Reinhardt v. Gulf Insurance

489 F.3d 405
CourtCourt of Appeals for the First Circuit
DecidedJune 11, 2007
DocketNos. 06-1932, 06-1933, 06-1934, 06-1935
StatusPublished
Cited by1 cases

This text of 489 F.3d 405 (Reinhardt v. Gulf Insurance) is published on Counsel Stack Legal Research, covering Court of Appeals for the First Circuit primary law. Counsel Stack provides free access to over 12 million legal documents including statutes, case law, regulations, and constitutions.

Bluebook
Reinhardt v. Gulf Insurance, 489 F.3d 405 (1st Cir. 2007).

Opinion

TORRUELLA, Circuit Judge.

EIU Group, Inc. (“EIUG”) filed this lawsuit against Gulf Insurance Company (“Gulf’), Citibank Delaware, Inc. (“Citibank”), and Kent Ziegler (collectively, “Appellants”) alleging that Ziegler breached his fiduciary duties to EIUG, thereby causing the company financial detriment. Gulf filed a counterclaim alleging breach of a $1.5 million promissory note. The case went to trial and the jury found that Ziegler had breached his fiduciary duty to EIUG, that Citibank was vicariously liable for Ziegler’s conduct, and that Gulf was not entitled to recover on its counterclaim. The jury awarded damages to EIUG and noted on the verdict slip that Ziegler and Citibank were to pay 100% of EIUG’s legal fees. Judgment was entered against Ziegler and Citibank for the damages awarded by the jury, but not for any amount of attorney’s fees.

All parties filed timely post-trial motions: EIUG to alter or amend the judgment by adding attorney’s fees and to vacate the previous dismissal of EIUG’s claim under Mass. Gen. Laws ch. 93A; Ziegler, Citibank, and Gulf for judgment as a matter of law and for a new trial. The district court denied all motions and Appellants and EIUG now appeal. In addition, Joseph Reinhardt, the attorney rep[409]*409resenting EIUG at trial, appeals from the district court’s imposition of a Rule 11 sanction. After careful consideration, we affirm the district court’s Rule 11 sanction and its denial of EIUG’s motions to alter or amend the judgment and to vacate. We reverse the court’s denial of Appellants’ motions for judgment as a matter of law and remand for further proceedings consistent with this opinion.

I. Facts

On June 3, 1999, James Broderick and John Stamatov entered into an agreement with Gulf to develop, underwrite, and sell environmental insurance policies issued by Gulf. This agreement, as embodied in a Plan of Organization (the “Plan”), provided for the formation of EIUG as a holding company with two subsidiaries, Environmental Capital Insurance Brokerage, Inc. (“ECIB”) and Environmental Insurance Underwriters Agency, Inc. (“EIUA”). ECIB was a company Broderick and Sta-matov. formed in 1997 to broker environmental insurance policies. Under the Plan, ECIB was to continue its role as a broker, selling environmental insurance issued by a number of companies, including Gulf. The Plan provided for the organization of EIUA as a program manager for Gulf. In this role, EIUA was to develop, sell, and underwrite Gulf environmental insurance products. Gulf and EIUA entered into a Program Manager’s Agreement (the “PMA”) under which the parties agreed that Gulf was responsible for obtaining reinsurance for the insurance products EIUA developed. The PMA also provided that Gulf had to approve any materials before they could be used to advertise Gulf insurance products.

As start-up capital for EIUG, Broderick and Stamatov contributed all of their interest in ECIB stock. Citibank, a Gulf affiliate, contributed $500,000. Thus, Broder-ick and Stamatov together owned 68.75% of the EIUG stock and Citibank owned 31.25%. Broderick, Stamatov, and Citibank entered 'into .a Stockholders Agreement (the “Agreement”) allowing each of the three shareholders to nominate a director who had to be elected unanimously. Bro-derick and Stamatov nominated themselves for the director positions, and Citibank nominated Kent Ziegler, the Chief Financial Officer and an executive vice president at Gulf. The Agreement also provided that, most major corporate decisions — declaring dividends, borrowing money, employing officers, etc. — had to be unanimous.

The first product Broderick and Stama-tov developed was called Terraguard, an environmental insurance policy designed for owners of low-risk properties. Gulf retained James Cincotta, a reinsurance specialist, to obtain reinsurance for this policy. By the spring of 1999, a reinsurance treaty was in place, and EIUA began selling Terraguard policies.

Terraguard did not sell well. Each month the company suffered losses until, in December 1999, EIUG became insolvent. By the beginning of 2000, Broderick viewed Terraguard as essentially unsalable.

Given these financial problems, EIUG approached Gulf for a loan in January 2000. Initially, Gulf made an interim loan of $25,000. On January 21, 2000, Gulf loaned EIUG $1.5 million. Under the promissory note for the $1.5 million loan (the “Promissory Note”), EIUG agreed to a repayment plan under which interest payments were due on January 21 and July 21 of each year, and the entire principal balance was due on January 21, 2005. In addition, the Promissory Note specified that EIUG would be considered in default if it became insolvent. In the event of a default, the Promissory Note provided that [410]*410Gulf could, by written notice, declare the principal and accrued interest immediately due and payable. The Promissory Note also provided that EIUG would be responsible for attorney’s fees and costs incurred in attempting to seek repayment.

Using the loaned money, Broderick and Stamatov developed a new product line called Millenious, consisting of three new policies. The first was a property owner’s policy on low-risk properties that was very similar to Terraguard. The second was a pollution legal liability policy for high-risk properties. The third was a secured creditors policy, which insured lenders against the risk that property held as collateral would become polluted while the borrowers were in default. At the outset, only the property owner’s policy had reinsurance because it was reinsured under the Terraguard reinsurance treaty.

Gulf again retained James Cincotta to obtain the needed reinsurance for the other Millenious policies. This time, the potential reinsurers raised questions about the insurance products. In particular, the reinsurers raised underwriting concerns about the risk and profitability of the policies given their monetary limits and anticipated terms. Broderick felt that the secured creditors policy would not be profitable unless it could be issued for up to $10 million and for a period of up to twenty years, but the reinsurers were hesitant to reinsure a policy for more than $4.5 million or for longer than fifteen years. Negotiations between Broderick and the reinsurers lasted until mid-June 2000. The reinsurance was in place by July 1, 2000. During this process, Ziegler did not try to do anything that could expedite the reinsurance process.

Thereafter, Broderick and Stamatov began trying to sell the policies. In late July 2000, Gulf acquired the renewal rights to United Capitol’s casualty and environmental insurance policies, which were arguably in direct competition with EIUG’s business. As CFO of Gulf, Ziegler was involved in this transaction, but he did not tell Broderick or Stamatov about it, nor did he do anything to prevent it from taking place.

Broderick testified that soon after this acquisition, Gulf withheld approval of Bro-derick and Stamatov’s advertising campaign for the Millenious products. Ziegler did not intervene on EIUG’s behalf to try to get advertising approval from Gulf.

Ultimately, Millenious was no more successful than Terraguard. On December 18, 2000, Broderick, Stamatov, EIUG, and EIUA filed a complaint against Gulf, Citibank, and Kent Ziegler. On April 11, 2001, the plaintiffs moved to amend the Complaint by adding ECIB as a plaintiff.

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Related

Reinhardt v. Gulf Insurance Company
489 F.3d 405 (First Circuit, 2007)

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