Insured’s Payment to Stockholders to Settle Bankruptcy Dispute Relates to Prior Notice of Circumstances

Applying Rhode Island law, the United States District Court for the District of Rhode Island has held that an insured was entitled to coverage for a settlement because the settlement related back to a prior notice of circumstances.  Twin River Worldwide Holdings, Inc. v. National Union Fire Ins. Co. of Pittsburgh, PA, 2018 WL 3640995 (D.R.I. Aug. 1, 2018).

After the insured, a casino and live entertainment venue, filed for bankruptcy, two classes of stockholders were created: stockholders who received 100% of the insured’s common stock and $300 million in new first lien debt; and holders of Contingent Value Rights (“CVRs”) who were entitled to receive a portion of the amounts paid to the stockholders only if the insured engaged in a fundamental transaction by November 5, 2017.  In June 2014, the insured company announced a potential buy back of the CVRs.  In response, the stockholders issued a letter to inform the company both that it owed them a duty to delay making a fundamental transaction until after November 5, 2017 and that the insured owed no duties to the CVR holders.  The stockholders also threatened legal action.  The company notified its insurer of the potential claim from the stockholders on October 22, 2014.  Once the bankruptcy court determined that the insured had obligations to the CVR holders, the company offered to buy back the CVRs.  The stockholders then filed suit against the company for breaches of fiduciary duties and issued a settlement demand.  The company ultimately settled with the stockholders for $5.6 million and sought coverage from its insurer.  The insurer denied coverage for the claim.

The district court held that the company was entitled to coverage for the settlement because the settlement related to the October 2014 notice of potential claim.  In so holding, the court determined that the settlement was “the final iteration of the claim” that the insured “flagged in the notice of circumstance; i.e., the stockholders demanded reimbursement of expenses paid fighting [the insured’s] support for and interest in paying the CVRs, which the stockholders deemed to be a breach of [the company’s] fiduciary duty to them.”  The court thus found that the lawsuit and settlement demand identified the same breaches of fiduciary duties as those alleged in the October 2014 notice, and that these alleged breaches of fiduciary duties constituted “Wrongful Acts” under the policy language.  The settlement demand therefore related back to the original notice of circumstances and, the policy applied to the subsequent settlement.

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