Vesttoo creditors, Clear Blue settle on bankruptcy plan and Vesttoo Bay XIV funds

The Official Committee of Unsecured Creditors in the Vesttoo bankruptcy case has reached a proposed settlement with fronting specialist Clear Blue Insurance that sees an agreement reached on the bankruptcy plan and in relation to funds specifically held in one of the debtor vehicles, Vesttoo Bay XIV Limited.

This settlement agreement has been reached after the mediation that began last week in New York, which is a positive step forward for getting Vesttoo’s bankruptcy finalised and enabling recoveries to begin for the cedents affected by the insurtech’s extensive letter of credit (LOC) in reinsurance fraud.

As we reported recently, the creditors in Vesttoo’s Chapter 11 bankruptcy case entered into mediation in an attempt to solve the key sticking point over the consolidation of the estate, versus honouring the segregation of cell structures used for reinsurance transactions affected by fraudulent letters of credit (LOCs).

As we’ve reported at length, the subject of ownership of segregated cells and any funds they contain or have linked to them, had spilled over into a dispute over taking a consolidation approach to bankruptcy and the disbursement of value left in Vesttoo’s estate, over honouring reinsurance transaction related segregation, and this became a key focus among creditors.

Mediation appears to have worked, as the Official Committee of Unsecured Creditors and Clear Blue on behalf of its insurers named in the Chapter 11 case, reach an agreement that suggests a potential path forwards, although now needs approval by the court.

Clear Blue had objected to the bankruptcy plan for the Vesttoo estate, saying that it is the only or primary creditor of Vesttoo Bay XIV, one of the companies used for reinsurance transactions by Vesttoo.

Vesttoo Bay XIV, which is a Limited Partnership, had held $10,166,882.66 of cash, but then Vesttoo itself had used a portion of these funds to pay certain fees and expenses of estate professionals in the Chapter 11 case.

Clear Blue claims it has a right to any cash remaining in Vesttoo Bay XIV and as the bankruptcy plan suggested a consolidated approach, to liquidating all the Vesttoo entities and then disbursing any remaining funds to creditors based on their claims, this was one of the sticking points.

Working with the mediator, the Creditor Committee and Clear Blue have reached an agreement to settle on this issue.

With this settlement enforced, Clear Blue has now agreed it will support, and not object to, the bankruptcy plan that has been proposed to the Delaware court.

Certain things need to happen though, including that the funds in question need to be transferred back from Vesttoo Ltd. to Vesttoo Bay XIV, to take them back to the sum mentioned above, so topping up any value that had been used to pay professionals.

It seems this is a specific example of the issue we highlighted last week, that some funds remaining from reinsurance transactions implicated in the letter of credit (LOC) fraud had been drawn from debtor structures and co-mingled at Vesttoo Ltd’s general account, then used to pay company expenses.

Once the cash is returned to Vesttoo Bay XIV and topped up, the agreement then states that it must remain segregated from that point and cannot be used by the bankruptcy estates until the bankruptcy plan is effective.

When the plan becomes effective, Clear Blue will then receive 50% of the funds remaining in Vesttoo Bay XIV, under this settlement agreement, but then would waive any rights to the remaining.

The remaining cash, the other 50%, would then be disbursed, according to the instructions of the Creditor Committee.

There is a time limit for this to occur though, which puts pressure on getting the bankruptcy plan approved, it seems and if this does not happen within specified timeframe, Clear Blue would remove its support for the plan.

The Committee is requesting the bankruptcy court and judge approve this settlement plan, seeing it as a fair compromise, it appears.

They note that the alternative would likely be expensive litigation, which could delay or jeopardise the bankruptcy plan in its entirety.

They say that the settlement related to Vesttoo Bay XIV also removes any uncertainty over how much cash may be recovered from this particular structure.

There is a clear need to speed a resolution, as with the Vesttoo bankruptcy estate depleted and shrinking with the ongoing costs of legal expertise and other service providers, without some kind of settlement between the parties involved, it seems highly unlikely any value would remain within a matter of months.

Of course, there are other parties involved in the bankruptcy that may not find this a palatable solution, as they have their own claims against other specific Vesttoo entities and may not want this to set any type of precedent for a way to treat cedent claims, versus claims of other creditors.

It’s also uncertain how parties to the bankruptcy such as Chaucer would react, as it has its own claims to try and gain control over the specific vehicles used for its reinsurance deals, or broker Aon which is also attempting to recover value for the parties to reinsurance deals it had brokered or facilitated where Vesttoo had provided fraudulent reinsurance collateral.

It’s going to be interesting to watch how this proposed settlement with Clear Blue is received and whether it can get pushed through, as all parties involved are surely cognisant that the longer this saga goes on, the less chance there is of them making any recoveries at all.

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