Yesterday a motion was filed in the MF Global bankruptcy proceedings asking MF Global Inc. (MFGI) trustee James Giddens to claim $120 million in insurance proceeds that is due to the MFGI estate. While the MF Global Holdings (MFGH) trustee Louis Freeh has argued against any of the money from the MFG Assurance policies (as well as other policies) going to former MF Global customers, preferring it be used for the defense cost of officers of the company, the MFGI trustee has taken a more nuanced approach.
Giddens stated in a Feb. 28 court filing: “The proceeds of the policies, though subject to competing claims, may potentially provide a source of recovery for customers for any shortfall in segregated or secured customer property either as the result of litigation by the SIPA trustee or by customers themselves….” However, it goes on to state, “The SIPA Trustee does not oppose payment of some reasonable and necessary defense costs under the policies but does support the suggestion that they be monitored.”
The motions relate to efforts to lift an automatic stay initiated with the bankruptcy filing on several insurance policies covering MF Global. Freeh has argued that the stay should be lifted so that those policies can pay for the defense of MFGH officers who are facing multiple lawsuits. The MFGH trustee and MFG Assurance, a subsidiary of MFGH, filed a stipulation and order between themselves regarding reimbursement of costs and expenses. Attorneys representing Sapere Wealth Management and related companies argued that the law requires that the proceeds from the MFG Assurance policies covering May 2011 through May 2012 be distributed to MFGI’s commodity customers and the automatic stay should only be lifted for that purpose.
Freeh also has argued consistently that former MF Global customers and their representatives should have no standing in the MFGH Chapter 11 proceedings. To date no stay has been lifted on any of the insurance policies, though some funds have been accessed from the various insurance policies for the defense of officers of the firm based on unrelated lawsuits filed prior to the bankruptcy.
Despite stating that the MFGI estate may have a claim to the insurance proceeds, Giddens has not asserted a claim to it, much to the chagrin of Sapare attorney John Witmeyer. “Giddens hasn’t gotten the $120 million [because] he hasn’t asked for it,” Witmeyer says. The Sapere motion states, “For unfathomable reasons, the trustee has not collected the policy proceeds. Instead, the trustee is passively acquiescing in efforts being made to divest MFGI’s commodities customers of the policies’ proceeds and to divert them to pay Corzine, et al.’s defense costs.”
The U.S. Specialty Insurance Company has also sought to lift a stay in order to make payments under a certain Directors Officers and Corporate Liability Insurance Policy. Generally speaking, director and officer policies (D&O policies) cover the defense of officers of a company and professional liability covers restitution and damages resulting from wrongful acts.
Like the MFG Assurance case, the SIPA trustee says the MFGI estate may have a claim. “While the SIPA trustee believes that there is authority to support a finding that he has a current interest in the proceeds of the D&O policy, he, likewise, does not seek a determination on that issue at this time,” states the Feb. 28 filing.
A confusing element in filings of both trustees is that they bundle the different polices together. The SIPA statement concludes: “The coverage under the D&O policy is a valuable asset which should be protected and preserved by this Court for the benefit of MFGI customers, should the SIPA trustee determine that he has claims against any of the D&O policy’s insureds, or otherwise asserts an interest in the D&O policy proceeds.”
Witmeyer says, “Both trustees are deliberately trying to confuse matters by falsely saying that the MFG Assurance liability insurance policy is a ‘D&O’ policy and is therefore governed by the rules applicable to the U.S. Speciality Lines D&O policy. However, the MFG Assurance policy is not a D&O policy."
Straw man argument
In addition to not distinguishing between the different types of policies, the MFGI statement misinterprets Sapere’s argument. “The Sapere objection alleges that commodities customer’s segregated accounts may have been used to pay insurance premiums for Professional Liability Insurance Policies issued by MFG Assurance. ... Based on this, the SIPA Trustee looked in to the payment of premiums on those policies. That investigation yielded no information that any payments were made in October 2011, let alone after October 26, 2011.”
Witmeyer says, “The seg funds issue is not the basis for the motion in the SIPA case, but it is the fact that the MFG Assurance policies cover the commodities customers’ missing segregated funds.”
The relevant language in the MFA Assurance policies, according to Witmeyer, is, “Insurance Covers Professional Liability: The insurer shall pay on behalf of the insured for all loss arising out a wrongful act which gives rise to a claim first made against an insured by a third party during the policy period (or discovery period, if applicable) and reported in writing to the insurer pursuant to the terms of this policy.”
The policy also states that the insured covers the policy holders and its subsidiaries.