Delaware Supreme Court Holds Trustee Action Alleging Breach of Fiduciary Duty, Unlawful Dividend, and Fraudulent Transfer Is Not a “Securities Claim”

The Delaware Supreme Court has held that D&O policies do not afford coverage for an underlying lawsuit asserting causes of action for breach of fiduciary duty, unlawful dividend, and fraudulent transfer because the lawsuit is not a “Securities Claim” under the policies.  In re Verizon Insurance Coverage Appeals, C.A. No. 558, 2018 (Del. Oct. 31, 2019).  The Supreme Court reversed the trial court opinion in favor of the insured and directed entry of summary judgment for the insurers.

In 2006, the insured telecommunications company spun off its print and online directory business to a subsidiary.  The subsidiary obtained the assets in exchange for stock, debt and cash.  After the subsidiary went bankrupt in 2009, a litigation trustee filed suit against the insured alleging that it had loaded the subsidiary with excessive debt.  The lawsuit asserted causes of action for fraudulent transfer, payment of unlawful dividends in violation of Delaware General Corporation Law, and common law breaches of fiduciary duty.

The insured sought coverage for defense costs under its D&O policies.  The insurers denied coverage on the basis that the trustee action did not constitute a “Securities Claim,” defined in relevant part as a claim “alleging a violation of any federal, state, local, or foreign regulation, rule or statute regulating securities (including, but not limited to, the purchase or sale or offer or solicitation of an offer to purchase or sell securities).”  In the ensuing coverage litigation, the trial court granted summary judgment to the insured, finding the term “Securities Claim” ambiguous and holding that the subject causes of action “regulated” securities because the insured had to comply with the laws in connection with a transaction involving securities.

On appeal, the Delaware Supreme Court reversed, holding that the term “Securities Claim” was unambiguous.  The court reasoned that “regulations, rules or statutes regulating securities” are “those specifically directed towards securities” and not laws “outside the securities regulation area.”  It held that none of the legal causes of action in the trustee suit were “specifically directed” towards securities laws or even necessarily involved securities.  The court rejected the insured’s argument that the “Securities Claim” definition encompassed claims for any unlawful conduct committed during a securities-related transaction.  The court noted that the “Securities Claim” definition already required that the claim arise from the purchase or sale of securities or be brought by a securities holder with respect to its interest in the securities, and the insured’s proffered interpretation rendered the “regulating securities” requirement meaningless.

Because the court found the policy language to be unambiguous, it did not examine any of the extrinsic evidence proffered by the insured.  In addition, the court held that it did not need to make any choice of law determination between Delaware or New York law, both of which enforce unambiguous contract language as written.

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