Professional Documents
Culture Documents
v.
Lexington Insurance Company (Lexington) seeking damages for Lexingtons breach of its
obligations under an insurance policy it issued in which it agreed to provide insurance coverage
to DCHSI. DCHSI asserts claims herein against Lexington for breach of contract, declaratory
judgment, and breach of Lexingtons implied covenant of good faith and fair dealing.
2.
that provided defense and indemnity coverage for DCHSI, among others, in the event a claim
was made against DCHSI as a result of certain acts, errors, or omissions.
3.
DCHSI was sued in the Superior Court for the District of Columbia, and
requested that Lexington defend and indemnify it pursuant to the terms of the insurance policy it
sold. Lexington denied DCHSIs claim on the basis of a misconstruction of its policy language
that ignores the plain terms of the policy it drafted, as well as a mischaracterization of the key
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allegations set forth in the underlying lawsuit. Lexington has breached the Policy by denying
coverage and refusing to defend DCHSI, and has also breached its implied covenant of good
faith and fair dealing owed to DCHSI.
PARTIES
4.
Plaintiff DCHSI is incorporated, and has its principal place of business, in the
District of Columbia.
5.
Group (AIG) company, is incorporated in Delaware, and has its principal place of business in
Boston, Massachusetts.
JURISDICTION
6.
This Court has jurisdiction over this action pursuant to 28 U.S.C. 1332(a), as
this action is between citizens of different states and the amount in controversy exceeds $75,000,
exclusive of interest and costs. This Court also has jurisdiction to award declaratory relief
pursuant to 28 U.S.C. 2201. Further, Lexington has submitted to this Courts jurisdiction by
virtue of a Service of Suit Condition included in an endorsement to the policy which states, in
relevant part, [i]n the event of our failure to pay any amount claimed to be due hereunder, we, at
your request, will submit to the jurisdiction of a court of competent jurisdiction within the United
States.
7.
substantial part of the events or omissions giving rise to the claim occurred within this judicial
district, and, additionally, Lexington resides within this judicial district for purposes of venue
because it is subject to this Courts personal jurisdiction with respect to this action.
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FACTUAL BACKGROUND
The Lexington Insurance Policy
8.
Lexington issued a Managed Care Risk Solutions Claims Made liability insurance
policy, policy number 35848309, effective March 15, 2013 through March 15, 2014, providing
$6 million in insurance coverage per claim, subject to a $25,000 self-insured retention (the
Policy). A copy of the Policy is attached hereto as Exhibit A. The Policy was extended, for a
substantial additional premium, through March 15, 2017 via an Optional Extended Reporting
Period. The Policy was issued to DCHSIs subsidiary, D.C. Chartered Health Plan, Inc. (D.C.
Chartered), as the Named Insured, and provided coverage for D.C. Chartereds directors,
officers, employees, and certain other individuals. By endorsement, the Policy extends coverage
to DCHSI as an Additional Insured.
9.
The Policy broadly provides coverage for claims resulting from an act, error, or
omission in the performance of: (1) any health care or managed care financial, management or
insurance service you perform in your business, (2) the design, development and marketing of
any such service, and (3) your vicarious liability for the conduct of others performing any such
service on your behalf.
10.
The Policy obligates Lexington to defend such claims even if the allegations are
groundless, false or fraudulent. The Policy also obligates Lexington to pay reasonable and
necessary claims expenses incurred in the defense of the claim, and in turn defines claims
expenses to include, inter alia, all reasonable and necessary fees and expenses incurred in the
investigation and defense of any claim, including all fees and expenses incurred in complying
with court mandated electronic discovery, and all costs awarded against you and prejudgment
interest awarded against you on that part of the judgment we pay. The Policy covers, inter alia,
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compensatory damages for tortious conduct, breach of contract, breach of duty, violation of civil
statute, ordinance or regulation, and attorneys fees of another party awarded against an insured.
11.
Insureds Risk Management or Legal Department seeking damages or other civil, administrative
or injunctive relief, or threatening suit or arbitration, including service of suit or institution of
arbitration proceedings.
12.
The Policy covers claims first made against a covered entity or person and
reported to Lexington during the period the Policy is in effect, or within 90 days following its
termination.
13.
DCHSI has performed its obligations under the Policy in good faith, and has
organization (HMO) regulated by the DISB, and that D.C. Chartered is required under the
D.C. Code to maintain a certain minimum amount of capital. The Rehabilitator Suit alleges that
D.C. Chartereds capital fell below the statutory minimum and, as a result of financial troubles,
D.C. Chartered adopted a resolution consenting to its rehabilitation under D.C. Code.
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16.
The Rehabilitator Suit alleges that, in October 2012, Commissioner White filed a
petition for order of rehabilitation, and that the Superior Court granted the petition the same day,
appointing Commissioner White as D.C. Chartereds Rehabilitator. The Rehabilitator Suit states
that the Rehabilitator filed the suit following an investigation into D.C. Chartereds books and
records. In the Rehabilitator Suit, the Rehabilitator expressly alleges that he brought the suit in
his capacity as Rehabilitator, and on behalf of D.C. Chartered, pursuant to the October 2012
Court order of rehabilitation.
17.
That in 2011, D.C. Chartered made improper cash transfers of $1.15 million
to affiliated entities, including at least $925,000 to DCHSI.
b.
c.
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18.
The Rehabilitator Suit asserts six causes of action: (1) breach of fiduciary duty;
(2) unjust enrichment; (3) conversion; (4) breach of contract; (5) indemnification; and (6)
violation of statutory duty to cooperate under D.C. Code 31-1305.
19.
The Rehabilitator Suit is a claim within the scope of coverage provided under
DCHSI has incurred, and will continue to do so in the future, substantial amounts
in defense of the Rehabilitator Suit, and faces the potential of substantial liability as a result of
the claims set forth in the Rehabilitator Suit.
Lexingtons Denial of Coverage
21.
requested that Lexington defend and indemnify it in connection with the Rehabilitator Suit.
22.
Lexington failed to timely respond and, when it did, it denied its coverage
obligations, including its duty to defend DCHSI, in connection with the Rehabilitator Suit.
23.
dispute that there was coverage for the Rehabilitator Suit within the terms of the Policys
Insuring Agreement. But, ignoring the plain language of the Policy it drafted, and the fact that
the Rehabilitator Suit was brought by the Rehabilitator (and not the Policys Named Insured,
D.C. Chartered), Lexington wrongly contended that coverage was barred by an exclusion in the
Policy relating to disputes between an Insured and its officers, directors, employees, trustees,
subsidiaries or affiliated entities. Among other things, Lexington ignored the fact that the
exclusion on which it based its denial is prefaced by the words We will neither defend you nor
pay any claim arising out of . . . (emphasis added), and in turn you is defined in the Policy as
being limited to an Insured. Thus, under the terms of the Policy that Lexington drafted,
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Lexingtons construction of the Policy, and requested that Lexington withdraw its denial and
provide a defense for DCHSI. When it did respond, rather than acknowledging the plain terms
of its Policy, Lexington raised new additional arguments that were not supported by the Policy
language and, if applied, would render coverage illusory. The plain terms of the Policy compel
that DCHSI is entitled to coverage for the Rehabilitator Suit; at the very least, the Policy is
ambiguous and as a matter of law is to be construed against its drafter, Lexington.
25.
The Policy is a valid and enforceable contract, under which Lexington agreed to
The Rehabilitator Suit constitutes a claim against DCHSI within the scope of
coverage provided under the terms of the Policy, thereby triggering Lexingtons coverage
obligations under the Policy.
29.
Lexington breached its obligations under the Policy by, among others, wrongfully
denying coverage and refusing to defend DCHSI and/or reimburse DCHSIs defense costs and
claim expenses.
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30.
DCHSI thus has been forced to defend itself in the Rehabilitator Suit at its own
cost, and has sustained substantial damages as a direct result of Lexingtons breach, in excess of
$75,000.
31.
DCHSI is entitled to payment from Lexington of, among others, all claims
expenses it has incurred, and will incur in the future, in defense of the Rehabilitator Suit.
Count II Declaratory Judgment
32.
The Policy is a valid and enforceable contract, under which Lexington agreed to
The Rehabilitator Suit constitutes a claim against DCHSI within the scope of
coverage provided under the terms of the Policy, thereby triggering Lexingtons coverage
obligations under the Policy, including Lexingtons obligation to defend DCHSI and indemnify
DCHSI for any liabilities arising out of such claims, and to reimburse it for all fees and expenses
incurred in connection with such claims.
35.
Lexington has failed to honor its contractual obligations under the Policy by
An actual and justiciable controversy exists between DCHSI and Lexington with
respect to Lexingtons duties and obligations under the Policy in connection with the
Rehabilitator Suit.
37.
the Policy to provide coverage to DCHSI for all the costs and liabilities it will incur in
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connection with the Rehabilitator Suit, including Lexingtons duties to defend, reimburse
DCHSIs claims expenses, and indemnify.
Count III Breach of Implied Covenant of Good Faith and Fair Dealing
38.
Lexington has an implied duty to deal fairly and in good faith with its
policyholders. Lexington has a duty to do nothing to injure, frustrate, or interfere with its
policyholders rights to receive the benefits of their insurance policies.
40.
Lexington has breached its implied covenant of good faith and fair dealing to
DCHSI in a number of respects, including, but not limited to, the following:
a.
b.
c.
41.
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b.
c.
d.
e.
Such other and further relief as the Court deems just and proper.
DEMAND FOR JURY TRIAL
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I. (a) PLAINTIFFS
DEFENDANTS
11 001
COUNTY OF RESIDENCE OF FIRST LISTED DEFENDANT --"'8'-"8'-"8"-'8,_,8=<------(IN U.S. PLAINTIFF CASES ONLY)
NOTE: IN LAND CONDEMNATION CASES, USE THE LOCATION OF THE TRACT OF LAND INVOLVED
James P. Bobotek
Pillsbury Winthrop Shaw Pittman LLP
1200 Seventeenth Street, NW
Washington, DC 20036
III. CITIZENSHIP OF PRINCIPAL PARTIES (PLACE AN x IN ONE BOX FOR
0
Q
1 U.S. Government
Plaintiff
2 U.S. Government
Defendant
3 Federal Question
(U.S. Govemment Not a Party)
4 Diversity
(Indicate Citizenship of
Parties in item III)
PLAINTIFF AND ONE BOX FOR DEFENDANT) FOR DIVERSITY CASES ONLY!
PTF
DFT
01
01
Oz
Oz
Citizen or Subject of a
Foreign Country
03
03
PTF
DFT
04
Os
06
A. Antitrust
0 B. Personal Injury/
0 C. Administrative Agency
Malpractice
0
410 Antitrust
0 E.
Review
O
O
O
310 Ahplane
315 Airplane Product Liability
320 Assault, Libel & Slander
0 330 Federal Employers Liability
0340Marine
O 345 Marine Product Liability
0 350 Motor Vehicle
O 355 Motor Vehicle Product Liability
0 360 Other Personal Injury
0 362 Medical Malpractice
0 365 Product Liability
O 367 Health Care/Pharmaceutical
Personal Injury Product Liability
O 368 Asbestos Product Liability
Real Property
0210 Land Condemnation
0 220 Foreclosure
0 230 Rent, Lease & Ejectment
0 240 Torts to Land
0 245 Tort Product Liability
0 290 All Other Real Property
Personal Property
0 370 Other Fraud
0371 Truth in Lending
0380 Other Personal Property
Damage
0 385 Property Damage
Product Liability
Social Security
0 861 HIA (1395ff)
O 862 Black Lung (923)
0 863 DIWC/DIWW (405(g))
0 864 SSID Title XVI
0 865 RSI (405(g))
Other Statutes
O 891 Agricultural Acts
0 893 Environmental Matters
O 890 Other Statutory Actions (If
Administrative Agency is
Involved)
OR
Bankruptcy
0 422 Appeal 27 USC 158
0 423 Withdrawal28 USC 157
Prisoner Petitions
535 Death Penalty
D 540 Mandamus & Other
D 550 Civil Rights
D 555 Prison Conditions
D 560 Civil Detainee- Conditions
of Confinement
D. Temporary Restraining
Order/Preliminary
Injunction
Property Rights
D 820 Copyl'ights
0830Patent
D 840 Trademark
Other Statutes
D 375 False Claims Act
0376 Qui Tam (31 USC
3729(a))
0 400 State Reapportionment
D 430 Banks & Banldng
D 450 Commerce/ICC
Rates/etc.
0 460 Deportation
0 462 Naturalization
Application
0 465 Other Immigration
Actions
0 G. Habeas Corpus/
2255
0
0
H. Employment
Discrimination
0 I. FOIA!Privacy Act
0
0
K. Labor/ERISA
(non-employment)
J. Student Loan
0 N. Three-Judge
M. Contract
Court
V. ORIGIN
1 Original
Proceeding
02Removed
from State
Court
3 Remanded from
Appellate Court
0 4 Reinstated or
Reopened
5 Transferred from
another district
(specify)
6 Multi-district
Litigation
07 Appeal to
District Judge
from Mag. Judge
VI. CAUSE OF ACTION (CITE THE U.S. CIVIL STATUTE UNDER WHICH YOU ARE FILING AND WRITE A BRIEF STATEMENT OF CAUSE.)
(See instruction)
DATE:
~~~
00
__..,..
tfNf~
II
COUNTY OF RESIDENCE OF FIRST LISTED PLAINTIFF/DEFENDANT (b) County of residence: Use 1100 I to indicate plaintiff if resident
of Washington, DC, 88888 if plaintiff is resident of United States but not Washington, DC, and 99999 if plaintiff is outside the United States.
III.
CITIZENSHIP OF PRINCIPAL PARTIES: Tllis section is completed Q!1!y if diversity of citizenship was selected as the Basis of Jurisdiction
under Section II.
IV.
CASE ASSIGNMENT AND NATURE OF SUIT: The assignment of a judge to your case will depend on the categ01y you select that best
represents the primmy cause of action found in your complaint. You may select only one categ01y. Youmust also select .QlJJl corresponding
nature of suit found under the categ01y of the case.
VI.
CAUSE OF ACTION: Cite the U.S. Civil Statute under wllich you are filing and write a brief statement of the primmy cause.
VIII.
RELATED CASE(S), IF ANY: If you indicated that there is a related case, you must complete a related case fonn, winch may be obtained from
the Clerk's Office.
Because of the need for accurate and complete information, you should ensure the accuracy of the information provided prior to signing the fonn.
District
of Columbia
__________
District
of __________
D.C. HEALTHCARE SYSTEMS, INC.,
1101 Pennsylvania Avenue, NW, 7th Floor
Washington, D.C. 20004,
Plaintiff(s)
v.
LEXINGTON INSURANCE COMPANY,
100 Summer Street
Boston, Massachussetts 02110,
Defendant(s)
)
)
)
)
)
)
)
)
)
)
)
)
If you fail to respond, judgment by default will be entered against you for the relief demanded in the complaint.
You also must file your answer or motion with the court.
CLERK OF COURT
Date:
Signature of Clerk or Deputy Clerk
; or
I left the summons at the individuals residence or usual place of abode with (name)
, a person of suitable age and discretion who resides there,
on (date)
, who is
; or
; or
Other (specify):
.
My fees are $
Date:
Servers signature
Servers address
0.00
EXHIBIT A
POLICYHOLDER NOTICE
Thank you for purchasing insurance from the Chartis companies. Chartis insurance
companies generally pay compensation to brokers and independent agents, and may have
paid compensation in connection with your policy. You can review and obtain information
about the nature and range of compensation paid by Chartis insurance companies to
brokers and independent agents in the United States by visiting our website at
www.chartisinsurance.com/producercompensation or by calling 1-800-706-3102.
91222 (12/09)
SM
DECLARATIONS
NOTICE: THIS IS A CLAIMS MADE AND REPORTED POLICY. COVERAGE IS ONLY PROVIDED FOR
CLAIMS FIRST MADE AGAINST THE INSURED AND REPORTED TO US DURING THE POLICY PERIOD OR
EXTENDED REPORTING PERIOD, IF APPLICABLE.
NOTICE: CLAIMS EXPENSES (WHICH INCLUDE ALL ATTORNEY FEES) ARE INCLUDED WITHIN AND
REDUCE THE APPLICABLE LIMIT OF LIABILITY. CLAIMS EXPENSES ARE INCLUDED WITHIN AND
REDUCE THE DEDUCTIBLE OR SELF INSURED RETENTION, WHICHEVER IS APPLICABLE.
Policy Number:
Item 1
Item 2
35848309
Renewal of Number:
New
Named Insured:
d/b/a
Address:
Item 3
Retroactive Date:
01/01/1996
Item 4
Policy Period:
From:
03/15/2013
To: 03/15/2014
At 12:01 a.m. Standard Time at you mailing address shown above.
Item 5
Limits of Liability:
Aggregate Limit:
Per Claim Limit:
$8,000,000
$6,000,000
Item 6:
$25,000
Item 7
Premium:
Item 8
Item 9
Item 10
Item 11
$120,823
25%
Months at
150%
By
Authorized Representative
95229 (8/07)
Insured eCopy
FORMS SCHEDULE
Named Insured:
D/B/A
Policy Number:
35848309
Effective Date:
Edition Date
Form Number
Cover Broker Letter
Cover Policy
91222
95229
95230
96691
96697
96699
PRG2023
89644
1209
0807
0709
1107
1107
1107
0705
0705
03/15/2013
Title
Covernote
Covernote
Policyholder Notice
Managed Care Risk Solutions
Managed Care Risk Solutions Claims Made Policy
Additional Insured Endorsement
Retroactive Date Amendatory Endorsement
Terrorism Premium Endorsement
Service of Suit Condition
Coverage Territory Endorsement
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Copyright Chartis Inc.
All Rights Reserved.
95230 (07/09)
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All Rights Reserved.
3. All interest on the amount of any judgment we pay that accrues after entry of the
judgment and before we have paid, offered to pay, or deposited in court the part of
the judgment we pay subject to the applicable Limit of Liability, and;
4. all premiums on appeal bonds required to be furnished in any suit.
E. Insured means the Named Insured, each of its present or former directors, trustees,
officers, medical directors, committee persons, volunteers, interns, employees, or any
other individual duly authorized to perform a service covered under the Insuring
Agreement on behalf of the Named Insured but only while acting in such capacity, and,
in the event of death or incapacity, the estate, heirs, or legal representatives of any of
them; and any other person or entity added to this policy as an Insured by
endorsement;
F. Medical service means any medical, surgical, mental health, dental, nursing or
chiropractic examination, treatment or therapy, the furnishing or dispensing of blood,
drugs or medical, surgical, dental, or chiropractic supplies or appliances, or the
handling of, or performing post-mortem examination on, a human body;
G. Most favorable jurisdiction means the jurisdiction where either the act, error or
omission giving rise to liability took place, the relief was awarded, you are
incorporated or have your principal place of business, or we are incorporated or have
our principal place of business; and
H. Vicarious liability means liability imposed upon you under a theory of agency,
ostensible agency, apparent agency or respondeat superior.
III. CLAIMS THAT ARE EXCLUDED
We will neither defend you nor pay any claim arising out of:
A. any act, error or omission which the Named Insureds Risk Management or Legal
Department knew or reasonably should have known was likely to lead to a claim, or
was reported to another insurer, prior to the commencement of the policy period of
the earliest consecutive policy issued by us immediately preceding this Policy;
B. the insolvency, receivership, bankruptcy, liquidation or financial inability to pay of any
Insured;
C. any dishonest, fraudulent, criminal or malicious act, error or omission committed by
you or at your direction; provided, however, that our obligations under this Policy shall
apply to any allegation otherwise within the scope of this exclusion until your liability
has been admitted or finally adjudicated, at which time all of our obligations under
this Policy with respect to such claim shall cease. For the purposes of this exclusion,
no act of any Insured shall be imputed to any other Insured;
95230 (07/09)
Page 3 of 13
Copyright Chartis Inc.
All Rights Reserved.
D. any dispute between you and any of your officers, directors, employees, trustees,
subsidiaries or affiliated entities; provided, however, that this exclusion will not apply
to any claim arising out of any service you perform as described in the Application
made by an individual who is a recipient of that service;
E. any act, error or omission in the conduct of any partnership or joint venture that is not
designated in the Declarations;
F. any act, error or omission in your performance of a medical service; provided,
however, that our obligations under this Policy will apply until such time as we have
determined that the medical service in question was performed by a health care
professional who, at the time of the performance of the medical service, was an
Insured. At that time, all of our obligations under this Policy with respect to such
claim shall cease.
This exclusion will not apply, however, to the voluntary
performance of an emergency medical service by an Insured without receipt or
expectation of remuneration;
G. any act, error or omission occurring before the Retroactive Date shown in the
Declarations;
H. the licensing, infringement, misappropriation or misuse of any patent, copyright,
trademark, service mark, trade name, computer software, trade dress, or other
intellectual property or trade secret; or
I. the unauthorized use or destruction of any computer data, software, hardware,
system, or network. This exclusion will not apply to claims arising out of (1) the
failure to protect the confidentiality of medical information obtained in the
performance of health care or managed care services and (2) information you maintain
for purposes of credentialing, selecting, or deselecting providers of medical services.
IV. LIMITS OF LIABILITY
Regardless of the number of (1) Insureds, (2) persons or entities that make a claim, or (3)
claims that are made under this Policy, our liability under this Policy and all other parts
and endorsements to this Policy combined, except as expressly provided therein, is limited
as follows:
A. AGGREGATE LIMIT:
Our total monetary obligation for all settlements, judgments and claims expenses as a
result of all claims for which coverage is afforded under this Policy shall not exceed
the Limit of Liability stated in the Declarations to be the Aggregate Limit.
95230 (07/09)
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Copyright Chartis Inc.
All Rights Reserved.
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Copyright Chartis Inc.
All Rights Reserved.
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Copyright Chartis Inc.
All Rights Reserved.
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Copyright Chartis Inc.
All Rights Reserved.
organization will have any right under this Policy to join or implead us as a party to any
action against you.
F. APPLICATION:
By acceptance of this Policy, you agree that the statements in the Application are your
true representations, that they shall be deemed material, that this Policy is issued in
reliance upon the truth of those representations and that this Policy embodies all
agreements existing between you and us, or any of our respective representatives,
relating to this insurance.
G. ASSIGNMENT:
This Policy will be void if assigned or transferred without our prior written consent.
H. FALSE OR FRAUDULENT CLAIM:
If you refer any claim to us which any Insured knows to be false or fraudulent, all
insurance hereunder shall be immediately forfeited.
I. CHANGES:
Notice to our authorized representative or knowledge possessed by any broker or other
person shall not effect a waiver or a change of any provision of this Policy or estop us
from asserting any right under the terms of this Policy, nor shall the terms of this
Policy be waived or changed except by endorsement issued to form a part of this
Policy.
J. INSPECTION:
We will be permitted, but not obligated, to inspect your property and operations at any
time. Neither our right to make inspections, nor the making thereof, nor any report
thereon shall constitute an undertaking on your behalf or for your benefit, or that of
others, to determine or warrant that such property or operations are safe or healthful,
or are in compliance with any law, rule, regulation or professional standard. We may
review your books and records at any time during the effective period of this policy or
any Extended Reporting Period, or within three years thereafter, as far as they relate
to the subject matter of this insurance.
K. PREMIUM:
All premiums for this Policy shall be computed in accordance with our rules and rates
applicable to such insurance. You must maintain records of such information as is
necessary for premium computation, and must send copies of such records to us at the
end of the effective period of this Policy as we may direct.
95230 (07/09)
Page 8 of 13
Copyright Chartis Inc.
All Rights Reserved.
L. CANCELLATION:
You may cancel this Policy by surrendering it to us or by mailing written notice to us
stating when thereafter the cancellation will be effective. If you cancel the Policy, we
will retain the customary short rate proportion of the premium, subject to the
Minimum Earned Premium set forth in the Declarations.
We may cancel the Policy by mailing written notice to you at the address shown in the
Declarations stating when, not less than ninety (90) days thereafter, the cancellation
will be effective. However, if we cancel the Policy because you have failed to pay a
premium or Deductible when due, we may cancel by mailing a written notice of
cancellation stating when, not less than ten (10) days thereafter, the cancellation will
be effective. The mailing of notice will constitute notice and the effective date of
cancellation stated in the notice shall become the end of the effective period of this
Policy.
Delivery of written notice by either of us as described shall be equivalent to mailing. If
we cancel, the earned premium shall be computed pro rata. Premium adjustment may
be made at the time cancellation is effected or as soon as practicable thereafter.
M. OTHER INSURANCE:
This insurance is excess of any other insurance whether provided on a primary,
contingent, excess, or any other basis, unless such other insurance is written to be
specifically excess of this policy. When this insurance is excess, we will have no duty
to defend any claim until all such other insurance has been exhausted in accordance
with its terms and conditions.
N. POLICY TERRITORY:
The policy territory is the United States, its territories and possessions and Puerto Rico.
Payment of loss under this Policy shall only be made in full compliance with all United
States of America economic or trade sanction laws or regulations, including, but not
limited to, sanctions, laws and regulations administered and enforced by the U.S.
Treasury Departments Office of Foreign Assets Control (OFAC).
O. MERGERS, ACQUISITIONS, OR NEWLY CREATED ENTITIES:
If, during the effective period of this Policy you form, acquire or merge with another
entity such that after the effective date of the transaction you hold a majority
ownership interest in the newly formed, acquired or merged entity, then for a period
of ninety (90) days after the effective date of the transaction or so long as this Policy
remains in effect, whichever is less, the newly formed, acquired or merged entity will
be included within the definition of Insured with
95230 (07/09)
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Copyright Chartis Inc.
All Rights Reserved.
respect to any claim arising solely out of acts, errors or omissions occurring after the
effective date of the transaction. Thereafter, all coverage under this Policy will cease
unless prior to the cessation of coverage:
1. you provide us with such information regarding the transaction and the newly
formed, acquired or merged entity as we request; and
2. we agree by written endorsement to this Policy to provide coverage, and you accept
any terms, conditions, exclusions or limitations, including payment of additional
premium, as we, in our sole discretion, impose on continued coverage.
P. SALE OR DISSOLUTION OF INSURED ENTITIES; CESSATION OF
BUSINESS:
95230 (07/09)
Page 10 of 13
Copyright Chartis Inc.
All Rights Reserved.
2. The Automatic Extended Reporting Period does not extend the Policy Period, nor
alter the Limits of Liability or any other term or condition of this Policy.
3. The Automatic Extended Reporting Period will not be effective if any other
insurance provides coverage to the Insured whether the other insurance applies on
a primary, excess, contingent, or any other basis.
4. Our offer of terms, conditions or premium different from the expiring Policy will not
be considered a refusal or failure to renew this insurance.
R. OPTIONAL EXTENDED REPORTING PERIOD
1. If this Policy is canceled or not renewed for any reason other than non-payment of
premium or failure to comply with the terms and conditions of the Policy, the first
Named Insured may purchase an Optional Extended Reporting Period Endorsement
commencing at the end of the Policy Period. The additional premium for, and the
period of, the Optional Extended Reporting Period Endorsement will be as stated in
the Declarations.
2. During the Optional Extended Reporting Period, any claim first made against an
Insured resulting from an act, error or omission that took place on or after the
Retroactive Date in the Declarations but before the end of the Policy Period will be
deemed to have been first made on the last day of the Policy Period. The Optional
Extended Reporting Period does not extend the Policy Period, nor alter the Limits of
Liability or any other term or condition of this Policy.
3. To obtain an Optional Extended Reporting Period Endorsement, the Named Insured
must make a request in writing within ninety (90) days after the end of the Policy
Period and pay the premium due. The premium will be fully earned and the
Optional Extended Reporting Period Endorsement cannot be canceled.
4. The insurance provided under the Optional Extended Reporting Period Endorsement
will be excess of any other insurance providing coverage to the Insured, whether
the other insurance applies on a primary, excess, contingent, or any other basis.
5. Our offer of terms, conditions or premium different from the expiring Policy will not
be considered a refusal or failure to renew this insurance.
S. ARBITRATION:
In the event of a disagreement as to the interpretation of this policy (except with
regard to whether this policy is void or voidable), it is mutually agreed that the dispute
shall be submitted to binding arbitration before a panel of three arbitrators consisting
of two party-nominated (non-impartial) arbitrators and a
95230 (07/09)
Page 11 of 13
Copyright Chartis Inc.
All Rights Reserved.
third (impartial) arbitrator (hereinafter umpire) as the sole and exclusive remedy.
The party desiring arbitration of a dispute shall notify the other party, including the
name, address and occupation of the Arbitrator nominated by the demanding party.
The other party shall, within 30 days following receipt of the demand, notify in writing
the demanding party of the name, address and occupation of the arbitrator nominated
by it. The two arbitrators so selected shall, within 30 days of the appointment of the
second arbitrator, select an umpire. If the arbitrators are unable to agree upon an
umpire, the selection of the umpire shall be submitted to the Judicial Arbitration and
Mediation Services (hereinafter, JAMS). The umpire shall be selected in accordance
with Rule 15 (as may be amended from time to time) of the JAMS Comprehensive
Arbitration Rules and Procedures for the selection of a sole arbitrator.
The parties shall present their respective cases to the panel by written and oral
evidence at a hearing time and place selected by the umpire. The panel shall be
relieved of all judicial formality, shall not be obligated to adhere to the strict rules of
law or of evidence, shall seek to enforce the intent of the parties hereto and may refer
to, but are not limited to, relevant legal principles. The decision of at least two of the
three panel members shall be binding and final and not subject to appeal except for
grounds of fraud or gross misconduct by the arbitrators. The award will be issued
within 30 days of the close of the hearings. Each party shall bear the fees and
expenses of its designated arbitrator and shall jointly and equally share with the other
the fees and expenses of the umpire and the arbitration.
The arbitration proceeding shall take place in the vicinity of Boston, Massachusetts or
such other place as may be mutually agreed by you and us. The procedural rules
applicable to this arbitration shall, except as provided otherwise herein, be in
accordance with the JAMS Comprehensive Arbitration Rules and Procedures.
T. SERVICE OF SUIT:
Subject to the provisions of Condition S, ARBITRATION, if we fail to pay any amount
due under this policy, at your request we will submit to the jurisdiction of a court of
competent jurisdiction within the United States. Nothing in this Condition constitutes
or should be understood to constitute a waiver by us of any right to commence an
action in any court of competent jurisdiction in the United States, to remove an action
to a United States District Court or to seek a transfer of a case to another court within
or outside of a jurisdiction as permitted by the laws of the United States or of any state
in the United States. It is further agreed that service of process in such suit may be
made upon Counsel, Legal Department, Lexington Insurance Company, 100 Summer
Street, Boston, Massachusetts, 02110. We will abide by the decision of such court or
of any appellate court in the event of any appeal.
95230 (07/09)
Page 12 of 13
Copyright Chartis Inc.
All Rights Reserved.
/
Secretary
President
This Policy shall not be valid unless signed at the time of issuance by an authorized
representative of the Insurer, either below or on the Declarations page of the policy.
Authorized Representative
95230 (07/09)
Page 13 of 13
Copyright Chartis Inc.
All Rights Reserved.
ENDORSEMENT #
This endorsement, effective 12:01 A.M., 03/15/2013
Forms a part of Policy No.: 35848309
d/b/a: D.C. CHARTERED HEALTH PLAN, INC.
Issued to: D.C. CHARTERED HEALTH PLAN, INC.
By: LEXINGTON INSURANCE COMPANY
Retroactive Date:
DC
2.
RapidTrans, Inc.
Retroactive Date:
3.
Retroactive Date:
The entity(ies) shown in the above Schedule are added as Additional Insured(s) to this Policy, but only
for claims arising out of the acts, errors or omissions committed by the Named Insured on or after the
Retroactive Date corresponding to the additional insured shown in the above Schedule.
Any claim made by any additional insured against any other insured or additional insured is excluded
from coverage.
All other terms and conditions of the Policy remain the same.
AUTHORIZED REPRESENTATIVE
96691 (11/07)
Dated:
Boston, MA
ENDORSEMENT #
This endorsement, effective 12:01 A.M., 03/15/2013
Forms a part of Policy No.: 35848309
Issued to: D.C. CHARTERED HEALTH PLAN, INC.
D/B/A: D.C. CHARTERED HEALTH PLAN, INC.
By: LEXINGTON INSURANCE COMPANY
Retroactive Date:
01/01/1996
Applies to $1,000,000
Per Claim and
$3,000,000
Aggregate Limit of Liability
07/11/2005
All other terms and conditions of the policy remain the same.
AUTHORIZED REPRESENTATIVE
96697 (11/07)
Dated: 03/15/2013
Boston, MA
ENDORSEMENT #
This endorsement, effective 12:01 A.M., 03/15/2013
Forms a part of Policy No.: 35848309
Issued to: D.C. CHARTERED HEALTH PLAN, INC.
D/B/A: D.C. CHARTERED HEALTH PLAN, INC.
By: LEXINGTON INSURANCE COMPANY
SURCHARGE:
$1,196
All other terms and conditions of the Policy remain the same.
AUTHORIZED REPRESENTATIVE
96699 (11/07)
Dated: 03/15/2013
Boston, MA
ENDORSEMENT #
This endorsement, effective 12:01 A.M.,
03/15/2013
Forms a part of Policy No.: 35848309
Issued to:
D.C. CHARTERED HEALTH PLAN, INC.
By: Lexington Insurance Company
Authorized Representative
ENDORSEMENT #
This endorsement, effective 12:01 A.M. 03/15/2013
Forms a part of Policy No.: 35848309
Issued to: D.C. CHARTERED HEALTH PLAN, INC.
D/B/A: D.C. CHARTERED HEALTH PLAN, INC.
By: Lexington Insurance Company
COVERAGE TERRITORY ENDORSEMENT
This endorsement modifies insurance provided under the following:
Payment of loss under this policy shall only be made in full compliance with all United States of
America economic or trade sanction laws or regulations, including, but not limited to, sanctions, laws
and regulations administered and enforced by the U.S. Treasury Departments Office of Foreign Assets
Control (OFAC).
______________________________
AUTHORIZED REPRESENTATIVE
89644 (7/05)
ENDORSEMENT #
This endorsement, effective 12:01 A.M., 03/15/2013
Forms a part of Policy No.: 35848309
Issued to: D.C. CHARTERED HEALTH PLAN, INC.
D/B/A: D.C. CHARTERED HEALTH PLAN, INC.
By: LEXINGTON INSURANCE COMPANY
and
we
prior
shall
to
Such coverage will be provided according to the applicable terms, conditions and exclusions of
the MANAGED CARE RISK SOLUTIONsm CLAIMS MADE POLICY PROVISIONS AND CONDITIONS,
II.
The Aggregate Limits described in Section IV. LIMITS OF LIABILITY of the MANAGED CARE RISK
SOLUTIONSsm CLAIMS MADE POLICY will not be increased or reinstated for claims made during
this Optional Extended Reported Period.
III.
In no event shall coverage offered by this Endorsement apply to any loss, claim or suit reported
to a prior insurance carrier nor shall coverage apply to any loss, claim or suit of which any
Insured had knowledge prior to the effective date of this Endorsement.
IV.
Premium for this Optional Extended reporting Period is fully earned by us on the effective date
of this Endorsement.
V.
Notice of
Any other terms not included herein shall apply in accordance with the Optional Extended Reporting
Coverage clause of the Policy.
All other terms and conditions of the policy remain the same.
AUTHORIZED REPRESENTATIVE
96700 (11/07)
ENDORSEMENT NO. 3
This endorsement, effective 12:01 A.M.
03/15/2013
Forms part of policy no.:
35848309
issued to:
D.C. CHARTERED HEALTH PLAN, INC.
D/B/A:
D.C. CHARTERED HEALTH PLAN, INC.
By: LEXINGTON INSURANCE COMPANY
IN CONSIDERATION OF AN ADDITIONAL PREMIUM OF $ 181,235.00, IT IS HEREBY UNDERSTOOD AND
AGREED THAT The Optional Extended Reporting Period endorsement is added to the policy
ALL OTHER TERMS, CONDITIONS AND EXCLUSIONS OF THIS POLICY REMAIN UNCHANGED.
Authorized Representative or
Countersignature (in states where Applicable)
By signing below, the President and the Secretary of the Insurer agree on behalf of the Insurer to all the
terms of this Policy.
Jeremy Johnson
PRESIDENT
Denis M. Butkovic
SECRETARY
This policy shall not be valid unless signed at the time of issuance by an authorized representative of the
Insurer, either below or on the Declarations page of the policy.
Ethan D. Allen
AUTHORIZED REPRESENTATIVE
78713 05/13
EXHIBIT B
v.
Jeffrey E. Thompson, et al.
Defendants.
AMENDED COMPLAINT
D.C. Chartered Health Plan, Inc. (in Rehabilitation), by and through counsel, and
pursuant to SCR-Civil 15(a), files this Amended Complaint against Defendants, Jeffrey E.
Thompson and D.C. Healthcare Systems, Inc., and for causes of action states:
Preliminary Statement
1.
This civil action, filed on behalf of D.C. Chartered Health Plan, Inc. (in
Rehabilitation) (Chartered), seeks over $16 million in damages from Defendants Jeffrey E.
Thompson (Thompson) and D.C. Healthcare Systems, Inc. (DCHSI) for breach of fiduciary
duty, unjust enrichment, conversion, breach of contract, indemnification, and violation of
statutory duties in connection with: (1) unsupported cash transfers from Chartered, (2) unpaid
contractual obligations under a Tax Allocation Agreement, and (3) the loss of Chartered assets
that secured a line of credit for DCHSI. After reasonable investigation, and on information and
belief, Chartered alleges as follows:
3401 et seq. (2012 Repl.). As an HMO, Chartered is regulated by the District of Columbia
Department of Insurance, Securities and Banking (DISB).
3.
The District of Columbia, like every state in the nation, regulates insurance
companies and health maintenance organizations (and similar risk-bearing entities) operating
within its borders. The principal purpose of insurance regulation is to protect policyholders,
enrollees, providers, other creditors, and the public from financial and other harm. See Couch,
Cyclopedia of Insurance Law 2:27 (citing minimum capital, surplus, and reserve requirements
enacted by legislatures to protect policyholders and creditors by ensuring that insurers are
solvent and able to pay claims as they come due). See also Solvency Modernization Initiative
(E) Task Force, The U.S. National State-Based System of Insurance Financial Regulation and the
Solvency Modernization Initiative, National Association of Insurance Commissioners (NAIC)
1, 12 (Aug 14, 2013), available at http://www.naic.org/documents/index_committees_white_
paper_ us_nat_system.pdf.
4.
D.C. Code 31-3851.01 et seq. (2012 Repl.) (the Health Organization RBC Act) which, in
order to protect enrollees, medical providers, and the general public, requires HMOs such as
Chartered to maintain a minimum amount of capital to support its overall business operations in
consideration of its size and risk profile. Insurer capital requirements are measured in terms of
risk-based capital (RBC), calculated using a mathematical formula that incorporates various
standards for quantifying risks. District law identifies various RBC action levels at which
company or regulatory action is required to address an insurers financial deficiencies. See D.C.
Code 31-3851.03 to 31-3851.06 (2012 Repl.).
5.
Under District law, when an HMOs RBC level falls below 200 percent of the
Authorized Control Level RBC amount, one of four action levels may be triggered. Id. These
are, from least to most serious:
(a) Company Action Level: 200% RBC where the HMO is required to submit a
detailed financial recovery plan to DISB. D.C. Code 31-3851.01(6), 313851.03 (2012 Repl.);
(b) Regulatory Action Level: 150% RBC where the HMO is required to prepare
and file an RBC report and DISB is required to issue a corrective order. D.C.
Code 31-3851.02, 31-3851.04 (2012 Repl.);
(c) Authorized Control Level: 100% RBC where, among other things, DISB
could place the HMO under regulatory control. D.C. Code 31-3851.01(3),
31-3851.05 (2012 Repl.);
(d) Mandatory Control Level: 70% RBC where DISB is required to place the
HMO under regulatory control, with discretion to allow up to 90 days for the
HMO to remedy its financial condition and RBC level. D.C. Code 313851.01(13), 31-3851.06 (2012 Repl.).
6.
Historically, Chartereds sole source of revenue was a Medicaid contract with the
District of Columbia Department of Health Care Finance, under which Chartered provided
Medicaid coverage to over 100,000 District residents. Chartereds Medicaid contract expired on
April 30, 2013.
7.
deteriorated to below the Company Action Level, requiring Chartered to submit a detailed
financial recovery plan to the DISB Commissioner. See D.C. Code 31-3851.01(6), 313851.03 (2012 Repl.).
8.
by auditors in the fall of 2012, as early as October, 2011, Chartereds RBC level had fallen to
well below the Mandatory Control Level prescribed by the District of Columbias Insurance
Code. See D.C. Code 31-3851.01(13), 31-3851.06 (2012 Repl.).
9.
Chartereds financial distress, without success. In April, 2012, Chartereds auditor, KPMG,
resigned. Five months later, Chartereds new auditors had found, among other things, that
Chartereds December 31, 2011 financial statements had misreported Chartereds true financial
condition, that Chartereds capital and surplus was at Mandatory Control Level as of December
31, 2011, and that there were irregular or unsupported related-party transfers between Chartered
and DCHSI. Adding to the companys struggles, on October 1, 2012, Chartered informed DISB
that its chief financial officer and controller had been dismissed due to matters discovered by
Chartereds new auditors.
10.
Holding Company System Act of 1993, D.C. Code 31-701 et seq. (2012 Repl.). See D.C.
4
registered in the District from among other things, having their assets raided by inappropriate
transfers to parent companies or affiliates.
Amendments to the NAIC Model Holding Company Act, 21 Tort & Insurance Law Journal 321,
339 (1985-86).
13.
As a regulated insurance entity, Chartered is, therefore, more than just an ordinary
corporation; and its transactions with its parent company are not simply subject to the common
law generally governing parent-subsidiary company relationships. Rather, its transactions with
its affiliates, including its parent DCHSI, are subject to regulatory scrutiny and a comprehensive
regulatory framework that is designed to prevent a parent entity or controlling shareholder from
diverting the insurance companys assets to the detriment of policyholders, healthcare providers,
and the public. See D.C. Code 31-701 et seq.; 31-3851.01 et seq. (2012 Repl.).
14.
The Holding Company System Act requires that, for all transactions within an
insurance holding company system, [t]he books, accounts, and records of each party to all the
transactions shall be so maintained as to clearly and accurately disclose the nature and details of
the transactions . . . . See D.C. Code 31-706(a)(1)(D) (2012 Repl.).
15.
Specifically, for transactions between an insurer and its affiliates, the Act
Thus, the Holding Company System Act regulates the movement of funds from
an insurer or HMO to its affiliates, including its parent. Under the Act, there are only two
legitimate ways for funds to move to an affiliate or parent: the first is through a documented
inter-affiliate transaction that meets the requirements of D.C. Code section 31-706(a)(1); the
second is through a dividend or distribution, that must also comply with section 31-706(a) and
(b). None of these requirements was met here.
17.
Indeed, Chartereds annual statement for 2011, filed well before Chartered
entered rehabilitation, specifically states that Chartered did not declare or pay dividend during
2011.
18.
other distributions would have been unreasonable and therefore prohibited under D.C. Code
31-706(a)(1)(E).
Chartereds Rehabilitation
19.
By 2012, with Chartereds RBC level below 70% RBC and thus triggering a
Mandatory Control Level Event, DISB was required to place Chartered under regulatory control
in a conservation, rehabilitation, or liquidation proceeding. D.C. Code 31-3851.06 (2012
Repl.) mandates:
If a Mandatory Control Level Event occurs, the Commissioner shall take
such action as is necessary to place the health organization under
regulatory control . . . . In such event, the Mandatory Control Level Event
shall be sufficient reason for the Commissioner to take action under
Chapter 34 of this title [Health Maintenance Organization] or Chapter 13
of this title [Insurers Rehabilitation and Liquidation Procedures]. In such
event, the Commissioner shall have the rights, powers, and duties with
respect to the health organization as are set forth in Chapter 34 of this title
and Chapter 13 of this title.
20.
apply to Chartered, which is incorporated in the District and served the Districts Medicaid
population. See D.C. Code 13-1302(1) (2012 Repl.) (The proceedings authorized by this
7
chapter may be applied to: (1) All insurers who are doing, or have done, an insurance business in
the District, and against whom claims arising from that business may exist now or in the
future.). Rehabilitation, liquidation, or conservation of HMOs are conducted under chapter
13 of Title 31. See D.C. Code 31-3420(a).
21.
Under the applicable statutory scheme, DISB was therefore mandated to compel
The Superior Court granted the Petition that same day and appointed the
The
The Rehabilitator examined Chartereds books and records and, based on the
All conditions precedent to the claims stated in this Amended Complaint have
Chartered is incorporated and has its principal place of business in the District of
Columbia.
8
27.
Chartered has been in Rehabilitation since October 19, 2012, with DISBs
The Rehabilitator brings this action both (a) in his capacity as Rehabilitator and
(b) on behalf of Chartered pursuant to D.C. Code 31-1312(d) (2012 Repl.) and pursuant to the
October 19, 2012 Emergency Consent Order of Rehabilitation issued by the District of Columbia
Superior Court that authorizes the Rehabilitator to pursue all appropriate claims and legal
remedies on behalf of Chartered.
29.
DCHSI is incorporated in the District of Columbia and is the parent and sole
shareholder of Chartered.
31.
Chartered and DCHSI are affiliated persons within an insurance holding company
The Court has subject matter jurisdiction over this case pursuant to D.C. Code
The Court has personal jurisdiction over Thompson and DCHSI pursuant to D.C.
Code 13-422 (2012 Repl.) because Thompson is domiciled in the District of Columbia and
because DCHSI is organized under the laws of and maintains its principal place of business in
9
the District. The Court also has personal jurisdiction over Thompson and DCHSI pursuant to
D.C. Code 13-423, and venue is proper in this Court, because they have committed acts within
the District of Columbia that give rise to the claims in this Complaint.
Statement of Facts
Chartereds Affiliates
34.
Chartered.
CFHC operated a medical clinic in the District that treated patients, including
Chartered and CFHC entered into contractual agreements under which CFHC
could use certain of Chartereds fixed assets and periodically would pay Chartered for
administrative support services, and Chartered agreed to reimburse CFHC for its actual costs
incurred in providing services to Chartered after deducting revenues collected from third-party
payors.
36.
Thompson controlled CFHC and was the only person with signing authority on
Chartered, CFHC, DCHSI and Thompson were all affiliates within the meaning
of D.C. Code 31-701(1) (2012 Repl.) and thus were an insurance holding company system
under D.C. Code 31-701(4) (2012 Repl.).
38.
to Chartered as a director of the company under D.C. Code 31-3405(a) and 29-306.30(a),
(b) (Repl. 2012).
39.
In February, 2011, CFHC sold substantially all of its assets, closed its medical
practice operations, and ceased active business operations. Thompson, however, continued to
10
exercise financial control over CFHCs accounts and corporate entity which, on information and
belief, remained intact until December, 2011.
The Cash Transfers
40.
After CFHC ceased operations in February, 2011, a total of $2.7 million dollars
transferred from CFHC to Chartereds parent, DCHSI, in most instances immediately upon
receipt of the transfers from Chartered. On information and belief, at least $850,000 of these
2011 transfers to CFHC, and at least $625,000 of that amount which was subsequently
transferred to DCHSI, were improperly transferred, as detailed below.
41.
Through the transactions detailed below, Thompson sought to evade the Districts
insurance regulatory scheme which was purposefully designed to prohibit an insurers parent or
affiliate, such as DCHSI, from stripping the assets of the insurer, thereby leaving the insurer
unable to meet its obligations to enrollees, healthcare providers, and the public.
42.
Thompson caused Chartered to make the following transfers of cash, totaling $850,000, to
CFHC:
(a) $300,000 from Chartered to CFHC on September 28, 2011;
(b) $300,000 from Chartered to CFHC on October 5, 2011; and
(c) $250,000 from Chartered to CFHC on November 2, 2011.
43.
All of the transfers described in paragraphs 42 and 43 were initiated and approved
transfer memoranda with his initials. Thompson, however, did not create or provide Chartered
with any documentary support for the transfers described in paragraphs 42 and 43 when they
were made, such as would reflect that (a) the transactions were properly recorded in the journals
and ledgers of the respective affiliated entities, (b) source documents existed to substantiate the
basis and justification for the transfers, and (c) books and records of the affiliated entities
established agreement between the independently maintained records of the same transactions.
46.
further funds to CFHC in the fall of 2011when the transfers identified in paragraph 42
occurredgiven that CFHC had ceased operations in February, 2011 and upon information and
belief Chartereds records indicated that all Chartered payables due CFHC had been satisfied
through various other transactions in mid-2011.
47.
Indeed, Chartered initially carried the amounts from the transfers identified in
paragraph 42 on its books as receivables from CFHC, but wrote the receivables off as bad debts
in its 2011 unaudited financial statements filed with DISB.
48.
As set forth in paragraph 43 above, CFHCs bank statements and general ledger
show that at least $625,000 of the $850,000 that Thompson caused Chartered to send to CFHC as
set forth in paragraph 42 was then transferred directly and in some cases immediately to DCHSI.
Again, the transfers were initiated and approved by Thompson, who had sole signatory authority
on the account.
12
49.
Thompson caused Chartered to transfer another $300,000 directly to DCHSI, purportedly for the
payment of federal income taxes.
approximately $10 million for that year and therefore had no basis to justify a federal tax
liability.
50.
Moreover, DCHSI had no rights to amounts from Chartered for federal income
taxes unless they were required by the Chartered-DCHSI Tax Allocation Agreement dated
November 8, 2006. The Tax Allocation Agreement required no amounts from Chartered, as
discussed in paragraphs 56 through 61 below.
51.
transferred from Chartered to DCHSI, no record existed that any calculation of Chartereds
potential tax obligations under the Tax Allocation Agreement had been prepared by DCHSI with
respect to the taxable year ending April 30, 2011 or estimated for the taxable year ending April
30, 2012.
52.
Indeed, to date, DCHSI has not filed federal income tax returns for itself or its
affiliated entities for those periods, even though it was required to do so by the Internal Revenue
Code and underlying regulations, and by the Tax Allocation Agreement.
53.
Therefore, the $300,000 that Thompson took from Chartered in December, 2011,
and transferred to DCHSI, ostensibly to pay Chartereds share of federal incomes taxes, was not
owed to DCHSI and was never remitted to the IRS by DCHSI or Thompson.
54.
separate demand for satisfactory documentation for, or reimbursement of, these transfers.
DCHSI provided nothing sufficient to explain or justify the transfers of cash out of Chartered
and to its non-regulated affiliate entities. To date, DCHSI has not reimbursed Chartered for
these transfers.
55.
with its affiliates, and (b) maintain books and records that did not clearly and accurately
disclose the nature and details of the transactions. On information and belief, the transfers
described above in paragraphs 42, 43 and 49 violated the District of Columbias statutory
scheme governing insurers and insurance holding companies, deprived Chartered of needed
resources, and unjustly enriched DCHSI and, in turn, Thompson, DCHSIs sole shareholder.
The Tax Allocation Agreement
56.
entered into a Tax Allocation Agreement (TAA, a true and accurate copy of which is attached
hereto as Exhibit B). The TAA expressly contemplated that DCHSI would pay the income tax
liability of its affiliated corporations, including Chartered, and charge each affiliate with an
amount equal to that affiliates separate tax liability. See Ex. B.
57.
Pursuant to the TAA, DCHSI and Chartered agreed that (a) the two entities
constituted an affiliated group under section 1504(a) of the Internal Revenue Code and, as
such, would join in the filing of consolidated federal income tax returns; (b) if requested by
DCHSI, each Member of the affiliated group would make periodic Estimated Tax Payments
to DCHSI (or direct to the relevant taxing authority) equal to the estimated tax payments that
would be payable by such Member individually; (c) each Member would make a Balance
Payment to DCHSI equal to the tax payment that would be payable by such Member
14
individually each year; and (d) DCHSI would pay to each Member the excess, if any, of the sum
of the Estimated Tax Payments paid by such Member over such Members Separate Tax
Liability within sixty (60) days after the due date of the affiliated groups tax return each year
(taking into account any extensions). See Ex. B, TAA 1, 2.
58.
Chartered approximately $4 million under the TAA. Indeed, Chartered carried this $4 million
receivable from DCHSI as an asset on its books as reported in its annual financial statement filed
with DISB in May, 2012.
59.
The TAA did not expressly provide for DCHSI to continue to charge Chartered
for additional amounts for taxes when DCHSI itself owed Chartered for substantial tax
overpayments. Moreover, DCHSIs 2011 tax year did not end until April, 2012, making an even
proper transfer of funds for tax payments strikingly premature given that DCHSIs IRS tax
filings would not be due until some 10 months later.
60.
Chartereds behalf. As a result, the Rehabilitator has confirmed that Chartered has no significant
income tax liabilities to offset the approximately $4 million owed by DCHSI to Chartered, and
Chartered may become entitled to additional amounts under the TAA due to potential refunds or
credits associated with operating losses or other tax attributes.
61.
The Rehabilitator has demanded that DCHSI pay Chartered amounts owed under
holding company system and is subject to the Holding Company System Act of 1993. See D.C.
15
Code 31-701 et seq. (2012 Repl.). The Act is designed to protect insurance companies
registered in the District from, among other things, risks associated with the affiliated entities
within their holding company structure.
63.
On or about October 10, 2008, Cardinal Bank made available to DCHSI a line of
credit in the maximum principal amount of $12 million. DCHSI in turn provided Cardinal Bank
with a promissory note for the line of credit amount.
64.
required that (a) Chartered and Thompson, jointly and severally, execute and deliver a Guaranty
of Payment to Cardinal Bank (Guaranty), and (b) Chartered enter into a Pledge, Assignment
and Security Agreement (Pledge Agreement) to secure Chartereds full and prompt
performance under the Guaranty and DCHSIs repayment of the line of credit. Thompson
therefore caused Chartered to execute the Pledge Agreement and to pledge securities to Cardinal
Bank as collateral for the line of credit to DCHSI. (A true and accurate copy of the Pledge
Agreement is attached hereto as Exhibit C.)
65.
(the Indemnification Agreement, a true and accurate copy of which is attached hereto as
Exhibit D).
66.
harmless and indemnifies Chartered for any moneys it is or may be obligated to pay in the event
Cardinal Bank exercises its rights against the collateral under the Pledge Agreement, including
any liquidation of the collateral. The Indemnification Agreement further states that Thompson
waives any rights or defenses he has or may have under any statute, common law or equitable
16
theory which has or may have the effect of enabling him to avoid, restrict or impair any liability
or obligation that arises from or is incident to this Undertaking.
67.
continued to hold Chartered assets as collateral and Chartered could not use those assets for its
own purposes.
68.
On or about April 26, 2013, Cardinal Bank cited events of default and accelerated
On or about May 16, 2013, Cardinal Bank liquidated the assets pledged by
Chartered as collateral to pay off the outstanding balance that DCHSI owed under its line of
credit. As a result, Chartered lost approximately $12 million.
70.
provide any notice or demand as a predicate for Thompsons liability and Thompson now owes
Chartered the sums lost due to Cardinal Banks liquidation of Chartereds pledged assets.
CAUSES OF ACTION
Count I Breach of Fiduciary Duty
(against Thompson)
71.
through 70.
72.
the company under common law and D.C. Code 31-701 et seq., 31-3405(a), and 29306.30(a), (b) (2012 Repl.).
17
73.
his own interests and those of DCHSI to the detriment of Chartered, its enrollees, medical
providers, and the general public, by improperly transferring cash from Chartered without
adequate justification or documentation, in violation of his duties under common law and under
D.C. Code 31-701 et seq., 31-3405(a), and 29-306.30(a), (b) (2012 Repl.).
74.
Chartereds financial condition, per D.C. Code 31-706(a)(1)(E) (2012 Repl.), prohibited such
activity.
75.
and proper accounting records, as required for all transactions under the Districts insurance
laws, see D.C. Code 31-706(a)(1)(D) (2012 Repl.).
76.
fiduciary duties.
Count II Unjust Enrichment
(against DCHSI)
77.
through 76.
78.
$625,000 in indirect transfers through CFHC as described in paragraph 43 and $300,000 in direct
transfers from Chartered as described in paragraph 49. DCHSI knew of the transfers, but
accepted and retained the cash despite demands for its return. DCHSI has been unjustly enriched
by the cash transfers.
18
79.
obligations, despite demands for payment. DCHSI has been unjustly enriched by retaining these
amounts.
80.
The Holding Company System Act prohibits transfers where, as here, the
distribution is not reasonable in relation to Chartereds outstanding liabilities and adequate to its
financial needs, see D.C. Code 31-706(a)(1)(E) (2012 Repl.). Because Chartered is a regulated
insurance entity and subject to the Holding Company System Act, DCHSI was statutorily
prohibited from transferring funds from Chartered to itself to the detriment of Chartereds
enrollees, healthcare providers, and the general public.
81.
82.
through 81.
83.
DCHSI and Thompson have unlawfully exercised dominion and control over
Chartereds assets for their own use and benefit, in denial of Chartereds rights to those assets.
84.
conversion of Chartereds assets. Dividends and other distributions are permitted only when
they are reasonable in relation to Chartereds outstanding liabilities and adequate to its financial
needs. See D.C. Code 31-706(a)(1)(E) (2012 Repl.). Under D.C. law, DCHSI was therefore
not entitled to Chartereds property, but was statutorily prohibited from transferring funds from
Chartered to itself to the detriment of Chartereds enrollees, healthcare providers, and the general
public.
19
85.
conversion.
Count IV Breach of Contract
(against DCHSI)
86.
through 85.
87.
88.
89.
90.
through 89.
91.
Indemnification Agreement for the loss of the assets liquidated by Cardinal Bank.
92.
Thompson has not satisfied his contractual duty and Chartered has been damaged
as a result.
Count VI Violation of Statutory Duty to Cooperate Under D.C. Code 31-1305
(against Thompson and DCHSI)
93.
through 92.
94.
Under D.C. Code 31-1305 (2012 Repl.), DCHSI and Thompson are obligated to
cooperate with the Rehabilitator by, among other things, responding promptly to inquiries and
20
making available any books, accounts, documents, and other records or information of or
pertaining to Chartered that are within their possession or custody or under their control.
95.
DCHSI and Thompson have not cooperated with the Rehabilitator as they are
RESPECTFULLY SUBMITTED,
s/ Richard E. Hagerty
Richard E. Hagerty, Bar Number 411858
Troutman Sanders LLP
1850 Towers Crescent Plaza, Suite 500
Tysons Corner, VA 22182
(703) 734-4326
(703) 734-6520 (facsimile)
richard.hagerty@troutmansanders.com
Attorneys for the Plaintiff
Of Counsel:
David Herzog (admitted pro hac vice)
Faegre Baker Daniels LLP
300 N. Meridian Street, Suite 2700
Indianapolis, IN 46204-1750
(317) 237-0300
David.Herzog@FaegreBD.com
22
CERTIFICATE OF SERVICE
I hereby certify that on January 13, 2015, a true and accurate copy of the foregoing
Amended Complaint was sent by first class U.S. mail., postage prepaid, to:
Deborah J. Israel
Joshua D. Greenberg
Womble Carlyle Sandridge & Rice, LLP
1200 Nineteenth Street, NW, Suite 500
Washington, DC 20036
disrael@wcsr.com
jgreenberg@wcsr.com
Lisa A. Bell
PCT Law Group
910 17th Street NW, Suite 800
Washington, DC 20006
lbell@pctlg.com
Attorneys for Defendants
/s/ Richard E. Hagerty
Richard E. Hagerty
23
Petitioner,
v.
DC CHARTERED HEALTH PLAN, INC.,
1205 15th Street, NW
Washington, D. C. 20005,
-;ti
051'
Respondent.
EXHIBIT A
(i)
(ii)
(iii)
(iv)
(v)
(vi)
(vii)
Authority to accept, direct, manage and pay employees and pay all
other expenses necessary to the rehabilitation.
(x)
(xi)
a
FURTHER ORDERED: That officers, directors, employees, agents and others
are directed to cooperate with the Rehabilitator as provided by D.C. Official Code 311305.
FURTHER ORDERED: That the Rehabilitator may seek to enjoin the initiation
of lawsuits, dissipation of bank accounts, obtaining of preferences, or any other
interference with the Rehabilitator.
FURTHER ORDERED: That the Rehabilitator file periodic accountings with
the Court, no less frequently than semi-annually.
FURTHER ORDERED: That the Rehabilitator submit a plan of rehabilitation
of Chartered for Court approval, if one is feasible. If the Rehabilitator determines that a
rehabilitation plan is not feasible, the Rehabilitator shall submit a report to the Court
which states the basis for such determination.
FURTHER ORDERED: That entry of this Order of Rehabilitation shall not
constitute an anticipatory breach of any contracts of Chartered nor shall it be grounds for
retroactive revocation or retroactive cancellation of any contracts of Chartered, unless the
revocation or cancellation is done by the Rehabilitator pursuant to D.C. Official Code
31-1312.
FURTHER ORDERED: That this Court retains jurisdiction in this matter
during Chartered's rehabilitation, and for purposes of granting such other and further
relief as this cause and the interest of the policyholders, creditors, or the public may
require.
t I
ROI" perior Court
3
Copies to:
E. Louise R. Phillips
Assistant Attorney General
Office of the Attorney General
441 Fourth Street, N.W., Ste. 650N
Washington, D.C. 20001
Am S
*Iv
WHEREAS, the DCHSI and Chattered desire to document their agreement to provide that
DCHSI shall pay the income tax liability of the DCHSI Group arid, concurrently therewith,
-Vs-detned
eleargeitte-Membcu-with-an-atneunt-equal-tcrweh.-Member
11 as determiiiirm this Agreement.
NOW, THEREFORE, the DCHSI and Chartered hereby agree effective as of the tax year
beginning April, 30, 2001 and thereafter as follows:
1.
eT
lab 1.1 ' of each Member for
For purposes of this Agreement, the "
each taxable year, or part thereof, during which such Member is a member of the DCHSI Group
shall be computed as if such Member were not included in the DCHSI Group but instead filed a
separate federal income tax return for such year, provided that certain items of income, gain,
deduction, loss and credit of each Member shall be taken into account by reference to Suction
1502 of the Code and applicable Treasury Regulations promulgated thereunder, without treating
each Member as filing such a separate return. A Member's Separate Tax Liability shall take into
account, among other things, all carryovers and carrybacks of net operating losses, arising in
connection with the sustaining of its separate company net operating loss or the earning of any
applicable credits, provided that the amount of each Member's net operating loss carryovers or
carrybacks for any taxable year shall be reduced by the amount of each payment such Member
received pursuant to Paragraph 3 with respect to the immediately preceding year.
2.
TALI
, <1_
13Xa
.
NTS
A.
Estimated. Talc Payrrsen . If requested by DCHSI, each Member shall
make periodic payments ('''..mated booms Tax Payments") to DCHSI (or directly to the
relevant taxing authority for the benefit of DCHSI) in such amounts as shall be equal to the
estimated tax payments that would be payable by such Member if it were not included in the
DCHSI Group but instead filed a separate federal income tax return for each year based on such
812339 2
EXHIBIT B
Member's Separate Tax Liability. Each Estimated Tax Payment shall be due no later than five
(5) days prior to the respective date on which such. payment would be due from suet,. Merel,er if
it were not included in the DCHSI Group.
B.
BalAAcelm
. as q.. Each Member shat pay to DCHSI an amount equal to
the tax payment that would be payable by such Member if it were not included in tl,e DCHSI
Group but instead filed a separate federal income tax return for each year with respect to such
Member's Separate Tax Liability (a "Balance Payment"). Each Balance Payment shall be due
and payable within sixty (60) days.
I1 DCHSI shall pay to each Member the excess, if any, of
C..ceas_taameA.
(1) the sum of the Estimated Income Tax Payments paid by such Member during each taxable
year pursuant to Paragraph 2(A), over (ii) the amount of such Member's Separate 'Tax Liability
for such taxable year (an "Excess Payment"). Each Excess Payment shall be due within sixty
(60) days after the due date of the relevant DCHSI Group consolidated return for each respective
taxable year (taking into account any extensions).
3.
LOSSES
If a Member's Separate Tax Liability for any taxable year reflects a net ocrating
ng..carryovera-an -camaelo-(fe-rax
loss-rea.pitaa-lo
Attributes"), in each case determined by reference to Section 1552(a)(2) of the Code ad
Treasury Regulation Section 1.1502.-33(d)(3), which DCHSI reasonably determines is actually
utilized in DCHSI Group's consolidated return, then, within, sixty (60) days after the due date
of the relevant DCHSI Group consolidated return for such taxable year (taking into account any
extensions), DCFISI shall pay to such Member an amount equal to the current tax savings or tax
benefit actually realized by the DCHSI. Group with respect to the use of such Member's Tax
Attributes.
4.
FAX ADRISZHEIITS
In the event that the DCHSI Group's consolidated federal income tax return is
adjusted for any period or periods for which this Agreement is effective, whether by means of an
amended return, claim for refund, determination by the Internal Revenue Service or otherwise,
the liability of the Members pursuant to this Agreement shall be =determined to give effect to
any such adjustment as if it had been made as part of the original computation of tax liability,
and any resulting payment thereby required to or from the Members pursuant to this Agreement
shall be made within sixty (60) days after the payment or receipt (or crediting) of such
attustment.
S.
In the case of foreign, state or local taxes based on or measured by the net income
of the DCHSI Group on a combined, consolidated or unitary basis, the provisions of this
Agreement shall apply with equal force to such foreign, state or local tax.
-2-
mrrExtEsT
6,
Any payment required to be made under this Agreement which is not timely made
shall bear interest from the date such payment was required to be made at the rate ree 'e the
manner provided in the Code for interest on underpayments and overpayments, respeetivoiy, for
federal income tax.
7.
All payments of federal income tax owed by the DCHSI Group shall be paid to
the Internal Revenue Service by DCHSI (unless a Member is directed by DCIISI to make Judi
paymeats directly to the Internal Revenue Service on behalf of the DCHSI Group).
8.
PRIORITY OF A..G_RE ME
The provisions of this Agreement shall fix the liability of each Member to the
other as to the matters covered herein, notwithstanding that such provisions are not controlling
for tax or other purposes, including, but not limited to, the computation of earnings and profits
for federal income tax purposes, and notwithstanding whether DCHSI and other corporations
which are now, or which from time to time may become, members of the DCHSI Group enter
.
into other arm me t
ion of a potion-othe-tette-teqt-liabil,3
-13
--Group-wbich-is-allocable-to-tirelcrdifebe
7e
s.
9.
DURATIM
This Agreement shall remain in effect as to each Member for so long as such
Member is a member of the DCHSI Group and the DCHSI Group files a consolidated income tax
return. Thereafter, each Member shall be entitled to receive and be obligated to pay, my amounts
subsequently determined to be refundable or owing pursuant to this Agreement as of the date of
termination.
10.
AMENDMENT
This Agreement may only be amended by the mutual consent of the undersigned
Members.
11.
11
.2/2r1WMENTS
The Members hereby consent and agree to the termination of any prior
agreements relating to allocation of taxes as of the effective date of this Agreement.
12.
IAMMEMBERS
The parties hereto recognize that from time to time other companies may become
members of the DCHSI Group and hereby agree that such new members may become parties to
this Agreement (and hence, "Members", as defined for purposes of this Agreement) by executing
a. copy of this Agreement.
13.lisl
kM:gKIFECT
This Agreement shall bind and in= to the respective successors and as.-.11.ps of
the parties hereto, provided that no assignment shall relieve any party's obligations hereunder
without the written consent of the other patty.
14.
This Agreement is made under the laws of the District of Columbia, which shall
be controlling in all matters relating to interpretation, construction or enforcement hereof.
15.
HEADINGS
The headings in this Agreement are inserted for convenience only and shall not be
deemed for any purposes to constitute a part or to affect the interpretation of this Agreement.
16.
gCit.IttaRraLS.
LEFT BLANK]
-5 -
B.
The disbursement of the Loan proceeds will benelltthe Assignor and, to inducethe
Lender to make the Loan, the Assignor has agreed to.execute and deliver to the Lender a certain
Guaranty of Payment of even date herewith made by the Assignorand Jeffrey E. Thompson (jointly
and severally, the "Guarantor") for the benefit of the Lender (as amended, modified, restated or
substituted at any time and from time to time, the "Guaranty").
C.
It is .a Condition precedent, among others, to the Lender's agreement to make the
Loan that the Assignor:enter into this Agreement lri orderto secure the full and prompt performance
of the Assignor of all of the obligations of the Assignor underthe Guaranty and all of-the other Loan
Documents (the 'Obligations").
6GREEMENTS
NOW, THEREFORE, in consideration of the Lender's making the Loan and for other good
and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the
Assignor hereby agrees as follows:
SECTION 1. SECURITY.
1.1 The Collateral. As security for the prompt and full performance of the
Obligations, and as security for.the prompt and full performance of all obligations of the Assignor
under this Agreement and all, If any, other obligations of the Assignor or Borrower to the Lender
underthe Loan Documents, all of the foregoing, whether nowin existence or hereafter created and
whether joint, several, or both, primary, secondary, direct, contingent in otherwise, the. Assignor
hereby pledges. assigns and grants to the Lender a security interest in the following property of the
Assignor (collectively, the "Collaterar), whether noW existing or here.afteroreated or arising:
(a)
Subject to the limitations set forth in Section 1.2 of this Agreement, all
of the Assignor's right, title and interest in that_certain account held in'the Assignor's name at
Cardinal Trust and Investments (CT1") and managed by Wilson/Bennett Capital Management, inc.
(Wilson') (CT1 and Wilson shall hereinafter be referred,to collectively as *Manager) as account no.
1050002002 (the -Accounr) and, all contents and proceeds thereof, including without limitation all
those securities beneficially owned by the Assignor in the Account. and all replacements or
EXHIBIT C
substitutions therefor and any securities held at any time and from time to time in the Account
(collectively, the "Securities');
(b)
Any substitutes for or additions to the. Securities, together with any
interest, bond rights, rights to subscribe, bond dividends, dividends paid in bonds, liquidating
dividends, all other or additional (or less) stock or other securities or property (including cash) paid
or distributed in respect of the Securities by way of stock-split, spin-off, split-up, reclassification,
combination of shares or similar corporate rearrangement, all other or additional stock or other
securities or property (Including cash) which may be paid or distributed in respect of the Securities
by reason of any consolidation, merger, exchange.f stock, conveyance of assets, liquidation or
similar corporate reorganization, new securities and other property (exclusive of cash dividends)to
which the Assignor may become entitled by reason of the ownership of the Securities during the
existence of this Agreement (the Proceeds"); and
(c)
all contents of the Account, including without limitation, bonds, money
market funds and cash; and
(d)
all proceeds (both cash and non-cash) of the foregoing, whether now
or hereafter arising under the foregoing.
12
Account Net Worth. Until such time as the Loan is Wily repaid and Lender
has no further obligations to make any advances thereunder, Assignor shall maintain a total
Account net worth (the Required Collateral Value) such that the Loan to value of the Collateral
shall not exceed ninety percent (90%), as determined by the Lender. If atany tinie the value of the
Collateral falls below the Required Collateral Value (Le., the Loan to value of the Collateral exceeds
ninety percent (90%), as determined by'the Lender). the:Assignor shall cure such default within five
(5) business days after notice to Assignor, by, of Assignor's option, making a principal curtailment
under the Loan and/or depositing addffional cash or securities in the Account in an amount
sufficient to reduce the loan to value ratio of the Loan to the value of the Collateral to ninety percent
(90%), as determined by Lender. Assignor's failure to so ouresuch default within five (5) business
days after notice shall constitute an. Event of Default hereunder. So long as no uncured default
under the Loan Documents exists beyond the expiration of any applicable notice andlor cure period
and Assignor maintains a total Account net worth of at least the Required Collateral Value, the.
Assignor may: (I) substitute other securities for the securities comprising a part of the Collateral, (Ii)
sell or redeem any of the Securities or (GI) traneer any Securities to another account or accounts
provided that the Collateral remaining in the Account meets the Required Collateral Value.
Notwithstanding the above. Assignor shall not cause or permit any change in the type of Securities
held in the Account from REPO U.S. Treasury without limp/larva-Men consent of the Lender, which
may be withheld or conditioned in the Lender's sole discretion. Furthermore, any such:change in
the type of Securities must comply with all federal, state and local regulatory requirements and all
contractual requirements applicable to Assignor, including without limitation, requirements that the
type of Securities be restricted to REPO U.S. Treasury, FDIC insured assets or government
secured assets.
1.3
Riohts of the Lender in the Collateral. The Assignor agrees that with respect
to the Collateral the Lender shall have all the rights and remedies of a secured party under the
Uniform Commercial Code, as well as those provided by applicable law and/or in this Agreement
2
SACardinaltDC HealthcareI2008 LoanISecurlties Pledge Agmt &dot
1.4
Rights of the Assignor in the Collateral. So long as no Event of Default (as
that term is defined in SECTION 4 below) is continuing, the Assignor shall be entitled to receive all
dividends and other distributions which may be paid on the Collateral. Any cash dividend or
distribution payable in respect of the Collateral which represents, in whole or in part a return of
capital or is in violation of this Agreement shall be received by the Assignor:in trust for the Lender,
shall be paid immediately to the Lender and shall be retained by the Lender as part of the
Collateral, unless the value of the other Collateral is at least the Required Collateral Value.
SECTION 2. REPRESENTATIONS AND WARRANTIES
To induce the Lender to advance sums to the Borrower under the Loan, the Assignor
represents and warrants to the Lender, as follows:
2.1
Binding Agreements. This Agreement and the other Loan Documents
executed and delivered by the Assignor have been;properly executed and delivered and constitute
the valid and legally binding obligations of the Assignor and are fully enforceable against the
Assignor in accordance with their respective terms, subject to (a) the effect of bankruptcy,
insolvency, reorganization, receivership, moratorium and other similar laws affecting the rights and
remedies of creditors generally and (b) the effect ofgenerat principles of equity, whether applied by
a court of law or equity,
12
No Conflicts Neither the execution, delivery and performance of the terms of
this Agreement or of any of the other Loan Documents executed and delivered by the Assignor nor
the consummation of the transactions contemplated;by this.Agreement will conflict with, violate or
be prevented by (a) any existing mortgage, indenture, contact or agreement binding on the
Assignor or affecting its property, (b) any applicable laws, (c) the organizational documents of the
Assignor, or (d) any restrictions on Assignor's use of the Collateral or any part thereof.
13
Organization. The Assignor is a corporation duly organized, validly existing
and in good standing under the lavvs of the District of Columbia with full power and authority to
execute, deliver and perform the covenants and obligations set forth in this Agreement and the
other Loan Documents; and this Agreement and the Loan Documents have been duly authorized,
executed and delivered by the Assignor.
2.4
Comonarlee with Laws. The Assignor is not in violation of any applicable
laws (including, without limitation, any laws relating to employment practices, to environmental,
occupational and health standards and controls) or order, writ, injunction, decree or demand:of any
court, arbitrator, or any governmental authority affecting the Assignor or any of its properties, the
violation of which could adversely affect the authority of the Assignor to enter into, or the ability of
the Assignor to perform under, this Agreement or any of the other Loan Documents executed by
the Assignor.
2.5
titiciation. There are no proceedings, actions or investigations pending or, so
far as the:Assignor knows, threatened against Assignor or its property before or by any court,
arbitrator any governmental authority which could reasonably be expected to adversely affect the
authority of the Assignor to enter into, or the ability of the Assignor to perform under, this
Agreement or any of the other Loan Documents executed and delivered by the Assignor.
3
SACardinaRDC Healtscare12008 LosolSeCurlties Pledge Agml 5.doc
2.6
Title to Collateral. The Assignor has good and marketable title to the
Collateral. The Assignor has legal, enforceable and uncontested rights to use freely such
Securities and other Collateral, except as noted on Assignor's financial statements. The Assignor
is the sole owner of the Collateral, free and clear of all security interests, pledges, voting trust&
agreements, liens, claims and encumbrances whatsoever, other than the ,security interest,
assignment and lien granted under this Agreement. The interests assigned as Collateral are
subject to no outstanding options, voting trusts, shareholders agreement, or other requirements or
restrictions with respect to such interests, except as noted on Assignor's financial statements.
2.7
Perfection and Priority of Collateral The Lenderhas, or upon execution and
recording of this Agreement and the Loan Documents will have, and will continue to have as
security for the Obligations and the other obligations secured by this Agreement a valid and
perfected lien on and security interest in all Collateral, free of all other liens, claims and rights of
third parties whatsoever.
2.8
Business Informatlen. The Information contained In EXHIBIT A. which is
attached to and a part of this Agreement is complete and correct.
SECTION 3. COVENANTS
Until payment in full and the performance of all of the Obligations and all of the
obligations of the Assignor hereunder or secured hereby, the Assignor covenants and agrees with
the Lender as follows:
3.1
Delivery of Collateral. Assignor shall authorize the Manager. (a) to send to
Lender, an original confirmation reflecting Lenders interest in the Collateral, (b) to enter Into that
certain Restricted (Blocked) Account Agreement:by and among Lender, DC Chartered. Cardinal
Trust and Investments and Wilson/BennettCapital Management, Inc. (the "Control Agreement') and
(c) by book-entry or otherwise, identify on its books and records that the Collateral Is subject to the
security interest of the Lender.
3.2 Defense ofTitle and Further Assurances. The Assignor will do or cause to be
done all things necessary to preserve and to keep in full force and effect its interests in the
Collateral, and shall defend, at Its sole expense, the title to the Collateral and any part thereof.
Further, the Assignor shall promptly, upon request by the Lender, execute, acknowledge and
deliver any financing statement, endorsement, renewal, affidavit, assignment, continuation
statement security agreement, certificate or other document as the Lender may reasonably require
in order to perfect, preserve. maintain, protect, continue, realize upon, and/or extend the lien and
security interest of the Lender under this Agreement and the priority thereat The Assignor shall
pay to the Lender upon demand all taxes, costs and expenses (including but not limited to
reasonable attorney's fees) Incurred by the Lender in connection with the preparation, execution,
recording and filing of any such document or Instrument mentioned aforesaid. Assignor hereby
further authorizes Lender to file UCC-1 Financing Statements and/or continuation statements with
respect to the Collateral without the signature of Assignor.
3.3
Compliance with Laws. The Assignor shall comply with all applicable laws
and observe the valid requirements of governmental authorities, the noncompliance with or the
nonobservance of which might have a material adverse effect on the ability of the Assignor to
4
SACardinalkOC Healthcaret2008 LoantSecurtlies Pledge Agmt 5.doc
perform its obligations under this Agreement or any of the Loan Documents to which the Assignor Is
a party or on the value of, or the ability of the Lender to realize upon, the Collateral.
3.4
Protection of Collateral The Assignor agrees that the Lender may at any
time take such steps as the Lender deems reasonably necessary to protect the Lender's interest in,
and to preserve the Collateral. The Assignor agrees to cooperatefully with the Lender's efforts to
preserve the Collateral and Will take such actions to preserve the Collateral as the Lender may in
good faith direct. All of the Lender's expenses of preserving the Collateral, Including, without
limitation, reasonable attorneys fees, shall be part of the Obligations.
3.5
Certain Notices. The Assignor will promptly notify the Lender in writing of any
Event of Default of which Assignor is aware and:of any litigation, regulatory proceeding, or other
event of which Assignor is aware which could reasonably be;expected to materially and adversely
affect the value of the Collateral. the ability of the ASsignor or the Lender to dispose of the
Collateral, or the rights and remedies of the Lender in relation thereto.
Locations.
3.6
The Assignor shall give the Lender not less than thirty (30)
days' prior written notice of any change to the information set forth on EXHIBIT A.
3.7
Agreement.
3.7.2 Each quarter, the Assignor shall deliver to Lender, and/or shall
authorize the Manager to send to the Lender, at the same time it Is sent to the Assignor, a copy of a
current statement for the Account.
3.73 It is the express intention of: the Assignor and the Lender that arty
permitted replacement or substitution of Securities or other Collateral with other Securities or
property as Collateral or the purchase of Secuties or other property with the proceeds of Securities
held as part.of the Collateral shall constitute a supplement to, and be oonsidered and construed as
part of this Agreement such that`this Agreement and all confirmations thereof shall constitute one
agreement. Notwithstanding the above, any change in the type of Securities held in the Account
shall be subject to the prior written consent of the Lender, which may be withheld or conditioned in
the Lender's discretion.
Liens. The Assignor will not create, incur, assume or suffer to exist any lien
3.8
upon any of the Collateral or the Account, other than liens in favor of the Lender.
Minimum Collateral Value The Assignors shall maintain with regard to the
3.9
Collateral a value at all times not less than the Required Collateral Value as determined by Lender
pursuant to the terms of Section 1.2 of this Agreement.
3.10 Survival. All representations and warranties contained in or made under or In
connection with this Agreement and the other Loan Documents shall survive the making of any
advance under the Loan and the incurring of any other Obligations and the other obligations
secured by this Agreement.
5
SACardlnaMIC Healthcare12008 LoarA.Secudlies Pledge Aged 5.doc
from time to time and as may be necessary to offer and/or sell the Securities or any part thereof In a
manner which is valid and binding and in conformance with ail applicable laws.
4.2.3 Specific Riohts With Renard to Collateral. In addition to all other
rights and remedies provided hereunder or as shall exist at law:orin equity from time to time, the
Lender may (but shall be under no obligation to), without notice to the Assignor, and the Assignor
hereby irrevocably appoints the Lender as his attomey-in-fact, during the continuance of an Event
of Default to, with power of substitution, In the name of the Lender or in the name of the Assignor or
otherwise, for the use and benefit of the Lender, but at the cost and expense of the Assignor and
without notice to the Assignor
(a)
compromise, extend or renew any of the Collateral or deal with the
same as it may deem advisable;
(b)
make exchanges, substitutions or surrenders of all or any part of the
Collateral;
(c)
copy, transcribe, or remove from any place of business of the
Assignor all books, records, ledger sheets, correspondence, invoices and documents, relating to or
evidencing any of the Collateral or without cost or expense to the Lender,
(d)
demand, collect, receipt for and give renewals, extensions, discharges
and releases of any of the Collateral;
(e)
institute and prosecute legal and equitable proceedings to enforce
collection of, or realize upon, any of the Collateral;
(f)
settle, renew, extend, compromise, compound, exchange or adjust
claims in respect of any of the Collateral or any legal proceedings brought In respect thereof,
(g)
endorse or sign the name of the Assignor upon any items of payment,
certificates of title, Instruments, Securities, powers, documents, documents of title, or other writing
relating to or part of the Collateral and on any Proof of Claim in Bankruptcy against an account
debtor; and
(h) take any other action necessary or beneficial to realize upon or dispose
of the Collateral.
42A Application of Prtmeeds. Any proceeds of sale or other disposition of
the Collateral will be applied by the Lender to the payment of its costs and expenses associated
with such sale, and any balance of such proceeds will be applied by the Lender to the payment of
the balance of the Obligations and the other obligations secured by this Agreement in such order
and manner of application as the Lender may from time to time in its sole and absolute discretion
determine. If the sale or other disposition of the Collateral fails to fully satisfy the Obligations and
the other obligations secured by this Agreement, the Assignor shall remain liable to the Lenderfor
any deficiency.
4.2.5 perfonnance by Lender. If the Assignor shall fall to perform, observe
or comply with any of the conditions, covenants terms, stipulations oragreements contained in this
Agreement or any of the other Loan Documents, the Lender without notice to or demand upon the
Assignor, except as may be specifically required herein or In the other Loan Documents with
respect to such event, and without waiving or releasing any of the Obligations or any default or
Event of Default, may (but shall be under no obligation to) at any time thereafter make such
payment or perform such act for the account and at the expense of the Assignor, and the Assignor
hereby irrevocably appoints the Lender as his attorney-th-factto do so, with power of substitution, In
the name of the Lender or In the name of the Assignor or otherwise, for the use and benefit of the
Lender, but at the cost and expense of the Assignor and-without notice to the Assignor. All sumsso
paid or advanced by the Lender together with Interest thereon from the date of payment, advance or
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incurring until paid in full and all costs and expenses, shall be paid by the Assignor to the Lender on
demand, and shall constitute and become a part of the Obligations.
4Z6 Other Remedies.. The Lender may from time to time proceed to
protect or enforce its rights by an action or actions at law or in equity or by any other appropriate
proceeding, whether for the specific performance of any of the covenants contained in this
Agreement or in any of the other Loan Doeument% or for an Injunction against the violation of any
of the terms of this Agreement or any of the other Loan Documents, or in aid of the exercise or
execution of any right, remedy or power granted in this Agreement, the Loan Documents, and/or
applicable laws.
43 Costs and Evenses. The Assignor shall pay on demand all costs and
expenses (including reasonable attorney's fees), all of which shall be deemed part of the
Obligations, incurred by and on behalf of the Lender incident to any collection, servicing, sale,
disposition or other action taken by the Lenderwith respect to the Collateral or any portion thereof.
4.4
Receipt Sufficient Discharge to Purchaser. Upon any sale or other
disposition of the Collateral or any part thereof, the receipt.of the Lender or other person making the
sale or disposition shall be a sufficient discharge to the purchaser for the purchase money, and
such purchaser shall not be obligated to see to the application thereof.
4.5
Remedies. etc. Cumulative. Each right, power and remedy of the Lender as
provided for in this Agreement or in any of the other Loan Documents min any related instrument or
agreement or now or thereafter existing at law or inequity.or by statute or otherwise shall be
cumulative and concurrent and shall be In addition to every other right, power or remedy provided
for in this Agreement or In the other Loan Documents or in any related document, instrument or
agreement or now or hereafter existing at taw or in equity or by statute or otherwise, and the
exercise or beginning of the exercise by the Lender of any one or more of such rights, powers or
remedies shalt not preclude the simultaneous or later exercise by the Lender of any or all such
other rights, powers or remedies.
4.6
No Waiver. etc. No failure or delay by the Lenderto insist upon the strict
performance of any term, condition, covenant or agreement of this.Agreement or of any of the other
Loan Documents:or of any related documents, instruments or agreements, or.to exercise any right,
power or remedy consequent upon a breach thereof, shall constitute a waiver of any such term,
condition, covenant or agreement or of any such breach, or preclude the Lender from exercising
any such right, power or remedy at any later time or times. By accepting payment after the due
date of any amount payable under this Agreement or under any of the other Loan Documents or
under any related document, instrument or agreement, the Lender shall not be deemed to waive the
right either to require prompt payment when due of all other amounts payable under this Agreement
or under any other of the Loan Documents, or to declare a default for failure to effect such prompt
payment of any such other amount
SECTION 5.
MISCELLANEOUS
Notices. All notices, requests, demands and other communications with respect
5.1
hereto shall be in writing and shall be delivered by hand, sent via teleoopier, sent prepaid by
Federal Express (or a comparable overnight delivery service) or sent by the United States first-class
mail, certified, postage prepaid, return receipt requested, to the following addresses:
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(a)
proceed against the Collateral with or without proceeding against the
Borrower, Assignor or any other person who may be liable for all or any part of the Obligations:
(b)
proceed against the Collateral with or without proceeding under any of
the other Loan Documents or against any other collateral and security for all or any part of the
Obligations;
(c)
without notice, release or compromise with any other person liable for
all or any part of the Obligations under the Loan Documents or otherwise; and
(d)
without reducing or impairing the obligations of the Assignor and
without notice thereof. (I) fall to perfect the lien in any or all'Collateral or to release any or ail of the
Collateral or to accept substitute collateral, go waive any provision ofthis Agreement or.the other
Loan Documents. (ill) exercise or fail to:exercise rights of set-off or other rights, or (v) accept partial
payments or extend from time to time the maturity of ail or any part of the Obligations,
5.4
Severe_billty. In case ere or more provisions, or part thereof, contained in this
Agreement or in the other Loan Documents shall be Invalid, illegal or unenforceable in any respect
under any law, then without need for any further agreement, notice or action, the validity, legality
and enforceability of the remaining provisions shall remain effective and binding on the parties
thereto and shall not be affected or impaired thereby.
5.5
Successors and Assigns. This Agreement and all other Loan Documents
shall be binding upon and Inure to the benefit of the Assignor and the Lender and their respective
personal representatives, heirs, successors and assigns, except that the Assignor shall not have
the right to assign his rights hereunder or any interest herein without the priorwritten consent of the
Lender.
5.6
of Virginia.
5.6.2 The Assignor irrevocably submits to the jurisdiction of any state or
federal court sitting In the Commonwealth of Virginia over any suit, action:or proceeding arising out
of or relating to this Agreement or any of the other Loan Documents. The Assignor irrevocably
waives. to the fullest extent permitted by law, any:objection that 11 may now or hereafter have to the
laying of the venue of any such suit, action or proceeding brought In any such court and any claim
that any such suit, action or proceecrmg brought in any such court has been brought in an
inconvenient forum. Final judgment in any such suit, action or proceeding brought in anysuchcourt
shall be conclusive and binding upon the Assignor and may be enforced In any court in which the
Assignor is subject to jurisdiction, bye suit upon'such judgment, provided that service of process is
effected upon the Assignor In one of lbe manners specified in this Section or as otherwise permitted
by applicable laws_
Entire Agreement This Agreement is intended by the Lender and the
5.7
Assignor to be a complete, exclusive and final expression of the agreements contained herein.
Neither the Lender nor the Assignor shall hereafter have any rights under any prior agreements but
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a1Cordinal= Heoliticare12008 Loan1Securtges Pledge Agni 5.doc
shall look solely to this Agreement for definition and determination of all of their respective rights,
liabilities and responsibilities under this Agreement.
5.10 Waiver of Trial by Jury. THE ASSIGNOR AND, BY ACCEPTING THIS
AGREEMENT, THE LENDER HEREBY JOINTLY AND SEVERALLY WAIVE TRIAL BY JURY IN
ANY ACTION OR PROCEEDING TO WHICH THE ASSIGNOR AND THE LENDER MAY BE
PARTIES, ARISING OUT OF OR IN ANY WAY PERTAINING TO (A) THIS AGREEMENT, (B)
ANY OF THE LOAN DOCUMENTS, OR (C) THE COLLATERAL. THIS WAIVER CONSTITUTES
A WAIVER OF TRIAL BY JURY OF ALL CLAIMS AGAINST ALL PARTIES TO SUCH ACTIONS
OR PROCEEDINGS, INCLUDING CLAIMS AGAINST PARTIES WHO ARE NOT PARTIES TO
THIS AGREEMENT.
5.11 Liablifiv of Lender, Except for gross negligence or willful misconduct, the
Lender shall:be under no liability for, and the Assignor hereby releases the Lende.rfrom, all claims
for loss or damage caused by (a) the Lender's failure to perform or collect any of the Collateral, or
(b) the Lender's failure to preserve or protect any rights of the Assignor under the Collateral
IN WITNESS WHEREOF, the Assignor has caused this Agreement to be executed, sealed
and delivered, as of the day and year first written above.
WITNESS:
ASSIGNOR:
D.C. CHARTERED HEALTH PLAN NC.
A District Golitrn
'ehlitoer-V7a4a,,,viiteJs.-4)
Print Name:An/4,o tits 6, Ktv4.74&.-cin
Y For
al Ado
4001r
[CORPORATE SEAL]
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alCardinalOC Healthcare2008 LoarASecuriUes Pledge Agin! 5.doc
" .0r;
iiipplIPP-
EXHIBIT A
The Assignor further represents and warrants to the Lender as follows:
1_
The exact legal name and jurisdiction of organization of Assignor are as stated in the initial
paragraph to the foregoing Agreement.
2.
3.
(a)
(b)
the Assignor in fact manages the main part of its business operations from that
address; and
(c)
it is at that address that persons dealing with the Assignor would normally look for
credit information.
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EXHIBIT D
1, JEFFREY E. THOMPSON, a resident of the District of Columbia and over the age of
18 years, being duly sworn, affirm and verify that the foregoing Undertaking is my voluntary act
and deed and that. I understand the obligations I have incurred in connection with the
Undertaking.
otary Public
My commission expires:
Maureen Smith
Mahn Aiblio District of Columbia
MY Commission Expires 7N14/20/2