When I read that former officers and directors of MF Global Holdings Ltd. had already spent more than $48 million defending themselves in lawsuits, I thought there was a misprint on the amount. But it appears the $48 million was a correct number. U.S. Bankruptcy Judge Martin Glenn called it “staggering.” Considering the taking of depositions hasn’t even begun, the $48 million is shocking. The money is actually coming from the company’s insurance policy. Judge Glenn explained in an opinion why he is obliged to give former MF Global managers almost unlimited access to the remainder of $225 million in directors’ and officers’ liability insurance.
MF Global Holdings and its brokerage unit went into separate bankruptcies in October 2011 after “discovering” a $1.6 billion shortfall in property that should have been segregated for customers. On top of the bankruptcies, a number of securities lawsuits were filed against company executives, which were consolidated in U.S. District Court in Manhattan. In April 2012, Judge Glenn allowed the executives to draw as much as $30 million from the liability policy to cover defense costs. Although Judge Glenn raised the cap to $43.8 million this year, the executives now claim that the judge no longer has the right to limit access to the policy because it’s not property of the bankrupt companies.
In his opinion, Judge Glenn agreed, saying the policy lost status as “estate property” given the advanced stage of the bankruptcies. Since the insurance can’t be considered estate property, Judge Glenn can no longer regulate how it’s used. The judge made this statement in explaining why he said he is not the “overseer” of defense costs:
Even though the rate that money goes out the door is of great concern to the court, it is unlikely that defense costs would entirely exhaust the D&O proceeds. It is not the proper role of the bankruptcy court to police litigation in other courts that does not directly affect the property of the estates. It would be fundamentally unfair for the securities lawsuits to proceed while denying the individual insureds coverage for defense costs.
Judge Glenn told the insurance companies to hold back about $13 million to cover the estimated maximum amount of indemnification claims the executives filed against the bankrupt companies. The representative of the holding company’s creditors unsuccessfully urged Judge Glenn to retain control over how the insurance money is spent to ensure most of it remains to pay settlements or judgments. The bulk of Judge Glenn’s opinion explains why the insurance is no longer estate property. In the advanced stage of the bankruptcies, it’s no longer possible to initiate a lawsuit against MF Global that would be covered by the policies.
MF Global Holdings emerged from Chapter 11 in June 2013 while the brokerage, MF Global Inc., is being liquidated by a trustee appointed under the Securities Investor Protection Act (SIPA). Reportedly, customers and secured creditors of the brokerage have been paid in full. The SIPA trustee announced last month that he will be making a first distribution of about 20 percent to unsecured creditors. All of the litigation mentioned above is in the U.S. Bankruptcy Court, Southern District of New York (Manhattan).
Source: Insurance Journal
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