- From LexisNexis® Mealey’s™ Daily Legal News.
A group calling itself the customer representatives in an ongoing class action against former directors and officers of MF Global Inc. (MFGI), an affiliate of bankrupt MF Global Holdings Ltd. (MFGH), on June 6 filed a brief arguing that the cap on what insurers can pay defendants to cover defense costs should be set at a “hard cap” limit of $ 40 million (In Re: MF Global Holdings Ltd., No. 11-15059, Chapter 11, S.D. N.Y. Bkcy.).
MFGH filed for Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the Southern District of New York in 2011. MFGI, as an affiliate of MFGH, entered Chapter 11 bankruptcy at the same time.
In 2011, a class of customers who had invested private funds with MFGI, the division of MFGH that handled customer funds, sued former MFGH CEO Jon Corzine in the U.S. District Court for the Southern District of New York, alleging fraud and misappropriation of funds (Deangelis v. Corzine, et al. [No. 11-07866, S.D. N.Y.]).
On April 25, 2012, the Bankruptcy Court modified the automatic stay under 11 U.S. Code Section 362(a) to permit insurers to advance and/or make payments for defense costs for the named individual defendants in a class action up to a “soft cap” of $ 30 million, with the possibility of extending that cap.
The customer representatives argued at the time that “it was manifestly unjust to permit unsupervised defense payments to the primary culprits of the defalcation of customer property at MFGI from insurance policies that may be the primary sources of funds to close the shortfall in property available to repay customer-victims.”
In their June 6 brief, the customer representatives say they were not part of any discussions among the parties that led to the stipulation to raise the soft cap to $ 40 million.
Unsupervised defense payments are amassing at an alarming rate, the customer representatives contend. Since April 2012, submitted claims for defendant payments have totaled more than $ 20 million, up from $ 8.3 million in April 2012. The claims for payment are approaching $ 30 million as of May 2013, the customer representatives argue.
If the Bankruptcy Court approves the stipulation, the payments will rise to exceed 10 percent of all available policy limits, the customer representatives say.
The customer representatives maintain that $ 40 million should be a “hard” cap that represents the limit of defense payments, absent the presence of future exceptional circumstances. The representatives also argue that its counsel should be added to the stipulation so that he receives written notice concerning defense payments, including amount to date and remaining available limits of the policies.
The customer representatives are represented by Andrew J. Entwistle of Entwistle & Cappucci in New York and Merrill G. Davidoff of Berger & Montague in Philadelphia.