The United States District Court for the District of Rhode Island has concluded that a stockholder demand letter for legal expenses in connection with a dispute regarding the rights of different classes of stockholders constitutes a covered claim for a wrongful act.  Twin River Worldwide Holdings, Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, PA, 2018 WL 3640995 (D.R.I. Aug. 1, 2018).

Following bankruptcy reorganization, the insured casino had two classes of stockholders:  common stock owners (the “Stockholders”) and a class receiving contingent value rights (the “CVRs”).  Under the reorganization plan, the CVRs would receive consideration if the casino engaged in a fundamental transaction by a certain date.  In June 2014, the casino announced a potential buy-back of the CVRs.  In response, certain Stockholders sent a letter threatening legal action and asserting that the casino had a duty to them to delay undertaking such a fundamental transaction until after the expiration of the CVRs’ rights to payment.  The casino notified its professional liability insurer of the Stockholders’ letter, and the insurer accepted the letter as a notice of circumstance.

The casino subsequently filed a declaratory judgment action against the Stockholders, confirmed its obligations to the CVRs, and commenced the tender offer.  The Stockholders appealed and filed a separate derivative action against the casino’s board of directors.  The Stockholders also sent a demand letter to the casino alleging that the casino breached its fiduciary duties, demanding reimbursement of the Stockholders’ legal fees, and demanding a limit to the CVR share tender price.  The parties settled for payment of the Stockholders’ legal fees incurred during the dispute in exchange for releases for the appeal, the derivative action, and any direct claims.  The casino’s insurer denied coverage for the settlement payment, arguing that there was no claim for a wrongful act because the payment to the Stockholders was not made to settle a dispute between the casino and the Stockholders, but to settle a dispute between the Stockholders and the CVRs.

The court disagreed, finding that the demand letter “is the final iteration of the claim that [the casino] flagged in the notice of circumstance; i.e., the Stockholders demanded reimbursement of expenses paid fighting [the casino’s] support for and interest in paying the CVRs, which the Stockholders deemed to be a breach of [the casino’s] fiduciary duty to them and demanded that [the casino] limit its valuation of the CVRs.”  Through the demand letter, “Stockholders did not abandon their position that [the casino] should not be using company monies to pay CVRs . . . but made a demand for monetary relief to settle the CVR issue.”  Therefore, the demand letter was a claim for a related wrongful act to the breach of fiduciary duty alleged in the notice of circumstance.