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AIU Insurance Co. v. Philips Electronics North America Corp.

Court of Chancery of Delaware

January 11, 2018


          Date Submitted: October 2, 2017

          Marc S. Casarino, Esquire of White and Williams LLP, Wilmington, Delaware and John S. Favate, Esquire of Hardin Kundla McKeon & Poletto, P.A., Springfield, New Jersey, Attorneys for Plaintiffs.

          David J. Baldwin, Esquire, Jennifer C. Wasson, Esquire and Andrew H. Sauder, Esquire of Potter Anderson & Corroon LLP, Wilmington, Delaware and Kenneth H. Frenchman, Esquire of McKool Smith, P.C., New York, New York, Attorneys for Defendants Philips Electronics North America Corporation and T H Agriculture & Nutrition L.L.C.

          Daniel K. Hogan, Esquire and Garvan F. McDaniel, Esquire of Hogan♦McDaniel, Wilmington, Delaware and Sander L. Esserman, Esquire, Steven A. Felsenthal, Esquire and David A. Klinger, Esquire of Stutzman, Bromberg, Esserman & Plifka, Dallas, Texas, Attorneys for Defendant T H Agriculture & Nutrition, L.L.C. Asbestos Personal Injury Trust.


          SLIGHTS, Vice Chancellor

         The parties in this case are bound together in a contractual relationship that involves the administration of an asbestos trust, The T H Agriculture & Nutrition, L.L.C. Asbestos Personal Injury Trust (the "Trust"), created to fund settlement payments to victims of asbestos exposure. The Trust was initially funded by Defendants, Philips Electronics North America Corporation ("PENAC") and T H Agriculture & Nutrition, L.L.C. ("THAN"), pursuant to THAN's plan of reorganization under Chapter 11 of the Bankruptcy Code.[1]

         As of THAN's Chapter 11 filing, THAN and its then-parent, PENAC, faced significant asbestos-related liability and were engaged in insurance coverage litigation with several of their insurers (Plaintiffs in this action).[2] While THAN's Chapter 11 case was pending, the AIG Insurers, PENAC and THAN entered into a settlement agreement to resolve the coverage litigation (the "Settlement Agreement").[3] The Bankruptcy Court approved the Settlement Agreement on May 6, 2009, and confirmed THAN's "First Amended Prepackaged Plan of Reorganization" (the "Plan") soon thereafter.[4]

         The Plan provides for the Trust's assumption of THAN'S pre-petition asbestos-related liabilities, and directs to the Trust (via injunction) all asbestos-related personal injury claims on which THAN might otherwise be liable.[5] To recover on an injury claim, the claimant (or his/her representative) must submit the claim to the Trust, which then determines the amount, if any, the claimant is entitled to receive. The AIG Insurers are required (per the Settlement Agreement) to make incremental reimbursement payments to PENAC based on the total amount paid by the Trust on asbestos-related cancer claims.[6]

         The parties' current dispute centers on the scope of the AIG Insurers' right under the Settlement Agreement to conduct a yearly "audit [of] payments and distributions made by the Trust."[7] Specifically, the parties dispute "what an audit must include to satisfy [Plaintiffs' audit] right."[8] In an earlier decision, the Court determined that the Settlement Agreement "provides [Plaintiffs] with a broad audit right, " but expressly refrained from declaring the precise scope of that right.[9]Following that decision, the parties made some progress toward the completion of an audit as contemplated by the Settlement Agreement, and an initial audit (of sorts) occurred on June 21-24 and July 25, 2016. Plaintiffs contend that the audit was "incomplete" and, thus, did not satisfy their audit right under the Settlement Agreement.

         Plaintiffs have filed a six-count Amended Complaint in which they assert several claims arising out of the Settlement Agreement and the Plan. Counts I-V of the Amended Complaint relate to Plaintiffs' audit right and Count VI relates to Plaintiffs' offset-related rights.[10] PENAC, THAN and the Trust have variously moved to dismiss each count of the Amended Complaint. Plaintiffs have cross-moved for summary judgment on Counts V and VI.

         As explained below, with respect to Counts I-V, the dispositive issues raised by the parties' motions turns on the proper construction of the following clause in Section 2.3 of the Settlement Agreement: "[Plaintiffs] shall have the right to audit payments and distributions made by the Trust." [11] The parties have offered competing reasonable constructions of that language, and the present procedural posture does not allow the Court to choose between those constructions. Because the clause is ambiguous, the Court will receive extrinsic evidence regarding the intended meaning of the term "audit" in Section 2.3 to aid in its construction of that provision. While the parties have attempted to address the scope of the audit through the negotiation of an audit protocol, that process, as evidenced by this litigation, has failed. A definitive construction of the Settlement Agreement as relates to audit rights is necessary to guide the parties as they continue to work through the processing of asbestos claims in the years to come.

         Count VI, relating to a purported right to offset for miscalculated payments made by the Trust, must be dismissed because it fails to state a claim upon which relief can be granted. The Trust is not a party to the Settlement Agreement, and Plaintiffs have failed to identify any basis other than the Settlement Agreement upon which Plaintiffs may be entitled to offset their payment obligations to PENAC under that agreement. Moreover, Plaintiffs have failed to plead the existence of conditions precedent to any set-off right they may have.


         The facts are drawn from the allegations in the Amended Complaint, documents integral to the Amended Complaint and those matters of which the Court may take judicial notice, including the admissions of the parties.[12] The Court's June 4, 2015, decision in this matter provides a detailed discussion of the parties and their relationships.[13] I will not repeat that detail here. Instead, I will focus on the facts relevant to the parties' current dispute.

         A. The Trust's Distribution Procedures

         The process by which the Trust reviews and liquidates asbestos-related personal injury claims ("Asbestos PI Claims") is governed by the "Trust Distribution Procedures" (the "TDP").[14] The TDP "establish a schedule of eight asbestos-related diseases ('Disease Levels'), seven of which have presumptive medical and exposure requirements . . . and specific liquidated values ('Scheduled Values') . . . ."[15]

         Under the TDP, Asbestos PI Claims are processed via "Expedited Review" or "Individual Review." "[C]laims that undergo Expedited Review and meet the presumptive [medical and exposure criteria] for the relevant Disease Level" are paid the Scheduled Value indicated for that Disease Level.[16] By contrast, for claims processed via Individual Review, the Trust calculates claim value "based on the historic liquidated values of other similarly-situated claims in the tort system for the same Disease Level." [17] In making these calculations, the Trust "takes into consideration all of the factors that affect the severity of damages and values within the tort system." [18] Generally, the liquidated value of a claim processed via Individual Review may not exceed the "Maximum Value" indicated for the relevant Disease Level-although it may exceed the Scheduled Value for that Disease Level.[19]

         B. Relevant Contractual Provisions

         The Amended Complaint principally implicates Sections 2.3 and 2.4 of the Settlement Agreement.[20] Section 2.3 provides, in full:

[Plaintiffs] shall have the right to audit payments and distributions made by the Trust at their own expense, no more than once per year. Before conducting any audit, AIG shall agree to keep all information confidential and shall further agree not to utilize any information for anything other than to assess whether the Trust in fact made payments to the claimants as set forth in the quarterly reports.[21]

         Section 2.4 of the Settlement Agreement provides that Plaintiffs may not dispute the Trust's payments and distributions to claimants, or dispute or offset their payment obligations under the Settlement Agreement on account of the Trust's allegedly improper calculation or payment of claims, with two exceptions:

(a) If Plaintiffs "determine based on their review and/or audit" that one or more of the Trust's payments to cancer claimants "were miscalculated due to an accounting error, " Plaintiffs may notify the trustees of the accounting error and request that they review the matter. "If the [trustees] agree that there has been an accounting error, Plaintiffs will be credited the amount of any overpayment by [Plaintiffs] resulting from the accounting error . . . ."[22]
(b) If Plaintiffs "have reason to believe" that the Trust has paid one or more fraudulent cancer claims, "such that the Trust . . . has a right to recover back payments made" on those claims, Plaintiffs may bring evidence of such fraud to the trustees' attention and request that they review the evidence. If the trustees "agree that the evidence supports" Plaintiffs' fraud claim or otherwise "warrants further investigation" and the Trust "ultimately recovers back all or some of" the amounts paid toward fraudulent cancer claims, "PENAC will credit [Plaintiffs] with the applicable percentage . . . of the recovered amount . . . ."[23]

Sections 2.4(a) and (b) also provide that "PENAC agrees to cooperate with [Plaintiffs] in obtaining any pertinent information."[24]

         C. The Parties' Interactions Following the AIU I Decision

         In AIU I, the Court held, inter alia, that Section 2.3 of the Settlement Agreement "provides [Plaintiffs] with a broad audit right that is not limited to only verifying that the Trust's stated payments and distributions were actually made."[25]The Court cautioned, however, that its decision "should [not] be construed as directing what an audit must include to satisfy [Plaintiffs' audit] right."[26]

         Following AIU I, Plaintiffs moved to compel the Trust's production of "preliminary information" to facilitate their audit of the Trust's payments and distributions.[27] On February 8, 2016, the Court ordered the Trust to produce certain "initial information for each cancer claimant whose cancer claim ha[d] been paid by the Trust" as of that date.[28] Thereafter, on March 7, 2016, the Trust "produced a spreadsheet to Plaintiffs containing [the specified] information regarding 7, 538 cancer claims paid by the [Trust] since its inception."[29] After reaching agreement with the Trust on an audit protocol (the "2016 Audit Protocol"), Plaintiffs selected 584 of those claims "to be the subject of [their] initial annual audit, " and then conducted that audit on June 21-24 and July 25, 2016.[30]

         Plaintiffs allege that "[t]he materials reviewed during the initial audit raised questions [regarding] possible payment miscalculations . . . and whether certain claims paid by the [Trust] were based on fraudulent information."[31] Plaintiffs raised these concerns with the Trust in a letter dated May 9, 2017.[32] In response, the Trust stated that Plaintiffs had not provided "evidence or a sufficient basis for further investigation." [33] Plaintiffs, in turn, advised the Trust that they "strongly disagree[d]" with the Trust's assessment; that "there is substantial evidence of payment miscalculations and/or fraud, all . . . of which is in the Trust's sole possession and control"; and that such evidence "more than justifies cooperation and further investigation by the Trust."[34] The Trust replied that if Plaintiffs were attempting to raise "concerns about the extent of the audit materials [they were] provided for review, " their concerns came too late since the 2016 Audit Protocol- to which Plaintiffs agreed and with which the Trust complied-"specified, in clear terms, the audit materials that the Trust would make available for [Plaintiffs'] review."[35]

         According to Plaintiffs, the 2016 Audit Protocol does not capture the full scope of their audit right under the Settlement Agreement, and their agreement to that protocol in no way limits their audit right. Moreover, Plaintiffs maintain that their initial audit remains incomplete "because [their] questions [as to] fraud and payment miscalculations remain unanswered."[36]

         D. Procedural History

         Plaintiffs filed their Amended Complaint on April 20, 2017. As noted, the Amended Complaint contains six counts, five of which relate to Plaintiffs' audit right under the Settlement Agreement.[37] PENAC and THAN have moved to dismiss Counts I, II, V and VI of the Amended Complaint under Chancery Rule 12(b)(1) and 12(b)(6). The Trust has moved to dismiss Counts III, IV and VI under Chancery Rule 12(b)(6) or, in the alternative, for summary judgment on those Counts, and to dismiss Count V as moot or, alternatively, under Chancery Rule 12(b)(6). Finally, Plaintiffs have cross-moved for summary judgment on Counts V and VI.

         II. ANALYSIS

         The parties' current dispute reduces to two issues:

1. What must an "audit" include to satisfy Plaintiffs' audit right under the Settlement Agreement?
2. If an audit conducted by Plaintiffs leads Plaintiffs to question whether the Trust has made payment miscalculations or paid fraudulent claims (or both), and Plaintiffs then raise such questions with the Trust's trustees, does the Settlement Agreement require the Trust to investigate and attempt to resolve those questions?

         For the reasons that follow, I have concluded that (1) the Settlement Agreement is ambiguous as to what an audit must include to satisfy Plaintiffs' audit right; and (2) the Settlement Agreement does not require the Trust to investigate or resolve Plaintiffs' questions as to possible payment miscalculations or the payment of fraudulent claims by the Trust. The decision to investigate such questions, or not, is committed to the sole discretion of the trustees.

         A. Standards Governing the Parties' Motions

         The standards governing the parties' motions are well settled. On a motion to dismiss under Chancery Rule 12(b)(1), "[t]he plaintiff bears the burden of establishing th[e] Court's [subject matter] jurisdiction" over the challenged claim(s).[38] "[I]f it appears from the record that the Court does not have subject matter jurisdiction over the claim, " the Court will dismiss the claim.[39]

         On a motion to dismiss under Chancery Rule 12(b)(6), "(i) all well-pleaded factual allegations are accepted as true; (ii) even vague allegations are 'well-pleaded' if they give the opposing party notice of the claim; (iii) the court must draw all reasonable inferences in favor of the nonmoving party; and (iv) dismissal is inappropriate unless the plaintiff would not be entitled to recover under any reasonably conceivable set of circumstances susceptible of proof."[40]

         Finally, on a motion for summary judgment, the court may grant summary judgment only if "there is no genuine issue as to any material fact and . . . the moving party is entitled to a judgment as a matter of law."[41] "When the issue before the Court involves the interpretation of a contract, summary judgment is appropriate only if the contract in question is unambiguous."[42]

         B. The Controversy Relating to the Precise Scope of Plaintiffs' Audit Right Under the Settlement Agreement Is Not Moot

         Count V of the Amended Complaint seeks a declaration as to the scope of Plaintiffs' audit right under the Settlement Agreement. Defendants contend that Count V is moot because the scope of Plaintiffs' audit right has already been determined-by AIU I and by the parties in the 2016 Audit Protocol. According to Defendants, "Plaintiffs have had their audit" in keeping with these set parameters and the matter should now be put to rest.[43] Plaintiffs disagree. According to Plaintiffs, neither the Court's AIU I decision nor the 2016 Audit Protocol definitively determined "what an audit must include to satisfy [Plaintiffs' audit] right."[44] Thus, Plaintiffs argue, there is an actual, justiciable controversy as to the precise scope of their audit right under the Settlement Agreement.

         For this court to exercise jurisdiction over a particular dispute, the legal issue(s) in dispute must be "amenable to a judicial resolution."[45] "If a grant of relief 'cannot have any practical effect on the existing controversy, ' the dispute is moot."[46]A dispute "that has become moot normally will be dismissed."[47] Of course, "if the alleged injury still exists despite the occurrence of intervening events, a justiciable controversy remains, and the mootness doctrine will not operate to deprive a court of jurisdiction to hear the case."[48]

         Notably, Section 2.3 entitles Plaintiffs to "audit payments and distributions made by the Trust" once per year.[49] Thus, absent a definitive judicial construction of Section 2.3 as to the precise scope of Plaintiffs' audit right-an issue as to which the Settlement Agreement is silent[50]-the parties' current dispute likely will recur year after year in connection with future audits.[51] The Court's AIU I decision did not specifically identify "what an audit must include to satisfy [Plaintiffs' audit] right."[52] Nor did Plaintiffs' agreement to the 2016 Audit Protocol "ultimately settle[] the precise breadth of [their] audit right."[53] Therefore, as discussed in more detail below, the parties' current dispute as to the precise scope of Plaintiffs' audit right under the Settlement Agreement is an actual, justiciable controversy.[54]

         C. The Settlement Agreement is Ambiguous as to the Precise Scope of Plaintiffs' Audit Right

         "In deciding a motion to dismiss [pursuant to Chancery Rule 12(b)(6)], the trial court cannot choose between two differing reasonable interpretations of ambiguous [contractual] provisions."[55] Likewise, on cross-motions for summary judgment, if the cross-movants both offer reasonable interpretations of the operative contractual language, the court "may, in its discretion, deny summary judgment [so that it may] . . . inquire into ...

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