Vesttoo bankruptcy case: Creditors accuse Chaucer of “lying in wait”

While disagreements over a consolidated approach to liquidating the Vesttoo bankruptcy estate, versus a more segregated approach that makes assets available to the cedents involved in certain reinsurance deals, continues, the Official Committee of Unsecured Creditors have now accused Chaucer of “lying in wait” before launching efforts to secure value for itself.

As we reported, specialty insurance and reinsurance firm Chaucer formally entered the Vesttoo bankruptcy case in January, filing its appearance soon after having registered a $257 million claim under the court process.

We then explained that Chaucer is seeking to protect the specific segregated cells that were used for its reinsurance transactions with insurtech Vesttoo, to prevent any leakage of value to claims made by other creditors to the case.

In another report on the case, we then highlighted that it remains clear that a major difference of opinion in the bankruptcy estate is related to the ownership of segregated cells and their contents.

Some parties are keen to take this approach, of securing any value related to the collateralized reinsurance deals they had been party to, where as other parties are already well down the line in proposing a more consolidated approach to the liquidation of the insurtech.

Meanwhile, as we reported yesterday, the insurtech at the heart of the reinsurance letter of credit (LOC) fraud scandal, Vesttoo, wants to scrap the US bankruptcy case all together and start liquidation proceedings in Israel.

In a flurry of filings made yesterday, the Official Committee of Unsecured Creditors in the Vesttoo bankruptcy have now jumped on Chaucer’s late attempt to secure value for itself, saying the company had been lying in wait through all of the preliminary work to agree a plan of bankruptcy and then jumped in right before it could be approved.

Which of course is entirely Chaucer’s right, as a creditor also with significant value exposed to Vesttoo’s fraud, although why the company hadn’t entered the fray earlier in the bankruptcy process is unknown.

The creditor committee filed a lengthy objection to Chaucer’s motion, saying, “In a difficult situation, the Committee has positioned these cases for imminent Plan confirmation, which would relieve the estates from significant ongoing chapter 11 expenses and move to an asset recovery phase for the benefit of all creditors. The Committee has sought a path to avoid inter-creditor fighting that would bog down and potentially implode these cases.

“But now, without warning and well after the deadline established by this Court, Chaucer has sprung on the parties and the Court a flurry of last-minute requests aimed at taking for itself a large portion of the Debtors’ remaining cash.”

The committee adds, “In addition to filing an adversary proceeding to establish a constructive trust over $18.8 million of cash held by Debtor Vesttoo Bay XXIV, L.P. (“Vesttoo Bay XXIV”), Chaucer seeks relief from a Court deadline to file claim objections to further fortify its asserted rights to that cash.

“Adjudicating Chaucer’s claim objections would require a material confirmation delay which would harm all other creditors.

“Allowing Chaucer to proceed along this path would threaten to throw these cases into chaos and undo the considerable progress made by the Committee.”

They say that, while Chaucer has filed a claim of over $257 million against the Vesttoo bankruptcy estate, which makes it one of the largest creditors, “Chaucer was invisible during the first five months.”

Chaucer failed to appear or object during those five months and the committee state the company has not communicated with them, in any manner.

The committee further state, “Now, at this critical inflexion point and after the Committee has expended significant resources on a plan process that does not favor any sub-set of creditors, Chaucer has taken the remarkable position that Vesttoo Bay XXIV— which has more cash than almost any other Debtor—should not be responsible for any expenses. Chaucer appears to have waited to raise these issues until the moment that it believed it had maximum leverage over the other creditors.”

Chaucer had been hoping that “a consensual settlement would be reached with certain non-Debtor parties that would allow Chaucer to avoid active participation in these Bankruptcy Cases,” which suggests the re/insurer had been looking elsewhere to be made whole after the reinsurance letter of credit (LOC) fraud affected the company.

It’s not clear who that non-Debtor party was, that Chaucer was hoping to reach a settlement with, but it is likely to be an intermediary in the chain of the collateralized reinsurance arrangement, we suspect.

The committee go on to state, “Despite Chaucer’s acknowledged inactivity, it takes the position that $18.8 million of the Debtors’ cash should be earmarked solely for Chaucer. The idea that Chaucer was actively attempting to, or could ever, settle that issue through discussions with unspecified “non-Debtor parties” and without the involvement of the Debtors or the Committee (which was never aware of any such discussions) is far-fetched.”

The committee calls on the Delaware bankruptcy court and its judge to deny Chaucer’s motion, so the plan presented to the court can move forwards.

Chaucer claims it is “the only legitimate unsecured creditor against Vesttoo Bay XXIV” but the committee note that for the court to side with that claim “would require a substantive determination of the merits of competing creditor claims against Vesttoo Bay XXIV during Plan confirmation.”

They say Chaucer has not shown good reason for delaying the bankruptcy plan approval and its late objection shows a lack of good faith.

But, as we have reported, Chaucer clearly knows that there is value in the specific segregated cell and linked accounts or trusts that could relate to the casualty quota share reinsurance it entered into with Vesttoo forged LOC backing, so it feels it has a right to value left.

Porch Group, the tech-focused parent to insurer Homeowners of America, which also fell foul of fraudulent letters of credit (LOC) for its reinsurance thanks to Vesttoo’s executives, has also filed an objection to Chaucer’s moves.

Porch states, “After lying in wait for months while it had full notice of the events in these bankruptcy cases, Chaucer now seeks to prevent defrauded creditors of the Vesttoo Debtors from voting in respect of Bay XXIV notwithstanding that these creditors have participated diligently in these bankruptcy cases and through the Committee’s lengthy efforts, have proposed a reorganization plan that is on the eve of confirmation.”

Porch notes that it is in a similar situation to Chaucer, having entered into a similar collateralized casualty quota share reinsurance agreement with a segregated cell that ended up funded by a forged LOC.

Porch states, “The commonality of facts between the transfers of premium by Bay XXIV and Bay XVII and the collateralization of reinsurance obligations with fake LOCs to create an illusion of solvency strongly indicates that the Vesttoo affiliates were being used as “mere instrumentalities” to perpetrate a massive fraud on all creditors. Through the various reinsurance transactions and the illusion of LOCS as collateral, even though the Vesttoo entities were separate as a matter of corporate formality, each – including both Bay XVII and Bay XXIV – was formed, created and used as part of a larger scheme to defraud multiple victims on a scale that overrides each individual transaction and entity.”

They note that Vesttoo, as the dominant corporation, used other structures, vehicles and cells to perpetrate the fraud and as a result creditors have a right to assert claims against the so-called subservient corporations involved.

Which harks back to the consolidation versus segregation argument we have highlighted as the main focus of recent disagreements in the Vesttoo bankruptcy case.

Porch also highlights that Chaucer has not objected in time, saying the re/insurer has, “purposefully ignored the Deadline established by this Court’s Solicitation Procedures Order to guide the Plan approval process.”

Porch adds, “Chaucer’s decision not to participate in these cases until now puts the full brunt of prejudice on the estates and remaining creditors if the plot that Chaucer has hatched comes to fruition. Chaucer has laid in wait for months, even though the assets held at Bay XXIV have been public information since the Debtors first filed their monthly operating statements.”

“In sum, if Chaucer’s Motion is granted and the Court relieves Chaucer of the consequences of its decision to ignore the Deadline, creditors that have participated in creating a Plan that conserves estate assets for all, and that have overwhelmingly voted in favor of the Plan, will be forced to litigate whether their votes are valid. Such litigations would be costly, time- consuming and would result in a long delay in confirming a Plan (which could, indeed, be fatal to the reorganization effort). If the motion that Chaucer ultimately seeks to file – to prevent voting by these other creditors – is granted, then the post-confirmation estates will have to deal with Bay XXIV in chapter 7 or in Israel, with the attendant increased costs and significant delay,” Porch summarises.

Markel Bermuda has also filed a joinder to the committee’s objection to Chaucer’s motion, saying, “Chaucer’s vague hope of a consensual resolution with unidentified non-Debtor parties does not warrant a finding of excusable neglect and should not permit Chaucer to avoid compliance with the Court’s Solicitation Procedures Order.”

Adding, “Chaucer appears to have laid in wait for months with full knowledge of the Chapter 11 Cases before strategically filing its Motion and Proposed Late Objection at the same time Chaucer filed a comprehensive slate of other related filings.”

All of which sets the onus now on the Delaware court and the judge in the bankruptcy case, to decide whether to allow Chacuer’s late motion, or not.

As a creditor, Chaucer is well within its rights to seek recoveries under the bankruptcy estate and the thorny subject of whether a consolidated approach to the liquidation, or a segregated one is likely to crop up again and again, unless the court rules in a specific direction.

The fact Chaucer had been trying to reach a settlement outside of the bankruptcy case, with a non-debtor (so not a Vesttoo entity), also speaks to the strong chance that additional litigation is filed in time, between parties involved in the reinsurance deals that were affected by the fraudulent LOCs.

Where next for the bankruptcy case? It’s hard to say. Either a directional ruling from the court, that might give some certainty to creditors but may also give rise to a raft of other litigation, or perhaps a shift to another form of liquidation, or even a move of proceedings to Israel, if Vesttoo got its way.

It feels like the case is moving very slowly now and could slow further, while at the same time the arguments between parties increase, which is often a sign that additional litigation may not be far away.

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