CCLD Rejects Several Defenses to Insurance Coverage of a Settlement Paid By Investment Fund

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Sycamore Partners Management, L.P. v. Endurance American Insurance Co., C.A. No. N18C-09-211 AML CCLD (Del. Super. Sept. 10, 2021)

Prior to the closing of a leveraged buyout of a company (the “Merger”) whereby the plaintiff investment fund sought to divest, liquidate, and resell some of the company’s high-value assets (the “Restructuring Transactions”), the company’s stockholders brought derivative claims against the company’s board relating to the voting process underlying the Merger. The company settled the Merger-related claims, the Merger closed, and the plaintiff executed the Restructuring Transactions. Shortly thereafter, company bondholders sought information from the company—which the company never provided—regarding whether the Merger and Restructuring Transactions violated an indenture between the bondholders and the company. 

Following the execution of the Restructuring Transactions, the company was no longer able to pay its debts and filed for bankruptcy. In connection with the bankruptcy proceeding, the company’s creditors conducted an investigation into the company’s solvency at the time of the Restructuring Transactions, ultimately leading the company’s estate to sue over the Restructuring Transactions and enter into a settlement agreement with the plaintiff. Plaintiff sought insurance coverage of the settlement amount from defendant insurers which they refused to pay, prompting the plaintiff to pay the settlement amount (financed, in part, with third-party funds) and to bring a breach of contract action against the defendant insurers in Delaware Superior Court. The plaintiff and defendant then cross-moved for summary judgment regarding several of the defendant’s defenses. 

The court, in granting the plaintiff’s motion, addressed two main issues. First, the court analyzed whether, pursuant to the insurance policies, the bankruptcy claim relating to the Restructuring Transactions for which the plaintiff sought coverage was “interrelated” with the stockholder derivative suits challenging the Merger, thus barring the plaintiff’s recovery. In finding that the claims were not interrelated, the court held that there was no “meaningful linkage” between the bankruptcy claim challenging the plaintiff’s alleged wrongdoing in connection with the Restructuring Transactions and the derivative claims challenging the board’s alleged wrongdoing in connection with the voting process leading to the Merger. Second, the court considered whether the demand letters requesting information relating to an indenture between the company and the bondholders constituted an “interrelated claim” barring the plaintiff’s recovery. In rejecting this contention, the court noted that, pursuant to the policies, a third party’s request for information from an insured’s portfolio company was not even a “claim” let alone a claim “against” plaintiff. 

In denying the defendant’s cross motion, the court analyzed and rejected two arguments. First, the defendant argued that the loss was not “incurred” by the plaintiff pursuant to the policies because the settlement amount was paid, in part, with third-party funding. The court rejected this argument finding that the language in the policies did not require the plaintiff to personally pay for the loss in full (or at all) before seeking coverage from the defendant. Second, the defendant argued that the plaintiff’s representations in the warranty letter regarding knowledge of claims barred the plaintiff’s recovery. The court, again, rejected the defendant’s argument finding that while the warranty letter contained a provision stating that any claim to which plaintiff had “actual knowledge” would be excluded from coverage, there was another provision providing that only “reasonably expected” claims would be excluded. Thus, because there was more than one reasonable construction of the warranty letter, the defendant’s summary judgment motion was not supported by undisputed material facts and was denied.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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