one point six million dollars in defense costs and an additional nine hundred seventy five thousand dollars in settlements which arose out of an underlying securities action that had been filed when pan pacific sought to merge with western properties the underlying securities action contained ten different causes of action and over the course of an eighteen month period of time all of the costs of action or claims had been thrown out by way of raid from their insurers they settled the underlying case and then they sued the insurers to get coverage for the security section the district court held that there was no coverage in the secure in the subsequent securit defense costs in this case two i'd like to talk about the specific claim that remained at the end of the securities case that being the breach of duty claim and white was not restitution ery and third i want to take up the well california law with respect to the application of the contracts the two insurance contract delaware law in particular bears on how the nature of the remedy is characterized with respect to the restitution claim g to make sure we're on the same page on that well the key documents here of course are going to be the two contracts that being the gulf policy in the twin city policy and there's really three provisions in the in those insurance policies there are interrelated provisions that have to do with when the insurer has an obligation to actually make a payment be it by way of defense or indemnity and those three in a related concepts are lost claim wrongful act in particular the insurer is required to make a payment for it lost as a result of a claim for iran flag that's what the insuring clause as and that's what the insured is required to show in order disagree with anyone that there was a there was a claim here i also don't think there's any disagreement that there was a wrongful act here because the policy defines a wrongful act as an actual or an alleged error or omission misstatement or breach of duty the policy having to do with the amount that in the church pays as a result of the wrong flaxen there were two payments that were made here we paid one point six million dollars actually it was in two components each of the insurance paid to approximately eight hundred thousand dollars for their attorneys to defend the underlying case and then ultimately they made a settlement payment nine hundred seventy five thousand dollars that was the last there was a defense component and there was an indemnity component policy defines lost as including and excluding different types of things and it's all subject to a big limitation and the big limitation is and the one that we're probably going to be spending most of the  today is a provision in both policies that says look we're not responsible for a loss to the extent the matter is on insurable under the law in this case california and i want to be very clear about something we are not arguing in that's brief or in this appeal that restitution is somehow insurable in california it isn't we agree the argument here quite simply is that if you take the time to work through the actual claims and defenses in this case you see that this was not arrested to shoot every remedy that was being sought for example what was it what was it a remedy for well i realize there were there were other claims but what comes down to one type of claim it's the breach of produce sherry duty of disclosure clane the alameda county superior court and dismissed all other types of claims that went into play that there were different aspects of those ultimately that was the one type of claim that was settled at the end of the case now could the district court make a judgment that the settlement amount doesn't appear to be damages for breach of duty to disclose but rather looks like more compensation you know for the acquisition or is that it or miscible well that's exactly what the district court did your honor if you look through relying on the seven circuit level three opinion and it said i have the ability to look through this claim and see that it looks restitution ery to me and we simply submit that that's an impermissible based on the record that was  conclusion that the court in fact erred and there was plenty of in disha indicate that it wasn't arrested to sion arry type of relief that was being sought at the end of the day the reasons being number one delaware law this was again recovery that could have been sought and insured in the underlying cakes but they're also refinements that the claim had gone through this had a very long history this claim it had gone through a classification process it had gone through motions for summary judgment and if you read the underlying orders from the superior court you can see one of the things that they did is they threw out for example the claim prime just enrichment which would have been discouragement and we would have agreed w restitution ery type relief that's when was gone at the time the case was settled the other thing the idea that the superior court had done is it divided the case and the claim out into its head look we're going to allow to go to trial that aspect of the claim that deals with direct damages and we're dismissing that part of the claim that has to do with derivative damages if this was truly a restitution arry type claim or what we're going to hear from the insurers in a moment what they say was a bump up claim or additional consideration paid for the for the transaction that took place that were going to go with the type of relief and that as i say was dismissed from the case the only thing left the wreck aspects inducing the shareholders to vote for the merger that the proxy statement in fact was just misleading and it didn't say things or did not say completely things in effect of disclosure at the end of the day you know here's the that i think you can do two things here not number one you can give me my defense costs because i think that's pretty clear under the policy that the the definition of lost includes it says that's involved policy includes defense cause and those are the reasonable and necessary costs in order to defend the claim those are not restitution ery those are paid to the lawyers and though the clients may say that's ill got money he the fact of the matter is it's not a return of some type  of improper benefit that's been obtained by by the by the company or by the directors and the second thing that you can do is that you can actually allow the claim to be adjudicated although in this case it's been settle k testimony from the attorneys in the case as to what was being still in controversy at the time the claim would have been postured up for trial on the record here we have that i think rather extraordinar declarations we have one declaration from mr james who actually handled the underlying case on behalf of the officers and directors and defended the case really the more extraordinary declaration and for the court's attention it's at eight thirty of the record we have the declaration of the plaintiff's attorney in this case the guy who was pressing these claims and he says look when i lost everything in the underlying case on that motion for s judgment except for the breach of fiduciary duty claim and paraphrasing but he says i knew the game was up i had lost the ability to get the type of damages that i was really after in this case that being the bump up the additional consideration the two thirty two is the beginning of the declaration and he talks about how he interpreted what the hell media superior court did to him or did to the claims and what he felt was left and why he settled the underlying case district court on that issue or is it all in the paper it's all in the papers and the two declarations mr james's that thirteen fifty five for the defense and mr autonomy thirty two were put in those were the only people who had dealt with the underlying case that was the only evidence they weren't interviewed they weren't deposed there was no evidentiary hearing and our position is that that information was on counter addicted in the record and therefore the district court was obligated to a good morning your honors david dibiase with my colleague david billings on behalf of the gulf to split fifteen minutes with mister who's here on behalf of twin city i submit to court that if the ruling of the trial court is to be undone than a natural ancillary to that is that if my client and this research was trying hard to in effect fund the additional consideration to close this merger then give us an equity interest in the surviving company insurance is not about financing mergers and i submit respectfully that the trial court did is obligated to do what level three for the seventh circuit clearly says that a court ought to do which is to look beyond the labels him to grasp the substance of what the underlying looked to the critical allegations of the underlying complaint which repeatedly stated that the shareholders of western were underpaid they received less than fair value for their shares in the merger transaction he cites just for the many examples they are that what we really have here is a case with all the multiple causes of action one way or the other six one thing and one thing only and what that one seeks is more money for the shareholders whose interests were bought out in the pants if a merger i submit that level three and bank of the west are on point that is nothing short mergers of this nature cannot be undone you can't put the genie back in the bottle so whether you phrase your complaint as a matter of direct overt under compensation to the acquired shareholders or you try to get to the same point by alleging some sort of breached would ensure you which i'd like to address as a sidebar matter the ultimate result is the same and the ultimate result manifested itself in this very case with the practical completion which is everyone got more was inadequate i can't even get insurance i'm going to go to my insurance company golf insurance company and they're going to say well what's at the heart of this thing is they claim that you stole money from a company think i don't understand how position you're taking here so confidently would allow for a legitimate defense of a legitimate director who legitimately though perhaps try to find your question or you're on the stand the difficulty of looking at partial quotes of the document you can't see what comes before comes afterwards and the reason i ask for the thing in context so i can see what the thing looks like or council anxiously is approaching four twenty four of this record and in the middle of page four twenty four four two four of this record is the definition of loss and the point i  was ineptly attempting to make your honor is that the last definition itself takes into account and incorporates quote matters uninsurable under the law pursuant to which this policy is construed so the question due to the court presented i can answer as follows and the question is what what's a poor director to do going into a complicated transactions where he may be sued for a variety of reasons and my answer is that if the claim against the director and or his corporation to me is employed with me as employed is that they paid in adequate consideration for an acquired company then it's on their dime the claim is that the directors didn't give the shareholders adequate information that they should have disclosed and the consequence of that was they the shareholders got less money did not make disclosures if the damages were of a different nature so if for example because of lack of proper disclosure a shareholder later said i have you know a heart attack or great emotional distress when i learned i've been hoodwinked you know unless there's some other reason why that's not possible under the policy in that that wouldn't come under the no restitution rule the reference but if we travel from the bank of the west decision of the california supreme court and go east and look at some delaware law about the theoretical possibility of of lack of information being a component of damage as a generic concept and there are cases that so state but what we have here is that component of a claim which has to be looked at at the end of the day and at the end of the day like at the beginning of the day in the underlying case there was only one thing involved and that is shareholders of western who claim they got shorted for the value of their stock and at the end of the day that shortfall was made good by way of the settlement and that's settlement should not as a matter of public policy be funded by the insurance industry that settlement should be paid by the into the which got the benefit of acquiring the stock for less than it's very valuable and the related burden in defending that if i can transition of the defense cost likewise likewise is on the acquiring company and when counsel for the appellant look at the last provision of course you neglected to mention that sorry serve at the insurance policy does not respond as to the unique aspects of this case the answer is yes we do not and without apology we believe that american business enterprise to the extent that they are accused of getting something for nothing paying more for something then be less for something than it was worth when they are called to account for that that is something that the business enterprise itself has to pay for not the insurance industry and i think that that is where the connection between this case public policy in general and concepts of increased merger considerations all brought into one i think very effectively by the trial court where he said i'm going are in that five minutes i'd like to do two things one i'd like to focus quickly hundred into the separate defense and then i'd like to answer some of the specific questions that were asked about this record and what the plaintiffs were seeking in this case because the factual determination was ones that were made but let me first focus on the issue of defense costs for twenty twenty city fire insurance company is the insurer of western and westerns directors and officers it is not the insurer of pan pacific that's important because western was acquired by pm pacific in the merger and pursuant to the merger agreement pan pacific agreed to indemnify western in its directors and officers as a result at the end of the day when they came to us and they said we would like you to reimburse defense costs that were paid under wreckers on behalf of the directors and officers we asked who paid guess what the answer was pay and pacific now this is a coverage case so it's important that we look at the policy and with the ensuring clauses in the policy require in order for there to be coverage and in this case for the do you know those direct defense costs to be indemnified those defense costs have to be  indemnified by western wester never indemnified their directors and officers it's very simple western has the ability to sue for coverage but they must prove that there's coverage and they cannot prove that there's coverage for the directors and officers legal expenses because at the end of the day western never indemnified the directors and officers it's very simple it for the same reasons those to western the insuring clause in order for there to be coverage i asked the question western is not obligated to pay your honor the answer is yes that is true for the purpose of it have dropped off the face of  they'd been sued could have got a dismissal say sorry i will have a liability because in any event in the way this policy works in the event that was one party i'm talking about whether it was obligated  asking you the question i asked you was west obligated to pay the three possible answers you can give me yes no i don't know now we can talk about you cannot amplify those after you give me the answer but i would like to know which of those three answers you chose my answer at this point your honor is i do not know on the record ok so so insofar as you are lying on westerns not having an reimburse him board yes your honor the fair one the insurer will pay on behalf of the company lost for which the company has to the extent permitted or required by law indemnified the directors and officers in which the directors and officers have become legally obligated to pay as a result of the claim that is that is the section that's an issue in the defense cost side of this because what has been asked of us is to pay the legal expenses as i understood the insurance policy i maybe i'm missing something it put an obligation on twin cities if western made a payment and if western was legally obligated to p during made a gratuitous payment i wasn't obligated to pay no coverage or if it was obligated to pay but didn't make a payment no coverage the like which seems to require literally that both the president is that is that the company's position yes thank you judge called you said it better than i did no i say right or if i'm right or wrong it's wrong but that was my understanding of the position yes yes it is your honor and it's clear that bigger at this point i don't dispute that ok your honor with respect to the issue related to the bump up i want to get down it's quickly as i could do that because it is the a palin has said they don't consider seeing they don't they don't argue that restitution ery payments are uninsured a bull and they don't argue that at least at the start what the plaintiff sought was additional consideration for their shares what they argue is that there was an order issued by the superior court in this case which narrowed the case and then somehow left the plaintiffs with nothing other than a non restitution ery payment that was available that that  is not fair and i want to be be clear as to why we believe that that is the case because this is important the order of the underlying superior court's order is it seven ninety seven of this record that order does not address the remedy for the disclosures the alleged breach of disclosures by the directors and officers and company defendants and in fact the defendants in that case did not move on the issue of damages it wasn't before the court it had not been and those claims were based on allegations that the defendants failed to disclose as follows that's a peer your offers have been made to acquire western so weary from i'm reading from the complaint a paragraph a lot of paper up here information regarding western that the board of trustees had a conflict of interest such that they would not independently exercise business judgment in voting in favor of the merger and in recommending a vote by shareholders in favor of the merger that the exchange ratio in the stock for stock exchange merger was unfairly low that the board of trustees had not negotiated the highest possible price for the shares of western the details of the compensation question you're right is then what does it mean what's the remedy available to the plaintiffs what are they complaining point let's assume it's true we didn't give you the information how are you damaged what happened and so we should look at the free to me why this is not exactly the kind of claim that you guys insured against because at the end of the day with the plaintiffs have complained about is that they didn't get enough money for the shares that were exchanged in the merge and by virtue of that fact what the plaintiffs are seeking is to complete the transaction with more money for their shares why should it be is a matter of public policy then an insurance company that did not receive that  any benefits in the merger should subsidize the transaction pay and pacific is basically in a position where they acquired shares in the belief the plaintiffs i know you were just saying i asked you a simple question one of the and here is you didn't like gore she it hard enough to get a good price for the shares you have the words right there's a lot of other stuff in there there's usually a lot of other stuff in there promise how much they have to how was how was it ever the cash comes from the company how i mean let's say in fact there was nothing else but the claim you guys were stupid or lazy and didn't fight hard enough and then there was a startlement situation and that situation i think the best practice would be i'm sorry you are not in the case of the time presumably so so so you are now this is what happened that bought this case they claimed you guys were stupid want to get to this point because this is important and the reason i was quoting those allegations is because those were the allegations that existed and the question is what did the plaintiffs say you say they want to cash the right they want to cash what did they say they were going to cash for and why did they say they wanted it and we put in the record and it's in the record that after this this order came down the expert that was put up by the plainest by a fine respected law firm he said petri and simon put up an expert that said the reason these plaintiffs have been damaged is because they didn't get enough for their shares the price was too low and we believe they should have got more for their shares and therefore on that basis we want these defendants to subsidize the transaction and pay  record the declaration that decided by a balance council i'm listening to your truck but i mean let's say these guys really were stupid and lazy and the price was too low because they didn't clarify a point if the insurance companies and both of them are saying yes yes even if there's a claim like for non disclosure or negligence that might come with policies coverage if the only damages for her restitution ery then they're not operated under california law it's not a loss that is correct that is absolutely not saying i agree with that or not but that's my understanding of the theory and that's the level three level three case theory yes i think that it's a well myself assert my understanding is a little different i mean it i