Joseph B. Conahan

The Delaware Chancery Court has signed off on the framework that will govern how scores of insurers press claims in the liquidation of Scottish Re (U.S.) Inc., issuing an opinion to spell out when courts must defer to the state insurance commissioner and when they must step in. Vice Chancellor J. Travis Laster's ruling Friday approved the Delaware Insurance Commissioner's proposed claims and dispute-resolution procedures for the insolvent reinsurer, holding that the court's role is to police legal compliance and avoid second-guessing business and valuation judgments the commissioner makes as receiver. "This decision holds that the procedures must both comply with law (principally DUILA) and otherwise not constitute an abuse of discretion," Vice Chancellor Laster wrote, referring to Delaware's Uniform Insurance Liquidation Act, which establishes a streamlined, coordinated and orderly statutory scheme for the Delaware Insurance Commissioner to take possession of an insolvent insurer's assets and facilitate the fair and equitable resolution and payment of claims for policyholders and creditors across multiple jurisdictions. The vice chancellor framed the standard of review as a two-step exercise. Courts must first review the commissioner's decisions de novo for compliance with "positive law" such as constitutions, statutes, regulations and common law, and only then consider whether the commissioner's judgment calls are supported by substantial evidence and free of arbitrariness. Once the commissioner has identified a legal basis, articulated a rationale and built a factual record, the burden shifts to objectors to show that the decision violates law, lacks evidentiary support or constitutes an abuse of discretion, Vice Chancellor Laster said. He applied that framework both to the commissioner's request for approval of global claims procedures and to future recommendations on individual claims. As to claim determinations, the opinion held that purely legal issues will be reviewed de novo, but that "as to any issue requiring the exercise of judgment or the weighing of evidence, the court will review the commissioner's recommendation under an abuse of discretion standard." Scottish Re (U.S.), a life and annuity reinsurer headquartered in Charlotte, North Carolina, stopped writing new business in 2008 and went into run-off, backing existing obligations to primary insurers through reinsurance and retrocession agreements. The insurer's financial position worsened after its Cayman and Delaware parent entities entered insolvency proceedings, and in March 2019 the Delaware insurance commissioner obtained a rehabilitation order in Chancery Court. In July 2023, after efforts to save the business failed, the court converted the case to a liquidation, fixed Scottish Re's obligations to its cedents as of Sept. 30, 2023 and imposed antisuit injunctions requiring claims to be funneled through the receivership. Delaware Insurance Commissioner Trinidad Navarro followed with a series of 2024 motions seeking approval of reinsurance claims procedures, "other claims" procedures, dispute-resolution rules and "final determination" procedures for adjudicating and paying claims. Large blocks of cedent insurers and retrocessionaires objected, raising more than two dozen issues about standards of review, the sequence of the claims process, the use of arbitration clauses, access to information and contractual protections for reinsurers. Objectors first attacked the commissioner's plan to solicit information from each claimant, issue an initial valuation and then invite the claimant either to accept that number or file a formal claim. They argued that DUILA requires claimants to file first before any evaluation occurs. The court disagreed, holding that "the commissioner's approach does not violate DUILA and is not an abuse of the commissioner's discretion," and declining to hard-wire a more rigid sequence into the statute's silence. Vice Chancellor Laster likewise declined to bless or condemn specific valuation formulas, holding instead that the commissioner's proposed methodologies were not inherently an abuse of discretion and that fights over how to value particular books of business should wait until concrete recommendations reach the court. On discovery, insurers had urged the court to allow plenary, litigation-style information demands on the receiver. The vice chancellor rejected that as incompatible with a streamlined liquidation. "The special nature of the claims proceeding does not accommodate plenary discovery," he wrote, finding the proposed information-sharing mechanism adequate so long as the commissioner uses it in good faith and does not wield noncooperation as a blunt forfeiture tool. The opinion also turned aside objections that the procedures violate mandatory arbitration clauses in Scottish Re's contracts. DUILA and the court's antisuit injunctions centralize the process in Chancery, and "Delaware's regulatory scheme takes precedence," Vice Chancellor Laster held, though he left room for parties to seek relief from the injunctions in exceptional cases where sending a dispute to arbitration would still comport with liquidation policy. Retrocessionaires argued that they were contractually entitled to notice of all underlying claims, an opportunity to investigate and a right to assert additional defenses before the commissioner. They further pressed for a ruling that their contracts terminated when Scottish Re's outward-facing reinsurance contracts were cut off. Laster found that, under Delaware law, those notice-and-participation provisions do not bind the commissioner as receiver and noted that the commissioner had already committed to give reasonable notice, allow reinsurers to investigate at their own expense and raise defenses by objection after recommendations are filed. "That is all the reinsurers would be entitled to even if Delaware law validated the provisions at issue," he said. He also refused to impose a retrocession termination date, holding that the commissioner's decision "is not contrary to law, nor is it an abuse of discretion." Beyond the immediate fights, Vice Chancellor Laster used the opinion to criticize Delaware's continued reliance on a 1939-era uniform act that the drafters themselves withdrew as obsolete in 1981, noting that "By not updating its statute and persisting with DUILA, Delaware continues to use a gapridden scheme that the promulgating authority declared obsolete over four decades ago." Representatives for the parties did not immediately respond to requests for comment Monday. Delaware Insurance Commissioner Trinidad Navarro, receiver for Scottish Re (U.S.) Inc. is represented by Peter B. Ladig and GianClaudio Finizio of Bayard PA. Scottish Re (U.S.) Inc. is represented by Michael Busenkell of Gellert Scali Busenkell & Brown LLC. The insurance companies are represented by Joseph B. Cicero and Gregory E. Stuhlman of Chipman Brown Cicero and Cole LLP, Travis S. Hunter of Richards Layton & Finger PA, Ricardo Palacio, William P. Bowden and Catherine A. Gaul of Ashby & Geddes PA, Kelly A. Green and Jason Miller of Smith Katzenstein & Jenkins LLP, Marisa R. De Feo, Allison Neff, Gary W. Lipkin and Patrick A. Lockwood of Saul Ewing LLP, Randall MacTough and Paul S. Seward of Eckert Seamans Cherin & Mellott LLC, Elizabeth Fenton of Barnes & Thornburg LLP, John C. Phillips and David A. Bilson of Phillips McLaughlin & Hall PA, Jennifer R. Hoover and Noelle Torrice of Benesch Friedlander Coplan & Aronoff LLP, John G. Harris of Halloran Farkas Kittila LLP, Peter C. McGivney of Berger McDermott LLP and Simon Fraser of Cozen O'Connor PC. The case is In the Matter of the Rehabilitation of Scottish Re (U.S.) Inc., case number 2019-0175, in the Delaware Chancery Court.

Dec 1

5 min

A Georgia federal judge stayed Merrill Lynch's case alleging Dynasty Financial Partners, Charles Schwab and a dozen former employees conspired to start a new firm with Merrill's staff and confidential information one day after denying the company's bid for an injunction. In an order on Wednesday, U.S. District Judge Victoria M. Calvert stayed the case pending the completion of arbitration proceedings before a Financial Industry Regulatory Authority panel. The order comes one day after Judge Calvert, ruling from the bench, denied Merrill's motion for a temporary restraining order that would have prevented more employees from joining the new firm. In issuing that denial, Judge Calvert said Merrill had not presented enough evidence to show it would be irreparably harmed absent an injunction, that the solicitation of employees it alleged actually took place or that what is known as "the protocol" — an agreement for how client data can be handled when a financial adviser moves between firms — was violated. Merrill had also requested expedited discovery, but Judge Calvert said Tuesday that she thought that would be best left up to FINRA, noting that all parties agreed the agency was best suited to handle the dispute. In its complaint, Merrill alleged it was suing to stop a "pre-meditated corporate raid" of its Atlanta-based global corporate and institutional advisory services business, which provides a range of financial services to "ultra-high net worth individuals," large businesses and institutional investors. The firm accused the defendants of improperly soliciting 170 financial advisers and support staff assigned to its global corporate and institutional advisory services, or GCIAS, business to work for a competing entity affiliated with Schwab and Dynasty called OpenArc Corporate Advisory. Merrill also alleged former employees used confidential client lists, financial strategies and other trade secrets to solicit business and support staff. An attorney for Merrill alleged the actions were part of an "unprecedented" and huge corporate raid. Attorneys for OpenArc, the former Merrill employees, Dynasty and Schwab all argued during Tuesday's hearing that there was no evidence of Merrill's claims and that it was instead engaging in "speculation" about what it believed happened. The launch of OpenArc was announced last week in a press release saying it was already one of the largest independent firms in the corporate benefits and private wealth sectors. The release said OpenArc had received a capital investment from Dynasty and that the new company would introduce a "new model that integrates corporate benefits, executive services, and private wealth management — delivered through a high-touch, open architecture platform." OpenArc will be helped by "Charles Schwab's broad capabilities and Dynasty Financial Partners' advanced tech platform," according to the release. Merrill Lynch is represented by Tala Amirfazli of Burr & Forman LLP, Rachael L. Carp, Christopher S. Koller and Benjamin S. Levine of Rubin Fortunato & Harbison PC. The former Merrill employees and OpenArc are represented by Charles A. Wood Jr., C. Jade Davis, Jarrod J. Malone, Michael D. Bressan and Michael S. Taaffe of Shumaker Loop & Kendrick LLP, and Joseph B. Alonso of Alonso & Wirth Law LLC. Dynasty is represented by Barry R. Lax, Matthew C. Plant and Robert R. Miller of Lax Neville & Intelisano LLP, and Benjamin B. Watson and Joshua P. Gunnemann of Councill Gunnemann & Chally LLC. Schwab is represented by Faith Gay and Joshua S. Margolin of Selendy Gay PLLC, and Michael P. Elkon of Fisher Phillips. The case is Merrill Lynch Pierce Fenner & Smith Inc. v. Bjerke et al., case number 1:25-cv-05437, in U.S. District Court for the Northern District of Georgia.

Oct 2

3 min

The litigation trust overseeing bankrupt crypto custodian Prime Core Technologies Inc. has launched a clawback suit in the U.S. Bankruptcy Court for the District of Delaware, seeking to recover nearly $93.6 million in alleged preferential transfers made to a London-based trading partner in the weeks before Prime's collapse. In the complaint filed Friday, the PCT Litigation Trust said Prime paid $244.4 million to Enigma Securities Ltd. and affiliate Makor Securities London Ltd. between May 16 and June 21, 2023, just before Nevada regulators forced Prime Core into Chapter 11 bankruptcy. This, the trust said, clearly meets the five elements of avoidable preference claims, given the payments were property of Prime, made to a creditor, on account of an antecedent debt, while Prime was insolvent, and within 90 days of its Aug. 14, 2023, petition to file for bankruptcy. After subtracting Enigma's potential "new-value" defense of about $150.8 million, the trust pegs recoverable preference exposure at $93,576,258.70. "Prime's transfers to Enigma during the preference period exacerbated Prime's already precarious financial position, accelerating the downward financial spiral that culminated in Prime's Chapter 11 filing," the trust said in the complaint. The Enigma suit builds on an earlier clawback action the same litigation trust filed against Crescent Financial Inc. in late July, which seeks to recover about $2.1 million in pre-bankruptcy transfers made under similar circumstances. In both cases, the trust alleged that Prime used commingled customer funds to pay favored counterparties as its finances unraveled, saying the relationships were strictly debtor-creditor, not fiduciary, and echoing U.S. Bankruptcy Judge J. Kate Stickles' July 18 opinion that Prime's assets and customer deposits were so intermixed that they must be treated as property of the estate. The trust argued in this case that Prime was insolvent during the preference period, citing $179 million in liabilities against $44 million in assets, adding that the payments enabled Enigma to receive more than it would have received in a Chapter 7 liquidation. The trust said that because Prime and Enigma's relationship was purely debtor-creditor, not fiduciary or custodial, the transferred funds are property of Prime's estate and subject to avoidance, rather than assets Prime merely held in trust for Enigma. "The [master services and custodial] agreements establish that the parties always maintained a strictly debtor-creditor relationship," the trust said. The trust also cited Judge Stickles' earlier opinion on Prime's involvement with Crescent, where she said Prime's customer and company's assets were "hopelessly commingled" and "not traceable," which the trust argued forecloses and claim that Enigma's deposits were segregated or immune from clawback. The trust said Prime also kept all customer deposits, including Enigma's, in omnibus bank accounts, sweeping funds daily between accounts in round numbers with no link to specific clients. "The internal ledger was errantly and later intentionally corrupted by Prime," the trust said. The trust pointed out that Prime employees testified that fake wire entries were created to mask Prime's use of customer cash to replace roughly $82 million in missing Ethereum. Because Prime's records were unreliable and its accounts mixed client and company money, the trust said, "it is impossible to identify, trace, or otherwise distinguish" the funds Enigma withdrew. Representatives for the parties did not respond to immediate requests for comment Tuesday. PCT Litigation Trust is represented by Joseph M. Aminov, Darren Azman, Magali M. Duque, Joseph B. Evans, Jessica Greer Griffith, David R. Hurst, Patrick V. Kennedy and James Pardo of McDermott Will & Schulte LLP. Counsel information for Enigma Securities Ltd. was not available Tuesday. The case is PCT Litigation Trust v. Enigma Securities Ltd., case number 1:25-ap-52370, in the U.S. Bankruptcy Court for the District of Delaware. The underlying bankruptcy case is In re: Prime Core Technologies Inc. et al., case number 1:23-bk-11161, in the U.S. Bankruptcy Court for the District of Delaware.

Oct 14

3 min

The litigation trust overseeing bankrupt crypto custodian Prime Core Technologies Inc. has launched a clawback suit in the U.S. Bankruptcy Court for the District of Delaware, seeking to recover nearly $93.6 million in alleged preferential transfers made to a London-based trading partner in the weeks before Prime's collapse. In the complaint filed Friday, the PCT Litigation Trust said Prime paid $244.4 million to Enigma Securities Ltd. and affiliate Makor Securities London Ltd. between May 16 and June 21, 2023, just before Nevada regulators forced Prime Core into Chapter 11 bankruptcy. This, the trust said, clearly meets the five elements of avoidable preference claims, given the payments were property of Prime, made to a creditor, on account of an antecedent debt, while Prime was insolvent, and within 90 days of its Aug. 14, 2023, petition to file for bankruptcy. After subtracting Enigma's potential "new-value" defense of about $150.8 million, the trust pegs recoverable preference exposure at $93,576,258.70. "Prime's transfers to Enigma during the preference period exacerbated Prime's already precarious financial position, accelerating the downward financial spiral that culminated in Prime's Chapter 11 filing," the trust said in the complaint. The Enigma suit builds on an earlier clawback action the same litigation trust filed against Crescent Financial Inc. in late July, which seeks to recover about $2.1 million in pre-bankruptcy transfers made under similar circumstances. In both cases, the trust alleged that Prime used commingled customer funds to pay favored counterparties as its finances unraveled, saying the relationships were strictly debtor-creditor, not fiduciary, and echoing U.S. Bankruptcy Judge J. Kate Stickles' July 18 opinion that Prime's assets and customer deposits were so intermixed that they must be treated as property of the estate. The trust argued in this case that Prime was insolvent during the preference period, citing $179 million in liabilities against $44 million in assets, adding that the payments enabled Enigma to receive more than it would have received in a Chapter 7 liquidation. The trust said that because Prime and Enigma's relationship was purely debtor-creditor, not fiduciary or custodial, the transferred funds are property of Prime's estate and subject to avoidance, rather than assets Prime merely held in trust for Enigma. "The [master services and custodial] agreements establish that the parties always maintained a strictly debtor-creditor relationship," the trust said. The trust also cited Judge Stickles' earlier opinion on Prime's involvement with Crescent, where she said Prime's customer and company's assets were "hopelessly commingled" and "not traceable," which the trust argued forecloses and claim that Enigma's deposits were segregated or immune from clawback. The trust said Prime also kept all customer deposits, including Enigma's, in omnibus bank accounts, sweeping funds daily between accounts in round numbers with no link to specific clients. "The internal ledger was errantly and later intentionally corrupted by Prime," the trust said. The trust pointed out that Prime employees testified that fake wire entries were created to mask Prime's use of customer cash to replace roughly $82 million in missing Ethereum. Because Prime's records were unreliable and its accounts mixed client and company money, the trust said, "it is impossible to identify, trace, or otherwise distinguish" the funds Enigma withdrew. Representatives for the parties did not respond to immediate requests for comment Tuesday. PCT Litigation Trust is represented by Joseph M. Aminov, Darren Azman, Magali M. Duque, Joseph B. Evans, Jessica Greer Griffith, David R. Hurst, Patrick V. Kennedy and James Pardo of McDermott Will & Schulte LLP. Counsel information for Enigma Securities Ltd. was not available Tuesday. The case is PCT Litigation Trust v. Enigma Securities Ltd., case number 1:25-ap-52370, in the U.S. Bankruptcy Court for the District of Delaware. The underlying bankruptcy case is In re: Prime Core Technologies Inc. et al., case number 1:23-bk-11161, in the U.S. Bankruptcy Court for the District of Delaware.

Oct 14

3 min

The Delaware Chancery Court has signed off on the framework that will govern how scores of insurers press claims in the liquidation of Scottish Re (U.S.) Inc., issuing an opinion to spell out when courts must defer to the state insurance commissioner and when they must step in. Vice Chancellor J. Travis Laster's ruling Friday approved the Delaware Insurance Commissioner's proposed claims and dispute-resolution procedures for the insolvent reinsurer, holding that the court's role is to police legal compliance and avoid second-guessing business and valuation judgments the commissioner makes as receiver. "This decision holds that the procedures must both comply with law (principally DUILA) and otherwise not constitute an abuse of discretion," Vice Chancellor Laster wrote, referring to Delaware's Uniform Insurance Liquidation Act, which establishes a streamlined, coordinated and orderly statutory scheme for the Delaware Insurance Commissioner to take possession of an insolvent insurer's assets and facilitate the fair and equitable resolution and payment of claims for policyholders and creditors across multiple jurisdictions. The vice chancellor framed the standard of review as a two-step exercise. Courts must first review the commissioner's decisions de novo for compliance with "positive law" such as constitutions, statutes, regulations and common law, and only then consider whether the commissioner's judgment calls are supported by substantial evidence and free of arbitrariness. Once the commissioner has identified a legal basis, articulated a rationale and built a factual record, the burden shifts to objectors to show that the decision violates law, lacks evidentiary support or constitutes an abuse of discretion, Vice Chancellor Laster said. He applied that framework both to the commissioner's request for approval of global claims procedures and to future recommendations on individual claims. As to claim determinations, the opinion held that purely legal issues will be reviewed de novo, but that "as to any issue requiring the exercise of judgment or the weighing of evidence, the court will review the commissioner's recommendation under an abuse of discretion standard." Scottish Re (U.S.), a life and annuity reinsurer headquartered in Charlotte, North Carolina, stopped writing new business in 2008 and went into run-off, backing existing obligations to primary insurers through reinsurance and retrocession agreements. The insurer's financial position worsened after its Cayman and Delaware parent entities entered insolvency proceedings, and in March 2019 the Delaware insurance commissioner obtained a rehabilitation order in Chancery Court. In July 2023, after efforts to save the business failed, the court converted the case to a liquidation, fixed Scottish Re's obligations to its cedents as of Sept. 30, 2023 and imposed antisuit injunctions requiring claims to be funneled through the receivership. Delaware Insurance Commissioner Trinidad Navarro followed with a series of 2024 motions seeking approval of reinsurance claims procedures, "other claims" procedures, dispute-resolution rules and "final determination" procedures for adjudicating and paying claims. Large blocks of cedent insurers and retrocessionaires objected, raising more than two dozen issues about standards of review, the sequence of the claims process, the use of arbitration clauses, access to information and contractual protections for reinsurers. Objectors first attacked the commissioner's plan to solicit information from each claimant, issue an initial valuation and then invite the claimant either to accept that number or file a formal claim. They argued that DUILA requires claimants to file first before any evaluation occurs. The court disagreed, holding that "the commissioner's approach does not violate DUILA and is not an abuse of the commissioner's discretion," and declining to hard-wire a more rigid sequence into the statute's silence. Vice Chancellor Laster likewise declined to bless or condemn specific valuation formulas, holding instead that the commissioner's proposed methodologies were not inherently an abuse of discretion and that fights over how to value particular books of business should wait until concrete recommendations reach the court. On discovery, insurers had urged the court to allow plenary, litigation-style information demands on the receiver. The vice chancellor rejected that as incompatible with a streamlined liquidation. "The special nature of the claims proceeding does not accommodate plenary discovery," he wrote, finding the proposed information-sharing mechanism adequate so long as the commissioner uses it in good faith and does not wield noncooperation as a blunt forfeiture tool. The opinion also turned aside objections that the procedures violate mandatory arbitration clauses in Scottish Re's contracts. DUILA and the court's antisuit injunctions centralize the process in Chancery, and "Delaware's regulatory scheme takes precedence," Vice Chancellor Laster held, though he left room for parties to seek relief from the injunctions in exceptional cases where sending a dispute to arbitration would still comport with liquidation policy. Retrocessionaires argued that they were contractually entitled to notice of all underlying claims, an opportunity to investigate and a right to assert additional defenses before the commissioner. They further pressed for a ruling that their contracts terminated when Scottish Re's outward-facing reinsurance contracts were cut off. Laster found that, under Delaware law, those notice-and-participation provisions do not bind the commissioner as receiver and noted that the commissioner had already committed to give reasonable notice, allow reinsurers to investigate at their own expense and raise defenses by objection after recommendations are filed. "That is all the reinsurers would be entitled to even if Delaware law validated the provisions at issue," he said. He also refused to impose a retrocession termination date, holding that the commissioner's decision "is not contrary to law, nor is it an abuse of discretion." Beyond the immediate fights, Vice Chancellor Laster used the opinion to criticize Delaware's continued reliance on a 1939-era uniform act that the drafters themselves withdrew as obsolete in 1981, noting that "By not updating its statute and persisting with DUILA, Delaware continues to use a gapridden scheme that the promulgating authority declared obsolete over four decades ago." Representatives for the parties did not immediately respond to requests for comment Monday. Delaware Insurance Commissioner Trinidad Navarro, receiver for Scottish Re (U.S.) Inc. is represented by Peter B. Ladig and GianClaudio Finizio of Bayard PA. Scottish Re (U.S.) Inc. is represented by Michael Busenkell of Gellert Scali Busenkell & Brown LLC. The insurance companies are represented by Joseph B. Cicero and Gregory E. Stuhlman of Chipman Brown Cicero and Cole LLP, Travis S. Hunter of Richards Layton & Finger PA, Ricardo Palacio, William P. Bowden and Catherine A. Gaul of Ashby & Geddes PA, Kelly A. Green and Jason Miller of Smith Katzenstein & Jenkins LLP, Marisa R. De Feo, Allison Neff, Gary W. Lipkin and Patrick A. Lockwood of Saul Ewing LLP, Randall MacTough and Paul S. Seward of Eckert Seamans Cherin & Mellott LLC, Elizabeth Fenton of Barnes & Thornburg LLP, John C. Phillips and David A. Bilson of Phillips McLaughlin & Hall PA, Jennifer R. Hoover and Noelle Torrice of Benesch Friedlander Coplan & Aronoff LLP, John G. Harris of Halloran Farkas Kittila LLP, Peter C. McGivney of Berger McDermott LLP and Simon Fraser of Cozen O'Connor PC. The case is In the Matter of the Rehabilitation of Scottish Re (U.S.) Inc., case number 2019-0175, in the Delaware Chancery Court.

Dec 1

5 min