Vesttoo case: Constructive trust & cell issues persist, as JPL’s object to settlements

The joint provisional liquidators (JPL’s) to the cells of the Aon White Rock SAC vehicle that were affected by the Vesttoo letter of credit (LOC) in reinsurance fraud have objected to settlements reached between bankruptcy creditors, saying care must be taken to ensure constructive trust claims are respected and those entering into settlements do not receive preferential treatment.

As we’ve been reporting, thanks to what appears to have been an effective mediation process, a number of settlements have been reached between different groups of creditors to the Vesttoo bankruptcy estate.

The first proposed settlement to emerge was between the Official Committee of Unsecured Creditors in the Vesttoo bankruptcy case and fronting specialist Clear Blue Insurance, which saw an agreement reached on the proposed bankruptcy plan and in relation to funds held in one of the debtor vehicles, Vesttoo Bay XIV Limited.

The second settlement agreement involved specialty insurance and reinsurance firm Chaucer, which settled with the Creditor Committee, over the Vesttoo Bay XXIV vehicle that had been used for collateralized casualty reinsurance quota shares it had entered into that had been backed by what is now known to be fraudulent reinsurance collateral supplied by Vesttoo.

The third settlement agreement we reported, saw the Official Committee of Unsecured Creditors and two of the affected cedents, in this case Beazley and Porch Group, reaching agreement over support for the bankruptcy plan and the rights to a portion of funds held in debtor vehicle Vesttoo Bay XIX Limited.

The joint provisional liquidators (JPL’s) to the Aon owned White Rock Insurance (SAC) Ltd., a Bermuda segregated accounts company that was used to house reinsurance deals that were affected by Vesttoo’s forged letters of credit (LOCs) disagree with these settlements, saying they risk preferential treatment, as it remains uncertain whether any other parties could also have claims over some of the funds involved.

The JPLs say that they “do not wish to undermine reasonable settlements that would enable Cedents to efficiently recover fair value for valid claims.”

They highlight that they were the party that brought the constructive trust claims to the cedents, Clear Blue, Porch, and Beazley, as well as indirectly to Chaucer.

“The JPLs are supportive of the constructive trust theory in context of this massive Vesttoo fraud,” they explain.

Adding, “The White Rock Cells and the Cedents they contracted with plainly were victims of fraud, such that any money held by the Debtors and traceable to the Cedents should clearly be deemed to be held in trust.”

As a result, the JPLs asserted constructive trust claims “on behalf of each of the White Rock Cells they act for, all for the benefits of all Cedents who contracted with those Cells,” they stated.

But also state that, “Importantly, however, many Cells (and related Cedents) likely have valid constructive trust claims once the relevant facts are better understood. Therefore, care must be taken in these still-early stages of investigation to ensure that the settling Cedents are not treated preferentially over non- settling Cedents in a way that is unfair and potentially prejudicial to non-settling Cedents.”

“The JPLs have serious concerns about the Committee’s recent and overly hasty complete reversal of position concerning the proposed settlements,” they assert.

The JPLs raise the subject of the comingling of funds, which we reported on recently.

As we had explained, some of the funds remaining from reinsurance transactions implicated in the letter of credit (LOC) fraud had been drawn from specific debtor structures that were linked to cells and co-mingled at Vesttoo Ltd’s general account, then used to pay company expenses.

The JPLs say that the creditor committee raised this uncertainty over funds, their location and how much cash might remain, two weeks ago, saying that the prepetition cash balance had dwindled to just $2.7 million and that “the implication was clear that virtually no constructive trust claims against the Debtors could succeed because no material losses could be reliably traced into the Debtors’ current bank account.”

The JPLs go on to say, “In a hasty about-face, the Committee has now flipped from completely denying the possibility of tracing to conceding that certain funds claimed by Chaucer are so traceable only to Chaucer, such that Chaucer is entitled to an 82.5% settlement payment on its disputed claim.”

They say that they are confident Chaucer has a “significant constructive trust claim”, but that 82.5% is an “extremely high recovery.”

“The JPLs cannot support such a payment to Chaucer, because the JPLs have not yet been provided sufficient financial information to have the high level of confidence in Chaucer’s tracing analysis that an 82.5% settlement would imply,” they continue.

Adding that, with just a short extension to provide a little more time and access to the right financial information from the debtors Vesttoo, they believe the funds could be more accurately traced so that there is certainty over the cash remaining and whether the settlements are appropriate, or not.

The JPLs say they are sympathetic to the creditor committee’s desire to move the process forwards with these settlements, but state, “The Committee cannot disregard its fiduciary duties to other Cedents who may have constructive trust claims, and who are all creditors in these cases at least indirectly through the JPLs’ claims filed on the White Rock Cells’ behalf. The Committee’s transparent motivation is to immediately confirm the Plan at any cost, including by paying Chaucer 82.5% on its constructive trust claim, before the Committee has properly analyzed whether other Cedents may have similar and competing constructive trust claims.”

The JPLs say that with some more time they believe it will be possible to “more fully diligence the Chaucer Settlement, and that reaching such agreement would facilitate full agreement on all plan issues.”

They go on to explain a range of reasons why the bankruptcy plan should not be confirmed in its current form, with constructive trust claims an issue that is repeatedly raised.

With one conclusion being that, “By depriving the JPLs, who were never given ballots despite repeated requests, of their full constructive trust claims (and related rights under the Bermuda Segregated Accounts Act of 2000 (the “SAC Act”)) the Plan does not provide the JPLs and certain Cedents with at least as much as they would receive in a chapter 7 liquidation. Indeed, the Committee’s liquidation analysis does not even attempt a Debtor-by-Debtor liquidation analysis to show otherwise.”

The JPLs arguments put the Bermuda SAC Act front and centre, as they try to push home the relevance of constructive trust and other claims made under that Act, to the bankruptcy process and how ultimately any funds should be apportioned and disbursed.

The JPLs state that the proposed settlements “were in all probability negotiated less on the merits and more with a view to generating sufficient cash available to fund the Plan.”

They also raise the payment of professional fees, saying the proposed bankruptcy Plan represents an attempt to ensure those fees are paid, “even though those professionals’ fees are enormous, unjustified, and the primary cause of the Debtors’ cash shortfall.”

The JPLs say the bankruptcy plan does not meet the best interests of creditors and that while creditors agree that the diminished cash position of Vesttoo risks the conversion of the case to a Chapter 7 liquidation, under the proposed Plan “essentially all cash now held by the Debtors (other than the cash to be paid to the First in Line Cedents) would be used to fund the Plan even though much of it likely is subject to valid constructive trust claims.”

“As the Committee should not be able to use cash that is not property of the Debtors’ estates, the Plan is not feasible,” they conclude.

A hearing on the confirmation of the bankruptcy plan held yesterday, saw the next date for agreement pushed into next week (Monday), driving a further delay but with the goal of allowing further analysis of funds linked to the settlements, to try and get full agreement on them and a way forward.

The judge said that the court needs to see progress on these issues and she was not prepared to delay the next hearing any further than that.

All of which takes us right back to an argument from last August, where Vesttoo had itself claimed ownership of segregated cells or accounts that housed some reinsurance transactions, after Aon had filed in a Bermuda court to pursue recovery of any value remaining in cells that had been used for transactions where its clients where parties to them.

As we later reported in January, it was apparent that this difference of opinion that emerged near the beginning of the saga, over ownership of segregated cells and their contents, remained the key issue of disagreement between a range of creditors and parties involved.

Which seems to still be the case today.

While, at the same time, the bankruptcy estate is dwindling and, so far, there remains a lack of clarity over the location of the assets and what might be left, the ownership of them and rights to them, whether constructive trust would stand if cash has been moved around and depleted.

So we don’t appear to be much further on than we were last August, in terms of the topics that are the focus of the case and hindering the bankruptcy plan confirmation, despite the thousands of documents shared and the analysis that has been undertaken.

The topic of constructive trust and cedent rights to the contents of segregated cells and any accounts linked to them, remains the most contentious and seemingly important piece of this case still today. While anyone watching as an observer would be forgiven for thinking that the focus on the fraud itself and any criminal activity that occurred has been all but forgotten.

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