1012-00005 · Stonefield Logistics Group · Insurance & Lender Notifications

analysis-graymark-coverage-declination.docx DOCUMENT Litigation

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MEMORANDUM

PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT

To: Samuel Eklund, Responsible Partner Patrick Gallagher, Lead Associate Tobias Wren, General Counsel, Stonefield Logistics Group Inc.

From: Simone Laroche, Associate, Calderwood & Harkness LLP

Date: October 10, 2022

Re: Analysis of Graymark Insurance Company's Declination of Coverage Under D&O Policy No. GLG-DO-1025-00008 — Vantor Holdings Corp. v. Stonefield Logistics Group Inc., Case No. 22-cv-07841 (S.D.N.Y.)

Matter No.: 1012-00005

I. Executive Summary

The purpose of this memorandum is to analyze the October 3, 2022 coverage declination letter issued by Graymark Insurance Company ("Graymark") in response to Stonefield Logistics Group Inc.'s ("Stonefield" or the "Company") September 6, 2022 tender of the claims asserted by Vantor Holdings Corp. ("Vantor") in Vantor Holdings Corp. v. Stonefield Logistics Group Inc., Case No. 22-cv-07841 (S.D.N.Y.) (the "Underlying Action"), under Stonefield's Directors and Officers Liability Insurance Policy, Policy No. GLG-DO-1025-00008 (the "Policy").

After a thorough review of the Vantor Complaint, the Policy, Graymark's declination letter, and applicable law, the bottom-line conclusion of this memorandum is that Graymark's declination is legally defensible. The claims asserted by Vantor arise from a commercial breach-of-contract dispute — specifically, the alleged wrongful termination of the Transportation Services Agreement dated March 15, 2019 — rather than from alleged wrongful acts of Stonefield's directors or officers in their capacity as such. The Policy's contractual liability exclusion squarely applies to bar coverage. Moreover, because no individual director or officer is named as a defendant in the Underlying Action, and because the entity-level coverage (Side C) is limited to securities claims, the fundamental prerequisites for coverage under the Policy are not satisfied.

Accordingly, Stonefield should not challenge or appeal the declination. The cost and likelihood of success of a coverage action do not justify the expense, given the clear applicability of the exclusion and the absence of any named individual defendant. Defense costs for the Underlying Action will be borne directly by Stonefield. This memorandum sets forth the analysis supporting this recommendation and addresses the financial and operational implications of the declination for the Company's litigation planning.

II. Background

A. The Underlying Litigation

On August 12, 2022, Vantor Holdings Corp. filed a Complaint in the United States District Court for the Southern District of New York, assigned Case No. 22-cv-07841 (the "Complaint"), against Stonefield Logistics Group Inc. The Complaint alleges wrongful termination of the Transportation Services Agreement dated March 15, 2019, between Stonefield and Vantor Transport Services LLC, a wholly owned subsidiary of Vantor Holdings Corp. (the "TSA," Contract Ref. No. SLG-VTS-2019-0315).

The TSA governed the provision of dedicated transportation and logistics services by Vantor Transport Services LLC to Stonefield across a defined network of regional distribution lanes in the Midwest and Southeast United States. The TSA was a multi-year agreement with guaranteed minimum freight volumes, exclusivity provisions on certain designated lanes, and detailed termination-for-cause procedures, including notice and cure requirements set forth in Section 13.4.

On March 4, 2022, Stonefield issued a written notice of termination for cause, citing Vantor's alleged failure to meet service-level requirements under Annex B of the TSA, including on-time delivery performance, equipment standards, and compliance with safety protocols mandated by the Department of Transportation. Vantor disputes that these defaults constituted material breaches and contends that Stonefield's termination was pretextual — allegedly motivated by Stonefield's desire to consolidate transportation services under a competing carrier at a lower per-mile rate following the appointment of new management at Stonefield by its private equity sponsor, Ridgeline Capital Partners.

Vantor claims approximately $95.4 million in damages, consisting of the following categories:

• Liquidated damages of approximately $67.23 million pursuant to Section 14.2 of the TSA, which provides for the payment of a specified formula-based amount in the event of a wrongful early termination by Stonefield during the exclusivity period;

• Lost profits of $18.7 million, representing the projected margin Vantor would have earned on guaranteed volumes for the remaining term of the TSA through its scheduled expiration on March 14, 2024;

• Stranded assets and costs of $5.2 million, representing capital investments in rolling stock, terminal leases, and specialized equipment acquired by Vantor specifically to service the Stonefield account;

• Workforce reduction costs of $2.87 million, representing severance obligations and retraining costs associated with the elimination of approximately 340 driver and operations positions attributable to the Stonefield account; and

• Mitigation costs of $1.4 million, representing expenses incurred by Vantor in attempting to redeploy assets and personnel following the termination.

Vantor's core theory of liability is that Stonefield's March 4, 2022 termination for cause was pretextual and constituted a material breach of the TSA. Specifically, Vantor alleges that (i) the service-level defaults cited by Stonefield were cured within the applicable cure period set forth in Section 13.4, (ii) Stonefield failed to provide the required second notice before effectuating termination, and (iii) Stonefield's true motivation was cost reduction and carrier consolidation, not legitimate performance concerns. The Complaint asserts three causes of action: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) declaratory judgment regarding the enforceability of the liquidated damages provision.

Calderwood & Harkness LLP was engaged as lead defense counsel on September 1, 2022. Samuel Eklund serves as Responsible Partner, with Patrick Gallagher serving as Lead Associate. The firm filed its Notice of Appearance in the Underlying Action on September 8, 2022. A responsive pleading is due on November 11, 2022, following a stipulated extension of time granted by Magistrate Judge Patricia Kellner on September 22, 2022.

B. The D&O Policy

Stonefield maintains a Directors and Officers Liability Insurance Policy issued by Graymark Insurance Company. The relevant policy details are as follows:

• Insurer: Graymark Insurance Company, 100 Constitution Plaza, Hartford, Connecticut 06103

• Policy Number: GLG-DO-1025-00008

• Named Insured: Stonefield Logistics Group Inc. and its directors and officers, as defined in the Policy

• Policy Period: January 1, 2022 through January 1, 2023 (current policy year)

• Aggregate Limit of Liability: $15,000,000

• Self-Insured Retention: $500,000 per Claim (applicable to Side B and Side C coverage only)

• Governing Law: State of Connecticut

The Policy provides coverage for "Loss" arising from "Claims" made against "Insured Persons" (defined as the directors and officers of the Named Insured) for "Wrongful Acts" committed in their capacities as directors or officers of the insured entity. The Policy is structured as follows:

• Side A Coverage: Direct coverage for individual directors and officers when the Company does not or cannot indemnify them;

• Side B Coverage: Reimbursement coverage for the Company when it indemnifies its directors and officers for covered Claims;

• Side C Coverage (Entity Coverage): Coverage for the Company itself, but limited exclusively to "Securities Claims" — that is, claims brought by shareholders or the SEC alleging violations of securities laws.

The following key definitions in the Policy are material to this analysis:

• "Wrongful Act" is defined as "any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty by an Insured Person in their capacity as a director or officer of the Company."

• "Claim" is defined as "a written demand for monetary damages or civil proceeding commenced against an Insured Person for a Wrongful Act."

• "Loss" is defined as "damages, judgments, settlements, and Defense Costs that an Insured Person becomes legally obligated to pay as a result of a Claim." Loss expressly excludes "matters which are uninsurable under the law pursuant to which this Policy is construed."

The Policy also contains a number of exclusions, the most relevant of which is the Contractual Liability Exclusion, set forth in Section 5(g) of the Policy, which provides:

The Insurer shall not be liable for Loss in connection with any Claim arising out of, based upon, or attributable to any actual or alleged liability under any contract or agreement, whether written or oral, except to the extent that the Insured Person would have been liable in the absence of such contract or agreement.

This exclusion is broadly drafted and is consistent with standard market terms in directors and officers liability insurance policies.

C. The Tender

On September 6, 2022, Tobias Wren, General Counsel of Stonefield, submitted a formal notice of claim and tender of defense to Graymark's Claims Department via certified mail and electronic transmission, addressed to the attention of Margaret Howe, Senior Claims Examiner, Graymark Insurance Company. The tender was prepared in consultation with Samuel Eklund, who reviewed the submission prior to its transmittal.

The tender package included the following materials:

• A cover letter from Mr. Wren identifying the Policy by number and requesting that Graymark provide a prompt coverage determination and, if applicable, assume or reimburse defense costs incurred in connection with the Underlying Action;

• A complete copy of the Vantor Complaint, as filed on August 12, 2022;

• A copy of the April 8, 2022 pre-litigation demand letter from Vantor's counsel, Tarvick Torrance LLP, to Stonefield, demanding payment of $95.4 million in damages and threatening litigation;

• A copy of the March 4, 2022 termination letter issued by Stonefield; and

• The Notice of Appearance filed by Calderwood & Harkness LLP on September 8, 2022.

The tender was submitted within the Policy's required notice period and in compliance with the notice provisions set forth in Section 7.1 of the Policy.

D. The Declination

On October 3, 2022 — twenty-seven days after the tender — Graymark issued a written coverage declination letter (the "Declination Letter") addressed to Stonefield Logistics Group Inc., attention Tobias Wren, General Counsel. The Declination Letter was authored by Margaret Howe, Senior Claims Examiner, and countersigned by David Lorenzen, Vice President of Claims, Graymark Insurance Company.

In the Declination Letter, Graymark determined that the claims asserted by Vantor in the Underlying Action arise from a commercial contract dispute — namely, the alleged breach of the TSA — and do not arise from wrongful acts of directors or officers in their insured capacities within the meaning of the Policy. Graymark cited two primary, independent bases for its declination:

1. Contractual Liability Exclusion (Section 5(g)): Graymark determined that the Vantor claims arise out of, are based upon, and are attributable to Stonefield's actual or alleged liability under the TSA. Because the claims sound entirely in contract, the Contractual Liability Exclusion applies to preclude coverage. Graymark further determined that the "absent the contract" carve-back does not apply because Stonefield would have no liability to Vantor in the absence of the TSA — there is no independent tort duty or common-law obligation running from Stonefield to Vantor that would give rise to the damages claimed.

2. Insured Capacity Requirement / Absence of Named Individual Defendants: Graymark noted that the Complaint names only Stonefield Logistics Group Inc. as defendant. No individual director or officer of Stonefield is named as a defendant. The Complaint does not allege that any Insured Person committed a Wrongful Act in their capacity as a director or officer. Accordingly, the fundamental predicate for coverage under Sides A and B of the Policy — a Claim against an Insured Person for a Wrongful Act — is not satisfied. Graymark further noted that the entity-coverage provision (Side C) is limited to Securities Claims, which the Vantor lawsuit indisputably is not.

Graymark expressly reserved all rights and defenses under the Policy, including the right to assert additional grounds for declination should circumstances change. The Declination Letter was received by Stonefield on October 5, 2022, and was forwarded to Calderwood & Harkness LLP on the same date.

III. Analysis of the Declination

Having reviewed the Complaint, the Policy, the Declination Letter, and applicable case law, we have independently assessed the legal soundness of Graymark's coverage declination. For the reasons set forth below, we conclude that the declination is well-founded and that Stonefield does not have a viable basis for challenging it.

A. The Contractual Liability Exclusion Bars Coverage

The Contractual Liability Exclusion in Section 5(g) of the Policy is the most significant basis for Graymark's declination, and our analysis confirms that it plainly applies to the Vantor claims.

The Vantor Complaint is rooted entirely in the alleged breach of the TSA — a commercial transportation services agreement between Stonefield Logistics Group Inc. and Vantor Transport Services LLC. Every cause of action in the Complaint depends upon the existence and terms of the TSA. Without the TSA, Vantor would have no claim against Stonefield, because the obligations that Vantor alleges were breached — minimum freight volume commitments, lane exclusivity, termination-for-cause procedures, and the corresponding liquidated damages provision — exist solely by virtue of the contractual relationship between the parties.

The specific claims asserted by Vantor confirm the purely contractual nature of the dispute:

• Wrongful termination of the TSA: This claim is predicated on the allegation that Stonefield failed to comply with the contractual notice and cure provisions in Section 13.4 of the TSA before effectuating termination. The claim sounds exclusively in contract.

• Failure to tender minimum volumes: Vantor alleges that Stonefield diverted freight to competing carriers in violation of the minimum volume guarantees set forth in Annex A of the TSA. This obligation arises solely from the contract.

• Diversion of freight in violation of exclusivity provisions: Vantor alleges that Stonefield breached the lane exclusivity commitments in Section 5.3 of the TSA by routing freight on designated lanes through other carriers. Again, this obligation is entirely contractual in nature.

• Breach of the implied covenant of good faith and fair dealing: While styled as a separate cause of action, this claim is derivative of the contract and depends upon the existence of the TSA. Under New York law, a claim for breach of the implied covenant of good faith and fair dealing is not independent of the underlying contract and does not create a separate tort duty. See Harris v. Provident Life & Accident Ins. Co., 310 F.3d 73, 81 (2d Cir. 2002); New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 318 (1995).

Vantor's damages categories further confirm the contractual nature of the claims. Every element of Vantor's $95.4 million damages demand flows directly from the alleged breach of the TSA:

• Liquidated damages of $67.23 million are payable, if at all, under Section 14.2 of the TSA — a contractual provision establishing a formula for early termination damages;

• Lost profits of $18.7 million represent the projected margin Vantor would have earned during the remaining contract term;

• Stranded assets ($5.2 million), workforce reduction costs ($2.87 million), and mitigation costs ($1.4 million) are consequential damages arising from the loss of the contractual relationship.

None of these damages categories arises from any alleged wrongful act by a director or officer in their individual or fiduciary capacity. Rather, they are the standard measure of damages in a commercial breach-of-contract action.

The Contractual Liability Exclusion in the Policy is a standard and widely enforced provision in directors and officers liability insurance. Under Connecticut law, which governs the Policy, insurance policy exclusions are given their plain and ordinary meaning and are enforced according to their terms where the language is clear and unambiguous. See Nationwide Mut. Ins. Co. v. Pasion, 219 Conn. 764, 771 (1991); R.T. Vanderbilt Co. v. Continental Cas. Co., 273 Conn. 448, 462 (2005). The Connecticut Supreme Court has repeatedly held that when an exclusion is "clear and unambiguous," it must be enforced "as written." See QSP, Inc. v. Northpoint Casualty Group Cas. & Surety Co., 256 Conn. 343, 353 (2001).

Under New York law, which governs the Underlying Action and which would apply to any coverage dispute litigated in the Southern District of New York, the result is the same. New York courts enforce contractual liability exclusions in D&O policies where the underlying claims are grounded in contract. See National Union Fire Ins. Co. of Pittsburgh, Pa. v. U.S. Liquids, Inc., No. 03-cv-8979, 2005 WL 1155416 (S.D.N.Y. May 16, 2005); see also Hakim v. Massachusetts Gen. Life Ins. Co., 424 F. Supp. 2d 631, 637 (S.D.N.Y. 2006) (enforcing contractual liability exclusion where claims arose from breach of employment agreement).

The Contractual Liability Exclusion contains a standard carve-back that preserves coverage "to the extent the Insured Person would have been liable in the absence of such contract or agreement." This carve-back is designed to ensure that the exclusion does not eliminate coverage for claims that have an independent basis in tort or common law — for example, a claim for fraud that happens to also involve a breach of contract. However, the carve-back does not apply to the Vantor claims, because Stonefield's potential liability arises solely and exclusively from its obligations under the TSA. Absent the TSA, there would be no duty to tender freight volumes, maintain lane exclusivity, follow contractual termination procedures, or pay liquidated damages. The carve-back therefore provides no basis for coverage.

Conclusion: The Contractual Liability Exclusion in Section 5(g) of the Policy plainly bars coverage for the Vantor claims. Graymark's reliance on this exclusion is legally sound and well-supported by the plain language of the Policy and by applicable case law.

B. The Insured Capacity Requirement Is Not Satisfied, and Side C Entity Coverage Is Inapplicable

Independent of the Contractual Liability Exclusion, Graymark's declination is also supported by the fact that the Complaint does not name any individual director or officer as a defendant and does not allege wrongful acts by any Insured Person in their directorial or officer capacity.

The Complaint names only Stonefield Logistics Group Inc. as defendant. None of the following individuals — each of whom serves as a director or officer of Stonefield and would qualify as an "Insured Person" under the Policy — is named as a defendant or individually referenced in connection with any alleged wrongful conduct:

• Marcus Denton, Chief Executive Officer

• Priya Ramachandran, Chief Financial Officer

• Tobias Wren, General Counsel and Secretary

• Raymond Hess, Senior Vice President, Operations (who issued the cure notice to Vantor on behalf of Stonefield)

• Alison Trang, Board Member (Ridgeline Capital Partners designee)

• Douglas Whitmore, Board Member (Ridgeline Capital Partners designee)

• Other members of the Board of Directors

Directors and officers liability insurance is designed to protect individual directors and officers against personal liability arising from claims that they committed wrongful acts in their management capacity. The fundamental coverage grant under Sides A and B of the Policy requires that a "Claim" be made against an "Insured Person" for a "Wrongful Act" committed in their "capacity as a director or officer." Where, as here, no Insured Person is a defendant, the triggering condition for Side A and Side B coverage is not satisfied.

Side C of the Policy provides entity-level coverage for the Company itself, but this coverage is expressly limited to "Securities Claims" — defined in the Policy as claims brought by shareholders, the Securities and Exchange Commission, or other regulatory authorities alleging violations of federal or state securities laws. The Vantor lawsuit is unambiguously not a Securities Claim. It is a breach-of-contract action brought by a commercial counterparty. Accordingly, Side C coverage is inapplicable.

We have also considered whether the analysis would change if Vantor were to amend its Complaint to name individual officers as defendants. For example, Vantor could potentially seek to add Tobias Wren, who signed the March 4, 2022 termination letter on behalf of Stonefield, or Raymond Hess, who issued the December 2021 cure notice, as individual defendants. However, even if such an amendment were sought and granted, those individuals acted in their corporate capacities in executing a business decision on behalf of the Company. The acts alleged — signing a termination letter, issuing a cure notice — are quintessential corporate acts, not individual wrongful acts. Moreover, even if individual defendants were added, the Contractual Liability Exclusion analyzed in Section III.A above would still apply to bar coverage, because the claims would continue to arise from the TSA.

Based on current intelligence regarding Vantor's litigation strategy, we do not believe an amendment to add individual defendants is likely. Vantor's counsel, Tarvick Torrance LLP, has not indicated any intent to pursue individual claims, and the Complaint contains no factual allegations that would support individual liability. The claims are directed at Stonefield as a corporate entity for its breach of a commercial agreement.

Conclusion: The insured capacity requirement for coverage under Sides A and B of the Policy is not met, and Side C entity coverage does not extend to the commercial breach-of-contract claims asserted in the Underlying Action. This provides an independent and sufficient basis for Graymark's declination.

C. Additional Considerations

1. Potential "Mixed Claims" Argument. We have considered whether Stonefield could argue that the Vantor claims are "mixed claims" — that is, claims that implicate both contractual obligations and the judgment and good faith of Stonefield's directors and officers — and that the Policy should therefore provide coverage for at least a portion of the defense.

The principal basis for such an argument would be Vantor's allegation that Stonefield's termination for cause was "pretextual." Vantor alleges that the real reason for the termination was not Vantor's service-level performance, but rather Stonefield's desire to consolidate freight with a competing carrier at a lower cost — a decision allegedly driven by new management installed by Ridgeline Capital Partners. One could argue that this allegation implicates the business judgment and good faith of Stonefield's officers and directors, and that the alleged pretextual nature of the termination constitutes a "Wrongful Act" within the meaning of the Policy.

However, this argument fails for several reasons:

• The pretextual termination allegation is pled as a breach of contract claim, not as a tort or fiduciary duty claim. Vantor does not allege fraud, tortious interference with contractual relations, breach of a fiduciary duty, or any other tort. The allegation of pretext is made in support of Vantor's contention that the termination was wrongful under the terms of the TSA — i.e., that the cited defaults were not legitimate grounds for termination for cause. This is a contractual argument, not a tort argument.

• Vantor does not allege that any individual director or officer owed a duty to Vantor. The fiduciary duties of Stonefield's directors and officers run to Stonefield and its stockholders, not to Vantor, a commercial counterparty. Vantor has no standing to assert claims based on breaches of fiduciary duty by Stonefield's directors or officers.

• Courts consistently decline to recharacterize breach-of-contract claims as D&O claims merely because the contract was negotiated, approved, or executed by officers. The mere involvement of corporate officers in a business decision that gives rise to a contract dispute does not transform the dispute into a management liability claim cognizable under a D&O policy. See, e.g., Tyco Int'l Ltd. v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 04-cv-3756, 2006 WL 2422832, at 7 (S.D.N.Y. Aug. 22, 2006) (contractual liability exclusion applied even though officers were involved in contract decisions); see also IKON Office Solutions, Inc. v. American Policyholders Ins. Co.*, 153 F. App'x 78, 80 (2d Cir. 2005).

• Under New York law, a claim for breach of the implied covenant of good faith and fair dealing is not an independent tort claim. It is a contract claim that arises from and is dependent upon the underlying contract. See Harris v. Provident Life & Accident Ins. Co., 310 F.3d at 81. Therefore, even to the extent the "pretextual" allegation relates to the implied covenant cause of action, it remains a contract claim subject to the Contractual Liability Exclusion.

For these reasons, the "mixed claims" argument is unlikely to succeed. It would not provide a viable basis for challenging Graymark's declination.

2. Defense Cost Obligation. Even setting aside the applicability of the Contractual Liability Exclusion, the duty to advance or reimburse defense costs under the Policy is triggered only when a covered Claim is made against an Insured Person. Because no Insured Person is a defendant in the Underlying Action, the duty to advance defense costs does not arise under any provision of the Policy.

The practical consequence of this determination is significant. Stonefield's defense costs for the Underlying Action — currently estimated at $3.5 million to $5.2 million in attorney fees plus $400,000 to $750,000 in costs and disbursements through summary judgment, per the preliminary litigation budget prepared by Calderwood & Harkness LLP on September 12, 2022 — will be borne entirely by Stonefield. There is no basis for recovering any portion of these costs from Graymark under the Policy as it currently stands.

If the case proceeds to trial, additional defense costs would be incurred, estimated at $1.5 million to $2.5 million for trial preparation and trial, depending on the length and complexity of the proceedings. These costs, too, would fall entirely on Stonefield.

3. CGL Policy. We have also considered whether coverage for the Vantor claims might be available under Stonefield's Commercial General Liability ("CGL") insurance policy. Stonefield maintains a CGL policy with Brindoval Mutual Insurance Co., Policy No. CGL-SLG-2022-11902. However, CGL policies provide coverage for bodily injury and property damage arising from an "occurrence" — generally defined as an accident, including continuous or repeated exposure to conditions. CGL policies do not cover breach-of-contract claims, economic loss claims, or commercial disputes of the type asserted by Vantor.

The Vantor claims allege purely economic losses arising from the breach of a commercial agreement. There is no allegation of bodily injury, property damage, or an "occurrence" within the meaning of the CGL policy. Accordingly, the CGL policy does not provide coverage for the Vantor claims, and no tender to Brindoval Mutual has been made or recommended.

We are not aware of any other insurance policy maintained by Stonefield that would potentially provide coverage for the Vantor claims. However, if additional policies are identified — for example, an Errors and Omissions policy or a professional liability policy — those should be reviewed for potential applicability.

IV. Assessment of Options

In light of the foregoing analysis, Stonefield has three principal options with respect to the Graymark declination. Each is assessed below.

A. Option 1: Challenge the Declination (Not Recommended)

Stonefield could initiate a coverage action against Graymark in the Connecticut Superior Court (pursuant to the Policy's forum selection clause) or in the Southern District of New York, seeking a declaratory judgment that Graymark is obligated to provide coverage and advance defense costs for the Underlying Action.

Likelihood of Success: Very low. As set forth in Section III above, the Contractual Liability Exclusion is clear, unambiguous, and squarely applicable to the Vantor claims. The absence of any named individual defendant provides an independent and sufficient basis for the declination. We are not aware of any credible legal theory under which Stonefield could overcome both of these obstacles. Courts in Connecticut and New York routinely enforce contractual liability exclusions in D&O policies, and we have not identified any case in which a court required D&O coverage for a pure breach-of-contract claim brought against only the corporate entity where no individual director or officer was named as a defendant.

Cost: A coverage action against Graymark would likely cost $300,000 to $500,000 or more in additional legal fees, depending on the duration and complexity of the proceedings. These costs would be incremental to the already substantial defense costs in the Underlying Action. Given the low likelihood of success, this expenditure would be difficult to justify.

Timing: A coverage dispute would not be resolved in time to offset current defense costs in the Underlying Action. Coverage litigation typically takes twelve to eighteen months or more to reach resolution, either through dispositive motion practice or trial. Meanwhile, Stonefield would be incurring defense costs in the Underlying Action that would not be reimbursed unless and until a favorable coverage determination were obtained — an outcome we consider highly unlikely.

Risk of Adverse Precedent: An adverse ruling in a coverage action could create negative precedent regarding the scope of D&O coverage, potentially affecting future D&O tenders by Stonefield or by other Ridgeline Capital Partners portfolio companies that maintain similar policies. This strategic consideration further weighs against pursuing a coverage challenge.

Conclusion: The cost-benefit analysis strongly disfavors challenging the declination. The expenditure of $300,000 to $500,000 in legal fees to pursue a claim with a very low likelihood of success, in a proceeding that would not provide timely relief, and that carries the risk of adverse precedent, is not justified.

B. Option 2: Request Reconsideration with Additional Information (Not Recommended)

As an intermediate step, Stonefield could submit a letter to Graymark requesting reconsideration of its declination, emphasizing that Vantor's "pretextual termination" allegation implicates the judgment and decision-making of Stonefield's officers and directors and therefore constitutes a "Wrongful Act" within the meaning of the Policy.

Likelihood of Changing Outcome: Very low, for the reasons analyzed in Section III.C.1 above. The "pretextual termination" allegation is pled as a breach-of-contract claim, not a tort claim. No individual director or officer is named as a defendant. The Contractual Liability Exclusion and the absence of named individual defendants are dispositive, and a reconsideration request is unlikely to alter Graymark's analysis.

Cost: Minimal — the cost of drafting and submitting a letter. However, the collateral risks outweigh the negligible cost.

Risk: A reconsideration request could signal uncertainty in Stonefield's litigation posture to Graymark. If Graymark perceives that Stonefield believes the claims implicate officer misconduct or bad faith, this could complicate other aspects of the insurer-insured relationship or create disclosure issues. Additionally, correspondence with Graymark in the context of a coverage dispute could potentially become discoverable in the Underlying Action, depending on the scope of discovery disputes.

Conclusion: Not recommended. The likelihood of changing Graymark's determination is de minimis, and the request carries risks that outweigh any potential benefit.

C. Option 3: Accept the Declination (Recommended)

The recommended course of action is to accept Graymark's declination as legally defensible and to proceed with the defense of the Underlying Action funded directly by Stonefield. Specifically, we recommend the following:

1. Accept the declination without filing a coverage action or requesting formal reconsideration.

2. Proceed with the defense of the Underlying Action at Stonefield's direct expense, consistent with the preliminary litigation budget and strategy developed by Calderwood & Harkness LLP.

3. Preserve the right to re-tender the claim to Graymark in the event of material changes to the nature of the claims asserted in the Underlying Action. Specifically, if Vantor amends its Complaint to (a) name individual directors or officers as defendants, or (b) assert claims sounding in tort, fraud, or fiduciary duty that could constitute "Wrongful Acts" within the meaning of the Policy, Stonefield should promptly re-tender the claim. Based on the current posture of the case, we believe such an amendment is unlikely, but the right to re-tender should be expressly preserved in any communications with Graymark.

4. Retain the Declination Letter and all related correspondence in the firm's matter files (Matter No. 1012-00005). Ensure that Stonefield's General Counsel maintains copies of all coverage-related correspondence for potential future reference, including in connection with any future policy renewals or applications where disclosure of prior claims or declinations may be required.

V. Impact on Litigation Budget and Funding

With the D&O coverage declination confirmed, all defense costs for the Underlying Action will be borne directly by Stonefield Logistics Group Inc. This section addresses the financial and operational implications of this determination.

Defense Cost Estimates. Per the preliminary litigation budget prepared by Calderwood & Harkness LLP on September 12, 2022, the estimated total defense expenditure through summary judgment is as follows:

These estimates include document review and production costs, fact and expert discovery, depositions, motion practice, and summary judgment briefing. If the case proceeds to trial, additional expenditures of $1.5 million to $2.5 million are anticipated for trial preparation and trial.

Stonefield's Financial Capacity. Stonefield's fiscal year 2022 EBITDA of approximately $118 million provides sufficient financial capacity to absorb defense costs without material impact on the Company's operations, debt service obligations, or compliance with financial covenants under its credit facilities. Nevertheless, the defense costs represent a non-trivial expenditure that should be incorporated into Stonefield's financial planning and budgeting processes.

Credit Agreement Reporting Obligations. Stonefield notified Lakeshore National Bank, as Administrative Agent under the Credit Agreement (Ref. No. LNB-SLG-2017-CA-4402), of the Underlying Action on August 24, 2022, in accordance with the litigation notification requirements set forth in Section 6.03(b) of the Credit Agreement. The insurance coverage status should be referenced in quarterly litigation updates provided to Catherine Devereaux, Senior Vice President, Loan Administration, Lakeshore National Bank, as part of the ongoing reporting obligation under the Credit Agreement. Specifically, Stonefield should disclose that the D&O carrier has declined coverage and that defense costs will be borne directly by the Company.

Audit and Financial Reporting Considerations. Clarendon Partners LLP (Stonefield's independent auditor, engagement partner Robert Farraday) should be advised of the absence of insurance coverage for the Vantor claims in connection with (i) the assessment of contingent liabilities for purposes of financial statement disclosure under ASC 450 (Contingencies), and (ii) the preparation of Stonefield's audited financial statements for fiscal year 2022. The absence of insurance coverage may be relevant to the determination of whether and how the Vantor claims should be disclosed or accrued in Stonefield's financial statements, depending on the assessed probability and estimability of loss.

Ridgeline Capital Partners. Ridgeline Capital Partners, as Stonefield's controlling private equity sponsor, should be informed that defense costs will not be offset by D&O insurance proceeds. This information is relevant to Ridgeline's oversight of portfolio company litigation exposure and to any reserves or provisions that Ridgeline maintains at the fund level for portfolio company contingencies.

VI. Recommendation

Based on the analysis set forth in this memorandum, we recommend the following course of action:

1. Accept Graymark's declination without challenge. The declination is legally defensible. The Contractual Liability Exclusion and the absence of named individual defendants each independently support Graymark's determination that the Policy does not provide coverage for the Vantor claims.

2. Do not file a coverage action or request formal reconsideration. The cost, timing, and likelihood of success of a coverage challenge do not justify the expenditure, and a challenge could create adverse precedent.

3. Preserve the right to re-tender in the event of material changes to the nature of the claims asserted in the Underlying Action — specifically, if individual directors or officers are named as defendants or if Vantor asserts tort-based claims that could constitute "Wrongful Acts" under the Policy.

4. Inform the client team and PE sponsor contacts. Tobias Wren (General Counsel) and Priya Ramachandran (CFO) at Stonefield, as well as Alison Trang and Douglas Whitmore at Ridgeline Capital Partners, should be advised that defense costs will not be offset by D&O insurance and will be borne directly by the Company.

5. Update financial and reporting stakeholders. Lakeshore National Bank (Catherine Devereaux) and Clarendon Partners LLP (Robert Farraday) should be advised of the absence of insurance coverage for purposes of credit agreement compliance reporting and financial statement disclosure, respectively.

6. Retain all documentation. The Declination Letter and all related correspondence should be retained in the matter file (Matter No. 1012-00005) and in Stonefield's corporate records.

VII. Conclusion

Graymark Insurance Company's October 3, 2022 declination of coverage under D&O Policy No. GLG-DO-1025-00008 is legally sound. The claims asserted by Vantor Holdings Corp. in Vantor Holdings Corp. v. Stonefield Logistics Group Inc., Case No. 22-cv-07841 (S.D.N.Y.), are quintessential breach-of-contract claims arising from a commercial transportation services agreement. They do not allege wrongful acts by any individual director or officer of Stonefield in their insured capacity.

The Policy's Contractual Liability Exclusion (Section 5(g)) squarely applies: every cause of action and every element of damages in the Vantor Complaint arises out of, is based upon, and is attributable to Stonefield's actual or alleged liability under the TSA. The "absent the contract" carve-back does not rescue coverage because Stonefield would have no liability to Vantor in the absence of the contractual relationship. Independently, the absence of any named individual defendant means that the fundamental predicate for coverage under Sides A and B of the Policy — a Claim against an Insured Person for a Wrongful Act — is not satisfied, and the entity-coverage provision under Side C is limited to Securities Claims, which the Vantor lawsuit is not.

These two independent grounds provide a complete and dispositive basis for the declination. Challenging the declination through a coverage action or reconsideration request would be expensive, time-consuming, unlikely to succeed, and potentially counterproductive. The recommended course of action is to accept the declination, fund the defense of the Underlying Action directly through Stonefield's operating resources, and preserve the option to re-tender the claim only if the nature of the claims materially changes.

This memorandum is protected by the attorney-client privilege and the work product doctrine. It is prepared for the exclusive use of the addressees in connection with Matter No. 1012-00005 and should not be disclosed to third parties without the prior written consent of Calderwood & Harkness LLP. This memorandum does not constitute a guarantee or prediction of the outcome of any coverage dispute or litigation.

Respectfully submitted,

CALDERWOOD & HARKNESS LLP

By: ________

Simone Laroche Associate Calderwood & Harkness LLP Tel: (212) 555-0194 slaroche@calderwoodharkness.com

Date: October 10, 2022

Enclosures:

1. Graymark Insurance Company Declination Letter, dated October 3, 2022

2. D&O Policy No. GLG-DO-1025-00008 (Selected Provisions)

3. Vantor Holdings Corp. Complaint, dated August 12, 2022

4. Stonefield Tender Letter, dated September 6, 2022

5. Preliminary Litigation Budget, dated September 12, 2022

Cost Category	Low Estimate	High Estimate
Attorney Fees (through summary judgment)	$3,500,000	$5,200,000
Costs and Disbursements (through summary judgment)	$400,000	$750,000
Total (through summary judgment)	$3,900,000	$5,950,000

MEMORANDUM
PRIVILEGED AND CONFIDENTIAL — ATTORNEY WORK PRODUCT
To: Samuel Eklund, Responsible Partner Patrick Gallagher, Lead Associate Tobias Wren, General Counsel, Stonefield Logistics Group Inc.
From: Simone Laroche, Associate, Calderwood & Harkness LLP
Date: October 10, 2022
Re: Analysis of Graymark Insurance Company's Declination of Coverage Under D&O Policy No. GLG-DO-1025-00008 — Vantor Holdings Corp. v. Stonefield Logistics Group Inc., Case No. 22-cv-07841 (S.D.N.Y.)
Matter No.: 1012-00005
I. Executive Summary
The purpose of this memorandum is to analyze the October 3, 2022 coverage declination letter issued by Graymark Insurance Company ("Graymark") in response to Stonefield Logistics Group Inc.'s ("Stonefield" or the "Company") September 6, 2022 tender of the claims asserted by Vantor Holdings Corp. ("Vantor") in Vantor Holdings Corp. v. Stonefield Logistics Group Inc., Case No. 22-cv-07841 (S.D.N.Y.) (the "Underlying Action"), under Stonefield's Directors and Officers Liability Insurance Policy, Policy No. GLG-DO-1025-00008 (the "Policy").
After a thorough review of the Vantor Complaint, the Policy, Graymark's declination letter, and applicable law, the bottom-line conclusion of this memorandum is that Graymark's declination is legally defensible. The claims asserted by Vantor arise from a commercial breach-of-contract dispute — specifically, the alleged wrongful termination of the Transportation Services Agreement dated March 15, 2019 — rather than from alleged wrongful acts of Stonefield's directors or officers in their capacity as such. The Policy's contractual liability exclusion squarely applies to bar coverage. Moreover, because no individual director or officer is named as a defendant in the Underlying Action, and because the entity-level coverage (Side C) is limited to securities claims, the fundamental prerequisites for coverage under the Policy are not satisfied.
Accordingly, Stonefield should not challenge or appeal the declination. The cost and likelihood of success of a coverage action do not justify the expense, given the clear applicability of the exclusion and the absence of any named individual defendant. Defense costs for the Underlying Action will be borne directly by Stonefield. This memorandum sets forth the analysis supporting this recommendation and addresses the financial and operational implications of the declination for the Company's litigation planning.
II. Background
A. The Underlying Litigation
On August 12, 2022, Vantor Holdings Corp. filed a Complaint in the United States District Court for the Southern District of New York, assigned Case No. 22-cv-07841 (the "Complaint"), against Stonefield Logistics Group Inc. The Complaint alleges wrongful termination of the Transportation Services Agreement dated March 15, 2019, between Stonefield and Vantor Transport Services LLC, a wholly owned subsidiary of Vantor Holdings Corp. (the "TSA," Contract Ref. No. SLG-VTS-2019-0315).
The TSA governed the provision of dedicated transportation and logistics services by Vantor Transport Services LLC to Stonefield across a defined network of regional distribution lanes in the Midwest and Southeast United States. The TSA was a multi-year agreement with guaranteed minimum freight volumes, exclusivity provisions on certain designated lanes, and detailed termination-for-cause procedures, including notice and cure requirements set forth in Section 13.4.
On March 4, 2022, Stonefield issued a written notice of termination for cause, citing Vantor's alleged failure to meet service-level requirements under Annex B of the TSA, including on-time delivery performance, equipment standards, and compliance with safety protocols mandated by the Department of Transportation. Vantor disputes that these defaults constituted material breaches and contends that Stonefield's termination was pretextual — allegedly motivated by Stonefield's desire to consolidate transportation services under a competing carrier at a lower per-mile rate following the appointment of new management at Stonefield by its private equity sponsor, Ridgeline Capital Partners.
Vantor claims approximately $95.4 million in damages, consisting of the following categories:
•  Liquidated damages of approximately $67.23 million pursuant to Section 14.2 of the TSA, which provides for the payment of a specified formula-based amount in the event of a wrongful early termination by Stonefield during the exclusivity period;
•  Lost profits of $18.7 million, representing the projected margin Vantor would have earned on guaranteed volumes for the remaining term of the TSA through its scheduled expiration on March 14, 2024;
•  Stranded assets and costs of $5.2 million, representing capital investments in rolling stock, terminal leases, and specialized equipment acquired by Vantor specifically to service the Stonefield account;
•  Workforce reduction costs of $2.87 million, representing severance obligations and retraining costs associated with the elimination of approximately 340 driver and operations positions attributable to the Stonefield account; and
•  Mitigation costs of $1.4 million, representing expenses incurred by Vantor in attempting to redeploy assets and personnel following the termination.
Vantor's core theory of liability is that Stonefield's March 4, 2022 termination for cause was pretextual and constituted a material breach of the TSA. Specifically, Vantor alleges that (i) the service-level defaults cited by Stonefield were cured within the applicable cure period set forth in Section 13.4, (ii) Stonefield failed to provide the required second notice before effectuating termination, and (iii) Stonefield's true motivation was cost reduction and carrier consolidation, not legitimate performance concerns. The Complaint asserts three causes of action: (1) breach of contract, (2) breach of the implied covenant of good faith and fair dealing, and (3) declaratory judgment regarding the enforceability of the liquidated damages provision.
Calderwood & Harkness LLP was engaged as lead defense counsel on September 1, 2022. Samuel Eklund serves as Responsible Partner, with Patrick Gallagher serving as Lead Associate. The firm filed its Notice of Appearance in the Underlying Action on September 8, 2022. A responsive pleading is due on November 11, 2022, following a stipulated extension of time granted by Magistrate Judge Patricia Kellner on September 22, 2022.
B. The D&O Policy
Stonefield maintains a Directors and Officers Liability Insurance Policy issued by Graymark Insurance Company. The relevant policy details are as follows:
•  Insurer: Graymark Insurance Company, 100 Constitution Plaza, Hartford, Connecticut 06103
•  Policy Number: GLG-DO-1025-00008
•  Named Insured: Stonefield Logistics Group Inc. and its directors and officers, as defined in the Policy
•  Policy Period: January 1, 2022 through January 1, 2023 (current policy year)
•  Aggregate Limit of Liability: $15,000,000
•  Self-Insured Retention: $500,000 per Claim (applicable to Side B and Side C coverage only)
•  Governing Law: State of Connecticut
The Policy provides coverage for "Loss" arising from "Claims" made against "Insured Persons" (defined as the directors and officers of the Named Insured) for "Wrongful Acts" committed in their capacities as directors or officers of the insured entity. The Policy is structured as follows:
•  Side A Coverage: Direct coverage for individual directors and officers when the Company does not or cannot indemnify them;
•  Side B Coverage: Reimbursement coverage for the Company when it indemnifies its directors and officers for covered Claims;
•  Side C Coverage (Entity Coverage): Coverage for the Company itself, but limited exclusively to "Securities Claims" — that is, claims brought by shareholders or the SEC alleging violations of securities laws.
The following key definitions in the Policy are material to this analysis:
•  "Wrongful Act" is defined as "any actual or alleged error, misstatement, misleading statement, act, omission, neglect, or breach of duty by an Insured Person in their capacity as a director or officer of the Company."
•  "Claim" is defined as "a written demand for monetary damages or civil proceeding commenced against an Insured Person for a Wrongful Act."
•  "Loss" is defined as "damages, judgments, settlements, and Defense Costs that an Insured Person becomes legally obligated to pay as a result of a Claim." Loss expressly excludes "matters which are uninsurable under the law pursuant to which this Policy is construed."
The Policy also contains a number of exclusions, the most relevant of which is the Contractual Liability Exclusion, set forth in Section 5(g) of the Policy, which provides:
The Insurer shall not be liable for Loss in connection with any Claim arising out of, based upon, or attributable to any actual or alleged liability under any contract or agreement, whether written or oral, except to the extent that the Insured Person would have been liable in the absence of such contract or agreement.
This exclusion is broadly drafted and is consistent with standard market terms in directors and officers liability insurance policies.
C. The Tender
On September 6, 2022, Tobias Wren, General Counsel of Stonefield, submitted a formal notice of claim and tender of defense to Graymark's Claims Department via certified mail and electronic transmission, addressed to the attention of Margaret Howe, Senior Claims Examiner, Graymark Insurance Company. The tender was prepared in consultation with Samuel Eklund, who reviewed the submission prior to its transmittal.
The tender package included the following materials:
•  A cover letter from Mr. Wren identifying the Policy by number and requesting that Graymark provide a prompt coverage determination and, if applicable, assume or reimburse defense costs incurred in connection with the Underlying Action;
•  A complete copy of the Vantor Complaint, as filed on August 12, 2022;
•  A copy of the April 8, 2022 pre-litigation demand letter from Vantor's counsel, Tarvick Torrance LLP, to Stonefield, demanding payment of $95.4 million in damages and threatening litigation;
•  A copy of the March 4, 2022 termination letter issued by Stonefield; and
•  The Notice of Appearance filed by Calderwood & Harkness LLP on September 8, 2022.
The tender was submitted within the Policy's required notice period and in compliance with the notice provisions set forth in Section 7.1 of the Policy.
D. The Declination
On October 3, 2022 — twenty-seven days after the tender — Graymark issued a written coverage declination letter (the "Declination Letter") addressed to Stonefield Logistics Group Inc., attention Tobias Wren, General Counsel. The Declination Letter was authored by Margaret Howe, Senior Claims Examiner, and countersigned by David Lorenzen, Vice President of Claims, Graymark Insurance Company.
In the Declination Letter, Graymark determined that the claims asserted by Vantor in the Underlying Action arise from a commercial contract dispute — namely, the alleged breach of the TSA — and do not arise from wrongful acts of directors or officers in their insured capacities within the meaning of the Policy. Graymark cited two primary, independent bases for its declination:
1.  Contractual Liability Exclusion (Section 5(g)): Graymark determined that the Vantor claims arise out of, are based upon, and are attributable to Stonefield's actual or alleged liability under the TSA. Because the claims sound entirely in contract, the Contractual Liability Exclusion applies to preclude coverage. Graymark further determined that the "absent the contract" carve-back does not apply because Stonefield would have no liability to Vantor in the absence of the TSA — there is no independent tort duty or common-law obligation running from Stonefield to Vantor that would give rise to the damages claimed.
2.  Insured Capacity Requirement / Absence of Named Individual Defendants: Graymark noted that the Complaint names only Stonefield Logistics Group Inc. as defendant. No individual director or officer of Stonefield is named as a defendant. The Complaint does not allege that any Insured Person committed a Wrongful Act in their capacity as a director or officer. Accordingly, the fundamental predicate for coverage under Sides A and B of the Policy — a Claim against an Insured Person for a Wrongful Act — is not satisfied. Graymark further noted that the entity-coverage provision (Side C) is limited to Securities Claims, which the Vantor lawsuit indisputably is not.
Graymark expressly reserved all rights and defenses under the Policy, including the right to assert additional grounds for declination should circumstances change. The Declination Letter was received by Stonefield on October 5, 2022, and was forwarded to Calderwood & Harkness LLP on the same date.
III. Analysis of the Declination
Having reviewed the Complaint, the Policy, the Declination Letter, and applicable case law, we have independently assessed the legal soundness of Graymark's coverage declination. For the reasons set forth below, we conclude that the declination is well-founded and that Stonefield does not have a viable basis for challenging it.
A. The Contractual Liability Exclusion Bars Coverage
The Contractual Liability Exclusion in Section 5(g) of the Policy is the most significant basis for Graymark's declination, and our analysis confirms that it plainly applies to the Vantor claims.
The Vantor Complaint is rooted entirely in the alleged breach of the TSA — a commercial transportation services agreement between Stonefield Logistics Group Inc. and Vantor Transport Services LLC. Every cause of action in the Complaint depends upon the existence and terms of the TSA. Without the TSA, Vantor would have no claim against Stonefield, because the obligations that Vantor alleges were breached — minimum freight volume commitments, lane exclusivity, termination-for-cause procedures, and the corresponding liquidated damages provision — exist solely by virtue of the contractual relationship between the parties.
The specific claims asserted by Vantor confirm the purely contractual nature of the dispute:
•  Wrongful termination of the TSA: This claim is predicated on the allegation that Stonefield failed to comply with the contractual notice and cure provisions in Section 13.4 of the TSA before effectuating termination. The claim sounds exclusively in contract.
•  Failure to tender minimum volumes: Vantor alleges that Stonefield diverted freight to competing carriers in violation of the minimum volume guarantees set forth in Annex A of the TSA. This obligation arises solely from the contract.
•  Diversion of freight in violation of exclusivity provisions: Vantor alleges that Stonefield breached the lane exclusivity commitments in Section 5.3 of the TSA by routing freight on designated lanes through other carriers. Again, this obligation is entirely contractual in nature.
•  Breach of the implied covenant of good faith and fair dealing: While styled as a separate cause of action, this claim is derivative of the contract and depends upon the existence of the TSA. Under New York law, a claim for breach of the implied covenant of good faith and fair dealing is not independent of the underlying contract and does not create a separate tort duty. See Harris v. Provident Life & Accident Ins. Co., 310 F.3d 73, 81 (2d Cir. 2002); New York Univ. v. Continental Ins. Co., 87 N.Y.2d 308, 318 (1995).
Vantor's damages categories further confirm the contractual nature of the claims. Every element of Vantor's $95.4 million damages demand flows directly from the alleged breach of the TSA:
•  Liquidated damages of $67.23 million are payable, if at all, under Section 14.2 of the TSA — a contractual provision establishing a formula for early termination damages;
•  Lost profits of $18.7 million represent the projected margin Vantor would have earned during the remaining contract term;
•  Stranded assets ($5.2 million), workforce reduction costs ($2.87 million), and mitigation costs ($1.4 million) are consequential damages arising from the loss of the contractual relationship.
None of these damages categories arises from any alleged wrongful act by a director or officer in their individual or fiduciary capacity. Rather, they are the standard measure of damages in a commercial breach-of-contract action.
The Contractual Liability Exclusion in the Policy is a standard and widely enforced provision in directors and officers liability insurance. Under Connecticut law, which governs the Policy, insurance policy exclusions are given their plain and ordinary meaning and are enforced according to their terms where the language is clear and unambiguous. See Nationwide Mut. Ins. Co. v. Pasion, 219 Conn. 764, 771 (1991); R.T. Vanderbilt Co. v. Continental Cas. Co., 273 Conn. 448, 462 (2005). The Connecticut Supreme Court has repeatedly held that when an exclusion is "clear and unambiguous," it must be enforced "as written." See QSP, Inc. v. Northpoint Casualty Group Cas. & Surety Co., 256 Conn. 343, 353 (2001).
Under New York law, which governs the Underlying Action and which would apply to any coverage dispute litigated in the Southern District of New York, the result is the same. New York courts enforce contractual liability exclusions in D&O policies where the underlying claims are grounded in contract. See National Union Fire Ins. Co. of Pittsburgh, Pa. v. U.S. Liquids, Inc., No. 03-cv-8979, 2005 WL 1155416 (S.D.N.Y. May 16, 2005); see also Hakim v. Massachusetts Gen. Life Ins. Co., 424 F. Supp. 2d 631, 637 (S.D.N.Y. 2006) (enforcing contractual liability exclusion where claims arose from breach of employment agreement).
The Contractual Liability Exclusion contains a standard carve-back that preserves coverage "to the extent the Insured Person would have been liable in the absence of such contract or agreement." This carve-back is designed to ensure that the exclusion does not eliminate coverage for claims that have an independent basis in tort or common law — for example, a claim for fraud that happens to also involve a breach of contract. However, the carve-back does not apply to the Vantor claims, because Stonefield's potential liability arises solely and exclusively from its obligations under the TSA. Absent the TSA, there would be no duty to tender freight volumes, maintain lane exclusivity, follow contractual termination procedures, or pay liquidated damages. The carve-back therefore provides no basis for coverage.
Conclusion: The Contractual Liability Exclusion in Section 5(g) of the Policy plainly bars coverage for the Vantor claims. Graymark's reliance on this exclusion is legally sound and well-supported by the plain language of the Policy and by applicable case law.
B. The Insured Capacity Requirement Is Not Satisfied, and Side C Entity Coverage Is Inapplicable
Independent of the Contractual Liability Exclusion, Graymark's declination is also supported by the fact that the Complaint does not name any individual director or officer as a defendant and does not allege wrongful acts by any Insured Person in their directorial or officer capacity.
The Complaint names only Stonefield Logistics Group Inc. as defendant. None of the following individuals — each of whom serves as a director or officer of Stonefield and would qualify as an "Insured Person" under the Policy — is named as a defendant or individually referenced in connection with any alleged wrongful conduct:
•  Marcus Denton, Chief Executive Officer
•  Priya Ramachandran, Chief Financial Officer
•  Tobias Wren, General Counsel and Secretary
•  Raymond Hess, Senior Vice President, Operations (who issued the cure notice to Vantor on behalf of Stonefield)
•  Alison Trang, Board Member (Ridgeline Capital Partners designee)
•  Douglas Whitmore, Board Member (Ridgeline Capital Partners designee)
•  Other members of the Board of Directors
Directors and officers liability insurance is designed to protect individual directors and officers against personal liability arising from claims that they committed wrongful acts in their management capacity. The fundamental coverage grant under Sides A and B of the Policy requires that a "Claim" be made against an "Insured Person" for a "Wrongful Act" committed in their "capacity as a director or officer." Where, as here, no Insured Person is a defendant, the triggering condition for Side A and Side B coverage is not satisfied.
Side C of the Policy provides entity-level coverage for the Company itself, but this coverage is expressly limited to "Securities Claims" — defined in the Policy as claims brought by shareholders, the Securities and Exchange Commission, or other regulatory authorities alleging violations of federal or state securities laws. The Vantor lawsuit is unambiguously not a Securities Claim. It is a breach-of-contract action brought by a commercial counterparty. Accordingly, Side C coverage is inapplicable.
We have also considered whether the analysis would change if Vantor were to amend its Complaint to name individual officers as defendants. For example, Vantor could potentially seek to add Tobias Wren, who signed the March 4, 2022 termination letter on behalf of Stonefield, or Raymond Hess, who issued the December 2021 cure notice, as individual defendants. However, even if such an amendment were sought and granted, those individuals acted in their corporate capacities in executing a business decision on behalf of the Company. The acts alleged — signing a termination letter, issuing a cure notice — are quintessential corporate acts, not individual wrongful acts. Moreover, even if individual defendants were added, the Contractual Liability Exclusion analyzed in Section III.A above would still apply to bar coverage, because the claims would continue to arise from the TSA.
Based on current intelligence regarding Vantor's litigation strategy, we do not believe an amendment to add individual defendants is likely. Vantor's counsel, Tarvick Torrance LLP, has not indicated any intent to pursue individual claims, and the Complaint contains no factual allegations that would support individual liability. The claims are directed at Stonefield as a corporate entity for its breach of a commercial agreement.
Conclusion: The insured capacity requirement for coverage under Sides A and B of the Policy is not met, and Side C entity coverage does not extend to the commercial breach-of-contract claims asserted in the Underlying Action. This provides an independent and sufficient basis for Graymark's declination.
C. Additional Considerations
1. Potential "Mixed Claims" Argument.  We have considered whether Stonefield could argue that the Vantor claims are "mixed claims" — that is, claims that implicate both contractual obligations and the judgment and good faith of Stonefield's directors and officers — and that the Policy should therefore provide coverage for at least a portion of the defense.
The principal basis for such an argument would be Vantor's allegation that Stonefield's termination for cause was "pretextual." Vantor alleges that the real reason for the termination was not Vantor's service-level performance, but rather Stonefield's desire to consolidate freight with a competing carrier at a lower cost — a decision allegedly driven by new management installed by Ridgeline Capital Partners. One could argue that this allegation implicates the business judgment and good faith of Stonefield's officers and directors, and that the alleged pretextual nature of the termination constitutes a "Wrongful Act" within the meaning of the Policy.
However, this argument fails for several reasons:
•  The pretextual termination allegation is pled as a breach of contract claim, not as a tort or fiduciary duty claim. Vantor does not allege fraud, tortious interference with contractual relations, breach of a fiduciary duty, or any other tort. The allegation of pretext is made in support of Vantor's contention that the termination was wrongful under the terms of the TSA — i.e., that the cited defaults were not legitimate grounds for termination for cause. This is a contractual argument, not a tort argument.
•  Vantor does not allege that any individual director or officer owed a duty to Vantor. The fiduciary duties of Stonefield's directors and officers run to Stonefield and its stockholders, not to Vantor, a commercial counterparty. Vantor has no standing to assert claims based on breaches of fiduciary duty by Stonefield's directors or officers.
•  Courts consistently decline to recharacterize breach-of-contract claims as D&O claims merely because the contract was negotiated, approved, or executed by officers. The mere involvement of corporate officers in a business decision that gives rise to a contract dispute does not transform the dispute into a management liability claim cognizable under a D&O policy. See, e.g., Tyco Int'l Ltd. v. National Union Fire Ins. Co. of Pittsburgh, Pa., No. 04-cv-3756, 2006 WL 2422832, at 7 (S.D.N.Y. Aug. 22, 2006) (contractual liability exclusion applied even though officers were involved in contract decisions); see also IKON Office Solutions, Inc. v. American Policyholders Ins. Co.*, 153 F. App'x 78, 80 (2d Cir. 2005).
•  Under New York law, a claim for breach of the implied covenant of good faith and fair dealing is not an independent tort claim. It is a contract claim that arises from and is dependent upon the underlying contract. See Harris v. Provident Life & Accident Ins. Co., 310 F.3d at 81. Therefore, even to the extent the "pretextual" allegation relates to the implied covenant cause of action, it remains a contract claim subject to the Contractual Liability Exclusion.
For these reasons, the "mixed claims" argument is unlikely to succeed. It would not provide a viable basis for challenging Graymark's declination.
2. Defense Cost Obligation.  Even setting aside the applicability of the Contractual Liability Exclusion, the duty to advance or reimburse defense costs under the Policy is triggered only when a covered Claim is made against an Insured Person. Because no Insured Person is a defendant in the Underlying Action, the duty to advance defense costs does not arise under any provision of the Policy.
The practical consequence of this determination is significant. Stonefield's defense costs for the Underlying Action — currently estimated at $3.5 million to $5.2 million in attorney fees plus $400,000 to $750,000 in costs and disbursements through summary judgment, per the preliminary litigation budget prepared by Calderwood & Harkness LLP on September 12, 2022 — will be borne entirely by Stonefield. There is no basis for recovering any portion of these costs from Graymark under the Policy as it currently stands.
If the case proceeds to trial, additional defense costs would be incurred, estimated at $1.5 million to $2.5 million for trial preparation and trial, depending on the length and complexity of the proceedings. These costs, too, would fall entirely on Stonefield.
3. CGL Policy.  We have also considered whether coverage for the Vantor claims might be available under Stonefield's Commercial General Liability ("CGL") insurance policy. Stonefield maintains a CGL policy with Brindoval Mutual Insurance Co., Policy No. CGL-SLG-2022-11902. However, CGL policies provide coverage for bodily injury and property damage arising from an "occurrence" — generally defined as an accident, including continuous or repeated exposure to conditions. CGL policies do not cover breach-of-contract claims, economic loss claims, or commercial disputes of the type asserted by Vantor.
The Vantor claims allege purely economic losses arising from the breach of a commercial agreement. There is no allegation of bodily injury, property damage, or an "occurrence" within the meaning of the CGL policy. Accordingly, the CGL policy does not provide coverage for the Vantor claims, and no tender to Brindoval Mutual has been made or recommended.
We are not aware of any other insurance policy maintained by Stonefield that would potentially provide coverage for the Vantor claims. However, if additional policies are identified — for example, an Errors and Omissions policy or a professional liability policy — those should be reviewed for potential applicability.
IV. Assessment of Options
In light of the foregoing analysis, Stonefield has three principal options with respect to the Graymark declination. Each is assessed below.
A. Option 1: Challenge the Declination (Not Recommended)
Stonefield could initiate a coverage action against Graymark in the Connecticut Superior Court (pursuant to the Policy's forum selection clause) or in the Southern District of New York, seeking a declaratory judgment that Graymark is obligated to provide coverage and advance defense costs for the Underlying Action.
Likelihood of Success: Very low. As set forth in Section III above, the Contractual Liability Exclusion is clear, unambiguous, and squarely applicable to the Vantor claims. The absence of any named individual defendant provides an independent and sufficient basis for the declination. We are not aware of any credible legal theory under which Stonefield could overcome both of these obstacles. Courts in Connecticut and New York routinely enforce contractual liability exclusions in D&O policies, and we have not identified any case in which a court required D&O coverage for a pure breach-of-contract claim brought against only the corporate entity where no individual director or officer was named as a defendant.
Cost: A coverage action against Graymark would likely cost $300,000 to $500,000 or more in additional legal fees, depending on the duration and complexity of the proceedings. These costs would be incremental to the already substantial defense costs in the Underlying Action. Given the low likelihood of success, this expenditure would be difficult to justify.
Timing: A coverage dispute would not be resolved in time to offset current defense costs in the Underlying Action. Coverage litigation typically takes twelve to eighteen months or more to reach resolution, either through dispositive motion practice or trial. Meanwhile, Stonefield would be incurring defense costs in the Underlying Action that would not be reimbursed unless and until a favorable coverage determination were obtained — an outcome we consider highly unlikely.
Risk of Adverse Precedent: An adverse ruling in a coverage action could create negative precedent regarding the scope of D&O coverage, potentially affecting future D&O tenders by Stonefield or by other Ridgeline Capital Partners portfolio companies that maintain similar policies. This strategic consideration further weighs against pursuing a coverage challenge.
Conclusion: The cost-benefit analysis strongly disfavors challenging the declination. The expenditure of $300,000 to $500,000 in legal fees to pursue a claim with a very low likelihood of success, in a proceeding that would not provide timely relief, and that carries the risk of adverse precedent, is not justified.
B. Option 2: Request Reconsideration with Additional Information (Not Recommended)
As an intermediate step, Stonefield could submit a letter to Graymark requesting reconsideration of its declination, emphasizing that Vantor's "pretextual termination" allegation implicates the judgment and decision-making of Stonefield's officers and directors and therefore constitutes a "Wrongful Act" within the meaning of the Policy.
Likelihood of Changing Outcome: Very low, for the reasons analyzed in Section III.C.1 above. The "pretextual termination" allegation is pled as a breach-of-contract claim, not a tort claim. No individual director or officer is named as a defendant. The Contractual Liability Exclusion and the absence of named individual defendants are dispositive, and a reconsideration request is unlikely to alter Graymark's analysis.
Cost: Minimal — the cost of drafting and submitting a letter. However, the collateral risks outweigh the negligible cost.
Risk: A reconsideration request could signal uncertainty in Stonefield's litigation posture to Graymark. If Graymark perceives that Stonefield believes the claims implicate officer misconduct or bad faith, this could complicate other aspects of the insurer-insured relationship or create disclosure issues. Additionally, correspondence with Graymark in the context of a coverage dispute could potentially become discoverable in the Underlying Action, depending on the scope of discovery disputes.
Conclusion: Not recommended. The likelihood of changing Graymark's determination is de minimis, and the request carries risks that outweigh any potential benefit.
C. Option 3: Accept the Declination (Recommended)
The recommended course of action is to accept Graymark's declination as legally defensible and to proceed with the defense of the Underlying Action funded directly by Stonefield. Specifically, we recommend the following:
1.  Accept the declination without filing a coverage action or requesting formal reconsideration.
2.  Proceed with the defense of the Underlying Action at Stonefield's direct expense, consistent with the preliminary litigation budget and strategy developed by Calderwood & Harkness LLP.
3.  Preserve the right to re-tender the claim to Graymark in the event of material changes to the nature of the claims asserted in the Underlying Action. Specifically, if Vantor amends its Complaint to (a) name individual directors or officers as defendants, or (b) assert claims sounding in tort, fraud, or fiduciary duty that could constitute "Wrongful Acts" within the meaning of the Policy, Stonefield should promptly re-tender the claim. Based on the current posture of the case, we believe such an amendment is unlikely, but the right to re-tender should be expressly preserved in any communications with Graymark.
4.  Retain the Declination Letter and all related correspondence in the firm's matter files (Matter No. 1012-00005). Ensure that Stonefield's General Counsel maintains copies of all coverage-related correspondence for potential future reference, including in connection with any future policy renewals or applications where disclosure of prior claims or declinations may be required.
V. Impact on Litigation Budget and Funding
With the D&O coverage declination confirmed, all defense costs for the Underlying Action will be borne directly by Stonefield Logistics Group Inc. This section addresses the financial and operational implications of this determination.
Defense Cost Estimates. Per the preliminary litigation budget prepared by Calderwood & Harkness LLP on September 12, 2022, the estimated total defense expenditure through summary judgment is as follows:
These estimates include document review and production costs, fact and expert discovery, depositions, motion practice, and summary judgment briefing. If the case proceeds to trial, additional expenditures of $1.5 million to $2.5 million are anticipated for trial preparation and trial.
Stonefield's Financial Capacity. Stonefield's fiscal year 2022 EBITDA of approximately $118 million provides sufficient financial capacity to absorb defense costs without material impact on the Company's operations, debt service obligations, or compliance with financial covenants under its credit facilities. Nevertheless, the defense costs represent a non-trivial expenditure that should be incorporated into Stonefield's financial planning and budgeting processes.
Credit Agreement Reporting Obligations. Stonefield notified Lakeshore National Bank, as Administrative Agent under the Credit Agreement (Ref. No. LNB-SLG-2017-CA-4402), of the Underlying Action on August 24, 2022, in accordance with the litigation notification requirements set forth in Section 6.03(b) of the Credit Agreement. The insurance coverage status should be referenced in quarterly litigation updates provided to Catherine Devereaux, Senior Vice President, Loan Administration, Lakeshore National Bank, as part of the ongoing reporting obligation under the Credit Agreement. Specifically, Stonefield should disclose that the D&O carrier has declined coverage and that defense costs will be borne directly by the Company.
Audit and Financial Reporting Considerations. Clarendon Partners LLP (Stonefield's independent auditor, engagement partner Robert Farraday) should be advised of the absence of insurance coverage for the Vantor claims in connection with (i) the assessment of contingent liabilities for purposes of financial statement disclosure under ASC 450 (Contingencies), and (ii) the preparation of Stonefield's audited financial statements for fiscal year 2022. The absence of insurance coverage may be relevant to the determination of whether and how the Vantor claims should be disclosed or accrued in Stonefield's financial statements, depending on the assessed probability and estimability of loss.
Ridgeline Capital Partners. Ridgeline Capital Partners, as Stonefield's controlling private equity sponsor, should be informed that defense costs will not be offset by D&O insurance proceeds. This information is relevant to Ridgeline's oversight of portfolio company litigation exposure and to any reserves or provisions that Ridgeline maintains at the fund level for portfolio company contingencies.
VI. Recommendation
Based on the analysis set forth in this memorandum, we recommend the following course of action:
1.  Accept Graymark's declination without challenge. The declination is legally defensible. The Contractual Liability Exclusion and the absence of named individual defendants each independently support Graymark's determination that the Policy does not provide coverage for the Vantor claims.
2.  Do not file a coverage action or request formal reconsideration. The cost, timing, and likelihood of success of a coverage challenge do not justify the expenditure, and a challenge could create adverse precedent.
3.  Preserve the right to re-tender in the event of material changes to the nature of the claims asserted in the Underlying Action — specifically, if individual directors or officers are named as defendants or if Vantor asserts tort-based claims that could constitute "Wrongful Acts" under the Policy.
4.  Inform the client team and PE sponsor contacts. Tobias Wren (General Counsel) and Priya Ramachandran (CFO) at Stonefield, as well as Alison Trang and Douglas Whitmore at Ridgeline Capital Partners, should be advised that defense costs will not be offset by D&O insurance and will be borne directly by the Company.
5.  Update financial and reporting stakeholders. Lakeshore National Bank (Catherine Devereaux) and Clarendon Partners LLP (Robert Farraday) should be advised of the absence of insurance coverage for purposes of credit agreement compliance reporting and financial statement disclosure, respectively.
6.  Retain all documentation. The Declination Letter and all related correspondence should be retained in the matter file (Matter No. 1012-00005) and in Stonefield's corporate records.
VII. Conclusion
Graymark Insurance Company's October 3, 2022 declination of coverage under D&O Policy No. GLG-DO-1025-00008 is legally sound. The claims asserted by Vantor Holdings Corp. in Vantor Holdings Corp. v. Stonefield Logistics Group Inc., Case No. 22-cv-07841 (S.D.N.Y.), are quintessential breach-of-contract claims arising from a commercial transportation services agreement. They do not allege wrongful acts by any individual director or officer of Stonefield in their insured capacity.
The Policy's Contractual Liability Exclusion (Section 5(g)) squarely applies: every cause of action and every element of damages in the Vantor Complaint arises out of, is based upon, and is attributable to Stonefield's actual or alleged liability under the TSA. The "absent the contract" carve-back does not rescue coverage because Stonefield would have no liability to Vantor in the absence of the contractual relationship. Independently, the absence of any named individual defendant means that the fundamental predicate for coverage under Sides A and B of the Policy — a Claim against an Insured Person for a Wrongful Act — is not satisfied, and the entity-coverage provision under Side C is limited to Securities Claims, which the Vantor lawsuit is not.
These two independent grounds provide a complete and dispositive basis for the declination. Challenging the declination through a coverage action or reconsideration request would be expensive, time-consuming, unlikely to succeed, and potentially counterproductive. The recommended course of action is to accept the declination, fund the defense of the Underlying Action directly through Stonefield's operating resources, and preserve the option to re-tender the claim only if the nature of the claims materially changes.
This memorandum is protected by the attorney-client privilege and the work product doctrine. It is prepared for the exclusive use of the addressees in connection with Matter No. 1012-00005 and should not be disclosed to third parties without the prior written consent of Calderwood & Harkness LLP. This memorandum does not constitute a guarantee or prediction of the outcome of any coverage dispute or litigation.
Respectfully submitted,
CALDERWOOD & HARKNESS LLP
By: ________
Simone Laroche Associate Calderwood & Harkness LLP Tel: (212) 555-0194 slaroche@calderwoodharkness.com
Date: October 10, 2022
Enclosures:
1.  Graymark Insurance Company Declination Letter, dated October 3, 2022
2.  D&O Policy No. GLG-DO-1025-00008 (Selected Provisions)
3.  Vantor Holdings Corp. Complaint, dated August 12, 2022
4.  Stonefield Tender Letter, dated September 6, 2022
5.  Preliminary Litigation Budget, dated September 12, 2022
Cost Category | Low Estimate | High Estimate
Attorney Fees (through summary judgment) | $3,500,000 | $5,200,000
Costs and Disbursements (through summary judgment) | $400,000 | $750,000
Total (through summary judgment) | $3,900,000 | $5,950,000

MEMORANDUM

CALDERWOOD & HARKNESS LLP

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