MF Global Holdings Ltd. v. Allied World Assurance Co. (In re MF Global Holdings Ltd.)
Docket: Case No. 11-15059 (MG); Adv. Proc. No. 16-01251 (MG)
Court: United States Bankruptcy Court, S.D. New York; January 31, 2017; Us Bankruptcy; United States Bankruptcy Court
The memorandum opinion and order issued by Judge Martin Glenn addresses the violation of the Barton Doctrine by five Bermuda-based insurers in the context of an adversary proceeding involving MF Global Holdings Ltd. (MFGH) and its subsidiaries. The plaintiffs, MFGH as Plan Administrator and MF Global Assigned Assets LLC (MFGAA), seek recovery of insurance policy limits and damages due to the insurers' refusal to pay following a global settlement related to MDL litigation concerning the collapse of MF Global in October 2011.
The Bermuda Insurers initiated parallel proceedings in the Bermuda Supreme Court, obtaining anti-suit injunctions that barred the plaintiffs from pursuing their claims in U.S. court. They also sought to compel arbitration based on existing arbitration clauses in their errors and omissions insurance policies. The plaintiffs argue that the U.S. court is the appropriate forum, not arbitration in Bermuda.
The U.S. Bankruptcy Court previously issued temporary restraining orders and a preliminary injunction to prevent the Bermuda Insurers from enforcing these anti-suit injunctions, ultimately holding them in contempt for non-compliance. The plaintiffs contend that the actions of the Bermuda Insurers breached the Barton Doctrine and the Bar Order from the August 10, 2016 order approving the Global Settlement. Following a hearing on January 23, 2017, the Court ruled that the Bermuda Insurers indeed violated the Barton Doctrine by their actions, ordering them to dismiss their cases in Bermuda without prejudice. The written opinion elaborates on the rationale behind these rulings.
The Bermuda Insurers complied with court orders and discontinued their actions in Bermuda. A case management conference is scheduled for February 23, 2017, to discuss the briefing and hearing schedule for the Bermuda Insurers' motions to compel arbitration. A key issue is whether the Bermuda Insurers violated the Barton Doctrine by initiating proceedings against the Plaintiffs in Bermuda without the Court's permission. The Court determined that it does not need to address potential violations of the Bar Order at this time. Following the issuance of a Temporary Restraining Order (TRO) Opinion, which prohibited the Bermuda Insurers from enforcing certain terms of the Bermuda court's orders, Allied World Assurance Company Ltd. and the Iron-Starr Insurers submitted legal memoranda opposing the Bar Order and Barton Doctrine. The Plaintiffs also filed legal documents asserting ongoing violations of the Bar Order by the Bermuda Defendants, including affidavits and exhibits.
Background details include the confirmation of the Amended and Restated Joint Plan of Liquidation under Chapter 11 on April 5, 2013, with MFGH as the Plan Administrator responsible for liquidating assets and distributing to creditors. A Sale and Assumption Agreement approved on August 19, 2015, outlined the transfer of certain rights from MF Global Inc. to MFGH, including claims related to errors and omissions (E&O) and directors and officers (D&O) insurance policies. MFGAA, established on August 26, 2015, as a limited liability company under Delaware law, was assigned claims and rights from MFGI and is managed by MFGH.
E&O insurance policies from the Bermuda Insurers include mandatory arbitration provisions stipulating that disputes related to these policies will be resolved through arbitration in Bermuda. However, the interplay between arbitration law and U.S. bankruptcy law complicates the decision on whether specific disputes must be arbitrated. Courts must apply a four-part test when considering motions to compel arbitration in bankruptcy contexts: (1) whether there is an agreement to arbitrate, (2) the scope of that agreement, (3) if federal statutory claims are involved, whether Congress intended those claims to be nonarbitrable, and (4) the decision on staying other claims if only some are found arbitrable. Waiver, particularly regarding whether claims are core or non-core, is a significant issue in arbitration disputes related to bankruptcy. The complexity of defining core versus non-core claims can arise in insurance coverage disputes.
The Plaintiffs assert that the Bermuda Insurers' demand for costs and attorneys’ fees in the Bermuda proceedings constitutes a violation of the Bar Order, as it represents a "claim" against them. They further argue that the Insurers are unlawfully challenging the insurability of claims under the Global Settlement, which the Bar Order prohibits. The Plaintiffs contend that MFGH has rights under the Global Settlement to pursue assigned claims under the E&O policies, contrary to the Insurers' claims that only MFGAA can do so.
Additionally, the Plaintiffs argue that the Bermuda Insurers have infringed upon the Barton Doctrine, asserting that MFGH and MFGAA possess rights against the Insurers under the Plan, and thus are entitled to protections under this doctrine while marshaling estate assets. MFGAA is described as a vehicle established by MFGH to hold assigned assets and work towards liquidating those estate assets.
The Bermuda Insurers acknowledge their awareness of the Barton Doctrine, having cited relevant case law during their submissions to the Bermuda Court. They argue that the Bar Order's plain language does not prevent anti-suit injunctions, asserting that the Bar Order's primary intent was to safeguard the Global Settlement from collateral attacks. They claim that their actions in Bermuda do not violate the Bar Order's spirit, as they do not seek to challenge the Global Settlement.
Regarding the Barton Doctrine, the Bermuda Insurers contend that their proceedings do not constitute a suit against a court-appointed officer in an official capacity, as they are merely defending a pre-existing arbitration clause. They argue that MFGH, while a court-appointed officer, lacks the authority to pursue recovery of the insurance policy proceeds, making the Barton Doctrine inapplicable. They further assert that the Doctrine is typically invoked in different circumstances, such as trustees committing malpractice or breaching fiduciary duties, and that their proceedings do not interfere with creditors' claims or estate administration since MFGH is the only relevant estate and does not hold the policy proceeds.
The legal standards indicate that bankruptcy courts retain post-confirmation jurisdiction to interpret and enforce their orders, as established by the Second Circuit. The Barton Doctrine, developed by the Supreme Court, prohibits suits against court-appointed receivers without the appointing court's permission, extending its application to bankruptcy and arbitration contexts. This doctrine aims to protect receivers from personal liability and to uphold the administration of the estate by the receivership court.
The Barton Doctrine serves to centralize bankruptcy litigation and oversee court-appointed officers, requiring anyone wishing to file suit in an international forum to obtain leave from the appointing court. It has been applied by various courts, including the Ninth Circuit, which barred claims against unsecured creditors' committee members due to their aligned interests with the bankruptcy trustee. The Yellowstone court emphasized that lawsuits against such committees could disrupt bankruptcy proceedings and hinder the members' duties. The Sixth Circuit extended the Doctrine's protections to counsel for trustees, viewing them as the "functional equivalent" of a trustee, thus ensuring that the leave requirement cannot be circumvented by suing the trustee's attorneys. The Eleventh Circuit adopted this functional equivalence test for officers appointed by the trustee. In a related case, the District Court of Arizona found a Bermuda-based insurer violated the Barton Doctrine by filing action against a plan trustee. The Second Circuit has not defined a test for the Doctrine's application to parties other than trustees or receivers, but some district courts have recognized its protection for both trustees and their counsel. When a violation is found, the remedy is the cessation of the improper action.
In a related discussion, a Bar Order permanently bars entities not party to a Settlement Agreement from asserting claims related to specific insurance payments. The question of whether the Bermuda Insurers violated this order hinges on whether their Bermuda proceedings constitute an assertion of a claim against the Plaintiffs or challenge the Global Settlement's reasonableness. The Insurers argue their actions are defensive and do not directly challenge the Settlement. Although they initially sought indemnity costs in the Bermuda proceedings, all related anti-suit injunctions have since been vacated.
The Court determines that the Bermuda Insurers violated the Barton Doctrine by initiating actions in Bermuda without first obtaining permission from this Court, making it unnecessary to address potential violations of the Bar Order. MFGH, serving as Plan Administrator, and MFGAA, created under the approved Plan and Sale and Assumption Agreement, filed an adversary proceeding against the Bermuda Insurers to recover funds for creditors, acting within their official capacities. The Bermuda Insurers’ actions disrupted the administration of the estate, infringing on the interests of this Court and the Plaintiffs. The Bermuda proceedings have led to fragmented litigation across various jurisdictions, delaying creditor distributions and undermining the intent of the Barton Doctrine, which is designed to protect court-appointed officers from such interference.
The Court emphasizes that the Barton Doctrine applies broadly to prevent lawsuits against court-appointed officers, as illustrated by the Eleventh Circuit's rulings. MFGAA, as the party entitled to collect on the Bermuda-issued policies, is aiding MFGH in fulfilling its official duties. The analogy to the Boston Chicken case is drawn, where a Bermuda-based insurer similarly obstructed a plan administrator's efforts without court approval, leading to a ruling against the insurer for violating the Barton Doctrine. Hence, MFGH and MFGAA's actions in pursuing claims against the Bermuda Insurers align with the objectives of a bankruptcy trustee in administering assets for creditors.
The Bermuda proceedings were initiated to restrict the Plaintiffs following the filing of their Complaint, which was done in line with their responsibilities. The Barton Doctrine safeguards the Plaintiffs in their court-sanctioned actions, ensuring they are not hindered by litigation from dissatisfied litigants. If trustees, like the one involved, are forced to defend against claims from disgruntled parties, it could obstruct their duties to the court. The Bermuda Insurers were required to seek the court's permission under the Barton Doctrine before initiating arbitration proceedings against MFGH and MFGAA. Despite the proceedings being outside the U.S., the doctrine mandates that any party filing suit in an international forum must obtain leave from the appointing court. The Court found that the Bermuda Insurers violated the Barton Doctrine by filing proceedings in Bermuda and ordered them to cease those proceedings without prejudice. The Court did not need to consider if these actions breached the Bar Order from the Global Settlement. However, it remains open whether arbitration in Bermuda may still be necessary, but the resolution of this issue falls to the Court, not the Bermuda Court. The Court will review and decide on the Bermuda Insurers' motions to compel arbitration once the briefing is completed. Familiarity with previous related opinions is assumed, as they outline the background of this adversary proceeding. The Bermuda Insurers include Allied World Assurance Company Ltd., Iron-Starr Excess Agency Ltd., Ironshore Insurance Ltd., and Starr Insurance & Reinsurance Limited. The Court announced its decision promptly to address an upcoming hearing in the Bermuda Court where the Insurers sought additional relief.
Following the confirmation of the Plan, the Court approved subsequent amendments that did not significantly change the liquidation and asset distribution provisions. The arbitration clause of the Allied Policy stipulates that any disputes shall be resolved in Hamilton, Bermuda, under The Bermuda International Conciliation and Arbitration Act of 1993, by a board of three arbitrators. The Bar Order modifies the Plan Injunction concerning the Debtors to allow necessary actions for the Global Settlement, including payments under specific insurance policies. Individuals not part of the Settlement Agreement are permanently barred from initiating claims related to these payments or disputing the reasonableness of the Settlement. However, the Order does not prevent Insurance Assignees from enforcing Assigned Rights or MFG Plaintiffs from asserting claims against Dissenting Insurers on their own behalf. The Plaintiffs emphasize that the remaining Debtors are the sole members of MFGAA and are responsible for claims under the Allied and Iron-Starr policies. The limited exception to the Barton Doctrine in 28 U.S.C. 959(a) allows legal actions against appointed trustees or managers concerning their business operations; however, this exception does not apply as no current business is being conducted in relation to this case. The Bermuda Insurers acknowledge MFGH as a court-appointed officer.
