CALDERWOOD & HARKNESS LLP Attorneys at Law
700 Louisiana Street, Suite 4500 Houston, Texas 77002
Telephone: (713) 554-8000 Facsimile: (713) 554-8001 www.calderwoodharkness.com
August 19, 2024
Via Email and U.S. Mail
Marcus D. Stonefield Chief Executive Officer Stonefield Logistics Group Inc. 2900 Petroleum Tower Boulevard, Suite 400 Midland, TX 79701
Dale Engstrom Vice President of Risk Management Stonefield Logistics Group Inc. 2900 Petroleum Tower Boulevard, Suite 400 Midland, TX 79701
Re: Stonefield Logistics Group Inc. v. Meridian Surety & Indemnity Company — Cargo Loss Coverage Dispute Policy No.: IML-TX-0039821-2023 C&H Matter No.: 1012-00003
Dear Mr. Stonefield and Mr. Engstrom:
1. Purpose of This Letter
This letter confirms the successful resolution and formal closure of the above-referenced matter. As you know, Calderwood & Harkness LLP ("C&H" or the "Firm") was retained by Stonefield Logistics Group Inc. ("SLG") on February 5, 2024, to evaluate coverage, prepare a comprehensive coverage opinion, and pursue recovery under the Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023 (the "Policy") issued by Meridian Surety & Indemnity Company ("Meridian") in connection with the warehouse fire that occurred on November 17, 2023, at SLG's Midland Facility — specifically, Warehouse Building C, located at 4501 East County Road 130, Midland, Texas 79706.
We are pleased to report that this matter has been resolved on terms highly favorable to SLG, and we are writing to memorialize the resolution, summarize the procedural history, present a final accounting of fees and costs, and provide recommendations regarding document retention and prospective risk management. We are gratified to have achieved this outcome on behalf of SLG and appreciate the trust that your management team and Irongate Capital Partners, LP placed in our firm throughout the engagement.
2. Summary of Matter Resolution
2.1 Settlement Agreement
On August 12, 2024, Stonefield Logistics Group Inc. and Meridian Surety & Indemnity Company executed a Settlement Agreement and Mutual Release (the "Settlement Agreement") that fully and finally resolves all disputes between the parties arising from or related to the November 17, 2023 loss event and Policy No. IML-TX-0039821-2023. The material terms of the Settlement Agreement are as follows:
(a) Settlement Payment. Meridian agreed to pay SLG a lump-sum settlement amount of Four Million Five Hundred Thousand Dollars ($4,500,000.00), inclusive of indemnity (net of SLG's $250,000 self-insured retention ("SIR")) and in full resolution of all claims asserted or that could have been asserted under the Policy and under Chapters 541 and 542 of the Texas Insurance Code.
(b) Release by SLG. SLG released and forever discharged Meridian from all claims, demands, causes of action, and liabilities of any kind arising from or related to the November 17, 2023 loss and Policy No. IML-TX-0039821-2023, including without limitation all claims under the Texas Insurance Code, common law bad faith, breach of contract, and breach of the duty of good faith and fair dealing.
(c) Release by Meridian. Meridian released and forever discharged SLG from all subrogation claims and any other claims that Meridian held or could hold against SLG in connection with the November 17, 2023 loss.
(d) Confidentiality. The Settlement Agreement contains a mutual confidentiality provision prohibiting either party from disclosing the terms or amount of the settlement to any third party, subject to customary exceptions for legal, tax, and regulatory advisors, auditors, and as required by law or court order.
(e) No Admission. The Settlement Agreement contains a no-admission clause pursuant to which neither party admitted liability, fault, or wrongdoing of any kind.
An executed copy of the Settlement Agreement is enclosed with this letter for your records.
2.2 Receipt of Settlement Funds
We confirm that the settlement payment of $4,500,000.00 was received via wire transfer on August 16, 2024. The funds were deposited directly into SLG's operating account at Pinnacle National Bank, Midland, Texas, in accordance with SLG's wire instructions provided to Meridian's counsel. Payment was received within five (5) business days of execution of the Settlement Agreement, consistent with the payment timeline specified therein. No further amounts are outstanding from Meridian to SLG.
2.3 Context of Recovery
To place the settlement in proper context, we summarize below the total loss and the recovery achieved:
The total cargo loss sustained in the November 17, 2023 fire was determined by Whitlock & Associates, CPAs, P.C. (Sandra Whitlock, CPA, CFF) and set forth in the sworn proof of loss submitted to Meridian on February 1, 2024, in the aggregate amount of $4,780,000.00. The cargo losses were categorized as follows:
After application of SLG's $250,000 SIR, the net claim amount under the Policy was $4,530,000.00.
The settlement of $4,500,000.00 represents recovery of approximately 99.3% of the net claim amount — a result that we believe is exceptional in light of the posture of this matter when the engagement commenced. For comparison, Meridian's initial settlement offer of $1,750,000.00 (communicated on May 6, 2024) would have represented only approximately 38.6% of the net claim, a discount of more than $2.75 million from the amount ultimately recovered.
The $30,000.00 discount from the full net claim amount was more than offset by SLG's waiver of statutory remedies under Chapters 541 and 542 of the Texas Insurance Code. Those remedies included, among other things, penalty interest under Section 542.060, which we calculated at 18% per annum on the unpaid claim. As of the approximate date of accrual (April 29, 2024, i.e., sixty days after SLG's February 1, 2024 proof of loss and ninety days from the date of notice), the estimated value of penalty interest alone was approximately $250,128.00 through the date of settlement, and this figure would have continued to accrue. In economic terms, SLG's agreement to accept $30,000.00 less than the full net claim amount in exchange for Meridian's waiver of subrogation rights and in full resolution of all claims — including the avoidance of protracted litigation — represented a highly advantageous trade.
3. Procedural History Summary
For your records, we provide the following chronological summary of the key events in this matter:
November 17, 2023: A fire erupted at approximately 2:14 a.m. CST in Warehouse Building C at SLG's Midland Facility, located at 4501 East County Road 130, Midland, Texas 79706. Building C was declared a total structural loss. The fire destroyed all cargo stored within the facility, as described in Section 2.3 above.
December 4, 2023: Meridian issued a Reservation of Rights letter to SLG, reserving rights under Policy Exclusion 4(k) (Failure to Maintain Premises or Equipment). Notably, Meridian's Reservation of Rights letter cited only Exclusion 4(k) and did not reference any other coverage defense.
January 22, 2024: Meridian issued a formal coverage denial letter to SLG, this time invoking two separate exclusions: Exclusion 4(f) (Improper Storage of Cargo) and Exclusion 4(k) (Failure to Maintain Premises or Equipment). The denial letter asserted that SLG had failed to maintain its fire suppression system in operable condition and had stored cargo in a manner inconsistent with the Policy's requirements. Meridian denied the claim in its entirety.
February 1, 2024: SLG submitted its sworn proof of loss to Meridian, prepared by Whitlock & Associates, CPAs, P.C., in the amount of $4,780,000.00, supported by detailed inventory records, receiving documentation, shipper manifests, and replacement-cost valuations.
February 5, 2024: Calderwood & Harkness LLP was formally retained by SLG, and the engagement was opened as C&H Matter No. 1012-00003. The engagement letter, executed by Mr. Stonefield on behalf of SLG, authorized the Firm to evaluate coverage, prepare a coverage opinion, and pursue recovery through negotiation, mediation, or litigation as appropriate.
February 12, 2024: At C&H's recommendation, SLG retained Ridgeline Forensic Consultants LLC to conduct an independent origin-and-cause investigation of the Warehouse C fire. The investigation was led by Dr. William Creech, P.E., CFEI, a board-certified fire investigation engineer.
March 15, 2024: Ridgeline Forensic Consultants LLC delivered its final origin-and-cause report. The report concluded, to a reasonable degree of engineering certainty, that the fire originated in a Square D Model QED-2 electrical distribution panel located in the northeast quadrant of Warehouse Building C. Critically, Dr. Creech further concluded that the municipal water pressure available at the Midland Facility — measured at 36 psi actual versus the 52 psi design specification for the facility's wet-pipe sprinkler system — would have significantly limited fire suppression efficacy regardless of the maintenance status of the sprinkler system. This finding directly undermined the factual predicate for both of Meridian's exclusion defenses.
March 22, 2024: C&H delivered a comprehensive coverage opinion memorandum to SLG, analyzing the applicability of Exclusions 4(f) and 4(k) under Texas law and concluding that neither exclusion was applicable to the November 17, 2023 loss. The memorandum addressed, among other things, the proximate-cause standard applicable to policy exclusions under Texas law, the burden of proof on the insurer, and the evidentiary record established by the Ridgeline forensic report.
April 12, 2024: C&H sent a formal demand letter to Meridian, addressed to Patricia Ng, Vice President of Claims, with a copy to Meridian's outside counsel at Kessler, Brandt & Howe LLP (Victoria Kessler, Esq.), demanding payment of $4,530,000.00 — the full net claim amount after application of the $250,000 SIR. The demand letter was accompanied by the Ridgeline forensic report and a detailed analysis of the inapplicability of the cited exclusions.
May 6, 2024: Meridian, through its counsel at Kessler, Brandt & Howe LLP, communicated an initial settlement offer of $1,750,000.00. After consultation with SLG's management team, the offer was rejected as grossly inadequate.
June 20, 2024: The parties participated in a full-day mediation at JAMS Houston before the Honorable Margaret Colquitt (Retired), JAMS Case No. 1440-02917-2024. Despite extensive negotiations, the mediation concluded at impasse, with the parties remaining approximately $1.8 million apart at the close of the session.
July 1, 2024: C&H sent a pre-suit statutory notice to Meridian pursuant to Texas Insurance Code Section 541.154, formally notifying Meridian of the specific unfair settlement practices alleged and providing the required sixty-day notice period prior to the commencement of litigation.
August 12, 2024: Following additional post-mediation negotiations facilitated in part by Judge Colquitt's continued involvement, the parties reached agreement on all terms, and the Settlement Agreement and Mutual Release was executed by authorized representatives of both SLG and Meridian.
August 16, 2024: Settlement funds in the amount of $4,500,000.00 were received by wire transfer and deposited to SLG's operating account at Pinnacle National Bank, Midland, Texas.
August 19, 2024: Matter closed.
4. Final Fee and Cost Summary
4.1 Legal Fees
The total legal fees billed to SLG in connection with this matter are $198,450.00. All fees were billed on an hourly basis with no contingency component, as set forth in the Firm's engagement letter dated February 5, 2024.
The engagement team and applicable hourly rates were as follows:
The original estimated fee budget for the pre-litigation phase of this engagement, as communicated in the engagement letter and in C&H's initial case assessment, was $175,000 to $225,000. Actual fees of $198,450.00 fell comfortably within this range, and we are pleased that our staffing approach and the efficient progression of the matter allowed us to achieve this result without exceeding the estimated budget.
We note, in particular, that this matter was resolved without the necessity of filing suit. Had litigation been required — including discovery, depositions, expert reports, summary judgment briefing, and trial preparation — the additional legal fees would have been substantial, and we estimate that total fees through trial would have been in the range of $650,000 to $900,000. The pre-litigation resolution therefore resulted in significant cost savings for SLG.
4.2 Costs Advanced
The total costs advanced by the Firm on SLG's behalf are $47,320.00, broken down as follows:
4.3 Total Legal Spend and Net Recovery
The total legal spend for this matter is summarized as follows:
Legal Fees: $198,450.00 Costs Advanced: $47,320.00 Total Legal Spend: $245,770.00
SLG's net recovery, after deduction of all legal fees and costs, is calculated as follows:
Settlement Proceeds: $4,500,000.00 Less Total Legal Spend: ($245,770.00) Net Recovery to SLG: $4,254,230.00
We note that the final invoice accompanying this letter details all individual time entries and cost disbursements for the entire duration of the engagement. The final invoice is being submitted concurrently under separate cover, and payment is due in accordance with the terms of the engagement letter.
5. Document Retention Recommendations
We strongly advise SLG to retain all documents related to this matter in a secure, organized file — whether physical, electronic, or both — for a minimum period consistent with the applicable Texas statutes of limitation and with SLG's corporate document-retention policy. Given the four-year statute of limitations for breach of contract claims under Texas law, and the potential for other claims with varying limitations periods, we recommend a minimum retention period of no less than six (6) years from the date of execution of the Settlement Agreement (i.e., through at least August 12, 2030).
Specifically, we recommend that SLG retain the following categories of documents:
1. The executed Settlement Agreement and Mutual Release dated August 12, 2024;
2. All correspondence with Meridian Surety & Indemnity Company, including without limitation the Reservation of Rights letter dated December 4, 2023, and the coverage denial letter dated January 22, 2024;
3. The complete Meridian Surety & Indemnity Company Inland Marine Cargo Legal Liability Policy No. IML-TX-0039821-2023 (effective April 1, 2023 through March 31, 2024), including all endorsements, schedules, and declarations;
4. The Ridgeline Forensic Consultants LLC origin-and-cause report dated March 15, 2024, including all supporting photographs, diagrams, and laboratory analyses;
5. The Whitlock & Associates, CPAs, P.C. sworn proof of loss and all supporting documentation, including inventory schedules, shipper manifests, receiving records, and replacement-cost valuations;
6. SLG's Warehouse Layout Plan Rev. 7 (June 2023) for the Midland Facility;
7. All NFPA 25 inspection records pertaining to the Midland Facility, including quarterly visual inspection reports and annual full-flow test records;
8. The Lone Star Fire Protection Inc. engagement letter dated August 28, 2023, and all related communications;
9. Wire transfer confirmations for the August 16, 2024 settlement payment;
10. All Calderwood & Harkness LLP invoices and the engagement letter dated February 5, 2024; and
11. Any other documents or communications related to the November 17, 2023 loss event, the claim, or the coverage dispute.
We remind you that the confidentiality provision contained in the Settlement Agreement is an ongoing obligation that survives the closing of this matter. We recommend that SLG communicate the existence and scope of this confidentiality obligation to all relevant SLG personnel who may have knowledge of or access to information regarding the settlement terms, including, without limitation, members of SLG's executive team, finance and accounting departments, and risk management personnel.
For its part, Calderwood & Harkness will retain its own matter file in accordance with the Firm's document-retention policy, which provides for retention of closed-matter files for a minimum of ten (10) years following matter closure, after which the file may be destroyed in accordance with the Firm's standard procedures. Should you require access to any documents in the Firm's file in the future, please do not hesitate to contact us.
6. Prospective Risk-Management Recommendations
While the following observations fall outside the formal scope of our engagement in this matter, we believe they may be of value to SLG in mitigating future exposure to similar risks. We offer them for your consideration and recommend that they be discussed with SLG's internal risk management team and relevant advisors.
6.1 NFPA 25 Compliance — Annual Full-Flow Sprinkler Testing
As this matter demonstrated, the maintenance status of SLG's fire suppression systems was a central issue in Meridian's coverage defenses. Although the Ridgeline forensic report ultimately established that the sprinkler system's maintenance status was not the proximate cause of the loss, the factual question would not have arisen at all had SLG's NFPA 25 inspection records been fully up to date at the time of the fire.
We recommend the following:
(a) SLG should establish a formal annual calendar for NFPA 25 Section 5.3.2 annual full-flow testing across all fourteen (14) SLG terminal locations in Texas, New Mexico, and Oklahoma. The calendar should assign specific testing windows for each facility and designate a responsible individual at each location to coordinate with the fire protection contractor.
(b) Annual full-flow tests should be scheduled with a minimum sixty (60)-day buffer before the anniversary date of the prior year's test. As you are aware, the scheduling delays that occurred with Lone Star Fire Protection Inc. in 2023 contributed to the gap in the testing record that Meridian seized upon in its coverage defense. Building in an adequate scheduling buffer will help avoid similar issues in the future.
(c) SLG should identify and qualify a backup fire protection contractor in addition to Lone Star Fire Protection Inc. to ensure that testing can proceed on schedule even if the primary contractor experiences scheduling constraints.
(d) SLG should maintain contemporaneous written records of all inspections — including quarterly visual inspections under NFPA 25 Section 5.2.1 and annual full-flow tests under Section 5.3.2 — in a centralized digital repository accessible to the Vice President of Risk Management and other designated personnel. These records should include the date of each inspection, the name and qualifications of the inspector, a description of any deficiencies identified, and the date and nature of any corrective actions taken.
6.2 Insurance Program Review
The coverage dispute in this matter highlighted several areas where SLG's insurance program could be strengthened. We recommend the following actions in connection with the next renewal cycle:
(a) SLG should work with its insurance broker, Calvert & Strauss Insurance Brokers, Inc. (Jason Muñoz, Account Executive), to conduct a comprehensive review of SLG's inland marine and cargo legal liability program at the next renewal.
(b) In particular, SLG should request that any renewed or replacement policy narrow or clarify the scope of exclusions comparable to Exclusions 4(f) (Improper Storage) and 4(k) (Failure to Maintain) — or their equivalents — to ensure that a proximate-cause standard is expressly stated in the policy language. While Texas law generally applies a proximate-cause standard to policy exclusions, an express policy provision would reduce the likelihood of similar coverage disputes in the future and provide greater certainty in the event of a claim.
(c) SLG should review the adequacy of the per-occurrence limit under the Policy, which was set at $5,000,000 under the IML-TX-0039821-2023 policy. Given the aggregate value of cargo routinely held at the Midland Facility and SLG's other terminals — and in light of SLG's growing revenue base, which reached $187.4 million in fiscal year 2023 — it may be appropriate to increase the per-occurrence and aggregate limits to provide a more adequate cushion.
(d) SLG should also evaluate whether the $250,000 SIR remains appropriately calibrated to SLG's current risk profile and financial position. With reported EBITDA of $29.1 million in fiscal year 2023, the existing SIR level may warrant adjustment — either upward to reduce premium costs, or in combination with other program modifications to optimize the overall cost of risk.
6.3 Warehouse Operations
(a) We recommend that SLG continue to adhere to the warehouse layout plan with segregated bays and buffer zones, as documented in Warehouse Layout Plan Rev. 7 (June 2023), and that SLG periodically review and update the plan to reflect changes in cargo mix, storage density, and operational practices. Any updates to the layout plan should be documented and distributed to warehouse management personnel.
(b) We also recommend that SLG implement a program of periodic electrical infrastructure inspections at all warehouse facilities, with particular attention to the aging Square D Model QED-2 electrical distribution panels (installed 2011) that were identified as the origin point of the Warehouse C fire. Given that these panels are now over thirteen years old, SLG should consult with a qualified electrical engineer regarding whether replacement or upgrade is warranted. Additionally, SLG should coordinate with the municipal water authority to monitor design water pressure availability at the Midland Facility and all other locations, and should promptly report and address any pressure deficits that could impair fire suppression system performance.
6.4 Coordination with Irongate Capital Partners
Given Irongate Capital Partners, LP's board-level oversight of SLG's insurance and risk-management program through Irongate Industrial Partners Fund IV, LP, we suggest that SLG brief Carolyn Reeves, Managing Partner of Irongate Capital Partners, on the prospective risk-management recommendations outlined above. Irongate's perspective on capital allocation for risk mitigation — including investment in electrical infrastructure upgrades, insurance program enhancements, and compliance systems — would be valuable in prioritizing these initiatives.
7. Matter Closure
We hereby confirm that Calderwood & Harkness LLP Matter No. 1012-00003 is closed effective August 19, 2024. The Firm's representation of Stonefield Logistics Group Inc. in this matter has concluded as of this date.
Please note that the closure of this matter does not create any ongoing duty on the part of Calderwood & Harkness LLP to monitor, advise on, or take any further action regarding the Meridian Policy, the Settlement Agreement, or any related matters, unless and until a new engagement is formally opened. Should any issues arise in the future that require legal counsel — whether related to the matters discussed in this letter or otherwise — we would, of course, welcome the opportunity to assist.
We wish to express our sincere appreciation for the opportunity to serve Stonefield Logistics Group Inc. in this matter. The confidence placed in our firm by the SLG management team, and by Irongate Capital Partners, has been deeply valued, and we are proud of the result achieved. We look forward to the opportunity to work with you again in the future.
8. Contact Information
Should you have any questions regarding this letter, the Settlement Agreement, the final invoice, or the document-retention and risk-management recommendations set forth above, please do not hesitate to contact either of the undersigned:
Howard Bellamy Partner Calderwood & Harkness LLP 700 Louisiana Street, Suite 4500 Houston, TX 77002 Direct: (713) 554-8124
Email: hbellamy@calderwoodharkness.com
Andrew Fitzpatrick Senior Associate Calderwood & Harkness LLP 700 Louisiana Street, Suite 4500 Houston, TX 77002 Direct: (713) 554-8247
Email: afitzpatrick@calderwoodharkness.com
Very truly yours,
CALDERWOOD & HARKNESS LLP
By: ________
Howard Bellamy Partner
cc: Leah Tran, Chief Financial Officer, Stonefield Logistics Group Inc. Carolyn Reeves, Managing Partner, Irongate Capital Partners, LP Douglas Fairchild, Billing Partner, Calderwood & Harkness LLP Andrew Fitzpatrick, Lead Associate, Calderwood & Harkness LLP
Enclosures:
1. Final Invoice and Fee Summary (Matter No. 1012-00003) — submitted under separate cover
2. Copy of executed Settlement Agreement and Mutual Release dated August 12, 2024 (for client records)
| Cargo Description | Shipper / Owner | Loss Amount |
| 312 joints of 5-1/2" P-110 casing pipe | Permian Wellhead Services LLC | $1,842,000.00 |
| 47 pallets of completion chemicals | Cantera Chemical Supply Co. | $1,126,500.00 |
| 18 crates of downhole tools and sensors | Triton Subsurface Technologies Inc. | $987,000.00 |
| Miscellaneous freight (multiple shippers) | Various | $824,500.00 |
| Total Cargo Loss | $4,780,000.00 | |
| Timekeeper | Role | Hourly Rate |
| Howard Bellamy | Responsible Partner | $1,050/hr |
| Douglas Fairchild | Billing Partner | $975/hr (minimal time) |
| Andrew Fitzpatrick | Lead Associate | $725/hr |
| Naomi Petersen | Working Associate | $575/hr |
| Cost Item | Amount | |
| Ridgeline Forensic Consultants LLC — Independent origin-and-cause investigation (Dr. William Creech, P.E., CFEI) | $38,500.00 | |
| JAMS Houston mediation fee (JAMS Case No. 1440-02917-2024) | $6,200.00 | |
| Miscellaneous costs (copying, courier, filing fees, etc.) | $2,620.00 | |
| Total Costs Advanced | $47,320.00 |