The Hancock Natural Resources Group is being sued by a partner that oversaw some of Hancock's investments, alleging that Hancock wrongfully terminated the firm and is illegally withholding incentive fee income.
The Campbell Group Inc. sued The John Hancock Mutual Life Insurance Co. and its Natural Resource Group subsidiary last month in Massachusetts Superior Court alleging breach of contract and wrongful termination.
Campbell also seeks a ruling that would force Hancock to pay all or a portion of more than $33 million of unpaid incentive fees Campbell claims it earned as timber manager for Hancock's separate account and partnerships.
"Defendants have purported to terminate the contract with cause whereas the termination was, in fact, without cause," the complaint states.
Hancock Natural Resources manages $1.3 billion in timber investments for pension funds, endowments and foundations.
Contract negotiations fail
Hancock spokesman Scott Sacco said the two parties failed to reach an agreement following lengthy contract negotiations. The insurer is searching for a replacement to Campbell, which manages properties in the northwest United States and Canada on behalf of Hancock. Campbell will continue to manage the properties through the end of 1997, said Mr. Sacco.
Among the pension funds that are clients of Hancock and Campbell are the California Public Employees' Retirement System, the Oregon Public Employes' Retirement System, the Ohio State Teachers' Retirement System and the pension fund for United Parcel Services of America Inc.
According to the complaint, Hancock proposed "a radical restructuring" of the Hancock Timber Resource Group that would eliminate many of the benefits Campbell received under a previous agreement.
Hancock, according to the suit, proposed:
* That it be in charge of acquisition and disposition duties, thus eliminating the fee paid to Campbell for those services;
* That Campbell's incentive fees be capped for current clients in almost all cases and the firm be prohibited from sharing in incentive fees on investments by new clients;
* That Campbell's status be reduced from exclusive working partner to a preferred provider of timberland management services, which would open up the services to bid.
Hancock also wanted Campbell to offer to it first any acquisition opportunity greater than $50 million; that Campbell not compete directly with Hancock for investment by pension funds, endowments and foundations; and that Campbell not manage any properties for Hancock's competitors.
Hancock said client concern about excessive fees was the reason for restructuring the agreement. Campbell, in the complaint, claims Hancock was motivated, in part, by a desire to maintain its own profits on timberland investments.
"Campbell reluctantly agreed in principle to all of Hancock's demands, other than its demands for a right of first offer and a continuing and expanded non-competition agreement," the complaint states.
"Hancock insisted that Campbell accept all of its demands, threatening to terminate the agreement if Campbell refused," the complaint states.
Arguing over just cause
Hancock terminated the agreement "with cause" effective Dec. 31, saying Campbell failed to accept Hancock's proposal.
Campbell states that its refusal to accede to Hancock's restructuring proposal does not constitute "cause" to terminate the agreement. Section 16.3 of the agreement provides that cause for termination includes such grossly wrongful acts as fraud, criminal activity and bad faith material breach of the agreement, none of which is alleged by Hancock.
Campbell claims its share of unpaid incentive fees earned over a 10-year period totals $33.8 million as of June 30, 1997. The contract states, according to Campbell, that the fee is forfeited if Campbell engages in competing timberland investment management business with Hancock's existing clients or certain prospective clients during a 10-year period.
"If Hancock terminates the agreement without cause, Campbell is entitled to its full post-termination incentive fees and is free to compete with Hancock," states the complaint.
"In the event this court determines that Hancock has properly terminated the master agreement with cause, Campbell seeks a declaratory judgment . . . that the forfeiture of its accrued and unpaid incentive fees under the circumstances of this case would constitute an unreasonable penalty.
"Campbell seeks an order invalidating the forfeiture provision in its entirety, or in the alternative, reducing the forfeiture to an amount that is reasonable under all the circumstances," the complaint states.
The business relationship between the two companies began in 1985 when the two teamed up with Resource Management Services Inc. to manage a timber portfolio for the California employees' fund.
Campbell was responsible for identifying investments for the portfolio in the northwestern United States and Canada. Resource Management was responsible for the southeast United States.
Encouraged by the initial success, the three parties formed Hancock Timber Resources Group and entered into an agreement to execute the timberland strategy for other pension funds. Campbell would identify investments and Hancock would be responsible for marketing and structuring the investments. Hancock Timber Resources was retained as a subadviser.