The opinion of the court was delivered by: THOMAS GRIESA, Senior District Judge
This is a securities class action brought against Reliance Group
Holdings ("RGH") and certain officers and directors of RGH. Plaintiffs
are persons who between February 8, 1999 and December 6, 2000 purchased
certain RGH securities. Defendant RGH is a holding company whose
principal business is ownership of subsidiaries including Reliance
Insurance Company ("RIC") and Reliance Financial Services Corporation
("RFSC").*fn1 The three individual defendants named in the case are
former directors and officers of RGH and RIC. Joined as defendants for
purposes of the motions currently before the Court are Syndicate 1212 at
Lloyd's, London and other underwriters of certain insurance policies held
by RGH, its directors and officers, and other entities ("the
Underwriters"). M. Diane Koken, Insurance Commissioner of the
Commonwealth of Pennsylvania, in her official capacity as Statutory
Liquidator of RIC, has been permitted to intervene in the action. The action has been in a settlement posture since May 2001, when the
parties to it entered into a Memorandum of Understanding ("MOU")
outlining the terms for a contemplated settlement. At the same time that
the parties entered into the MOU, defendants and the Underwriters entered
into a Funding Agreement in which the Underwriters agreed to fund the
contemplated settlement from the proceeds of certain policies that
insured the defendants. These agreements are the subject of the motions
now before the Court.
Plaintiffs move to enforce the MOU and the Funding Agreement. The
Underwriters oppose plaintiffs' motion on the ground that the insurance
policies are assets of the RIC estate, and that therefore the MOU and the
Funding Agreement are now subject to the approval of Koken and the
Commonwealth Court. Koken moves to dismiss or stay plaintiffs' motion.
For the reasons set forth below, plaintiffs' motion is granted, and
Koken's motion is denied.
The following facts are taken from the pleadings and the affidavits
submitted on the motions.
The action was filed June 22, 2000, and alleges that between February
8, 1999 and December 6, 2000 RGH and the individual defendants made false
and misleading statements regarding the financial status of RGH, causing
the company's stock price to be artificially inflated.
On May 29, 2001 the parties entered into the MOU. The MOU provides that
defendants "shall cause their insurance carriers" to pay to the plaintiff
class a $17.4 million settlement in two installments: $100,000 to be paid
into an account upon execution of a stipulation of settlement, and the
remaining amount to be paid within seven business days of the effective
date of settlement (para. 2). Following execution of the MOU, plaintiffs'
counsel was required to file an amended class action complaint.
Subsequently, upon filing a stipulation of settlement, the parties were
to submit to the Court a proposed order certifying a settlement class
(paras. 1 and 3). Upon execution of the stipulation of settlement, the
parties were to apply "promptly" for preliminary approval of the
settlement, and the parties were to "use their best efforts to obtain
final Court approval of the settlement" (para. 8). The MOU also states
that "a condition precedent to this Settlement" would be dismissal or
final approval of settlement of a pending derivative action in New York
state court against RGH directors and officers, Leibowitz, et al. v.
Steinberg, et al., No. 9869/00 ("the Leibowitz action")
The separately executed Funding Agreement was entered into by RGH, on
behalf of itself and the individual defendants, and the Underwriters, on
the same day as the MOU. It provides that the Underwriters would fund the $17.4 million settlement with the
proceeds of certain insurance policies held by RGH. The Funding Agreement
states that the Underwriters "have consented to the terms and conditions
of the settlement resolving the Shareholder and Bondholder Action . . .
as set forth in the Memorandum of Understanding," and that the
Underwriters "agree and commit" to, among other things, fund the
settlement in the two installment amounts specified in the MOU.
In addition to the above provisions, the MOU addresses the eventuality
of a bankruptcy petition being filed by or against RGH prior to approval
of the settlement. This provision provides that
Reliance shall move expeditiously for approval by
the bankruptcy court in which the Reliance
bankruptcy is pending of (a) the Stipulation of
Settlement and (b) the Settlement Funding and
Release Agreement dated May 29, 2001 between the
Defendants and the Underwriters . . . The parties
shall use their best efforts to obtain bankruptcy
court approval of both (a) and (b) of this
paragraph 4, and bankruptcy court approval of each
will be conditions precedent to the Settlement.
Finally, the MOU provides that "all applications to the Court with
respect to any aspect of this Settlement" shall be presented and
determined by the court where the Reliance Securities Class Action was
brought, i.e., this Court (para. 7).
Plaintiffs subsequently filed a consolidated amended class action
complaint on July 16, 2001. Due to factors that will be explained in greater detail below, this is the only step that has
been taken by any party to the MOU to carry out the agreed-upon
procedures for effectuating the contemplated settlement.
It is necessary to describe in some detail the terms of the insurance
policies relevant to the MOU and the Funding Agreement.
There are five separate insurance policies issued by the Underwriters
to RGH, which in aggregate provide $125 million in insurance coverage for
RGH and its subsidiaries, as well as for directors and officers of the
same. Four policies are characterized as "blended" policies, so named
because each of the four policies actually consists of four separate
categories of coverage: director, officer, and company liability coverage
("D&O coverage"), errors and omissions coverage, fiduciary liability
coverage, and employment practices coverage.
With respect to these four policies, the policies essentially start by
naming "the Assured" as "Reliance Group Holdings, Inc." Later in the
"Definitions" section, there is a definition of "Assureds," as meaning
"the Company and the Directors and Officers." The term "Company" is said
to mean "the Parent Company [RGH]" and also "any Subsidiary." The latter
would include RIC.
The first of the four blended policies is a "primary" policy, providing
$10 million in aggregate coverage, and the other three blended policies
are excess policies, providing, respectively, coverage of $20 million in excess of $10 million, $20
million in excess of $30 million, and $50 million in excess of $50
million. Thus, the policies provide total aggregate coverage of $100
million. According to the Underwriters, when that aggregate is exhausted,
regardless of the category of coverage under which it is paid, the
coverage ceases. With the exception of the premium and limit of
liability, the terms of the four policies are identical. Coverage in all
four categories of the blended policies extends both to liability as well
as to costs, expenses, and fees incurred in the legal defense of
The D&O coverage applies to any wrongful acts committed by the
directors and officers of RGH or its subsidiaries. D&O coverage both
reimburses RGH or a subsidiary in cases where the corporation indemnifies
its directors and officers, and provides direct coverage to the
individual officers and directors where indemnification is not permitted
by state law or the corporation's charter or by-laws. Additionally, the
D&O coverage directly insures RGH and its subsidiaries against
securities claims such as the instant suit asserted
against the corporation itself.
The other three categories of coverage under the blended policies do
not apply to the liabilities of directors and officers. Rather, these
categories directly insure only RGH and its subsidiaries for their liabilities as corporate entities.
The fifth policy is referred to as the "Side A" policy. Like the
blended policies, the Side A policy starts by naming "the Assured" as
"Reliance Group Holdings, Inc." Unlike the blended policies, the Side A
policy contains no express definition of "the Assured." However, the
first section, titled "Insuring Clause," states that
Underwriters shall pay on behalf of the Directors
and Officers Loss which the Directors and Officers
shall become legally obligated to pay as a result
of a Claim first made against such Directors and
Officers for a Wrongful Act in excess of the
amounts payable under, or for which no amounts are
payable with respect to such Loss under, or for
which Underwriters wrongfully refuse or are
financially unable to pay under the Directors and
Officers Liability Section of the Underlying
Insurance . . .
Later in the "Definitions" section, there is a definition of
"Directors and Officers" as including "directors [and] officers . . . of
a Company." The policy defines "Company" as meaning "the Parent Company"
as well as "any Subsidiary." The definitions also make clear that
"Underlying Insurance" refers to the blended policies described above.
Thus, the only beneficiaries under the Side A policy are the directors
and officers of RGH and its subsidiaries, including RIC.
Plaintiffs and defendants have represented that proceeds of the
insurance policies are paid on a first-come, first-served basis,
following notification by an assured to the Underwriters of a claim. Although the policies themselves do not appear to state
this directly, nothing in the policies contradicts this representation,
and the Underwriters have not disputed it.
The Underwriters have represented that, in addition to the instant
action, several other lawsuits have been submitted by assureds for
coverage under the policies. Four of these suits have been publicly
disclosed, and two name RGH and RIC, respectively, as defendants. The
Underwriters have represented with respect to the action naming RIC as a
defendant that RIC submitted notification of the lawsuit, as required
under the blended policies "as a condition precedent to . . . rights to
payment," but that such notification was after expiration of the
policies. The Underwriters assert that they "have not yet opined as to
whether the post-expiry adversary action is `related' to [a prior action]
and, as such, entitled to coverage." The Underwriters have also stated in
general terms that notices of several other lawsuits, not yet publicly
disclosed, involving potential liabilities of RIC have been submitted by
RIC. The Underwriters have not indicated their intentions to approve or
disapprove payment to RIC pursuant to these notices of claim. It is not
known when the notices of claim regarding the non-public actions were
No party has given any indication of the amount of liability RIC may be
facing, nor is there any suggestion that the total amount of such potential liability ...