Health Net 2004 Annual Report Download - page 124

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
SV00-14099GM. The lawsuit related to the 1998 sale of Business Insurance Group, Inc. (“BIG”), a holding company of workers’
compensation insurance companies operating primarily in California, by FHC to Superior National Insurance Group, Inc.
(“Superior”).
On October 22, 2003, we entered into an agreement with SNTL Litigation Trust, successor-in-interest to Superior, to settle all
outstanding claims under the Superior National Insurance Group, Inc. v. Foundation Health Corporation, et. al. litigation. As part of
the settlement agreement, we agreed to pay the SNTL Litigation Trust $137 million and receive a release of all of the SNTL
Litigation Trust’s claims against us. We have accounted for the settlement with SNTL Litigation Trust as discontinued operations on
our condensed consolidated statements of operations for the year ended December 31, 2003.
However, following the announcement of the settlement, we learned that, on or about October 28, 2003, Capital Z Financial
Services Fund II, L.P. and certain related parties (referred to collectively as “Cap Z”) had filed suit against us in the Supreme Court of
the State of New York, County of New York, asserting claims arising out of the same BIG transaction that is the subject of the
settlement agreement with the SNTL Litigation Trust. Cap Z previously had participated as a creditor in the Superior bankruptcy and
is a beneficiary of the SNTL Litigation Trust. The Cap Z complaint alleges at least $250 million in damages and seeks unspecified
punitive damages and the costs of the action, including attorneys’ fees. Following the commencement of the Cap Z proceeding, we
and the SNTL Litigation Trust entered into a revised settlement agreement to, among other things, require the Trust to obtain
bankruptcy court approval of the revised settlement agreement and reduce the amount payable to the SNTL Litigation Trust to $132
million. We paid the $132 million in the fourth quarter of 2003. As more fully described below, there are various procedural motions
pending in the Cap Z matter. We will reassess our position after rulings on these motions. The Bankruptcy Court approved the revised
settlement agreement on December 29, 2003. Following that approval, District Court action brought by Superior was dismissed with
prejudice on December 31, 2003. Cap Z appealed the District Court’s order approving the settlement. On March 18, 2004, pursuant to
the stipulation of Cap Z and the SNTL Trust, the District Court dismissed with prejudice Cap Z’s appeal from the Bankruptcy Court
Order approving the revised settlement. Accordingly, the Bankruptcy Court’s approval of the settlement is final.
Cap Z’s complaint alleges that we made certain misrepresentations and/or omissions, relating to the sufficiency of BIG’s
reserves, the nature of its internal financial condition (including its accounts receivable) and the status of certain of its “captive”
insurance programs. Cap Z claims that in reliance thereon it voted its shares in favor of the BIG acquisition and provided financing to
Superior for that transaction. Cap Z alleges at least $250 million in damages and seeks unspecified punitive damages and the costs of
the action, including attorneys’ fees. We removed the action from New York state court to the District Court for the Southern District
of New York. Presently before that court is Cap Z’s motion to remand the action to state court and our motion to dismiss the action.
No hearing date for those motions has been scheduled. We intend to defend ourselves vigorously against Cap Z’s claims. This case is
subject to many uncertainties, and, given its complexity and scope, its final outcome cannot be predicted at this time. It is possible
that in a particular quarter or annual period our results of operations and cash flow could be materially affected by an ultimate
unfavorable resolution of the Cap Z matter depending, in part, upon the results of operations or cash flow for such period. However,
at this time, management believes that the ultimate outcome of the Cap Z matter should not have a material adverse effect on our
financial condition and liquidity.
Miscellaneous Proceedings
In the ordinary course of our business operations, we are also party to various other legal proceedings, including, without
limitation, litigation arising out of our general business activities, such as contract disputes and employment litigation, and claims
brought by members seeking coverage or additional reimbursement for
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