Health Net 2006 Annual Report Download - page 137

HEALTH NET, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS—(Continued)
been consolidated in the Louisiana Court of Appeal but no briefing schedule has been set. On January 17, 2007,
the Court of Appeal vacated on procedural grounds the trial court’s judgments denying the AmCare-LA and
AmCare-OK claims for attorney fees and punitive damages, and referred those issues instead to be considered
with the merits of the main appeal pending before it. The Court of Appeal also has considered and ruled on
various other preliminary procedural issues related to the main appeal.
On November 3, 2006, we filed a complaint in the U.S. District Court for the Middle District of Louisiana
and simultaneously filed an identical suit in the 19th Judicial District Court in East Baton Rouge Parish seeking
to nullify the three judgments that were rendered against us on the grounds of fraud and/or ill practice. We have
alleged that the judgments and other prejudicial rulings rendered in these cases were the result of impermissible
ex parté contacts between the receivers’ litigation counsel and the trial court during the course of the litigation.
Preliminary motions and exceptions have been filed by the receivers for AmCare-TX, AmCare-OK and
AmCare-LA seeking dismissal of our claim for nullification on various grounds. Those motions and exceptions
have not been heard by the Court.
We have vigorously contested all of the claims asserted against us by the plaintiffs in the consolidated
Louisiana actions since they were first filed. We intend to vigorously pursue all avenues of redress in these cases,
including the actions for nullification, post-trial motions and appeals, and the prosecution of our pending but
stayed cross-claims against other parties. During the three months ended June 30, 2005, we recorded a pretax
charge of $15.9 million representing the estimated legal defense costs for this litigation.
These proceedings are subject to many uncertainties, and, given their complexity and scope, their outcome,
including the outcome of any appeal, 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 these proceedings 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 these proceedings should not have a
material adverse effect on our financial condition and liquidity.
Superior National and Capital Z Financial Services
On April 28, 2000, we and our former wholly-owned subsidiary, Foundation Health Corporation (FHC),
which merged into Health Net, Inc., in January 2001, were sued by Superior National Insurance Group, Inc.
(Superior) in an action filed in the United States Bankruptcy Court for the Central District of California, which
was then transferred to the United States District Court for the Central District of California. The lawsuit
(Superior Lawsuit) related to the 1998 sale by FHC to Superior of the stock of Business Insurance Group, Inc.
(BIG), a holding company of workers’ compensation insurance companies operating primarily in California. In
the Superior Lawsuit, Superior alleged that FHC made certain misrepresentations and/or omissions in connection
with the sale of BIG and breached the stock purchase agreement governing the sale. In October 2003, we entered
into a settlement agreement with the SNTL Litigation Trust, successor-in-interest to Superior, of the claims
alleged in the Superior Lawsuit. As part of the settlement, we ultimately agreed to pay the SNTL Litigation Trust
$132 million and received a release of the SNTL Litigation Trust’s claims against us.
Shortly after announcing the settlement on October 28, 2003, Capital Z Financial Services Fund II, L.P., and
certain of its affiliates (collectively, Cap Z) sued us (Cap Z Action) in New York state court asserting claims
arising out of the same BIG transaction that is the subject of the settlement agreement with the SNTL Litigation
Trust. Cap Z had previously participated as a creditor in the Superior Lawsuit and is a beneficiary of the SNTL
Litigation Trust. In its complaint, Cap Z alleges that we made certain misrepresentations and/or omissions that
caused Cap Z to vote its shares of Superior in favor of the acquisition of BIG and to provide approximately $100
million in financing to Superior for that transaction. Cap Z’s complaint primarily alleges that we misrepresented
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