Former officers and directors of MF Global Holdings Ltd. have already spent more than $48 million defending themselves from lawsuits, a sum U.S. Bankruptcy Judge Martin Glenn called “staggering” considering examinations under oath haven’t even begun.
In a 23-page opinion on Sept. 4, Glenn explained why he’s nonetheless 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 on discovering a $1.6 billion shortfall in property that should have been segregated for customers. On top of the bankruptcies, a raft of securities lawsuits was filed against company executives. Those suits have been consolidated in U.S. District Court in Manhattan.
In April 2012, Glenn allowed the executives to draw as much as $30 million from the policy to cover defense costs. Although he raised the cap to $43.8 million this year, the executives argued 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 last week, Glenn agreed, saying the policy lost status as “estate property” given the advanced stage of the bankruptcies. Since the insurance isn’t estate property, he can no longer regulate how it’s used, Glenn said.
Even though the rate that money goes out the door is of “great concern to the court,” Glenn said, “it is unlikely that defense costs would entirely exhaust the D&O proceeds.”
Glenn said he’s not the overseer of defense costs because “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,” Glenn said.
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 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 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. Customers and secured creditors of the brokerage have been paid in full. The SIPA trustee announced last month that he’ll be making a first distribution of about 20 percent to unsecured creditors.
The holding company case is In re MF Global Holdings Ltd., 11-bk-15059, U.S. Bankruptcy Court, Southern District of New York (Manhattan). The liquidation of the brokerage is In re MF Global Inc., 11-ap-02790, in the same court.
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