Court of Appeals Allows Investor to Sue $ 200 Million of Former Tower Group Owners


Creditors who say they were swindled over $ 200 million by the former owners of the liquidated group of insurance companies CastlePoint can pursue most of the claims they have made in a lawsuit in New York, a ruled a California Court of Appeals.

A formation of the Court of Appeal of the 1st district this Tuesday reversed a San Francisco County Superior Court ruling dismissing arguments by the California Department of Insurance that allowing creditors to sue would interfere with the liquidation process.

The panel ruled that an injunction barring legal actions against CastlePoint’s estate – which was imposed when the insurance commissioner wound up the company – does not block six of the 10 causes of action listed in the lawsuit.

The notice states that “we are not convinced that allowing these claims to proceed in New York will deplete the assets of the CastlePoint estate or disrupt the liquidation plan.”

CastlePoint started out as Tower Group International, Ltd., a Bermuda-based group of 10 insurance companies. Tower borrowed $ 175 million from Alesco Preferred Funding and other investors by selling trust preferred securities, known as TruPS.

When Tower’s share price fell in 2013, its shareholders sold the company for $ 143 million to ACP, a reinsurer owned by the Karfunkel Family Trust. The Karfunkels quickly sold much of Tower’s assets to AmTrust and National General Holdings Corp.

Tower’s financial condition continued to deteriorate. In 2016, the company reached an agreement with six state regulators to merge all of the Tower companies into CastlePoint and enter into a retention plan. The California Insurance Department has been appointed curator. The department then liquidated the company and began the process of selling its assets to pay off the unresolved claims.

Alesco and other plaintiffs filed a Manhattan lawsuit in October 2017 accusing the Karfunkel family, AmTrust and other defendants of plotting to plunder Tower Group by selling the best assets while leaving the business portfolio little. carrier performance to be retained as CastlePoint. The lawsuit says the defunct company now owes $ 220 million on the TruPS securities, including interest. The lawsuit aims to recover this money from the Karfunkels, AmTrust and National General, which they accuse of fraud and unjust enrichment.

There is a catch. After Insurance Commissioner Dave Jones was named CastlePoint’s curator in 2016, he accepted a $ 200 million contribution from AmTrust, National General and Karfunkel Trust to pay outstanding claims. The custody agreement also prohibits creditors of the insurance company from pursuing claims against Karfunkel Trust, ACP, AmTrust and Tower without the approval of the insurance department. In 2016, Jones released these parties from any claims the Insurance Department may have regarding their involvement with CastlePoint.

When the creditors sought permission to continue their lawsuit, Jones argued that it would be “unfair” because “it would deprive the defendants of the benefit of their deal … purchased at a cost of over $ 200 million,” according to a footnote in the notice.

The appeals court said it found this argument “remarkable”.

“If the commissioner suggests that he is authorized to sell protection against third party claims that will not interfere with the liquidation of CastlePoint, he is mistaken,” the panel said.

The panel said some of the claims in the New York lawsuit could clearly interfere with the liquidation process. The court said compensation claims for actions taken as part of the retention and liquidation process were clearly prohibited by the injunction.

The court said that other causes of action unrelated to retention and liquidation, such as breach of contract, breach of fiduciary duty and tortious interference, may be brought against the company. Karfunkel family, Tower and ACP.

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