Refusing to Quit, Callahan & Blaine Delivers a $30 Million Settlement in Complex D&O Case

In February 2012, Callahan & Blaine brokered a $15.5 Million settlement which, on top of a prior recovery of $14.5 Million, resulted in a total recovery of $30 Million and brought closure to litigation that had been on-going for nearly a decade. The lion's share of this settlement will go to pay newspaper carriers who were members of a class action against Freedom's Orange County Register.

The class action was initially filed in the Orange County Superior Court in 2003 and then proceeded through the litigation process, culminating in seven weeks of jury trial before it was settled in January of 2009 for $38 million. But in September, 2009, before the settlement was funded, Freedom filed for Chapter 11 bankruptcy seeking to eliminate their payment obligations under the settlement.

Callahan & Blaine, who successfully represented the newspaper carriers in the class action, refused to quit and flew to Delaware where Daniel J. Callahan was elected chairman of Freedom's unsecured creditors committee. Mr. Callahan first order of business was to reject an offer to settle for $5 Million and instead aggressively pursue claims on behalf of the unsecured creditors. As a result, Mr. Callahan was able to negotiate an advance payment of $14.5 million, along with an assignment of Freedom's rights to sue its own directors and officers. Mr. Callahan then formed a litigation trust and caused the Trustee to file suit in the U.S. District Court for the Central District of California.

The Trustee's action, which was spearheaded by Daniel J. Callahan and David J. Darnell, asserted claims against Freedom's officers and directors for illegal dividends, negligence and breach of fiduciary duty. Specifically, the Trustee alleged that directors and officers breached their duties of loyalty and good faith by putting shareholder interests above the best interests of the company, which caused company to squander hundreds of millions of dollars on the eve of an inevitable bankruptcy filing.

In their defense, the directors and officers argued that they did nothing wrong and did not breach their fiduciary duties, that they considered the best interests of the company at all times and that Freedom was not harmed as a result of anything they did.

In addition, their insurers claimed that there was no coverage for the claims at issue. Accordingly, the insurers filed a separate lawsuit claiming they were not obligated to provide coverage for any alleged damages or judgment that might be entered against the directors and officers. The insurers also argued that even if they were obligated to provide coverage, their exposure on any judgment was limited to whatever policy limits remained after paying all attorney's fees, expert fees and costs of defense because they were "burning limits" policies. The insurers further claimed that fees and costs in defending the case would exceed $10 Million, which meant that there would be less than $15 Million in policy limits available if the case proceeded to trial.

The Trustee's case against Defendants was set to proceed with a four week jury trial in July 2012 before Andrew J. Guilford in District Court in Santa Ana.

On February 27, 2012, after attending three mediation sessions, Callahan & Blaine obtained a $15.5 Million settlement for the Trustee. Thus, between the $14.5 Million previously advanced and the $15.5 Million recovered in the directors and officers lawsuit, the Trustee recovered a total amount of $30 Million.

Given the complexity of the issues, as well as the arguments over insurance coverage and the amount of "burning limits" that would be available, the Trustee and Callahan & Blaine are extremely pleased with the end result.

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