On December 16, 2022, the U.S. District Court for the Southern District of Ohio held that a settlement of a fraudulent transfer suit was not covered under the settling defendant’s insurance policies. Huntington National Bank loaned $16 million to Cyberco Holdings, Inc, a computer-services business, by paying the loan proceeds directly to Cybero’s vendor, Teleservices Group, Inc. Teleservices, however, turned out to be a front for a Ponzi scheme perpetrated by Cyberco’s executives to misappropriate funds. Although Huntington’s loan was paid off, many other lenders incurred significant losses. Following the bankruptcies of Cyberco and Teleservices, the bankruptcy trustee sued Huntington to, among other things, recover the money Teleservices transferred to Huntington. Th bankruptcy court found that Huntington did not receive most of those transfers in good faith, and Huntington eventually settled with the trustee for $32 million. Huntington subsequently requested coverage from AIG Specialty Insurance and National Union Fire Insurance Co. of Pittsburg, PA for the settlement, but the insurers rejected coverage.

Huntington sued AIG and National Union for breach of contract and bad faith. The court, however, concluded that Huntington’s settlement payment was uninsurable under Ohio law because Huntington’s acceptance of the loan payments without good faith constituted the wrongful taking of money. The court stated, “[w]hile Huntington had the contractual right to be repaid on its loan, it did not have the right to accept payments from the bankrupt Cyberco and Teleservices without good faith and to the detriment of the other victims of the fraud.” The court also found that the loan payments to Huntington were “unrecoverable” credit under an exclusion in the policy since they were unwound by the bankruptcy court.

The case is Huntington National Bank v. AIG Specialty Insurance Co., No. 2:20-cv-256 (S.D. Ohio Dec. 16, 2022). Huntington is represented by Carpenter Lipps & Leland LLP and Haynes and Boone LLP. AIG and National Union are represented by Carlile Patchen & Murphy LLP and Arnold & Porter. The opinion is available here.

Editorial note: The Huntington decision recognizes that disgorgement liability is insurable under Delaware law, but it predicts that Ohio law would not follow suit. A recent Delaware decision, involving an underlying fraudulent transfer claim arising from a spin-off transaction, reinforces that split. There, the court found insurance coverage available for a fraudulent transfer settlement because, among other reasons, disgorgement liability is insurable. The opinion in that case, Verizon Commc’ns, Inc. v. Nat’l Union Fire Ins. Co., No. N18C-08-086 (Del. Super. Ct. Oct. 18, 2022), is available here.