Delaware Trial Court Holds that Fraudulent Transfer Claim by Bankruptcy Trustee is a “Securities Claim”

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Applying Delaware law, the Delaware Superior Court has held that a bankruptcy trustee’s fraudulent transfer claim constitutes a “Securities Claim” under a D&O policy. Verizon Commc’ns Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa, 2021 WL 710816 (Del. Super. Ct. Feb. 23, 2021).

In 2008, Verizon executed a multi-step merger involving Verizon, Spinco, and FairPoint. Shortly thereafter, FairPoint sought Chapter 11 bankruptcy relief. In 2011, a bankruptcy trustee appointed pursuant to FairPoint’s reorganization plan brought an action against Verizon seeking to avoid any alleged actual and constructive fraudulent transfers connected with the merger. The insureds sought coverage under their D&O policies. The insurers denied coverage on the grounds that the Trustee’s action was not a “Securities Claim,” defined in relevant part to include a claim “brought derivatively on the behalf of an Organization by a security holder of such Organization.” The insurers argued that the Trustee is not a “security holder,” and a fraudulent transfer claim is a direct claim, not a derivative claim. After settling the Trustee’s claim, the insureds filed coverage litigation against the insurers.

The Delaware trial court held that the insureds were entitled to coverage for the Trustee’s claim. To begin, the court distinguished this case from the 2019 Delaware Supreme Court decision in In re Verizon Ins. Coverage Appeals, wherein the high court held that a bankruptcy trustee’s fraudulent transfer claim was not a “Securities Claim.” The trial court found that case distinguishable because the “Securities Claim” definition at issue there included “a Claim made against any Insured brought derivatively on the behalf of an Organization by a security holder of such Organization, relating to a Securities Claim as defined in paragraph (1) above.” Here, the trial court held, the absence of the definitional text requiring that the derivative action share any nexus to securities regulation broadened the scope of the term. Therefore, the court held that under this policy “a fraudulent transfer claim need not be specific to transfers involving securities to be a Securities Claim.”

From there, the court held that, under the plain language of the Policy, the Trustee’s claim was a Securities Claim. First, as a result of the merger FairPoint held Spinco notes, which constitute “securities.” Second, the Trustee was a “security holder” of FairPoint because it brought the suit on behalf of security holders, and by operation of bankruptcy law no other security holder could do so. Third, the court held that the action was brought derivatively because it was a general claim brought for the benefit of all creditors of the estate. Finally, the Court agreed with the insureds that the action was brought “on the behalf of” FairPoint, as it was brought by the Trustee who represents the estate and has the capacity to sue and be sued on its behalf.

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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