Canadian Underwriter

Supreme Court of Canada will not hear appeal of disputed $15-million D&O liability claim from Onex

April 18, 2016   by Canadian Underwriter

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For the second time in 18 months, the Supreme Court of Canada has declined to hear an appeal of a verdict of an Ontario lawsuit arising from a disputed US$15-million directors’ and officers’ liability claim arising from an unjust enrichment lawsuit in the United States.

iStock_000004053474_MediumParties to the case include American International Group Inc.’s Canadian subsidiary, AIG Canada (then known as American Home) which wrote D&O policies for Toronto-based private equity firm Onex Corp.

The Supreme Court of Canada announced April 14 it is denying an application, from American Home, for leave to appeal an August, 2015 Court of Appeal for Ontario ruling ordering American Homes to pay Onex $15 million, on top of nearly $14 million it already paid on a D&O liability policy arising from a lawsuit against Onex directors and officers.

Onex’s investments include interests in several firms, including Toronto-based electronics equipment maker Celestica Inc., commercial brokerage USI Insurance Services LLC and plastics processing equipment vendor KraussMaffei Group GmbH, among others.

Until 2003, Onex owned custom metal building systems manufacturer Magnatrax Corp., which went through bankruptcy proceedings in the U.S.

Two Onex officials were on the Magnatrax board at the time. One – Nigel Wright – is an Onex managing director (who served as chief of staff to then-Prime Minister Stephen Harper from 2010 until 2014). The other was Mark Hilson, who at the time was an Onex managing partner and has since left Onex to become managing general partner of Toronto mortgage lender Rompsen Investment Corp.

In 2005, Onex and several other parties were sued for about $600 million in the U.S. District Court Northern District of Georgia. The plaintiff – Richard Kipperman, a trustee representing unsecured creditors of Magnatrax – alleged breach of fiduciary duty, among other things. All figures are in U.S. dollars.

Defendants in the Kipperman lawsuit included Wright and Hilson, as well as two Onex officials that were not on the Magnatrax board. One was Onex chief financial officer Chris Govan. The other was Gerry Schwartz, who founded Onex in 1983 and is currently its chairman and CEO. Schwartz also controls firms that own the majority of voting shares of Indigo Books and Music Inc., which is not owned by Onex.

“A major theme of the Kipperman complaint was that Onex caused the bankruptcy of Magnatrax,” Madam Justice Mary Sanderson of the Ontario Superior Court of Justice wrote in a decision Dec. 5, 2014. “Onex, acting through its directors, directed Magnatrax to make a number of highly leveraged acquisitions that benefited Onex and its directors at the expense of the Magnatrax creditors,” she wrote of the Kipperman’s allegation. “Those alleged wrongful acts of the Onex directors were committed in their capacity as Onex directors. They included breach of their fiduciary duty to Magnatrax, fraudulent conveyance of Magnatrax assets, and unjust enrichment.”

She added that Kipperman’s lawsuit “contained allegations that Hilson, Wright, Schwartz and Govan committed wrongful acts in relation to Magnatrax, when they were acting in different capacities, in their capacity as Onex directors and in their capacity as Magnatrax directors.”

Kipperman’s lawsuit was settled for $9.25 million. Onex spent about $35 million on legal fees. Two of the six individual defendants (Charles Blackmon and Robert Ammerman) were Magnatrax directors who were not working for Onex.

Those six individuals were paid a combined total of $15 million, the limit of an AIG D&O policy, which was a run-off policy providing a temporary and conditional binder of coverage for Magnatrax. Blackmon and Ammerman got $1.22 million of that, while the four Onex officials got the other $13.89 million.

In 2008, Onex asked the Ontario Superior Court of Justice for a summary judgement requiring AIG to pay legal costs – under a different AIG D&O policy, in effect from 2004 to 2005. Onex also asked for coverage under excess policies associated with the 2004-05 policy. Schwartz, Wright, Govan and Hilson were parties along with Onex in the Ontario court action.

In the alternate, Onex argued it should be covered under an AIG policy issued for 2002-03, covering “officers and directors of Onex and its subsidiaries in respect of liability for claims first made against them and reported during the policy period and had an aggregate limit of liability for all loss, including defence costs, of US$15 million.”

AIG has argued that only the Magnatrax policy applied to the Kipperman lawsuit and therefore AIG is not required to pay more than the $13.89 million already paid.

In 2011, Mr. Justice Laurence Patillo ruled partly in favour of Onex and the four executives, finding that AIG must pay $15 million under its 2002-03 policy. Justice Patillo ruled that AIG was not liable under the 2004-05 policy but did Onex and its officers $15 million, in addition to the $13.89 million already paid.

Both sides appealed and in 2013, the Court of Appeal for Ontario found that Endorsement 14 in the 2002-03 D&O policy – written by AIG for Onex – was ambiguous.

Endorsement 14 stipulated that AIG is “not 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,” wrote Mr. Justice Russell Juriansz, of the Court of Appeal for Ontario, in a ruling released Aug. 14, 2015. “It further provides that American Home is not liable to make payment for any ‘Loss in connection with any Claim made against an Insured alleging, arising out of, based upon or attributable to any breach of duty, act, error or omission” of Magnatrax or its executives.'”

Justice Juriansz wrote the decision the second time the case came before the Court of Appeal for Ontario.

In 2011, Justice Patillo had found that Endorsement 14 was unambiguous. In 2013, the Court of Appeal for Ontario sent the case back to the Ontario Superior Court of Justice in order to determine the “reasonable expectations of both parties” in adopting Endorsement 14.

Both parties applied, in 2013, for leave to appeal that decision with the Supreme Court of Canada. The highest court announced, in October of that year, their applications were dismissed.

In May and June of 2014, new hearings were held before Justice Sanderson. The court heard testimony from witnesses at commercial brokerage Aon and from AIG who had worked on the Onex D&O policies.

AIG and Onex “agreed that the parties intended that whatever coverage for Onex directors was provided by the Magnatrax Policy would be taken away from the Onex 2002-2003 Policy,” Justice Sanderson wrote in her decision, released Dec. 5, 2014. “However, they disagreed as to what coverage was provided to Onex directors acting in their capacity as Onex directors under the Magnatrax Policy, and what coverage was taken away from Onex directors acting in their capacity as Onex directors under the Onex Policy.”

Justice Sanderson found that AIG must pay out $15 million under its 2002-03 policy and is not allowed to offset the $13.89 million already paid out under the Magnatrax policy. She ruled that Endorsement 14 in the policy

“does not exclude coverage under that policy for wrongful acts of Onex directors acting in their capacity as Onex directors in connection with Magnatrax.”

That ruling was upheld on appeal, in the decision released Aug. 14, 2015.

Two months later, AIG applied for leave to appeal with the Supreme Court of Canada, which announced April 14, 2016 that it dismissed the leave application.