On February 17th, dietary supplement maker Cell Tech International shareholders,
Darryl Kollman and Helen Fraxer (“appellants”), asked the
Ninth Circuit Court to confirm that an American International Group (AIG)
division owes millions of dollars in interest based on a $4.1 million
judgment awarded in 2004. Their claim contends that a lower court erred
in its ruling that a $5 million policy limit precluded any interest payments.
In its opening brief, appellants claim the National Union Fire Insurance
Co. of Pittsburgh, PA (“National Union”) is required to pay
9% interest on the $4.1 million owed from a $40 million shareholder suit
settled over a decade ago.
Appellants argued that a federal judge in Oregon read the word "loss"
in the policy as a preclusion to any award of interest, stating that "any
limitation on prejudgment interest included in the definition of Loss
applies only to 'covered judgments' that are entered against the
'insured.' " They further contend that judgments awarded
against National Union are not subject to any restriction contained in
the loss definition, in regards to prejudgment interest.
The appeal targets District Judge Owen M. Panner's ruling in September
2015 that awarded $4.1 million in damages to Frazer and Kollman.
Court filings show that in 2002, Kollman sued the company’s ex-director
Donald Hateley, and other associates in Oregon state court, alleging the
company failed to file registration statements and periodic reports with the SEC.
Plaintiff’s lawsuit also included an allegation that Cell Tech breached
its contractual obligation to trade stock and make it available for public purchase.
In 2004, the jury awarded Kollman a $40 million judgment against Hateley
and fellow Cell Tech executive, Marta Carpenter, who was not named in the suit.
In an attempt to recover the damages awarded, Kollman had the case removed
to federal court later that year, accusing National Union of acting in
bad faith when it denied coverage of Cell Tech.
Intervening in Kollman’s suit against National Union, Cell Tech claimed
the insurer also acted in bad faith by failing to previously settle the
case with Kollman for the policy limit of $5 million dollars.
Shortly afterward, Hateley declared bankruptcy stemming from the $40 million
In September, Judge Panner awarded Cell Tech over $880,000, including prejudgment
interest, and Frazer and Kollman over $4.1 million, along with legal fees
but with no prejudgment interest. He awarded Hateley's BK estate $2,000,000
plus post-judgment interest, and an additional $515,000 in attorney fees.
In their appeal, Kollman and Frazer argued that prejudgment interest is
required to be paid because the National Union policy limit on prejudgment
interest only applies to judgments against the insured, and not the actual insurer.
Kollman's attorneys argued that, "Nothing in the insurance policy
states that if National Union breaches the insurance policy and fails
to timely pay its policy limits, which will not be responsible for any
pre or post-judgment interest that is required by Oregon statute for a
breach of contract."
Oral arguments have been completed and it is now in the hands of the Ninth
Circuit Court of Appeals to determine whether to uphold or overrule the
lower court’s findings based on whether the policy language precludes
interest from a judgment against the insurer and not the insured. A decision
for National Union would be a resounding victory for insurance carriers
nationwide. Such a decision will surely reduce a carrier’s willingness
to resolve cases quickly if they know they will not be held liable for
pre-judgment interest, and reduce any urgency in payment of judgments
if they are also not liable for post-judgment interest accruals.
The case is
Kollman, et al. v. National Union Fire Insurance Co. of Pittsburgh, PA, case number 15-35795, in the United States Court of Appeals for the Ninth Circuit.