American court hearing recordings and interviews - Season 6. Episode 27. April 25, 2024 12:14 pm. In re BlockFi Inc. et al., chapter 11 bankruptcy case no. 2022-19361, audio of hearing held in the BlockFi bankruptcy proceedings pending in NJ, USA #crypto

Episode Date: May 3, 2024

The court posted this recording to its docket a few days after posting the recording starting at 11:27 am the same day.

also argue that they had to assume the policy rather than reject it because allegedly rejection would have prevented them from asserting a rescission claim, which would have given the insurers a windfall, and rejection would have prevented them from enforcing a provision of the policy that voids it if certain conditions are not met. These arguments are unpersuasive. The debtor's own schedule of retained causes of action expressly states that all claims all causes of action are preserved even for rejected contracts. Alternatively, as I mentioned before, Your Honor, the debtors could have filed their lawsuit prior to confirmation or they could have let the policy ride through.

A more likely explanation for their failure to reject is that rejection was completely contrary to the committee settlement party's expectation that the policy would continue to exist with unaltered coverage consistent with the express language in the plan and the confirmation order. So unless Your Honor has any other questions for all these reasons, we respectfully request that, Your Honor, enforce the plan and confirmation order to preclude the claims asserted against the movements by the wind-down debtors. All right. Thank you. Let me ask, are there any other counsel on this side, the insurer side, who wishes to be heard or remotely? Well, we'll turn to the wind-down debtors. Thank you. Thank you, Your Honor. Tristan Axel rep for the Wind Down Debtor Block 5, Inc.

And I'll respond to some of the points in the context of a general reintroduction of some of these issues. So we're here on three motions. They are related. They all relate to this D&O insurance policy. It's just been discussed. That was issued to the debtors just a few days before the petition date November 28th, 2022. There's $30 million in nominal coverage for a payment of $22. and $2.5 million in cash, which was the proceeds of deposits of cryptocurrency that had recently been liquidated by the debtors to fund these cases and fund these policies. So the wind-down debtors, as they've been saying they would do since before the confirmation, are trying to get their $22.5 million back.

The plan was drafted very intentionally and openly as part of a settlement to allow them to do that. We filed litigation in state court to that end. So there's three motions we're talking about today. There is the enforcement motion that was just introduced by counsel to the insurers. There's an action to, a motion to remove this back to the state court, remand this, excuse me, having been removed from the insurers to this court. And then there's a stay relief motion basically to determine the benefits that certain insureds

could maybe get under the policy. And we actually didn't object to that. said just don't enter an order that prejudices state court litigation there's a dispute on that and my colleague mr. Alette will come back to it in a bit so I think to reintroduce the record for the benefit of some of our customers and others that are looking at the record in this case in early November FTX collapsed early November 2022 and notwithstanding some early assurances from the management of Block 5 that everything is okay

very quickly BlockFi had to freeze its platform and prepare for bank and back, back, back, back, back, back, back, back, back, back, back, back, back, back, back, back, back, back. And at that time, BlockFi had about a billion dollars with liquidity. Excuse me. Am I okay to put it? Okay, thank you. See, this is what happened when we get out of practice and having live, everything is remote. We haven't had live argument in a while.

Go ahead. Thank you. So at that time, BlockFi had nearly a billion dollars in liquidity frozen at FTX between loans to be returned and customer accounts at FTX all frozen. But it also had hundreds of millions of dollars in market value with other cryptocurrency assets held it with other vendors or internally. And it made a couple of key decisions in that period of November 10th to November 28th. was that it liquidated about $240 million worth of its cryptocurrency assets at those

prices, notably worth considerably more today. And then it decided to go out and use about 10% of that money. Well, it decided to go out and purchase as much D&O liability insurance as it possibly could. It approached Realm, which was RELM, its historic D&O insurer, and asked to increase coverage. was a $2 million policy then in place, and Realm took a look at it and said, no way, can't touch this, refused to increase its coverage. And so they went out to other insurers in the market. And ACE insurance said, yes, we'll offer a $30 million policy.

It's, as counsel mentioned, it's a quota share policy, meaning it's an ACE policy, and other insurers sort of volunteer to provide a piece of the coverage under that single policy, but it is an ACE policy. And my colleague, Mr. Healy, is here today, and I may introduce him later if your honor would like more detailed insurance-related discussion. I'm a humble bankruptcy lawyer. So $30 million in nominal coverage, but $15 million of that coverage is for post-bankruptcy insurance. So usually post-bankruptcy insurance D&O insurance is pretty cheap because there's an expectation that management will be excrued. for bankruptcy-related decision-making,

that it will be released under a plan, typically the ratio of the premium cost to the coverage costs of post-bankruptcy insurance very low. But they paid $22.5 million. The other $15 million of that coverage is retroactive. It's the coverage for past action, including when directors and officers were telling people it's okay, our platform is functional,

right before the platform is frozen, which is, among other things, what directors and officers are now being sued for and making claims under the policy for. And I just want to be very clear here not expressing any of you in the merits of that. We work with Block Fai's current and former management routinely and everything is going well there as far as I understand from Mr. L.A. But the point of this is to say there was really $15 million of coverage that mattered and And they paid $22.5 million for that.

And it's a weird policy. There were concerns, there are still concerns, whether it's really an effective policy that could pay anything worthwhile. And it has this avoidability provision that's in the contract that you discussed with counsel briefly before. We would have to go into the details of that contract, but our view, which we have alleged in the state court, is that they have. They have breached that contract by not making a payment to us of the policy on demand.

So even within their view of what the policy says and its effect on a rescission claim, when we assumed it we had a right to recover that payment under certain conditions, we hadn't made use of that right yet. We did not relinquish contractual rights by assuming the contract. So that's the answer to that body of discussion and I may come back to that in a little bit. But again, point is, $15 million of coverage that mattered, $22 million payment for it. And so then BlockFight does file bankruptcy. And as this court recalls, customers were very upset to find out that the company had liquidated hundreds of millions of dollars at historically low prices,

and it was using that money to purchase insurance to protect insiders, including this coverage and primarily this coverage. So the first half of 2023, we were before, Your Honor, taking up with this dispute generally about what was going on with insiders, and it was very ugly. We don't want to get back to it, but we could not get a plan confirmed because of that issue. It was remarked on the record multiple times. There was going to be massive litigation and likely appeals if we couldn't make a compromise with insiders and others to get out of the court. bankruptcy and so finally as spring turn to summer and summer term was looking at fall

this court started pushing the parties make a deal get creative and if you don't we're going to destroy a lot of value in a confirmation trial so we did get to a deal and it was pretty creative but we do want to say it's actually very similar to a deal as far as insurance goes that was struck in Voyager we look at a Voyager another major crypto bankruptcy was happening at the time and in the Voyager plan it basically says we are assuming these D&O insurance policies but we're preserving the right to rescind the policy to make an an avoidance action to recover the policy payments basically doing the same thing

that we're doing here but it was all part of when we reached that deal it was all part of a grand bargain that had a few different components to it one is that the directors and officers of BlockFi would make certain payments and contributions to BlockFi. If they failed to do that, there would actually be a – I'm sorry, and in exchange for that, they would be granted a release. If they failed to meet their obligations, those releases would be unmade. And then in that case, this policy, we retained the right to enforce it by its terms. And then there would be – so there would be these releases, there would be these payments, the insurance policies would resume and remain in place, but then we added

this paragraph at the end of 5F, and we understood at the time, we understand it now, it's complicated to have multiple notwithstanding clauses, but we added the clause that says, hey, notwithstanding anything you say about assumption, we're preserving these claims, and it's the claims to recover the policy issued by ACE, and we put ACE in to the plan supplement to say we are preserving these claims to rescind the policy. You can't rescind it just against a, it's one policy under a quota share. So now there are a few different legal and factual arguments that we can get to today, but a lot of it has to do with this bargain and essentially whether it holds up.

And so we respectfully say it has to hold up. To put the deal a bit differently, the directors and officers made this deal because it preserved them some insurance coverage. They got the realm policy. They got maybe this policy. We put that off for another day. It got some, it got them releases. It let them move on with their lives. And the customers of BlockFi got to say, okay, we're not going to sue individuals and directors and officers on a derivative basis, but if we opt into it, we can sue them directly, and maybe there will be this policy and we can make a deal around it. BlockFi got out of bankruptcy, and even the insurers didn't have to be involved in a confirmation trial.

They didn't challenge this at trial. So skipping ahead to today, insurers have instigated this flurry of activity to bring the anticipated litigation back to this court and say to Your Honor, you know, we know you approve this language. It's all over the plan on confirmation order, and it was discussed that this insurance could be subject to challenge, but you know what? They used the word assume in the plan, and we knew at the time or have discovered now that the notwithstanding clause doesn't quite work against what we think is our more powerful notwithstanding

clause. And so this grand bargain, you know what, it's really not effective. So, Your Honor, we don't really know what to do with this. My firm was representing the creditors committee at the time. We worked very hard to reach this deal. There was negotiation of this specific language. We did the job that the court was asking us to do to make a difficult bargain to get out of bankruptcy. Here we are trying to do exactly what we said we were going to do. We're trying to do exactly what Voyager was doing. And by the way, Your Honor, Voyager, they just announced in a status update, they've settled with their insurers and they're receiving millions of dollars in payment from their insurers. We don't know the details of it yet. But it seemed like that was a successful option that we

were just going to utilize from them in a creative way. And now we're here being told, oh, actually the plan doesn't permit you to do that. And to be blunt, our feelings are We think that other cases or other judges, other professionals are certainly watching this because it goes to, you know, what happens when you make a deal? Should you be watching out for this kind of gotcha behavior or is bankruptcy a forum where deal-making is prioritized and effectuated? And certainly we think that Voyager is watching because essentially what the insurers are saying is this court, not only can this court not enforce its plan, but maybe Voyager can't, and maybe that settlement that was just reached won't have proved.

So there are long-term implications here, and that that's beyond just the $22 million that we believe should come back to customers of BlockFi in these cases. Your Honor, I have a number of other comments that really go more to remand, and I would love to just delight these issues if that works for you. I think I've addressed a number of the categories of arguments that were addressed with Insurance Council. Be guided by you where you'd like me to go next. Let me ask a couple of questions.

Counsel, did you want to be here? I just wanted to say, Your Honor, if I may, it would be easier for me to respond contemporaneously to the points that he made and then move on to the remand arguments so that I can be done with my piece and Mr. Benjamin can take over. All right. Before we get to the remand arguments, let me understand what the wind-down debtor's position would be. If rescission were successful, what is the impact on the understanding?

underlying contract and the availability of coverage for the offices in the way? Answer, I might overcomplicate this. In our state court action, there are two claims for rescission. One is rescission under the express terms of the contract where if certain conditions occur and you make a demand, the payment should come back. There's another rescission under a concept under New Jersey law, which we generally call illusory coverage. which is basically where you tell the court,

this is not insurance because there was no transfer of risk, and under those conditions, policy can be recovered. What was always contemplated, I think now directly answering your question, if we get the money back, generally, I suppose there's a world where the insureds, the management personnel, would still make a demand against the insurers under the policy and I maybe you're considering some world where the insurers have to pay twice I don't think that's where we're headed and that seems like a perfect issue for mediation

but frankly we don't feel like mediation is fruitful when the parties are saying oh you don't have the bargain you thought you had and you have no rights well I'm trying to understand I thank you let me be more specific I'm trying to clarify the language in 5F the debtors required to assume the insurance contract in their entirety which is I think nobody's going to argue that that's basic bankruptcy law and those contracts open quotes shall not be amended modified waived release discharge or impaired in any respect close close and the debtor or wind down debtor shall not terminate or reduce the

coverage under any V&O liability insurance policy a lot of that language wasn't for the benefit of the insurers he was to say it was for the benefit of the insureds the directors and officers and I'm concerned with you know or impaired how do you reconcile rescission of the contract with not impairing the coverage that would be available under the policy that's that's the hurdle I'd like you to mount. Sure. I think it's, first of all, expressly modified by the paragraph we added, which I'll quote

here, notwithstanding any provision of this plan to the contrary, neither assumption of any insurance contracts nor any outstanding obligation of the debtors or wind down debtors or insurers shall or shall be deemed or construed to in any way preclude the wind down debtors from commencing, prosecuting, introducing any evidence or making any argument in connection with, reducing to judgment or collecting upon any causes of action against any insurers in respect of any vested causes of action, including but not limited to any avoidance action. So we felt that that was more powerful than any rights granted to the insureds under the proceeding parts of that provision of the plan.

So let's be clear. What the wind-down debtor is saying is that as part of the bargain, as part of the settlement, we agree to assume the insurance. contract. There were no cures, the false to cure, etc. And you would not terminate it, you would not reduce the coverage. But you were still permitted to take steps such as to bring suit for rescission, which might actually impair the coverage. I mean, certainly rescission is going to impair the coverage if the policy is no longer available to the insureds. So, Your Honor, functionally what happened is that this was drafted to be, I think,

and we were not debtors counsel at the time, but there's language that you often see in bankruptcy plans that conforms to expectations of insurance neutrality, which is to say there's language that says the policies are assumed and they proceed unaffected. And there's a long doctrine of insurance neutrality. It doesn't, there's actually, as part of major litigation about this in the Boy Scouts, It doesn't say you have to be insurance neutral. What it says is if you have an insurance neutral plan, insurers don't have standing to object to confirmation. And when the deal came together around this,

we didn't take out the insurance neutrality language. We didn't take out a lot of that. We just added the notwithstanding clause to clearly reflect that we intended to rescind this and that that would have the effect that it had. And we knew that it would be complicated, and there is this potential that we have a three-way issue between ourselves and the insureds and the insurers. And again, we think that's a good issue for mediation.

And along similar lines, apart from rescission, the wind-down debtors are pursuing a fraudulent transfer claims under state law. Yes. For recovery of the premium. In essence, saying that the in the insurm, insurers receive more value than the debtors gave. Or you could switch it around. The debtors did not receive equivalent value for the premium that was paid. If there is a recovery of the premium or a portion of the premium, what is the

wind-down debtors position as to whether or not that impacts whether the policy is still in effect and whether the insurers have obligations under the policies? Does that impair the coverage for the directors and officers? Your Honor, we'd like to get the premium back. We would like that payment or some portion of it. We don't have a position at this time on how that impacts the insurers. Under fraudulent transfer doctrine, if we don't have to fully avoid the transaction under certain circumstances,

we could recover some portion of the payment and let the policy. continue to be in effect to benefit the insurers, there's a lot of different ways that that could work out. So one doesn't necessarily lead to the other? Is that a fair statement that the policy can remain in effect even if the insurers are obligated to return a portion of the premium? Yes, Your Honor. Similarly, we could receive an award of damages for breach of the contract and the contract

would remain enforceable otherwise in favor of the insureds. All right. Is there anything else you wanted to add in response to my questions? If not, I would be inclined to hear them discuss this issue and then move to the remand. I yield the floor. Thank you, Your Honor. Thank you, Your Honor. I appreciate the opportunity to respond contemporaneously, Rachel Albany's DeL.

like Piper. There's a few specific points that I wanted to respond to. Your Honor, right off the bat, Mr. Axelrod admitted that they knew about the fraudulent transfer claims since early in the case, and they wanted to try and avoid the premium then. That's a classic example of when the contract assumption defense applies. I couldn't have said it any better myself. He also mentioned that typically insurance is cheap or something along those lines. That's not true.

The coverage was purchased on the eve of bankruptcy with the public knowing all about the issues related to BlockFi, and that meant that the policy necessarily would be more expensive than if there weren't all of this hair on the case. He mentioned a similar deal in Voyager, but that is not at all relevant because the insurers in that case were part of the settlement. There's no grand bargain here with the insurers. They're not part of the committee settlement. It doesn't say rescission of the policy anywhere in the plan, confirmation order, or

any other document. It's deliberately obtuse. The DNOs, Mr. Axelrod said, the DNOs maybe got this policy. Talk about a gotcha. That's the definition of one. That's not what the confirmation brief says either, and it's not what Mr. Vogel said at the confirmation and committee settlement hearing. Your Honor asked about the impact of rescission and said that you can't reconcile rescission with not impairing coverage under the policy. That's exactly the point. The carve out doesn't help them. Lastly, the fraudulent transfer recovery of the premium, Your Honor, you ask, would the policy still be in effect? And does that impair the coverage? And the answer is yes, it impairs the coverage. The policy is no longer available to the insurance in that

Why is that? Let me confer with my insurance colleague here. All right, well, this is going back to law school. It fails for lack of consideration, Your Honor. Well, isn't the concept underlying a fraudulent transfer as you're getting the excess, you're recovering the value, the difference between what the debtor should have received in value compared to what it paid out? It doesn't mean it didn't pay out anything, and it doesn't mean that it didn't mean that

didn't get some value there is consideration it's just that the value of the policy what the wind down debt is arguing is that the value of what they paid 22 million dollars for was a near 22 million they can only recover the difference in between what value the debtor did receive in having this coverage versus what it should have paid for that coverage your honor their complaint seeks to the return of the entire premium and I think that's more of a substantive question about relative value and whether the policy remains in effect and it's available for the insured.

So, you know, I might ask that my colleague, Mr. Benjamin, address that in more detail. All right. Did you want to address that at this point? Sure, Your Honor, just briefly. Or, or Ms. Roof? Yes, she. Yes. Yes.

Yes. Your Honor. So, good afternoon, Your Honor. or Stacey Ruforn or Hari Mangle for the movements. Just from the insurance perspective, certainly the rescission, right? A rescission voids the policy at an issue, as if there never was any policy

and there can be no protection and no coverage for D's and O's. So when in the plan, it says the wind-down debtor will take no action to terminate or eliminate coverage available to the D's and O's, that's wholly inconsistent with the rescission and cause of action. Because that unquestionably terminates the coverage available. So, you know, there's just no way to reconcile that.

One has to prevail over the other, and given the language of 5F, I think it's the language that preserves the coverage, right? That they agreed with the D's and O's, and they've said these D's and O's are helping them. And they made a bargain, they made an agreement with the D's and O's, and part of that agreement was we're not going to impair the coverage. With respect to fraudulent transfer, you know, the consideration was the bargain at the time in the meeting of the mines.

The insurers were willing to issue a policy for the premium given, and if that premium was not given, there might not have been a policy. So there's no meeting in the mines there, and even a partial refund of the premium would cause the contract to fail for lack of consideration because there was never a meeting in the minds as to what the what the value of the contract was all right thank you did you want to have somebody somebody in the back your honor sorry Dan Gold from Sherman serving on behalf of the insurers I didn't realize they were going to be building into all of these issues as part of this first motion so I didn't

appear earlier but I would like to be heard briefly I'll give you an opportunity let me keep the arguments back and forth mr. Oxlerod did you want to add actually mr. I do want to ask, and I'll give you a moment to confer, if you could respond to the argument raised with respect to the citations or the authority that was given that you cannot assume and then still pursue a fraudulent transfer or a preference with respect to any premiums. MR. One moment, please.

MR. Your Honor, could we, to clarify the record, could you repeat the question, please? I wanted you to address the arguments and the citations to authority that you cannot do both assume and recover preferences or fraudulent transfers. That assumption precludes the ability to pursue a fraudulent transfer with respect to premiums or obligations. On that argument, we wrote language into the plan that says here's what assumption means in this case and we're preserving that right and so it comes down to them essentially

saying either that language in the plan is not effective or this court can't enforce the bargain that was confirmed so you're respectfully we feel like the language in the plan is quite clear your position would be that the insurers should have objected it to confirmation that's right and I don't know I'm almost afraid to ask this where all the insurers are noticed as far as the confirmation hearing and the terms we certainly believed so but also they're here and forced trying to enforce the plan they're not saying I didn't receive notice of it that irony all right continue please I didn't know did you have anything else you

want to add I think we just add to clarify I mean there's language in the in the policy that voids it ab initio certain conditions are met we're trying to enforce that I think we agree that's inconsistent with you know insurers being obligated to provide coverage thereafter but there are many ways that a court could rule on our claims including for instance that if they've made this policy in bad faith they could be precluded from denying coverage if part of the premium is returned I don't think we're prepared to say that there that our claims in there entirely are inconsistent with any ongoing coverage to the

insurers and that's that's never been our view All right, thank you. May I have one moment of sir reply? One last, and then I'll hear from the Council for the insurance. Thank you, Your Honor. Rachel Albany, CLA Piper. He said that the insurers should have objected to the plan. I heard him say moments ago that under the insurance neutrality concept,

they might argue that the insurers don't have standing. But putting that aside, Your Honor, the plan provided very clearly, and the insurers reasonably thought that the policy was being assumed, and that the debtors would remain fully liable based on the language, the plain language and express language of the plan, and that's it. Thank you, Your Honor. All right. I won't know.

In 18 years or so of experience, I've never had a situation where the insurers are reluctant to object to a plan and see where it falls out. Let me hear from counsel for the insurers. Thank you, Your Honor. Dan Gold from Sherman and Sterling. on behalf of Zach Prince and Florea Marquez. And I also represent all of the individual defendants in the securities action that is intertwined

with some of these issues. There were just, I think, two points on this that I wanted to make sure to raise from the perspective of the insurance. The first was that there's been a lot of talk about assumption. But as Your Honor noted, the plan, it doesn't only involve assumption of the policy. There's language about, as your honor noted, the coverage not being reduced or impaired.

And there's also language that the former directors, officers, managers, and employees of the debtors who served in such capacity at any time before or after the affected date shall be entitled to the full benefits of any such policy for the term of such policy subject in all respects to determine the conditions thereof. So from the perspective of the insured, that language is important, has meaning as part of the bargain. And any cause of action that's been brought that seeks to, or that would result in eliminating coverage for the insurers, is from our perspective inconsistent with the plan. And sort of putting the car before the horse a little bit to sort of, I think, maybe talk through how different theories might impact the coverage, but from the insurance perspective, we are

under the plan, under the confirmation order entitled to the full benefits of the policy, regardless for what happens in the other lawsuit. I know my friends on the carrier side don't agree with that. I don't think that's an issue for today, but I want the insurance perspective to be clear on the record. All right, thank you. Let's move, if we may, to remand. Let me hear from the line down, Dennis.

Thank you, Your Honor. I will just one quick note on what we said. He did say subject to the terms and conditions thereof. So if a state court were to find that the terms of that policy void it, it would seem that they're not entitled to cover. Let's talk about the remand motion, as Your Honor requested. The state court action that we filed as HUD Hudson, New Jersey Superior Court for Hudson County, HUDL-205. 25-24. And there has been a jury demand in that case, which is important for reasons they'll get to. There's six causes of action in our amended complaint. There's really three categories of claims.

One is, as we've mentioned, there's claims for breach of contract and for enforcement of the oitability provision of the policy itself. There are fraudulent transfer claims under New Jersey law via Section 544 of the bankruptcy code, and then there is a rescission claim on basis of a loser coverage. So really three buckets of claims. There's contract claims, there is illusory coverage, and there's fraudulent transfer. These are all state law claims. And very notably, for decades, insurance companies in this country have advocated before Congress, for many regulatory bodies, that insurance regulation should be a state law issue. The result is that all of these claims, mostly there's state common law but some are state statutory law the idea of

what is reasonably equivalent value when you for the purchaser that purchases an insurance policy that is a state law issue the idea of whether this is really insurance at all that's a loose recovery whether there has been a transfer of risk such that an insurer can fairly be entitled to keep its policy that is a state law issue the only part of these claims and of course there's the contract interpretation that's a state law issue usually reserved for the state coverage court. So the only part of this litigation that derives from federal law is the wind-down debtors authority to

bring what is ordinarily a state court fraudulent transfer claim brought by a creditor to stand in that creditor's shoes as with the powers of a trustee or a debtor under the bankruptcy code. I'm going to come back to that in a minute. So as a preference preface to all this discussion, removal statutes are to be strictly construed against removal and all doubts are to be resolved in favor of remanding back to the state court, which is to say all doubts should be resolved in favor of this court abstaining from the exercise of jurisdiction so that litigation can proceed in state court where it began.

The insurers filed a notice of removal, basically saying that because of the Section 544 issue and later they've asserted these plan enforcement claims, that makes it a bankruptcy law issue. Notably, their notice of removal also does not consent to this court entering a final order, and they have not consented to this court hearing a jury trial, nor has the district court under what I understand are applicable rules here.

So when we talk about abstention, abstention can be mandatory or discretionary. I won't rehash all the legal standards that are in the paper, but they cover a lot of the same ground, and if this court were to observe that a party fails satisfy one element of the mandatory abstention standard we would simply point to a discretionary standard. Either way, the core question that comes up on extension is, are these really bankruptcy claims or are they state law litigation? And we think that it's very

clear that this is state law, state court litigation. Again, contract claims, state law, illusory coverage, state doctrine, fraudulent transfer, these are state claims. We're bringing because we're entitled to do so on behalf of the creditors who ordinarily would bring those claims. Then there's fact that we've made a jury demand and neither party consented to a jury trial, not a typical bankruptcy court practice with all respect to your honor to hold a jury trial and the cases are very clear that even the right to a jury trial points to the exercise of discretion to abstain from jurisdiction. The argument from the insurer seems to be, you know, everything around the plan.

don't want to rehash that. We think the plan plainly allows us to prosecute this litigation per se. And getting past that, they argue that the Section 544 claim makes this more of a bankruptcy-feeling litigation. We think that that's just wrong. The circumstances of the bankruptcy actually ease the fact-finding in some ways for the state court. It'd be pretty tough to argue that on November 17th, 2022, Block 5 was a solvent entity for purposes of a fraudulent transfer dispute. And again, what does this litigation come down to? It comes down to what does the contract say? What does an insurer fairly need to provide in exchange for a premium? And was this a fraudulent transfer under state law? These just aren't questions of federal law. They aren't

questions of bankruptcy law unless you get to the plan enforcement issues, which again, not going to go back to. So mandatory and discretionary abstention. I'll just talk through the factors with mandatory abstention first. First, that these are state law claims. I think I've done that. Second is that jurisdiction does not arise in or arise under the bankruptcy code. These are technical terms, as Your Honor is well aware, I'm sure. In our motion at footnote 6, we cite some cases where bankruptcy courts have said,

if all you got is 544B and everything else is state law, I'm not going to exercise jurisdiction. And some of them say it's not really arising under, some of them don't go into that, they just say, I don't want this case. We could cite more cases to that effect. The bottom line is when we're looking at cases where, again, a lot of state court claims, and the only tie is 544B, the bankruptcy courts, under either standard, don't like to take that for very good reasons. At any rate, doubts are to be resolved in the favor of remand, and we think if under the circumstances,

if that's what's tying us to the bankruptcy, the fact that we're collecting under 544B of the bankruptcy code, it does not need to be in bankruptcy court just for that reason. The third element of mandatory abstention is that the federal courts would not have jurisdiction over the claim but for its relation to a bankruptcy case, relation to being the third category of bankruptcy jurisdiction. We think that if there's jurisdiction here at all, it's related to we're trying to collect money for creditors in a post-bankruptcy scenario. So there are actually cases that say that's not even related to jurisdiction.

There are cases that say it is. We don't need to get into that. We feel if we're in bankruptcy land at all, it's for that. It's to collect money for customers. The fourth element of the standard is that we've commenced the case in a state forum of appropriate jurisdiction. I don't believe that's disputed here. And then the fifth is that the action can be timely adjudicated in a state forum. There seems to be a dispute here.

I'd love to come back to this if we have to, but basically there wasn't an evidentiary showing that that's not the case. We haven't compared backlogs. They did cite to a website that's unsubstantiated that actually showed that there was at least a pandemic year of backlog in Hudson County, but it seems to be reducing quite rapidly. We don't think that there's a fair assertion that the state court cannot timely adjudicate this matter. And as we've said, endlessly, I think this is a... state court type of matter. The state courts are very used to hearing insurance litigation. So those are the five factors for mandatory abstention. We think we've met them. If not,

discretionary abstention comes into play. There are numerous factors. There isn't a single Third Circuit standard that can be delineated in a tight number. But basically it comes down to is this state law, is it federal law? Again, we think it's really clear. One of those factors is, is there a right to a jury trial? Not only do we have that right, which is quite important, but we're exercising it. We want this before a jury. So we think that the insurers, excuse me, give me one moment.

Sure. I'm losing my voice, Your Honor. I apologize. Take your time. So we think that looking at these factors and when we filed their amend motion, it really necessitated the question of why we're even here, because the factors point so squarely to this being state court litigation.

And the answer is really presented in the enforcement motion. That's what ties all of this together. And in the remand response, what the insurers say is, well, look at what the plan says. There's all of this dispute about whether they can bring these claims at all. Well, Your Honor, we're here about what the plan says. And we'd like a decision on that. So we don't appreciate the implication that this court could rule on the enforcement motion in our favor,

and then they'd go back to state court and somehow argue all that again as a defense to the substantive claims. We think this will be resolved, and that that shouldn't be a basis to keep this litigation in the bankruptcy court itself. So I think that brings me to the end of my comments. I don't want to re-argue the plan enforcement motion, but we felt that the deal was very clear What our claims were what we'd be bringing what the effect would be we're trying to get this 22 million dollars back so that it can be distributed to customers But otherwise we think this is classic state court coverage and policy litigation that should be in the state court For all the reasons I've just said and I'll reserve the balance of my time. Thanks your honor

All right, thank you Now, insurers never want to stay in bankruptcy court. You're always looking to run back to state court. What's different now? What does that tell you, Your Honor, about how we feel about this? Robert Benjamin, Kaufman, Borgeson, counsel to National Union Fire Insurance Company at Pittsburgh, PA, and I know that we're the ones who filed the opposition to remand

and the other insurers have all joined in that one brief. Your Honor is exactly correct. We never want to be in bankruptcy court, But this is where this case belongs. What the wind-down debtors have done is they have drafted a complaint in state court that they absolutely must know is violative of Your Honor's confirmation order and the plan, and that it seeks in a state court proceeding to which none of the directors and officers are parties to remove their coverage. That's what that seeks to do. It seeks to rescind the policy.

It seeks to remove the consideration for the policy. it seeks to amend the policy, it seeks to do all the things that the plan says that they're not allowed to do. So it's really not a surprise that they don't want to be here. Your Honor, it's important to remember for purposes of jurisdiction who all these parties are and what is it that we're talking about litigating. We're talking about a wind-down debtor created by this court through the plan for the purpose of affecting the plan. That's their entire purpose is to affect the plan. in this court, of course, retain jurisdiction over disputes under the plan.

We've just spent an hour or so discussing all these issues of what the plan covers, doesn't cover, what does it prohibit, what does an assumption under bankruptcy law mean for purposes of pre-petition, post-petition. This is all bankruptcy stuff, to steal your phrase, as a humble insurance lawyer, that's all bankruptcy stuff, that's not insurance, and that's what we've been talking about for an hour in this case. What is it that we're talking about litigating over? We're talking about litigating over property of the estate. The insurance policy, and I think the case law is fairly clear

that the policy itself is property of the estate. Different courts and insurers can certainly have disputes, and I've been counsel on several of them, over whether the proceeds are property of the estate, and I'm sure that that's something that maybe comes up when we start talking about the stay lift aspect of today's proceeding. But the policy itself is property of the bankrupt estate. That's unquestionable.

And that is something that the that the mind-down debt are assumed under the plan. So what they are seeking to do is to litigate whether there is in the amount of property of the estate. I think they just said they want to bring proceeds of the policy, the premium, excuse me, the premium under the policy back into the estate. That's through a rescission action. They want to, and there's a very big difference between rescission and the operation of the policy. They argue about a provision in the policy. We disagree that entitles them to, under the terms of the policy,

enforce the terms of the policy, and void the policy, that would be pursuant to the policy's terms. That's not rescission. They're also seeking, separately, to rescind the policy. And I'm not sure what the standard was that counsel referenced in terms of rescission of the policy. Recision of the policy is based on a misrepresentation of during the underwriting, which, of course, all of that would have been waived once they assumed the policy under the plan. So, Your Honor, we can go through the various factors as they are for mandatory abstention

and the court's bankruptcy. I know that they've been well briefed. We obviously disagree with the majority of those factors. The complaint certainly does not arise solely in state court claims. They use 550 and other bankruptcy provisions, while other courts have hesitated in finding that those provisions alone are sufficient to have a rising in or rising under excuse me, a rise in or riding under jurisdiction. I want to make sure I had it right in my head. As I said, I'm just an insurance lawyer. I want to make sure that they have that they have

that jurisdiction. Those are not cases brought by a wind-down debtor over policy over property of the estate. Those are cases that deal with employment disputes and other types of litigation that have nothing to do with the property of the estate and are not being brought for purposes of enforcing

the plan and recovering for the plan. The other factors, again, all of those factors that were referenced, it's their burden to establish those factors. It's not ours. They've not done it. and we've gone through the various pieces in our brief. I don't know.

I think we've been here for quite a while. We can go through them all if you'd like, but if you have specific questions, I'm happy to. The court has both published and published decisions on abstention, mandatory and discretionary. I know the standards and the various factors. Post-confirmation isn't the threshold for related jurisdiction, even higher, other resource in the national. It sure is, Your Honor. Your jurisdiction, the jurisdiction of this court is narrowed post-confirmation.

But it doesn't modify the aspects of jurisdiction that are important here, which are the enforcement interpretation of the plan. And that's what we've been talking about for over an hour here now, is what does this plan mean? What are all these various notwithstanding clauses mean? Does the specific statement that they will not do anything? to terminate or otherwise reduce the coverage under any DNO liability insurance policy. And that's a pretty clear statement.

I don't know what that means if you're then going to say, well, actually, we can maybe do other things under other policies or other vague causes of action. You're really undercutting with that statement must mean nothing. It's totally illusory if they want to talk about illusory. Again, I'm sure that the D's and O's would have quite a lot to say about that and whether they got the benefit of their bargain when they joined in on this place. plan and not objecting to this plan. So I think Your Honor certainly has the jurisdiction, the retained jurisdiction, and that

these – the claims that the debtor – the wind-down debtors bring both the rise in and a rise under the bankruptcy. All right, thank you. Response? MR. Thank you, Your Honor. I'll respond to three particular comments that were made. First, the general point, who are these parties?

What's going on? Is this really a bankruptcy issue? I agree. There are bankruptcy plan issues. They've brought them up. Let's have a ruling now. Let's get this court's view on what the plan requires of the parties and take that to the state court.

I think that we can resolve that kind of issue today or through an order of this court. And we felt it shouldn't even be an issue, but we're happy to be here today to talk about the plan. The next argument seems to be that because the policy, itself is property of the estate, there's bankruptcy jurisdiction. Probably, yeah, it's related to jurisdiction. These are causes of action that belong to the bankruptcy estate. We're trying to get money that we believe should come into the bankruptcy estate as a proceed of the cause of action. That's very separate from whether this type of action arises under the bankruptcy code.

It's very different from, it's certainly not dispositive of, all the factors of abstention. There is a comment that there are cases about section 544 that are not really avoidance actions where you're trying to recover money, they're more about employment disputes. I don't know what that's about. I can tell you Stowe, STOE is the Third Circuit formative case

that lays out the factors for abstention. And that was a case that involved, I think, an employment dispute. But we cited a case called Trooper and Librand in our motion. That's where the court said, you know, if all you got is 544, go back to state court. Since you brought it up, here are a few more citations for the record. Hopkins v. Plant Insulation Company 342B.R. 703, bankruptcy district of Delaware, 2006. Breed Technologies v. Allied Signal, Inc. 128, federal supplement second, 743, District of Delaware, 2001.

It was reversed on other grounds by the Third Circuit at 298F3, 263. But the Third Circuit in that decision actually said that the bankruptcy court was well within its authority to remand on the basis that 544 was an insufficient exercise of jurisdiction to stay in bankruptcy court. There are many cases where courts declined to exercise jurisdiction under simply on the basis of a 544 and 550 claim. And since counsel brought out 550 is the section of the bankruptcy code that actually says you can recover once you avoid a transaction under 544 or 547 or 548, they go hand in hand. Those are the only bankruptcy code sections that are cited in our complaint. I'm fairly certain. Your Honor, I think I've responded to counsel's comments unless you have anything further. I do not.

Thank you, counsel. Thank you. I thank all counsel for argument. With respect to the remand motion and the motion to compel compliance with the confirmation order, to enforce the confirmation order, as I've indicated, I'm going to reserve, consider the arguments that have been raised, and come out with the decision hopefully in the next few With respect to the third motion on stay relief, there we are. I've read the motion, the limited objection and response to the limited objection.

Here's where I'm coming down on it. I'll throw out – I tried my hand at some language. it some language that I thought would work in other words I would grant the motion as requested and then add a paragraph you'll tell me by jumping up and down whether the paragraph works or not assuming the motion is granted for purposes of clarity the court notes that it is not ruling on any assertion of coverage and that the ruling is limited to authorizing movements only to assert such rights, if any, to access the reference excess director and officers' policies for defense costs.

Moreover, wind-down debtors reserve their rights, if any, to the excess policy. Let me suggest this. Think about it. If you all can come to – differing language. I'll read it one more time for everybody's benefit. You can try to avoid you having to pay for a transcript, although we know you're ordering the transcript anyway today. For purposes of clarity, the court notes that it is not ruling on any assertions of coverage and that the ruling is limited to authorizing movements only to assert such rights, if any, to access the reference excess director and officer's policies for defense costs. Moreover, the wind-down debtors reserve their respective rights, if any, to the excess policy.

It was my attempt to be as vanilla as possible to include reservation of rights. But we're here. You've come. So if you want to add or take issue with... Thank you for the record, Kenneth O'Hollett of Brown-Rutnik. Your language does solve a large number of our issues. I think there was one key issue we were a little bit concerned about, that we wanted to make sure that we – we just spent the last hour and a half over Dickering Language, want everything to be very clear and avoid any sort of implications.

We want to make sure that there's not an implication. that we are agreeing that the policy exists because we were concerned about a certain argument that might be raised, which is our non-opposition was taken as the D&O carriers make payments to the D&O insurers, and we are now stopped because we didn't object to those payments. We want to make sure that – I think what Your Honor laid out is what we were trying to get at, And under the circumstances, we spilled a great deal of ink trying to get to it to avoid, you know, another hearing like we've just had. But we want to make sure that there's no suggestion that we are stopped by anything, by agreeing to the order or not opposing the order, that anything the D&O carriers do in response to an assertion of coverage somehow limits our rights.

Let me hear from the moving on the motion. Council, I think your language may accomplish what we were hoping to collectively accomplish. I hear some concerns perhaps being raised from the carrier side. But I think the language you read would be acceptable to move this. Let me hear from the carrier. Thank you. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr. Mr.

Mr. Chairman, Calforderson, Ryan, Counselton, National Union. The only amendment that we would seek is the insertion of the word covered before defense costs in your proposed language. Policies for coverage defense costs? Covered. Covered. Covered. C-O-V-E-R-E-D.

Let me suggest this, all right? I'm going to ask Moveance counsel to submit a proposed form of order. order, including the language, in the interim, wind down debtors, counsel, insurers, counsel. If you want to suggest modifications to each other, circulate it. If you can't agree on it, we'll have a call. It'll take five minutes, and I'll just call it depending upon what the remaining language dispute is.

I just wanted to try to cut off argument on it. So work with what I have and the word covered. Fight about it among yourselves in a few emails. If you can't agree, just come back to me quickly. And we'll have a call. Other than that, I thank you for argument. I don't see any hands raised for those watching and remotely.

So we'll be able to.