Health Net 2006 Annual Report Download - page 41

Corporation (“FHC”). In 1999, FHC sold its interest in these plans to AmCareco, Inc. (“AmCareco”) and we
retained a minority interest in the three plans after the sale. Thereafter, the three plans became known as AmCare
of Louisiana (AmCare-LA), AmCare of Oklahoma (“AmCare-OK”) and AmCare of Texas (“AmCare-TX”). In
2002, three years after the sale of the plans to AmCareco, each of the AmCare plans was placed under state
oversight and ultimately into receivership. The receivers for each of the AmCare plans later filed suit against
certain of AmCareco’s officers, directors and investors, AmCareco’s independent auditors and its outside counsel
in connection with the failure of the three plans. The three receivers also filed suit against us contending that,
among other things, we were responsible as a “controlling shareholder” of AmCareco following the sale of the
plans for post-acquisition misconduct by AmCareco and others that caused the three health plans to fail and
ultimately be placed into receivership.
The action brought against us by the receiver for AmCare-LA action originally was filed in Louisiana on
June 30, 2003. That original action sought only to enforce a parental guarantee that FHC had issued in 1996. The
AmCare-LA receiver alleged that the parental guarantee obligated FHC to contribute sufficient capital to the
Louisiana health plan to enable the plan to maintain statutory minimum capital requirements. The original action
also alleged that the parental guarantee was not terminated by virtue of the 1999 sale of the Louisiana plan. The
actions brought against us by AmCare-TX and AmCare-OK originally were filed in Texas state court on June 7,
2004 and included allegations that after the sale to AmCareco we were responsible for the mismanagement of the
three plans by AmCareco and that the three plans were insolvent at the time of the sale to AmCareco. On
September 30, 2004 and October 15, 2004, respectively, the AmCare-TX receiver and the AmCare-OK receiver
intervened in the pending AmCare-LA litigation in Louisiana. Thereafter, all three receivers amended their
complaints to assert essentially the same claims against us and successfully moved to consolidate their three
actions in the Louisiana state court proceeding. The Texas state court ultimately stayed the Texas action and
ordered that the parties submit quarterly reports to the Texas court regarding the status of the consolidated
Louisiana litigation.
On June 16, 2005, a consolidated trial of the claims asserted against us by the three receivers commenced in
state court in Baton Rouge, Louisiana. The claims of the receiver for AmCare-TX were tried before a jury and
the claims of the receivers for the AmCare-LA and AmCare-OK were tried before the judge in the same
proceeding. On June 30, 2005, the jury considering the claims of the receiver for AmCare-TX returned a verdict
against us in the amount of $117.4 million, consisting of $52.4 million in compensatory damages and $65 million
in punitive damages. The Court later reduced the compensatory and punitive damages awards to $36.7 million
and $45.5 million, respectively and entered judgments in those amounts on November 3, 2005. We thereafter
filed a motion for suspensive appeal and posted the required security as required by law.
The proceedings regarding the claims of the receivers for AmCare-LA and AmCare-OK concluded on
July 8, 2005. On November 4, 2005, the Court issued separate judgments on those claims that awarded $9.5
million in compensatory damages to AmCare-LA and $17 million in compensatory damages to AmCare-OK.
The Court later denied requests by AmCare-LA and AmCare-OK for attorneys’ fees and punitive damages. We
thereafter filed motions for suspensive appeals in connection with both judgments and posted the required
security as required by law, and the receivers for AmCare-LA and AmCare-OK each appealed the orders denying
them attorneys’ fees and punitive damages. Our appeals of the judgments in all three cases have 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
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