Former First Brands Group executives partially prevailed in their motion to access funds from directors and officers (D&O) insurance policies issued to a non-debtor to cover their legal defense costs.
Former First Brands CEO Patrick James, his brother Edward James, former CFO Stephen Graham and former Chief Strategy Officer Michael Baker filed a motion on Nov. 26 seeking to modify the automatic stay so that they can use proceeds of D&O insurance policies issued to a non-debtor, Mayfair Enterprises LLC, for their defense costs. The motion notes two policies: (i) an ABC policy with Berkshire Hathaway Specialty Insurance Company; and (ii) excess layers of D&O coverage with the Side A policy issued by National Union Fire Insurance Company of Pittsburgh (AIG Side A policy).
During a hearing today (Jan. 7), Judge Christopher Lopez of the US Bankruptcy Court for the Southern District of Texas found that the AIG Side A policy is not property of the estate, and he declined to lift the stay on the Berkshire Hathaway policy.
The unsecured creditors committee (UCC) and receivables purchaser Katsumi Servicing objected to the motion.
The UCC’s redacted objection held that the insurance policy was purchased as a “fortress” to protect James and his cohorts “once the jig is up,” and that granting access would consume proceeds that would otherwise be payable to First Brands’ estate or creditors with claims against the estate. There will be considerable litigation against James and potentially all of the movants, and there is no need to grant the relief given the “anticipated development” of the case, the committee said.
The debtor filed adversary litigation against James and other parties in November, alleging that James fraudulently secured billions of dollars of financing for the debtor and misappropriated funds to enrich himself and his family.
Katsumi argued that the majority of the policies and their proceeds are property of First Brands’ estates because they provide coverage to both the debtor and the executives. The policies are “wasting” policies that would reduce the amount of available coverage available to First Brands if any defense costs are advanced or paid, Katsumi said. If the movants and their law firms are granted “unfettered access” to proceeds of the policies, they could deplete the policy and leave the estate with no available coverage, they said.
UCC counsel Robert Stark said every dollar of claim that is paid by the policy is one less dollar of claim that is assertable and payable by the estate. There is risk of prejudice to the estate and stakeholders if coverage is advanced, Stark said. The risk is acute given the number of claimants, the allegations at plan, the adversary proceeding and the number of law firms already retained, he said.
If the executives use up the policy, creditors who assert claims for losses against the company won’t be paid, which will lead to the estate’s claim burden increasing, he said. First Brands is facing a liquidity shortage, and things like insurance are important when claims are being asserted against parties like Patrick James in an adversary proceeding, he said.
In support of the motion, the court largely heard from Graham’s attorney – Daniel Saval of Kobre & Kim. Any delay in approving the motion would cause immediate prejudice and deprive the movants of the ability to defend themselves by having access to the policies, Saval said. The movants face active litigation and investigations, and denying them defense costs will cause them irreparable harm, he said.
He described the arguments raised in the UCC’s objection as a “freewheeling appeal to equity,” and not based in fact or law. The policies and their proceeds are not assets of the estate, as Side A of the Berkshire policy provides coverage only to directors and officers, not the debtor, Saval said. There are no facts or legal basis to deny coverage, and courts don’t deny advancement of funds or favor leave based on speculative depletion and unproven allegations of misconduct, he said.
Saval also unveiled “concessions” agreed to by the movants and the debtor to provide certain reporting of the amounts that were accessed from the D&O policies, and a requirement to make monthly reports of amounts advanced or paid under the relevant policy.
Mark Dendinger of Bracewell, counsel for Edward James, said the D&Os are entitled contractually to the proceeds of the policy, which are not property of the estate. He questioned how the executives could be asked to be cooperative, defend themselves or comply if they don’t have access to funds to properly defend themselves. Counsel for other executives also joined in support of the motion.
When ruling today, Judge Lopez said there is no evidence that says the executives cannot have access to the AIG policy first. There can be another hearing on the Berkshire policy, because the movants haven’t established cause to lift the stay, Judge Lopez said. The judge noted he wasn’t making findings to pre-judge any litigation – “That’s what trials are for.”
Related documents:
First Brands Group chapter 11 docket
First Brands Group company page
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Kennedy Rose
kennedy.rose@levfininsights.com
+1 646 943 6248
