Canadian Underwriter
News

Supreme Court of Canada rejects appeal leave application over disputed D&O liability claim


October 3, 2013   by Greg Meckbach, Associate Editor


Print this page Share

The Supreme Court of Canada announced Thursday it has denied an application by Onex Corp. of Toronto for leave to appeal an Ontario Court of Appeal decision on a disputed directors’ and officers’ liability claim with American Home Assurance Company.

Court records indicate the ongoing dispute will now be dealt with by the Ontario Superior Court of Justice. It is now up to Onex and American Home — later renamed Chartis Insurance Company of Canada and now known as AIG Canada — to decide whether to renew motions for summary judgement or to proceed by way of trial.

American Home had written liability policies covering directors and officers of Onex, including Gerry Schwartz, who founded the private equity firm in 1983 and is now its chairman, president and chief executive officer.

Onex’s holdings include stakes in the Tropicana hotel in Las Vegas and Toronto-based electronics manufacturer Celestica Inc.

Read more: Canadian Underwriter September Issue – Policy Interpretation

One of Onex’s former subsidiaries is metal buildings maker Magnatrax Corp., which went through bankruptcy proceedings in the United States between May 2003 and January 2004. A trustee representing unsecured creditors of Magnatrax — Richard Kipperman — filed a US$600-million lawsuit in 2005 in Georgia against several parties. One was Schwartz and three were managing directors of Onex at the time. That lawsuit gave rise to Onex’s D&O liability claim with American Home.

Kipperman alleged that “Onex and the personal defendants used their control of Magnatrax to enrich themselves at the expense of Magnatrax and ultimately caused Magnatrax and its subsidiaries to become insolvent,” according to court records. The lawsuit was settled for US$9.25 million and it cost US$35 million to defend, but Onex only got US$13.88 million on its liability insurance claim.

In essence, American Home had argued that the Magnatrax trustee’s lawsuit was excluded from one of its policies, due to “Endorsement 14,” which excludes losses “alleging, arising out of, based upon or attributable to or in connection with any Claim brought by or made against … Magnatrax.”

On Feb. 25, 2013, the Ontario Court of Appeal ruled that a lower court must take into account the “reasonable expectations of both parties,” or their intentions in adopting Endorsement 14. That decision set aside a 2011 ruling by a lower court, which ruled at the time that Onex’s claim was not excluded by Endorsement 14 and that Endorsement 14 was unambiguous.

On April 26, Onex applied for leave to appeal the Ontario Court of Appeal decision with the Supreme Court of Canada. On Oct. 3 the Supreme Court of Canada said it dismissed Onex’s application for leave to appeal, awarding costs to American Home and three excess carriers: Brit Syndicates Ltd. (Lloyd’s Syndicate 2987), Heritage Managing Agency Ltd. (Lloyd’s Syndicate 3245) and XL Insurance Company Ltd. Onex’s primary D&O liability policies with American Home had US$15-million limits. A primary policy, effective in 2004-05, had associated excess policies, written by Brit Syndicates, Heritage Managing Agency, XL Company Ltd., Liberty Mutual Insurance Company and Houston Casualty Company.

American Home had reimbursed Onex for its legal costs, by about US$13.88 million, under its “Magnatrax run-off policy,” which had a US$15-million limit. American Home paid out on the limit, to a total of six individuals. Two defendants who were not Onex corporate officers were reimbursed a total of US$1.22 million.

Schwartz’s three co-defendants in the Magnatrax lawsuit were: Onex managing director Chris Govan; former Onex managing director Mark Hilson, who is now managing general partner of Romspen Investment Corp.; and former Onex managing director Nigel Wright, who until last May was Prime Minister Stephen Harper’s chief of staff. Wright and Govan were on Magnatrax’s board of directors at one time. Hilson and Schwartz were not Magnatrax directors but Kipperman had alleged Hilson and Schwartz had been “de facto” directors of Magnatrax when it was an Onex subsidiary.

Those four Onex executives — along with Onex as a corporation — went to court in Ontario in 2008 asking for coverage under Onex’s primary D&O policy with American Home in effect from 2004 to 2005, as well from the excess policies associated with it. In the alternate, they asked for coverage under a 2002-03 policy written by American Home. For its part, American Home had argued that neither its 2002-03 policy nor its 2004-05 policy applied.

In a decision released June 30, 2011, Mr. Justice Laurence Patillo of the Ontario Superior Court of Justice ruled partly in favour of Onex. He declared that American Home must pay $15 million under the 2002-03 policy, meaning that Onex would get $15 million from American Home on top of the $13.88 million it already got under the Magnatrax run-off policy.

But Judge Patillo rejected Onex’s argument that American Home should pay under its 2004-05 policy, which excludes claims made under prior policies. Onex had argued the Magnatrax lawsuit was a claim made and reported during the period of the 2004-2005 policy.

However, in November 2003, Onex’s broker had faxed, to American Home, an August, 2003 letter from lawyers representing the unsecured creditors of Magnatrax. That letter was addressed to Magnatrax lawyers, alleged that Magnatrax had claims against Onex and its directors and officers and requested confirmation that Magnatrax would pursue those claims. In essence, Judge Patillo agreed with American Home’s contention that its receipt of the lawyer’s letter  before the 2002-03 policy expired “constitutes sufficient notice of circumstances within the period of the 2002-2003 D&O Policy.”

Judge Patillo also dismissed American Home’s motion asking that the $15 million owed by American Home under its 2002-03 D&O policy be set-off against the $13.88 million already paid under the Magnatrax run-off policy.

So American Home appealed Judge Patillo’s ruling and Onex cross-appealed, because Onex wanted $15 million under the 2004-05 policy (rather than the 2002-03 policy) and excess coverage associated with the 2004-05 policy.

On Feb. 25, 2013, the Ontario Court of Appeal upheld some of Judge Patillo’s findings but disagreed with Judge Patillo’s finding that Endorsement 14 in the 2002-03 D&O policy with American Home was unambiguous. Endorsement 14 stipulated that American Home “shall not be liable for any Loss alleging, arising out of, based upon or attributable to or in connection with any Claim brought by or made against … Magnatrax Corp.”

Judge Patillo had ruled that Endorsement 14 did not exclude Onex’s liability insurance claim because the allegations made in the Magnatrax lawsuit against the four Onex executives were “asserted against them in their capacity both as directors and officers of Onex and as directors (or de facto directors in the case of Schwartz and Govan) and officers of Magnatrax.”

In setting aside Judge Patillo’s
decision the Ontario Court of Appeal ruled in March, 2013 that Judge Patillo’s interpretation of Endorsement 14 was “reasonable.” But the appeal court found there are other reasonable interpretations as well.

For example, the exclusion in Endorsement 14 “could reasonably be interpreted as not excluding all of the defence costs of the (Magnatrax trustee’s lawsuit) from coverage,” the Ontario Court of Appeal noted, so if an Onex director or officer were sued while acting in more than one capacity, “it would be necessary to separate the claims based upon the capacities in which the Insured is being sued and to then determine whether or not the Insured is covered or excluded under the provisions of the policy.”

So the Court of Appeal found that both Onex and American Home “advanced an interpretation of Endorsement #14 reflecting their reasonable expectation of coverage,” and that either interpretation “would produce a commercially sensible result.”

So the appeal court ordered the matter returned to the Ontario Superior Court of Justice.

“We leave it open to the parties to decide whether to renew motions for summary judgment or to proceed by way of a trial of the issues that we have identified,” the Ontario Court of Appeal wrote.


Print this page Share

Have your say:

Your email address will not be published. Required fields are marked *

*