A recurrent issue in corporate bankruptcies may have entered the alternative-investment world’s consciousness more keenly than ever before as a consequence of the fall-out from the much-watched bankruptcy of commodities broker MF Global.
Former MF directors and officers, facing lawsuits by shareholders and customers alike, seek access to what is known as their “A insurance.”
In the D&O world, A insurance is that which pays the individual defendants for costs and losses that, for legal reasons, the company itself cannot pay. [B insurance pays the company for what it has paid to the relevant individuals, and C insurance pays the company for the losses and costs it has incurred on its own behalf.]
The subject is worth examination here for a couple of reasons. First (for those who seek alpha in distressed securities) the D&O debate is becoming part a regular feature of the war in the trenches in bankruptcy courts these days. Second, though, the question whether D&O of Type A will be available likely plays into the dynamics of board-room fights well before any filings appear in the clerk’s office of any bankruptcy court, so equity/activist strategies ought to take account of developments here as well.
Onto the MF Global matter.
The storied brokerage filed for bankruptcy on October 31, 2011. In April 2012 certain insured individuals [including Jon S. Corzine, above] first requested access to proceeds of these policies.
The court declined to give them “unfettered” access: Instead, it set a $30 million limit. The court also observed at that time that there was some question which estate the policy proceeds might belong to: MF Global Inc. or MF Global Holdings Ltd.
The individuals exhausted the $30 million quickly and went back to the court for more. That $30 million limit had been described as a “soft” cap, so it isn’t surprising that the defendants tested how soft or hard it was going to be. The bankruptcy court denied the request for more proceeds the first time it was made, but did so without prejudice, and granted the same request next time it was made, in April 2014. The court at this point increased the cap to $43.8 million.
That extra $13.8 million didn’t last long. Before the summer was out, individual defendants were back for more. This time they asked the court to decide that the A insurance is not the property of either the MFGI or the MFGH estates, but their own property, and that they should have access without caps of any firmness level.
Glenn’s Recent Decision
The Manhattan bankruptcy court, by the Hon. Martin Glenn, in a decision September 4th, did grant them the unfettered access they had been seeking for more than two years. Unfettered access, that is to the D&O insurance properly speaking, but not to certain errors and omissions policies (E&O), treated by Glenn as a separate issue.
With the passage of time it seems to have become obvious to the court that neither of the two corporate entities involved is likely to be named in any lawsuits that would “give rise to coverage under the D&O policies” or that would trigger those entities’ indemnification obligations. In other words, Insurance types B and C are out of the picture, so the court is content to take the cap off A.
The Plan Administrator had argued for continued oversight, contending that even if the D&O proceeds are not estate property the court still has authority to impose soft caps under 2d Circuit precedent: Parmalat v. Bank of America Corp (2011), and that the court should be wary of the way the defendants are burning through their D&O proceeds.
Footwork and a Bottom Line
Here, I’m afraid, the court engages in some fancy footwork. It mentions the Parmalat decision, then drops all discussion of it, and later says simply in a conclusory way that there are no precedents that do what the administrator apparently contended Parmalat does. So the administrator is presumably (in the eyes of the court) wrong in this, but the legal profession is given no explanation as to why it is wrong.)
Still, the bottom line is clear: for individual defendants outside the scope of company indemnification, getting those valuable litigation-fueling proceeds from the insurer of a company in bankruptcy can be a tricky and time-consuming. And since this is a very fact and contractual language specific inquiry, every case is up in the air until the moment it is actually decided.
All decisions, by the directors of companies on the brink of insolvency and by those who have or who even may name them in lawsuits, have to be taken with the toughness of the hoeing of this litigational row in mind.