US Trustee aims to speed Vesttoo liquidation, preserve value for stakeholders

In a sign that the Vesttoo saga could be sped through the courts in order to liquidate the insurtech and its assets, to protect value for stakeholders and creditors while avoiding further litigation between parties, a filing by the US Trustee calls for the Chapter 11 bankruptcy case to be converted to Chapter 7.

This move could put a halt to the insurtech’s plans to sell its assets, rebrand and attempt to trade forwards it seems, as if Vesttoo’s bankruptcy moves under Chapter 7, an independent trustee would be appointed by the court with the sole goal of liquidating the firm’s assets to maximise value to pay back its creditors.

The difference to a Chapter 11 case, is that under Chapter 11 the goal is typically a restructuring.

A company under Chapter 11 can request its case be converted to Chapter 7, but in this instance it is the US trustee of the bankruptcy court that has reached a point where it does not believe the trade forward plan is viable and also wants to avoid further litigation between the committee of creditors and Vesttoo.

So the US Trustee is calling for the Vesttoo Chapter 11 to be converted to Chapter 7, an independent fiduciary to be appointed and the process to liquidate be started.

The US Trustee raises a number of points of concern, about how the Chapter 11 case is progressing so far.

Referencing the Official Committee of Unsecured Creditors objection to Vesttoo’s plan to attempt to trade forward and desire to  accelerate the liquidation of the firm, the US Trustee notes, “To spare the Court and the estates the cost of a lengthy contest between the Debtors and the Committee, the U.S. Trustee moves to convert these chapter 11 cases to chapter 7 cases so that an independent fiduciary can wind down the debtors’ affairs and avoid significant administrative costs (namely, professional fees) that would be incurred if these cases remain in chapter 11.

“If the Committee prevails on its motion to terminate exclusivity and the Debtors continue to oppose further items sought by the Committee, the estates will suffer further diminution in value that conversion to chapter 7 would avoid entirely.”

Fraud on this “massive scale” deserves an independent fiduciary “be appointed to pursue causes of action against responsible parties, to investigate whether others were involved or bear liability for failing to take appropriate action, and to marshal the assets of these Debtors in an unbiased way to promote the greatest recovery to stakeholders,” the US Trustee continues.

The US Trustee also raises a concern about the continuity between the current management and Board of Vesttoo, with those in place while the fraud was perpetrated.

Explaining that, despite a number of senior employees including two of Vesttoo’s co-founders having been removed, the ongoing continuity of leadership, “creates a situation where the current interim CEO and the rest of the Debtors’ Board of Directors continue to manage the Debtors despite being present for actual fraud, dishonest dealings and/or criminal conduct, which is the root issue of the chapter 11 filings for these Debtors.”

The US Trustee states that, under Chapter 7, “A trustee should investigate: (i) the substantial and serious allegations of fraud, dishonesty, incompetence, misconduct, and mismanagement by the pre-petition Debtors; (ii) the circumstances surrounding the Debtors’ failure to perform their obligations under the reinsurance contracts and agreements; (iii) identification of nonexistent LOCs; and (iv) whether colorable claims and causes of action exist to remedy losses.”

While the US Trustee acknowledges the work undertaken in an internal investigation into the fraud by Vesttoo, “The questions at stake here are simply too large and important to be left to an internal investigation.”

The US Trustee also specifically points to Vesttoo’s Interim CEO, Ami Barlev, as having been present at the firm while the fraud was perpetrated, saying, “Mr. Barlev, as an officer and director of the debtors (and as an appointee of prior management, present during the conduct at issue), cannot act as a true neutral, especially as to parties whose objectives may conflict with those of the Vesttoo Debtors.”

Another damning comment by the US Trustee is that it believes Vesttoo has exhibited “gross mismanagement of the estate postpetition,” so since entering into the Chapter 11 bankruptcy process.

Here, the US Trustee is referring to unauthorised payment of fees to service providers, totalling almost $1 million.

In addition, the US Trustee is concerned about ongoing cash burn at Vesttoo, linked to its efforts to sell itself, rebrand and trade forwards, so hopes that by converting the case to Chapter 7 any spend here can also be stopped.

It’s clear the back and forth between debtor Vesttoo and the creditor committee is a key driver for the desire to move the case to Chapter 7, as continued disagreement “invites further pitched litigation that will continue to deplete and drain resources away from the payment of unsecured claims,” the US Trustee states.

“Conversion to chapter 7 will avoid further litigation among the parties in these chapter 11 cases and preserve the greatest amount of estate resources for distribution on allowed claims.”

On the trade forwards plan, the US Trustee says, “The Debtors are eating into their cash position to fund employee expenses in the hopes of achieving a speculative sale of intellectual property and the prosecution of their chapter 11 bankruptcy cases. Despite the formulation of the “Trade Forward” business plan, the Debtors are not generating any revenue from operations, and the cloud of the prepetition conduct will likely severely curtail any interest from counterparties in doing business with the Debtors in the near term. In short, there is a continuing loss to, or diminution of, the estates and the absence of a reasonable likelihood of rehabilitation. Accordingly, conversion of the cases to cases under chapter 7 is required.”

The US Trustee further explains, “The size of the distribution made to general unsecured creditors in these cases will hinge on the estates’ success in resolving issues among various constituencies, litigating where necessary, and taking expeditious, effective action to maximize value. Given the circumstances confronting the various estates and parties in interest, the appointment of an independent and disinterested fiduciary is necessary to lead that effort.

“Gross mismanagement featured prominently in the Debtors’ path to bankruptcy, and has not improved meaningfully in the postpetition period. Fraud on a massive scale goes beyond gross mismanagement, and notwithstanding adverse employment action against the Debtors’ identified bad actors, current management was also in place throughout the relevant period.

“The Debtors have failed to appreciate the limitations imposed by the Bankruptcy Code and improperly paid almost $1 million in professional fees. In total, these facts require a responsible and independent steward to take control of the Debtors’ assets so that value for stakeholders can be preserved and creditor concerns about mismanagement can be put to rest.”

They also raise concerns of impartiality of the current leadership and Board, with no way of knowing if any had knowledge of the fraudulent activity.

Stating, “The implication of Vesttoo’s current management in the fraud scheme would raise issues of impartiality and direct conflicts of interest which would inhibit a transparent and fair examination of the Debtors’ wrongdoing. The Debtors’ Board could exert undue pressure on the CEO and other employees. In contrast, a duly-appointed chapter 7 trustee would displace the Board’s control over the Debtors’ estates and start from a position of independence, and be required as a fiduciary to proceed as facts develop.”

Chapter 7 would make for a cleaner exit and eliminate the chance of additional messy back and forth on restructuring plans and ambitions, the US Trustee believes, highlighting that, “Termination of exclusivity does not restrict the Debtors’ rights to propose a competing plan, or otherwise oppose relief sought by the Committee, and so instead of an efficient and value-maximizing liquidation, termination of exclusivity will likely only serve to increase chapter 11 administrative expenses.”

While, conversely the move to Chapter 7 would mean, “Conversion results in the appointment of an independent fiduciary that is experienced with the liquidation of debtor assets, and while the process may not provide distributions as quickly as some chapter 11 liquidating plans, the safeguards of chapter 7 and the elimination of further litigation between the Debtors and Committee will preserve estate resources and promote greater recoveries for stakeholders.”

The US Trustee holds a considerable amount of weight in any bankruptcy case and any moves they make are typically closely considered by the judge and the bankruptcy court, so it will be interesting to see whether its motion to convert the case to Chapter 7 gets approved.

Of course, even if Vesttoo is moved to a faster liquidation, it doesn’t mean that its assets won’t be snapped up by the same group that it had been developing a plan to sell them to already.

But, importantly, this move would put a stop to wasteful litigation that could drain the bankruptcy estate, so protecting value that can be recovered for those affected by the extensive reinsurance letter of credit (LOC) fraud.

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