A judge at the US District Court for the Middle District of Alabama has ruled in favour of Christopher Jarvis, former owner of Jade Risk, after he filed a lawsuit against Arsenal Insurance, a subsidiary of TaylorChandler, for breach of contract.
TaylorChandler agreed on a deal with Jarvis to purchase Jade Risk for $3 million at the end of 2015.
As part of the agreement, Jarvis signed a 60-month employment agreement with TaylorChandler to remain at the firm.
However, in 2017, Jarvis’ employment was terminated by employees of TaylorChandler Britt Taylor, Norman Chandler, and Johnny Johnson for his “pre-deal conduct”.
Judge Andrew Brasher ruled that “TaylorChandler breached the employment agreement”.
Brasher explained: “The employment agreement provides that, in the event of litigation, the loser will pay the winner’s ‘costs and expenses (including attorney’s fees).’ Accordingly, Jarvis is due to receive deferred salary, bonuses, and his expenses and attorneys’ fees for litigating this action.”
In his conclusion, the judge said: “Jarvis substantially performed the contracts he signed with defendants, and they were never excused from their payment obligations under the employment agreement and promissory note.”
The sale of Jade Risk
Jarvis sold captive manager Jade Risk to Taylor, Chandler, and Johnson of TaylorChandler in 2015 due to the increasing running price of the business.
By the end of 2015, the parties had agreed to a purchase price of $3 million for Jade Risk and sought to close the deal.
TaylorChandler applied to borrow money from Synovus Bank to complete the purchase. Part of the money for the loan came from the Small Business Administration and with it came an important limitation: if a loan from the SBA is used to buy a business, the seller may not remain employed with that business for longer than a year after the purchase.
Jarvis, Taylor, Chandler and Johnson developed a workaround where Jarvis became an employee of TaylorChandler itself to satisfy the bank, according to the judge.
In 2016, Jarvis informed Chandler that Jade Risk had 35 active captives, however, 12 of those captive clients surrendered or dissolved bringing the number down to 23. The deal closed four weeks later without a change in terms of the purchase price.
The judge explained that Jarvis made financial concessions to assuage TaylorChandler’s concerns that surrendering captives and increased regulatory scrutiny would translate into a loss on the deal.
Jarvis volunteered to defer $175,000 of his salary and $750,000 of the purchase price and suggested that the agreement include performance benchmarks that could substantially reduce the deferred payments if he failed to meet them.
Problems emerged
After the deal closed, it became difficult to merge Jade Risk into Arsenal and convert Jarvis from an owner into an employee. Brasher noted two reasons for this, federal regulatory challenges hurt the captive insurance industry and fundamental differences in philosophy strain the parties’ relationship.
The federal regulatory changes that were causing problems was the Internal Revenue Service’s (IRS) Notice 2016-66, which formally labelled micro-captive transactions as “transactions of interest”. Chandler testified at trial stating that the notice had a “chilling effect” on the captive industry.
In the court case, the judge suggested that Jade Risk was “aggressive” in selling micro captives for tax purposes.
The judge referenced a PowerPoint webinar that Jarvis had used which mentioned Arsenal as the owner of a hypothetical case study to illustrate how a construction company could dramatically reduce its tax liability by using a captive.
The judge said: “Chandler testified at trial that, because it framed captives as a tax dodge and would draw the ire of the IRS, he had told Jarvis that he didn’t want Arsenal’s name on it. Jarvis denies being told this.”
However, the court found that “Chandler never told Jarvis not to use the case study, although he clearly did not want Jarvis to use it”.
In his opinion, judge Brasher stated that the “deal was doomed before the ink was dry. It fell apart less than a year after closing.”
Among the issues that had already occurred, electronic files were reported missing and Jarvis had also allegedly retained an Apple laptop which became the property of Arsenal Insurance as part of the acquisition.
In terms of the missing files, Julia Stuart, a longtime administrator for various financial institutions and former Jarvis employee, testified that although she preserved emails for Jarvis’ defence and wiped data from the desktop computer, Jarvis did not order her to do so.
In her initial deposition, Stuart said she didn't delete anything from the computer, but in a subsequent affidavit, she admitted to “deleting everything as well as shredding all the hard documents that were on site”.
At trial, Jarvis testified that he did not know the destruction of documents because he was overseas when it occurred. But before trial, Jarvis wrote in an affidavit that he authorised the shredding “because he did not want the documents to be discovered by other office tenants”.
The court found that this evidence was destroyed in bad faith.
The judge concluded that although there was “a lot of testimony during the trial about the captive management industry and best practices in creating and maintaining such insurance companies. The court appreciated that testimony — it was very interesting — but it was not especially relevant”.
He explained: “This case is ultimately about written agreements that memorialised an arms-length deal between sophisticated parties. The court concludes that Jarvis substantially performed the contracts he signed with defendants, and they were never excused from their payment obligations under the employment agreement and promissory note.”
The judge noted that there are three issues that remain to be resolved, which include the defendant’s spoliation sanctions, Jarvis’s costs and attorneys’ fees, and prejudgment interest.
He said: “After these issues are addressed, the court will enter a final judgment as a separate document that (1) awards Jarvis $175,000 in deferred salary from TaylorChandler, $160,000 in captive origination bonus payments from TaylorChandler, $512,286.88 in promissory note payments from individual defendants Taylor, Chandler, and Johnson, and appropriate prejudgment interest; (2) requires Jarvis to render unto TaylorChandler the MacBook Pro laptop or its value in 2017; (3) awards spoliation sanctions to all defendants in the amount of attorneys’ fees and expenses expended to develop and litigate the spoliation issue; and (4) awards Jarvis his attorneys’ fees and expenses in litigating this action.”