Friday October 5, 2018
On Thursday, October 4th, a Texas federal judge ruled that Great American Insurance Company wrongfully refused to cover Nobilis Health Corp’s costs to defend two shareholder class action suits, accusing Nobilis of artificially inflating its stock price, finding that the suits involved allegations similar to those in an earlier action that the insurer had agreed to cover.
U.S. Magistrate Judge Nancy K. Johnson entered partial summary judgment in favor of Houston-based Nobilis on its breach of contract claim against Great American, which had issued the company a directors and officers liability policy for a period spanning October 2014 through October 2015.Great American had funded Nobilis’s defense of an October 2015 class action complaint filed by disgruntled shareholders, but declined to cover two subsequent shareholder suits lodged in January 2016, beyond the coverage period.However, the D&O policy provided that multiple claims involving identical or similar wrongful acts will be treated as one claim. Nobilis argued that all three suits share the same core allegations and, therefore, the two later suits should be treated as having been filed at the same time as the first action for insurance purposes.
Judge Johnson agreed with Nobilis’ position, rebuffing Great American’s contention that the two later suits were markedly different from the first.“At their core, all three complaints are allegations that Nobilis inflated its stock price by making various misstatements to the investing public,” Judge Johnson wrote. “Thus, at the very least, the ‘wrongful acts’ alleged in the complaints are united by common circumstance or situation such that the allegations are ‘related wrongful acts’ under the policy.”
Nobilis’ troubles began in mid-October 2015, when financial services website Seeking Alpha published an anonymous article characterizing Nobilis as an overvalued company whose stock price was bound to “drastically drop.” Shortly after the article’s publication, Nobilis’s stock price fell 27 percent, according to court documents.
The plunge led a putative class of Nobilis shareholders to sue the company and two top executives in Texas federal court. In that case, referred to as the “Hall” action in Judge Johnson’s order, the plaintiffs alleged Nobilis had artificially inflated its stock price by making a number of false or misleading statements, including overstating its 2014 revenue by $36 million.
“All three lawsuits contain allegations that Nobilis’ financial statements were misstated, false, misleading and/or inaccurate,” the judge wrote. “Additionally, all three complaints discuss the information revealed by the Seeking Alpha post. The court finds that the Hall, Schott and Cappelli complaints contained at least some allegations of the same ‘wrongful acts.’”
Great American had argued that the three cases are not related because the Schott and Cappelli actions dealt with the accounting errors that Nobilis disclosed to the SEC, after the Hall case had already been dismissed.
But Judge Johnson said Nobilis’ January 2016 disclosure was not itself a wrongful act. All three suits sought damages based on the same or similar purported misstatements by Nobilis, the judge found.
“The ‘wrongful acts’ complained of in the three lawsuits are primarily that Nobilis’ financial statements from 2014 and the first two quarters of 2015 contained misstated information,” Judge Johnson wrote.
Tyler G. Doyle of Smyser Kaplan Veselka LLP, who represents Nobilis, told Law360, “Nobilis is extremely pleased with the court’s ruling and believes that the court reached the correct decision here.”