Free Response to Motion - District Court of Colorado - Colorado

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IN THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF COLORADO Senior District Judge Richard P. Matsch Civil Action No. 04-cv-725-RPM-OES THE QUIZNO'S MASTER LLC, a Colorado limited liability company and THE QUIZNO'S HOLDING COMPANY, a Nevada corporation, as assignee of and successor in interest to THE QUIZNO'S CORPORATION, a Colorado corporation, Plaintiffs, v. WESTCHESTER FIRE INSURANCE COMPANY, a New York corporation and ROYAL INDEMNITY COMPANY, a Delaware corporation, Defendants.

QUIZNO'S RESPONSE BRIEF IN OPPOSITION TO DEFENDANT WESTCHESTER FIRE INSURANCE COMPANY'S MOTION FOR SUMMARY JUDGMENT "'When I use a word,' Humpty Dumpty said, in rather a scornful tone, 'it means just what I choose it to mean, neither more nor less.'" Chapter 4, Through the Looking Glass, Lewis Carroll. Plaintiffs The Quizno's Master LLC and The Quizno's Holding Company (hereinafter referred to singularly as "Quizno's"), hereby presents its Response Brief in Opposition to Defendant Westchester Fire Insurance Company ("Westchester")'s Motion for Summary Judgment as follows: INTRODUCTION None of the arguments raised by Westchester entitle it to summary judgment. Westchester argues that the settlements and defense costs in the Nickerson Action and the

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Sebesta Action, and the judgment and defense costs in the Dissenters Action constitute a return of "ill-gotten gain," and therefore, insurance coverage for them would violate public policy. In short, Westchester argues that all of the similar D&O policies it sells are void and it never intended to pay a claim on such policies. Westchester ignores Colorado contract interpretation rules. Even if there were such a "public policy" a court applying Colorado law will not disregard a parties' agreement to advance a purported public policy concern. Rather, Colorado law guarantees parties that courts: (1) enforce the clear terms of a parties' agreement; (2) are loath to reduce coverage in an insurance contract; and (3) interpret an ambiguous policy as legal and enforceable to give purchasers the benefit of their bargain. Westchester represented to Quizno's that the losses for which it seeks coverage were "losses" covered in the policies it sold to Quiznos. Westchester does not argue that the losses for which Quizno's seeks coverage fall outside the definition of "Loss." Nor does Westchester rely on any of the 12 express exclusions to coverage agreed to by the parties. Rather, Westchester asks this Court to rewrite its policy to avoid its promises and agreements. To accept Westchester's argument would turn the industry on its head. However, Westchester's basis for voiding its agreement is wrong, because the losses incurred by Quizno's do not constitute restitution. Indeed, Westchester represented in its policies that defense costs were covered in the express exclusion precluding coverage for certain true restitution type losses. Moreover, the plaintiffs in the Nickerson Action and the Sebesta Action sought traditional out-of-pocket compensatory damages, not restitution. The plaintiffs claimed they

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were damaged by the defendants' alleged beaches of fiduciary duty for failing to make disclosures and approving the transaction at issue. And, it is apparently a disputed fact whether Quizno's paid fair or appropriate consideration for its shares in connection with the 2000 Voluntary Offer underlying the Nickerson Action and the going private merger under the Sebesta Action (and the Dissenters Action). In addition, Westchester's argument that the settlements in the Nickerson and Sebesta Actions constitute "ill gotten gain" is inconsistent with several federal appellate decisions that have held to the contrary. See e.g., Limelight Productions, Inc. v. Limelight Studios, Inc., 60 F.3d 767, 768 (11th Cir. 1995). The losses suffered by the board members cannot be considered restitution; the board members were not parties to the transactions at issue. The members of the board of directors incurred defense costs and were liable on the settlements of those actions. Quizno's indemnified those board members. These losses cannot qualify as restitution, as the losses were not borne by the entity Westchester claims received the "ill-gotten gain." The Dissenter's Action presents different issues. However, at least some of the losses incurred by Quizno's in connection with the Dissenters Action are clearly not restitution in character. First, Quizno's seeks coverage for its fees and costs, which are not part of the award to the dissenting shareholders. Second, the dissenting shareholders in the Dissenters Action asserted counterclaims, including claims for their attorneys' fees, in addition to the alleged fair value of their shares. The judgment included an award to the dissenting shareholders of their fees on the basis that Quizno's acted in bad faith toward them in connection with the valuing of the shares. This portion of the judgment is not restitution in character. Third, the dissenting shareholders in effect asserted claims for breach of fiduciary duty and the court appears to have

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agreed in its judgment. Fourth, the district court held that under the Colorado Dissenter's Rights statute, fair value is not fair market value. Therefore, the difference between fair market value, the trading price of the shares, and fair value under the Colorado statute, $34.00 per share, constitute an insurable loss that is not restitution. Indeed, it is the equivalent to an award of damages to the dissenting public shareholders who have been forced out of the company when it went private in the merger transaction. In addition, Westchester's argument that the dissenting shareholders did not make claims against Quizno's for Wrongful Acts, as that term is defined in the Policies, is disingenuous at best. Westchester also argues that Quizno's claims for coverage constitute only a single claim under a single policy. To the contrary, the underlying facts and circumstances of the claims made against Quizno's in the Nickerson Action are different than the facts and circumstances underlying the claims made against Quizno's in the Sebesta Action. Each claim was made during two different policies and, therefore, are covered under two different policies. Westchester is mistaken when in its other argument it attempts to place all coverage obligations on Royal by ignoring Endorsement 6 of its policy. In Endorsement 6 Westchester specifically agreed that it (together with Royal) would be obligated to cover a claim arising out of the same circumstances described in the notice of potential claim letter Quizno's sent Royal in January 1999. Westchester argues that the follow-up letter Quizno's sent to Royal in February described different circumstances than those described in the January letter. Westchester then argues that the claims in the Nickerson Action and the Sebesta Action arise out of the same circumstances described in the February letter, but not the January letter, so Endorsement 6 does

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not apply. Therefore, Westchester argues, only Royal owes coverage because Quizno's provided notice to Royal under Royal's prior policy. Westchester is wrong because the January and February letters to Royal describe the same circumstances, namely the Schadens' proposal to buy all of the outstanding shares. Finally, summary judgment is inappropriate on Quizno's insurance bad faith claims because those claims raise factual issues regarding Westchester's conduct, lack of responsiveness and coverage decisions.

RESPONSE TO STATEMENT OF UNDISPUTED MATERIAL FACTS
Westchester has misstated or misconstrued the content of some of the key underlying documents. As a result, Westchester has drawn incorrect legal conclusions from the documents that underlie the issues relating to coverage. Quizno's presents the following to put Westchester's claims into context. Initially, Quizno's incorporates by reference its Statement of Undisputed Material Facts ("SUMF") set in its Motion for Summary Judgment filed on July 1, 2005. As set forth more fully in Quizno's SUMF, there are three different corporate actions at issue: (1) a proposal by the minority shareholders in the fall of 1998 (the "Fall 1998 Proposal"); (2) a Fall 2000 Voluntary Offer whereby Quizno's offered to buy shares from shareholders at a premium over the trading price; (3) and a cash out merger in December 2001 between Quizno's and a company owned by the Schadens whereby Quizno's went from a public company to a private company. And, there are
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Westchester has generally provided an accurate (and, therefore, undisputed) timeline of events. In addition, the parties do not dispute the authenticity or accuracy of the documents from the underlying transactions and lawsuits.

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three legal proceedings with respect to which Quizno's seeks coverage: (1) the Nickerson Action, which related to the 2000 Voluntary Offer; (2) the Sebesta Action, which related to the 2001 Merger; and (3) and the Appraisal Action, which also related to the 2001 Merger. Although Quizno's described these transactions and suits in detail in its Motion, Quizno's provides the following description to put in context on the arguments advances by Westchester. Fall 1998 Proposal In a letter dated December 29, 1998, Richard E. Schaden and Richard F. Schaden (the "Schadens"), the two majority shareholders of The Quizno's Corporation, offered to purchase all of the outstanding shares of The Quizno's Corporation for a price between $7.84 and 8.20 per share. See Quizno's Motion for Summary Judgment at Meyers' Decl. ¶ 5. A true and correct copy of the December 29, 1998 letter is attached Meyers' Decl., Exhibit D. By letter dated January 5, 1999, The Quizno's Corporation notified Royal of this proposal, which The Quizno's Corporation described as a circumstance that would reasonably be expected to give rise to a claim, as defined in the Royal Policy at Section 4.G(2). A true and correct copy of the January 5, 1999 letter (with the enclosures describing the Schadens' offer) is attached to the Meyers' Decl. at Exhibit E. By letter dated January 4, 1999 a dissenting shareholder notified The Quizno's Corporation, among other things, that he contemplated taking legal action if the board of directors, or a special committee thereof, chose to go forward with the proposed buy-out. A true and correct copy of the January 4, 1998 letter is attached to Meyers' Decl. at Exhibit F. Accordingly, by letter dated February 11, 1999 The Quizno's Corporation notified Royal of this letter, which The Quizno's Corporation indicated established that the proposed buy-out described

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in its January 4 letter was a circumstance that it reasonably expected would give rise to a claim. A true and correct copy of the February 11, 1999 letter is attached to the Meyers' Decl. at Exhibit G. The January 4, 1999 letter and the February 11, 1999 letter with the attachments provided with those letters are collectively referred to as the "Notice Letters." Westchester raises a false issue regarding the Notice Letters at paragraph 13 of its Statement. There, Westchester characterizes Endorsement 6 of its Policy No. DON648267 by opining that it applied "to matters described only in the January 5, 1999 notice letter to Royal, but not the February 11, 1999 notice letter to Royal." Westchester's characterization is inaccurate. Westchester suggests that the matters described in the January 5, 1999 notice letter are different than the matters described in the February 11, 1999 notice letter, when they are not. Endorsement 6 specifically refers to the "matters" described in the January 5, 1999 notice letter as those "related to potential claims in connection with, among other things, a proposed Voluntary Offer by the Schaden Acquisition Company of [Quizno's] outstanding shares of common stock." However, a review of the two letters (and attachments) demonstrates that both the January 5, 1999 and the February 11, 1999 notice letters described those same matters. Thus, Endorsement 6 applied to the same matter, which was described in both letters. The Fall of 2000 Voluntary Offer On November 13, 2000, The Quizno's Corporation announced that it had commenced a Voluntary Offer (the "2000 Voluntary Offer") whereby it offered to purchase the outstanding shares of its common stock at a price of $8 per share. A true and correct copy of the Tender Offering Memorandum setting forth the terms of the 2000 Voluntary Offer, among other things, is attached to the Meyers' Decl at Exhibit I. The 2000 Voluntary Offer expired on December 11,

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2000 and The Quizno's Corporation accepted the tendered shares and paid $8 per share for them. Meyers' Decl. ¶ 12. In excess of 150 shareholders, representing approximately 779,055 shares, responded to the 2000 Voluntary Offer and sold their shares to The Quizno's Corporation. Meyers' Decl. ¶ 13. December 2001 Merger The Quizno's Corporation merged with Firenze Corp. on December 21, 2001 (the "2001 Merger"), after a special committee of the board of directors recommended and a majority of The Quizno's Corporation's shareholders voted to approve the merger. The Quizno's Corporation was the surviving company and was then a private company owned by the Schadens. In connection with the 2001 Merger, The Quizno's Corporation paid its minority shareholders $8.50 per share and all shareholders tendered their shares to Quizno's. The Proxy Statement with merger agreement attached, which describe and set forth the terms of the merger, among other things, are attached to the Meyers' Decl. at Exhibit J. The Nickerson Action On or about January 20, 2004, William Nickerson filed an action against Quizno's and five members of its Board of Directors alleging that Quizno's and its directors breached fiduciary duties to shareholders in connection with the 2000 Voluntary Offer by failing to disclose alleged material information in the 2000 Voluntary Offer materials ("Nickerson Action"). A true and correct copy of the complaint in the Nickerson Action is attached to the Meyers' Decl. at Exhibit V. Westchester mischaracterizes the plaintiff's claims in Nickerson. At paragraph 40 of its Statement, Westchester claims that the allegations in Nickerson "mirrored those made in the

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Sebesta Action, namely that the price for shares was inadequate." This statement is misleading in that it fails to apprise the Court that the allegations in Nickerson related to an entirely different transaction ­ the 2000 Voluntary Offer ­ not the 2001 Merger transaction at issue in the Sebesta Action. The issues in Nickerson, therefore, involved different laws and different documents than the transaction in Sebesta. Further, a review of the Nickerson complaint demonstrates that the thrust of Nickerson's allegations was not simply that the price was inadequate. Rather, Nickerson's claims were made against the members of the board of directors of Quizno's for failing to disclose or the omission of certain alleged material facts. Nickerson alleged that these acts constituted a breach of fiduciary duty by the members of the board of directors. Nickerson essentially claimed he would not have sold his shares back to Quizno's for $8 if he had been given more information in the Tender Offering Memorandum filed with the United States Securities and Exchange Commission ("SEC") and that he was damaged thereby. Nickerson complaint, ¶ 41 ("Defendants failed to inform the tendering shareholders of important and relevant information that would have been material to the decision whether to tender the stock or not.") Attached to the Meyers Declaration at Exhibit V. Quizno's and the individual members of the board of directors disputed that the Tender Offering Memorandum contained misrepresentations or omitted material facts and disputed that the plaintiff was damaged. See Motion to Dismiss, provided herewith (without its exhibits) as

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Exhibit 1. Indeed, the Tender Offering Memorandum, which is before the Court as Exhibit I to the Meyers Declaration, was a complete and accurate statement of all material information. In addition, Quizno's and the individual members of its board of directors believe, and so argued in that action (and maintain today) that the $8 per share price paid by Quizno's was more than fair and adequate consideration for those shares. Indeed, in the 12-month period prior to the 2000 Voluntary Offer, Quizno's shares had publicly traded in the range of just over $6.00 per share on the NASDAQ Small Cap market. Thus, those shareholders who voluntarily agreed to tender their shares for $8 received a windfall over what they could have obtained in the market. Id. Defendants and counsel for the Class reached a settlement with respect to the Nickerson Action. That settlement was approved by the Court. A true and correct copy of the parties' Stipulation of Settlement is attached to the Meyers' Decl. at Exhibit CC. A true and correct copy of the Court's Order is attached to the Meyers' Declaration at Exhibit DD. Quizno's is paying the settlement amount on behalf of the individually named members of the board of directors pursuant to the Indemnification Agreements. Meyers' Decl. ¶ 31. The Sebesta Action On or about November 13, 2001, a minority shareholder, Edward Sebesta ("Sebesta"), brought a different action against The Quizno's Corporation and seven members of the board of directors in the District Court, City and County of Denver, Colorado (the "Sebesta Action"). Sebesta purported to bring the claim as a class action on behalf of all existing shareholders of

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This court may take judicial notice of court documents and matters of public record. See Abdelsamed v. United States, 2002 WL 31409521, *17 (D. Colo. Sept. 17, 2002).

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Quizno's (except the named Defendants). He sought, among other things, an injunction preventing Quizno's from merging with Firenze Corporation ("Firenze") and compensatory damages. The Court denied the request for injunctive relief. Sebesta claimed, among other things, that the members of the board of directors breached their fiduciary duties in approving and recommending the Merger without fully considering an offer from a third party to buy The Quizno's Corporation shares and in not insuring that the proxy statement filed with the SEC contained certain disclosures regarding the third party offer. A true and correct copy of the Complaint is attached to the Meyers' Decl. at Exhibit K. At paragraph 28 of its Statement, Westchester omits the main thrust of the actions alleged by Sebesta in the Sebesta complaint.
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Counsel for the Sebesta class repeatedly distinguished the class' claims from claims made in the Dissenters Action. See e.g., transcript from proceedings held March 11, 2004, pp.20:6-15; 30:22-31:8 ("[w]hat the dissenters were seeking to do in the appraisal action was something far different than what we were attempting to do in our breach of fiduciary duty action...Our view is we want to get the best we could at the time that the company was being merged. We had a third party market check by one of the players here, who offered [$]9.50.") Exhibit 2 attached hereto. Westchester's allegations in paragraph 29 that Quizno's "admitted" that the Sebesta Action was solely about undervaluation of the price paid in connection with the 2001 Merger is
Westchester's characterization is not totally inaccurate because Westchester correctly preferences its comments by indicating that the referenced allegations were made "among other things." However, a reading of the complaint shows that those "other things" included the primary thrust of Sebesta's allegations, breach of fiduciary duty by members of the board of directors for not adequately considering and not disclosing fully and accurately the terms of a third party offer to purchase Quizno's shares.
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false. Rather, Quizno's correctly pointed out that Sebesta's complaint sought damages and, therefore, he was unable to prove the necessary element for obtaining injunctive relief of no adequate remedy at law. Quizno's responded to Sebesta's claims for damages by arguing, among other things, that Sebesta could not prove the necessary elements for a breach of fiduciary duty, misrepresentation/failure to disclose case in light of the business judgment rule. Sebesta contested this issue and that was a significant issue underlying the Sebesta settlement. See remarks of class counsel, Exhibit 2, 22:22-23:18. Quizno's and counsel for the purported class reached a settlement agreement in the Sebesta Action and the Court, by Order dated April 2, 2004, approved that settlement agreement. A true and correct copy of the parties' Stipulation of Settlement and Notice of Proposed Settlement and Final Hearing, as filed in the Sebesta Action, are attached to the Meyers' Decl. at Exhibit T. A true and correct copy of the Court's Order is attached to the Meyers' Decl. at Exhibit U. Quizno's is paying the settlement amount on behalf of the individually named members of the board of directors pursuant to the Indemnification Agreements. Meyers' Decl. ¶ 23. The Appraisal Action Unlike the Sebesta and Nickerson Actions in which Quizno's was a defendant, The Quizno's Corporation commenced as a plaintiff an appraisal proceeding pursuant to the Colorado Dissenter's Rights statute (C.R.S. §7-113-101 et seq.) naming the dissenting shareholders who perfected their dissenters rights and made claims against Quizno's for the "fair value" of their shares and their attorneys' fees and costs ("Dissenters Action"). The dissenting shareholders asserted counterclaims against Quizno's. The dissenting shareholders claimed Quizno's had

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wrongly undervalued its shares and had acted "arbitrarily, vexatiously, or not in good faith with respect to the rights provided under the Dissenters' Rights Statute." See e.g., Answer and Counterclaims of Respondents Thomas O. Sturkie, Mary Keenan Sturkie, C. Lyn Crooms, Jo Ann Roberts Crooms and LBT Enterprises, Inc. ¶20. (The counterclaims of all dissenters are attached hereto as exhibit 3). With respect to the Appraisal Action, the Court entered its Findings of Fact, Conclusions of Law and Order for Entry of Judgment on January 8, 2004, nunc pro tunc, January 7, 2004. The Court concluded and determined the "fair value" of Quizno's shares as of December 21, 2001 was approximately $32.50 per share, for a total judgment of over $10,000,000 with interest, over 400 times its public trading price, or fair market value. The Court also held that Quizno's had acted "in bad faith" (as that term is set forth in the Dissenter's Rights statute) and, therefore, the court concluded that the dissenters were entitled to an award of their attorneys' fees from Quizno's. The fee award exceeds $1,500,000. See Final Judgment, attached hereto as Exhibit 6.
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In addition, the minority shareholders asserted claims against Quizno's beyond just a difference of opinion of the fair value of the Quizno's shares. At various times throughout the pleadings and the trial, plaintiffs asserted various breaches of fiduciary duty against the owners and officers, including failing to disclose material facts in various documents and engaging advisors with conflicts of interest. See e.g. Opening Statement of Counsel at hearing, pp. 41-43 (attached as exhibit 4) and the Respondent Fagan Groups Trial Brief, pp. 17-21, attached hereto as Exhibit 4.
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The Court subsequently adjusted that number to $24 per share.

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Westchester's Actions Westchester initially agreed to advance defense costs associated with the Sebesta Action.
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Westchester also initially agreed to advance a certain portion of the defense costs associated with the Dissenters Action. As such, the parties entered into an Interim Funding Agreement pursuant to which Westchester paid just under $300,000 (after applying a $250,000 retention) of Quizno's defense costs associated with the Sebesta Action and the Dissenter's Action. Westchester made these payments in December 2002 and February 2003. Those are the only amounts Westchester has paid. Meyers' Decl. ¶ 21. A true and correct copy of the Interim Funding Agreement is attached to the Meyers Declaration at Exhibit S. Westchester subsequently refused to pay any further defense costs associated with either the Appraisal Action or the Sebesta Action even though Quizno's continued to incur defense costs associated with both of those actions. From June 2003 forward, Quizno's made repeated requests to Westchester to cover and advance defense costs associated with the Sebesta Action. At first, in June 2003, Westchester indicated a desire to change the allocation of defense costs between the Appraisal Action and the Sebesta Action. Eventually, Westchester refused to address the issue further and ignored Quizno's requests for further payment and further negotiation. Second Declaration of Patrick Meyers, ¶¶4-6 (The Second Declaration of Patrick Meyers is attached hereto as Exhibit 7).

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Initially, Westchester agreed to cover the Sebesta Action under a reservation of rights. Westchester Motion, Exhibit A-11. Westchester cited to Exclusions a(7) and a(12) as possibly barring coverage. Id. Westchester denied coverage for the Dissenters Action.

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Quizno's made numerous attempts to obtain Westchester's input and approval with respect to the terms of the Sebesta Action settlement. Westchester refused to provide any feedback to Quizno's regarding the proposed settlement. Id. Westchester denied coverage for the Nickerson Action on the bases that it related back to the Sebesta Action. Westchester Motion, Exhibits 14-16.

ARGUMENT
I. LEGAL STANDARDS The question of whether a claim is covered is one of contract interpretation. Heckla Mining Co. v. New Hampshire Ins. Co., 811 P.2d 1083, 1090 (Colo. 1991). Accordingly, general rules of contract interpretation govern whether a claim is covered by the insurance contract. Id. The interpretation of a contract is a question of law. Coors v. Security Life of Denver Ins. Co., 2003 WL 22019815 (Colo. App.) When terms of a contract are clear and unambiguous, the court is to enforce that contract as written. Randall & Black, Inc. v. Metro Wastewater Reclamation District, 77 P.3d 804 (Colo. App. 2003). See also, Fight Against Coercive Tactics Network v. Coregis Ins. Co., 926 F.Supp. 1426, 1430 (D.Colo. 1996) (applying Colorado law and stating that interpretation of an insurance policy is a matter of law and, if unambiguous, the court is to enforce it as written). While courts apply general principles of contract interpretation, courts utilize additional interpretative tools in the context of insurance coverage. See Tepe v. Blue Cross and Blue Shield of Colorado, 893 P.2d 1323, 1327-28 (Colo. App. 1994). All ambiguities are resolved in favor of the insured. Id. See also, Coregis, 926 F.Supp. at 1430 (stating where policy ambiguous or if terms conflict, courts must "construe against the insurer and in favor of coverage to the

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insured.") When an insurance carrier seeks to restrict coverage, the policy must contain a clear expression of the limitation and, absent such a clear expression or if the policy provisions are inconsistent or ambiguous, "the insurance contract must be construed in favor of coverage and against limitations." Tepe, 893 P.2d at 1327-28 citing State Farm Mutual Automobile Ins. Co. v. Nissen, 851 P.2d 165 (Colo. 1993) and Lister v. American United Life Ins. Co., 797 P.2d 832 (Colo. App. 1990). The court is to liberally construe the insurance policy "to provide the broadest possible coverage" and to effectuate coverage for what a reasonable insured would have expected to have been covered when it entered into the policy. Tepe, 893 P.2d at 1327-28. See also, Compass Insurance Co. v. City of Littleton, 984 P.2d 606, 617 (Colo. 1999) (holding that court is to interpret undefined terms according to the understanding of the average purchaser of insurance and the insured's reasonable expectation concerning coverage). In addition, a court should interpret an insurance policy as legal and enforceable if such an interpretation is possibly reasonable. See The Superior Oil Co. v. Western Slope Gas Co., 604 F.2d 1281, 1297 (10th Cir. 1979) (Barrett, J. concurring) (stating, "it is well settled that contracts are presumed to be legal and enforceable and that an ambiguously worded contract should not be interpreted to render it illegal and unenforceable, where wording lends itself to a logically acceptable construction which renders it legal and enforceable" and citing Walsh v. Schlecht, 429 U.S. 401 (1977)). When parties enter into an insurance policy, and the insured pays premiums for the insurance, a court should be reluctant to disturb the express terms on public policy grounds. Theriot v. Colorado Ass. Of Soil Concevation. Distr. Medical Benefit Plan, 38 F. Supp.2d 870,

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880 (D. Colo. 1999). In Theriot, Judge Nottingham refused to find a provision in a reinsurance policy void as against public policy and stated, [p]ublic policy favors enforcing agreements as written. Freedom of contract and enforcing agreements between commercial entities is 'one of the essential freedoms of citizenry.' Thus, '[u]ntil fully and solemnly convinced that an existent public policy is clearly revealed, a court is not warranted in applying that principal of public policy to void a contract." Id at 880. United States Supreme Court precedent reinforces this principle: "Care is to be observed lest the doctrine that a contract is void as against public policy be unreasonably extended" because "public policy requires that competent persons shall have the utmost liberty of contracting, and that their contracts, when entered into fairly and voluntarily, shall be held sacred, and shall be enforced by courts of justice." Black & White Taxicab & Transfer Co. v. Brown & Yellow Taxicab & Transfer Co., 276 U.S. 518, 527 (1928) (internal citation omitted). A party challenging a policy provision on public policy grounds must show that the provision is clearly "obnoxious to the pure administration of justice, or manifestly injurious to the interests of the public." Theriot, 38 F. Supp. 2d at 880. And courts construing policies under Colorado law have limited application to those provisions that would limit coverage, that is, courts will apply the principle where voiding the provision increases coverage. See e.g., F.D.I.C. v. American Casualty Co. of Reading, Penn., 843 P.2d 1285, 1290-91 (Colo. 1993); Jones v. AIV Ins. Co., 51 P.3d 1044, 1045 (Colo. App. 2002). See also Aetna Casualty & Surety Co. v. McMichael, 906 P.2d 92, 100 (Colo. 1995) (holding that a provision in an insurance contract is "void and unenforceable if it violates public policy by attempting to `dilute, condition, or limit statutorily mandated coverage.'") Colorado courts have not generally voided policies on public policy grounds if the effect is to reduce or limit coverage. Compare, Nicholls v. Zurich

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American Ins. Group, 244 F.Supp.2d 1144, 1161 n. 8 (D.Colo. 2003) (refusing to address insurance company's argument that the D&O policy is void as against public policy of Colorado where directors sought coverage for claims brought against them by bankruptcy trustee of corporation's estate for sham stock transaction because the court applied an express exclusion and because "the argument raises unsettled issues of Colorado law.") II. THE SETTLEMENTS/VERDICTS AND DEFENSE COSTS FROM THE NICKERSON, SEBESTA AND DISSENTERS ACTIONS ARE COVERED LOSSES. Quizno's and the individual members of its board of directors suffered covered losses under the plain language of the Westchester policies: the settlements, verdict and defense costs fall squarely within the definition of losses, no exclusions apply and no public policy exists which would require the extraordinary actions of voiding coverage clearly afforded under the express terms. Westchester claims that the settlements in the Nickerson and Sebesta Actions, the verdict in the Dissenters Action and the defense costs associated with all three actions are not covered by the policy. Westchester does not argue that the losses are outside the express definition of Loss in the policy or that an express exclusion applies to bar coverage. Rather, Westchester asks this Court to disregard the express terms of the policy and void coverage on what it calls "public policy" grounds. Westchester never articulates this so-called public policy, other than to say that the settlements and judgment all represent payment of Quizno's of restitution for "ill-gotten gain" in the form of inadequate consideration originally paid to the plaintiff shareholders.

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Neither Colorado law nor the facts support Westchester's position. In Colorado, courts enforce the express language of the contract. As a matter of fact, the settlements, verdict and defense costs do not constitute restitution. A. The Settlements, Verdicts and Defense Costs from the Nickerson, Sebesta and Dissenters Actions Are Covered Losses as Defined in the Policies.

In the Westchester policies, Westchester clearly and unambiguously represented and agreed to provide insurance to Quizno's and its members of the board of directors (defined as "Insureds") for losses sustained whenever a Claim is advanced against an Insured for committing a Wrongful Act. This coverage is set forth in three insuring clauses of the Directors, Officers and Company Securities Liability Coverage Part. Those clauses are identified as Insuring Clause A, Insuring Clause B and Insuring Clause C. Obviously, Quizno's and its directors, as all similarly situated insureds, relied on Westchester's word. Insuring Clause B provides that Westchester "shall pay on behalf of [Quizno's] Loss for which [Quizno's] grants indemnification to the Insured Persons, as permitted or required by law, and which the Insured Persons have become legally obligated to pay by reason of any Claim first made against the Insured Persons during the Policy Period. . . . for any Wrongful Acts taking place prior to the end of the Policy Period." Insuring Clause C provides coverage to Quizno's for losses "which [Quizno's] becomes legally obligated to pay by reason of any Securities Claim first made against [Quizno's] during the Policy Period . . . for any Wrongful Acts taking place prior to the end of the Policy Period." The policies' definition of Loss is clear and unambiguous: "Loss" is defined to include "the amount which the Insureds become legally obligated to pay on account of each Claim . . . including, but not limited to, damages, judgments . . . settlements and Defense Costs."

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The Nickerson settlement, the defense costs incurred with respect to the Nickerson Action, the Sebesta settlement and the defense costs associated with the Sebesta Action all fit clearly within the policies' definition of Loss because individual members of the board of directors and Quizno's (Insureds) became "legally obligated to pay" those amounts by reason of claims made against them during the policy periods of the two different Westchester policies. And, Quizno's agreed to indemnify the members of the board of directors with respect to their obligation to pay defense costs and the settlements. Further, the final judgment (both the damage award relating to the increased cost per share under the "fair value" analysis over the "Fair Market Value" or trading price, and, additionally, the amount of attorneys' fees and costs awarded to the dissenting shareholders), as well as Quizno's defense costs in the Dissenters Action, also fit clearly within the policies' definition of Loss. In the Dissenters Action, Quizno's, an Insured, became "legally obligated to pay" those amounts to the dissenting shareholders who perfected their dissenters' rights and asserted the necessary security claim against Quizno's in connection therewith during the policy period. Westchester does not argue that the losses are not "Losses" as defined in the policy. Indeed, contrary argument would ignore the plain language of the contract. B. No Exclusion Applies to Bar Coverage.

Nor does Westchester argue that one of the 12 listed exclusions apply to bar coverage. An examination of the policies' coverage exclusions demonstrates that the parties did not intend to exclude settlements such as those in the Nickerson and Sebesta Actions, defense costs from those actions or even the judgment and defense costs from the Dissenters Action.

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Two of the policy exclusions contained within the Westchester policies explicitly address the issues Westchester raises. Indeed, in Westchester's denial of coverage in this case (and its prior reservations of right letters) it indicated that it was relying on these two exclusions in denying coverage. See Westchester's Exhibits A-11, A-12 and A-13. However, Westchester has not asserted these exclusions apply in its Motion. Rather, Westchester is asking this Court to add a new exclusion to alter the express terms of the exclusion to which the parties agreed. The first exclusion that Westchester originally said relates to coverage is Exclusion A(7). Exclusion A(7) provides that Westchester will not be obligated to cover any Losses from Claims made against any Insured Person "based upon . . . such Insured gaining in fact any profit, remuneration or financial advantage to which such Insured was not legally entitled." But, when the parties agreed to this Exclusion, they also agreed that it would "not apply to Loss indemnified by [Quizno's]." Westchester withdrew its reliance on this Exclusion because by its express terms it is inapplicable here. It is undisputed that Quizno's indemnified members of its board of directors in connection with the Nickerson settlement, the Nickerson defense costs, the Sebesta settlement and the Sebesta defense costs. And, under the undisputed facts, allocation between individual members of the board of directors and Quizno's with respect to either settlements or defenses costs would be improper. See Safeway Stores, Inc. v. National Union Fire Ins. Co. of PA, 64 F.3d 1282, 1286-90 (9th Cir. 1995). With respect to the Dissenters Action, if Westchester were to argue in the future that this exclusion applies to bar coverage, there are fact issues relating to which, if any, portions of the verdict would be barred. As described more fully below, the portion of the final judgment

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awarding the dissenting shareholders their attorneys' fees in the action would not be barred by this exclusion. And, the defense costs would not be barred by this exclusion. In addition, because of the interpretation of the definition of "fair value," at least some portion of the verdict represents an extra amount over the fair market value of the shares and that additional amount would not be barred by this exclusion. None of these losses sustained by Quizno's represent any profit, remuneration or financial advantage to Quizno's. Westchester requests that this Court add a new exclusion that does not include the phrase limiting the circumstances to those where the loss is not indemnified by the company or to add such an exclusion to the policies. The second exclusion to which the parties actually agreed and which Westchester originally argued excluded coverage is Exclusion A(12). Exclusion A(12) provides that losses are excluded from coverage with respect to claims: Based upon . . . the actual or proposed payment by [Quizno's] of allegedly inadequate consideration in connection with [Quizno's] purchase of Securities issued by [Quizno's] but this exclusion shall not apply to Defense Costs or to Insuring Clauses A or B. Thus, the parties specifically agreed that in the event Quizno's was alleged to have paid inadequate consideration for its shares, then the losses associated with repaying the difference to make the consideration "adequate" would not be covered. In so doing, however, the parties specifically agreed that such an exclusion would not apply to any defense costs associated with such an action and would not apply, or to insuring clause B, an action against individual members of the board of directors with respect to which Quizno's agreed to indemnify the members of the board of directors. It is undisputed that Quizno's indemnified the members of the board of directors for the settlements and defense costs in both the Nickerson Action and the

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Sebesta Action. Further, Quizno's seeks coverage for defense costs with respect to the
7

Dissenters Action.

8

Accordingly, although Westchester initially raised this exclusion in correspondence with Quizno's, it has not asked this Court to apply the exclusion here. The reason Westchester is ignoring this exclusion is obvious: on its face, it cannot apply to any of the defense costs Quizno's seeks with respect to any of the three actions nor to the Nickerson settlement or Sebesta settlement. Again, Westchester requests that this Court impermissibly rewrite Exclusion A(12) or add another exclusion by implication addressing the same subject matter but not limiting its application with respect to defense costs and claims brought against members of the board of directors and indemnified by the company. Given that Westchester consciously chose not to include in the policies such a "restitution" exclusion that applied to defense costs and claims brought against members of the board of directors and indemnified by the company, there can be little doubt that the parties contemplated the very restitution concerns raised by Westchester and agreed that such losses would be covered.

7

Westchester provides no support for its statement that some of the members of the board of directors were dismissed from the case before the settlement was reached. To the extent true, that does not change the fact that these board members incurred defense costs which were indemnified by the company and that all of the board members named in Nickerson were parties to the settlement.
8

As explained below, some or all, of the verdict in the Dissenters Action comprises damages over and above any claim of failure to pay inadequate consideration. Further, Quizno's did not buy its own shares in the going private transaction, rather another company merged into Quizno's and, therefore, this exclusion by its clear terms does not apply to the Sebesta Action or the Dissenters Action, in any event).

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C.

Courts Should Enforce Coverage for Restitution Type Settlements and Judgments if Policy Terms Provide Coverage.

Further, the Nickerson settlement, the Sebesta settlement, the defense costs in Nickerson, the defense costs in Sebesta, the judgment in the Dissenters (both difference in value and attorneys' fees award) and costs associated with the Dissenters Action are covered losses even if some of those loses were restitution in nature (which they were not). Several well-reasoned federal cases so demonstrate. For example, in analyzing policies similar to Westchester's policies, the Eleventh Circuit rejected the insurers' arguments that "ill-gotten profits are not damages covered by the insurance policies." Limelight 60 F.3d at 770. The Limelight court explained that when the insurers had issued the policies, they "were on notice plaintiffs could recover ill-gotten profits [from the insured], and must be held to have intended to cover these damages because they did not exclude them." Id. at 769. The court found it would be wrong "to allow [the insurance companies] to deny coverage for the very injury they took payment to insure against." Id. See also, American Employers' Ins. Co. v. DeLorme Publishing Co., Inc., 39 F.Supp.2d 64, 79 (D.Me. 1999) (finding ill-gotten profits are "damages" under policy's terms and then analyzing whether any exclusion clearly applies). Similarly, in International Ins. Co. v. Johns, 874 F.2d 1447, 1453-55 (11th Cir. 1989), the court analyzed an insurance policy that, similar to the Westchester policy at issue here, defined the "term Loss [as] any amount which the Insureds are legally obligated to pay for a claim or claims made against them for Wrongful Acts, and should include but not be limited to damages, judgments, settlements and costs." Id. at 1452, n. 9. The Johns court held that the settlement,

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despite arguably being restitutionary in character, was a covered loss because it "fits within the plain language of the policy's definition of loss." Id. at 1454-55. The D.C. Circuit rejected an insurer's argument that "disgorgement" is not a covered loss under an insurance policy in In Re Estate of Corriea, 719 A.2d 1234, 1240-41 (D.C. Cir. 1998). In Corriea plaintiffs sued an attorney's estate for breach of fiduciary duty. After a trial, the court entered judgment for plaintiffs and ordered the estate to "disgorge" over $1.4 million in profits as damages. Id. at 1237. The estate then sued its insurance company, which had issued a professional liability policy to the attorney. Just as in this case, the insurer denied coverage claiming, among other things, that a disgorgement could not fall within the definition of "damages" in the policy. The court held that the disgorgement fell within the definition of
9

"damages" because it constituted an amount the estate was "legally obligated to pay." Id. at 1237. The court "decline[d] to hold such restitution `uninsurable' under the district's law and, therefore, coverage provided by the [] policy." Id. at 1241. D. No Colorado Public Policy Excludes the Settlement, Judgment or Defense Costs from Coverage.

Contrary to Westchester's arguments, there is no public policy under Colorado law which forces this Court to change definitions in the policy, add implied exclusions or change express and clear exclusions in the policy. In short, there is no public policy requiring this Court to disregard the parties' agreement with respect to the insurance coverage for which Quizno's expected and paid full premium. Rather, Colorado's public policy of enforcing the written
The definition "Damages" in the Corriea policy was identical in all relevant respects to the definition of "Loss" at issue in this case. Corriea 719 A.2d at 1237-38.
9

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contracts controls. See Theriot v. Colorado Ass. Of Soil Concevation. Distr. Medical Benefit Plan, 38 F. Supp.2d 870, 880 (D. Colo. 1999). Moreover, the settlements, judgment and defense costs at issue in the three underlying cases, do not constitute the type of restitution damages that would support altering the parties' contract even if Westchester were correct that "ill-gotten gains" are not insurable. 1. Colorado law requires enforcement of the policy terms and Westchester has failed to establish that enforcement of the clear agreement would be "obnoxious to the pure administration of justice or manifestly injurious to the interests of the public."

Colorado courts are reluctant to declare a contract void for being in contravention of public policy. Theriot v. Colorado Ass. Of Soil Concevation. Distr. Medical Benefit Plan, 38 F. Supp.2d 870, 880 (D. Colo. 1999) Colorado courts enforce the clear terms of the parties' contracts or read the contract in such a way as to provide for its enforcement. Id. In Colorado, courts interpret an insurance policy to provide coverage where the insured has a reasonable expectation that such coverage was included in the policy in exchange for the premium paid. See Tepe v. Blue Cross and Blue Shield of Colorado, 893 P.2d 1323, 1327-28 (Colo. App. 1994). Only when a party can establish clearly that enforcement of the agreement would be "obnoxious to the pure administration of justice or manifestly injurious to the interests of the public" will a court find a contract provision void as against public policy. Theriot, 38 F. Supp 2d 880.
10

10

Westchester's so-called public policy concern is that if this Court holds Westchester to the policies' terms and requires Westchester to cover the losses claimed by Quizno's, Westchester will be reimbursing supposed "restitution" paid by Quizno's. Westchester argues that this is against public policy as it would "eliminate the incentive for obeying the law" and require it as insurer to pay for a business transaction. Motion, p. 17. Westchester suggests that enforcing the policies will create an incentive for companies to lie in order to obtain valuable stock at a bargain price. Westchester is incorrect.
(footnote continued to next page)

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The only real public policy created by this case is the hazard that, were this Court or any other court to entertain requests by insurers like Westchester seeking a way out of their own explicit policy language, insured parties would not be able to rely upon the coverage for which they bargained and paid. Colorado law finds that hazard unacceptable and, thus, prohibits courts from rewriting contracts based on purported "public policy" grounds. 2. The settlements, judgment and defense costs do not constitute "restitution" or otherwise comprise return of "ill-gotten gain." a. Nickerson settlement and defense costs.

The plaintiffs in the Nickerson Action asserted claims relating to the 2000 Voluntary Offer, pursuant to which The Quizno's Corporation purchased shares for $8 per share. Quizno's, through counsel, prepared, filed with the SEC and presented a Tender Offering Memorandum in connection with the 2000 Voluntary Offer. In the Nickerson Action, the plaintiff alleged that Quizno's and members of the board of directors engaged in securities fraud by making misrepresentations and omitting material facts in the Tender Offering documents. In addition, the plaintiff alleged the same conduct by the board

(footnote continued from previous page)

First, Westchester again is ignoring the policies' express language, which specifically excludes coverage for loss on account of any claim made against an insured "based upon . . . any Wrongful Act committed by such Insured with actual knowledge of its wrongful nature or with intent to cause damage if a final and non-appealable judgment or adjudication adverse to such Insured establishes that such Insured committed 10 such a Wrongful Act." Exclusion A(6). Therefore, a calculated corporate strategy to lie about the value of shares would fall squarely within this exclusion. Second, it defies logic that a corporation like Quizno's would encourage its employees or would itself engage in illegal behavior in the hopes of creating some gain that, if returned in a subsequent lawsuit, might later be reimbursed by its insurance company. Such concerns ignore issues like the deductible and limits of liability, the uncertainty of litigation, and the many other potential costs of such calculated wrongdoing.

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of directors constituted a breach of their fiduciary duties. Plaintiff also asserted a claim against both Quizno's and the individual members of the board of directors for aiding and abetting a breach of fiduciary duty and against the Company for unjust enrichment. The plaintiff sought "compensatory" and "actual" damages jointly and severally against all named Defendants. See Complaint attached to Quizno's Motion for Summary Judgment at Exhibit V to the Meyers' Declaration. The Plaintiff claimed he and the purported class were damaged because they sold their shares too soon and that they would not have sold, but rather would have participated in the Dissenters Action, if Quizno's and the board had made certain claimed omissions. They did not seek return of any money or claim Quizno's had received an ill-gotten gain in the transaction. Rather, they claimed they were damaged. Id. Quizno's and the individual members of the board of directors disputed that the Tender Offering Memorandum contained misrepresentations or omitted material facts and disputed that the plaintiff was damaged. See Motion to Dismiss, provided herewith (without its exhibits) as Exhibit 1. Indeed, the Tender Offering Memorandum filed with the SEC was a complete and accurate statement of all material information. In addition, Quizno's and the individual members of its board of directors maintained in that action (and maintain today) that the $8 per share offered and paid by Quizno's was more than fair and adequate consideration for those shares. Indeed, in the 12-month period prior to the 2000 Voluntary Offer, Quizno's shares had publicly traded in the range of just over $6.00 per share on the NASDAQ Small Cap market. Thus, those shareholders who voluntarily agreed to tender their shares for $8 received a windfall over what they could have obtained in the market.

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There are at least three reasons why the losses Quizno's incurred with respect to the Nickerson Action do not constitute restitution or return of an "ill-gotten gain." First, the losses were incurred by members of the board and indemnified by Quizno's and it is undisputed that the individual members of the board were not parties to the 2000 Voluntary Offer and could not have personally gained through that transaction. Quizno's by contract and pursuant to Colorado law indemnified the individual members of the board of directors named in the Nickerson Action both with respect to the defense costs incurred and the settlement with the purported class. See Meyers Declaration, ¶¶ 28 and 30.
11

The members of the board of directors, as well as Quizno's, incurred defense costs and were obligated on the settlement. See Stipulation of Settlement, pp. 2, 7, and 12, attached to Quizno's Motion for Partial Summary at Exhibit CC to Meyers' Declaration (showing that the parties to the settlement are those named in the case, that "Defendants" include the individually named members of the board of directors and that the "Defendants" were obligated to pay the settlement consideration). Westchester's claim that the board members were not obligated on the settlement agreement is simply false. See Wayne County Neighborhood Legal Services v. National Union Fire Ins. Co., 971 F.2d 1, 4 (6th Cir. 1992) (reversing trial court's award of summary judgment to insurance carrier and finding that individual director was jointly and severally liable under terms of settlement agreement in underlying action and, therefore finding

11

This fact is either undisputed or, to the extent it is disputed, that dispute precludes summary judgment on this point.

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that "[t]he argument that for [the director] to be entitled to indemnification she must actually write the settlement check is unpersuasive.")
12

Second, the settlement did not reflect payment of rescissionary or restitution type damages. Nor did it reflect return of an "ill-gotten gain" by Quizno's. Rescissionary damages are based on a defendant's gain and focus on forcing the defendant to return to plaintiff their illicit profits. Earthinfo, Inc. v. Hydrosphere Resources Consultants, 900 P.2d 113, 118 (Colo. 1995). The purpose is to "undue" the transaction and return the plaintiffs to the position in which they would have been had the deal never taken place. Id. Thus, the focus is not on compensating the plaintiffs, but rather on forcing the defendants literally to return the stock or, if unavailable, its full value at a later date, conceivably even as late as the date the litigation is decided. Id. See also, Green v. Occivental Petroleum Corp., 541 F.2d 1335, 1342 (9th Cir. 1976). Indeed, the Tenth Circuit recognizes that the typical damage award in a securities fraud case is the plaintiff's damages and is not restitutionary in character. Anixter v. Home-Stake Prod. Co., 977 F.2d 1549, 1553 (10th Cir. 1992) ("although a rescissionary measure of damages may be

12

To the extent Westchester would argue in the future that Exclusions A(7) or A(12) (referenced above) would apply to bar the portion of the settlement attributable to the company, as opposed to individual members of the board, subject to allocation provisions in its policies, that issue would be a factual issue precluding summary judgment or, more likely, would be rejected by this court on the basis that allocation is improper in that scenario. See Safeway Stores, Inc. v. National Union Fire Ins. Co. of PA, 64 F.3d 1282, 1286-90 (9th Cir. 1995) (rejecting insurance company's claim that the settlement and the defense costs should be allocated between those incurred by the members of the Board and those incurred by the Company in the underlying breach of fiduciary duty and aiding and abetting fiduciary duty claims brought by shareholders in connection with a leverage buyout because the liability was concurrent).

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available in certain cases under §10(b), the more typical remedy generally limits the plaintiffs' recovery to out-of-pocket losses or actual damages.") That is exactly what the plaintiff in Nickerson was requesting and exactly why Quizno's and the individual members of the board of directors agreed to settle the case. Quizno's disputed the claims, but settled for business reasons and to void the risks of litigation. Because the nature of the settlement was not restitutionary, but rather actual damages, Westchester's denial of coverage for the purported policy reasons that "ill-gotten gains" should not be covered, is misplaced. Third, the defense costs were not restitution. Westchester fails to articulate a reason why the defense costs incurred by Quizno's and defense costs incurred by the members of the board of directors and indemnified by Quizno's should not be covered on public policy grounds. Indeed, it is difficult to image how one could argue that defense costs constitute restitution damages or otherwise constitute an "ill-gotten gain." Even some of the cases heavily relied upon by Westchester suggest that defense costs associated with defending a case are covered even when the settlement or verdict are not insurable because they are return of an "ill-gotten gain." See e.g., Reliance Group Holdings, Inc. v. National Union Fire Ins., 594 N.Y.S.2d 20, 26-27 (N.Y.Supp. 1993) (indicating that member of the board of directors "undoubtedly would have been entitled to indemnification for his defense costs if he engaged separate counsel" and further concluding that issues regarding indemnification for defense costs under the D&O policy should be treated as a factual question to be determined by the jury, but noting that the defense costs would not rise to the threshold for coverage under the excess carrier's policy at issue.) Conseco, Inc. v. National Union First Insurance Company of Pittsburgh, PA, 2002 WL 31961447 *14

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(Ind. Cir.) (holding that the legal fees incurred in defending the securities claim "were not per se uninsurable and would constitute a `loss'" as defined in the policy even though the settlement of those claims was uninsurable as restitution in character). See also, Pan Pacific Retail Properties, Inc. v. Gulf Ins. Co., 2004 WL 2958479 *12-15 (S.D.Cal. 2004) (rejecting insured's claim that under the terms of that specific policy insurer had an obligation to advance defense costs on the claim that resulted in return of "ill-gotten gain" and distinguishing cases with policies with definitions more closely aligned those in the Westchester policies.)"
13

See also, Brotherhood of

Teamsters Help & Welfare Fund v. Five Star Managers, LLC, 735 N.E.2d 679, 684 (Ill. App. 2000) (refusing to address whether fees should be covered with respect to claim in which the parties settled by return of "ill-gotten gain" because the threshold for insurance coverage was not implicated). b. Sebesta settlement and the associated defense costs.

The purported class in the Sebesta Action comprises those shareholders who had failed to perfect their dissenter's rights under the Colorado Dissenter's Rights statute. The class representative, Sebesta, filed an action to enjoin the going private merger. The court denied the request for injunctive relief. See Statement of Undisputed Material Facts in Quizno's Motion for Summary Judgment, ¶ 23. Sebesta also sought compensatory damages against the Company and members of the board of directors. He alleged the members of the board of directors had breached fiduciary duties by approving the merger, not adequately considering a third party offer

13

See also, Fight Against Coercive Tactics Network, Inc. v. Coregis Ins. Co., 926 F. Supp. 1426, 1433 (D. Colo. 1996) (insurer with policy with definitions similar to those in Westchester policy had duty to advance defense costs as incurred in breach of fiduciary claim against director and offers).

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and failing to disclose adequately that third party offer in the proxy materials filed with the SEC. See Sebesta Complaint, attached Quizno's Motion for Summary Judgment at Exhibit K. Sebesta claimed he was damaged because the merger consideration paid by Firenze Corp. was less than that in the third party offer.
14

Quizno's and the individual members of the board of directors disputed the alleged breach, and that the third party's offer was a bona fide. Defendants further maintained that the decision by the special committee of the board of directors was within the business judgment rule and, that the merger consideration was significantly higher than the historical trading price of Quizno's shares. Quizno's honored its contract and indemnified the individual members of the board of directors named in the Sebesta Action, both with respect to the defense costs incurred and with respect to the settlement with the purported class. See Meyers' Declaration, ¶¶ 17 and 23. Quizno's and the members of the board of directors incurred defense costs and settlement fees. See Stipulation of Settlement, attached to Quizno's Motion for Summary Judgment at Exhibit T (showing parties to the stipulation of settlement as the named defendants).
15

For the same reasons and case law cited above, because individual members of the board of directors, as opposed to Quizno's, were obligated on the settlement, it cannot be considered
14

See e.g., transcript from proceedings held March 11, 2004, pp.20:6-15; 30:22-31:8 ("Our view is we want to get the best we could at the time that the company was being merged. We had a third party market check by one of the players here, who offered [$]9.50.") Exhibit 2 attached hereto.
15

Westchester states, without support, that some of the individual members of the board were dismissed from the Sebesta Action prior to the settlement. To the extent that happened, it does not change the fact that some members of the board remained in the case when it settled and that all board members incurred fees and costs indemnified by Quizno's.

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restitutionary in character. And, any issues with al