Chaucer looks to protect its Vesttoo-linked transaction cells from other creditor claims

Having recently filed to appear as a creditor in the Chapter 11 bankruptcy case of Vesttoo, international specialty insurance and reinsurance group Chaucer is now looking to protect the specific segregated cells that were used for its reinsurance transactions with the insurtech, against any leakage of value to claims made by other creditors to the case.

Chaucer had entered into collateralized casualty quota share reinsurance arrangements with Vesttoo and once the letter of credit (LOC) fraud was revealed the company found that its transactions were affected.

Which has ultimately led Chaucer to register a $257 million creditor unsecured claim under the Vesttoo bankruptcy court process and file its appearance, as we were first to report last week.

But, the re/insurer clearly feels the need to act strongly to protect its interests and so is objecting to any claims from other creditors that target the segregated cell and structures that supported its specific Vesttoo-linked reinsurance transactions.

A number of the unsecured creditors to the bankruptcy of Vesttoo have registered claims against in some cases every single structure the insurtech had owned, registered, or that was linked to it.

As a result, there are cells which have been utilised for specific collateralized reinsurance transactions, for a specific cedent, but now find themselves subject to claims from parties that were not involved in those specific arrangements.

Of course, due to the sizeable fraud said to have been perpetrated by senior leadership executives at Vesttoo, the collateral backing these reinsurance deals was found to be non-existent when the letters of credit (LOC) from international banks were found to have been forged.

Chaucer’s position seems to be that, the cells used for its transactions with Vesttoo were set up for the sole purpose of supporting its casualty quota share arrangements. So, any funds (especially premiums) left in them, or in accounts linked to them, should only be available to creditor claims made by the company itself, not to any other creditors, or to be shared among all the creditors to the bankruptcy estate.

Which is a similar argument made by others, such as Aon, which has sought to regain control of cells of its own structures that have been used for transactions backed by collateral that is now known to be fraudulent and was provided by Vesttoo and its investors.

But, across the bankruptcy, there are numerous parties making claims against the estate and many more that have lost value because of the fraudulent actions of Vesttoo, so the court needs to decide how to approach this and whether any sums should be ring-fenced for specific creditors.

Which is what Chaucer appears to be urging the court to decide in its favour on.

Chaucer’s argument is related to the structure Vesttoo Bay XXIV, Limited Partnership, as well as the cells related to its transactions.

Chaucer pointed out to the court that, “The Debtors’ fraudulent business was conducted through a series of special purpose partnerships and related Segregated Cells. The purpose of that structure was to isolate the reinsurance transactions that the Debtors arranged with a particular cedent from the reinsurance transactions that the Debtors arranged with other cedents.”

Further explaining that, “This segregation of the assets and liabilities related to each cedent’s reinsurance transactions, undertaken for the benefit of the participating cedent, was a necessary component to induce the various cedents to enter into such transactions.”

Which leads to Chaucer’s argument, that as the cells were established to segregate assets and liabilities related to a specific cedent’s reinsurance arrangement (protecting them from other transaction arrangements and parties involved in them), shouldn’t any value recoverable from those cells only be available to creditor claims made by the very same cedent?

The re/insurer states, “The Bay XXIV Debtor was one such special purpose partnership, and its sole business was to engage in transactions involving the Chaucer Cell and Chaucer. Notwithstanding the reality of the Bay XXIV Debtor’s business activities, numerous claimants in these Bankruptcy Cases that had no direct relationship or business dealings with the Bay XXIV Debtor have filed claims against the Bay XXIV Debtor that were virtually identical to the claims such claimants filed against all other Debtors in these Bankruptcy Cases. Such claims against the Bay XXIV Debtor failed to articulate any reason why they would be enforceable against the Bay XXIV Debtor, and in almost all cases failed to even mention the Bay XXIV Debtor in the supporting materials attached to such claims.”

Chaucer said it had been hoping that a “consensual settlement would be reached with certain non-Debtor parties,” that would have negated the need for it to participate in the bankruptcy case.

It’s unclear who the “non-Debtor parties” are in this case, but it seems Chaucer is in disagreement with more parties than just Vesttoo.

Because Chaucer could not avoid entering the bankruptcy fray, with all the associated costs of litigation etc, the company said, “Chaucer determined that its appearance was, unfortunately, necessary to protect its claims against the Bay XXIV Debtor and Chaucer’s interests in the Bay XXIV Debtor’s assets (which assets are limited entirely to whatever interest the Bay XXIV Debtor has in cash fraudulently obtained from Chaucer).”

As a result, Chaucer is objecting to all the claims made by other parties against the Vesttoo Bay XXIV, Limited Partnership and related cells, asking the court to file an objection against them.

Chaucer states, “The Bay XXIV Debtor was one such special purpose partnership conducting business with that certain Segregated Cell designated “T108 – Chaucer” (the “Chaucer Cell”), and their collective purpose was to engage in segregated reinsurance transactions with Chaucer.”

The re/insurer had entered into casualty quota share reinsurance contracts with the Chaucer Cell, effective January 1st 2022 and January 1st 2023 respectively.

In connection with these reinsurance arrangements, Chaucer made premium payments to the Chaucer Cell, which equaled approximately $28.8 million in the aggregate, the company further explained.

“Based on information available to Chaucer, an integral part of the structure of the Reinsurance Transactions was the formation of the Bay XXIV Debtor and the Chaucer Cell, which were specifically intended to segregate, for the benefit of Chaucer, the assets and liabilities involved in such Reinsurance Transactions from the other reinsurance arrangements and Segregated Cells being created and utilized by the Debtors,” Chaucer said.

Further explaining that, “A portion of such Premium Payments equal to approximately $18.7 million was subsequently transferred prior to the Petition Date from the Chaucer Cell to the Bay XXIV Debtor (the “Transferred Premium”).

“Such Transferred Premium has remained in the possession and control of the Bay XXIV Debtor since such transfer.”

The interest of the Bay XXIV Debtor in this transferred premium is the structures only material asset, Chaucer states, while this entity has not entered into any other reinsurance arrangements involving any other cell or cedent, the company claims.

But other parties have levelled creditor claims against the Bay XXIV Debtor, which has led Chaucer to ask the court to deny them and only allow its own claim against this structure.

It’s clear Chaucer believes that the only value residing in the structure is from the premium payments it had made to it, to pay for the reinsurance cover Vesttoo was supposed to have provided and funded.

With that funding proving to be fraudulent collateral, Chaucer is trying to ensure it can recover the premiums it had paid.

But, with many other parties claiming against the structure in question, Chaucer must fear the value contained in its linked cells being split between the unsecured creditors to the bankruptcy case.

Hence, asking all other claims to be denied and also asking to enjoin with the creditor committee’s objections to Aon and the JPL’s multiple claims.

With many claimants in the Vesttoo bankruptcy having registered claims against every structure or company owned by the insurtech that they can, this raises a challenge for the court to decide whether the value of the bankruptcy estate is everything that resides in a Vesttoo owned company or structure, or whether some of that value could have specific claimants with greater priority, perhaps.

We’ll have to wait and see how the court responds to this. From a cedent’s point of view it is easy to see why Chaucer feels it should have the only claim against that specific structure, if all it contains is the premiums the re/insurer had paid to Vesttoo.

The cedent will always argue that the cells should have been both bankruptcy remote and protected, so it is an understandable argument to make.

On the other hand, bankruptcy estate’s can often result in the rolling up of all value into a single pool, to be apportioned among creditors.

With the bankruptcy estate of Vesttoo looking meagre in terms of the remaining quantum of value, compared to the significant value destroyed by its fraud, it is very easy to see why some creditors may opt for an angle that, as everyone has lost out, all creditors to the estate should be treated equally when it comes to sharing out what little value remains.

This issue has the potential to run, as there are other creditors that could make similar arguments to this one from Chaucer, we’ll have to see how the court responds.

Read all of our coverage of the alleged fraudulent or forged letter-of-credit (LOC) collateral linked to Vesttoo deals.