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A mechanical contractor company’s legal dispute with its former chief financial officer is not covered under its Hartford Insurance Group Inc. unit’s employment practices liability coverage, a federal appeals court said Tuesday, in affirming a lower court’s ruling.
Catonsville, Maryland-based Madison Mechanical OS Corp., a holding company, and Madison Mechanical Inc., its operating company, had five shareholders including Robert Buczkowski, who served as the operating company’s chief financial officer, according to the ruling by the 4th U.S. Circuit Court of Appeals in Richmond, Virginia, in Madison Mechanical Inc. et. al. v. Twin City Fire Insurance Co. and Robert Buczkowski.
Hartford unit Twin City Fire Insurance Co. issued an “employment practices wrongful act” policy to the holding and operating companies in 2015, according to the ruling.
A few months later, the holding company’s majority shareholder and sole director told Mr. Buczkowski that the four other shareholders were creating a new entity without him.
In November 2015, a lawyer representing Mr. Buczkowski sent a letter to the holding company’s four other shareholders and a fifth investor in the new company, stating the new company’s purpose was to divert the holding company’s business and client base and could lead to a cause of action for breach of fiduciary duty, among other issues.
Mr. Buczkowski was fired from his job soon after. The remaining old holding company shareholders claimed this triggered a provision requiring Mr. Buczkowski to sell back his shares for “the lesser” of two figures that were based on the company’s current book value, which they said was negative, meaning he had to surrender his shares for nothing.
Mr. Buczkowski filed suit against the holding company, its four original shareholders and the new company’s fifth member in state court. The lawsuit was settled two years later for $725,000.
While that lawsuit was still pending, the defendants in that case filed suit against Twin City, charging it had breached its contractual obligations by refusing to defend and indemnify them in the litigation.
The U.S. District Court in Baltimore ruled in the insurer’s favor, and was affirmed by a three-judge appeals court panel.
An employment practice wrongful act claim under the policy issued to the company includes any act involving wrongful dismissal, discharge or employment termination, the ruling said.
“The document Buczkowski sent to plaintiffs sought to remedy shareholder-related claims, including oppression of a minority shareholder and breach of fiduciary duty,” it said, in affirming the lower court.
“There are insurance policies covering those sorts of claims, but the policy before us is not one of them,” it said.
Attorneys in the case did not respond to a request for comment.