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Finger-pointing over fallout from PE-backed insurer's collapse broadens


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Finger-pointing over fallout from PE-backed insurer's collapse broadens

A tangledweb of litigation that has emerged from the 2014 collapse of FreestoneInsurance Co. continues to expand, but not necessarily to the extentat least one of the parties involved had hoped.

on July22 filed suit in the U.S. District Court for the District of South Carolina againstU.S. Bancorp units and , each of which playedroles associated with a reinsurance collateral trust that secured Freestone's obligationsto the Columbia, S.C.-based carrier under a 2013 fronting arrangement.

The complaintseeks an unspecified amount of damages stemming from U.S. Bank's role as trusteeof the collateral account and U.S. Bank Trust's capacity as trustee for the DestraTargeted Income Unit Investment Trust. Accident Insurance alleged that SouthportLane Advisors LLC, an affiliate of Freestone owner Southport Lane LP, converted a majority of the liquid assetsin the collateral trust into illiquid assets with "little to no value"that included units of various series of Destra Targeted Income Unit InvestmentTrust. The Destra fund was allegedly established and controlled by Alexander Burns,Southport Lane's owner.

The Destrainvestments and assets purportedly included a $120 million painting allegedly byMichelangelo Merisi da Caravaggio known as "David Holding the Head of Goliath."But Accident Insurance alleged that the painting is worthless as "no reputableperson or entity" has recognized it as an original work of Caravaggio and thatU.S. Bank Trust failed to evaluate the painting's "validity, provenance andvalue." Accident Insurance alleged that it, Freestone, Southport SpecialtyFinance and what was formerly known as Companion Property and Casualty InsuranceCo. (currently Enstar Group Ltd.unit Sussex Insurance Co.)were the only holders of Destra units. The company accused U.S. Bank of breach offiduciary duty and various other claims in its supposed failure to disclose thatthe Destra units were valueless and did not constitute an eligible asset under thetrust agreement.

Giventhe "worthless" status of the units and Freestone's receivership, AccidentInsurance said it has been forced to pay claims with its own funds rather than thosein the collateral trust. Accident Insurance General Counsel James Webster said hiscompany expects to take a $1.5 million "hit" to its second-quarter statutorystatement on the Freestone arrangement.

Companion,which also had been party to a fronting arrangement with Freestone, brought similarclaims against U.S. Bank NA in a March 2015 suit. That action, also pending in federalcourt in South Carolina, has mushroomed to incorporate a third-party complaint filedby U.S. Bank against several Southport Lane entities, Burns and certain other partiesas well as a fourth-party complaint filed July 8 by Burns against U.S. Bank Trust.

For itspart, U.S. Bank alleged that two Southport Lane insurance companies and SouthportLane Advisors were the ones that had directed the conduct underlying Companion'scomplaints and provided valuations, representations and warranties that Companionalleges to have been false. U.S. Bank denied any liability to Companion, sayingthat if the insurer is found to have suffered damages, the third-party defendantsshould be held liable.

Burns,meanwhile, also denied that Companion suffered damages. If the court finds otherwise,he argued, U.S. Bank Trust directly caused any losses pertaining to the Destra units.He argued that the trustee breached its duty to the two Southport Lane insurancecompanies by failing to accurately value the units and by permitting U.S. Bank tosubstitute assets into the collateral trust before it first determined that theirfair market value was not less than that of the assets they were replacing.

Webstersaid Accident Insurance's arrangement with Freestone was "smaller but similar"to that of Companion. He noted that his company had previously filed the complaintin the U.S. District Court for the Eastern District of Tennessee before refilingit in South Carolina.

U.S.Bank had also unsuccessfully sought permission to pursue claims in the South Carolinaaction against Freestone itself, despite the insurer's liquidating status.

The DelawareChancery Court on July 7 denied the bank's motion in the liquidation proceedingto lift the anti-suit injunction that bars third parties from pursuing claims againstthe Freestone estate outside of the established claims process. The bank had wishedto name Freestone a third-party defendant in the South Carolina case and to obtaina judgment against the insurance company, which would establish the amount of itsclaims and its status as a general creditor of the estate.

The court,however, found that forcing Delaware Insurance Commissioner Karen Weldin Stewart,in her capacity as Freestone's receiver, to defend the South Carolina action wouldresult in a diversion of a portion of the estate's "limited resources."Further, the court said, it is "highly unlikely" that Freestone'sfinancial situation would permit U.S. Bank to receive a distribution.