(16) Legal and Insurance Matters

There are various lawsuits, claims, investigations and proceedings that have been brought or asserted against the Company, which arise in the ordinary course of business, including actions with respect to securities and shareholder class actions, personal injury, vehicular and industrial accidents, commercial contracts, legal and regulatory compliance, securities disclosure, labor and employment, employee benefits and environmental matters, the more significant of which are summarized below. The Company records a provision for these matters when it is both probable that a liability has been incurred and the amount of the loss can be reasonably estimated. Any provisions are reviewed at least quarterly and are adjusted to reflect the impact and status of settlements, rulings, advice of counsel and other information and events pertinent to a particular matter.

The Company believes that it has valid defenses with respect to legal matters pending against it. Based on its experience, the Company also believes that the damage amounts claimed in the lawsuits disclosed below are not necessarily a meaningful indicator of the Company’s potential liability. Litigation is inherently unpredictable, however, and it is possible that the Company’s results of operations or cash flow could be materially affected in any particular period by the resolution of one or more of the legal matters pending against it.

Texas Jury Verdict

On June 4, 2012, a lawsuit was commenced in the District Court of Dimmit County, Texas, alleging wrongful death in a case involving a vehicle accident. The accident occurred in May 2012 and involved our subsidiary Heckmann Water Resources (CVR), Inc.(“CVR”) truck and one other vehicle. The case is captioned Jose Luis Aguilar, Individually; Eudelia Aguilar, Individually; Vanessa Arce, Individually; Eudelia Aguilar and Vanessa Arce, as Personal Representatives of the Estate of Carlos Aguilar; Clarissa Aguilar, as Next Friend of Carlos Aguilar, Jr., Alyssa Nicole Aguilar, Andrew Aguilar, Marcus Aguilar, and Kaylee Aguilar; and Elsa Quinones as Next Friend of Karime and Carla Aguilar, Plaintiffs vs. Heckmann Water Resources (CVR), Inc. and Ruben Osorio Gonzalez, Defendants. On December 5, 2013, a jury verdict was rendered against CVR in the amount of $281.6 million, which award was subsequently reduced to $163.8 million when the judgment was signed by the court on January 7, 2014. CVR filed post-trial motions on February 6, 2014, seeking (among other things) to have the judgment overturned or a new trial ordered, and intends to continue to vigorously defend this case through the Texas appellate court system. CVR’s insurers have provided a surety bond of $25.0 million to stay enforcement of the judgment until the Texas appeals process is final. There will be no final resolution of the trial court judgment until the appellate process is concluded or the case is otherwise resolved. We have agreed to indemnify our insurance carriers, subject to a complete reservation of rights, up to $9.0 million, for losses sustained in excess of the insurance coverage of $16.0 million in connection with the surety bond.

On January 29, 2014, a lawsuit was commenced in the District Court of Dimmit County, Texas captioned Clarissa Aguilar, as Next Friend of Carlos Aguilar, Jr., Alyssa Nicole Aguilar, Andrew Aguilar, Marcus Aguilar, and Kaylee Aguilar v. Zurich American Insurance Company, Heckmann Water Resources (CVR), Inc., Heckmann Water Resources Corp., and Nuverra Environmental Solutions, Inc. f/k/a Heckmann Corp., Cause No. 14-01-12176-DCV. Plaintiff seeks a declaratory judgment that Nuverra Environmental Solutions, Inc. and Heckmann Water Resources Corp. are the alter egos of CVR, and therefore these entities are jointly and severally liable for the judgment against CVR in the wrongful death action. Plaintiff also seeks a declaratory judgment that Zurich American Insurance Company, as CVR’s insurer, breached certain obligations when they failed to settle the wrongful death action within insurance policy limits, and is therefore liable for the judgment entered against CVR. The Company, Heckmann Water Resources Corp., and CVR intend to vigorously defend themselves against the claims asserted in this action.

 

The Company currently estimates the potential loss for these cases to range between zero and the maximum judgment amount and accrued interest. The trial court judgment or any revised result that may be achieved through an appeals process (which could take several years to complete) could result in multiple potential outcomes within this range. Considering the status of the judicial process and based on currently available information, the Company has determined that this claim is not yet probable and has not established a reserve for this matter at this time. However, there can be no assurance that the Company will not be required to establish significant reserves in connection with this matter in the future, and to the extent any such accrued liability is not fully offset by insurance recoveries it could have a material adverse effect on the Company’s business, liquidity, financial condition and results of operations.

Shareholder Litigation

2010 Derivative Action. In November 2010, a stockholder filed a derivative complaint, purportedly on behalf of the Company, against various officers and directors (the “2010 Derivative Action”). The 2010 Derivative Action alleged claims for breach of fiduciary duty, waste of corporate assets, and unjust enrichment in connection with the acquisition of China Water. On April 1, 2013, the Company and plaintiffs entered into a Stipulation of Settlement which was granted final approval by the Superior Court of California on June 24, 2013. Under the Stipulation of Settlement, the Company agreed to make certain corporate governance changes, pay the plaintiff’s attorneys $0.3 million in cash (which was paid by the Company’s insurance carriers) and issue 0.1 million shares of the Company’s common stock to the plaintiff’s attorneys. In connection with the settlement, the Company recognized an expense of $1.6 million in the year ended December 31, 2013.

2010 Class Action. On May 21, 2010, Richard P. Gielata, an individual purporting to act on behalf of stockholders, served a class action lawsuit filed May 6, 2010 against the Company and various directors and officers in the United States District Court for the District of Delaware captioned In re Heckmann Corporation Securities Class Action (Case No. 1:10-cv-00378-JJF-MPT) (the “2010 Class Action”). On October 8, 2010, the court-appointed lead plaintiff filed an Amended Class Action Complaint which adds China Water as a defendant. The 2010 Class Action alleges violations of federal securities laws in connection with the acquisition of China Water. The Company responded by filing a motion to transfer the 2010 Class Action to California and a motion to dismiss the case. On October 19, 2012, plaintiff filed a motion to certify a class and appoint class representatives and class counsel. On January 18, 2013, the Company filed its opposition and a motion to exclude the declaration of plaintiff’s class certification expert. On February 19, 2013, plaintiff filed a reply brief. A hearing on plaintiff’s motion to certify a class and appoint class representatives and class counsel has not been scheduled. Depositions were taken by the parties during the three months ended September 30, 2013. During this time a mediator was also appointed for the case and settlement discussions occurred. Management was subsequently apprised of the status of the case by counsel and based on these developments and an assessment of its remaining insurance coverage, the Company recorded a charge of $16.0 million in the quarter ended September 30, 2013 to establish an accrual in connection with this matter.

Settlement discussions with the plaintiffs continued through the mediator during the period December 2013 through February 2014. On March 4, 2014, the Company reached an agreement in principle to settle this matter by entering into a Stipulation of Settlement with the plaintiffs. Under the terms of the agreement, which must be approved by the court, the Company has agreed to a cash payment of $13.5 million, a portion of which will come from remaining insurance proceeds, as well as the issuance of 0.8 million shares of its common stock. The Company has agreed to provide a floor value of $13.5 million on the equity portion of the settlement. Consequently, if the value of the shares is below $13.5 million at the time of the final court approval of the Stipulation of Settlement, the Company will be required to contribute additional shares (or cash, at its option) such that the total value of the settlement is equal to $27.0 million. The cash payment is expected to be deposited into escrow prior to June 30, 2014 and the shares will be issued when the settlement proceeds are distributed to the claimants. The Stipulation of Settlement remains subject to court approval and will resolve all claims asserted against the Company and individual defendants in the case. As a result of the pending settlement of this matter, the Company recorded an additional charge of $7.0 million in the quarter ended December 31, 2013, to effectively accrue for the proposed settlement (Note 8). The Company could incur additional charges in future periods if the market value of the 0.8 million shares exceeds $13.5 million upon issuance.

 

2013 Shareholder Class Actions. On September 3, 2013, and September 26, 2013, respectively, two separate but substantially-similar putative class action lawsuits were commenced in the United States District Court for the District of Arizona. Plaintiffs in each action asserted claims against the Company and certain of its officers and directors for violations of (i) Section 10(b) of the Exchange Act of 1934 (the “Exchange Act”), and Rule 10b-5 promulgated thereunder, and (ii) Section 20(a) of the Exchange Act. Plaintiffs in each action alleged that the Company and the individual defendants made certain material misstatements and/or omissions relating to the Company’s operations and financial condition which caused the price of the Company’s shares to fall.

By order dated October 29, 2013, the two putative class actions were consolidated. The consolidated action is captioned In re Nuverra Environmental Solutions Securities Litigation, No. 13-CIV-01800-PHX-JWS, and is pending before Judge John D. Sedwick in the District of Arizona. Pursuant to provisions of the Private Securities Litigation Reform Act of 1995, Judge Sedwick appointed a Lead Plaintiff group in the consolidated action on January 15, 2014. Lead Plaintiffs have been ordered to file a consolidated complaint by March 17, 2014. Defendants will thereafter have an opportunity to answer or move to dismiss the claims asserted by the Lead Plaintiffs. The Company and the individual defendants intend to vigorously defend themselves against the claims asserted in this consolidated action.

2013 Shareholder Derivative Actions. On September 20, 2013, October 4, 2013, and October 7, 2013, respectively, three separate but substantially-similar shareholder derivative lawsuits were commenced in the United States District Court for the District of Arizona. By order dated October 29, 2013, these actions were consolidated. The consolidated action is captioned as In re Nuverra Environmental Solutions, Inc. Derivative Shareholder Litigation, No. CV-13-01933-PHX-NVW, and is pending before Judge Neil V. Wake in the District of Arizona. Plaintiffs filed a consolidated complaint on December 31, 2013. Plaintiffs allege that members of the Company’s board failed to prevent the issuance of certain misstatements and omissions and assert claims for breach of fiduciary duty, waste of corporate assets and unjust enrichment. Defendants intend to vigorously defend themselves against the claims asserted and expect to file a motion to dismiss the claims in mid-February.

On October 7, 2013, two identical shareholder derivative lawsuits were commenced in the Superior Court for the State of Arizona in and for the County of Maricopa against ten of the Company’s current officers and/or directors. Plaintiffs in each action asserted claims for (i) breach of fiduciary duty, (ii) waste of corporate assets and (iii) unjust enrichment. By order dated January 28, 2014, these two actions were consolidated. The consolidated action is captioned In re: Nuverra Derivative Shareholder Litigation, No. CV2013-013425, and is pending before Judge John Rea in the Superior Court for the State of Arizona in and for the County of Maricopa. Plaintiffs have yet to file a consolidated complaint. The Company and the individual defendants intend to vigorously defend themselves against the claims asserted in this consolidated action.

The Company does not expect that the outcome of other claims and legal actions not discussed above will have a material adverse effect on its consolidated financial position, results of operations or cash flows.