Professional Documents
Culture Documents
ILLINOIS
COTJNTY DEPARTMENT, CHANCERY DIVISION
DHR INTERNATIONAL, INC., f/K/A )
HOFFMAN ACQUISTIION CO., INC., )
an Illinois Corporation, and DAVID H.
HOFFMAN, an Illinois Resident,
t2CH28 ? 6 3
Plaintiffs,
No.
FEDERALINSURANCECOMPANY, )
a Foreign
Corporation,
Defendant.
)
)
I-I.
Hoffman, by their undersigned counsel, for their complaint for Declaratory Judgment and other
Relief, state as follows:
l.
under a ForeFront Portfolio insurance policy issued by Federal to Plaintiff DH1 Intemational,
Inc' ("DHR"), on which policy Plaintiff David H. Hoffman ("Hoffman',) was also an Insured,
copy of which is attached hereto as Exhibit A, with respect to the lawsuit filed in the Law
Division of this court by Defendant Robert E. Reilly, Jr. ("Reily") against plaintiffs, No.2005 L
008700, a copy of which Complaint herein is attached hereto as Exhibit
B.
PARTIES
2'
Cook County.
3.
4.
Defendant Federal is an Indiana stock insurance company with its principal place
of business in New Jersey, and is authorized to write insurance policies in Illinois and did issue
an insurance policy to Plaintiffs in Illinois.
5.
This Court has jurisdiction over Defendants pursuant to 735 ILCS 5/2-209.
6.
Venue is proper in this County pursuant to 735 ILCS 5/2-101, 512-102(a), and
5/2-103G)|-
7.
On August 9,2005, Defendant Reilly filed his Verified Complaint for Damages
and other Relief ("complaint") against Plaintiffs herein styled Robert E. Reilly, Jr., v. DHR
International, Inc., f/Aa Hoffman Acquisition Co., Inc., and David H. Hoffman, (Case No. 2005
L 008700), which complaint was tendered by DHR to Defendant Federal with notice.
8.
is attached hereto as Exhibit c, stating that "Federal accepts coverage," but in which letter
Federal also denied coverage under certain parts of the policy and for certain allegations of the
complaint, and acknowledged its duty to defend the entire complaint. Federal was thereby
obliged to defend the complaint
in its
in
all
9.
In spite ofthe fact that Federal both denied coverage for certain allegations under
one part of the Policy and accepted coverage for other allegations under another part of the
policy, and agreed to provide a defense to its insureds for the entire Complaint. Federal never
advised
its
insureds
of their right
to be
defended by
independent ("Peppers") counsel, and did not in fact provide such independent defense counsel
to its insureds. Instead, Federal pushed upon the insureds the services of a law firm which
regularly did work for Federal, even though that law firm was in a conflict of interest with
respect to the representation.
I
0.
insureds,
Exhibit C, p. 2, emphasis in original). Neither in this part nor any other part of the letter,
did Federal advise the insureds that the provision of 100% of the defense costs would be subject
to any limit whatsoever; the only limitations mentioned are the satisfaction ofthe deductible, and
the continued presence ofCounts I and
I
l.
III,
as discussed below.
Federal's November 9, 2005 letter went on to deny coverage under the Directors
as
we
under the Employment Practices Liability Coverage Section of the Policy for Loss other than
*Ix.
l;
12.
(id.,p. r-2:3-
In spite ofthe fact that Federal provided a defense to the insureds for portions of
the Complaint while reserving the right to deny and,/or denying coverage for other portions
of the
Complaint, Federal neither in its November 9, 2005 letter nor in any other letler to the insureds,
advised the insureds of their rights under Illinois law to independent counsel of the insureds'
choice, which counsel would not be subject to control or inJluence by Federal to steer the
defense of the Complaint away from potentially covered counts and into potentially uncovered
counts.
TIIE COMPLAINT
13.
nine Counts, which together allege that Plaintiffs' actions as officers and directors and as an
organization constiluted wrongful acts which damaged Reitly.
14.
Breach of a November 2000 Employment Agreement; count II, Breach of Revised shareholder
Agreementi county
III,
y,
vII,
Act.
to
rX,
linois
..
Lltage
rights
under both an Employment Agreement between Reilly and DHR and under
to suggest that
fll). DHR
Shareholder
15.
As factual background for his complaint, Reilly alleges the following: DHR is an
executive search firm assisting businesses in recruiting senior level executives. (1d., Complaint,
1i3).
DHR is not publicly-traded through any security market, DHR is a successor company ro
,1f3).
David
I The-Complaint
in the underlying lawsuit was subsequently amended and the pending pleading in the
underlying fawsuit is cu*ently a se.cond Amended veriJied Complainl. However, lor purposes of
Federal's coverage position, the operative pleading is the original Verffied Complaint.
Hoffman owned the controlling interest in DHR and served as DHR's Chairman and CEO. At
all times, Reilly was and currently is a shareholder of record of DHR owning approximately
6.25% of outstanding shares. (1d,
26,2005, when he voluntarily terminated his employment relationship with DHR and terminated
all other then-existing officer and director relationships with DHR. (1d, fls 10, I l).
16.
l,
Agreement entitled Reilly to certain rights as a shareholder in DHR. In addition, the Shareholder
Agreement has provisions relating to the re-purchzue ofoutstanding shares of DFIR and requrres,
among other things, an independent appraisal of shares when any shareholder resigns from DLIR
and./or attempts to sell vested shares. (See,
17.
Exhibit B, Complaint,ll2).
DHR entered into an additional agreement, (herein, the "November 200 Agreement"). The
November 2000 Agreement provides among other things that Reilly was to be granted additional
ownership equity
Agreement. The November 2000 Agreement also provided for an additional employment rights
and benefits
to Reilly
18.
DHR.
(.See,
DHR. Reilly
as an equity owner
and
distribution of settlement funds from separate litigation between DHR, Hoffman Investment
company, and Deloitte & Touche in a matrer called EpS litigation. (see, Exhibit B,!ls 26-2g).
19.
Pursuant
to a
resolution
annual
distribution of profits in March 2001. Reilly was entitled to distribution as a shareholder. Based
upon Reilly's stock ownership, he was entitled to profit distributions for the years 2001 through
2005. However, those shareholders distributions were not paid. (see, Exhibit B, complaint,
'lf3 I
). Reilly also alleges that he was the holder of promissory notes with DHR under DHR
20-
assets
EPS litigation." (see, Exhibit B, complaint, '!J34). In connection with the repurchase of DHR in
the EPS litigation, DHR raised Capital from its shareholders in a rotal amounl of $10.57 million.
Each DHR shareholder including Reilly repurchased DHR stock in the transaction. pursuant to a
memorandum of understanding between DHR and its shareholders, the shareholders were to be
repaid pro rata following the buy-back. (1d., fl34). However, Hoffman misappropriated the
additional capital raised and converted it "for the benefit of Hoffm
an)' (1d.,fl39).
Hoffman and
DHR misappropriated and wasted DHR assets for the benefits of individual shareholders
and
family members, and acted in an "illegal, fraudulent and oppressrve mafier towards
Reilly
and
2l-
In count I of his Complau,rl, Reilly alleges that DIIR an{ Hoffman breached rhe
employment agreement between Reilly and DHR and failed to issue Reilly
additional equity in
commissions." (ld.,n45).
22.
In Count II Reilly alleges that DHR breach the Revised Shareholder Agreement
between DHR and its Shareholders. In particular, Reilly alleges that DHR breach the agreemenr
in "failing to obtain fair or accurate appraisal and failing to repurchase Reilly's shares" pursuant
to the Revised Shareholder Agreement. (See, Exhibit B, Complaint,fl50).
23.
In Counts III and Count IV Reilly alleges that DHR breached its obligations under
the resolutions for payment of valid and binding amounts to DHR and its directors
and
not
distributed profits from DHR according to those revisions. Further, DHR breach the agreement
to distribute DHR profits pro rata to Reilly as a DHR sharchol der. (1d.,!158, et seq.).
24. In count v,
Promissory Notes in failing to repay amounts and interest to Reilly. (,See, Exhibit B, Complaint,
fl61). In Count VI, Reilly alleges that DHR breached the Terms of The Settlement Agreement in
the Deloitte & Touche EPS litigation by failing to make payments to the DHR shareholder and
principals according to the agreement. (ld.,n6q.
25
'
In count
vll,
including, but not limited to duties to locality and good faith, to DHR shareholders." (see.
Exhibil B, complaint, fl68). while DHR is a closely held corporation and its shares are not
publicly-traded, Hoffman is a controlling Director of DHR and owes a fiduciary duty to Reilly
and other shareholders. (/d , t{69).
26. In count vIII, Reilry alreges that under Ilrinois law, DHR and Hoffman
misappropriated and wasted corporate assets and
Reilly. (see, Exhibit B, Complaint,ll2). Anindependent audit isjustified under Illinois law in
light of DHR's and Hoffman's failure to provide proper accounting.
27.
In Count IX, Reilly alleges that under the Illinois Wage Payment Provisions he is
entitled to additional payment and full compensation for wages, salaries and commissions. (See,
Exhibit B, Complaint,
''Jls
75-82). Reilly further alleges that DHR and Hoffman willfully refused
to pay Reilly a final compensation in order to secure those funds for themselves. (1d.,
'|]180).
which are set forth further below, (herein, "Federal policy").2 The Federal policy provides lnrer
a/ia a Directors & Officers Liability (D&O) Coverage Section, as follows:
I.
INSURING CLAUSES
(A)
IndividualNon-IndcmnificdLiabilityCoveragc
The Company shall pay Loss on behalfofthe Insured persons resulting from any D&o
claim first made against such Insured Pcrsons during the policy period, or any
applicable Extended Reporting Period, for wrongful Acts, but only to the extent the
Insured Organization does not indemnify the Insured persons for such Loss.
(B)
IndividuallylndcmnifiedLiabilityCoveragc
The company shall pay Loss on behalf of the Insured organization resulting from any
D&o claim first made against Insured persons during the policy pcriod, or any
applicable Extended Reporting Period, lor wrongful Acts to the extent the Insured
Organization indemnifies the Insurcd persons lor such Loss.
(C)
II.
DEFINITIONS
For purposes ofthis Coverage Section;
(D)
D&O Claim
(l)
any
means:
ofthe following:
'To the extent that provisions were not set forth in the Noyember 9, 2005, tener, additional policy provisions are
taken from Exhibit A, Federal's 2005-2006 policy to DHR Intemational. Inc_ anached.
(b)
against an Insured Person for a Wrongful Act, including any appeal therefrom,
or
(J)
(U)
(1)
the
of
(a)
For purposes of coverage under Insuring Clauses (A) and (B); any
Insured Pcrson in his or her capacity as such, or any matter claimed
against any Insurcd Person solely by reason ofhis or her status as such;
(b)
For purposes
of
Organization; or
(c)
(2)
Wrongful Act.
III. EXCLUSIONS
(A)
No coverage will be available under this Coverage Section for any Claim against an
Insured:
(5)
(a)
Demand
Action;
(S)
Securityholder Derivative Action means any Claim brought on behalf of, or in the
narne or the right of, the Insurcd Organization by one or more securityholders of the
Insurcd Organization in their capacity as such if such Claim is brought and maintained
without the assistance, participation or solicitation of any Exccutive.
29.
the litigation, without any reference in that assertion to any potentially applicable policy limit to
the provision of the defense, Federal did not assert that payment ofDefense Costs shall reduce or
exhaust any available limits. Defendant Federal thereby intentionally relinquished and waived
any right to rely on any such limit ofliability or insurance.
36.
Plaintiffs accordingly request that this Court find that Defendant Federal
it
has
may have had to terminate payment of Defense Costs based upon any
puryoned limit and finding that the payment of Defense Costs is in addition to the available
limits of liability.
38.
Plaintiffs reasonably relied upon Defendant Federal's statement that it would pay
100% of Defense Costs, without reference to any potentially applicable policy limit, and was
materially prejudiced by this reliance, such that Federal is now estopped from maintaining that it
can terminate payment of Defense Costs.
39.
40.
Plaintiffs reasonably relied upon Defendant Federal's statement that it would pay
100% of Defense Costs, without reference to any potentially applicable policy limit and by not
representing that the Defense Costs reduce, exhaust or limit any available
limit of liability or
insurance, and Plaintiffs were materially prejudiced by this reliance, such that Federal is now
estopped from maintaining that
any limits.
ll
41.
42.
Under Illinois case law, an insurer which questions whether there is coverage for
a complaint must promptly seek a declaratory judgment that there is no coverage for
the
complaint, or must defend the insured pursuant to a reservation ofrights to deny coverage for the
complaint. In this instance Federal exercised neither option mandated by Illinois case law: It did
not file a declaratory judgment action, and it did not defend the insured subject to a reservation
of rights to deny indemnity coverage for D & O coverage. Instead, in its November 9,
2005
letter (Exhibit A) and in all subsequent correspondence with Plaintiffs, it denied any obligation
to provide coverage for any judgment or settlement arising from the Complaint, and stated that it
would provide "Defense Costs only." (emphasis in original). See, e.g., Ex. A. p. 1. It did not
offer to defend the insured subject to a reservation of rights to deny D & O coverage, but instead
defended the insured with the express disclaimer that it had already denied D & O coverage, and
therefore would provide only a defense, but never indemnity coverage. In doing so the insured
violated the Illinois requirement to either file a declaratory judgment action seeking judicial
confirmation
reservation of rights as to indemnity. Having done neither, defendant Federal is now estopped
under Illinois law from disclaiming D & O coverage on any basis.
43.
44.
Federal has attempted to both deny (Exhibit A, p.1) and/or reserve the right to
deny (id., p. 6-10) that it has any duty to indemnifr Plaintiffs under the EPL coverage except for
Defense Costs. Federal's denials and/or reservations of rights to deny EPL indemnity coverage
t2
are based upon the employment contract exclusion from EPL coverage set forth above as well as
other exclusions from EPL coverage set forth in Exhibit C, p. 8-10. Federal has failed to carry
its burden to demonstrate that the entirety of the Complaint is encompassed within any of these
exclusions. In particular, the employment contract exclusion III. (C) set forth above does not
apply where there is no written employment contract, and there was no such written contract.
Moreover, even
if
there was such contract, the further exception to the exclusion, for liability
which would exist in the absence of such contract, would apply, because the liability alleged in
the Complaint by defendant herein Reilly could also exist under a negligent misrepresentation or
Complaint which is within the EPL coverage grant set forth above and not excluded.
45.
& O coverage.
& O Insuring
See
its D & O
Exhibit A., p.
coverage,
l; 5. The
not met its burden that to establish that the entirety of the Complaint is encompassed by
Exclusion III. A. (5) set forth above. In support thereof plaintiffs state as follows:
46.
The Complaint alleges Wrongful Acts under Insuring Clause (B) as defined in the
"As Chairman and CEO of DHR, Hoffman owes fiduciary duties, including but not limited to
duties of loyalty and good faith to DHR and its shareholders." The complaint goes on to allege
that "As a result ofthe acts alleged in paragraphs 34-42, arrd on information and belief, other acts
of self-dealing by Hoffman, the assets of DHR have been misappropriated and wasted to enrich
Hoffman and at the expense of Reilly, whose ownership interest in DHR has lost value and been
IJ
damaged as a result of the self-dealing." Insuring Clause (B) obligates the insurer to pay Loss.
Loss is defined to include Defense Costs. Hoffrnan and DHR have incurred Loss as a result of
allegedly Wrongful Acts, thereby triggering Federal's duty to defend under the D & O coverage.
4'1.
Exclusion A. (5) does not apply because of exception (a) thereto set forth above,
which states that the exclusion does not apply to a Security Derivative Action. Security
Derivative Action is defined in (S) above as any claim brought on behalfofor in the name or the
right of an insured organization by one or more security holders of the insured organization in
if
such claim
see, e.g.,
Exhibit B,
fl
of DHR have been misappropriated and wasted at the expense of Reilly whose ownership
tf 69.
the t)?e of allegation which only a corporation can assert against Hoffman as
it
was the
corporation to which Hoffman owed duties and which allegedly incurred damages directly, while
Reilly allegedly incurred damages indirectly via an alleged reduction in the value of his
shares
by the alleged damage to the corporation. Reilly therefore brought the Complaint against the
corporation DHR in his capacity as a shareholder, and at a time when he was no longer an
Executive, which places the claim within D & O coverage and not subject to exclusion.
t4
COUNT
VII-VIOLATION
48.
49.
counsel under the doctrine set forth by the Illinois Supreme Court in Maryland Cas. Co.
Peppers, 64 Ill.
v.
the Complaint henceforth, damages for any and all harm to Plaintiffs caused by the improper
representation, and bars Federal from denying or limiting defense or indemnity coverage for the
COUNT
VIII-VIOLATION
50.
51
DHR assets and in connection with corporate activity and personally enriched himself "at the
expenses
(See, Exhibit
also alleges that David H. Hoffman, personally, acted in an "illegal, fraudulent and oppressive
manner toward Reilly." (1d., fl40). Therefore, the allegations in the Complaint potenlially create a
52.
Federal violated and continues to violate the rights of both DHR and Hoffman,
personally, to counsel separate and independent from counsel for DHR. The allegations in the
Complaint combined with Federal's conduct in the defense of the Complaint have created
conllict in the representation of its insureds. At a minimum, Federal was required to inform
DHR and Hoffman of the potential conflicts and allow and informed right to waive any such
conflicts. Federal did not protect the rights of its insureds to counsel in violation of Illinois law.
l)
WHEREFORE, DHR International, Inc., and David H. Hoffman, request that this Court
enter judgment in their favor and against Federal Insurance Company, and that the Court further
issue an order as follows, alternatively or in combination:
(a)
declaring that Federal has a duty to defend and a duty to indemnify DHR and
Hoffman for and against all of the allegations in the Complaint in the
underlying lawsuit;
(b)
declaring that Federal has waived any policy limits relating to or limiting the
duty to defend and to pay the attomeys' fees, costs and expenses incuned in
the defense of the allegations in the Complaint in the underlying lawsuit;
(c)
declaring that Federal's obligation to pay the attomeys' fees, costs and
expenses incuned in the defense of the DHR and Hoffman in the underlying
lawsuit are in addition to the limit of liability or insurance of the Federal
policY;
Dated
(d)
declaring that Federal is estopped from denying the obligation to defend and
indemni$ DHR and Hoffman from and against all of the allegations in the
Complaint in the underlying lawsuit;
(e)
awarding DHR and Hoffman's attorneys' fees, costs and expenses in bringing
this lawsuit under Illinois law;
(0
for any such other reliefas this Court deems appropriate under Illinois law'
thisJulv
LG,zotz
---T_---
Edward F. Rubeny
Attorney for Plaintiff
RUBERRY, STALMACK & GARVEY, LLC
500 West Madison Strect, Suite 2300
Chicago, IL 60661
Tel. 3121466-8050
Attomey I.D. No. 48602
lo