2. CONTINGENCIES

The Company is party to a number of claims, including five remaining lawsuits brought on behalf of five employees or their families, for injuries and losses suffered as a result of the 2008 Port Wentworth refinery industrial accident. All of the lawsuits are pending in the State Court of Chatham County, Georgia. None of the lawsuits demand a specific dollar amount of damages sought by the plaintiffs. The Company has workers compensation insurance which provides for coverage equal to the statutory benefits provided to workers under state law. Additionally, the Company's general liability policy provides for coverage for damages to third parties up to a policy limit of $101 million.

The Company previously resolved forty-three lawsuits related to the accident. On October 19, 2011, the attorneys representing the plaintiffs in the lawsuits remaining at that time submitted a time-limited global settlement offer to resolve these lawsuits for a sum within the Company's remaining limits of insurance. Two of the three insurers who issued the insurance policies representing the Company's remaining limits of insurance, American Guarantee & Liability Insurance Company ("AGLIC") and St. Paul Fire & Marine Insurance Company ("St. Paul"), elected not to respond to this settlement offer by its deadline. The Company has notified AGLIC and St. Paul that due to their failure to settle the remaining lawsuits within the Company's available limits of insurance pursuant to the global settlement offer, the Company will seek to hold them responsible for damages due to their negligent failure to settle and bad faith in the event verdicts or settlements in the remaining lawsuits are in excess of the Company's limits of insurance.

While the Company believes, based on the facts of these cases, that claims by employees and certain contractors are limited to benefits provided under Georgia workers compensation law, the ultimate resolution of these matters could result in liability in excess of the amount accrued. The Company believes the likelihood of the aggregate liability, including the amounts paid in the previous settlements, exceeding the $101 million policy limit is remote.

The Company was named as a defendant in a lawsuit filed by one of its excess general liability insurers, AGLIC, in the U.S. District Court for the Northern District of Georgia on August 19, 2011, and styled as American Guarantee & Liability Insurance Company v. Imperial Sugar Company, et al., Civil Action No. 1:11-CV-2778-WSD (the "Georgia Lawsuit"). On January 10, 2012, AGLIC filed an amended complaint in the Georgia Lawsuit seeking : (1) a judicial declaration that the AGLIC policy does not cover the Company's defense expenses incurred defending various claims arising from the industrial accident that occurred in 2008 at its plant located in Port Wentworth, Georgia (the "Port Wentworth Claims"), (2) an equitable accounting of the settlements of certain of the Port Wentworth Claims that were settled using proceeds provided by the primary and umbrella layers of liability policies and the workers compensation policy issued by Chartis-affiliated insurers, (3) a judicial declaration that the limits of liability of the underlying primary and umbrella liability policies were improperly exhausted as a result of such settlements, (4) a judicial declaration that the Company breached the AGLIC policy by failing to cooperate and, as a result, coverage under the policy should be voided and (5) recoupment from the Company of amounts paid by AGLIC to settle Port Wentworth Claims in excess of its obligations under the AGLIC policy.

 

AGLIC shares on a 50/50 pro-rata basis with St. Paul the final $50 million layer of excess liability coverage available to the Company for the Port Wentworth Claims. St. Paul was also named as a defendant in the Georgia Lawsuit and has asserted an amended cross claim against the Company seeking (1) a judicial declaration regarding whether the underlying primary and umbrella policies have been exhausted properly in connection with the settlement of certain Port Wentworth Claims and if they have not been exhausted properly, a judicial declaration that St. Paul is entitled to recoup all sums paid in excess of its obligations under the St. Paul policy and (2) a judicial declaration that St. Paul is not obligated to defend the Company or pay or reimburse the Company's defense expenses incurred in connection with the Port Wentworth Claims. On January 31, 2012, the Company filed its answer to the amended complaint and asserted amended counterclaims and cross claims against AGLIC and St. Paul, respectively, alleging, among other things that (1) AGLIC and St. Paul have breached their insurance policies by wrongfully denying coverage for the Company's defense expenses incurred as a result of the Port Wentworth Claims and (2) AGLIC's and St. Paul's breaches and other conduct amount to bad faith.

In December 2010, the Louisiana Department of Environmental Quality ("LDEQ") issued a Consolidated Compliance Order and Notice of Potential Penalty to the Company alleging violations of state environmental regulations and the terms of the wastewater discharge permit for the Company's Gramercy, Louisiana refinery. The alleged violations relate to the release of foam into waters of the state and exceedances of applicable criteria for dissolved oxygen and pH. The Company investigated the alleged violations, took measures to cease and contain the foam discharge, and coordinated with the LDEQ to develop and implement a plan to remove and dispose of the foamy material and achieve and maintain compliance with applicable legal requirements. In December 2011, the Company reached an agreement in principle with LDEQ to settle the allegations of violation of environmental regulations, which is subject to execution of a settlement agreement. Without admitting liability, the Company agreed to a settlement amount of $6,000 plus a payment of $4,770 for response costs.

On August 11, 2011, the Georgia Environmental Protection Division ("EPD") issued to the Port Wentworth facility a Notice of Violation (the "NOV") regarding the Company's semi-annual air permit report for the first six months of 2011. The Company reported periodic emissions of nitrogen oxides from a boiler above the permit limit. In addition, the Company reported several maintenance, repair, and other issues that had affected the boiler operations and that corrective measures had been taken. EPD requested further information which was provided, including that total excess emissions were minimal and had no significant impact on air quality. In January 2012, the Company and EPD entered into a settlement agreement regarding the NOV. Without admitting liability, the Company paid a settlement amount of $6,000 and submitted a written plan for manually maintaining control over natural gas operation of the boiler.

In March 2011, the Company filed suit in the United States District Court for the Southern District of Texas against Southern Systems, Inc. ("SSI"), the contractor who constructed the conditioning silos at the Company's Port Wentworth refinery, for breach of contract. The lawsuit seeks damages for deficiencies in construction of the conditioning silos. In June 2011, SSI filed a counterclaim against the Company for $3.5 million for work it allegedly performed and was not paid. The lawsuit is in discovery.

In May 2011, the Company joined seven cane and beet sugar producers and two sugar industry trade associations as plaintiffs in a lawsuit filed against six producers of high fructose corn syrup (the "Member Companies") and the Corn Refiners Association (the "CRA") (collectively, the "HFCS Defendants") in the United States District Court for the Central District of California regarding advertising and marketing of high fructose corn syrup. The lawsuit initially alleged violations of the federal Lanham Act and state law by the HFCS Defendants in marketing and advertising high fructose corn syrup as a natural product equivalent to cane and beet sugar. The lawsuit seeks money damages and injunctive relief. On October 21, 2011, the Court issued an order on the motion to dismiss the amended complaint filed by the HFCS Defendants, denying the motion as to the CRA, granting the motion as to the Member Companies, and giving plaintiffs leave to amend their complaint to set forth additional allegations regarding the Member Companies. On the same day, the Court issued a separate order on a motion filed only by the CRA, dismissing the state law claim for unfair competition. On November 18, 2011, the plaintiffs filed an amended complaint naming the Member Companies as defendants on the federal Lanham Act claim to which the Member Companies have filed a motion to dismiss.

On August 30, 2011, a shareholder of the Company filed a putative class action lawsuit in the United States District Court for the Southern District of Texas, styled as Dawes v. Imperial Sugar Company, et al., Civil Action No. 4:11-cv-03250, alleging that the Company, its current President and Chief Executive Officer, and its current Senior Vice President and Chief Financial Officer, violated the federal securities laws. On September 22, 2011, another shareholder filed a nearly identical putative class action lawsuit against the Company, its current President and Chief Executive Officer and its current Senior Vice President and Chief Financial Officer in the United States District Court for the Southern District of Texas styled as Hassan v. Imperial Sugar Company, et al., Civil Action No 4:11-cv-03457. On October 28, 2011, these cases were consolidated by the court. The complaints assert fraud claims under Sections 10 and 20 of the Securities Exchange Act of 1934, and allege that the defendants made misleading statements and/or omissions about the Company's sales and business prospects, which purportedly were disclosed on August 5, 2011 when the Company announced its third fiscal quarter results.

 

On October 31, 2011, Carpenter's Pension Fund of Illinois moved for appointment as lead plaintiff. On January 16, 2012, plaintiff Hassan filed a motion to dismiss his individual claims without prejudice on the basis that his interests are adequately represented in the class action. At an initial pre-trial conference held on January 31, 2012, the Court entered an order appointing Carpenter's Pension Fund of Illinois as lead plaintiff and dismissing plaintiff Hassan's individual action. Pursuant to the Court-ordered schedule, the lead plaintiff will have until March 16, 2012 to file an amended consolidated complaint.

On September 27, 2011, the Board of Directors of the Company received a letter from counsel for a shareholder of the Company requesting, among other things, that the Board cause an independent investigation to be made and a legal action commenced with respect to alleged mismanagement and breaches of fiduciary duty by the Company's officers and directors relating to the August 5, 2011 announcement of the Company's third fiscal quarter results. On October 12, 2011, the Board received a similar letter on behalf of another shareholder. The Board of Directors established a committee of independent and disinterested directors on October 5, 2011 with full authority to investigate and address the allegations contained in such shareholder letters. On February 2, 2012, one of the shareholders reference above filed a derivative lawsuit in the District Court of Fort Bend County, Texas, styled as Piszko v. Imperial Sugar Company, et al., Cause No. 12-DCV-195994, alleging that the Company's current President and Chief Executive Officer, its current Senior Vice President and Chief Financial Officer, the current directors and a former director breached their fiduciary duties, were unjustly enriched and engaged in the waste of corporate assets. On February 3, 2012, the other shareholder referenced above filed a nearly identical derivative lawsuit against the Company's current President and Chief Executive Officer, its current Senior Vice President and Chief Financial Officer, its current directors and a former director in the District Court of Fort Bend County, Texas styled as Cinotto v. Imperial Sugar Company, et al., Cause No. 12-DCV-196013. The complaints allege, among other things, that the defendants failed to establish and maintain adequate internal controls over the Port Wentworth refinery, made improper statements in press releases, SEC filings and other public disclosures and failed to establish and maintain disclosure controls in order to prevent the allegedly improper statements from being made. The complaints further allege that the defendants engaged in a conspiracy to aid and assist each other in masking the alleged breaches of duty, unjust enrichment and the waste of corporate assets.

The Company is party to other litigation and claims which are normal in the course of its operations. While the results of such litigation and claims cannot be predicted with certainty, the Company believes the final outcome of such matters will not have a material effect on its consolidated results of operations, financial position or cash flows. In connection with the sales of certain businesses, the Company made customary representations and warranties, and undertook indemnification obligations with regard to certain of these representations and warranties including financial statements, environmental and tax matters, and the conduct of the businesses prior to the sale. These indemnification obligations are subject to certain deductibles, caps and expiration dates.

In connection with the sale of a subsidiary in 2002, the buyer assumed $9.5 million of industrial revenue bonds, with final maturity in 2025. The Company remains contingently liable for repayment of the bonds under a guaranty arrangement and does not believe that a liability is probable. The Company has recorded a non-current liability for the $1.3 million fair value of the guarantee.