Ploen v. AIG Specialty Insurance Company

Background

Mark Ploen and Richard Enrico each invested $3 million in AOM Holdings, LLC in July 2016. AOM provided advertising services through its subsidiary, AllOver Media LLC. At the time, AOM was experiencing financial problems, including falling revenue, reduced earnings before interest, taxes, depreciation, and amortization, approximately $50 million in debt, and difficulties meeting its lenders’ financial requirements.

The investments were structured as purchases of Class B shares. They were intended to operate in some ways like the plaintiffs’ earlier loans to AOM, including quarterly dividend payments at a 10 percent rate and an expected share buyback within two years. The plaintiffs received transaction documents identifying the arrangement as an investment, had the documents reviewed by their own lawyers, and represented that they were accredited investors capable of evaluating the investment. AOM never paid cash dividends or bought back the shares. Instead, the plaintiffs received additional shares as dividends and incurred taxes on that income.

In 2020, the plaintiffs separately sued AOM in state court. Their claims included fraudulent inducement and negligent misrepresentation, based primarily on statements about AOM’s intention and ability to pay cash dividends. The state-court judges ruled that Delaware law governed the claims, that the plaintiffs had adequately pleaded negligent-misrepresentation and fraudulent-inducement claims, and that the transaction documents’ anti-reliance language did not defeat those claims. They dismissed the plaintiffs’ claims for breach of the duty of good faith and fair dealing. Enrico’s separate intentional-misrepresentation claim was also dismissed as duplicative of his fraudulent-inducement claim.

Miller-Shugart agreements

While the underlying cases were pending, the plaintiffs and AOM participated in mediation. They later entered into agreements providing for stipulated judgments of $3 million for each plaintiff. The agreements allocated all settlement amounts to the negligent-misrepresentation claims and nothing to the fraudulent-inducement claims. They also required AOM to pay each plaintiff an additional $250,000. The agreements stated that if they were unenforceable, the plaintiffs had no further recourse against AOM beyond the agreements.

The agreements were incorporated into $3 million judgments in the underlying cases. The plaintiffs then sued AIG, which had insured AOM, seeking payment of those judgments. Under Minnesota law, a Miller-Shugart agreement is enforceable against an insurer when the insurer received notice of the settlement and the settlement was reasonable and was not the product of fraud or collusion. The claimant bears the burden of showing that the settlement was reasonable and prudent. The relevant question is what a reasonably prudent defendant would have agreed to pay, considering the facts bearing on liability and damages and the risks of trial.

Court’s analysis

The court analyzed the settlements primarily under the plaintiffs’ negligent-misrepresentation claims because the plaintiffs allocated all of the settlement amounts to those claims. The plaintiffs’ expert estimated that Ploen’s potential recovery was slightly above $4 million and that Enrico’s was approximately $3.5 million. Those estimates included the investments, certain tax liabilities, and prejudgment interest; Ploen’s estimate also included interest he paid to finance his investment. The court questioned whether some of those financing-interest payments could have been recovered from AOM.

Even accepting the expert’s calculations, the court found the settlements unusually large. Including the $250,000 payments from AOM, the settlements represented approximately 80 percent of Ploen’s estimated maximum recovery and 91 percent of Enrico’s. The court stated that settlements of that size would ordinarily require an almost certain case, but found that the plaintiffs’ cases were not nearly that strong.

The court recognized evidence supporting the plaintiffs, including evidence that AOM received negative financial information while reassuring the plaintiffs that the business was doing well. But the court identified substantial litigation risks. The plaintiffs could have lost because AOM might not have owed them the required duty of care under Delaware law. They also faced uncertainty about whether a court would grant rescission, a remedy that cancels a contract and attempts to return the parties to their prior positions. The court noted that rescission is rarely granted and that the plaintiffs filed their lawsuits nearly four years after the investments, creating a question whether the parties could still be returned substantially to their earlier positions.

The court also found a significant risk that the plaintiffs could not prove justifiable reliance. It emphasized their experience as businessmen and investors, their access to lawyers and advisers, their contractual right to obtain information, and their knowledge that AOM’s ability to pay cash dividends depended on financial requirements. The court viewed the $3 million liquidity requirement disclosed shortly before closing as a warning sign that should have prompted further investigation. The plaintiffs nevertheless did not request financial or other documents from AOM before investing. The court found that a factfinder could have concluded that their failure to investigate was unreasonable, contributed to their damages, or supported a reduction in recovery under comparative-fault principles.

The court also concluded that considering the fraudulent-inducement claims would not change the result. Those claims sought the same damages as the negligent-misrepresentation claims, and the plaintiffs themselves treated the negligent-misrepresentation claims as easier to prove because they did not require proof that AOM acted knowingly or with the required fraudulent intent. The court found that the evidence also created a significant obstacle to proving intentional deception because AOM shared some negative information with Tony Jacobson, who was both an investor and a trusted friend of the plaintiffs.

Ruling

The court concluded that the settlements were unreasonable and therefore unenforceable against AIG. Chief Judge Patrick J. Schiltz ordered that the plaintiffs recover nothing on their claims against AIG and directed that judgment be entered accordingly. The opinion does not state that the judgment was entered with or without prejudice.