Vesttoo bankruptcy case: Consolidation vs segregation now the focus

As the Vesttoo bankruptcy case continues in the Delaware court, it’s apparent that a difference of opinion that emerged near the beginning of the saga, over ownership of segregated cells and their contents, remains the key issue of disagreement between a range of creditors and parties involved.

The question of ownership of segregated cells, that were used in the collateralized reinsurance transactions where Vesttoo had provided letters-of-credit (LOC) that are now know to have no value due to being forged, and the contents of those cells, was raised very early on in the process.

Right back in August 2023, 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.

There are cells remaining in structures linked to the debtor Vesttoo, as well as in other vehicles that housed reinsurance deals where Vesttoo had been involved, which have some value remaining.

But, a bankruptcy process can often see a consolidation of all of the sources of funds deemed part of a bankruptcy estate, for them then to be distributed between secured and unsecured creditors, according to some kind of plan of value apportionment.

The question of how value can be recovered and divided among the range of creditors to Vesttoo’s estate has always been bubbling under the case, but often overshadowed by other facts on the scandal as they emerged.

In recent days though, it’s come back to the fore, with the court set to have to make a number of decisions over issues related to this.

As Artemis was first to report last week, specialty re/insurer Chaucer has filed in the bankruptcy case as it looks to protect a specific segregated cell that was used for its reinsurance transactions with Vesttoo against any leakage of value to the claims against the estate that were made by other creditors.

First off, there are some of Vesttoo’s equity holders that appear to have also acted as third-party investors, that are now claiming ownership of portions of certain funding vehicles the insurtech had used to raise its capital and transact reinsurance.

Among these are Matag Investment Ltd. a participant in one of Vesttoo’s equity funding rounds and another company named M. Arkin (1999) Ltd. which seems to have backed a Vesttoo deal, that are claiming ownership of value stored in some structures, and arguing that the broader creditor base to Vesttoo should not be allowed to consolidate any funds stored in these structures into the bankruptcy estate for apportionment between themselves.

Matag and Arkin are limited partners of one of the debtors under the bankruptcy court, a vehicle called Vescor Bay L.P and were involved in a reinsurance deal that involved the Marsh McLennan structure Isosceles Insurance and Vertex Reinsurance SPC Ltd. as cedent.

$18.48 million in notes were issued by Isosceles Insurance and Vescor LP was the purchases, but with Chinese investor YuPo Holdings, Ltd. as the sole limited partner of Vescor LP, to begin.

Matag Investments then purchased a 23% interest in Vescor LP from YuPo for a purchase price of $4 million, while Arkin purchased a 6.75% limited partnership interest in Vescor LP from YuPo for a purchase price of $1 million, court documents show.

Matag and Arkin claim that approximately $18.9 million is held in an agency and trust account, which is expected to be released upon the maturity of the Notes that were issued on February 21st 2024.

As a result, both parties (Matag and Arkin) have filed claims against Vescor LP, Vescor GP and Vesttoo Alpha, looking to recover what they clearly see as their own funds.

They say that they should be allowed to vote on the bankruptcy plan, and argue that the plan approved by the Offical Committee of Unsecured Creditors seeks a substantive consolidation of Vescor LP with all of the other debtor vehicles owned by Vesttoo and for the estate to be bundled, before then being divided and distributed.

Matag and Arkin say there are “no other valid creditors against Vescor LP” and so they should be entitled to a distribution from it, even if its claims are subordinated or determined to be solely equity interests by the court.

As a result, this seems a similar complaint to Chaucer’s. That they believe the value remaining in certain cells or structures was only ever meant for their benefit, as participants or backers in a reinsurance transaction Vesttoo had provided fraudulent collateral to, so they should be the only party(s) able to recover whatever value remains in such cells or structures.

Meanwhile, broking group Aon and its Bermuda based structure White Rock Insurance (SAC) Ltd. have also objected to the Chapter 11 plan for the liquidation of Vesttoo that the creditor committee had proposed.

Aon and White Rock join in the objection levelled by Chaucer, saying that the plan cannot be confirmed because it “effectuates a de facto substantive consolidation without satisfying the requirements for substantive consolidation and violates the absolute priority rule,” the objection states.

The objection also states that the plan does not “satisfy the best interest of creditors test” and may not be feasible because the debtors (Vesttoo) could be insolvent already.

Aon and White Rock also argue that set-off rights are not being preserved under the bankruptcy plan, and also ask for the plan to be modified to make it clear creditors can adjudicate their proofs of claim.

Chaucer has also filed a further objection to the plan, stating that, “Substantive consolidation—express, deemed, de facto or otherwise—is inappropriate in these cases and would be materially prejudicial to the creditors of certain Debtors, including those of the Bay XXIV Debtor. The respect for the separateness of the Debtors should not end with the Proposed Plan.”

Further claiming, “The Proposed Plan attempts to subsidize the liquidation of over 40 Debtors with the cash balances of but a handful, including the cash balances of intentionally segregated entities like the Bay XXIV Debtor, which should not be allowed.”

Similar arguments have been made by the Joint Provisional Liquidators (JPL’s) assigned to Aon’s White Rock Insurance (SAC) Ltd. by the Bermuda Supreme Court, Charles Thresh and Michael Morrison of Teneo.

Here, the JPL’s specifically refer to the White Rock cells that formed part of the earlier debate over ownership, and they state the bankruptcy plan “May prematurely and inappropriately extinguish claims based on the proprietary and equitable rights of certain White Rock Cells and would do so without the Disclosure Statement articulating this critical consequence or its basis.”

Adding, that “Further, the de facto substantive consolidation of the Debtors that would be imposed by the Plan is inconsistent with express statements in the Combined Disclosure Statement and Plan that the Plan does not impose substantive consolidation. That result also appears irreconcilable with the Bermuda statutory scheme under which the White Rock Cells were created.”

So again, the objection is to the consolidation of the bankruptcy estate, to ensure those parties with assets remaining in cells and linked structures or accounts are able to recover them, rather than all the remaining value being bundled and then apportioned through some court sanctioned scheme.

The JPL’s clarify that, “The JPLs assert this Objection unless and until the Plan’s details, impacts, and underlying facts are made clear to all, including cedents (the “Cedents”) who would be the primary economic beneficiaries of the JPLs’ efforts on behalf of the Cells.”

The JPL’s say their focus is on trying to maximise recoveries for the cedents behind the White Rock cells that were affected by the Vesttoo fraud.

But acknowledge, “That goal is challenging as, while the interests of each White Rock Cell and its applicable Cedent are aligned, the interests of each White Rock Cell and its Cedent do not always coincide with the interests of other White Rock Cells and their respective Cedents.”

They say they have been compelled to file an objection as the committee of creditors has pushed for a consolidated liquidation of Vesttoo’s business and assets, which does not align with the JPL’s goal of securing recoveries for the cedents involved.

Again, it’s clearly about the recovery from segregated cells and the argument that, due to this segregation any remaining value should be available for recovery to the specific party to the reinsurance transactions that used those cells.

They state that a “substantive consolidation” would require a “disregard of corporate separateness”, adding that a “scrambling of assets and liabilities” does not align with how the laws governing the structures in question are designed to work.

They say that the cash in each of the applicable Vesttoo Bay debtor structures should be frozen, until all issues related to consolidation, the Bermuda SAC Act, and trust related issues are resolved or settled by final orders of the court.

Importantly they highlight that, for the bankruptcy court to confirm a Chapter 11 plan for Vesttoo, it does not require the disputed funds to have been released first.

But the JPL’s also caution that, if any of those disputed funds are released to any parties, their recipients should be prepared for the chance there are likely to be attempts to claw them back.

They state, “Certain creditors, including certain White Rock Cells, potentially have the Bermuda SAC Act law and constructive trust claims described above that would entitle them to all or most cash now held by certain Vesttoo Debtors because if successful, those claims would signify the applicable cash is not property of those Debtors. At a minimum, therefore, such creditors’ rights to assert such claims, and their ability to recover the applicable cash must be preserved under the Plan.”

Concluding, “While the JPLs believe the disputed funds should be frozen if the Plan were to be confirmed without those disputes having been finally resolved or settled, should the Court determine otherwise, then the JPLs respectively request that the Court advise the Committee, Wind Down Officer, Wind Down Debtors, Liquidating Trustee, Liquidating Trust, General Unsecured Creditors, and any party or entity that could receive such funds that the funds may be clawed back later in order to ensure such transfers and/or distributions satisfy the requirements of the Bankruptcy Code and other applicable law.”

All of these new arguments feature the same focus on the topic of consolidation of the Vesttoo bankruptcy estate and whether that is appropriate. Which, as we said, does all seem to hark back to the very early disagreement over ownership rights to segregated cells, or other corporate structures, as well as their contents and those of linked accounts or trusts, and whether they should be for the sole benefit of the cedents behind reinsurance deals where Vesttoo LOC’s proved to be fraudulent and have zero value.

It feels like this argument could run and may bring the subject of segregation increasingly into focus in the bankruptcy case, so it will be interesting to see how the Delaware court responds, and the official creditor committee, to this flurry of complaints and objections, as it may significantly slow down the liquidation process.

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