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Yeransian v. Marine Corp.

United States District Court, D. Delaware

July 31, 2017

THOMAS YERANSIAN, in Ms capacity as the representative of holders of certain Contingent Value rights under the Contingent Values Rights Agreement dated October 15, 2010, Plaintiff,
v.
MARINE CORPORATION, a Virginia Corporation, Defendant.

          MEMORANDUM

         I. INTRODUCTION

         Plaintiff Yeransian, in his capacity as the representative of holders of certain contingent value rights under the Contingent Value Rights Agreement, brought this suit against Markel Corporation ("Markel") on September 15, 2016. (D.I. 1). Yeransian alleges that Markel breached the Contingent Value Rights Agreement ("the CVR Agreement") by failing to follow generally accepted accounting principles ("GAAP") and actuarial standard of practice ("ASOP") in its calculations of the Adjusted Principal Amount. Id. The Complaint's eight causes of action essentially arise out of Marke's alleged failure to properly calculate the loss and expense reserves, Markel's alleged misrepresentations or misstatements with regard to calculation of those reserves, and Markel's failure to provide the correct documentation for its calculations. Id.

         Currently before the court is Markel's Motion to Stay Litigation and Compel Arbitration. (D.I. 35). Markel moves the court to stay the litigation, pending completion of the dispute resolution procedures outline in Section 3.2(d) of the CVR. (D.I. 36). For the reasons that follow, the court grants Markel's motion.

         II. BACKGROUND

         The current action arises out of Marke's 2009 acquisition of Aspen Holdings, Inc., a workers' compensation insurance underwriter. (D.I. l'¶5). In 2009, Aspen reported $81.7 million in shareholder equity (book value). Id. ¶ 6. Based on that book value, Markel offered to buy Aspen for $183 million subject to due diligence. Id. ¶ 7. After due diligence, Vice Chairman of Markel's Board of Directors informed the CEO of Aspen, Luke Yeransian, that Markel found Aspen's book value to be overstated by $47.3 million as of December 31, 2009. Id. ¶ 8. Markel agreed to purchase Aspen but, in order to account for the possibly overstated book value, Markel would pay $135.7 million in cash at closing and create a Contingent Value Rights Agreement. Id. The CVR Agreement would pay $47.3 million in additional consideration to Aspen's shareholders in eight years (with a pre-payment option at year five) if Aspen's book value as of December 31, 2009 turned out to be correct. Id.

         As part of its regular business practice, and important to the company's book value, Aspen "established loss and expense reserves to pay for claims arising from workers' compensation policies." Id. ¶ 5. Accordingly, the CVR Agreement was intended to capture changes in Markel's book value-due in part to the reserves-as it affected the compensation ultimately paid to Aspen's shareholders.

The CVR would be adjusted upward or downward dollar for dollar following the acquisition based on future changes to: (a) Aspen's outstanding loss and expense reserves ("Reserve Adjustment"), (b) the value of Aspen's commission receivable ("Receivable Adjustment") related to its Managing General Agency Contracts, and (C) other Offsets, including premium audit and any adjustments and/or extraordinary settlements of amounts due to counter parties (reinsurance companies) that would impact book value as stated on December 31, 2009.

Id. ¶ 9. If it turned out that Aspen's book value was higher than the stated value of $81.7 at December 31, 2009, then Markel would pay the CVR Holders "the corresponding amount dollar for dollar over the $47.3 million initial CVR value." Id. ¶ 11.

         To calculate the value of the CVR, and, accordingly, the final payment amount, Markel was to follow the procedures outlined in Section 3.1 of the Agreement. Section 3.1 of the CVR Agreement explains that any prepayment, under Section 3.5(a) or Section 3.5(b), or set-off amounts, under Section 3.4, will be deducted from the Initial Principal Amount. (D.I. 36-2 Section 3.1(a)). Further, the Reserve Adjustment is added to the Receivable Adjustment to determine the Principal Adjustment. Id. The Initial Principal Amount adjusted by the Principal Amount then yields the value of the Adjusted Principal Amount. Id. The Adjusted Principal Amount, "together with interest accrued thereon at the Interest Rate from the Closing Date to the Payment Date, constitutes the Final Amount. Id. § 3.1(b).

         Markel was also required to abide by certain obligations under the CVR Agreement: (1) "The amounts used to calculate the 'Adjusted Principal Amount' from December 31, 2014 through December 31, 2017 [had to] be adjusted . .: consistent with Actuarial Principles, (D.I. .36-2 Section 3.1(c)); (2) The Holders had to receive annual accountings, and supporting documentation, demonstrating in reasonable detail how such amounts were determined, id. Section 3.2(a); and (3) the actuarial assumptions had to incorporate a 50% confidence interval, and the reserves had to be calculated in accordance with "commonly accepted actuarial standards." Id. at Annex A.

         The CVR Agreement predicted possible disagreements over calculation and valuation of the CVR. In order to resolve such disagreements, the CVR Agreement lays out a detailed process in Section 3.2. According to Section 3.2(d), "[u]pon delivery of a Disagreement Notice, the Holder Representative and Parent [would] attempt in good faith to reach agreement" over the calculation of the Adjusted Principal Amount. In the event that they could not reach agreement within fifteen days of service of the Disagreement Notice, the Holder Representative could request that the calculation of the Adjusted Principal Amount be referred to an "Independent Actuary" and an "Independent Claims Expert."

The Independent Claims Expert will independently review and evaluate the Net Loss and Expense Reserves with respect to the claims reported as of the Calculations Date on a case-by-case basis and provide the results of his evaluation to the Independent Actuary. The Independent Actuary will then determine the Adjusted Principal Amount based, in the case of Net Loss and Expense Reserves with respect to claims reported as of the Calculation Date, solely on the results of the Independent Claims Expert's review, and otherwise in accordance with GAAP (in the case of the Receivable Adjustment) or SAP (in the case of the Reserve Adjustment) and the Actuarial Principles. The scope of the Independent Actuary's and the Independent Claims Expert's review will be limited to those matters over which there is disagreement between the parties as reflected in the Disagreement Notice. With respect to the review and evaluation of any Adjustment Statement, the Independent Actuary's determination of the Adjusted Principal Amount set forth therein will be final and binding on the parties.

Id. Section (d).

         The current litigation is not the first time suit has been filed over the CVR Agreement. In 2015, the CVR Holders questioned the validity of the information in Markel's annual Adjustment Statement dated December 31, 2014. (D.I. 1 ¶ 21). The Holders engaged Huggins Actuarial Services, Inc. to calculate any necessary adjustments and the value of the CVRs. Id. ¶ 22. Markel, believing that the Holders planned to request an independent valuation, filed suit against the previous CVR Holder Representative. Id. ¶ 24. Markel sought declaratory judgment that the previous CVR Holder Representative "had made no prepayment election and was therefore mot entitled to an independent audit and a prepayment of the CVR value at year five." Id. That prior suit ended in settlement between the parties. The parties executed the 2015 Settlement Agreement, which limited the prepayment rights of the CVR Holders with regard to the Five-Year Adjustment Statement. Id. ¶ 25. Inapplicable to the current motion pending before the court, the CVR Holders contest the validity and enforceability of that settlement agreement. Id. ¶27.

         Markel also filed suit in this court alleging that Yeransian breached the 2015 Settlement Agreement, and requesting specific performance of that agreement. Markel also seeks a declaratory judgment that the Settlement Agreement is valid and enforceable. On February 21, 2017, the court issued an oral order consolidating that case with Yeransian's case.

         III. ...


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