IN THE COURT OF CHANCERY OF THE STATE OF DELAWARE

IN THE MATTER OF THE 

LIQUIDATION OF FREESTONE 

INSURANCE COMPANY

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)

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C.A. No. 9574-VCL

MEMORANDUM OPINION

Date Submitted: October 30, 2014

Date Decided: December 24, 2014

Eric Lopez Schnabel, Robert W. Mallard, Alessandra Glorioso, DORSEY & WHITNEY 

LLP, Wilmington, Delaware; Michael R. Stewart, Michael B. Fisco, FAEGRE BAKER 

DANIELS LLP, Minneapolis, Minnesota; Attorneys for U.S. Bank National Association.

Christopher P. Simon, Joseph Grey, CROSS AND SIMON, LLC, Wilmington, Delaware; 

James J. Black, III, Jeffrey B. Miceli, Mark Drasnin, BLACK & GERNGROSS, P.C., 

Philadelphia, Pennsylvania; Attorneys for the Insurance Commissioner of the State of 

Delaware as Receiver for Freestone Insurance Company.

LASTER, Vice Chancellor.
1

Freestone Insurance Company (“Freestone”), a Delaware-domiciled insurer, is 

currently in receivership under the administration of the Insurance Commissioner of the 

State of Delaware (the “Commissioner”). When delinquency proceedings began, 

Freestone maintained cash and securities valued at approximately $175 million (the 

“Assets”) in a custodial account at U.S. Bank, N.A. As part of the delinquency 

proceedings, the court entered an order directing that Freestone be rehabilitated, causing 

title to Freestone’s property to vest in the Commissioner as receiver. The court’s 

rehabilitation order directed the Commissioner to marshal Freestone’s assets and called 

upon third parties to turn over property belonging to Freestone to the Commissioner. 

Relying on the rehabilitation order and the authority conferred by the Delaware 

Uniform Insurance Liquidation Act (“DUILA”), the Commissioner terminated the 

custodial relationship and instructed U.S. Bank to return the Assets. U.S. Bank turned 

over approximately $19 million but kept the rest, contending it was security for potential 

indemnification claims and present and future expenses. The Commissioner disputed 

U.S. Bank’s position and threatened to seek to hold U.S. Bank in contempt of the 

rehabilitation order. U.S. Bank then filed the current motion, which seeks an order 

establishing its right to retain the Assets or, alternatively, declaring that any amounts 

turned over to the Commissioner will be subject to a security interest. 

U.S. Bank’s request for an order establishing its right to retain the Assets is 

denied. U.S. Bank shall turn over the Assets to the Commissioner. Before doing so, U.S. 

Bank may deduct from the Assets the fees and expenses it has incurred for administering 

the account. U.S. Bank may not deduct legal expenses. If U.S. Bank chooses not to make 
2

a deduction, it shall have a security interest in the Assets equal to the amount of fees and 

expenses incurred for administering the account. U.S. Bank is not entitled to retain the 

Assets or to have a security interest in the Assets for indemnification claims or future 

expenses.

I. FACTUAL BACKGROUND

The factual background is drawn from the submissions made by the parties in 

connection with U.S. Bank’s motion. The relevant facts consist of a series of undisputed 

events and the details of certain agreements.

A. The Custody Agreement

U.S. Bank held the Assets for Freestone pursuant to an Insurance Custody 

Agreement dated July 25, 2013 (the “Custody Agreement” or “CA”). Under the Custody 

Agreement, U.S. Bank’s duties were ministerial in nature, see id. § 9, and U.S. Bank had 

“no duties or responsibilities except those specifically set forth” in the Custody 

Agreement, id. § 1(e). U.S. Bank held the Assets “subject to the instructions of 

[Freestone],” and the Assets could be withdrawn “upon the demand of [Freestone].” Id. § 

2(b). 

In Section 12 of the Custody Agreement, Freestone agreed to “(i) reimburse [U.S. 

Bank] for costs incurred by it hereunder, and (ii) pay to [U.S. Bank] fees for its services 

under this Agreement . . . .” Id. § 12(a). Under Section 14 of the Custody Agreement, 

Freestone agreed to indemnify U.S. Bank and its agents for any “Claim,” defined broadly 

to include any cost, loss, claim, liability, or fee arising out of the agreement. Id. § 14(a). 

Under Section 17 of the Custody Agreement, “[a]ny fees or expenses [U.S. Bank] incurs 
3

in responding to any Legal Action (including, without limitation, attorneys’ and other 

professionals’ fees) [could] be charged against the Account.” Id. § 17(l). The term “Legal 

Action” was defined to include any “subpoena, restraining order, writ of attachment or 

execution, levy, garnishment, search warrant or similar order relating to the Account.” Id.

Under Section 15(a) of the Custody Agreement, either party could terminate the 

relationship upon 30 days written notice. Id. § 15(a). At that point, U.S. Bank was 

obligated to 

follow reasonable [Freestone] instructions concerning the transfer of the 

Assets; provided that:

. . . .

(ii) Unless required by proper regulatory agency, [U.S. Bank] shall 

not be required to make any delivery or payment until full payment shall 

have been made by [Freestone] of all liabilities constituting a charge on or 

against [U.S. Bank] and until full payment shall have been made to [U.S. 

Bank] of all its compensation, costs and expenses hereunder; and

(iii) [U.S. Bank] shall have been reimbursed for any advances of 

monies or securities made hereunder to [Freestone] . . . .

Id. § 15(b).

B. The Commissioner Demands The Return Of The Assets

On April 24, 2014, the Commissioner filed delinquency proceedings against 

Freestone. By order dated April 28, 2014, the court placed Freestone into rehabilitation.

Dkt. 4 (the “Rehabilitation Order”). The Rehabilitation Order instructed the 

Commissioner to take “exclusive possession and control of” Freestone’s property. Id. ¶ 6.

To facilitate the Commissioner’s efforts, the Rehabilitation Order instructed parties 

holding Freestone’s property to turn it over to the Commissioner. Id. ¶ 13.
4

In May 2014, the Commissioner demanded the return of the Assets. U.S. Bank 

turned over cash and securities worth approximately $19 million, but kept the remaining 

$156 million. U.S. Bank justified its refusal on the theory that it may face potential 

claims arising out of its services to Freestone or otherwise be drawn into litigation 

involving Freestone. If that happens, then U.S. Bank anticipates making a claim for 

indemnification against Freestone under the Custody Agreement. U.S. Bank also 

anticipates incurring expenses as it continues to maintain the account.

In addition to its right to indemnification under the Custody Agreement, U.S. 

Bank cited trust agreements pursuant to which U.S. Bank held assets to secure 

obligations between Freestone and other insurance companies (the “Trust Agreements”). 

In each case, either Freestone or another insurance company acted as a reinsurer, and 

U.S. Bank held the assets in trust to secure the insurer’s right to payment from the 

reinsurer. U.S. Bank provided examples of three Trust Agreements:

● The White Rock Trust Agreement. Pursuant to a trust agreement dated January 1, 

2012, White Rock Insurance (SAC) Ltd (“White Rock”) deposited cash and 

securities with U.S. Bank for the benefit of Freestone. U.S. Bank’s duties and 

responsibilities under the agreement were “entirely administrative and not 

discretionary and determined only with reference to this Agreement and 

Applicable Insurance Law.” Id. § 8(n). White Rock was obligated to reimburse 

U.S. Bank for its fees and costs. If White Rock failed to pay, then U.S. Bank could 

recover its fees and costs out of trust income. Id. § 9. The White Rock Trust 

Agreement was governed by New York law. Id. § 13.

● The Companion Trust Agreement. Pursuant to a trust agreement dated December 

28, 2012, Freestone deposited cash and securities with U.S. Bank for the benefit of 

Companion Property and Casualty Insurance Company. U.S. Bank’s duties and 

obligations were “only . . . such as are specifically set forth in [the] Agreement, as 

it may from time to time be amended, and no implied duties or obligations shall be 

read into this Agreement against the Trustee.” Id. § 7(i). Freestone was obligated 

to reimburse U.S. Bank for its fees and costs. Id. § 8(a). If Freestone failed to pay, 
5

then U.S. Bank could recover its fees and costs out of trust assets. Id. The 

Companion Trust Agreement was governed by South Carolina law. Id. § 12.

● The Accident Trust Agreement. Pursuant to a trust agreement dated September 25, 

2013, Freestone deposited cash and securities with U.S. Bank for the benefit of 

Accident Insurance Company. U.S. Bank’s duties were “entirely administrative 

and not discretionary and determined only with reference to this Agreement and 

Applicable Insurance Law. Id. § 8(n). Freestone was obligated to reimburse U.S. 

Bank for its fees and costs. Id. § 9(a). If Freestone failed to pay, then U.S. Bank 

could recover its fees and costs out of the trust income. Id. § 9(b). The Accident 

Trust Agreement was governed by Delaware law. Id. § 13.

U.S. Bank believes that its security interest extends not only to claims under the Custody 

Agreement, but also to claims under the Trust Agreements.

U.S. Bank does not believe it has done anything that would warrant a lawsuit, 

much less result in liability, and U.S. Bank has not attempted to quantify its exposure to 

any claims. Given that each agreement defined U.S. Bank’s duties as exclusively 

ministerial and limited to the contractual obligations set forth in the agreement, U.S. 

Bank would not seem to be at great risk. Nevertheless, U.S. Bank believes it is entitled to 

hold almost 90% of the Assets, worth approximately $156 million, because it is possible 

that a claim might be made. As a practical matter, that means U.S. Bank will hold the 

Assets for what might be years, until U.S. Bank feels confident that the relevant statutes 

of limitations have run or U.S. Bank receives releases in the interim from the parties who 

might assert claims.

C. The Current Motion

U.S. Bank and the Commissioner attempted without success to work out their 

differences. After the Commissioner took the position that U.S. Bank would be in 
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contempt of the Rehabilitation Order if it did not return the Assets, then U.S. Bank filed 

the current motion. 

On July 22, 2014, in response to a request by the Commissioner, the court 

transitioned Freestone out of rehabilitation and into liquidation. See Dkt. 68 (the 

“Liquidation Order”). The Liquidation Order repeated the directives that the 

Commissioner secure Freestone’s property and that any party holding Freestone’s 

property turn it over to the Commissioner. Id. ¶¶ 3, 10. The Liquidation Order set a bar 

date of December 31, 2015, for creditors to file claims with the Commissioner. Id. ¶ 16.

II. LEGAL ANALYSIS

When an insurer enters delinquency proceedings, the DUILA vests title to its 

property in the Commissioner, acting as receiver:

[T]he Commissioner shall be vested by operation of law with the title to all 

of the property, contracts and rights of action and all of the books and 

records of the insurer, wherever located, as of the date of entry of the order 

directing the Commissioner to rehabilitate or liquidate a domestic insurer or 

to liquidate the United States branch of an alien insurer domiciled in this 

State, and the Commissioner shall have the right to recover the same and 

reduce the same to possession, except that ancillary receivers in reciprocal 

states shall have, as to assets located in their respective states, the rights and 

powers which are herein prescribed for ancillary receivers appointed in this 

State as to assets located in this State.

18 Del. C. § 5913(b). The DUILA provides that any rehabilitation order “shall direct the 

Commissioner forthwith to take possession of the property of the insurer and to conduct 

the business thereof and to take such steps toward removal of the causes and conditions 

which have made rehabilitation necessary as the court may direct.” 18 Del. C. § 5910(a).

The DUILA similarly provides that any liquidation order “shall direct the Commissioner 
7

forthwith to take possession of the property of the insurer [and] to liquidate its business.” 

18 Del. C. § 5911(a).

In this case, Freestone entered rehabilitation on April 28, 2014, at which point the 

Commissioner became vested by operation of law with title to all of Freestone’s 

“property, contracts and rights of action . . ., wherever located.” 18 Del. C. § 5913(b). As 

of that date, the Commissioner gained title to the property possessed by Freestone under 

the Custody Agreement and the three Trust Agreements. The Rehabilitation Order 

instructed the Commissioner to take “exclusive possession and control of” Freestone’s 

property. Rehabilitation Order ¶ 6. To facilitate the Commissioner’s task, the 

Rehabilitation Order called upon parties holding Freestone’s property to turn it over to 

the Commissioner. Id. ¶ 13. By terminating the Custody Agreement and demanding the 

return of the Assets from U.S. Bank, the Commissioner was fulfilling her obligations

under the statute and the Rehabilitation Order. The Liquidation Order confirmed and 

reiterated that the Commissioner held title to Freestone’s property, that the Receiver 

should take exclusive possession and control of Freestone’s property, and that other 

parties holding Freestone’s property should turn it over to the Commissioner. Liquidation 

Order ¶¶ 6, 13.

Although the Rehabilitation Order and the Liquidation Order vested title to 

Freestone’s property in the Commissioner, those orders only gave the Commissioner the 

same rights that Freestone possessed. In re Rehab. of Nat’l Heritage Life Ins. Co., 656 

A.2d 252, 256 (Del. Ch. 1994). As receiver, the Commissioner did not gain greater rights 

than Freestone had. Id. The Commissioner therefore obtained the right under the Custody 
8

Agreement to instruct U.S Bank to turn over the Assets to the same degree that Freestone 

could have insisted upon their return.

The Custody Agreement provided generally that Freestone could obtain return of 

the Assets on demand. Section 2(b) stated that the “Assets shall be held subject to the 

instructions of [Freestone] or [Freestone’s] agent and upon [U.S. Bank’s] receipt of 

Appropriate Instructions shall be withdrawable upon the demand of [Freestone] or 

[Freestone’s] agent.” CA § 2(b). In addition, Section 15(a) stated that either party could 

terminate the relationship upon 30 days written notice. Id. § 15(a). U.S. Bank agreed that, 

that upon termination, it “shall follow reasonable [Freestone] instructions concerning the 

transfer of the Assets,” subject to the conditions that 

(ii) [u]nless required by proper regulatory agency, [U.S. Bank] shall 

not be required to make any delivery or payment until full payment shall 

have been made by [Freestone] of all liabilities constituting a charge on or 

against [U.S. Bank] and until full payment shall have been made to [U.S. 

Bank] of all its compensation, costs and expenses hereunder; and

(iii) [U.S. Bank] shall have been reimbursed for any advances of 

monies or securities made hereunder to [Freestone] . . . .

Id. § 15(b). U.S. Bank does not dispute that the Commissioner is “a proper regulatory 

agency.” 

Rather than returning the Assets, U.S. Bank has taken the position that it has a 

valid security interest in the Assets that secures U.S. Bank’s rights to claims it has or 

might have in the future against Freestone under the Custody Agreement and under other 

agreements between U.S. Bank and Freestone, such as the Trust Agreements. U.S. Bank 

describes its claims as falling into two categories: (i) claims for indemnification that U.S. 
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Bank might have if it were brought into any dispute relating to the Trust Agreements, and 

(ii) claims for fees and expenses incurred by U.S. Bank while continuing to administer 

the custodial account and custody agreements. The category of indemnification claims 

does not include any present claims or current amounts. U.S. Bank concedes that any 

indemnification claims it might have are contingent, unmatured, unliquidated, and 

unasserted. The reference to fees and expenses appears to include (i) fees U.S. Bank 

charged and the expenses it incurred for actual administration of the custodial account 

(“Administrative Fees”) and (ii) legal fees incurred by U.S. Bank relating to Freestone’s 

receivership and associated disputes (“Legal Fees”). U.S. Bank has represented that it has 

accrued some fees and expenses to date (“Current” fees), but also that it will continue to 

accrue fees and expenses in the future (“Future” fees).

Minnesota law governs the Custody Agreement. CA § 17(g). Under Minnesota 

law, unambiguous contract terms must be given their “plain and ordinary meaning.” Bob 

Useldinger & Sons, Inc. v. Hangsleben, 505 N.W.2d 323, 328 (Minn. 1993). When 

construing contract terms, the language “must be read in the context of the entire 

contract.” Quade v. Secura Ins., 814 N.W.2d 703, 705 (Minn. 2012). “[T]he expression 

of specific things in a contract implies the exclusion of all not expressed.” Am. Nat. Bank 

of Minn. v. Hous. & Redevelopment Auth. for City of Brainerd, 773 N.W.2d 333, 338 

(Minn. Ct. App. 2009) (internal quotations omitted).

A. The Plain Language Of Section 15(b)

Under the plain language of Section 15(b), U.S. Bank must return the Assets to the 

Receiver. Section 15(b) required U.S. Bank to “follow reasonable . . . instructions 
10

concerning the transfer of the Assets” upon termination of the Custody Agreement, 

subject to the conditions that 

(ii) [u]nless required by proper regulatory agency, [U.S. Bank] shall 

not be required to make any delivery or payment until full payment shall 

have been made by [Freestone] of all liabilities constituting a charge on or 

against [U.S. Bank] and until full payment shall have been made to [U.S. 

Bank] of all its compensation, costs and expenses hereunder; and

(iii) [U.S. Bank] shall have been reimbursed for any advances of 

monies or securities made hereunder to [Freestone] . . . .

Id. Under Section 15(b)(ii), if “required by a proper regulatory agency,” then U.S. Bank 

can be “required to make . . . delivery” of the Assets before “full payment shall have been 

made . . . of all liabilities constituting a charge on or against” U.S. Bank. Likewise, if 

“required by a proper regulatory agency,” then U.S. Bank can be “required to make . . . 

delivery” of the Assets before “full payment shall have been made . . . of all [U.S. 

Bank’s] compensation, costs and expenses hereunder.” The Commissioner is “a proper 

regulatory agency” empowered to terminate the Custody Agreement and demand return 

of the Assets without the holdbacks contemplated by Section 15(b)(ii).

U.S. Bank’s contingent, unmatured, unliquidated, and unasserted claims for 

indemnification do not yet represent a liability constituting a “charge on or against” U.S. 

Bank. The term “charge” contemplates an actual monetary amount “on or against” U.S. 

Bank that could be reflected on U.S. Bank’s general ledger or financial statements. 

Assuming they did rise to that level, U.S. Bank could not withhold those amounts in the 

face of a demand from a proper regulatory agency. U.S. Bank’s claims for Administrative 

Fees fall within the plain meaning of “compensation, costs and expenses hereunder” that 
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U.S. Bank cannot withhold in the face of a demand by a proper regulatory agency. U.S. 

Bank therefore cannot rely on either category of claim to avoid its obligations under 

Section 15(b). 

Under Section 15(b)(iii), U.S. Bank potentially could decline to return the Assets 

until U.S. Bank had been “reimbursed for any advances of monies or securities made 

hereunder to” Freestone. Section 15(b)(iii) does not include a provision overriding this 

requirement in the case of a request by a proper regulatory agency, so the 

Commissioner’s status as a regulator does not alter U.S. Bank’s ability to withhold funds. 

This case, however, does not implicate Section 15(b)(iii), because U.S. Bank has not 

identified any outstanding amounts that it advanced for “monies or securities made 

hereunder to” Freestone. This concept refers to amounts of funds or securities that 

Freestone has advanced as a result of trading in the custodial account. Section 12(b) of 

the Custody Agreement describes the types of transactions that it contemplates:

If any advance of funds is made by [U.S. Bank] on behalf of [Freestone] to 

purchase, or to make payment on or against delivery of securities or there 

shall arise for whatever reason an overdraft in the Account, or if [Freestone] 

is for any other reason indebted to [U.S. Bank], including, but not limited 

to, any advance of immediately available funds to [Freestone] with respect 

to payments to be received by [U.S. Bank] in next-day funds (which 

[Freestone] acknowledges [Freestone] is liable to repay if [U.S. Bank] does 

not receive final payment), [Freestone] agrees to repay [U.S. Bank] on 

demand the amount of the advance, overdraft or other indebtedness and 

accrued interest at a rate per annum . . . equal to the Federal Funds rate in 

effect at the time.

CA § 12(b). None of the claims that U.S. Bank has identified relates to this type of 

transaction.
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Consequently, under Section 15(b), upon termination of the Custody Agreement, 

U.S. Bank was obligated to return the Assets to the Commissioner. Having not yet 

returned all of the Assets, U.S. Bank must do so now.

B. The Plain Language Of Section 12(e)

As its principal argument in favor of retaining the Assets, U.S. Bank relies on 

Section 12(e) of the Custody Agreement, which U.S. Bank believes gives U.S. Bank a 

security interest in all of the Assets. Section 12(e) states that “[t]o secure payment 

obligations under this Section 12 or in any other agreement between [Freestone] and 

[U.S. Bank], [Freestone] does hereby grant to [U.S. Bank] a security interest in all Assets 

up to the amount of any deficiency or other indebtedness to [U.S. Bank].” Because 

Section 12(e) extends only to “payment obligations,” whether arising under the Custody 

Agreement or another agreement, this decision refers to that section as the “Payment 

Obligation Provision.” The success of U.S. Bank’s argument depends on the scope of the 

security interest created by the Payment Obligation Provision.

1. The Plain Meaning Of “Payment Obligation”

Section 12(e) grants U.S. Bank a security interest “to secure payment obligations 

under this Section 12 or any other agreement between [Freestone] and [U.S. Bank].”

When the term “payment obligation” is applied in the context of the Custody Agreement, 

its scope does not extend to claims for indemnification or Legal Fees.

If viewed in the abstract, untethered from the language of the Custody Agreement, 

then the words “payment obligations” could be read broadly. The phrase does not appear 

to have a settled legal meaning, whether under Minnesota law or otherwise. The parties 
13

have not identified any cases addressing the term, and Black’s Law Dictionary does not 

define it as such. Black’s Law Dictionary does define a “payment” as the “[p]erformance 

of an obligation by the delivery of money . . . accepted in partial or full discharge of the 

obligation.” BLACK’S LAW DICTIONARY 1243 (9th ed. 2009). It defines an obligation as a 

“legal or moral duty to do or not do something” or a “binding agreement or 

acknowledgement of a liability to pay a certain amount . . . .” Id. at 1179. In theory, 

therefore, the words “payment obligation” could encompass any type of claim.

But the words being interpreted in this motion do not exist in a vacuum. They 

appear in Section 12 of the Custody Agreement, titled “Compensation and 

Reimbursement.” That section provides in totality as follows:

(a) [Freestone] shall (i) reimburse [U.S. Bank] for costs incurred by it 

hereunder, and (ii) pay [U.S. Bank] fees for its services under this 

Agreement . . . .

(b) If any advance of funds is made by [U.S. Bank] on behalf of [Freestone] 

to purchase, or to make payment on or against delivery of securities or there 

shall arise for whatever reason an overdraft in the Account, or if [Freestone] 

is for any other reason indebted to [U.S. Bank], including, but not limited 

to, any advance of immediately available funds to [Freestone] with respect 

to payments to be received by [U.S. Bank] in next-day funds (which 

[Freestone] acknowledges [Freestone] is liable to repay if [U.S. Bank] does 

not receive final payment), [Freestone] agrees to repay [U.S. Bank] on 

demand the amount of the advance, overdraft or other indebtedness and 

accrued interest at a rate per annum . . . equal to the Federal Funds rate in 

effect at the time.

(c) In the event of an advance of funds by [U.S. Bank], or if any overdraft 

is created by Account transactions, or if [Freestone] is otherwise in default 

of any obligation to [U.S. Bank], [U.S. Bank] may directly charge the 

Account and receive payment therefrom.
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(d) In the event that a compensation payment due [U.S. Bank] is past due 

by more than 30 days, the amount may be charged to the Account and [U.S. 

Bank] may receive payment therefrom.

(e) To secure the payment obligations under this Section 12 or in any other 

agreement between [Freestone] and [U.S. Bank], [Freestone] does hereby 

grant to [U.S. Bank] a security interest in all Assets up to the amount of any 

deficiency or other indebtedness to [U.S. Bank].

(f) None of the provisions of this Agreement shall require [U.S. Bank] to 

expend or risk its own funds or otherwise to incur any liability, financial or 

otherwise, in the performance of any of its duties hereunder, or in the 

exercise of any of its rights or powers hereunder, if [U.S. Bank] believes 

that repayment of funds, or indemnity satisfactory to [U.S. Bank] against 

such risk or liability, is not assured.

CA § 12 (emphasis added). 

The term “payment obligations” thus appears in one subsection of a larger section 

addressing compensation and reimbursement and as part of the phrase “payment 

obligations under this Section 12 or in any other agreement.” So located, the term 

“payment obligations” cannot mean any obligation of any kind. Rather, it refers to the 

types of payments contemplated by Section 12, which are (i) costs incurred by U.S. Bank 

in providing the limited administrative services contemplated by the Custody Agreement, 

(ii) fees charged for those services, (iii) advances of funds by U.S. Bank to make payment 

on or against delivery of securities, and (iv) overdrafts in the account.

So read, the term “payment obligations” does not include claims for 

indemnification. The locus of the indemnification obligations in the Custody Agreement 

reinforces this reading. Freestone’s obligation to indemnify U.S. Bank is found in Section 

14, which is titled “Indemnification.” By defining the payment obligations secured by the 

Assets as those arising “under this Section 12,” the drafters of Section 12(e) excluded 
15

obligations found in other sections of the agreement, such as the indemnification 

obligations found in Section 14. Had the drafters intended to extend the security interest 

in Section 12(e) to claims for indemnification, it would have been an easy matter to have 

left out the words “under this Section 12,” to have referred to “obligations under this 

Agreement,” or to have referenced Section 14 specifically. Under Minnesota law, “a 

party that fails to include a term in a contract is bound by the agreement and cannot use 

extrinsic evidence to alter unambiguous contract language.” Am. Bank of St. Paul v. 

Coating Specialties, Inc., 787 N.W.2d 202, 205 (Minn. Ct. App. 2010).

The same logic teaches that the term “payment obligations” does not encompass 

Legal Fees. Section 17(l) of the Custody Agreement states:

If [U.S. Bank] is served with a subpoena, restraining order, writ of 

attachment or execution, [etc.,] relating to the Account (a “Legal Action”), 

[U.S. Bank] will comply with that Legal Action . . . . Any fees or expenses 

[U.S. Bank] incurs in responding to any Legal Action (including, without 

limitation, attorneys’ and other professionals’ fees) may be charged against 

the Account.

CA § 17(l) (emphasis added). Once again, the scope of the “payment obligations” 

secured by the Payment Obligation Provision is limited to those arising “under . . .

Section 12.” It does not encompass the obligations created by Section 17(l). The Custody 

Agreement reinforces this limitation on the scope of the Payment Obligation Provision by 

stating directly in Section 17(l) that fees and expenses for any Legal Action “may be 

charged” against the Assets. If that right already existed as a payment obligation under 

Section 12, then Section 17(l) would not have to address that subject.
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By contrast, the Payment Obligation Provision does appear to encompass 

Administrative Fees, although for reasons discussed in the next section, only to the extent 

they are Current Administrative Fees. The Custody Agreement, read as a whole, makes 

clear that the plain meaning of the term “payment obligations” refers to the categories of 

compensation and reimbursement identified in Section 12, which are (i) costs incurred by 

U.S. Bank in providing the services contemplated by the Custody Agreement, (ii) fees for 

the services provided under the Custody Agreement, (iii) advances of funds by U.S. Bank 

to make payment on or against delivery of securities, and (iv) overdrafts in the account. 

Although U.S. Bank only has described its Administrative Fees in general terms, they 

appear to fall within the first two categories in this list.

It is true that Section 12(b) of the Custody Agreement also refers generally to 

“other indebtedness” that may arise “for any other reason,” but U.S. Bank cannot rely on 

that language to encompass indemnification obligations or Legal Fees. First, to do so 

would write out the limitation of Section 12(e) to obligations arising “under this Section 

12,” as opposed to obligations arising under other sections of the Custody Agreement.

Second, under the principle of ejusdem generis, general language must be read 

consistently with more specific language. See Lefto v. Hoggsbreath Enterprises, Inc., 581 

N.W.2d 855, 858 (Minn. 1998) (“General words are construed to be restricted in their 

meaning by preceding particular words.” (internal quotations omitted)). The “other 

indebtedness” contemplated by Section 12 is therefore limited to the types of payment 

and reimbursements contemplated by Section 12, not other, unrelated types of 

indebtedness.
17

By its terms, the security interest created by the Payment Obligation Provision 

does not extend to U.S. Bank’s claims for indemnification or Legal Fees. U.S. Bank 

cannot rely on those categories of claims to support a security interest in the Assets.

2. The Plain Meaning Of “Amount”

Just as the security interest in Section 12(e) only extends to “payment 

obligations,” it also only applies “up to the amount of any deficiency or other 

indebtedness to [U.S. Bank].” CA § 12(e) (emphasis added). U.S. Bank has not made a 

claim for any amount, although it has represented that it has incurred Current 

Administrative Fees and Current Legal Fees. U.S. Bank concedes that its claims for 

indemnification are contingent, unmatured, unliquidated, and unasserted, as are its claims 

for Future Administrative Fees and Future Legal Fees.

The Supreme Court of Minnesota has interpreted the term “amount” to refer to a 

measurable quantum of value.1In other contexts, Minnesota courts have construed terms 

such as “amount due” narrowly to refer only to the amount of money then due and not to 

other amounts, such as fees and charges or additional amounts due upon acceleration.2To 

 

1

See In re Tveten, 402 N.W.2d 551, 556-58 (Minn. 1987) (holding that a reference 

in the Minnesota Constitution to a “reasonable amount” required some quantifiable value 

limitation); How v. How, 61 N.W. 456, 457 (Minn. 1894) (same).

2

See Davis v. Davis, 196 N.W.2d 473, 474-75 (Minn. 1972) (interpreting a 

provision permitting a borrower to a cure default upon tender of the “amount actually 

due” to mean the amount then presently due absent acceleration); Riverview Muir Doan 

LLC v. JADT Dev. Gp. LLC, 776 N.W.2d 172, 178 (Minn. Ct. App. 2009) (construing 

“original principal amount secured by the mortgage” to mean “the greatest principal 

balance actually due at any time during the term of the loan”); Shakopee Ford, Inc. v. 

Wittenburg, 371 N.W.2d 56, 58 (Minn. Ct. App. 1985) (holding that ordinary meaning of 
18

the extent U.S. Bank is owed a payment obligation, the security interest covers the entire 

payment obligation, i.e., it exists “up to the amount of any deficiency or other 

indebtedness to [U.S. Bank].” The reference to a “deficiency or other indebtedness” 

implies a specific, quantified amount, not a presently unknown, unspecified, contingent 

amount that might become certain in the future.

By its terms, the security interest created by the Payment Obligation Provision 

does not extend to U.S. Bank’s claims for indemnification, Future Administrative Fees, 

or Future Legal Fees. The term “payment obligation” only refers to present amounts.

Although U.S. Bank has not specified the amounts for purposes of its motion, U.S. Bank 

is entitled to a security interest equal to its Current Administrative Fees.

3. The Plain Meaning of “Other Agreements”

The security interest granted by the Payment Obligation Provision extends to 

payment obligations existing under “any other agreement between [Freestone] and [U.S. 

Bank].” U.S. Bank correctly contends that the Trust Agreements are “other agreements.” 

The plain language of the Payment Obligation Provision extends to “any other

agreements” between Freestone and U.S. Bank. The Commissioner argues that this 

language means other agreements that are between only Freestone and U.S. Bank, not 

multi-party agreements where Freestone and U.S. Bank are among the parties. The 

 

term “amount of credit” referred only to amount borrowed and not finance charges or 

other costs of credit).
19

Commissioner contends that the Trust Agreements are excluded because each is a threeparty agreement with an additional insurer among the signatories.

The term “other agreements” plainly encompasses any other agreement that 

establishes obligations between Freestone and U.S. Bank. The Payment Obligation 

Provision does not include a modifier such as “only” that would restrict its coverage to 

two-party agreements. Had Freestone and U.S. Bank intended to limit Section 12(e) to 

bilateral arrangements, they could have done so. 

This reading of “other agreement” does not mean, however, that the Payment 

Obligation Provision automatically extends to every “other agreement” to which 

Freestone and U.S. Bank are parties. The Accident Trust Agreement, for example, cannot 

constitute an “other agreement” for purposes of Section 12(e) because it was executed 

after the Custody Agreement and contains an integration clause. Section 16 of the 

Accident Trust Agreement states that “[t]his Agreement constitutes the entire agreement 

among the Parties relating to the subject matter hereof, and there are no understandings or 

agreements . . . that are not fully expressed in this Agreement.” The Custody Agreement 

was an earlier agreement rendered inapplicable by the integration clause. Peden v. Gray, 

2005 WL 2622746, at *2 (Del. 2005) (TABLE) (“The parol evidence rule bars evidence 

of additional terms to a written contract, when that contract is a complete integration of 

the agreement of the parties.” (internal quotations omitted)). The White Rock Trust 

Agreement and the Companion Trust Agreement, by contrast, preceded the Custody 

Agreement and therefore could be “other agreements” referenced in the Payment 

Obligation Provision.
20

Although the Payment Obligation Provision extends to the White Rock Trust 

Agreement and the Companion Trust Agreement, it only grants U.S. Bank a security 

interest to the extent of any payment obligations due under those agreements. The term 

“payment obligations” as applied to the White Rock Trust Agreement and the Companion 

Trust Agreement has the same meaning as under the Custody Agreement. It does not 

extend to indemnification obligations or to future fees.

The White Rock Trust Agreement cannot give rise to any “payment obligations” 

on behalf of Freestone because White Rock, not Freestone, is solely responsible for 

paying pay all of U.S. Bank’s fees. The Companion Trust Agreement, by contrast, can 

give rise to payment obligations on behalf of Freestone, because Freestone is obligated to 

pay U.S. Bank’s compensation under that agreement. 

4. The Scope Of The Security Interest

The security interest granted by the Payment Obligation Provision extends only to 

Current Administrative Fees. To determine what Administrative Fees are current, the 

operative date is thirty days after the Receiver demanded that U.S. Bank return the 

Assets. The Receiver’s demand operated as a notice of termination pursuant to Section 

15(a) of the Custody Agreement, which provides that the “Agreement shall remain in 

effect until terminated by either party giving written notice 30 days in advance of the 

termination date.” CA § 15(a). U.S. Bank was entitled to continue accruing 

Administrative Fees until the termination date. U.S. Bank does not have a security 

interest that covers its indemnification claims, Future Administrative Fees, or Legal Fees. 

C. DUILA Section 5918(d)
21

As its final bases for retaining the Assets, U.S. Bank relies on two sections of the 

DUILA. Neither alters the analysis.

U.S. Bank first cites Section 5918(d) of the DUILA, 18 Del. C. § 5918(d). That 

subsection states that

[t]he owner of a secured claim against an insurer for which a receiver has 

been appointed in this or any other state may surrender his/her security and 

file a claim as a general creditor, or the claim may be discharged by resort 

to the security, in which case the deficiency, if any, shall be treated as a 

claim against the general assets of the insurer on the same basis as claims of 

unsecured creditors.

18 Del. C. § 5918(d). U.S. Bank contends that under Section 5918(d), U.S. Bank must be 

permitted to retain its security because otherwise it would be reduced to the status of a 

general creditor and denied the election that Section 5918(d) permits. But Section 

5918(d) does not authorize a party to retain security indefinitely as part of an election 

process. The subsection appears in a section titled “Priority of certain claims.” The 

subsection ensures that a secured party can execute on its security and, if there is a 

deficiency, seek to recover any deficiency as an unsecured creditor. U.S. Bank can make 

that election now.

U.S. Bank also relies on Section 5928(a), which provides as follows:

(a) No contingent and unliquidated claim shall share in a distribution of the 

assets of an insurer which has been adjudicated to be insolvent by an order 

made pursuant to this chapter, except that such claim shall be considered, if 

properly presented, and may be allowed to share where:

(1) Such claim becomes absolute against the insurer on or before the 

last day for filing claims against the assets of such insurer . . . .
22

18 Del. C. § 5928(a). U.S. Bank argues that it should not have to take any action until the 

time comes to make such a claim, which is the bar date of December 31, 2015. By that

point, some of its currently contingent, unmatured, unliquidated, and unasserted claims 

might at least be asserted.

This argument does not go very far because the plain language of the Custody 

Agreement does not grant U.S. Bank a security interest for indemnification claims or 

Legal Fees. Whether claims falling into those categories might accrue by the bar date is 

irrelevant, because U.S. Bank lacks a security interest in those claims in any event. The 

only category where the bar date might matter is Administrative Fees, where U.S. Bank 

does have a security interest. But because the Commissioner has demanded the return of 

the Assets and terminated the custodial relationship, U.S. Bank’s ability to incur 

Administrative Expenses ceased thirty days after the Commissioner’s demand. No 

additional Administrative Expenses can be incurred.

III. CONCLUSION

U.S. Bank shall turn over the Assets to the Commissioner. U.S. Bank is not 

entitled to retain indefinitely, potentially for years, property valued at $156 million. Such 

an interpretation would strike out Section 2(b) of the Custody Agreement, which requires 

that U.S. Bank hold the Assets “subject to the instructions of” Freestone and return the 

Assets on demand, as well as Section 15(b) of the Custody Agreement, which requires 

that U.S. Bank “follow reasonable [Freestone] instructions concerning the transfer of the 

Assets” upon termination. In place of these provisions, U.S. Bank would gain the right to 

continue holding the Assets until U.S. Bank concluded that all statutes of limitations had 
23

run or until U.S. Bank received releases that it found adequate. As a practical matter, U.S. 

Bank’s interpretation would re-write the Custody Agreement to say that U.S. Bank need 

only return the Assets if, in its sole discretion, U.S. Bank feels sufficiently secure. That is 

not what the Custody Agreement says.

Before returning the Assets, U.S. Bank may deduct its Current Administrative 

Fees to the extent incurred as of a date thirty days after the date that the Commissioner 

demanded the return of all of the Assets. If U.S. Bank elects to turn over the Assets 

without any deduction, then U.S. Bank has a security interest in the Assets in that 

amount. The Payment Obligation Provision does not grant U.S. Bank a greater security 

interest than that.