Preview
FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023
NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023
Exhibit A
FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023
NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023
1 MICHAEL JOHN MIGUEL (SBN 145182)
mmiguel@mckoolsmith.com
2 JACK L. MEYER (SBN 323915)
jmeyer@mckoolsmith.com
3 MAKENNA MILLER (SBN 329244)
mmiller@mckoolsmith.com
4 MCKOOL SMITH, P.C.
300 South Grand Avenue, Suite 2900
5 Los Angeles, CA 90071
Tel: (213)-694-1200
6 Fax: (213)-694-1234
7 Attorneys for Plaintiffs
8 SUPERIOR COURT OF THE STATE OF CALIFORNIA
9 FOR THE CITY AND COUNTY OF SAN FRANCISCO
10 UNLIMITED JURISDICTION
11 FOX PAINE & COMPANY, LLC; FOX Civil Action No. CGC-17-557275
PAINE CAPITAL FUND II [Assigned for all purposes to the Hon.
12 INTERNATIONAL, L.P.; Andrew Y.S. Cheng in Dept. 613]
FP INTERNATIONAL LPH, L.P.;
13
FOX PAINE INTERNATIONAL GP, LTD.; THIRD AMENDED COMPLAINT
14 and SAUL A. FOX, FOR:
Plaintiffs,
15 (1) BREACH OF CONTRACT;
v.
(2) DECLARATORY JUDGMENT;
16 (3) BREACH OF COVENANT OF
TWIN CITY FIRE INSURANCE GOOD FAITH AND FAIR
COMPANY; ST. PAUL MERCURY DEALING; AND
17 INSURANCE COMPANY; LIBERTY (4) AIDING AND ABETTING
18 MUTUAL INSURANCE COMPANY; BREACHES OF FIDUCIARY
and DOES DUTIES
19 1-5, INCLUSIVE.
20 DEMAND FOR JURY TRIAL
Defendants.
21
22
23
24
25
26
27
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Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275
FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023
NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023
1 Plaintiffs Fox Paine & Company, LLC, Fox Paine Capital Fund II International, L.P., FP
2 International LPH, L.P., Fox Paine International GP, Ltd., and Saul A. Fox (collectively
3 “Plaintiffs”), by and through their undersigned counsel, as and for their complaint against
4 Defendants Twin City Fire Insurance Company (“Twin City”), St. Paul Mercury Insurance
5 Company (“St. Paul”), Liberty Mutual Insurance Company (“Liberty Mutual”), and DOES 1-5
6 (collectively, “Defendants”), allege as follows:
7 THE PARTIES
8 1. Plaintiff Fox Paine & Company, LLC, a Delaware limited liability company with
9 offices in California (“FPC”), is a private equity fund manager that manages a fund called Fox
10 Paine Capital Fund II International, L.P. (“Fox Fund II”). FPC provides management advisory
11 services to Fox Fund II and its portfolio companies.
12 2. Plaintiff Fox Paine Capital Fund II International, L.P. is a Cayman Islands
13 exempted limited partnership. Fox Fund II effectively serves as the partner of various co-
14 investment funds holding Fox Fund II investments.
15 3. Plaintiff FP International LPH, L.P., a Cayman Islands exempted limited
16 partnership, is the general partner of Fox Fund II.
17 4. Plaintiff Fox Paine International GP, Ltd., a Cayman Islands exempted company,
18 is the general partner of FP International LPH, L.P.
19 5. Plaintiff Saul Fox (“Fox”) is an individual residing in California, and founding
20 partner of FPC.
21 6. Each of Fox Paine Capital Fund II GP, LLC, Fox Paine Capital Management II,
22 LLC, Fox Paine Capital International GP, LLC, FP International LPH, LP and FP International
23 LPH GP, Ltd., formerly named as Plaintiffs in this lawsuit (collectively the “Former Plaintiffs”),
24 have been dissolved and rolled up into, or merged into, the Plaintiffs set forth in paragraphs 1-4
25 above, such that the Plaintiffs set forth in paragraphs 1-4, above, are the legal successors to the
26 Former Plaintiffs, and holders of all rights and remedies previously inuring to the Former
27 Plaintiffs.
28 7. Each Plaintiff qualifies as “insured” under the policies issued by Defendants that
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Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275
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1 are the subject of this lawsuit.
2 8. Defendant Twin City Fire Insurance Company (“Twin City”) is a corporation
3 organized under the laws of the State of Indiana. At all times pertinent, Twin City was licensed
4 to do business, and was and is conducting and transacting business, in the State of California,
5 with offices in San Francisco, California. Twin City issued to FPC “Universal Excess Policy” No.
6 00 DB 0227503-06, providing $10 million in excess insurance coverage, attaching at $10 million,
7 for the period December 30, 2006 through December 30, 2007. Twin City also issued to FPC
8 “Universal Excess Policy” No. 00 DB 0228793-06 providing $10 million in excess insurance
9 coverage, attaching at $30 million, for the period December 30, 2006 through December 30,
10 2007.
11 9. Defendant St. Paul Mercury Insurance Company (“St. Paul”) is a corporation
12 organized under the laws of the State of Connecticut. At all times pertinent, St. Paul was licensed
13 to do business, and was and is conducting and transacting business, in the State of California,
14 with offices in San Francisco, California. St Paul issued to FPC “Excess Policy” No.
15 594CM1797, providing $10 million in excess insurance coverage, attaching at $20 million, for
16 the period December 30, 2006 through December 30, 2007.
17 10. Defendant Liberty Mutual Insurance Company (“Liberty Mutual”) is a corporation
18 organized under the laws of the Commonwealth of Massachusetts. At all times pertinent, Liberty
19 Mutual was licensed to do business, and was and is conducting and transacting business, in the
20 State of California, with offices in San Francisco, California. Liberty Mutual issued to FPC
21 “Excess Follow Form Policy” No. BL4N451383002 providing $10 million in excess insurance
22 coverage, attaching at $40 million, for the period December 30, 2006 through December 30,
23 2007.
24 11. Twin City, St. Paul and Liberty Mutual may collectively be referred as the “FPC
25 Excess Insurers” in this Complaint.
26 12. The true names of Defendants DOES 1-5, inclusive, whether individual, corporate,
27 associate, or otherwise, are unknown to Plaintiffs. Plaintiffs are informed and believe and thereon
28 allege that each of the DOE defendants is in some manner affiliated with Twin City, St. Paul, or
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Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275
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1 Liberty Mutual, and that each is legally responsible in some actionable manner for the events
2 described herein, and thereby proximately caused damage to Plaintiffs. Plaintiffs will seek leave
3 of the Court to amend this Complaint to state the true names and capacities of such DOE
4 defendants when they have been ascertained.
5 JURISDICTION AND VENUE
6 13. Plaintiffs repeat and reallege each of the allegations contained in the preceding
7 paragraphs as if fully set forth herein.
8 14. This Court has subject matter jurisdiction over all parties because at all times
9 relevant to this complaint, all parties have conducted business in California and the events giving
10 rise to this complaint occurred in California.
11 15. The damages sought in this matter exceed $25,000.
12 16. Plaintiffs FPC and Fox are citizens of California.
13 17. The Excess Insurers are subject to personal jurisdiction in California because they
14 have availed themselves of the privilege of conducting business within California including
15 substantial, continuous, and systematic contacts with California, and they contract to transact
16 business or engage in conduct within California that they know or should reasonably expect
17 would have consequences in California.
18 18. Venue is proper in this Court because each of the Defendants is subject to personal
19 jurisdiction in this County and a substantial part of the events giving rise to this action occurred in
20 this County. Specifically, Defendants Twin City, St. Paul, and Liberty Mutual are all licensed to
21 do business in California, and maintain offices in San Francisco, California.
22 FACTS
23 Plaintiffs’ Insurance Coverage Structure
24 19. In 2006, FPC purchased a primary Private Equity Professional Liability Policy,
25 Policy Number H706-60545, issued by Houston Casualty Company (“HCC”) (the “HCC
26 Policy”), a true and correct copy of which is attached hereto as Exhibit 1. The HCC Policy
27
28
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Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275
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1 provides $10 million in coverage (after a retention) on a claims-made basis, for “Loss,” 1
2 including “Costs, Charges and Expenses”2 incurred during the policy period of December 30,
3 2006 through December 30, 2007, subsequently extended to January 2, 2008. Each of the
4 Plaintiffs qualify as an “insured” under the HCC Policy as either Insured Organizations,
5 Subsidiaries, or Insured Persons. HCC claims exhaustion of the HCC Policy by payment of
6 “Loss” thereunder.
7 20. In addition to the primary coverage, FPC also purchased from Defendants excess
8 Private Equity Policies (the “Excess Policies”) to extend its insurance protection up to $50
9 million for covered claims during the same period. Each of the Excess Policies agrees to “follow
10 form” to the HCC coverage, meaning that unless there are specific provisions in the Excess
11 Policies to the contrary, the terms, conditions and obligations of the HCC primary policy sets
12 forth the insuring agreements for the Excess Policies. The Excess Policies, true and correct
13 copies of which attached hereto as Exhibits 2-5, created a coverage “tower” with each insurance
14 “layer” providing Plaintiffs an additional $10 million in coverage. Twin City issued the first and
15 third layers of the Excess Policies, while St. Paul and Liberty Mutual issued the second and fourth
16 layers, respectively, as follows:
17 Insurer Coverage
18 HCC No. 706-60545 Primary to $10 million
Twin City No. 00 DB 022750306 $10 million excess $10 million
19 St. Paul No. 594CM1797 $10 million excess $20 million
Twin City No. 00 DB 022879306 $10 million excess $30 million
20 Liberty Mutual No. BL4N451383002 $10 million excess $40 million
21 21. The policies in Plaintiffs’ “coverage tower” shall be referred to as the “FCP
22 Policies.” FPC is the “named insured” in the FPC Policies, and all other Plaintiffs are covered
23 under the FCP Policies as either Insured Organizations, Subsidiaries, or Insured Persons.
24
25
26 1
“Loss” is defined as “damages, settlements, and Costs, Charges and Expenses incurred by any of the Insureds,
including punitive, exemplary, or multiplied damages…” (Exhibit 1 at § II(K).)
27
2
“Costs, Charges and Expenses” is defined as “reasonable and necessary legal fees and expenses (including expert
28 fees) and cost to attachment or similar bonds incurred by the Insureds in defense of any Claim…” (Id., § II(C))
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1 HCC’s Coverage
2 22. The HCC Policy provides, among other things, coverage for loss arising from five
3 broad categories of conduct entitled “Insuring Agreements.” The “Insuring Agreements” are
4 demarcated in the HCC Policy as “Coverages A – E.” Specifically, the Excess Policies provide
5 coverage including, but not limited to, the following:
6 • Coverage A—Private Equity Investment Professional Liability Insurance
7 (“Coverage A”). Coverage A provides coverage for claims arising out of the
8 performance of “Private Equity Activities.” “Private Equity Activities” is defined
9 to include: (i) services as an officer, director or manager of an FPC portfolio
10 company; (ii) the investment in, formation, capitalization or disposition of, or
11 rendering of management, consulting, or advisory services to an FPC portfolio
12 company; or (iii) the creation, distribution, sale of securities in, or management or
13 administration of a private equity fund. Exhibit A at Insuring Agreement
14 Coverage A (at policy page 1) and Endorsements 5 and 7.
15 • Coverage C—Management Liability Insurance. Coverage C provides coverage for
16 claims arising from “any actual or alleged breach of duty, neglect, error,
17 misstatement, misleading statement, omission or act by the Insured Organization
18 or the Insured Persons in their respective capacities as such ... or any matter
19 claimed against them solely by reason of their status as Insured Persons.”
20 • Coverage E—Employment Practices Coverage. Coverage E provides coverage for
21 claims arising from “Wrongful Employment Practices.” “Wrongful Employment
22 Practices” is defined to include, among other things: (i) discrimination, (ii)
23 harassment, (iii) wrongful termination, demotion, retaliation or other wrongful
24 employment decision, or (iv) breach of an implied employment contract or breach
25 of the covenant of good faith and fair dealing in the employment contract.
26 23. HCC has represented and warranted to Plaintiffs that the full limits of liability
27 under the HCC Policy have been exhausted by payment of “Loss” thereunder.
28
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1 Defendants’ Excess Policies
2 24. Each of the foregoing “Insuring Agreements” set forth in paragraph 22, above, and
3 specifically, Coverages A, C, and E, are incorporated into each of the FPC Excess Policies, and
4 represent the insuring obligations to Plaintiffs of the Defendant Excess Insurers.
5 25. The Excess Insurers are required to pay costs, charges or expenses for
6 investigation or defense of covered claims within their limits of liability, upon exhaustion of
7 Plaintiffs’ underlying insurance. The Excess Policies also provide that in the event of the
8 reduction or exhaustion of the aggregate limits of liability of underlying coverage, they will pay
9 covered loss in excess of the reduced limits or “continue in force as primary insurance.” 3
10 Accordingly, in light of the exhaustion of the HCC Policy, the current effective limits and
11 attachment points of the FPC Excess Insurers are as follows:
12 Insurer Coverage
13 HCC No. 706-60545 Exhausted
Twin City No. 00 DB 022750306 Primary to $10 million
14 St. Paul No. 594CM1797 $10 million excess $10 million
Twin City No. 00 DB 022879306 $10 million excess $20 million
15 Liberty Mutual No. BL4N451383002 $10 million excess $30 million
16
26. Despite FPC’s timely and proper notice to the FPC Excess Insurers of the
17
existence of covered claims under the Excess Policies — as described in detail below — the FPC
18
Excess Insurers have failed and refused to pay or reimburse Plaintiffs’ covered liabilities.
19
27. Defendant Excess Insurers have breached their obligations to Plaintiffs by, among
20
other things, their: (i) failure to provide consent to defense costs arising from covered claims; (ii)
21
failure to pay or reimburse Plaintiffs’ defense costs for covered claims; (iii) refusal to
22
communicate with their insureds regarding claims tendered under the Excess Policies; (iv) failure
23
to properly investigate tendered claims under the Excess Policies; (v) improper communication
24
with FPC’s litigation opponents, and non-insureds, regarding coverage and proceeds under the
25
FPC Policies; (vi) failure to disclose communications to third parties regarding the Excess
26
Policies; and (vii) improperly disbursing policy proceeds from the FPC Policies to uninsured
27
28
3
Ex. 2, §II(B); Ex. 3, §3(B); Ex. 4, §II(B); Ex. 5, §5.
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1 parties who were litigating against the Insureds – thereby effectively funding litigation against
2 the Named Insured and Insured Persons.
3 Plaintiffs’ Covered Claims
4 28. Beginning in 1998, Saul Fox and Dexter Paine, through FPC, raised and managed
5 two successful private equity funds: Fund I (which closed in 1998 with $502 million in
6 committed capital) and Fox Fund II (which closed in 2001 with $1 billion in committed capital).
7 Dexter Paine was primarily responsible for the portfolio companies in Fund I, while Fox had
8 sourced and maintained primary responsibility for the portfolio companies in Fox Fund II. By
9 2006, Fund I was largely wound down and Dexter Paine wanted to raise a third fund; Fox was not
10 inclined to do so.
11 29. Dexter Paine nonetheless decided to proceed with the third fund (“Fund III”) on
12 his own, and, in early 2006, created a new, non-FPC-affiliated company to manage it, originally
13 called “Newco”, then “Fox Paine Management III, LLC”, and now known as “Paine Schwartz
14 Partners LLC” (“FPM III”). Fox refused to allow Fund III to become an affiliate of FPC, and did
15 not participate in the management of FPM III or Fund III, but did personally invest in Fund III
16 and received a small equity interest in FPM III.
17 30. In February 2006, recognizing the potential for a divergence of interests regarding
18 FPC and FPM III, Fox and Dexter Paine entered into a management agreement (the “Newco
19 Agreement”) to govern the respective operations of FPC and FPM III providing, among other
20 things:
21 • Any material commitment, action, or undertaking by FPC would require the joint,
written approval of Fox and Dexter Paine;
22 • FPC would remain the active manager of Funds I and II, and any future funds it
chose to sponsor;
23
• FPC employees providing services to FPM III would remain employees of FPC,
24 and FPM III would refrain from soliciting or hiring away any FPC employees;
• FPC would retain all of its existing assets, but would give FPM III a non-
25 exclusive, conditional license to use certain of FPC’s back-office-related assets
including its database, computers, furniture, fixtures, and equipment (not FPC’s
26 insurance policies), subject to an annual fee.
27 31. Shortly after the creation of Fund III and the execution of the Newco Agreement,
28 relations between Fox and FPC, on the one hand, and Dexter Paine and FPM III, deteriorated.
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Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275
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1 Certain officers and directors of FPC (“Former FPC Executives”) — who were initially permitted
2 to work for both FPC and FPM III pursuant to the Newco Agreement — upon joining FPM III,
3 began to countermand Fox’s instructions and to abandon FPC’s interests in favor of FPM III’s
4 and to enrich themselves at the expense of FPC and the Fund II investors.
5 32. Among other wrongful acts, Dexter Paine and the Former FPC Executives:
6 (i) arranged for the termination, without Fox’s knowledge or consent, of the
Former FPC Executives’ employment by FPC as well as that of virtually all
7 other FPC employees, and informed those employees that FPM III was their
new sole employer;
8
(ii) surreptitiously arranged for lucrative deferred compensation agreements
9 through FPC, executed solely by Dexter Paine, which rewarded the Former
FPC Executives and others with capital and carried interests in Fox Fund II
10 companies at a time when they had ceased to devote themselves to FPC, Fox
Fund II, and its portfolio companies;
11
(iii) caused FPC to accelerate vesting of certain capital and carried interest
12 grants to ensure that the Former FPC Executives could cash out before their
disloyalty to FPC became known;
13
(iv) fraudulently represented to other FPC employees, FPC attorneys, portfolio
14 company executives, and others, that Fox had authorized or directed various
actions on behalf of FPC or the portfolio companies when he had not done so;
15
(v) attempted to force the sale of Fox Fund II portfolio companies against
16 Fox’s express instructions in pursuit of their own self-interests to the detriment
of FPC, Fox, the portfolio companies, and Fox Fund II investors;
17
(vi) intentionally undermined the performance of FPC’s remaining and newly-
18 hired personnel through false and misleading statements and other misconduct,
in an effort to conceal Paine’s and the Former FPC Executives’ wrongdoing;
19 and
20 (vii) undermined Fox’s ability to manage FPC and his authority over the Fox
Fund II companies by their various actions, including disparaging Fox to the
21 executives of Fund II portfolio companies.
22
33. On August 27, 2007, FPC and Fox (individually and derivatively on behalf of
23
FPC, along with two Fox-owned entities) sued Dexter Paine, Paine’s family trust, FPM III, and,
24
nominally, FPC (“Delaware Defendants”), in Delaware Chancery Court regarding the foregoing
25
misconduct.
26
34. On September 14, 2007, the Delaware Defendants countersued, alleging that Fox
27
had breached his contractual and fiduciary duties to FPC. The Delaware Defendants’
28
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1 counterclaims against FPC, Fox, and Fox-related entities alleged breach of fiduciary duties
2 arising from Fox’s management of FPC (collectively the “Paine Counterclaims”). The Paine
3 Counterclaims are covered under the express terms of the Excess Policies as claims arising out of:
4 (i) “Wrongful Acts” in connection with “Private Equity Activities” under Insuring Agreement
5 Coverage A; and/or (ii) “Wrongful Acts ... by the Insured Organization or the Insured Persons in
6 their respective capacities as such …” under Insuring Agreement Coverage C; and/or (iii)
7 “Wrongful Employment Practices” under Insuring Agreement Coverage E.
8 FPC’s Claims Notice
9 35. Clause VIII(A) of the HCC Policy, incorporated into each of the Defendant Excess
10 Policies provides, in pertinent part, that “[t]he Insureds shall, as a condition precedent to their
11 rights to payment under this Policy, give to the Insurer notice in writing of any Claim as soon as
12 practicable but in no event later than 60 days after the end of the Policy Period.” A “Claim” is
13 defined to include “any written demand for monetary damages or non-monetary relief against an
14 Insured” and “any civil, judicial, administrative, regulatory or arbitration proceeding … initiated
15 against any of the Insureds…”
16 36. On November 7, 2007, on behalf of FPC and all Insureds, FPC’s broker provided
17 timely notice of the Paine Counterclaims to the FPC Excess Insurers (the “FPC Notice”). The
18 FPC Notice identifies FPC as the “Insured” on the Policy Declarations pages of the FPC Policies.
19 The FPC Notice contains no reference whatsoever to the Delaware Defendants or the Paine
20 Counterclaims, nor were any of them identified as being the claimant or insured seeking coverage
21 by virtue of the PFC Notice.
22 37. At the time the FPC Excess Insurers received the FPC Notice, the public pleadings
23 on file in the Delaware Chancery Court included Paine’s September 14, 2007 Answer and
24 Counterclaims, asserting various claims against Fox, as a counterclaim defendant, and against
25 FPC as a derivative counterclaim defendant.
26 38. After receiving the FPC Notice, the FPC Excess Insurers and their agents acting on
27 their behalves had a duty to make diligent inquiry into the claims and counterclaims asserted in
28 the Delaware Litigation (and the ensuing related litigation discussed below), and to timely
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1 determine whether FPC and Fox were entitled to coverage under the FPC Excess Policies. The
2 FPC Excess Insurers are also chargeable with knowledge of any facts that such a diligent inquiry
3 would have revealed.
4 39. In connection with their review and analysis of the FPC Notice, the FPC Excess
5 Insurers received and reviewed, or most certainly should have received and reviewed, the Paine
6 Counterclaims in the Delaware Litigation. Indeed, the FPC Excess Insurers each bid to provide
7 separate insurance to each of FPC and Fund II, and FPM III for the 2008 policy year, and were
8 expressly informed by Ms. Amy Ghisletta that Mr. Seth Gersch of FPC was in charge of FPC’s
9 ongoing insurance issues, and thereafter the Excess Insurers did in fact communicate with Mr.
10 Gersch—except with respect to the pre-existing FPC claim tendered to them on November 7,
11 2007. Thus, in connection with underwriting the 2008 policies, the FPC Excess Insurers gained
12 actual knowledge of the Counterclaims against Fox, FPC and the Plaintiffs.
13 40. The FPC Excess Insurers failed to provide coverage analysis to, and never
14 confirmed coverage for, FCP, Fox, or any other Fox-related party. Instead, the FPC Excess
15 Insurers apparently attempted to communicate with Plaintiffs by communicating with a broker
16 known to the FPC Excess Insurers to no longer represent Plaintiffs, and a former employee
17 known to the FPC Excess Insurers to no longer be an employee. The FPC Excess Insurers’
18 unreasonable failure to, at the very least, provide coverage analysis based on the FPC Notice
19 delayed, and ultimately prevented, Plaintiffs’ from obtaining the FCP Excess Insurers’ consent to
20 pay defense costs and indemnify Plaintiffs pursuant to Section VI.A of the HCC Policy.
21 41. On December 3, 2007, Fox and Paine executed a settlement agreement in the
22 Delaware Litigation (the “Delaware Settlement Agreement”) intended to resolve the litigation and
23 effect a “complete divorce” between FPC and Fox, on the one hand, and Dexter Paine and FPM
24 III, on the other. The Delaware Settlement Agreement provided for, among other things: (i) the
25 transfer of Dexter Paine’s entire interest in FPC and, with limited exceptions, Dexter Paine’s
26 entire interest in Fox Fund II, to Fox; (ii) the transfer of Fox’s entire interest in FPM III and Fund
27 III, and Fox’s residual interest in Fund I, to Dexter Paine; (iii) the termination of the Newco
28 Agreement, including the termination of the conditional license to use certain of FPC’s back-
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1 office-related assets; (iv) immediate termination of the Former FPC Executives’ employment at
2 FPC; and (v) the retention by Fox and FPC of “all FPC assets,” which included all insurance
3 policies and rights thereunder, including the FPC Excess Policies. The Settlement Agreement
4 further provided that FPM III would retain the employees it had hired away from FPC, including
5 the Former FPC Executives, and provided for the accelerated vesting and payout of certain
6 incentive compensation to those executives.
7 42. Plaintiffs are informed and believe that on January 31, 2008, after receiving
8 notification of the settlement of the Delaware Litigation, Defendant Twin City closed its claims
9 file, apparently on the assumption that no insured was pursuing the FPC Notice. St. Paul closed
10 its claims files under similar circumstances in August 2008, and Liberty Mutual closed its claims
11 files around mid-December 2008. These actions were not communicated to FPC or any other
12 Plaintiff, and none of the FPC Excess Insurers even attempted to speak with Plaintiffs to
13 determine whether they intended to pursue their claims pursuant to the FPC Notice. Plaintiffs
14 never withdrew their claims to Defendants for coverage under the FPC Excess Policies.
15 Protracted Delaware Fox-Paine Litigation
16 43. Clause V(D) of the HCC Policy, incorporated into each of the Defendant Excess
17 Policies, provides:
18 More than one Claim involving the same Wrongful Act or Interrelated
Wrongful Acts shall be deemed to constitute a single Claim and shall be
19 deemed to have been made at the earliest of the following times:
20 (1) the time at which the earliest Claim involving the same Wrongful
Act or Interrelated Wrongful Acts is first made, or
21 (2) the time at which the Claim involving the same Wrongful Act or
Interrelated Wrongful Acts shall be deemed to have been made
22 pursuant to Clause VIII(B).
23 Clause VIII(B) provides:
24 If, during the Policy Period, the Insureds first become aware of a specific
Wrongful Act, and if the Insureds during the Policy Period give written notice
25 to the Insurer of: (1) the specific Wrongful Act; (2) the consequences which
have resulted or may result therefrom; and (3) the circumstances by which the
26 Insureds first became aware thereof, then any Claim made subsequently arising
out of such Wrongful Act shall be deemed for the purpose of this policy to
27 have been made at the time such notice was first given.
28
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1 44. In January 2008, Dexter Paine began a years-long operation of filing motions
2 against Plaintiffs to “enforce” the Delaware Settlement Agreement which, in turn, spawned a web
3 of litigation including: (i) an appeal, (ii) a request for a writ of mandamus, (iii) the filing of
4 multiple demands for arbitration, and (iv) state court actions all involving the Paine Parties.
5 Specific claims sought were: (i) payment of accrued management fees, (ii) funding of carried
6 interest grants to Former FPC Executives, (iii) FPC’s alleged release of claims against Former
7 FPC Executives, and (iv) damages and injunctive relief for the dilution of the Former FPC
8 Executive’s Fox Fund II interests (the “Continuing Paine Claims”).
9 45. The Continuing Paine Claims against Plaintiffs here were covered under the
10 Excess Policies, specifically under Coverages A, C, and/or E as: (i) “Wrongful Acts” in
11 connection with “Private Equity Activities” under Insuring Agreement Coverage A; (ii)
12 “Wrongful Acts ... by the Insured Organization or the Insured Persons in their respective
13 capacities as such …” under Insuring Agreement Coverage C; (iii) and/or “Wrongful
14 Employment Practices” under Insuring Agreement Coverage E.
15 46. As a result of the Delaware Counterclaims and the Continuing Paine Claims,
16 Plaintiffs were forced to expend significant fees and costs to defend themselves. Since these
17 Continuing Paine Claims all involved either the same alleged wrongful acts or certainly acts
18 interrelated to the Delaware Litigation and the Continuing Paine Claims were part of a single
19 “Interrelated Wrongful Act,” with notice deemed to have been provided as of November 7, 2007,
20 pursuant to Clauses V(D) and VIII(B) in the HCC Policy, incorporated into each of the FPC
21 Excess Policies. The FPC Excess Insurers have admitted the Delaware Counterclaims and the
22 Continuing Paine Claims constitute “Interrelated Wrongful Acts.”
23 47. In bringing the Paine Counterclaims and the Continuing Paine Claims, Dexter
24 Paine and the Former FPC Executives were not acting in a capacity that could qualify them as an
25 insured under the FPC Excess Policies, and several of the Paine-related parties in that litigation
26 are neither Insured Organizations, Subsidiaries, or Insured Persons – a fact the FPC Excess
27 Insurers have already admitted. Thus, any so-called “insured versus insured” exclusion in the
28 FPC Excess Policies does not apply. However, even if the “insured versus insured” exclusion
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Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275
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1 were applicable (it is not), since under California law parties to a contract can waive rights either
2 expressly or impliedly, Defendants Twin City’s and St. Paul’s conduct has waived their right to
3 assert the exclusion as a matter of law, or they are estopped from taking inconsistent positions
4 here to the detriment and injury of Plaintiffs, by paying the Paine Parties proceeds, ostensibly as
5 putative insureds under the FPC Policies, with full knowledge their claims arose from litigation
6 against the first-named insured.
7 Excess Insurers’ Bad-Faith Claims Handling and Concealment
8 I. HCC Wrongfully Disburses FPC Policy Proceeds to Paine Parties
9 48. Instead of providing insurance to its actual insureds, Defendants Twin City and St.
10 Paul paid fees and costs to the opponents of its insureds, the Paine Parties, ostensibly under the
11 FPC Excess Policies issued to “Fox Paine & Company, LLC.” The Paine Parties were: (i) not
12 insured under the FPC Policies, and (ii) were the opponents of FPC in the Delaware Litigation
13 and the Continuing Paine Claims. In so doing, Defendants Twin City and St. Paul breached their
14 insurance contracts, breached the implied covenant of good faith and fair dealing, and breached
15 their fiduciary duties to FPC. Not only did Defendants Twin City and St. Paul fail to properly
16 protect its insured, they bankrolled litigation against Plaintiffs, its insureds and the actual insured
17 parties. Furthermore, Twin City and St. Paul have, at every turn, sought to cover up their
18 wrongful conduct, have ignored reasonable inquiries from its insureds, and have taken affirmative
19 actions to delay, and conceal the true facts of their conduct, all the while denying coverage to the
20 rightful insureds, Plaintiffs in this action.
21 49. On July 7, 2009 Mitchell Presser, a partner in FPM III and former corporate
22 counsel for FPC—who ceased representing FPC in 2006—wrote to HCC inquiring (among other
23 things) about the status of the November 7, 2007 FPC Notice and falsely claimed the original
24 FPC Notice was submitted on behalf of the Paine Parties, and that only the Paine Parties were
25 now seeking the proceeds of the HCC Policy. The Excess Insurers received notice of this
26 correspondence, did not inform FPC or any other Plaintiff of Mr. Presser’s assertion, and did no
27 due diligence to confirm or refute the Mr. Presser’s assertion.
28 50. The Paine Parties’ demand for proceeds from the HCC Policy was improper and
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Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275
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1 unlawful on several grounds, including: (i) the HCC Policy was obtained by, paid for by, and
2 listed as the first-named insured Fox Paine & Company, LLC; (ii) neither FPM III nor the Paine
3 Family Trust nor Presser ever qualified as insureds under the FPC Policies; (iii) neither Dexter
4 Paine nor the Former FPC Executives qualified as additional insureds with viable claims under
5 the FPC Policies; (iv) in the Delaware Litigation, the Paine Parties had been accused of multiple
6 breaches of fiduciary duty and other misconduct, including in connection with the formation of
7 their competing venture, all of which were utterly adverse and detrimental to FPC; (v) as of
8 December 2007, and the execution of the Delaware Settlement Agreement, neither the Paine
9 Parties nor the Former FPC Executives had any remaining interest in or ongoing connection to
10 FPC or any remaining right to claim benefits under the FPC Policies; and (vi) no person at FPM
11 III had ever been authorized by FPC or any other Plaintiff insured to address on their behalf
12 matters regarding the claims tendered under the FPC Policies.
13 51. On information and belief, at all relevant times, both HCC and the FPC Excess
14 Insurers knew, or with reasonable diligence should have known, that the Paine Parties’ demand
15 for the proceeds of the FPC Policies was improper and unlawful, yet at no time after July 7, 2009,
16 did HCC or the FPC Excess Insurers ever advise Plaintiffs of the improper demand.
17 52. On September 4, 2009, HCC’s outside insurance counsel wrote to FPM III setting
18 forth HCC’s position regarding coverage for the Paine Parties and FPC under the HCC Policy.
19 HCC’s counsel stated that it was wri
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FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 Exhibit A FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 MICHAEL JOHN MIGUEL (SBN 145182) mmiguel@mckoolsmith.com 2 JACK L. MEYER (SBN 323915) jmeyer@mckoolsmith.com 3 MAKENNA MILLER (SBN 329244) mmiller@mckoolsmith.com 4 MCKOOL SMITH, P.C. 300 South Grand Avenue, Suite 2900 5 Los Angeles, CA 90071 Tel: (213)-694-1200 6 Fax: (213)-694-1234 7 Attorneys for Plaintiffs 8 SUPERIOR COURT OF THE STATE OF CALIFORNIA 9 FOR THE CITY AND COUNTY OF SAN FRANCISCO 10 UNLIMITED JURISDICTION 11 FOX PAINE & COMPANY, LLC; FOX Civil Action No. CGC-17-557275 PAINE CAPITAL FUND II [Assigned for all purposes to the Hon. 12 INTERNATIONAL, L.P.; Andrew Y.S. Cheng in Dept. 613] FP INTERNATIONAL LPH, L.P.; 13 FOX PAINE INTERNATIONAL GP, LTD.; THIRD AMENDED COMPLAINT 14 and SAUL A. FOX, FOR: Plaintiffs, 15 (1) BREACH OF CONTRACT; v. (2) DECLARATORY JUDGMENT; 16 (3) BREACH OF COVENANT OF TWIN CITY FIRE INSURANCE GOOD FAITH AND FAIR COMPANY; ST. PAUL MERCURY DEALING; AND 17 INSURANCE COMPANY; LIBERTY (4) AIDING AND ABETTING 18 MUTUAL INSURANCE COMPANY; BREACHES OF FIDUCIARY and DOES DUTIES 19 1-5, INCLUSIVE. 20 DEMAND FOR JURY TRIAL Defendants. 21 22 23 24 25 26 27 28 1 Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 Plaintiffs Fox Paine & Company, LLC, Fox Paine Capital Fund II International, L.P., FP 2 International LPH, L.P., Fox Paine International GP, Ltd., and Saul A. Fox (collectively 3 “Plaintiffs”), by and through their undersigned counsel, as and for their complaint against 4 Defendants Twin City Fire Insurance Company (“Twin City”), St. Paul Mercury Insurance 5 Company (“St. Paul”), Liberty Mutual Insurance Company (“Liberty Mutual”), and DOES 1-5 6 (collectively, “Defendants”), allege as follows: 7 THE PARTIES 8 1. Plaintiff Fox Paine & Company, LLC, a Delaware limited liability company with 9 offices in California (“FPC”), is a private equity fund manager that manages a fund called Fox 10 Paine Capital Fund II International, L.P. (“Fox Fund II”). FPC provides management advisory 11 services to Fox Fund II and its portfolio companies. 12 2. Plaintiff Fox Paine Capital Fund II International, L.P. is a Cayman Islands 13 exempted limited partnership. Fox Fund II effectively serves as the partner of various co- 14 investment funds holding Fox Fund II investments. 15 3. Plaintiff FP International LPH, L.P., a Cayman Islands exempted limited 16 partnership, is the general partner of Fox Fund II. 17 4. Plaintiff Fox Paine International GP, Ltd., a Cayman Islands exempted company, 18 is the general partner of FP International LPH, L.P. 19 5. Plaintiff Saul Fox (“Fox”) is an individual residing in California, and founding 20 partner of FPC. 21 6. Each of Fox Paine Capital Fund II GP, LLC, Fox Paine Capital Management II, 22 LLC, Fox Paine Capital International GP, LLC, FP International LPH, LP and FP International 23 LPH GP, Ltd., formerly named as Plaintiffs in this lawsuit (collectively the “Former Plaintiffs”), 24 have been dissolved and rolled up into, or merged into, the Plaintiffs set forth in paragraphs 1-4 25 above, such that the Plaintiffs set forth in paragraphs 1-4, above, are the legal successors to the 26 Former Plaintiffs, and holders of all rights and remedies previously inuring to the Former 27 Plaintiffs. 28 7. Each Plaintiff qualifies as “insured” under the policies issued by Defendants that 2 Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 are the subject of this lawsuit. 2 8. Defendant Twin City Fire Insurance Company (“Twin City”) is a corporation 3 organized under the laws of the State of Indiana. At all times pertinent, Twin City was licensed 4 to do business, and was and is conducting and transacting business, in the State of California, 5 with offices in San Francisco, California. Twin City issued to FPC “Universal Excess Policy” No. 6 00 DB 0227503-06, providing $10 million in excess insurance coverage, attaching at $10 million, 7 for the period December 30, 2006 through December 30, 2007. Twin City also issued to FPC 8 “Universal Excess Policy” No. 00 DB 0228793-06 providing $10 million in excess insurance 9 coverage, attaching at $30 million, for the period December 30, 2006 through December 30, 10 2007. 11 9. Defendant St. Paul Mercury Insurance Company (“St. Paul”) is a corporation 12 organized under the laws of the State of Connecticut. At all times pertinent, St. Paul was licensed 13 to do business, and was and is conducting and transacting business, in the State of California, 14 with offices in San Francisco, California. St Paul issued to FPC “Excess Policy” No. 15 594CM1797, providing $10 million in excess insurance coverage, attaching at $20 million, for 16 the period December 30, 2006 through December 30, 2007. 17 10. Defendant Liberty Mutual Insurance Company (“Liberty Mutual”) is a corporation 18 organized under the laws of the Commonwealth of Massachusetts. At all times pertinent, Liberty 19 Mutual was licensed to do business, and was and is conducting and transacting business, in the 20 State of California, with offices in San Francisco, California. Liberty Mutual issued to FPC 21 “Excess Follow Form Policy” No. BL4N451383002 providing $10 million in excess insurance 22 coverage, attaching at $40 million, for the period December 30, 2006 through December 30, 23 2007. 24 11. Twin City, St. Paul and Liberty Mutual may collectively be referred as the “FPC 25 Excess Insurers” in this Complaint. 26 12. The true names of Defendants DOES 1-5, inclusive, whether individual, corporate, 27 associate, or otherwise, are unknown to Plaintiffs. Plaintiffs are informed and believe and thereon 28 allege that each of the DOE defendants is in some manner affiliated with Twin City, St. Paul, or -3- Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 Liberty Mutual, and that each is legally responsible in some actionable manner for the events 2 described herein, and thereby proximately caused damage to Plaintiffs. Plaintiffs will seek leave 3 of the Court to amend this Complaint to state the true names and capacities of such DOE 4 defendants when they have been ascertained. 5 JURISDICTION AND VENUE 6 13. Plaintiffs repeat and reallege each of the allegations contained in the preceding 7 paragraphs as if fully set forth herein. 8 14. This Court has subject matter jurisdiction over all parties because at all times 9 relevant to this complaint, all parties have conducted business in California and the events giving 10 rise to this complaint occurred in California. 11 15. The damages sought in this matter exceed $25,000. 12 16. Plaintiffs FPC and Fox are citizens of California. 13 17. The Excess Insurers are subject to personal jurisdiction in California because they 14 have availed themselves of the privilege of conducting business within California including 15 substantial, continuous, and systematic contacts with California, and they contract to transact 16 business or engage in conduct within California that they know or should reasonably expect 17 would have consequences in California. 18 18. Venue is proper in this Court because each of the Defendants is subject to personal 19 jurisdiction in this County and a substantial part of the events giving rise to this action occurred in 20 this County. Specifically, Defendants Twin City, St. Paul, and Liberty Mutual are all licensed to 21 do business in California, and maintain offices in San Francisco, California. 22 FACTS 23 Plaintiffs’ Insurance Coverage Structure 24 19. In 2006, FPC purchased a primary Private Equity Professional Liability Policy, 25 Policy Number H706-60545, issued by Houston Casualty Company (“HCC”) (the “HCC 26 Policy”), a true and correct copy of which is attached hereto as Exhibit 1. The HCC Policy 27 28 -4- Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 provides $10 million in coverage (after a retention) on a claims-made basis, for “Loss,” 1 2 including “Costs, Charges and Expenses”2 incurred during the policy period of December 30, 3 2006 through December 30, 2007, subsequently extended to January 2, 2008. Each of the 4 Plaintiffs qualify as an “insured” under the HCC Policy as either Insured Organizations, 5 Subsidiaries, or Insured Persons. HCC claims exhaustion of the HCC Policy by payment of 6 “Loss” thereunder. 7 20. In addition to the primary coverage, FPC also purchased from Defendants excess 8 Private Equity Policies (the “Excess Policies”) to extend its insurance protection up to $50 9 million for covered claims during the same period. Each of the Excess Policies agrees to “follow 10 form” to the HCC coverage, meaning that unless there are specific provisions in the Excess 11 Policies to the contrary, the terms, conditions and obligations of the HCC primary policy sets 12 forth the insuring agreements for the Excess Policies. The Excess Policies, true and correct 13 copies of which attached hereto as Exhibits 2-5, created a coverage “tower” with each insurance 14 “layer” providing Plaintiffs an additional $10 million in coverage. Twin City issued the first and 15 third layers of the Excess Policies, while St. Paul and Liberty Mutual issued the second and fourth 16 layers, respectively, as follows: 17 Insurer Coverage 18 HCC No. 706-60545 Primary to $10 million Twin City No. 00 DB 022750306 $10 million excess $10 million 19 St. Paul No. 594CM1797 $10 million excess $20 million Twin City No. 00 DB 022879306 $10 million excess $30 million 20 Liberty Mutual No. BL4N451383002 $10 million excess $40 million 21 21. The policies in Plaintiffs’ “coverage tower” shall be referred to as the “FCP 22 Policies.” FPC is the “named insured” in the FPC Policies, and all other Plaintiffs are covered 23 under the FCP Policies as either Insured Organizations, Subsidiaries, or Insured Persons. 24 25 26 1 “Loss” is defined as “damages, settlements, and Costs, Charges and Expenses incurred by any of the Insureds, including punitive, exemplary, or multiplied damages…” (Exhibit 1 at § II(K).) 27 2 “Costs, Charges and Expenses” is defined as “reasonable and necessary legal fees and expenses (including expert 28 fees) and cost to attachment or similar bonds incurred by the Insureds in defense of any Claim…” (Id., § II(C)) -5- Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 HCC’s Coverage 2 22. The HCC Policy provides, among other things, coverage for loss arising from five 3 broad categories of conduct entitled “Insuring Agreements.” The “Insuring Agreements” are 4 demarcated in the HCC Policy as “Coverages A – E.” Specifically, the Excess Policies provide 5 coverage including, but not limited to, the following: 6 • Coverage A—Private Equity Investment Professional Liability Insurance 7 (“Coverage A”). Coverage A provides coverage for claims arising out of the 8 performance of “Private Equity Activities.” “Private Equity Activities” is defined 9 to include: (i) services as an officer, director or manager of an FPC portfolio 10 company; (ii) the investment in, formation, capitalization or disposition of, or 11 rendering of management, consulting, or advisory services to an FPC portfolio 12 company; or (iii) the creation, distribution, sale of securities in, or management or 13 administration of a private equity fund. Exhibit A at Insuring Agreement 14 Coverage A (at policy page 1) and Endorsements 5 and 7. 15 • Coverage C—Management Liability Insurance. Coverage C provides coverage for 16 claims arising from “any actual or alleged breach of duty, neglect, error, 17 misstatement, misleading statement, omission or act by the Insured Organization 18 or the Insured Persons in their respective capacities as such ... or any matter 19 claimed against them solely by reason of their status as Insured Persons.” 20 • Coverage E—Employment Practices Coverage. Coverage E provides coverage for 21 claims arising from “Wrongful Employment Practices.” “Wrongful Employment 22 Practices” is defined to include, among other things: (i) discrimination, (ii) 23 harassment, (iii) wrongful termination, demotion, retaliation or other wrongful 24 employment decision, or (iv) breach of an implied employment contract or breach 25 of the covenant of good faith and fair dealing in the employment contract. 26 23. HCC has represented and warranted to Plaintiffs that the full limits of liability 27 under the HCC Policy have been exhausted by payment of “Loss” thereunder. 28 -6- Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 Defendants’ Excess Policies 2 24. Each of the foregoing “Insuring Agreements” set forth in paragraph 22, above, and 3 specifically, Coverages A, C, and E, are incorporated into each of the FPC Excess Policies, and 4 represent the insuring obligations to Plaintiffs of the Defendant Excess Insurers. 5 25. The Excess Insurers are required to pay costs, charges or expenses for 6 investigation or defense of covered claims within their limits of liability, upon exhaustion of 7 Plaintiffs’ underlying insurance. The Excess Policies also provide that in the event of the 8 reduction or exhaustion of the aggregate limits of liability of underlying coverage, they will pay 9 covered loss in excess of the reduced limits or “continue in force as primary insurance.” 3 10 Accordingly, in light of the exhaustion of the HCC Policy, the current effective limits and 11 attachment points of the FPC Excess Insurers are as follows: 12 Insurer Coverage 13 HCC No. 706-60545 Exhausted Twin City No. 00 DB 022750306 Primary to $10 million 14 St. Paul No. 594CM1797 $10 million excess $10 million Twin City No. 00 DB 022879306 $10 million excess $20 million 15 Liberty Mutual No. BL4N451383002 $10 million excess $30 million 16 26. Despite FPC’s timely and proper notice to the FPC Excess Insurers of the 17 existence of covered claims under the Excess Policies — as described in detail below — the FPC 18 Excess Insurers have failed and refused to pay or reimburse Plaintiffs’ covered liabilities. 19 27. Defendant Excess Insurers have breached their obligations to Plaintiffs by, among 20 other things, their: (i) failure to provide consent to defense costs arising from covered claims; (ii) 21 failure to pay or reimburse Plaintiffs’ defense costs for covered claims; (iii) refusal to 22 communicate with their insureds regarding claims tendered under the Excess Policies; (iv) failure 23 to properly investigate tendered claims under the Excess Policies; (v) improper communication 24 with FPC’s litigation opponents, and non-insureds, regarding coverage and proceeds under the 25 FPC Policies; (vi) failure to disclose communications to third parties regarding the Excess 26 Policies; and (vii) improperly disbursing policy proceeds from the FPC Policies to uninsured 27 28 3 Ex. 2, §II(B); Ex. 3, §3(B); Ex. 4, §II(B); Ex. 5, §5. -7- Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 parties who were litigating against the Insureds – thereby effectively funding litigation against 2 the Named Insured and Insured Persons. 3 Plaintiffs’ Covered Claims 4 28. Beginning in 1998, Saul Fox and Dexter Paine, through FPC, raised and managed 5 two successful private equity funds: Fund I (which closed in 1998 with $502 million in 6 committed capital) and Fox Fund II (which closed in 2001 with $1 billion in committed capital). 7 Dexter Paine was primarily responsible for the portfolio companies in Fund I, while Fox had 8 sourced and maintained primary responsibility for the portfolio companies in Fox Fund II. By 9 2006, Fund I was largely wound down and Dexter Paine wanted to raise a third fund; Fox was not 10 inclined to do so. 11 29. Dexter Paine nonetheless decided to proceed with the third fund (“Fund III”) on 12 his own, and, in early 2006, created a new, non-FPC-affiliated company to manage it, originally 13 called “Newco”, then “Fox Paine Management III, LLC”, and now known as “Paine Schwartz 14 Partners LLC” (“FPM III”). Fox refused to allow Fund III to become an affiliate of FPC, and did 15 not participate in the management of FPM III or Fund III, but did personally invest in Fund III 16 and received a small equity interest in FPM III. 17 30. In February 2006, recognizing the potential for a divergence of interests regarding 18 FPC and FPM III, Fox and Dexter Paine entered into a management agreement (the “Newco 19 Agreement”) to govern the respective operations of FPC and FPM III providing, among other 20 things: 21 • Any material commitment, action, or undertaking by FPC would require the joint, written approval of Fox and Dexter Paine; 22 • FPC would remain the active manager of Funds I and II, and any future funds it chose to sponsor; 23 • FPC employees providing services to FPM III would remain employees of FPC, 24 and FPM III would refrain from soliciting or hiring away any FPC employees; • FPC would retain all of its existing assets, but would give FPM III a non- 25 exclusive, conditional license to use certain of FPC’s back-office-related assets including its database, computers, furniture, fixtures, and equipment (not FPC’s 26 insurance policies), subject to an annual fee. 27 31. Shortly after the creation of Fund III and the execution of the Newco Agreement, 28 relations between Fox and FPC, on the one hand, and Dexter Paine and FPM III, deteriorated. -8- Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 Certain officers and directors of FPC (“Former FPC Executives”) — who were initially permitted 2 to work for both FPC and FPM III pursuant to the Newco Agreement — upon joining FPM III, 3 began to countermand Fox’s instructions and to abandon FPC’s interests in favor of FPM III’s 4 and to enrich themselves at the expense of FPC and the Fund II investors. 5 32. Among other wrongful acts, Dexter Paine and the Former FPC Executives: 6 (i) arranged for the termination, without Fox’s knowledge or consent, of the Former FPC Executives’ employment by FPC as well as that of virtually all 7 other FPC employees, and informed those employees that FPM III was their new sole employer; 8 (ii) surreptitiously arranged for lucrative deferred compensation agreements 9 through FPC, executed solely by Dexter Paine, which rewarded the Former FPC Executives and others with capital and carried interests in Fox Fund II 10 companies at a time when they had ceased to devote themselves to FPC, Fox Fund II, and its portfolio companies; 11 (iii) caused FPC to accelerate vesting of certain capital and carried interest 12 grants to ensure that the Former FPC Executives could cash out before their disloyalty to FPC became known; 13 (iv) fraudulently represented to other FPC employees, FPC attorneys, portfolio 14 company executives, and others, that Fox had authorized or directed various actions on behalf of FPC or the portfolio companies when he had not done so; 15 (v) attempted to force the sale of Fox Fund II portfolio companies against 16 Fox’s express instructions in pursuit of their own self-interests to the detriment of FPC, Fox, the portfolio companies, and Fox Fund II investors; 17 (vi) intentionally undermined the performance of FPC’s remaining and newly- 18 hired personnel through false and misleading statements and other misconduct, in an effort to conceal Paine’s and the Former FPC Executives’ wrongdoing; 19 and 20 (vii) undermined Fox’s ability to manage FPC and his authority over the Fox Fund II companies by their various actions, including disparaging Fox to the 21 executives of Fund II portfolio companies. 22 33. On August 27, 2007, FPC and Fox (individually and derivatively on behalf of 23 FPC, along with two Fox-owned entities) sued Dexter Paine, Paine’s family trust, FPM III, and, 24 nominally, FPC (“Delaware Defendants”), in Delaware Chancery Court regarding the foregoing 25 misconduct. 26 34. On September 14, 2007, the Delaware Defendants countersued, alleging that Fox 27 had breached his contractual and fiduciary duties to FPC. The Delaware Defendants’ 28 -9- Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 counterclaims against FPC, Fox, and Fox-related entities alleged breach of fiduciary duties 2 arising from Fox’s management of FPC (collectively the “Paine Counterclaims”). The Paine 3 Counterclaims are covered under the express terms of the Excess Policies as claims arising out of: 4 (i) “Wrongful Acts” in connection with “Private Equity Activities” under Insuring Agreement 5 Coverage A; and/or (ii) “Wrongful Acts ... by the Insured Organization or the Insured Persons in 6 their respective capacities as such …” under Insuring Agreement Coverage C; and/or (iii) 7 “Wrongful Employment Practices” under Insuring Agreement Coverage E. 8 FPC’s Claims Notice 9 35. Clause VIII(A) of the HCC Policy, incorporated into each of the Defendant Excess 10 Policies provides, in pertinent part, that “[t]he Insureds shall, as a condition precedent to their 11 rights to payment under this Policy, give to the Insurer notice in writing of any Claim as soon as 12 practicable but in no event later than 60 days after the end of the Policy Period.” A “Claim” is 13 defined to include “any written demand for monetary damages or non-monetary relief against an 14 Insured” and “any civil, judicial, administrative, regulatory or arbitration proceeding … initiated 15 against any of the Insureds…” 16 36. On November 7, 2007, on behalf of FPC and all Insureds, FPC’s broker provided 17 timely notice of the Paine Counterclaims to the FPC Excess Insurers (the “FPC Notice”). The 18 FPC Notice identifies FPC as the “Insured” on the Policy Declarations pages of the FPC Policies. 19 The FPC Notice contains no reference whatsoever to the Delaware Defendants or the Paine 20 Counterclaims, nor were any of them identified as being the claimant or insured seeking coverage 21 by virtue of the PFC Notice. 22 37. At the time the FPC Excess Insurers received the FPC Notice, the public pleadings 23 on file in the Delaware Chancery Court included Paine’s September 14, 2007 Answer and 24 Counterclaims, asserting various claims against Fox, as a counterclaim defendant, and against 25 FPC as a derivative counterclaim defendant. 26 38. After receiving the FPC Notice, the FPC Excess Insurers and their agents acting on 27 their behalves had a duty to make diligent inquiry into the claims and counterclaims asserted in 28 the Delaware Litigation (and the ensuing related litigation discussed below), and to timely - 10 - Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 determine whether FPC and Fox were entitled to coverage under the FPC Excess Policies. The 2 FPC Excess Insurers are also chargeable with knowledge of any facts that such a diligent inquiry 3 would have revealed. 4 39. In connection with their review and analysis of the FPC Notice, the FPC Excess 5 Insurers received and reviewed, or most certainly should have received and reviewed, the Paine 6 Counterclaims in the Delaware Litigation. Indeed, the FPC Excess Insurers each bid to provide 7 separate insurance to each of FPC and Fund II, and FPM III for the 2008 policy year, and were 8 expressly informed by Ms. Amy Ghisletta that Mr. Seth Gersch of FPC was in charge of FPC’s 9 ongoing insurance issues, and thereafter the Excess Insurers did in fact communicate with Mr. 10 Gersch—except with respect to the pre-existing FPC claim tendered to them on November 7, 11 2007. Thus, in connection with underwriting the 2008 policies, the FPC Excess Insurers gained 12 actual knowledge of the Counterclaims against Fox, FPC and the Plaintiffs. 13 40. The FPC Excess Insurers failed to provide coverage analysis to, and never 14 confirmed coverage for, FCP, Fox, or any other Fox-related party. Instead, the FPC Excess 15 Insurers apparently attempted to communicate with Plaintiffs by communicating with a broker 16 known to the FPC Excess Insurers to no longer represent Plaintiffs, and a former employee 17 known to the FPC Excess Insurers to no longer be an employee. The FPC Excess Insurers’ 18 unreasonable failure to, at the very least, provide coverage analysis based on the FPC Notice 19 delayed, and ultimately prevented, Plaintiffs’ from obtaining the FCP Excess Insurers’ consent to 20 pay defense costs and indemnify Plaintiffs pursuant to Section VI.A of the HCC Policy. 21 41. On December 3, 2007, Fox and Paine executed a settlement agreement in the 22 Delaware Litigation (the “Delaware Settlement Agreement”) intended to resolve the litigation and 23 effect a “complete divorce” between FPC and Fox, on the one hand, and Dexter Paine and FPM 24 III, on the other. The Delaware Settlement Agreement provided for, among other things: (i) the 25 transfer of Dexter Paine’s entire interest in FPC and, with limited exceptions, Dexter Paine’s 26 entire interest in Fox Fund II, to Fox; (ii) the transfer of Fox’s entire interest in FPM III and Fund 27 III, and Fox’s residual interest in Fund I, to Dexter Paine; (iii) the termination of the Newco 28 Agreement, including the termination of the conditional license to use certain of FPC’s back- - 11 - Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 office-related assets; (iv) immediate termination of the Former FPC Executives’ employment at 2 FPC; and (v) the retention by Fox and FPC of “all FPC assets,” which included all insurance 3 policies and rights thereunder, including the FPC Excess Policies. The Settlement Agreement 4 further provided that FPM III would retain the employees it had hired away from FPC, including 5 the Former FPC Executives, and provided for the accelerated vesting and payout of certain 6 incentive compensation to those executives. 7 42. Plaintiffs are informed and believe that on January 31, 2008, after receiving 8 notification of the settlement of the Delaware Litigation, Defendant Twin City closed its claims 9 file, apparently on the assumption that no insured was pursuing the FPC Notice. St. Paul closed 10 its claims files under similar circumstances in August 2008, and Liberty Mutual closed its claims 11 files around mid-December 2008. These actions were not communicated to FPC or any other 12 Plaintiff, and none of the FPC Excess Insurers even attempted to speak with Plaintiffs to 13 determine whether they intended to pursue their claims pursuant to the FPC Notice. Plaintiffs 14 never withdrew their claims to Defendants for coverage under the FPC Excess Policies. 15 Protracted Delaware Fox-Paine Litigation 16 43. Clause V(D) of the HCC Policy, incorporated into each of the Defendant Excess 17 Policies, provides: 18 More than one Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to constitute a single Claim and shall be 19 deemed to have been made at the earliest of the following times: 20 (1) the time at which the earliest Claim involving the same Wrongful Act or Interrelated Wrongful Acts is first made, or 21 (2) the time at which the Claim involving the same Wrongful Act or Interrelated Wrongful Acts shall be deemed to have been made 22 pursuant to Clause VIII(B). 23 Clause VIII(B) provides: 24 If, during the Policy Period, the Insureds first become aware of a specific Wrongful Act, and if the Insureds during the Policy Period give written notice 25 to the Insurer of: (1) the specific Wrongful Act; (2) the consequences which have resulted or may result therefrom; and (3) the circumstances by which the 26 Insureds first became aware thereof, then any Claim made subsequently arising out of such Wrongful Act shall be deemed for the purpose of this policy to 27 have been made at the time such notice was first given. 28 - 12 - Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 44. In January 2008, Dexter Paine began a years-long operation of filing motions 2 against Plaintiffs to “enforce” the Delaware Settlement Agreement which, in turn, spawned a web 3 of litigation including: (i) an appeal, (ii) a request for a writ of mandamus, (iii) the filing of 4 multiple demands for arbitration, and (iv) state court actions all involving the Paine Parties. 5 Specific claims sought were: (i) payment of accrued management fees, (ii) funding of carried 6 interest grants to Former FPC Executives, (iii) FPC’s alleged release of claims against Former 7 FPC Executives, and (iv) damages and injunctive relief for the dilution of the Former FPC 8 Executive’s Fox Fund II interests (the “Continuing Paine Claims”). 9 45. The Continuing Paine Claims against Plaintiffs here were covered under the 10 Excess Policies, specifically under Coverages A, C, and/or E as: (i) “Wrongful Acts” in 11 connection with “Private Equity Activities” under Insuring Agreement Coverage A; (ii) 12 “Wrongful Acts ... by the Insured Organization or the Insured Persons in their respective 13 capacities as such …” under Insuring Agreement Coverage C; (iii) and/or “Wrongful 14 Employment Practices” under Insuring Agreement Coverage E. 15 46. As a result of the Delaware Counterclaims and the Continuing Paine Claims, 16 Plaintiffs were forced to expend significant fees and costs to defend themselves. Since these 17 Continuing Paine Claims all involved either the same alleged wrongful acts or certainly acts 18 interrelated to the Delaware Litigation and the Continuing Paine Claims were part of a single 19 “Interrelated Wrongful Act,” with notice deemed to have been provided as of November 7, 2007, 20 pursuant to Clauses V(D) and VIII(B) in the HCC Policy, incorporated into each of the FPC 21 Excess Policies. The FPC Excess Insurers have admitted the Delaware Counterclaims and the 22 Continuing Paine Claims constitute “Interrelated Wrongful Acts.” 23 47. In bringing the Paine Counterclaims and the Continuing Paine Claims, Dexter 24 Paine and the Former FPC Executives were not acting in a capacity that could qualify them as an 25 insured under the FPC Excess Policies, and several of the Paine-related parties in that litigation 26 are neither Insured Organizations, Subsidiaries, or Insured Persons – a fact the FPC Excess 27 Insurers have already admitted. Thus, any so-called “insured versus insured” exclusion in the 28 FPC Excess Policies does not apply. However, even if the “insured versus insured” exclusion - 13 - Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 were applicable (it is not), since under California law parties to a contract can waive rights either 2 expressly or impliedly, Defendants Twin City’s and St. Paul’s conduct has waived their right to 3 assert the exclusion as a matter of law, or they are estopped from taking inconsistent positions 4 here to the detriment and injury of Plaintiffs, by paying the Paine Parties proceeds, ostensibly as 5 putative insureds under the FPC Policies, with full knowledge their claims arose from litigation 6 against the first-named insured. 7 Excess Insurers’ Bad-Faith Claims Handling and Concealment 8 I. HCC Wrongfully Disburses FPC Policy Proceeds to Paine Parties 9 48. Instead of providing insurance to its actual insureds, Defendants Twin City and St. 10 Paul paid fees and costs to the opponents of its insureds, the Paine Parties, ostensibly under the 11 FPC Excess Policies issued to “Fox Paine & Company, LLC.” The Paine Parties were: (i) not 12 insured under the FPC Policies, and (ii) were the opponents of FPC in the Delaware Litigation 13 and the Continuing Paine Claims. In so doing, Defendants Twin City and St. Paul breached their 14 insurance contracts, breached the implied covenant of good faith and fair dealing, and breached 15 their fiduciary duties to FPC. Not only did Defendants Twin City and St. Paul fail to properly 16 protect its insured, they bankrolled litigation against Plaintiffs, its insureds and the actual insured 17 parties. Furthermore, Twin City and St. Paul have, at every turn, sought to cover up their 18 wrongful conduct, have ignored reasonable inquiries from its insureds, and have taken affirmative 19 actions to delay, and conceal the true facts of their conduct, all the while denying coverage to the 20 rightful insureds, Plaintiffs in this action. 21 49. On July 7, 2009 Mitchell Presser, a partner in FPM III and former corporate 22 counsel for FPC—who ceased representing FPC in 2006—wrote to HCC inquiring (among other 23 things) about the status of the November 7, 2007 FPC Notice and falsely claimed the original 24 FPC Notice was submitted on behalf of the Paine Parties, and that only the Paine Parties were 25 now seeking the proceeds of the HCC Policy. The Excess Insurers received notice of this 26 correspondence, did not inform FPC or any other Plaintiff of Mr. Presser’s assertion, and did no 27 due diligence to confirm or refute the Mr. Presser’s assertion. 28 50. The Paine Parties’ demand for proceeds from the HCC Policy was improper and - 14 - Third Amended Complaint for Declaratory Relief and Damages Case No. CGC-17-557275 FILED: NEW YORK COUNTY CLERK 12/07/2023 10:35 AM INDEX NO. 161881/2023 NYSCEF DOC. NO. 3 RECEIVED NYSCEF: 12/07/2023 1 unlawful on several grounds, including: (i) the HCC Policy was obtained by, paid for by, and 2 listed as the first-named insured Fox Paine & Company, LLC; (ii) neither FPM III nor the Paine 3 Family Trust nor Presser ever qualified as insureds under the FPC Policies; (iii) neither Dexter 4 Paine nor the Former FPC Executives qualified as additional insureds with viable claims under 5 the FPC Policies; (iv) in the Delaware Litigation, the Paine Parties had been accused of multiple 6 breaches of fiduciary duty and other misconduct, including in connection with the formation of 7 their competing venture, all of which were utterly adverse and detrimental to FPC; (v) as of 8 December 2007, and the execution of the Delaware Settlement Agreement, neither the Paine 9 Parties nor the Former FPC Executives had any remaining interest in or ongoing connection to 10 FPC or any remaining right to claim benefits under the FPC Policies; and (vi) no person at FPM 11 III had ever been authorized by FPC or any other Plaintiff insured to address on their behalf 12 matters regarding the claims tendered under the FPC Policies. 13 51. On information and belief, at all relevant times, both HCC and the FPC Excess 14 Insurers knew, or with reasonable diligence should have known, that the Paine Parties’ demand 15 for the proceeds of the FPC Policies was improper and unlawful, yet at no time after July 7, 2009, 16 did HCC or the FPC Excess Insurers ever advise Plaintiffs of the improper demand. 17 52. On September 4, 2009, HCC’s outside insurance counsel wrote to FPM III setting 18 forth HCC’s position regarding coverage for the Paine Parties and FPC under the HCC Policy. 19 HCC’s counsel stated that it was wri