Meantime, Judge Martin Glenn lifted the automatic stay on two groups of insurance policies, allowing for proceeds of the policies to pay for defense costs of former directors, officers and employees of MFGH.
The judge placed a “soft cap” of $30 million on the policies; one a directors and officer policy totaling $225 million and the other an errors and omissions policy totaling $150 million. One policy was from MFG Assurance, a subsidiary of MFGH, which attorneys for the Sapere CTA Fund asserted should have been claimed by the MFGI estate because it covered claims arising from wrongful acts of the insured. Sapere argued that because segregated funds were violated and more than 25,000 claims were made as part of the MFGI liquidation, the proceeds of that policy should go to the MFGI estate.
John Witmeyer, attorney for Sapere, says, “The only relevant facts are undisputed. On Oct. 31 segregated funds were missing and it doesn’t matter if people think they know where [they] went. They are just not there; that breached the Commodity Exchange Act.”
The judge ruled against Sapere, but left open the question of whether customers have a claim on insurance proceeds.
The problem is that the policies are what is referred to as “wasting policies,” meaning once money is allocated it is gone. More troubling for Witmeyer is that the day after the ruling, he learned of a third MF Global policy obtained through an insurance syndicate totaling $250 million. The MFGH trustee, and perhaps the MFGI trustee, allegedly knew this policy existed and did not share that information with the bankruptcy court. In a letter to Giddens, Witmeyer says, the situation is troubling because neither trustees for MFGI nor MFGH “apprised the bankruptcy court of this additional D&O insurance. The importance of the nondisclosure of this information has been heightened by [the] decision that directs that making of inter-insurance allocations; proper allocations under insurance coverage law require taking into account the entire coverage block.”
The third policy includes $100 million of “Side A-only” coverage that would cover defense costs only for former directors, officers and employees and none of the entities that may have liability. So there is a $100 million policy that can be used only for defense costs of officers of MFGH that was not considered by the judge, while other policies that possibly could be used to cover liability claims due to errors will be at least partially tapped to defend Corzine and other officers.