Chancery Court Finds Breach of Fiduciary Duties in Insurance Business Gone Awry
By: Scott Waxman and Will Grossenbacher
In Triple H Family L.P. v. Jerry Neal , C.A. No. 12294-VCMR (Del. Ch. July 31, 2018), the Delaware Court of Chancery held that the member-manager of Omni Insurance Group, LLC (“Omni”) breached his fiduciary duties to the company when he misled Omni’s largest customer about lapses in the customer’s insurance coverage. Additionally, the court held that although the other member of Omni owed fiduciary duties to Omni as a de facto manager, that member did not breach his fiduciary duties when he directed business away from Omni after the parties had already agreed to dissolve. Finally, the court held that judicial dissolution of Omni was not required because the members had previously agreed to dissolve Omni, and, as such, all that was required was a winding-up of Omni’s business.
The dispute at hand involved a failed attempt by two old friends, Jerry Neal (“Neal”) and Jeffrey Hoops (acting through his holding company, Triple H Family L.P., “Hoops”) to start their own insurance agency, Omni. The goal of the venture was to use Neal’s experience in the insurance industry to save on commissions for insurance coverage for Hoops’ coal-mining business, Revelation Energy, LLC (“Revelation”). Essentially, the plan was that each member would get a fifty-percent cut of the Revelation insurance commissions that were currently going to a third party. Additionally Neal would roll his existing insurance business into Omni, and the two would work together to grow the Omni business.
The rosy arrangement between Hoops and Neal did not last long. Almost immediately, the parties ran into trouble. First, Neal was unable to transfer Revelation’s insurance policies over to Omni before the old policies lapsed. This resulted in a period of several days where, unbeknownst to Hoops, Revelation was without liability coverage. Additionally, Neal balked at the idea of transferring his existing business over to Omni. Finally, Neal forced Hoops to distribute his portion of the Revelation commission before finalizing the policy. As such, after roughly two months in business, the parties agreed to dissolve Omni.
Most importantly, the court held that Neal’s deceit regarding the Revelation policy renewal (and intervening lapse in coverage) constituted a breach of Neal’s fiduciary duties to Omni because Revelation was Omni’s single largest customer. Although both Hoops and Neal knew that the short time between founding Omni in late August and the expiration of Revelation’s insurance coverage on October 5 would leave less time than customary to begin the renewal process, Neal assured Hoops that he would have no trouble in renewing the policies. On October 1, Neal informed Hoops that he had successfully renewed all eleven of Revelation’s policies. However, as of October 4, Neal knew that the applications were still pending, so that when the policies lapsed on October 5, Revelation was without any insurance coverage.
Hoops made clear to Neal that the nature of the business meant that he had workers on the job at all times, and that he would rather shut down operations at a cost of $1 million per day than risk going without coverage. Nonetheless, Neal assured Hoops that he had successfully renewed the policies, despite the fact that he had not. Although he was eventually able to obtain all necessary coverage by October 8, the court reasoned that this likely would not have been the case had some accident occurred. Because of these lies, and the considerable financial risk that they posed to Revelation and to Omni itself, the court therefore concluded that Neal’s deception had resulted in a breach of his fiduciary duties. However, because Revelation (and, by extension, Omni) did not suffer any actual harm as a result of the lapsed coverage, the court awarded only nominal damages.
Additionally, the court held that Hoops did not breach his fiduciary duties to Omni when he took Revelation’s insurance business to another insurance agency he partly owned after the parties had agreed to dissolve Omni. In order to reach this conclusion, the court first held that Hoops, although not officially designated manager of Omni, was a de facto manager because of the degree of control he exercised over Omni. Although the parties intended that Neal would be solely responsible for running the business, it was Hoops who organized Omni, directed the establishment of its bank accounts and ledger and oversaw all staffing decisions. Thus, the court found that Hoops, in addition to Neal, served as a manager of Omni.
Because of Hoops’ status as a de facto manager of Omni, he also owed fiduciary duties to Omni. Thus, as Neal claimed, when Hoops transferred Revelation’s insurance business to a different agency, he usurped a corporate opportunity of Omni and breached those duties. The court did not agree. After Neal extracted the distribution, both parties agreed to part ways and dissolve Omni. Hoops then proceeded to establish a new insurance agency and transfer Revelation’s insurance policies (and the ensuing commissions) to that agency. Although this new agency was founded shortly after the dissolution of Omni, the court held that Hoops could not have usurped Omni’s opportunity because a dissolved company cannot, by definition, have any business opportunities. As such, the court concluded that Hoops had not breached his fiduciary duties.
Finally, the court also addressed the dissolution of Omni, holding that because the parties had mutually agreed to the terms by which the company would be dissolved, there was not need for a judicial dissolution. In reaching this conclusion, the court looked to email correspondence between the two parties that discussed whether they could continue the business and how the split would be handled. Although Neal and Hoops did not straightforwardly agree to dissolve Omni, the court found that by October 30, they had both agreed that the arrangement was not working out, that the should part ways, that Neal could keep his previous insurance business, and that he would receive one-half of the Revelation commission for the next year. Thus, the court held, the parties had mutually consented in writing to dissolve Omni. Because Neal and Hoops had agreed to dissolve Omni, the court found that no judicial dissolution was necessary and ordered that its business be wound up with Hoops serving as liquidating trustee.
Triple H Family L.P. v. Jerry Neal , C.A. No. 12294-VCMR (Del. Ch. July 31, 2018)