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Item 3. Legal Proceedings

2021-03-10 compared with 2020-03-11 · 93 added, 18 removed, 19 unchanged (85% of the section changed)

LEGAL PROCEEDINGS

There are no material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our or their property is the subject, except as set forth below.

On November 7, 2018, Citizens, CICA Ltd.

The following are material pending legal proceedings in which we or any of our subsidiaries is a party or in which any of our or their property is the subject.

Trade Secret Suit filed by the Company against Former Executives, Citizens American Life, LLC and Citizens American Life, Inc.

(collectively, “CALI”) and First Trinity.

As previously disclosed, on November 7, 2018, Citizens, CICA Ltd.

and CICA filed a lawsuit in the District Court of Travis County, Texas (the “District Court”) against (i) Randall Riley (“Riley”), a former Citizens executive and son of Citizens’ founder Harold E.

Riley, (ii) Citizens American Life, LLC and Citizens American Life, Inc.

(collectively, “CALI”), copycat companies formed by Riley and (iii) Alexis Enrique Delgado, Carlos Nalsen Landa, Enrique Pinzon Ruiz, Johan Emilio Mikuski Silva and Esperanza Peralta de Delgado (collectively, the “Los Raudales Defendants,” and together with Riley and CALI, collectively the “Defendants”), former independent consultants of Citizens, for unfair competition, misappropriation of Citizens’ trade secrets, tortious interference with Citizens’ existing contracts with its independent consultants and, with respect to the Los Raudales Defendants, breach of their independent consultant contracts with Citizens.

The lawsuit sought (i) a declaration that Citizens had grounds to terminate the Los Raudales Defendants for cause under the independent consultant contracts and the Los Raudales Defendants are not entitled to future commissions under such contracts, (ii) injunctive relief, (iii) damages and (iv) attorneys’ fees and costs.

Among other things, the suit alleges that Riley formed CALI and misappropriated trade secrets during the time he was employed by Citizens, in violation of his contractual and other duties to Citizens, and that the Los Raudales defendants breached their independent consultant contracts with Citizens by inducing or attempting to induce other independent consultants to terminate or reduce service to Citizens and disclosing confidential information.

Riley, (ii) CALI, copycat companies formed by Riley and (iii) Alexis Enrique Delgado, Carlos Nalsen Landa, Enrique Pinzon Ruiz, Johan Emilio Mikuski Silva and Esperanza Peralta de Delgado (collectively, the “Los Raudales Defendants,” and together with Riley and CALI, collectively the “Defendants”), former independent consultants of Citizens, for unfair competition, misappropriation of Citizens’ trade secrets, tortious interference with Citizens’ existing contracts with its independent consultants and, with respect to the Los Raudales Defendants, breach of their independent consultant contracts with Citizens.

The lawsuit sought (i) a declaration that Citizens had grounds to terminate the Los Raudales Defendants for cause under their independent consultant contracts with Citizens and that the Los Raudales Defendants are not entitled to future commissions under such contracts, (ii) injunctive relief, (iii) damages and (iv) attorneys’ fees and costs.

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independent consultant contracts with Citizens by inducing or attempting to induce other independent consultants to terminate or reduce service to Citizens and disclosing confidential information.

On January 25, 2019, the Defendants filed a motion to dismiss certain claims alleged in the suit, and on April 11, 2019, the District Court denied the Defendants’ motion in its entirety.

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A hearing for the preliminary injunction was held on August 12, 2019.

On August 13, 2019, the District Court denied the application for a temporary injunction, and on August 19, 2019, Citizens, CICA Ltd.

and CICA filed a notice of appeal in the Third Court of Appeals in Austin, Texas with respect to the District Court’s August 13, 2019 decision.

That interlocutory appeal remains pending.

On August 13, 2019, the District Court denied the application for a temporary injunction, and on August 31, 2020, the Third Court of Appeals in Austin, Texas affirmed the District Court’s decision.

On September 10, 2019, Citizens, CICA Ltd.

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Wood and Steven A.

Rekedal, former

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Citizens executives and employees and, in the case of Steven A.

Rekedal, former Citizens executives and employees and, in the case of Steven A.

Rekedal, a former Citizens independent consultant, (ii) First Trinity Financial Corporation, and Trinity American, Inc.

2 unchanged sentences

The amended complaint asserted additional claims for breach of contract, conspiracy and unjust enrichment.

The lawsuit is currently in discovery and is expected to proceed to trial in the fourth quarter of 2020.

While it is not possible at this time to predict with any degree of certainty the ultimate outcome of the appeal of the District Court’s denial of the preliminary injunction or this litigation, Citizens believes it has a basis for an injunctive relief and intends to vigorously pursue its action against the Defendants and seek appropriate compensation and any other remedies to which it may be entitled.

From time to time, we may be subject to other legal and regulatory actions relating to our business.

We may incur defense costs, including attorneys' fees, and other direct litigation costs associated with defending any claims.

If we suffer an adverse judgment as a result of litigation claims, it could have a material adverse effect on our business, results of operations and financial condition.

The lawsuit is currently in discovery and, depending on the District Court's scheduling in light of the COVID-19 pandemic, is expected to proceed to trial in the second quarter of 2021.

Colorado Litigation filed by the Foundation against the Company and the Board.

On September 2, 2020, the Company and its eight directors, Christopher W.

Davis, Jr., Gerald W.

Shields, Frank A.

Keating II, Terry S.

Dean Gage, Robert B.

and Constance K.

Weaver, were named as defendants in a lawsuit (the “Colorado Litigation”) filed by the Foundation, which at the time was the sole holder of the Class B common stock of the Company, in the District Court of Arapahoe County of Colorado (the “Colorado Court”).

The Foundation’s complaint requested:

(i) a declaration by the Colorado Court that the Action by Written Consent of the Foundation (the “Written Consent”) to add director nominees to the Company’s board of directors ("Board"), which was delivered on August 13, 2020, was valid and enforceable;

(ii) a declaration by the Colorado Court that the actions of the Board taken after the receipt of the Written Consent, including expanding the size of the Board and amending the Third Amended and Restated Bylaws of the Company, was void and unenforceable;

and (iii) immediate injunctive relief against the Board from taking certain actions outside the ordinary course of business.

Additionally, the Foundation’s complaint requested:

(i) the Company and the Board to indemnify the Foundation and its director nominees for any expenses incurred related to lawsuit;

(ii) the existing Board members to reimburse the Company for any (A) Board fees received on or since August 13, 2020 and (B) reimbursements received for acquiring legal representation relating to the litigation;

and (iii) the Colorado Court award the Foundation all fees and expenses incurred in pursuit of the litigation, including attorney fees.

The Board believed the dispute between the parties was essentially whether the Foundation could unilaterally appoint members to the Board without regard to the process mandated in the Corporate Governance Guidelines of the Company, namely that the Board’s Nominating and Corporate Governance Committee (the "Committee") is responsible for identifying, recruiting, interviewing, vetting and recommending potential director candidates and evaluating their qualifications, independence, potential conflicts of interest and other important considerations.

The Board believed the Foundation had to first engage the Committee and provide the Committee with a chance to assess the candidates’ qualifications in accordance with the criteria adopted by the Committee.

On September 28, 2020, the Colorado Court entered a mutually agreed Status Quo Stipulation (the “Stipulation”).

Pursuant to the Stipulation, the Board and its committees agreed not to direct or, to their knowledge after reasonable investigation, permit anyone on their or the Company’s behalf to take any significant action that is outside the ordinary course of business without the consent of the Foundation (each, a “Material Action”) until the Colorado Court made a determination on the merits or otherwise ruled on the Foundation’s motion for a preliminary injunction, if filed, whichever came first (the “Expiration Date”).

Material Actions were outlined in the Stipulation and included, among other things:

(i) creating or disbanding any committee of the Board or changing the composition of any such committee;

(ii) forming any subsidiary or entering into any partnership or joint venture;

(iii) issuing any equity securities of the Company or any of its subsidiaries, other than as required pursuant to the Company’s Stock Investment Plan and pursuant to the vesting, settlement or exercise of equity-linked awards outstanding as of September 2, 2020;

(iv) acquiring, encumbering, pledging, disposing of or otherwise transferring any assets,

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properties or rights of the Company or its controlled affiliates with a value in excess of ten percent of total assets in each case or twenty percent of assets in the aggregate (excluding any assets of the Company’s insurance subsidiaries backing reserves);

(v) entering into any agreements involving a material change in the business operations of the Company;

(vi) granting, providing or accelerating compensation payments or arrangements to any current or former employee, director, officer or other service provider, subject to certain exceptions;

(vii) incurring, assuming, guaranteeing or otherwise becoming responsible for any debt in excess of ten percent of total liabilities (excluding contingent liabilities owed to any policyholders of insurance subsidiaries of the Company);

(viii) authorizing, declaring or issuing any dividends or “poison pill” rights to the Company’s stockholders, officers, or directors;

(ix) amending, modifying or repealing Board committee charters or the Company’s core governing documents;

and (x) entering into any transactions involving a change in control of the Company.

On December 7, 2020, the Company filed counterclaims and third-party claims in the Colorado Litigation against the Foundation and two of its officers / trustees, Charles W.

Hott and Michael C.

Hughes, alleging that Mr.

Hughes and Mr.

Hott, as trustees or officers of the Foundation, among other things:

(i) defrauded state insurance regulators in order to seize control of the Company, (ii) breached their fiduciary duties to all of the Company’s shareholders, and (iii) violated the Colorado Consumer Protection Act (collectively, the “Counterclaims”).

On February 6, 2021, Baylor University and Southwestern Theological Seminary, as the two sole charitable beneficiaries of the Foundation (the “Foundation Beneficiaries”), resolved their litigation with the Foundation in which they alleged that the Foundation trustees, including Mr.

Hughes and Mr.

Hott, breached their fiduciary duties to the Foundation and misused Foundation monies for personal benefit, including the filing of the Colorado Litigation (see below, “Texas Third-Party Litigation filed by the Foundation’s Beneficiaries against the Foundation”).

As a result of their settlement, Mr.

Hughes and Mr.

Hott were removed as trustees from the Foundation.

The Foundation Beneficiaries, upon regaining control of the Foundation, entered into a Mutual Agreement for Compromise, Settlement and Release with the Company, its individual directors and the Foundation (the “Foundation Settlement Agreement”) to resolve the Colorado Litigation.

The Foundation Settlement Agreement, among other things, provided for the following terms:

• The Company, its directors and the Foundation dismissed, all claims at issue in the Colorado Litigation and the parties mutually released each other for conduct prior to February 5, 2021;

• The Company agreed to:

(a) restore its Board to its form as of August 12, 2020 consisting of a nine-seat Board comprised of four directors appointed by the Company's Class A common stockholders (Christopher W.

Davis, Jr., Gerald W.

Shields, and Frank A.

Keating II), four directors appointed by the Company's Class B common stockholders (E.

Dean Gage, Robert B.

Sloan, Terry S.

Maness, and Constance K.

Weaver (the "Class B directors:)), and one vacancy eligible to be filled by the holders of Class B common stock;

and (b) restore the Company’s Amended and Restated Bylaws to the form in which they existed on August 12, 2020;

• The Foundation was obligated to cooperate with the Company in such restoration of the Board and take all steps necessary or requested by the Company, including withdrawal of the Foundation Nominees who were previously submitted to the Company’s Nominating and Corporate Governance Committee for review and consideration and approval of the restoration of the four Class B directors named above;

• While in possession of the Class B Shares, the Foundation was obligated to comply with certain director qualification standards and a nomination process when nominating individuals to serve on the Board, including:

(a) not permitting the Foundation’s trustees or officers to serve as directors, officers, employees or agents of the Company;

(b) engaging with the Company’s Nominating and Corporate Governance Committee when developing a Class B director slate or filling vacancies in the Class B directorship and (c) communicating and coordinating with the Committee in developing a slate of Class B directors;

• The Foundation would sell, and the Company would purchase, 100% of the Company’s Class B Shares from the Foundation.

On February 5, 2021, the Company also entered into a Mutual Agreement for Compromise, Settlement and Release with Michael C.

Hughes, Charles W.

Hott and David A.

Boto as officers or trustees of the Foundation (the “Hughes-Hott-Boto Settlement Agreement”).

The Hughes-Hott-Boto Settlement Agreement settled all controversies between the parties thereto, including dismissal of the Counterclaims.

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Texas Third-Party Litigation filed by the Foundation’s Beneficiaries against the Foundation.

As previously disclosed, on September 8, 2020, the Foundation Beneficiaries filed a lawsuit in the 67th District Court of Tarrant County, Texas (the “Texas Court”) against the Foundation and its CEO/President, Michael C.

Hughes alleging that the Foundation trustees, including Mr.

Hughes and Mr.

Hott, breached their fiduciary duties to the Foundation and misused Foundation monies for personal benefit, including filing the Colorado Litigation against the Company and its Board, in an attempt to seat themselves on the Company’s board.

In December 2020, the Texas Attorney General intervened in the Texas Third-Party Litigation on behalf of the Foundation Beneficiaries.

On February 6, 2021, the parties to the Texas Third-Party Litigation entered into a settlement agreement to, among other things, dismiss the Texas Third-Party Litigation, cause the resignation of Mr.

Boto as trustees of the Foundation, and allow the Foundation Beneficiaries to appoint their own trustees to control the Foundation.

Neither the Company nor any member of the Board was a party to the Texas Third-Party Litigation.

MINE SAFETY DISCLOSURES

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Compared sentence by sentence after normalising whitespace, quotation marks, case and digits, so re-formatting and restated figures do not read as changed language. Wording changes appear as one removal and one addition. The current filing and the prior one are authoritative.

What changed 10-K

Item 3. Legal Proceedings