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IN RE RELIANCE GROUP HOLDINGS

April 30, 2004.

In re RELIANCE GROUP HOLDINGS, INC. SECURITIES LITIGATION


The opinion of the court was delivered by: THOMAS GRIESA, Senior District Judge

OPINION

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.

  FACTS

  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") (para. 8).

  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.
(Para. 4).

  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 assureds.

  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 filed.

  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 ...


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