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Delaware Magistrate’s Court Finds Fraudulent Transfer Request by Bankruptcy Trustee to be “Claim of Title” Wiley Rein LLP


Applying Delaware law, the Delaware Superior Court ruled that a fraudulent transfer request from a bankruptcy trustee constitutes a “claim of title” under a D&O policy. Verizon Commc’ns Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pennsylvania, 2021 WL 710816 (Del. Super. Ct. 23 February 2021).

In 2008, Verizon executed a multi-stage merger involving Verizon, Spinco, and FairPoint. Shortly thereafter, FairPoint filed for Chapter 11 bankruptcy relief. In 2011, a bankruptcy trustee appointed pursuant to FairPoint’s reorganization plan sued Verizon to prevent any suspected, actual and fraudulent transfers. implied, linked to the merger. Insureds have requested coverage under their D&O policies. Insurers denied coverage on the grounds that the trustee’s action was not a “title claim”, defined in the relevant part to include a claim “derived in a derivative manner on behalf of an organization by a title holder of this organization ”. The insurers argued that the trustee is not a “titleholder” and that a fraudulent transfer claim is a direct claim and not a derivative claim. After settling the trustee’s claim, the policyholders filed a coverage dispute against the insurers.

The Delaware trial court ruled that policyholders were entitled to coverage for the trustee’s claim. To begin with, the court distinguished this case from the 2019 Delaware Supreme Court decision in In the case of Verizon Ins. Coverage calls, in which the High Court ruled that a bankruptcy trustee’s fraudulent transfer request was not a “title claim”. The trial court concluded that the case stood out because the definition of the ‘title claim’ at issue included ‘a claim made against any insured brought in a derivative manner on behalf of an organization by a holder of securities of this organization, relating to a Securities Claim as defined in paragraph (1) above. “Here, the trial court ruled that the absence of a definitive text requiring the derivative action to share any connection with securities regulation widened the scope of the term. Therefore, the court ruled that in under this policy “a fraudulent transfer request need not be specific to transfers involving securities to be a securities request”.

From there, the court concluded that, according to plain language from the police, the trustee’s claim was a security claim. First, following the merger, FairPoint held Spinco Notes, which are “securities”. Second, the trustee was a “security holder” of FairPoint because he sued on behalf of the security holders, and under bankruptcy law no other security holder could do so. Third, the court ruled that the action was brought in derivative because it was a general action brought for the benefit of all the creditors of the estate. Finally, the Court agreed with the insured that the action had been brought “on behalf of” FairPoint, since it was brought by the trustee who represents the estate and has the capacity to sue and be sued on its behalf. .

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