Insurer’s Motion for Summary Judgment is GRANTED, and Zayo’s Motion for Summary Judgment is DENIED.
A. THE PARTIES
Zayo is a corporation organized under the laws of Delaware with its principal place of business in Colorado.2 Zayo is a global provider of communications infrastructure and owns and operates fiber networks, data centers, and small-cell sites used for 5G networks.3
Insurer National Union is a corporation organized under the laws of Pennsylvania with its principal place of business in New York.4
Insurer ACE is a corporation organized under the laws of Pennsylvania with its principal place of business in Pennsylvania.5
Insurer Arch is a corporation organized under the laws of Missouri with its principal place of business in New Jersey.6
In May 2019, Digital Colony Partners and the EQT Infrastructure IV Fund (collectively, “Consortium B”) acquired Zayo through a reverse triangular merger (the “Acquisition”).7 Through the Acquisition, Zayo transitioned from a public company to a private one.8 And Zayo’s shareholders received $35 in cash per share of common stock.9
C. THE CARUSO ACTION10
After the Merger, former Zayo public shareholders sued Zayo’s CEO, Dan Caruso, in the Delaware Court of Chancery.11 Mr. Caruso co-founded Zayo in 2007 and served as Zayo’s CEO and Chairman of the Board until October 2020.12 The plaintiffs—in a one-count complaint—asserted that Mr. Caruso breached his fiduciary duties when conducting the Acquisition.13 They alleged that Mr. Caruso deliberately botched a public announcement to tank Zayo’s stock price and ensure
The Court of Chancery largely dismissed the Caruso Complaint but left intact the plaintiffs’ claim that Mr. Caruso breached his duty of care by failing to disclose a conversation about the Acquisition to the stockholders before the Acquisition.16 That conversation showed that Consortium B was willing to purchase Zayo shares at a price above $35 per share.17 After some discovery, the parties mediated.18 And they settled the Caruso Action for $27,125,000.19 National Union reimbursed Zayo for certain defense costs incurred to defend the Caruso Action.20 But the Insurers denied coverage for the settlement.21
D. THE POLICY AND BUMP-UP CLAUSE
National Union issued Zayo insurance policy number 02-420-67-57 (the “Policy”) for the period of October 17, 2018, through October 17, 2019—later
Within the definition of Loss, the Policy contains a bump-up clause (the “Bump-Up Clause”) excluding coverage for any settlement that represents an effective increase in consideration gained from an acquisition:
In the event of a Claim alleging that the price or consideration paid or proposed to be paid for the acquisition or completion of the acquisition of all or substantially all the ownership interest in or assets of an entity is inadequate, Loss with respect to such Claim shall not include any amount of any judgment or settlement representing the amount by which such price or consideration is effectively increased; provided, however, that this paragraph shall not apply to Defense Costs or to any Non-Indemnifiable Loss in connection therewith.27
Lastly, Policy Endorsement 10 contains an allocation provision that requires the Insureds and the Insurer to use best efforts to determine a proper allocation of the amounts covered as a Loss:
In connection with any Claim either (i) made against both Insureds covered by this policy for such Claim and parties not covered by this policy for such Claim, or (ii) alleging matters that are both covered and uncovered under the terms and conditions of this policy, the Insureds
and the Insurer agree to use their best efforts to determine a fair and proper allocation of the amounts to be covered as Loss by this policy, taking into account the relative legal and financial exposures, and the relative benefits obtained by such Insureds and such uncovered parties.28
E. COVERAGE DISPUTE
Zayo sued to obtain coverage of the $27,125,000 settlement amount Mr. Caruso paid to the Zayo shareholders and alleges that National Union acted in bad faith by refusing to cover the Settlement.29
II. PARTIES’ CONTENTIONS
A. THE INSURERS
The Insurers argue that the Settlement meets all three of the Bump-Up Clause’s criteria and therefore the Settlement is excluded from coverage.30 Those criteria are that: (1) Consortium B acquired Zayo; (2) the Caruso Action sought to remedy inadequate consideration; and (3) the Settlement represents an effective increase in consideration.31 The Insurers also contend that they are entitled to summary judgment on Zayo’s bad-faith claim as it is a limited remedy, Zayo can’t establish an underlying breach of contract, and the Insurers had a reasonable
B. ZAYO
Zayo counters that the Bump-Up Clause doesn’t cover the Settlement since: (1) the underlying plaintiffs didn’t seek damages for inadequate deal price; and (2) the Settlement doesn’t represent an effective increase in consideration.33 Zayo alternatively avers that, even if some portion of the Settlement amount represents increased consideration, allocation isn’t warranted under the Larger Settlement Rule.34 Under that rule, responsibility for any portion of a settlement should be allocated away from the insured party if the uninsured party’s acts are determined to have increased the settlement.35 On the bad-faith claim, Zayo responds that the Bump-Up Clause clearly doesn’t exclude coverage, so the claim has merit.36
III. STANDARD OF REVIEW
This Court can grant a moving party’s motion for summary judgment under
When parties file cross-motions for summary judgment and don’t argue that there are disputed material facts, the Court deems the motions to be the equivalent of a stipulation for a decision on the merits based on the submitted record.44 Here,
IV. DISCUSSION
The Insurers don’t have to cover the Settlement because the Bump-Up Clause excludes coverage. The record establishes that the Settlement represented an increase in consideration to the underlying shareholders. Notably: (1) the underlying Zayo shareholders sued Mr. Caruso for inadequate consideration from the Acquisition; (2) the Settlement amount went to the allegedly injured shareholders on a per-share basis; (3) the parties mediated and had completed some discovery at the time of the Settlement; and (4) Mr. Caruso didn’t stipulate in the Settlement that he was settling solely to avoid continued litigation costs. Also, since the Bump-Up Clause excludes the entire Settlement amount, there is no allocation issue, and the Larger Settlement Rule is inapplicable.
Resultingly, the Insurers are entitled to summary judgment on Zayo’s bad-
A. TOWERS WATSON AND HARMAN BACKDROP
Bump-up clauses with the same language at issue here exclude settlement coverage when the settlement’s actual result increases consideration.
In Towers Watson & Co. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA [hereafter Towers Watson II], the United States Court of Appeals for the Fourth Circuit affirmed a district court decision that a bump-up clause excluded coverage.47 That clause prevented coverage if: (1) there was a claim alleging consideration paid; and (2) the settlement represented an effective increase in the consideration shareholders got for the acquisition.48 The court found that the underlying action asserting claims under federal securities law and Delaware law satisfied the first prong.49 On the second prong, the court opined that the settlement represented an effective increase in consideration.50 In doing so, the court observed that the lawsuit sought to rectify a shortfall in the merger process that devalued the shareholders’ stocks and that the settlement compensated the shareholders for the purportedly
By contrast, in Illinois Nat’l Ins. Co. v. Harman Int’l Indus., Inc. [hereafter Harman III], our Supreme Court held that a bump-up clause—with the same language as the clause in Towers Watson II—did not exclude coverage.52 That underlying suit—based on Section 14(a) claims—relied on allegations of inadequate consideration and sought damages for inadequate price or consideration.53 But the Court ruled that the settlement didn’t represent an effective increase in consideration.54 The Court distinguished Harman’s facts from those in Towers Watson II.55 And it outlined that: (1) the settlement class included Harman shareholders who held stock at any time, without requiring class members to hold stock through the transaction’s closing date; (2) the underlying action settled early in the litigation; and (3) the settlement amount was based on the cost of continuing litigation, falling almost directly in the center of the estimated range of litigation costs.56 Two justices dissented and would have found that the settlement represented
Here, the Caruso Action and the Settlement are far more aligned with the facts in Towers Watson II.
B. THE BUMP-UP CLAUSE EXCLUDES COVERAGE.
“[T]he interpretation of contractual language, including that of insurance policies, is a question of law.”58 And the Insurers shoulder the burden of proving any coverage exclusion’s applicability.59 If the exclusion applies and the language “is clear and unequivocal,”60 the exclusionary clause61 will be construed “narrowly to give effect to the interpretation most beneficial to the insured” based on its plain meaning.62
This Bump-Up Clause is identical to the clause in Towers Watson II and Harman and says that coverage is excluded when: (1) the underlying claim alleges
1. The underlying plaintiffs’ suit alleged an inadequate deal price.
To satisfy the first Bump-Up Clause criterion, the Insurers must establish: (1) a claim; (2) an allegation that the price or consideration was inadequate; and (3) an acquisition.64
First, Zayo doesn’t meaningfully dispute that the Caruso Action wasn’t a claim.65 And indeed, the underlying suit was a claim, as it was a lawsuit against Zayo’s CEO seeking damages arising from the Acquisition.66
Second, the underlying complaint alleges that the price and consideration were inadequate. In the Caruso Complaint, the underlying plaintiffs alleged a breach of fiduciary duty “in connection with [Zayo]’s sale” and sought damages for “unfair Merger consideration.”67 And the only theory that survived the motion to dismiss in Chancery asserted that Mr. Caruso breached his duty of care by failing to disclose a
On this point, Zayo contends that the Caruso Action didn’t seek an increase in consideration as the underlying plaintiffs’ claims targeted Mr. Caruso’s alleged pre-transaction depression of Zayo’s value as a go-forward entity—not inadequate negotiation of the deal price.69 That’s a creative take. But a pre-deal price depression still results in an inadequate price at the time of the Acquisition, since Zayo’s price would have been artificially lowered before its sale, and the buyer would then pay less. And the Bump-Up Clause doesn’t say that the underlying Claim must “only” or “solely” allege inadequate deal price as the only claim.70 The Bump-Up Clause also doesn’t mandate that the underlying Claim be brought against Zayo—just that it seeks inadequate consideration. Simply put, the Claim could conceivably be against any defendant, so long as it seeks increased consideration regarding the Acquisition.
Third, there was an acquisition. Again, Zayo doesn’t meaningfully contend that the Acquisition wasn’t an acquisition under the Bump-Up Clause.71 And this
2. The entire Settlement amount represents an effective increase in consideration.
The Insurers satisfy the second criterion by showing that the Settlement’s “real result” is that the Settlement amount, or any portion of it, increased the amount of deal consideration the shareholders received in the Acquisition.73
Looking at the Settlement’s language, Mr. Caruso denied any allegations of wrongdoing, fault, or liability.74 He settled solely because he considered it desirable to dismiss the action with prejudice and considered: (1) the uncertainties and expense of further litigation; and (2) to put all claims to rest in the action.75 The underlying plaintiffs stipulated that, while they believed their claims were meritorious, the Settlement provided a substantial and immediate benefit to the Class.76 Still, the underlying plaintiffs considered the litigation risks and the expense of continued proceedings.77 Unlike Harman, Mr. Caruso didn’t stipulate that he
There are strong indicators that the Settlement represented compensation for an inadequate deal price. Mr. Caruso paid the allegedly injured shareholders on a per-share basis and only to those who held stock at closing and therefore received consideration from the Acquisition.79 The Settlement also occurred after about a year of discovery, and the shareholders obtained and reviewed over 16,000 documents from Mr. Caruso and third parties before settling—supporting the notion that the Settlement represents an increase in consideration and not mere litigation avoidance.80 Although there was lengthy motion practice during this time, 81 the parties still exchanged documents and conducted some discovery.82 So, while maybe
In response, Zayo highlights that the $27.125 million Settlement amount is much less than the amount sought in some of the underlying plaintiffs’ other damage theories.85 Yet, as Zayo acknowledges, the Court of Chancery dismissed those other theories.86 Granted, Zayo presents evidence that the underlying plaintiffs intended to re-plead the dismissed claims, and the Settlement resolved those claims.87 But this evidence doesn’t overcome the fact that the Settlement amount went directly to the injured shareholders, who sued over the Acquisition’s allegedly inadequate price.88 Harman was unique in that there was a cost estimate, and the Settlement
Notes
amount fell directly within that estimate—demonstrating that the settlement didn’t represent an increase in consideration.89 Although there were no cost or damages prediction pre-Settlement, the Settlement amount here went only to the injured shareholders who received consideration from the Acquisition.90 This is largely determinative and carries more weight than Zayo’s arguments that the Settlement represented the costs of litigation.91 Too, the underlying plaintiffs represented to the
that they’re settling claims for the alleged breach of fiduciary duty.”) (D.I. 194); see also id., Ex. E at 30 (Settlement Hearing):
The plaintiffs also faced the prospect of protracted litigation following the Court’s granting of the defendants’ motion to bifurcate the adjudication of liability and damages. Considering the risks the plaintiffs faced of unfavorable rulings on liability and damages, the $27,125,000 settlement is a very good recovery. This amounts to about 12 cents per share, 12 percent of the difference between the high end of Digital Venture’s price optimism and the price its investor consortium actually paid. Altogether, the Court finds the “get” here to be reasonable.
Zayo also asserts that, under the Larger Settlement Rule,94 if only a portion of the Settlement amount represents increased consideration, then the Insurers must show that the Settlement amount was higher than it would have been had only covered claims been settled.95 This Court has declined to extend the Larger Settlement Rule beyond the allocation situation involving indemnifiable and non-indemnifiable parties.96 Here, there are no indemnifiable and non-indemnifiable parties involved—just, according to Zayo, covered and uncovered portions of the Settlement amount.97 As a result, the Larger Settlement Rule is inapplicable because there are no uninsured parties involved.
acquisition).
At bottom, the Settlement’s real result gave the injured shareholders in the underlying action—all of whom received consideration from the Acquisition—additional consideration. The Insurers have met their burden to show that the Bump-Up Clause excludes coverage in this instance. And Zayo fails to provide a meaningful rebuttal to the overwhelming evidence showing an increase in consideration for the shareholders.
C. THE INSURERS ARE ENTITLED TO SUMMARY JUDGMENT ON ZAYO’S BAD-FAITH CLAIM.
Bad-faith insurance denial claims are actionable where the insured can show that the insurer’s denial of benefits was clearly without reasonable justification.99 Reasonable justification requires that, at the time of denial, the insurer knew of facts or circumstances that created a bona fide coverage dispute and thus a meritorious
Because the Bump-Up Clause excludes coverage, Zayo cannot show a breach of contract. The reason is that the Policy doesn’t require the Insurers to cover the Settlement amount, so the Insurers didn’t breach the Policy by refusing to do so. Without an underlying breach, there can be no bad-faith claim. As a result, the Insurers are entitled to judgment as a matter of law on this claim.
V. CONCLUSION
At bottom, the Settlement’s real result gave the Zayo shareholders increased consideration for the Acquisition. Zayo zooms in on certain facts in the lead-up to the Settlement to contend that the Settlement amount had nothing to do with an increase in consideration. But, in the aggregate, these isolated facts cannot overcome the underlying injured shareholders receiving compensation on a per-share basis for a lawsuit alleging that Mr. Caruso caused Zayo to be undervalued in
For these reasons, the Court DENIES Zayo’s Motion for Partial Summary Judgment and GRANTS the Insurers’ Motion for Summary Judgment.
IT IS SO ORDERED.
/s/ Paul R. Wallace
Paul R. Wallace, Judge