Vesttoo claims Aon White Rock / BMA court action violates automatic stay

Vesttoo has stated in filings to the US bankruptcy court, that the joint action begun Friday, by broker Aon’s White Rock Insurance SAC vehicle alongside regulator the Bermuda Monetary Authority (BMA), is in violation of the automatic stay that began with its Chapter 11 filing.

Beleaguered insurtech Vesttoo appears again to be trying to ward off the latest legal angle of attack from the insurance and reinsurance broker, as Aon attempts to recover funds for clients that were party to collateralized reinsurance transactions facilitated by Vesttoo and undertaken within segregated sells of its Bermuda-based White Rock Insurance SAC, where the letters of credit (LOCs) backing the arrangements are now said to be invalid.

As we reported on Friday, Aon through its White Rock Insurance (SAC) Ltd. company joined forces with the Bermuda Monetary Authority (BMA) to pursue “maximum recovery” for the re/insureds affected by the alleged fraud involving Vesttoo related segregated accounts.

The Bermuda Monetary Authority (BMA) and White Rock Insurance (SAC) Ltd. had jointly agreed to pursue a course of action in the Supreme Court of Bermuda, targeting the liquidation of Vesttoo related cells and the recovery of any assets linked to the affected reinsurance deals.

For additional context, remember that Aon’s White Rock Insurance SAC had earlier last week begun legal action in New York, seeking a $136.7 million return of funds from invalid LOC impacted reinsurance cells.

After Vesttoo filed for Chapter 11 bankruptcy protection, that move appeared to halt the New York action against it that was being undertaken by Aon’s White Rock SAC.

Part of the Chapter 11 process sees what is known as an “automatic stay” come into effect the moment the debtor (which is Vesttoo and all of its entities in this case) files for bankruptcy.

The automatic stay is designed to preserve the value of the debtor, stopping creditors from launching multiple actions against it and picking it apart asset by asset, while protecting that value for creditors and putting them and any recoveries sought on a level playing field under the bankruptcy process.

An automatic stay halts all previously started legal cases against the debtor, hence the Aon White Rock action directly against Vesttoo in New York fell under the stay, as we reported.

Although it’s important to note that Vesttoo would not face any less scrutiny under the bankruptcy courts, but direct legal action against its entities would all therefore fall under that bankruptcy process.

There are exceptions that can avoid the “stay”, under a number of scenarios, such as where action is needed to close out positions in certain securities, or where a government intends to exert its police or regulatory powers.

In a declaratory filing made Friday, to the bankruptcy court, Vesttoo’s interim CEO Ami Barlev stated that the White Rock and BMA action in Bermuda’s Supreme Court was made “notwithstanding these Chapter 11 Cases,” and that their lawyers “had been informed that such action would violate the automatic stay.”

Barlev also noted that Vesttoo’s lawyers had been excluded from the Friday hearing in Bermuda.

While Barlev and Vesttoo are claiming that the Aon White Rock and BMA court action should fall under the provisions of the Chapter 11 bankruptcy court’s automatic stay, it seems likely Aon’s White Rock and the BMA would point to two mitigating factors.

First, that their action is not against Vesttoo entities, rather it is focused on liquidating and recovering assets from segregated cells of the White Rock Insurance (SAC) Ltd. vehicle for the benefits of cedents or clients.

While they may also state that this is necessary government regulatory action, with the BMA leading the case and White Rock participating alongside it, which could see it fall under the regulatory process exception in relation to the stay explained above.

It’s worth also noting that in the latest court filed declaratory statement, Vesttoo appears to claim ownership of the White Rock segregated cells in question.

Vesttoo interim CEO Barlev’s latest declaration to the bankruptcy court states that, the White Rock and BMA action sought to have, “the Supreme Court of Bermuda to appoint the same joint provisional liquidators that are serving over Vesttoo P&C to act as Joint Provisional Liquidators for White Rock with respect to the segregated cells owned by the Debtors.”

Remember, Vesttoo entities are the debtors in the bankruptcy case and it seems Barlev’s statement is suggesting that Vesttoo owns the segregated cells in question, despite the fact they are within the Aon-owned White Rock SAC structure.

The statement explains the Vesttoo business model here as, “Vesttoo became the owner of the accounts and cells and sold interests in such accounts or cells to capital markets investors. As part of the agreements related to the segregated cells, there was an agreement for collateral security to be posted for the reinsurer’s obligation. That security typically takes the form of letters of credit (LOCs). The investors provided collateral security for the insurance risks placed in the segregated accounts and protective cells.”

The wording suggests Vesttoo sees itself as the owner of any segregated cells in question, possibly including those that are within the White Rock Insurance SAC structure, but that it was the investors’ responsibility to fund them, to provide the collateral security necessary for backing the reinsurance arrangements.

So, Vesttoo is making the case that the investors had the responsibility to fund the cells, while also claiming ownership of the cells used for the transactions. Whether any ownership claim could see the cells fall under the automatic stay of the bankruptcy protection is unclear and may not apply if the Bermuda case falls under an exemption, in relation to the stay.

The BMA and White Rock action will seek to continue the pursuit of the recovery, for the benefit of the cedents, or clients involved, presumably claiming that this action deserves an exemption from the automatic stay.

As a regulator driven course of action in the Bermuda Supreme Court, it seems the BMA would have a strong case to continue its pursuit of this recovery as being exempted from the stay.

It’s not clear whether an ownership claim over the cells could have a bearing, given they are now under the oversight of liquidators that have been appointed by the Bermuda Supreme Court.

The fact the cells are now under the liquidators also means any assets or funds will be protected, which given how complex this has all become is important for the affected cedents or clients.

All of this suggests the legal process is likely to continue and could drag on, both in New York under the bankruptcy court, and in Bermuda’s Supreme Court, while further information is likely to emerge in the coming days and weeks.

At some stage Vesttoo will need to disclose what, if anything, it has learned under the investigation being undertaken by lawyers and by Kroll, which Barlev’s declaration says is “ongoing” and expected “to continue during these Chapter 11 cases.”

At this stage of the saga, the most important thing is protection of any assets, as well as transparency around what actually occurred. So, how the fraudulent, or invalid, letters of credit (LOCs) came to be introduced to the value chain of these reinsurance deals and which parties knew or instigated that.

Secondary to that, there is also the question of how any fraud circumvented the KYC and collateral security processes of the industry.

The court actions that are ongoing look destined to enforce the necessary discovery, to provide the transparency the industry now needs.

Separately, under the bankruptcy court, Vesttoo has filed a list of its top-30 creditors that are not insiders and that have unsecured claims totalling $2.23 million, of which consultancy McKinsey & Company is at the top, with almost $1.25 million owed to it for services rendered.

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