TheSEC's fraud charges against Patriarch Partners LLC have precipitated a coveragedispute between the investment firm and one of its liability insurers.
In acomplaint filed March 29 in the U.S. District Court for the Southern Districtof New York, Patriarch Partners alleged that three of its four liabilityinsurers, as part of a tower providing coverage of $25 million in theaggregate, had agreed to fund its defense of the SEC's investigation andenforcement action. One of them allegedly denied coverage, according to thesuit.
Ithas been one year since the SEC announced fraud charges against PatriarchPartners LLC, several of the funds it manages and founder and CEO Lynn Tilton.The regulator, in a March 30, 2015, release alleged that Tilton and thePatriarch Partners entities hid poor performance of loans backing three Zoharcollateralized loan obligations by failing to value assets in the mannerprescribed by the applicable offering documents. In so doing, the SEC alleged,Tilton and the Patriarch Partners firms had collected nearly $200 million infees and other payments to which they were not entitled.
TheSEC said at the time that the matter would be scheduled for a public hearingbefore an administrative law judge for proceedings to adjudicate theallegations and determine what, if any, remedial actions would be appropriate.Patriarch Partners filed suit on April 1, 2015, in the Southern District of NewYork, seeking among other relief a preliminary injunction to halt theadministrative proceeding on constitutional grounds. The district court deniedthe request for a preliminary injunction on June 30, 2015, and PatriarchPartners then appealed the decision to the U.S. 2nd Circuit Court of Appeals.
Areview of the appellate court docket shows that the matter remains pendingafter Patriarch Partners and the SEC submitted their respective briefs duringthe summer of 2015. The appellate court stayed the SEC enforcement actionpending the resolution of the firm's appeal.
PatriarchPartners said that it had been subpoenaed by the SEC in February 2012 — anevent that constituted a claim under the management liability coverage it hadin place at the time, the firm argued.
Courtrecords show that the firm had a claims-made policy branded as managementliability solutions-private equity firms that was issued by 's through abrokerage subsidiary of what is now known as Willis Towers Watson Plc. The CNA policy offered a $10million aggregate limit of liability, inclusive of defense costs, in exchangefor a premium of $322,500. The applicable one-year policy period ended on July31, 2012.
ThePatriarch Partners program also included three excess layers: a $5 million inexcess of $10 million layer provided by American Financial Group Inc.'s ; a $5million in excess of $15 million layer issued by 'sIllinois National InsuranceCo.; and a $5 million in excess of $20 million layer fromAXIS Capital HoldingsLtd.'s AXIS InsuranceCo.
Thefirm alleges in the suit that, of those excess carriers, only AXIS has deniedcoverage, despite the follow-form nature of the applicable policies.
PatriarchPartners said that it had exhausted the primary coverage in January 2014, thefirst excess layer in January 2015 and the second excess layer in August 2015.It allegedly received notice from AXIS in September 2015 of the insurer'scoverage position. The insurer allegedly argued that the SEC claim had arisenprior to the applicable policy period.
"AXISwrongfully denied coverage even though the SEC claim was first made andreported during the [AXIS] Policy Period, and Continental, whose policy AXISfollowed, and the other two excess insurance companies whose policies followedform to the Continental Policy, had all reimbursed AXIS's defense costs to theextent of their respective limits of liability," Patriarch Partnersalleged in the complaint.
AnAXIS spokesman said the company does not comment on legal matters.
PatriarchPartners is seeking a declaration of its rights under the AXIS policy as wellas compensatory and consequential damages in unspecified amounts for thealleged contract breach.
Thefirm has made headlines for unrelated legal proceedings with another insurancecompany, MBIA Inc.,and its bond insurance unit MBIAInsurance Corp. Tilton and Patriarch Partners XV LLC filed suit against the twoMBIA entities in the Westchester County, N.Y., Supreme Court in November 2015,alleging fraudulent inducement and related claims related to the Zohar I CLO.It also initiated involuntary bankruptcy proceedings that were dismissed pursuant to a courtorder dated March 28.
MBIAInsurance Corp. said in its annual statement that it insures $776 million of grosspar outstanding of notes issued by the Zohar II CLO, which is scheduled tomature in January 2017, and it made a $149 million of claims related to Zohar I inNovember 2015.
MBIAInc. CEO Jay Brown and President and COO William Fallon said in a recentlypublished annual letterto shareholders that "we have not yet been provided with a clear plan forachieving 100% payoff of the [Zohar II] notes by their January 2017 maturity."