In re MF Global Holdings Ltd.

• Decision Date: 10 April 2012
• Docket Number: No. 11–15059 (MG).,11–15059 (MG).
• Parties: In re MF GLOBAL HOLDINGS LTD., et al., Debtors.
• Court: United States Bankruptcy Courts. Second Circuit. U.S. Bankruptcy Court — Southern District of New York

469 B.R. 177

56 Bankr.Ct.Dec. 96

In re MF GLOBAL HOLDINGS LTD., et al., Debtors.

No. 11–15059 (MG).

United States Bankruptcy Court,

S.D. New York.

April 10, 2012.

Morrison & Foerster LLP, By: Brett H. Miller, Esq., Lorenzo Marinuzzi, Esq., New York, NY, for Louis J. Freeh, Chapter 11 Trustee.

Hughes Hubbard & Reed LLP, By: James B. Kobak, Jr., Esq., Jeffrey S. Margolin, Esq., New York, NY, for James W. Giddens, Trustee for the SIPA Liquidation of MF Global Inc.

Allen & Overy LLP, By: Ken Coleman, Esq., Stephen Doody, Esq., Andrew Dove, Esq., New York, NY, for MFG Assurance Company.

Troutman Sanders LLP, By: Brett D. Goodman, Esq., Leslie S. Ahari, Esq., New York, NY, for U.S. Specialty Insurance Company.

Ford Marrin Esposito Witmeyer & Gleser, L.L.P., By: John J. Witmeyer III, Esq., Jon R. Grabowski, Esq., New York, NY, for Sapere Wealth Management LLC, Granite Asset Management and Sapere CTA Fund, L.P.

Cole, Schotz, Meisel Forman, & Leonard, P.A., By: John H. Drucker, Esq., Laurence May, Esq., Jill B. Beinstock, Esq., New York, NY, for the Lead Plaintiffs.

Nisen & Elliott, LLC, By: Michael H. Moriano, Esq., Claire E. Gorman, Esq., Brittany E. Kirk, Esq., Carey & Hartmann, By: Peter B. Carey, Esq., Katherine T. Hartmann, Esq., Law Offices of Edward T. Joyce and Associates, P.C., By: Edward T. Joyce, Esq., Rowena T. Parma, Esq., Chicago, IL, for Henning–Carey Proprietary Trading, LLC, Charles Carey, Joseph Niciforo, Robert Tierney, Brian Fisher, Shane McMahon, Michael Mette, and Timothy Zaug.

Entwistle & Cappucci LLP, By: Andrew J. Entwistle, Esq., Joshua K. Porter, Esq., Jordan A. Cortez, Esq., New York, NY, for the Representative Customer Group.

Mark Schlachet, By: Mark Schlachet, Esq., Cleveland, OH, for the Sangani Family LP.

MEMORANDUM OPINION LIFTING AUTOMATIC STAY TO PERMIT PAYMENTS OF DEFENSE COSTS UNDER CERTAIN INSURANCE POLICIES

MARTIN GLENN, Bankruptcy Judge.

Two of the Debtors' ¹ insurance providers have sought relief from the automatic stay, to the extent applicable, to advance or pay defense costs on behalf of present or former directors, officers, and employees of the Debtors (i) that have been named as defendants in class action lawsuits in multiple federal and state courts, or (ii) in connection with ongoing investigations. A number of commodities customers of MFGI and securities holders of MFGH that are plaintiffs in those actions object to the use of insurance proceeds to pay such defense costs. The parties now agree that the insurance policies at issue are property of the Debtors' estates, but they dispute whether the proceeds of the policies are property of the estates. For the reasons explained below, the Court concludes, first, that certain commodity customers of MFGI that have asserted or threatened tort claims in the MFGH chapter 11 case have standing to object to the payment of defense costs by the insurers, and, second, that it is unnecessary at this time to determine whether policy proceeds are property of the estates as the automatic stay should be lifted so that directors, officers and employees may receive advancement or reimbursement of reasonable defense costs that are within the scope of the duty to defend under the applicable policies, whether or not the policy proceeds are currently determined to be property of the estates.

BACKGROUND

Since November 2011, numerous directors, officers and employees of MF Global have been named as defendants in lawsuits filed by securities holders, commodity customers and other plaintiffs alleging violations of the securities laws, the Commodity Exchange Act, the Racketeer Influenced and Corrupt Organizations Act, state consumer protection laws, as well as breach of contract, breach of fiduciary duties and various other torts. Many of these actions have been consolidated under the caption, DeAngelis v. Corzine, No. 11 Civ. 7866(VM), 2011 WL 5223690 (S.D.N.Y. filed Nov. 3, 2011), pending before Judge Victor Marrero. Other cases have been filed in Illinois, Michigan and Montana (collectively, the numerous pending cases will be referred to as the “Underlying Cases”). The cases pending in federal courts are presently the subject of motions to transfer recently heard by the Judicial Panel on Multidistrict Litigation. Since the commencement of the Underlying Cases and various government investigations, the Debtors' insurance providers have received numerous notices seeking coverage under the Debtors' insurance policies on behalf of the Debtors' current and former directors, officers and employees (the “Individual Insureds”).

In response to these requests, the Debtors' insurance providers seek a determination from the Court that the proceeds of the insurance policies at issue are not property of the Debtors' estates. Alternatively, the insurance providers seek to lift the automatic stay, to the extent it is applicable, to permit them to advance or reimburse defense costs on behalf of the Individual Insureds in connection with the Underlying Cases and pending investigations. As described below, two types of insurance policies are involved—director and officer liability insurance policies (“D & O Policies”) and errors and omissions (professional liability) insurance policies (“E & O Policies”). For the policy year, May 31, 2011 to May 30, 2012, the Debtors maintained a total of $225 million of D & O insurance and $150 million of E & O insurance. The objectors seek to block payment of defense costs under both types of policies. Because these motions present similar legal issues, the Court ordered a common briefing and argument schedule.

A. Procedural History

The issues before the Court arise from (i) the Notice of Presentment of Stipulation and Order Between the Chapter 11 Trustee and MFG Assurance Company Limited Regarding Payment of Loss and Reimbursement of Covered Expenses (the “Assurance Stipulation”) (ECF Doc. # 409) and (ii) the Motion of U.S. Specialty Insurance Company for Relief from the Automatic Stay, to the Extent Applicable (the “Specialty Motion”) (ECF Doc. # 428).

The Assurance Stipulation relating to the E & O Policies was originally filed on presentment (with a presentment date of February 9, 2012). Certain commodities customers of MFGI (ECF Doc. 416, 417) and Sapere Wealth Management LLC, Granite Asset Management and Sapere CTA Fund, L.P. (collectively, “Sapere”) (ECF Doc. # 419) filed objections to the Assurance Motion. The Sangani Family, LP filed a joinder to Sapere's objection on February 7, 2012. (ECF Doc. # 422.) At a hearing on February 9, 2012, the Court ordered further briefing on the Assurance Stipulation. Specifically, the Court ordered MFG Assurance Company Ltd. (“MFG Assurance”) and Louis J. Freeh (the “Chapter 11 Trustee”) to provide copies of the insurance policies referenced in the Assurance Stipulation and support the stipulation with legal arguments.

On March 5, 2012, MFG Assurance filed a memorandum of law in support of the Assurance Stipulation (the “MFGA Memorandum”) (ECF Doc. # 516), along with the declaration of John Oliver Heyliger (the “Heyliger Declaration”) (ECF Doc. # 519). The Chapter 11 Trustee also filed a memorandum in support of the Assurance Stipulation (the “Chapter 11 Trustee Memorandum”). (ECF Doc. # 518.) On March 19, 2012, responses in support of the objections were filed by certain MFGI customers (ECF Doc. # 573), and Sapere (ECF Doc. # 574). On March 22, 2012, after the deadline for responses had passed, the Lead Plaintiffs (defined below) filed a limited response and reservation of rights with respect to the Assurance Stipulation. (ECF Doc. # 586.) On March 23, the Chapter 11 Trustee and MFG Assurance filed reply memoranda in support of the Assurance Stipulation. (ECF Doc. 589, 590.)

While the briefing was ongoing on the Assurance Stipulation, U.S. Specialty Insurance Company (“U.S. Specialty”) filed the Specialty Motion. U.S. Specialty issued the primary level of D & O Policies. U.S. Specialty is unaffiliated with any of the Debtors. The Virginia Retirement System (“VRS”) and Her Majesty the Queen in Right of Alberta, Individually and on Behalf of All Others Similarly Situated (“Alberta” and together with VRS, the “Lead Plaintiffs”) (ECF Doc. # 477), certain MFGI customers (ECF Doc. # 484), and Sapere (ECF Doc. # 482), filed objections to the Specialty Motion. Additionally, James W. Giddens (the “SIPA Trustee”), as Trustee for the liquidation of the business of MFGI, filed a statement with respect to certain insurance issues (the “SIPA Statement”). (ECF Doc. # 489.) U.S. Specialty filed a reply in support of the Specialty Motion. (ECF Doc. # 503.) The Chapter 11 Trustee also filed a statement in support of the Specialty Motion. (ECF Doc. # 505.)

B. The Terms and Language of the Policies

Copies of the D & O Policies and E & O Policies have been filed. (ECF Doc. 428, 519.) The policies at issue are all “wasting policies,” i.e., every dollar spent of policy proceeds is one less dollar available to cover claims, that potentially provide direct coverage for the Debtors and the Individual Insureds. The D & O Policies and the E & O Policies provide different coverage, but both sets of policies expressly provide insurance for the Individual Insureds and provide for advancement or reimbursement of defense costs for the Individual Insureds. During the April 2, 2012 hearing, the Court was advised that lawyers have so far submitted claims for reimbursement or advancement of legal fees and expenses totaling approximately $8.3 million. As explained below, the terms and language of the policies and applicable state law control the scope of coverage.

a. The Assurance Stipulation and MFGA Policies

Through the Assurance Stipulation, the Chapter 11 Trustee and MFG Assurance seek Court authority to permit MFG Assurance to make payments for defense costs of the Individual Insureds who are covered by the MFGA Policies.

MFG Assurance is a wholly-owned subsidiary of MFGH and was incorporated in Bermuda on ...