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Emmis Communications Corp. v. Illinois National Insurance Co.

United States District Court, S.D. Indiana, Indianapolis Division

March 21, 2018



          Hon. William T. Lawrence, Judge

         This cause is before the Court on the Defendant's motion for summary judgment (Dkt. No. 53) and the Plaintiff's motion for partial summary judgment (Dkt. No. 59). The motions are fully briefed, and the Court, being duly advised, GRANTS IN PART AND DENIES IN PART the Defendant's motion and GRANTS the Plaintiff's motion for the reasons set forth below. The Court also DENIES the Plaintiff's motion for oral argument (Dkt. No. 63).


         Federal Rule of Civil Procedure 56(a) provides that summary judgment is appropriate “if the movant shows that there is no genuine dispute as to any material fact and the movant is entitled to judgment as a matter of law.” In ruling on a motion for summary judgment, the admissible evidence presented by the non-moving party must be believed, and all reasonable inferences must be drawn in the non-movant's favor. Zerante v. DeLuca, 555 F.3d 582, 584 (7th Cir. 2009) (“We view the record in the light most favorable to the nonmoving party and draw all reasonable inferences in that party's favor.”). When the Court reviews cross-motions for summary judgment, as is the case here, “we construe all inferences in favor of the party against whom the motion under consideration is made.” Speciale v. Blue Cross & Blue Shield Ass'n, 538 F.3d 615, 621 (7th Cir. 2008) (quotation omitted). “‘[W]e look to the burden of proof that each party would bear on an issue of trial.'” Diaz v. Prudential Ins. Co. of Am., 499 F.3d 640, 643 (7th Cir. 2007) (quoting Santaella v. Metro. Life Ins. Co., 123 F.3d 456, 461 (7th Cir. 1997)). A party who bears the burden of proof on a particular issue may not rest on its pleadings, but must show what evidence it has that there is a genuine issue of material fact that requires trial. Johnson v. Cambridge Indus., Inc., 325 F.3d 892, 901 (7th Cir. 2003). Finally, the non-moving party bears the burden of specifically identifying the relevant evidence of record, and “the court is not required to scour the record in search of evidence to defeat a motion for summary judgment.” Ritchie v. Glidden Co., 242 F.3d 713, 723 (7th Cir. 2001).


         This suit involves Defendant Illinois National Insurance Company's (“INIC”) denial of insurance coverage to Plaintiff Emmis Communications Corporation (“Emmis”) for a lawsuit filed against Emmis in this district in 2012. See Corre Opportunities Fund, LP, et al. v. Emmis Communications Corp., et al., 1:12-cv-491-SEB-TAB (hereinafter referred to as “the COF Suit”). The voluminous facts set forth in the parties' briefs are virtually undisputed; indeed, the Plaintiff does not expressly dispute any of the facts contained in the Defendant's Statement of Material Facts Not in Dispute, and the Defendant disputes only one of the facts asserted in the Plaintiff's.[1] The following facts are those facts of record that the Court believes to be either directly relevant to the Court's decision or helpful to put those relevant facts in context.

         Emmis's Preferred Stock

         In 1999, Emmis issued 2, 875, 000 shares of 6.25% Series A Cumulative Convertible Preferred Stock (“Preferred Stock”) for $50 per share. Emmis's Articles of Incorporation set forth the rights and protections associated with the Preferred Stock, which included: (1) a right to cumulative annual cash dividends at a rate per annum equal to 6.25% of the stock's $50 liquidation preference; (2) a right to sell the stock back to Emmis at $50 per share, plus outstanding dividends in certain go-private scenarios; and (3) the requirement that any issuance of senior-ranking stock or any adverse amendment to the terms of the Preferred Stock be approved by two-thirds of the outstanding Preferred Stock.

         The 2010 Go-Private Attempt

         In 2010, the market price of Emmis's Common Stock had fallen to under three dollars per share. Believing this to be an undervaluation, Jeff Smulyan, Emmis's CEO and largest shareholder, proposed a go-private transaction (the “2010 Go-Private Attempt”).[2] Smulyan formed a company called JS Acquisition, LLC (“JSA”) for the purpose of acquiring all of Emmis's Common Stock. JSA obtained a commitment from Alden Global Distressed Opportunities Master Fund (“Alden”) to provide financing for the 2010 Go-Private Attempt. Alden owned 42% of Emmis's Preferred Stock. JSA offered to pay a premium over the market price for the Common Stock and proposed that the Preferred Stock be converted into subordinated debt instruments.

         The Emmis Board of Directors approved the offer from JSA on the terms proposed. When a group of Preferred Stock holders formed a lockup group that threatened to object to the terms of the conversion of their stock into subordinated debt instruments (the “Go-Private Lockup Group”), JSA negotiated with the Go-Private Lockup Group to provide more favorable terms (the “Exchange Offer Modifications”), which the Go-Private Lockup Group members accepted, thereby paving the way for the Go-Private Offer to proceed. However, after this agreement was reached, Alden withdrew its offer of financing and notified the Securities and Exchange Commission (“SEC”) that it was withholding its approval for the Exchange Offer Modifications. This resulted in the failure of the 2010 Go-Private Attempt.

         Litigation Stemming from the 2010 Go-Private Attempt

         Between April 27 and June 18, 2010, seven lawsuits were filed on behalf of Emmis shareholders against Emmis and its officers and directors as putative class actions in response to the 2010 Go-Private Attempt, alleging that the offer grossly undervalued the shares of Emmis and the approval of it constituted a breach of fiduciary duty. See, e.g., Dkt. No. 54-2 at 146 ¶ 5 (“Under the terms of the Transaction, Emmis public shareholders will be cashed-out pursuant to grossly unfair and inadequate terms to the benefit of Smulyan, the controlling shareholder.”). The Shareholder Litigation further alleged that the offer was “coercive to the preferred shareholders of Emmis” because “[i]f a preferred stock shareholder does not convert their preferred shares . . . [the] dissenting preferred shares will be converted into Class A common stock immediately prior to the merger and receive the same consideration as Class A common stock shareholders-an amount less than otherwise required by the Company's Articles of Incorporation.” Id. ¶ 64. The plaintiffs alleged that Emmis's Directors had violated their fiduciary duties to the shareholders by approving the proposal without regard to its fairness, without considering alternatives, and without disclosing all material information to the shareholders and, in so doing, putting their personal interests ahead of those of the shareholders.

         Emmis had previously purchased a Directors and Officers (“D&O”) and Entity Liability policy from Chubb Insurance (“Chubb”) covering claims first made during the period from October 1, 2009, through October 1, 2010 (the “Chubb Policy”). Each of the Shareholder Suits was reported to Chubb, and Chubb accepted coverage of the Shareholder Suits under a reservation of rights.

         Each of the Shareholder Suits was voluntarily dismissed following the failure of the 2010 Go-Private Attempt; no class was ever certified in any of them.

         Alden's withdrawal of financing for the 2010 Go-Private Attempt also led to litigation. First, in September 2010, JSA filed suit against Alden for breach of its contract to finance the 2010 Go-Private transaction (the “JSA Suit”). In response, on February 16, 2011, Alden filed a derivative action against Emmis's Board of Directors (the “Alden Action”) asserting claims of breach of fiduciary duty based on Emmis's agreement, as approved by its Board, to invest in the JSA suit against Alden. Specifically, Alden alleged that the Board's agreement to loan JSA up to $200, 000 to pursue its breach of contract suit against Alden in exchange for a portion of any recovery obtained in the suit was illegal and that Smulyan, through JSA, filed the JSA Suit “as a personal litigation vendetta” against Alden for terminating the 2010 Go-Private Attempt and interfering with Smulyan's effort to take Emmis private. Dkt. No. 54-2 at 200 ¶ 4.

         On February 14, 2011, Emmis, through its broker, Marsh USA, Inc. (“Marsh”), reported the Alden Action to its D&O carriers for the policy period of October 1, 2010, to October l, 2011, which included National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”) and Chubb. National Union denied coverage for the Alden Action based on its policy's Specific Investigation/Claim/Litigation/Event or Act Exclusion. Although Chubb initially denied coverage for the Alden Action as falling outside the policy period, Chubb later reconsidered and accepted coverage of the Alden Action as a Related Claim to the Shareholder Suits. Chubb determined that the Alden Action and the Shareholder Suits were Related Claims because they both “emanate[d] from the proposed buyout by JSA”-i.e., the 2010 Go-Private Attempt. Dkt. No. 54-2 at 240.

         Emmis Gains Control of Its Preferred Stock

         In June 2011, Emmis entered into an agreement to sell some of its radio stations (the “Merlin Transaction”), which resulted in net proceeds to Emmis of $120 million. Shortly before the closing on the Merlin Transaction, two of Emmis's Preferred Stock shareholders approached Emmis management about obtaining liquidity for their shares. Purchasing its Preferred Stock at a discount would benefit Emmis, as credit ratings agencies would view it as extinguishing existing debt, making it easier for Emmis to refinance senior debt at lower interest rates, which would improve the overall financial health of the company. After the Merlin Transaction closed, Emmis obtained a loan commitment to fund purchases of Preferred Stock. In September and October 2011, Emmis approached its ten largest shareholders of Preferred Stock to determine whether there was interest in selling, and on October 25, 2011, Emmis senior management presented a proposal for a Preferred Stock Repurchase Plan at a Board meeting.

         One of the main goals of the Preferred Stock Repurchase Plan was for Emmis to preserve the voting rights of any Preferred Stock it acquired through the plan. Under Indiana law, any shares of Preferred Stock that Emmis acquired through outright purchases would have to be retired and could not be voted. Therefore, the Preferred Stock Repurchase Plan included the use of total return swap (“TRS”) transactions and TRS Voting Agreements, rather than ordinary purchase agreements, as the means to preserve the voting rights of the Preferred Stock. If Emmis could acquire two-thirds of the Preferred Stock through TRS transactions, it would have the ability to amend the Preferred Stock terms. After deliberation, the Board, including the Preferred Shareholders' representative, unanimously approved implementation of the Preferred Stock Repurchase Plan.

         On November 11, 2011, Emmis publicly announced the Preferred Stock Repurchase Plan, which was the first public notice of the plan to Preferred Stock shareholders. On November 14, 2011, Emmis filed an 8-K with the SEC disclosing the TRS transactions with certain holders of Preferred Stock involving approximately 23% of the Preferred Stock. On November 22, 2011, as part of a settlement of the litigation between Alden and JSA involving Alden's decision not to finance the 2010 Go-Private Attempt, Alden agreed to enter into a TRS transaction with Emmis involving over one million shares of Preferred Stock. With this transaction completed, Emmis had now acquired voting rights of 56.8% of the Preferred Stock.

         At this point Emmis's senior management believed for the first time that the company might be able to gain control of two-thirds of the outstanding shares of the Preferred Stock. That same day the Board met to discuss a tender offer and the implications of gaining control of two-thirds of the Preferred Stock. The Board approved a modified “Dutch Auction” tender offer at that meeting by an 8-1 margin, with the Preferred Shareholders' representative as the lone dissenter.

         On November 30, 2011, Emmis publicly announced it would conduct the modified Dutch auction tender offer to purchase up to $6 million in Preferred Stock at a price between $12.50 and $15.56 per share. One day later, on December 1, 2011, Emmis submitted its tender offer filing to the SEC and stated that if it succeeded in obtaining two-thirds of the Preferred Stock, it “may elect to . . . amend various provisions applicable to the Preferred Shares.”[3]

         On January 5, 2012, Emmis announced that it had purchased 164, 400 shares of Preferred Stock in the modified Dutch auction tender. Because those shares were purchased outright, rather than acquired through TRS transactions, they were retired and returned to the status of authorized but unissued Preferred Stock. With financing for the Preferred Stock Repurchase Plan about to expire, Emmis purchased and retired an additional 25, 700 shares of Preferred Stock at prices of up to $30 per share. On January 30, 2012, Emmis filed an 8-K stating that the total of “authorized but unissued” Preferred Shares had reached 452, 680, and that, if it reissued 390, 604 of those shares to a third-party with a voting agreement allowing Emmis to direct the vote, it would have voting control over two-thirds of the Preferred Stock. Emmis also disclosed in this filing that if it were able to acquire voting control, it “may elect” to use that power to amend the terms of the Preferred Stock.

         In early 2012, Emmis's senior management decided to create an employee benefit plan trust (the “Retention Plan Trust”) to which it would issue 400, 000 shares of Preferred Stock, which could be voted as directed by the Board under Indiana law. The proposal for the Retention Plan Trust was first presented to the Board on February 29, 2012, and approved by the Board at a follow-up meeting on March 8, 2012, once again by an 8-1 vote. Emmis contributed 400, 000 shares of Preferred Stock to the Retention Plan Trust in return for a voting agreement allowing the company to direct the vote of those shares. At that point, Emmis had gained control over two-thirds of the Preferred Stock.

         Amendments to Articles of Incorporation Affecting Preferred Stock

         At the February and March 2012 Board meetings where the Retention Plan Trust was discussed and adopted, the Board discussed specific Amendments to the Articles of Incorporation affecting the terms of the Preferred Stock and approved the Proposed Amendments for consideration by the Company's shareholders, with the Preferred Shareholders' representative again being the lone dissenter.

         On March 13, 2012, Emmis filed a preliminary proxy statement with the SEC in which it disclosed for the first time the exact terms of seven proposed amendments to the Preferred Stock. The amendments included the following: (1) eliminating Emmis's obligation to pay the Preferred Stock dividends that had accumulated since October 2008; (2) changing the Preferred Stock from “Cumulative” to “Non-Cumulative” so dividends would not accrue unless declared by the Board, thereby eliminating the right of Preferred Shareholders to elect directors in the event of nonpayment of dividends; (3) eliminating the right of holders of Preferred Stock to require Emmis to repurchase their shares upon certain going-private transactions, thereby allowing Emmis to classify Preferred Shares as equity on its balance sheet; and (4) eliminating the right to convert Preferred Stock to Common Stock at specified conversion prices upon a change of control. This preliminary proxy statement also disclosed Emmis's expectation that the holders of two-thirds of the Preferred Stock would vote in favor of the Amendments, based on the TRS and Retention Plan Trust voting agreements. The preliminary proxy stated that the Board had approved the Proposed Amendments based on the belief that they would have a positive effect on the overall capital structure of Emmis, which would in turn benefit the Common Stock holders.

         On September 4, 2012, the shareholders approved the proposed amendments to the Preferred Stock. Those amendments took effect that same day when Emmis filed Amended Articles containing the approved amendments with the Indiana Secretary of State.

         The COF Suit

         On April 16, 2012, five Preferred Shareholders filed the COF Suit against Emmis, its officers, and directors. The COF Suit alleged, inter alia, that the acquisition of Preferred Stock through TRS transactions and the reissuance of Preferred Stock to the Retention Plan Trust violated various federal securities laws as well as laws governing the conduct of Indiana corporations. The initial complaint in the COF Suit contained six counts alleging violations of federal securities laws, two counts alleging violations of Indiana corporate laws, one count alleging failure to follow Emmis's articles of incorporation, and two counts alleging breaches of fiduciary duty. Both the original ...

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