Court Opinion

ID: 4662441
Source: CourtListenerOpinion
Date Created: 2021-02-24 14:02:30.152703+00
Date Added: 2024-06-11T08:02:21.640363
License: Public Domain

IN THE SUPERIOR COURT OF THE STATE OF DELAWARE

   VERIZON COMMUNICATIONS INC.,  )
   NYNEX LLC, VERIZON NEW        )
   ENGLAND INC., and VERIZON     )
   INFORMATION TECHNOLOGIES      )
   LLC,                          )                C.A. No. N18C-08-086 EMD CCLD
                                 )
                  Plaintiffs,    )
                                 )
             v.                  )
                                 )
   NATIONAL UNION FIRE INSURANCE )
   COMPANY OF PITTSBURGH, PA, XL )
   SPECIALTY INSURANCE COMPANY, )
   NATIONAL SPECIALITY INSURANCE )
   COMPANY, U.S. SPECIALITY      )
   INSURANCE COMPANY, AXIS       )
   INSURANCE COMPANY, and ST.    )
   PAUL MERCURY INSURANCE        )
   COMPANY,                      )
                                 )
                  Defendants.    )

                              Submitted: November 16, 2020
                               Decided: February 23, 2021

           Upon Plaintiffs’ Motion for Partial Summary Judgment on Defense Costs
                                         GRANTED

                  Upon Defendants’ Motion for Judgment on the Pleadings
                                       DENIED

Jennifer C. Wasson, Esquire, Carla M. Jones, Esquire, Potter Anderson & Corroon LLP,
Wilmington, Delaware, Robin L. Cohen, Esquire, Keith McKenna, Esquire, Cohen Ziffer
Frenchman & McKenna LLP, New York, New York, Attorneys for Plaintiffs Verizon
Communications, Inc., NYNEX, LLC, Verizon New England, Inc., and Verizon Technologies, LLC.

Kurt M. Heyman, Esquire, Aaron M. Nelson, Esquire, Heyman Enerio Gattuso & Hirzel LLP,
Wilmington, Delaware, Lisa C. Solbakken, Esquire, Deana Davidian, Esquire, Arkin Solbakken
LLP, New York, New York, Attorneys for Defendant National Union Fire Insurance Company of
Pittsburgh, Pa.
Bruce E. Jameson, Esquire, John G. Day, Esquire, Prickett, Jones & Elliott, P.A., Wilmington,
Delaware, Alexis J. Rogoski, Esquire, Tammy Yuen, Esquire, Skarzynski Marick & Black, LLC,
New York, New York, Attorneys for Defendant XL Specialty Insurance Company.

Robert J. Katzenstein, Esquire, Eve H. Ormerod, Esquire, Smith Katzenstein & Jenkins LLP,
Wilmington, Delaware, Michael P. Duffy, Esquire, Scarlett M. Rajbanshi, Esquire, Peabody &
Arnold LLP, Boston, Massachusetts, Attorneys for Defendant National Specialty Insurance
Company.

John C. Phillips, Jr., Esquire, David A. Bilson, Esquire, Phillips, McLaughlin & Hall, P.A.,
Wilmington, Delaware, Joseph A. Bailey III, Esquire, Gabriela Richeimer, Esquire, Clyde & Co
US LLP, Washington, D.C., Attorneys for Defendant U.S. Specialty Insurance Company.

Robert J. Katzenstein, Esquire, Eve H. Ormerod, Esquire, Smith Katzenstein & Jenkins LLP,
Wilmington, Delaware, Michael R. Goodstein, Esquire, Bailey Cavalieri LLC, Columbus, Ohio,
Attorneys for Defendant AXIS Insurance Company.

Robert J. Katzenstein, Esquire, Eve H. Ormerod, Esquire, Smith Katzenstein & Jenkins LLP,
Wilmington, Delaware, Thomas J. Judge, Esquire, Jason C. Reichlyn, Esquire, Dykema Gossett,
PLLC, Washington, D.C., Attorneys for Defendant St. Paul Mercury Insurance Company.

DAVIS, J.

                                   I. INTRODUCTION

       This insurance coverage dispute case is assigned to the Complex Commercial Litigation

Division of this Court. Plaintiffs Verizon Communications Inc. (“Verizon”), NYNEX, LLC,

Verizon New England, Inc., and Verizon Technologies, LLC (collectively, the “Insureds”) allege

Defendants National Union Fire Insurance Company of Pittsburgh, Pa. (“National Union”); XL

Specialty Insurance Company, National Specialty Insurance Company (“National Specialty”),

U.S. Specialty Insurance Company (“US Specialty”), AXIS Insurance Company (“Axis”), and

St. Paul Mercury Insurance Company (“St. Paul Mercury”) (collectively, the “Insurers”),

wrongfully denied them coverage for expenses incurred from a fraudulent transfer lawsuit

prosecuted by a bankruptcy trustee (the “FairPoint Action”). On August 10, 2018, the Insureds

                                               2
filed a complaint (the “Complaint”),1 alleging that the Insurers breached their insurance policies

when they failed to honor the indemnification and defense obligations of the policies, and for

declaratory relief for indemnification and defense costs.

        On September 21, 2018, the Insurers moved to dismiss or, alternatively, to stay this

action.2 On April 26, 2019, the Court denied the motion.3

        On March 6, 2020, the Insureds moved (the “Insureds Motion”) for partial summary

judgment on the issue of indemnification and defense costs related to the FairPoint Action.4 On

March 9, 2020, the Insurers moved (the “Insurers Motion”) for judgment on the pleadings as to

coverage relating to the FairPoint Action.5 The parties fully briefed the Insureds Motion and the

Insurers Motion. On November 16, 2020, the Court held a hearing on the motions.6 After

hearing from the parties, the Court took the Insureds Motion and the Insurers Motion under

advisement.

        For the reasons set forth below, the Court will GRANT the Insureds Motion and DENY

the Insurers Motion.

                                          II. BACKGROUND

    A. THE INSURANCE POLICIES

        Two insurance policies (collectively, the “Policies”) are relevant to this dispute: (i) a

primary policy sold by National Union for the Policy Period of October 31, 2009 to October 31,

2010 (the “Verizon Policy);7 and (ii) a primary policy sold by National Union for the Policy

1
  D.I. 1, Verizon’s Complaint (“Compl.”).
2
  D.I. 29.
3
  D.I. 62; see generally Verizon Comms. Inc. v. Nat’l Union Fire Ins. Co. of Pittsburgh, Pa., 2019 WL 2517418
(Del. Super. Ct. Apr. 26, 2019).
4
  D.I. 96.
5
  D.I. 101.
6
  D.I. 130.
7
  Compl. ¶¶ 27-35; D.I. 102, Ex. C (hereinafter, the “Verizon Policy”).

                                                        3
Period of March 31, 2008 to March 31, 2014 (the “FairPoint Policy”).8 U.S. Specialty, Axis, and

St. Paul Mercury issued the Insureds excess coverage that follows form to the primary Verizon

Policy.9 XL Specialty and National Specialty issued the Insureds excess coverage that follows

form to the primary FairPoint Policy.10 The Policies are virtually identical. The Policies were

negotiated, in part, to reduce the Insureds’ exposure to liabilities arising from transactions

(described below) executed by and between Verizon, FairPoint Communications, Inc.

(“FairPoint”), and Northern New England Spinco Inc. (“Spinco”).11

         1. Definition of a “Securities Claim.”

         Central to the Motions is the definition of a “Securities Claim.” The Policies define a

Securities Claim to include “a Claim,” except for administrative or regulatory proceedings

maintained against or investigations of an “Organization,” “made against any Insured” –

         (1) 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) which is:

              (a) brought by any person or entity alleging, arising out of, based upon or attributable
              to the purchase or sale or offer or solicitation of an offer to purchase or sell any
              securities of an Organization; or

              (b) brought by a security holder of an Organization with respect to such security
              holder’s interest in securities of such Organization; or

         (2) brought derivatively on the behalf of an Organization by a security holder of such
             Organization.12

8
  Id. ¶¶ 18-26; D.I. 102, Ex. A (hereinafter, the “FairPoint Policy”).
9
  Id. ¶ 34; D.I. 1, Ex. B, Verizon Policy Tower.
10
   Id. ¶ 25; D.I. 1, Ex. A, FairPoint Policy Tower.
11
   Id. ¶ 21.
12
   FairPoint Policy § 2(y); Verizon Policy § 2(y).

                                                            4
         2. Relevant Coverage Definitions.

         The Policies define “Insured” to include an “Organization, but only with respect to a

Securities Claim.”13 The Verizon Policy defines “Organization” to include Verizon and its

subsidiaries that exist “on or before” the Policy Period.14 The FairPoint Policy defines

“Organization” to include Verizon, FairPoint, and their subsidiaries that exist “on or before” the

Policy Period.15 The Policies define “Loss” to include damages, settlements, judgments and

“Defense Costs.”16 And the Policies define “Defense Costs” to include “reasonable and

necessary fees, costs and expenses . . . resulting solely from the investigation, adjustment,

defense and/or appeal of a Claim against any Insured[.]”17

         3. Bankruptcy-Related Terms.

         The Policies exclude Loss incurred from a Claim brought inter-Organizationally. The

Policies state that the Insurers “shall not be liable . . . for Loss in connection with any Claim

made against any Insured: which is brought by or on behalf of an Organization[;]” or “which is

brought by any security holder . . . of an Organization, whether directly or derivatively, unless

the security holder’s . . . Claim is instigated and continued totally independent of . . . any

Organization.”18 The Policies also state that this exclusion does not apply “in any bankruptcy

proceeding by or against an Organization” or “any Claim brought by the . . . trustee . . . of such

Organization.”19

13
   FairPoint Policy § 2(n)(2); Verizon Policy § 2(n)(2).
14
   Verizon Policy §§ 2(t), (z).
15
   FairPoint Policy §§ 2(t), (z) & Endorsement #18 § 1(d)(ii).
16
   FairPoint Policy § 2(p); Verizon Policy § 2(p).
17
   FairPoint Policy § 2(f); Verizon Policy § 2(f).
18
   FairPoint Policy § 4(i); Verizon Policy § 4(i).
19
   FairPoint Policy § 4(i)(3); Verizon Policy § 4(i)(3).

                                                          5
        Consistent with the carve-out for bankruptcy, the Policies declare that “[b]ankruptcy or

insolvency of any Organization . . . shall not relieve the Insurer[s] of any of [their] obligations”

under the Policies.20

     B. THE TRANSACTION

        On March 31, 2008, Verizon executed a tax-free merger and asset sale using the “reverse

Morris trust” technique (the “Transaction”).21 The Transaction involved Verizon, Spinco and

FairPoint, and took several steps.22 Verizon formed Spinco, a wholly-owned subsidiary.23

Verizon sold Spinco a telecommunications portfolio FairPoint sought to acquire.24 In exchange,

Spinco issued corporate debt notes to Verizon.25 Verizon divested Spinco by spinning out its

stock to Verizon’s stockholders.26 Spinco and FairPoint merged.27 FairPoint survived.28

Spinco’s stock was cancelled and converted to “new” FairPoint stock.29 FairPoint’s outstanding

equity split post-closing comprised a stake for both Verizon-Spinco and pre-merger FairPoint

stockholders.30

20
   FairPoint Policy § 19; Verizon Policy § 19.
21
   Compl. ¶¶ 36-37; D.I. 102, Ex. B, Plaintiff’s Second Amended Complaint, FairPoint Comms., Inc. Litig. Tr. v.
Verizon Comms., Inc., C.A. No. 3:11-CV-00597-FDW-DCK (W.D.N.C. June 28, 2012), ECF No. 68, ¶¶ 102-13
(hereinafter, “FairPoint SAC”); see Costanzo v. DXC Tech. Co., 2020 WL 4284838, at *1 (N.D. Cal. July 27, 2020)
(describing the reverse Morris trust); In re Columbia Pipeline, Inc., 405 F. Supp. 3d 494, 502 (S.D.N.Y. 2019)
(same). The transactional structure of a reverse Morris trust resembles a reverse triangular merger, except that the
reverse Morris trust is designed to couple an untaxable asset transfer with a spinoff. A reverse triangular merger
may involve a spinoff, but its primary function is to consolidate control of two firms indirectly. Cf. W. Standard,
LLC v. Sourcehov Holdings, Inc., 2019 WL 3322406, at *6 (Del. Ch. July 24, 2019) (explaining reverse triangular
stock-for-stock merger).
22
   FairPoint SAC ¶¶ 102-13.
23
   Id.
24
   Id.
25
   Id.
26
   Id.
27
   Id.
28
   Id.
29
   Id.
30
   Id.

                                                         6
         FairPoint operated as an independent company.31 FairPoint’s balance sheet now

contained: (i) the assets Spinco had purchased; (ii) joint liabilities FairPoint incurred with Spinco

from drawing on a revolving credit facility to capitalize the new company; and (iii) liabilities on

Spinco’s own notes that it used to finance the initial transfer with Verizon.32 Verizon sold those

Spinco notes to investment banks.33 The investment banks in turn sold the notes to third-party

buyers on the secondary market.34

         The Transaction left FairPoint with considerable debt as it attempted to expand its

business in the New England market. The Transaction also meant that Verizon had eliminated

underperforming landlines and paid off its own lenders with the proceeds from FairPoint’s debts.

     C. THE FAIRPOINT ACTION

         FairPoint was unable to service the syndicated debt and the Spinco notes. On October

26, 2009, FairPoint filed a Chapter 11 petition under the federal Bankruptcy Code.35 FairPoint

confirmed a plan of reorganization that created a trust with an appointed trustee (the “Trustee”)

empowered to pursue litigation.36 The Trustee was “a successor to [FairPoint] and a

representative of [its] estate[.]”37 The Trustee was authorized to pursue FairPoint’s creditors’

causes of action.38 Any causes of action were “vested in [FairPoint’s] estate.”39 Those causes of

action included Spinco causes of action.40

31
   Id.
32
   Id.
33
   Id.
34
   Id.
35
   Id. ¶ 11.
36
   Id. ¶¶ 1-4, 14-16.
37
   Id. ¶ 16.
38
   Id. ¶ 4, 142.
39
   Id. ¶ 142.
40
   Id ¶¶ 4, 142, 154-59.

                                                  7
         On October 25, 2011, the Trustee brought an action under federal and state law against

Verizon.41 The Trustee sought to avoid alleged actual and constructive fraudulent transfers

connected to the Transaction.42 The Trustee alleged that FairPoint was insolvent at the time of

the Transaction.43 The Trustee repeatedly delineated the conduct of Spinco, “old” FairPoint, and

the post-Transaction FairPoint.44 The Trustee sought relief from transfers executed between

Verizon, Spinco and FairPoint together and separately.45

     D. THE PRESENT COVERAGE DISPUTE

         As early as October 4, 2010, the Insureds provided notice to the Insurers regarding

coverage for a tax dispute between the Insureds and FairPoint’s bankruptcy estate.46 On

December 16, 2010, National Union declined coverage.47 National Union claimed that the tax

dispute was not a Securities Claim.48 Once the FairPoint Action was filed, the Insureds

provided additional notice to the Insurers regarding coverage.49 In a January 11, 2012 letter,

National Union reiterated its position that the FairPoint Action did not state a Securities Claim.50

The other Insurers adopted National Union’s position.51 Nevertheless, the Insureds continued to

update the Insurers on the FairPoint Action.52

         In the early summer of 2014, the Insureds notified the Insurers that the Insureds had

settled the FairPoint Action.53 The Insureds settled the FairPoint Action for $95 million.54 The

41
   Id. ¶¶ 147-59.
42
   Id.
43
   Id. ¶¶ 150-59.
44
   Id.
45
   Id. ¶ 163.
46
   Compl. ¶¶ 38-40.
47
   Id. ¶ 40.
48
   Id.
49
   Id. ¶¶ 44-46.
50
   Id. ¶ 47.
51
   Id. ¶ 48.
52
   Id. ¶¶ 49-53.
53
   Id. ¶¶ 53-58.
54
   D.I. 97, Krebs Affidavit ¶¶ 6-7; D.I. 99, Stuhr Affidavit ¶ 14.

                                                            8
Insureds also incurred approximately $24 million in defense fees.55 The Insureds had been

sending the Insurers invoices for these amounts during the FairPoint Action.56 The Insurers did

not pay any defense costs or otherwise indemnify the Insureds.57

        On June 11, 2018, the parties engaged in a compulsory mediation.58 The parties’

mediation efforts were unsuccessful.59 As a result, the Insureds sued the Insurers in this Court.60

As stated above, the Insureds seek breach of contract damages and declarations that the

FairPoint Action and its defense fees are covered.61

                                  III. PARTIES’ CONTENTIONS

     A. THE INSUREDS

        The Insureds seek coverage under the FairPoint Policy for the settlement in the FairPoint

Action and its defense costs. The Insureds present several arguments as to why the FairPoint

Action qualifies as a Securities Claim. First, the Insureds contend that the Trustee was a

“security holder” because, under the Bankruptcy Code, the Trustee brought the claims as the

debtor’s securities holders. Second, the Insureds argue that fraudulent transfer actions are

brought “derivatively” (i) as a matter of law and (ii) because the clawed-back value reverts to the

debtor’s estate for ultimate distribution to creditors. Third, the Insureds claim that the FairPoint

Action was brought “on the behalf of” FairPoint through its estate because there is no distinction

between a debtor and its estate in bankruptcy. The Insureds note that the language of the

FairPoint Policy requires this result because the policy’s bankruptcy-related provisions would be

nullified if a Securities Claim were extinguished any time an Organization filed for bankruptcy.

55
   Id.
56
   Id.
57
   Compl. ¶¶ 53-58.
58
   FairPoint Policy, Alternative Dispute Resolution Endorsement #33 § 17; Verizon Policy § 17.
59
   Compl. ¶¶ 59-61.
60
   Id. ¶¶ 63-71 (breach of contract allegations), 72-83 (declaratory judgment allegations).
61
   Id.

                                                        9
           The Insureds also argue that their defense costs are reasonable “Defense Costs” because

the costs were incurred in defending the FairPoint Action and the Insurers waived any challenge

to the Costs’ reasonableness by failing to object to the invoices for six years.

       B. THE INSURERS

           The Insurers oppose all coverage related to the FairPoint Action under the Policies. The

Insurers argue that the FairPoint Action was not brought “by a security holder” because the

Trustee did not own any FairPoint securities. In addition, the Insurers contend that the FairPoint

Action was brought directly, not derivatively, because fraudulent transfer claims are direct

claims as a matter of law. The Insurers alternatively claim that, even if the FairPoint Action was

brought derivatively, the FairPoint Action was brought “on the behalf of” FairPoint’s creditors

or FairPoint’s estate, not FairPoint.

           If coverage is found under the FairPoint Policy, the Insurers argue that coverage for the

FairPoint Action is unavailable under the Verizon Policy because the Verizon Policy does not

name FairPoint as an insured and Spinco dissolved as part of the Transaction. The Insurers also

contend that the Insured’s proffered Defense Costs involve genuine issues of material fact as to

their reasonableness and that the Insurers “reserved all their rights” to make this argument at any

time.

                                 IV. STANDARDS OF REVIEW

       A. JUDGMENT ON THE PLEADINGS

           A party moves for judgment on the pleadings under Civil Rule 12(c).62 When

considering a Rule 12(c) motion, the Court “is required to view the facts pleaded and the

62
     Del. Super. Ct. R. 12(c).

                                                   10
inferences to be drawn from such facts in the light most favorable to the non-moving party.”63

The Court “must take the well-pleaded facts alleged in the complaint as admitted.”64 The Court

also must assume “the truthfulness of all well-pled allegations of fact in the complaint.”65 The

Court must, therefore, accord the non-movant “the same benefits as a party defending a motion

under Rule 12(b)(6).”66 The Court may grant a Rule 12(c) motion only “when no material issue

of fact exists and the movant is entitled to judgment as a matter of law.”67

     B. SUMMARY JUDGMENT

         The Court will grant summary judgment if, after viewing the record in a light most

favorable to the non-moving party, no genuine issues of material fact exist and the movant is

entitled to judgment as a matter of law.68 In reviewing a summary judgment motion, the Court’s

task is to detect genuine issues of material fact, not to decide them.69 If the record reveals that

material facts are in dispute, then summary judgment will be denied.70 Summary judgment also

will be denied if the record has not been developed thoroughly enough to allow the Court to

apply the law to the record.71 The moving party bears the initial burden of demonstrating that its

claim is supported by undisputed facts.72 If the motion is properly supported, then the burden

shifts to the non-moving party to show that there are material issues of fact to be resolved by a

fact-finder.73

63
   Northrop Grumman Innovation Sys., Inc. v. Zurich Am. Ins. Co., 2021 WL 347015, at *6 (Del. Super. Ct. Feb. 2,
2021) (internal quotation marks omitted).
64
   Desert Equities, Inc. v. Morgan Stanley Leveraged Equity Fund II, L.P., 624 A.2d 1191, 1205 (Del. 1993)
(citations omitted).
65
   Northrop, 2021 WL 347015, at *6 (internal quotation marks omitted).
66
   Id. (internal quotation marks omitted).
67
   V&M Aerospace LLC v. V&M Co., 2019 WL 3238920, at *3 (Del. Super. Ct. July 18, 2019) (citation omitted).
68
   Merrill v. Crothall-Am., Inc., 606 A.2d 96, 99-100 (Del. 1992) (citations omitted); see Del. Super. Ct. Civ. R. 56.
69
   Merrill, 606 A.2d at 99 (citation omitted).
70
   Northrop, 2021 WL 347015, at *7 (citing IDT Corp. v. U.S. Specialty Ins. Co., 2019 WL 413694, at *5 (Del.
Super. Ct. Jan. 31, 2019)).
71
   Ebsersole v. Lowengrub, 180 A.2d 467, 468-69 (Del. 1962).
72
   Moore v. Sizemore, 405 A.2d 679, 680 (Del. 1979).
73
   Brzoska v. Olson, 668 A.2d 1355, 1364 (Del. 1995).

                                                          11
         Although not cross summary judgment motions, the Insureds Motion and the Insurers

Motion, in essence, function like cross-dispositive motions. When cross-motions are filed and

neither party argues the existence of a genuine issue of material fact, “the Court shall deem the

motions to be the equivalent of a stipulation for decision on the merits based on the record

submitted with the motions.”74 Still, the Court will not grant a cross-dispositive motion unless

no genuine issue of material fact exists and the movant is entitled to judgment as a matter of

law.75 The Court evaluates each motion separately to determine genuine issues of material fact.76

And the Court will not grant any judgment as a matter of law if it seems prudent to make a more

thorough inquiry into the factual circumstances to which the law must be applied.77

                                              V. DISCUSSION

     A. PLAIN MEANING ANALYSIS GOVERNS INTERPRETATION OF THE POLICIES AND
        CONSTRUCTION OF THE SECURITIES CLAIM DEFINITION

         The Court must decide if the FairPoint Action was “brought derivatively on the behalf of

an Organization by a security holder of such Organization.” To decide whether it was, the Court

will turn to general insurance contract principles and specific guidance from the Supreme Court

about how to interpret Securities Claims.

         1. General Insurance Contract Principles.

         Insurance policies are contracts.78 The interpretation of contractual language, including

in insurance policies, “is a question of law.”79 The principles governing the interpretation of an

74
   Del. Super. Ct. Civ. R. 56(h).
75
   Northrop, 2021 WL 347015, at *7 (citations omitted); see Desert Equities, 624 A.2d at 1205 n.9 (“[C]ourts
generally apply the same standard of review for judgment on the pleadings and summary judgment.” (citations
omitted)).
76
   Northrop, 2021 WL 347015, at *7 (citations omitted).
77
   Ebsersole, 180 A.2d at 468-69.
78
   Northrop, 2021 WL 347015, at *7 (citation omitted).
79
   O’Brien v. Progressive N. Ins. Co., 785 A.2d 281, 286 (Del. 2001) see Eagle Force Holdings, LLC v. Campbell,
187 A.3d 1209, 1232 (Del. 2018) (“Whether [a] contract’s material terms are sufficiently definite [is] mostly, if not

                                                         12
insurance contract are well-settled. In attempting to resolve a dispute over the proper

interpretation of an insurance policy, “a court should first seek to determine the parties’ intent

from the language of the insurance contract itself.”80 In reviewing the terms of an insurance

policy, the Court considers “the reasonable expectations of the insured at the time of entering

into the contract to see if the policy terms are ambiguous or conflicting, contain a hidden trap or

pitfall, or if the fine print takes away that which has been provided by the large print.”81

Ambiguity exists when the disputed term “is fairly or reasonably susceptible to more than one

meaning.”82 Absent any ambiguity, contract terms should be accorded their plain, ordinary

meaning.83 If an insurance policy contains an ambiguous term, then the policy is to be construed

in favor of the insured to further the contract’s purpose and against the insurer, as the insurer

drafts the policy and controls coverage.84

         When determining an insurer’s duty to defend a claim asserted against an insured, the

Court will look to the allegations in the underlying complaint to decide whether the action

entirely, a question of law.” (citation omitted)); Exelon Generation Acquisitions, LLC v. Deere & Co., 176 A.3d
1262, 1232 (Del. 2017) (same).
80
   Alstrin v. St. Paul Mercury Ins. Co., 179 F. Supp. 2d 376, 388 (D. Del. 2002); see also Emmons v. Hartford
Underwriters Ins. Co., 697 A.2d 742, 745 (Del. 1997)(“The scope of an insurance policy's coverage . . . is
prescribed by the language of the policy.”) (citing Rhone–Poulenc Basic Chems. Co. v. Am. Motorists Ins. Co., 616
A.2d 1192, 1195–96 (Del. 1992); Playtex FP, Inc. v. Columbia Cas. Co., 622 A.2d 1074, 1076–77 (Del. Super.
1992) (citing E.I. du Pont de Nemours & Co., Inc. v. Shell Oil Co., 498 A.2d 1108, 1113 (Del. 1985)); Kaiser
Aluminum Corp. v. Matheson, 681 A.2d 392, 395 (Del. 1996).
81
   E.I. du Pont de Nemours & Co. v. Admiral Ins. Co., 1996 WL 111205, at *2 (Del. Super. Jan. 30, 1996)(citation
omitted); see Steigler v. Ins. Co. of N. Am., 384 A.2d 398, 401 (Del. 1978) (“[A]n insurance contract should be read
to accord with the reasonable expectations of the purchaser so far as the language will permit.”)(quoting State Farm
Mut. Auto. Ins. Co. v. Johnson, 320 A.2d 345, 345 (Del. 1974)(internal quotation marks omitted)).
82
   Alta Berkeley VIC. V. v. Omneon, Inc., 41 A.3d 381, 385 (Del. 2012).
83
   See id.; see also Goggin v. Nat'l Union Fire Ins. Co. of Pittsburgh, 2018 WL 6266195, at *4 (Del. Super. Nov. 30,
2018); IDT Corp., 2019 WL 413692, at *7.
84
   See Alstrin, 179 F. Supp. 2d at 390 (“Generally speaking, however, Delaware . . . courts continue to strictly
construe ambiguities within insurance contracts against the insurer and in favor of the insured in situations where the
insurer drafted the language that is being interpreted regardless of whether the insured is a large sophisticated
company.”)(citations omitted); Nat’l Union Fire Ins. Co. v. Rhone–Poulenc Basic Chems. Co., 1992 WL 22690, at
*8 (Del. Super. Jan. 16, 1992)(“Application of the [contra proferentem] doctrine turns not on the size or
sophistication of the insured, but rather on the fact that the policy language at issue is drafted by the insurer and is
not negotiated.” (citation omitted)).

                                                          13
against the policy holder states a claim covered by the policy.85 Generally, an insurer’s duty to

defend is broader than its duty to indemnify an insured.86 An insurer has a duty to defend where

the factual allegations in the underlying complaint potentially support a covered claim.87 The

insurer will have a duty to indemnify only when the facts in that claim are actually established.88

          The Court generally will look to two documents in its determination of the insurer’s duty

to defend: the insurance policy and the pleadings of the underlying lawsuit.89 The duty to defend

arises where the insured can show that the underlying complaint, read as a whole, alleges a risk

potentially within the coverage of the policy.90

         Where, as here, coverage language is in dispute, the insured bears the burden of

establishing coverage.91 When determining whether an underlying claim is covered, the Court

may disregard the underlying claimant’s “unilateral characterizations” of its claims.92 The Court

instead may look to the underlying complaint as a whole to draw reasonable inferences about the

underlying claim.93

85
   Am. Ins. Group v. Risk Enter. Mgmt., Ltd., 761 A.2d 826, 829 (Del.2000) (“The rationale underlying this principle
is that the determination of whether a party has a duty to defend should be made at the outset of the case, both to
provide the insured with a defense at the beginning of the litigation and to permit the insurer, as the defraying entity,
to control the defense strategy.”).
86
   Liggett Group, Inc. v. Ace Property and Cas. Ins. Co., 798 A.2d 1024, 1030 (Del. 2002)
87
   DynCorp v. Certain Underwriters at Lloyd’s, London, 2009 WL 3764971, at *3 (Del. Super. Nov. 9, 2009).
88
   LaPoint v. AmerisourceBergen Corp., 970 A.2d 185, 197 (Del.2009) (“‘As a general rule, ‘decisions about
indemnity should be postponed until the underlying liability has been established’’ because a declaration as to the
duty to indemnify ‘may have no real-world impact if no liability arises in the underlying litigation.’”) (quoting
Molex Inc. v. Wyler, 334 F.Supp.2d 1083, 1087 (N.D.Ill.2004)).
89
   Virtual Business Enterprises, LLC v. Maryland Cas. Co., 2010 WL 1427409, at *4 (Del. Super. Apr. 9, 2010).
90
   Cont’l Cas. Co. v. Alexis I. duPont Sch. Dist., 317 A.2d 101, 103 (Del.1974).
91
   See Northrop, 2021 WL 347015, at *18 (citing E.I. du Pont de Nemours & Co. v. Allstate Ins. Co., 693 A.2d
1059, 1061 (Del. 1997)).
92
   Northrop, 2021 WL 347015, at *11 (citing IDT Corp., 2019 WL 413694, at *10).
93
   See Blue Hen Mech., Inc. v. Atl. States Ins. Co., 2011 WL 1598575, at *2 (Del. Super. Apr. 21, 2011), aff’d, 29
A.3d 245 (Del. 2011).

                                                           14
        2. Specific Supreme Court Guidance About Securities Claims.

        The Supreme Court recently addressed the Securities Claim definition. 94 The Supreme

Court, in In re Verizon Ins. Coverage Appeals, rejected Verizon’s attempt to obtain coverage for

fraudulent transfer claims under a nearly indistinguishable Securities Claim definition to the one

at issue here.95 There, the Supreme Court interpreted the following Securities Claim definition:

“a Claim made against any Insured” –

        (1) 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) which is:

                 (a) brought by any person or entity alleging, arising out of, based upon or
                 attributable to the purchase or sale or offer or solicitation of an offer to
                 purchase or sell any securities of an Organization; or

                 (b) brought by a security holder of an Organization with respect to such
                 security holder’s interest in securities of such Organization; or

        (2) brought derivatively on the behalf of an Organization by a security holder of
        such Organization, relating to a Securities Claim as defined in paragraph (1)
        above.96

The Supreme Court first found that the language in the applicable policy was not ambiguous.

Then, applying the unambiguous language of the definition, the Supreme Court held that a

bankruptcy trustee’s fraudulent transfer claim does not allege a violation of laws or rules

regulating securities.97 The Supreme Court, therefore, seemingly foreclosed Securities Claim

coverage for any Claim that does not concern securities regulation as that area is traditionally

understood.

94
   In re Verizon Ins. Coverage Appeals, 222 A.3d 566 (Del. 2019).
95
   Id.
96
   Id. at 572-73 (emphasis added).
97
   Id. at 572-77.

                                                       15
         The FairPoint Policy’s Securities Claim definition is critically different. Unlike

subparagraph (2) cited above, the FairPoint Policy’s “brought derivatively” paragraph does not

incorporate subparagraph (1) by reference.98 The plain unambiguous brought-derivatively

paragraph in the FairPoint Policy, therefore, does not contain a regulating-securities element. As

a result, the Insureds do not have to establish that the FairPoint Action “implicates a regulation,

rule or statute specifically directed toward securities law”99 to have coverage under the FairPoint

Policy. That the brought-derivatively paragraph also is separated from the regulating-securities

paragraph and subparagraphs by a disjunctive “or” reinforces this conclusion.100

         Though the Supreme Court’s decision does not squarely address the possibility that a

Securities Claim definition may not solely reach securities, the decision does provide strong

interpretative guidance for construing the definition here. First, the Supreme Court’s reasoning

suggests that Securities Claim definitions are unambiguous.101 Second, the Supreme Court

instructs that the word “security” should be given the meaning it has in the securities regulation

field.102 Third, federal or analogous state law should supply meaning for any technical but

undefined terms, while common usage should supply meaning for generic but undefined

terms.103 And fourth, when the sought-after coverage provision lacks a nexus to securities

98
   FairPoint Policy § 2(y)(2).
99
   In re Verizon Ins. Coverage Appeals, 222 A.3d at 576 (internal quotation marks omitted); cf. id. at 575 (“If a
claim arises from a ‘purchase or sale’ of securities, or is brought by a securities holder with respect to such
interests,” then it must have, under that policy’s “Securities Claim definition[,]” “a connection to a securities
transaction. . . .” (emphasis added)).
100
    FairPoint Policy § 2(y)(2).
101
    In re Verizon Ins. Coverage Appeals, 222 A.3d at 573-75.
102
    Id. at 573-74 (“[T]he words used in the definition mirror those in a specific area of the law recognized as
securities regulation. . . . Thus, we start with the basic understanding of the words used in the policy that the
definition of a Securities Claim is aimed at a particular area of the law, securities law, and not of general application
to other areas of law.”).
103
    Id. at 573 & nn.26-32 (interpreting “offer or sale of securities” and “rules and regulations” primarily in reference
to federal law and state “Blue Sky” securities law counterparts); id. at 578-79 (analyzing dictionary definitions to
derive and confirm plain meaning).

                                                           16
regulation, a fraudulent transfer claim need not be “specific to transfers involving securities” to

be a Securities Claim.104

      B. UNDER THE PLAIN LANGUAGE OF THE FAIRPOINT POLICY, THE FAIRPOINT ACTION IS
         A SECURITIES CLAIM

         1. A Spinco Note is a “Security.”

         The Court must first address whether the FairPoint Action involved a “security.” The

Insureds argue Spinco’s notes are “debt securities.” Under the Securities Act of 1933, “the term

‘security’ means any note[.]”105 Spinco issued “notes” to Verizon that mixed with and impacted

FairPoint’s debt-equity ratio once the Transaction closed.106 The federal statutory meaning of

“security” thus would indicate that a Spinco note counts as a debt security.

         The term “note” in the Securities Act, however, cannot be read too literally. Recognizing

that the word “any” would make every loan an unregistered security, the United States Supreme

Court limited the definition of the term “note.”107 Our Supreme Court has embraced the same

logic and restrictions.108 Both Courts have held that all notes are presumptively securities,109 but

that the presumption is rebuttable.110 The presumption is rebuttable in two ways. First, a note is

not a security if it falls into a judicially crafted list of instruments often denominated as “notes”

but that legally are not considered securities.111 Spinco’s notes do not fit anywhere in that list.

Second, if, after engaging a multi-factor test, the note bears a “family resemblance” to one of the

104
    Id. at 577; cf. id. (observing that neither the fraudulent transfer provisions of the Bankruptcy Code nor a state’s
uniform fraudulent transfer act “are [] specific to securities regulation”).
105
    15 U.S.C. § 77b(a)(1).
106
    See FairPoint SAC ¶ 102-13.
107
    Reves v. Ernst & Young, 494 U.S. 56 (1990).
108
    Boo’ze v. State, 2004 WL 691903 (Del. Mar. 25, 2004).
109
    Reves, 494 U.S. at 65; Boo’ze, 2004 WL 691903, at *2.
110
    Id.
111
    Those categories are: (1) short-term notes secured by a lien on a small business or some of its assets; (2) short-
term notes secured by an assignment of accounts receivable; (3) notes evidencing loans by commercial banks for
current operations; (4) a note evidencing a “character” loan to a bank customer; and (5) a note that formalizes an
open-account debt incurred in the ordinary course of business. See Reves, 494 U.S. at 65 (internal quotation marks
citations omitted).

                                                           17
instruments on the list, then it is not a security.112 The central focus of the “family resemblance”

test in the business context is whether the note is an investment or represents a commercial or

consumer loan.113 If the note is an investment, then it is a security. If the note represents a

commercial or consumer loan, then it is not a security.

         The Spinco notes are investments. They were issued in a primary offering as

consideration for a corporate control sale and then resold on the secondary market to institutional

buyers.114 The holders’ likelihood of repayment—or of effective hedging or arbitrage—turned

on FairPoint’s post-closing success as a new business.115 Accordingly, the Court finds the notes

are “securities.”

             2. The Trustee was a “Security Holder” of FairPoint.

         The Court must next address whether the FairPoint Action was brought “by a security

holder” of FairPoint. The Court reads this phrase as broadly as reason permits.116 In addition,

the Court reads this phrase and those surrounding it with reference to the United State

Bankruptcy Code and Chapter 11 proceedings.117

112
    These factors include: (1) the counterparties’ motivation for transacting; (2) the note’s distribution plan; (3) the
investing public’s reasonable expectations; and (4) the presence of a parallel regulatory scheme that reduces the
note’s risks in a way sufficient for making application of the securities laws unnecessary. See id. at 64-67 (internal
quotation marks and citations omitted); accord Boo’ze, 2004 WL 691903, at *2-3.
113
    See, e.g., Fletcher Int’l, Ltd. v. ION Geophysical Corp., 2012 WL 1883040, at *9 (Del. Ch. May 23, 2012) (citing
Reves, 494 U.S. at 64); accord Boo’ze, 2004 WL 691903, at *2-3.
114
    See Fletcher, 2012 WL 1883040, at *9 (finding that note presumption will not be rebutted if the note is “easily
traded” and looks like “a corporate bond [or] debenture” (citations omitted)); FairPoint SAC ¶ 102-13.
115
    See Fletcher, 2012 WL 1883040, at *9 (finding that note presumption will not be rebutted if the note “is an
instrument the value of which rises and falls with the success of the issuer’s business” (citations omitted)).
116
    See Steigler v. Ins. Co. of North Am., 384 A.2d 398, 401 (Del. 1978); see also Urdan v. WR Cap. Partners, LLC,
2020 WL 7223313, at *6 n.17 (Del. Dec. 8, 2020) (“Absent some ambiguity, Delaware courts will not destroy or
twist policy language under the guise of construing it.” (internal quotation marks omitted)).
117
    See, e.g., In re Verizon Ins. Coverage Appeals, 222 A.3d at 573 (invoking federal law to read Securities Claim
definition).

                                                          18
         When a debtor declares bankruptcy, an estate is created.118 The estate encompasses “all

kinds of property . . . including causes of action.”119 A trustee is appointed to manage the

estate’s property, including causes of action.120 As the “representative of the estate,” only the

trustee has statutory authority to pursue the estate’s causes of action.121 Without court approval,

a creditor—like a debt security holder—or the debtor’s equity may not bring the estate’s

claims.122 Instead, the trustee “stands in the shoes” of the creditor or interest holder to bring

claims that the creditor may have had but for the bankruptcy filing.123

         FairPoint declared bankruptcy. FairPoint got a plan of reorganization confirmed. The

Trustee was appointed pursuant to the confirmed plan of reorganization. The Trustee had the

exclusive right to prosecute claims that belonged to FairPoint’s estate. The Trustee alone

brought the FairPoint Action because FairPoint’s debt security holders were barred from

bringing the Action without the Trustee’s permission.124 In other words, the Trustee brought the

FairPoint Action as a “security holder” of FairPoint because, by operation of law, no security

holder could do so. The Court, therefore, finds this part of the Securities Claim definition

satisfied.

         The Insurers contend the “by a security holder” phrase must be read strictly. According

to the Insurers, only a Securities Claim brought by a true security holder qualifies for coverage.

118
    Artesania Hacienda Real S.A. DE C.V. v. North Mill Cap., LLC (In re Wilton Armetale, Inc.), 968 F.3d 273, 280
(3d Cir. 2020) (citing 11 U.S.C. § 541).
119
    Id. at 280 (citing 11 U.S.C. § 541(a)) (internal quotation marks and citations omitted).
120
    Id.
121
    Id. (citing 11 U.S.C. §§ 323(a), (b)).
122
    See In re Emoral, Inc., 740 F.3d 875, 879 (3d Cir. 2014) (“[C]reditors [cannot] assert claims that are property of
the estate.” (internal quotation marks omitted)); see also 11 U.S.C. §§ 541(a)(1), (3) (defining “property of the
estate” to include “all legal and equitable interests of the debtor in property” and value recovered in a fraudulent
transfer action).
123
    See In re Tribune Co., 472 B.R. 223, 253 (Bankr. D. Del. 2012), vacated on other grounds, 2014 WL 2797042
(D. Del. June 18, 2014), rev’d on other grounds sub nom., In re Tribune Media Co., 799 F.3d 262 (3d Cir. 2015);
accord In re Wilton Armetale, Inc., 968 F.3d at 280.
124
    See In re Wilton Armetale, Inc., 968 F.3d at 284-85 (explaining that creditors cannot bring claims belonging to
the estate unless the trustee “relinquishes” or “abandons” them).

                                                          19
The Court is not persuaded by this argument on these facts. Coverage language must be read

broadly, not strictly.125 A holder is “a person with legal possession of a document of title or an

investment security.”126 But in bankruptcy, FairPoint’s debt security holders could not pursue

claims related to their notes. Only the Trustee could pursue those claims. The FairPoint Policy

clearly contemplated this possibility. Section 19 of the FairPoint Policy states that “[b]ankruptcy

or insolvency of any Organization . . . shall not relieve the Insurer[s] of any of [their]

obligations[.]” The Insurer’s reading would, in fact, relieve them of their obligation to cover

Securities Claims if FairPoint goes bankrupt. The Court must harmonize this provision with the

Securities Claim definition.127 The Insurer’s reading would make it meaningless and frustrates

the Insureds reasonable expectations.128

        The Insurers also speculate that Spinco debt security holders were not creditors in

FairPoint’s bankruptcy because Spinco is not explicitly named as a debtor entity in the litigation

Trustee’s complaint.129 The Court looks to the complaint as a whole and finds the FairPoint

Action permits the reasonable inference that Spinco security holders were among FairPoint’s

creditors.130 The complaint emphasizes that Spinco’s note issuance was integral to Verizon’s

alleged fraudulent transfers.131 The complaint also stresses that FairPoint’s capital structure was

125
    See, e.g., Med. Depot, Inc. v. RSUI Indem. Co., 2016 WL 5539879, at *7 (Del. Super. Sept. 29, 2016.
126
    Holder, BLACK’S LAW DICTIONARY (11th ed. 2019); see In re Verizon Ins. Coverage Appeals, 222 A.3d at 578-
79 (analyzing dictionary definitions in Securities Claim review).
127
    See Alta Berkeley, 41 A.3d at 385.
128
    But see Sonitrol Hld’g Co. v. Marceau, 607 A.2d 1177, 1183 (Del. 1992)(instructing courts not to render contract
terms meaningless); Med. Depot, 2016 WL 5539879, at *7 (observing that interpretation should “protect the
insured’s reasonable expectations” (citations omitted)).
129
    The Court notes that the most logical explanation for this “omission” is that Spinco ceased to exist after the
Transaction closed. See FairPoint SAC ¶¶ 102-13.
130
    See Blue Hen, 2011 WL 1598575, at *2, (observing that courts may look to the underlying complaint as a whole
to determine coverage), aff’d, 29 A.3d 245; see also 11 U.S.C. § 101(10)(A) (defining creditor to include an “entity
that has a claim against the debtor that arose at the time of or before” the bankruptcy).
131
    FairPoint SAC ¶¶ 102-13, 152-53, 158.

                                                        20
adversely affected by those notes.132 FairPoint was insolvent and unable to service the notes.133

It is therefore conceivable that Spinco security holders would be entitled to some distribution

from FairPoint’s estate after the FairPoint Action settled.

         3. The FairPoint Action was “Brought Derivatively.”

         Now, the Court needs to address the issue of whether the FairPoint Action was “brought

derivatively.” This inquiry involves a two-step analysis. The Court first assesses the claim’s

timing. If the claim attached before the bankruptcy was filed, then it can be derivative.134 Here,

the alleged fraudulent transfers occurred during the Transaction. The Trustee sought to avoid

transfers that happened prior to the filing of the Chapter 11 petition. The harm, therefore, was

inflicted before the bankruptcy was filed. Accordingly, the timing element is satisfied.

         The second step requires the Court to determine whether the claim is “general to the

estate or personal to the creditor.”135 Personal claims allege unique, creditor-specific injuries and

therefore are not property of the bankruptcy estate.136 In other words, personal claims are direct,

not derivative.137 By contrast, general claims “inure[] to the benefit of all creditors by enlarging

the estate[.]”138 General claims, then, belong to the estate and are derivative.139 When

132
    Id.
133
    Id. ¶ 151.
134
    In re Wilton Armetale, Inc., 968 F.3d at 282 (observing that a trustee may only bring derivative claims, which
must “predate[] the bankruptcy”); see In re Grossman’s Inc., 607 F.3d 114, 125 (3d Cir. 2010) (en banc) (In
bankruptcy, “a ‘claim’ arises when an individual is exposed . . . [to] conduct giving rise to an injury.” (quoting 11
U.S.C. § 101(5))).
135
    In re Wilton Armetale, Inc., 968 F.3d at 282 (citing In re Emoral, 740 F.3d at 879).
136
    Id; see In re Emoral, 740 F.3d at 879 (To be considered “property of the estate, the claim must be a general one,
with no particularized injury [to the holder] arising from it.” (internal quotation marks omitted)).
137
    In re Wilton Armetale, Inc., 968 F.3d at 283 (“Only when a particular creditor suffers a direct, particularized
injury that can be directly traced to the [fraudster] is the claim personal to that creditor and not property of the
estate.” (internal quotation marks omitted)).
138
    Id. at 282 (internal quotation marks and citations omitted); In re JMO Wind Down, Inc., 2018 WL 1792185, at *6
(Bankr. D. Del. Apr. 13, 2018) (“[A] derivative suit . . . is an asset of the corporation—which means that if . . . the
corporation is in bankruptcy, the suit is an asset of the bankruptcy estate” and “only may be pursued by the
[trustee].” (internal quotation marks and citations omitted)).
139
    See In re SemCrude, L.P., 796 F.3d 310, 316 (3d Cir. 2015); accord In re Wilton Armetale, Inc., 968 F.3d at 282.

                                                          21
distinguishing personal from general claims, the Court focuses on the theory of liability, not the

nature of the injury.140 The theory of liability for general claims is “not tied to the harm done to

a [particular] creditor by the debtor.”141 Instead, the theory of liability for general claims is

“based on an injury to the debtor’s estate that creates a secondary harm to all creditors[.]”142

        The FairPoint Action alleged fraudulent transfers.143 Fraudulent transfer claims are

general because the claims allege “third parties wrongfully depleted the debtor’s assets,” which

means “every creditor has a similar claim for the diversion of assets of the debtor’s estate.”144

Any recovery from avoidance actions “reverts back to the estate,” i.e., ultimately to “the general

creditor body.”145 Because that “recovery would serve to increase the pool of assets available to

all creditors,” fraudulent transfer claims are derivative as a matter of federal bankruptcy law.146

Accordingly, the type of claim element is satisfied as well. The “brought derivatively” element

in the Securities Claim definition is established.

        The Insurers advance several arguments about why the FairPoint Action was not

“brought derivatively.” First, the Insurers insist that the phrase “brought derivatively” was

meant to capture only paradigmatic stockholder breach of fiduciary duty actions. The language

of the FairPoint Policy does not support such a constraint. The plain language of the definition

refers to a “security holder.” A stockholder is just one class of security holder, but not the only

140
    In re Wilton Armetale, Inc., 968 F.3d at 282.
141
    Id. (internal quotation marks omitted).
142
    Id. (internal quotation marks omitted).
143
    See, e.g., FairPoint SAC ¶¶ 150-60.
144
    In re Wilton Armetale, Inc., 968 F.3d at 282 (cleaned up); see In re JMO, 2018 WL 1792185, at *9 (observing
that fraudulent transfer claims are “derivative in nature” (internal quotation marks omitted)); In re AstroPower
Liquidating Tr., 335 B.R. 309, 328 (Bankr. D. Del. 2005) (same).
145
    In re JMO, 2018 WL 1792185, at *7 (citations omitted).
146
    In re Wilton Armetale, Inc., 968 F.3d at 283 (citing In re Emoral, 740 F.3d at 881); see In re JMO, 2018 WL
1792185, at *7 (observing that courts focus on “who would receive the benefit of the recovery” when distinguishing
direct from derivative claims (citing Tooley v. Donaldson, Lufkin & Jenrette, Inc., 845 A.2d 1031, 1039 (Del.
2004))).

                                                       22
class. As here, a security holder can be a debt security holder. The Insureds and the Insurers

unambiguously intended coverage for claims brought by any class of security holder. Otherwise,

the parties would have agreed to limit the definition to stock or other equity security holders.

         Next, the Insurers suggest that fraudulent transfer claims are direct in bankruptcy. The

Insurers are incorrect. As explained above, courts have held repeatedly that fraudulent transfer

claims are derivative claims when brought in a bankruptcy.

         Finally, the Insurers assert that fraudulent transfer claims would be direct outside

bankruptcy and the Securities Claim definition cannot transform direct claims into derivative

ones simply due to bankruptcy. Fraudulent transfer claims, however, are not necessarily direct

claims outside bankruptcy. Delaware courts have held that creditors possess derivative standing

to bring clawback actions on behalf of a corporation when that corporation is insolvent.147

         The FairPoint Action alleged that FairPoint was insolvent at the time that Verizon’s

fraudulent transfers were executed.148 FairPoint’s creditors thus could have brought fraudulent

transfer claims derivatively outside bankruptcy. That aside, the Securities Claim definition is not

dependent on whether a Claim is brought outside or inside bankruptcy. The definition’s

unambiguous language does not make such distinctions. If anything, the FairPoint Policy

imagined both scenarios. The FairPoint Policy both disables certain exclusions when an insured

files for bankruptcy and totally prevents the Insurers from discriminating against coverage

147
    See Quadrant Structured Prods. Co., Ltd. v. Vertin, 115 A.3d 535, 551 (Del. Ch. 2015) (“Delaware law permits
creditors of an insolvent corporation to sue derivatively” because, among other reasons, creditors become “equitable
owners of the firm’s assets” when the firm is unable to pay its debts); id. at 561 (observing that fraudulent transfer
claims are claims creditors may bring derivatively when the entity is insolvent); see also N. Am. Cath. Educ.
Programming Found v, Gheewalla, 930 A.2d 92, 101 (Del. 2007) (“When a corporation is insolvent…its creditors
take the place of the shareholders as the residual beneficiaries of any increase in value. Consequently, the creditors
of an insolvent corporation have standing to maintain derivative claims…on behalf of the corporation…(emphasis in
original)(citations omitted).
148
    FairPoint SAC ¶ 151; see 11 U.S.C. § 548(a)(1)(B) (imposing an insolvency requirement on fraudulent transfer
actions).

                                                         23
merely because an insured filed for bankruptcy.149 Accordingly, the Court rejects the Insurers

opposition on this point, which would nullify the bankruptcy carve-outs in the FairPoint

Policy.150

         4. The FairPoint Action was Brought “on the Behalf of” FairPoint.

         Finally, the Court must address whether the FairPoint Action was brought “on the behalf

of” FairPoint. Under federal law, only the bankruptcy trustee or the debtor-in-possession may

bring derivative claims.151 That is because derivative claims always are property of the estate.152

The trustee is vested with exclusive authority to manage property of the estate, including causes

of action belonging to the debtor and creditors.153 As a result, the trustee “represent[s]” the

estate “with the capacity to sue and be sued on its behalf.”154 The federal construction of the

phrase “on the behalf of” mirrors the phrase’s plain meaning, which is “in the name of, on the

part of, as the agent or representative of.”155

         The Court recognizes, therefore, that a trustee does not bring derivative claims “on the

behalf of” creditors. The trustee’s power to sue is derived from the corporate debtor, not its debt

security holders. The debt security holders’ claims are converted into the debtor’s estate’s

property in bankruptcy.

         The Court’s finding is supported by the relationship between the debtor’s estate and

fraudulent transfer claims. “Fraudulent conveyance law aims to make available to creditors

149
    FairPoint Policy §§ 4(i)(3), 19.
150
    But see Sonitrol, 607 A.2d at 1183.
151
    See In re Wilton Armetale, Inc., 968 F.3d at 282-84.
152
    Id. at 283.
153
    Id. at 281 (“[O]nce a cause of action becomes the estate’s property, the Bankruptcy Code gives the trustee, and
only the trustee, the statutory authority to pursue it.”); see also id. (“A cause of action becomes property of the estate
if the claim existed at the commencement of the bankruptcy filing and the debtor could have asserted the claim on
his own behalf under state law.” (cleaned up)).
154
    Id. (citing 11 U.S.C. §§ 323(a), (b)) (emphasis added).
155
    On behalf of, BLACK’S LAW DICTIONARY (11th ed. 2019); see In re Verizon Ins. Coverage Appeals, 222 A.3d at
578-79.

                                                           24
those assets of the debtor that are rightfully a part of the bankruptcy estate[.]”156 Consistent with

the objective of equitable distribution, value is clawed-back via the trustee “by or on the behalf

of the” estate with ultimate benefit to the creditors.157 That is because fraudulent transfers cause

primary injury to the debtor “that creates secondary harm” to its creditors.158 The “interplay

between claims under . . . fraudulent transfer laws and the Bankruptcy Code” conforms to the

ordinary distinction between direct and derivative claims when it comes to recovery.159

         A derivative claim “belongs” to the firm in whose name the investor sues.160 Any

recovery is directed to the firm and might indirectly generate returns for investors.161 In

bankruptcy, the trustee brings claims that “belong” to the estate on its behalf as the estate’s

property, not the creditors’ property.162 Any recovery is directed to the estate and might

indirectly benefit those adequately prioritized or collateralized creditors who are entitled to a

share.163

         The FairPoint Action asserted claims regarding “injury” to FairPoint and to claw back

value for its estate. The Trustee did so as FairPoint’s representative, i.e., “on its behalf.” The

point of the FairPoint Action was to avoid transfers to the Insureds from FairPoint that were

156
    In re Tribune, 472 B.R. at 253.
157
    Id.; see In re Wilton Armetale, Inc., 968 F.3d at 282 (General-derivative claims, i.e., fraudulent transfer claims,
“promote[] the orderly distribution of assets in bankruptcy by funneling all asset-recovery . . . through a single plaintiff:
the trustee.” (internal quotation marks omitted)).
158
    In re Wilton Armetale, Inc., 968 F.3d at 283 (internal quotation marks omitted).
159
    In re Tribune, 472 B.R. at 253 (citing In re PWS Holding Corp., 303 F.3d 308, 314 (3d Cir. 2002)).
160
    See, e.g., In re M & F Worldwide Corp. S’holders Litig., 799 A.2d 1164, 1174 & n.31 (Del. Ch. 2002).
161
    See, e.g., In re Activision Blizzard, Inc. S’holder Litig., 124 A.3d 1025, 1052-55 (Del. Ch. 2015) (explaining the
various ways in which derivative recovery may be fixed at the corporate or stockholder level).
162
    In re Tribune, 472 B.R. at 253 (observing that the trustee may choose to extinguish claims that might have been
the creditors’ outside bankruptcy but that became property of the estate once the petition had been filed).
163
    See id. at 254 (“Any recoveries [from the fraudulent transfer claims] will be property of the estate pursuant to [11
U.S.C.] § 541(a)(3). . . . [T]he distribution of those funds would be a distribution or payment ‘by or on behalf of the
Company. . . .’”); accord In re Wilton Armetale, Inc., 968 F.3d at 284 (“[T]he Bankruptcy Code makes a creditor’s
derivative claims property of the estate. From there, the trustee decides how best to manage them for the benefit of
all creditors.” (emphasis added)); see also 11 U.S.C. § 541(a)(3) (providing that clawbacks are property of the
estate); 11 U.S.C. § 507 (setting recovery priority levels for creditors based on creditor type and claim type).

                                                            25
replaced with unpayable debt.164 The injury was to FairPoint primarily. The debt prevented

FairPoint from being feasible and paying its obligations as the obligations became due.

FairPoint’s alleged primary injury harmed its investors secondarily.165 FairPoint was more likely

to default and its investors were less likely to see return. The financial benefits of clawing back

those transfers would increase FairPoint’s estate’s pool of assets for distribution “by or on behalf

of” FairPoint’s estate to FairPoint’s creditors for potential recoupment of some of their losses.166

Accordingly, the Court finds the “on the behalf of” element satisfied.

         The Insurers press alternative readings of and theories about the phrase “on the behalf

of.” They start by arguing fraudulent transfer claims are brought “on the behalf of” creditors—to

whom those claims “belong”—as a matter of law. The Insurers, though, misstate the law. A

trustee brings fraudulent transfer claims on the behalf of the estate as its representative, not on

the behalf of a debtor’s creditors. The plan of reorganization or the Bankruptcy Code’s

distribution scheme controls distribution and not the creditors.167 In other words, unabandoned

claims belong to the estate, not to the creditors. That some creditors may ultimately reap

whatever sums increase the estate’s largess does not change this result.

         Moreover, the Insurers conflate the phrases “on the behalf of” and “for the benefit of.”

But the Policy does not say “for the benefit of.” The Policy states the clause, “on the behalf of.”

The Court will not insert language into a plain definition that the Insurers chose to omit.

164
    See 11 U.S.C. § 548(a)(1) (“The trustee may avoid any transfer of an interest of the debtor in property, or any
obligation . . . incurred by the debtor. . . .”).
165
    In re Wilton Armetale, Inc., 968 F.3d at 283-84 (identifying the various ways in which the trustee can dispose
claims).
166
    Id. at 283; In re Emoral, 740 F.3d at 881; In re JMO, 2018 WL 1792185, at *7; In re Tribune, 472 B.R. at 253-
54.
167
    In re Wilton Armetale, Inc., 968 F.3d at 283.

                                                         26
         The Insurers next urge the Court to abide by inconsistent statements in the FairPoint

complaint in which the Trustee said it was suing “on the behalf of” creditors.168 The Court,

however, can ignore an underlying claimant’s unilateral characterizations of its allegations.169

Looking to the complaint as a whole, and the federal law it incorporates, the Trustee was suing

on behalf of the FairPoint estate under FairPoint’s confirmed Chapter 11 plan for recovering

litigation assets.170 As explained, fraudulent transfer claims and their recoveries do not “belong”

to the creditors, regardless of the way the trustee stylizes its role.171

         Finally, the Insurers contend that if the Trustee was suing on the behalf of FairPoint, then

it was doing so through its uninsured estate. But there are at least two problems with this

argument. First, the debtor does not disappear in a Chapter 11 bankruptcy. The debtor exists

temporarily as an estate until it reorganizes and resumes operations. Unless the debtor fully

liquidates, there is no practical difference between the debtor and the interests it becomes when

the petition is filed.172 Second, even if there were a difference of commercial magnitude

between a debtor and its estate, the Insurers agreed it would not matter. As previously discussed,

168
    See, e.g., FairPoint SAC ¶¶ 4, 142.
169
    Northrop, 2021 WL 347015, at *11 (citing IDT Corp., 2019 WL 413694, at *10).
170
    The Court notes the fact that the Trustee was operating under a trust agreement does not change this outcome.
The U.S. Bankruptcy Court for the District of Delaware has accepted that litigation trusts and individual trustees are
equivalent when it comes to the Bankruptcy Code provisions addressing property of the estate. See generally In re
Lomas Fin. Corp., 1999 WL 33495524 (Bankr. D. Del. June 25, 1999) (requiring defendant to turn over documents
to a litigation trust because the documents were property of the estate under §§ 542(a), (e) of the Bankruptcy Code).
In addition, the U.S. Court of Appeals for the Third Circuit has treated a bankruptcy litigation trust and trustee as
indistinguishable in analyzing derivative claims and the scope of an estate’s representation. See In re SemCrude,
L.P., 796 F.3d at 312-14, 322. The Trustee also confirmed that the Trustee and the trust were “representatives of
FairPoint’s estate[.]” FairPoint SAC ¶ 142.
171
    See In re Wilton Armetale, Inc., 968 F.3d at 283 (“[W]e decline to rely on the trustee’s assertion that [the] claims
‘belonged to . . . [the creditor] (not the Wilton estate). . . .’ We will not outsource to the trustee our duty to determine
what is part of the estate.” (citation omitted)).
172
    See In re Wilton Armetale, Inc., 968 F.3d at 284 (observing that a debtor may retain abandoned property of the
estate, however gathered, once the debtor obtains a discharge); 11 U.S.C. § 544(c) (same); cf. In re Edwards, 2003
WL 22110778, at *2 (Bankr. E.D. Pa. Aug. 28, 2003) (observing a conceptual difference between the debtor and the
estate for Bankruptcy Code construction purposes, but not a practical difference as a matter of business reality).

                                                            27
the Insurers assured the Insureds that an insured Organization’s bankruptcy would not cancel

coverage otherwise provided under the FairPoint Policy.

      C. THE INSURERS FAIL TO SHOW THAT COVERAGE IS UNAVAILABLE UNDER THE VERIZON
         POLICIES AS A MATTER OF LAW

         The Insureds do not seek coverage under the Verizon Policy through the Insureds

Motion. The Insurers, however, move separately to oppose coverage for the FairPoint Action

under the Verizon Policy. The Insurers contend that no coverage is available for any Spinco

Securities Claim liabilities because Spinco ceased being a “Subsidiary” over which Verizon had

“Management Control” by the time the Verizon Policy was purchased.173 The Court finds that

the Insurers have not carried their burden to show they are entitled to judgment as a matter of law

here.

         As an initial matter, the Verizon Policy defines “Subsidiary” to include entities over

which Verizon has Management Control “on or before. . . the Policy Period.”174 Verizon owned

100% of Spinco “before” the Policy Period, i.e., as a special purpose vehicle through March 31,

2008. Spinco liabilities therefore cannot be precluded on this definitional basis.

         In addition, the Verizon Policy was amended to include the following endorsement:

“‘Deal’ means the merger of [FairPoint], [and] [Spinco], currently a subsidiary of [Verizon], on

March 31, 2008[.]”175 That same endorsement further provides that coverage is available for “a

Claim involving acts, errors or omissions in connection with or relating to the Deal[.]”176

Plainly, the parties intended this endorsement to expand coverage to liabilities incurred in the

173
    Verizon Policy § 2(q) (“Management Control means: (1) owning interests representing more than 50% of the
voting, appointment or designation power for the selection of the majority of [managerial staff]; or (2) “having the
right to . . . appoint or designate a majority of [managerial staff].” (internal quotation marks omitted)); id. § 2(z)
(“Subsidiary means: (1) any for-profit entity that is not formed as a partnership over which [Verizon] has
Management Control. . . .” (internal quotation marks omitted)).
174
    Verizon Policies § 2(z) (emphasis added) & Endorsement #7.
175
    Id. Endorsement #34.
176
    Id.

                                                          28
Transaction to a maximum extent. In fact, this language is much broader than the technical

language in the Securities Claim definition and contains none of the latter’s restrictions. The

FairPoint Action easily alleged “acts”177 in connection with the Transaction. For example, the

Trustee alleged fraudulent transfers between Verizon and Spinco that led to FairPoint’s

bankruptcy.178 The Trustee also stated that the estate contained some Spinco causes of action.179

The FairPoint Action permits the reasonable inference that FairPoint was not exclusively liable

for Spinco’s wrongdoing merely because FairPoint continued to operate as a new business.180 If

the Court were to adopt the Insurers’ interpretation that in no event is there coverage for

Securities Claims, then the Deal-specific language and its inclusion is superfluous and/or

meaningless.

         The Court must harmonize all provisions, not render some illusory. The Insurers’

reading, though, would deny coverage on the Deal-specific basis and the Securities Claim basis.

Their reading also would ignore that Spinco was added back into, or recognized as a

Subsidiary—and therefore, an Organization181—by the Verizon Policy for some purpose.

Though Spinco dissolved as a corporate law matter, its causes of action still may have existed as

a bankruptcy law matter because the alleged fraudulent transfers occurred before the merger.182

In purchasing the Verizon Policy five days after FairPoint’s bankruptcy was filed, Verizon could

have reasonably expected that any Spinco-related liabilities would be covered despite Spinco’s

177
    Act, BLACK’S LAW DICTIONARY (11th ed. 2019) (“Something done or performed, esp. voluntarily[.]”).
178
    See, e.g., FairPoint SAC ¶¶ 107, 150-59, 163.
179
    Id. ¶¶ 4, 142, 151-53.
180
    See, e.g., id. ¶¶ 150-59 (repeatedly separating Spinco’s transfers from FairPoint’s); see also Elmer v. Tenneco
Resins, Inc., 698 F. Supp. 535, 542 (D. Del. 1988) (explaining that, in order to impose successor liability on a
merged entity for the dissolved entity’s liabilities, the merged entity must be “a continuation of the [dissolved]
entity,” not simply the “continuation of [a] business operation” of that entity (citations omitted)).
181
    Verizon Policy §§ 2(n), (t), (z).
182
    FairPoint SAC ¶¶ 102-13, 151-53, 156-57; see In re Wash. Mut., Inc., 464 B.R. 656, 670 (Bankr. D. Del. 2012)
(holding that equity holders of an entity that dissolved in a merger still were entitled to a distribution from assets
recovered by the new company’s estate on a claim that existed before the merger).

                                                          29
divestiture and dissolution. Accordingly, the Insurers have not demonstrated as a matter of law

that Spinco’s role in the Transaction does not create any Spinco Securities Claim coverage under

the Verizon Policy.

         Again, the Insureds have not sought Securities Claim coverage under the Verizon Policy

for the FairPoint Action. There may be none. But the Court finds that these provisions raise

genuine and material issues sufficient to deny the Insurers’ motion on this point. The parties

may resolve issues about Securities Claims and the Verizon Policy at trial. The Court simply

must detect issues at this stage, not decide them.

      D. VERIZON IS ENTITLED TO SUMMARY JUDGMENT ON ITS DEFENSE COSTS

         The Insureds seek coverage for Defense Costs under the FairPoint Policy. Defense Costs

are defined to include “reasonable and necessary” fees incurred from a Claim.183 After denying

coverage and basically ignoring the FairPoint Action for six years, the Insurers now complain

that the Insureds’ fees are unreasonable and unnecessary. In support of this objection, the

Insurers offer a belated set of affidavits in which forensic accountants opine that the Insureds’

counsel’s resources and billing methodologies were inappropriate and excessive.184 The Insurers

also point to their declination letters in which they stated they “reserved all their rights” despite

denying coverage entirely.185 In essence, then, the Insurers ask the Court to audit the Insureds’

counsel’s billable hours to determine if the fees charged were reasonable and necessary.

         “The Court is not required to conduct a line-item review” of fees.186 Moreover, the Court

is not required to “examine individually each time entry and disbursement.”187 The Court is also

183
    FairPoint Policy § 2(f).
184
    D.I. 121, Exs. A-B.
185
    D.I. 99, Exs. H-J.
186
    Boeing Co. v. Spirit Aerosys, Inc., 2017 WL 6021423, at *3 (Del. Super. Dec. 5, 2017).
187
    Id. (internal quotation marks omitted).

                                                        30
not required “to conduct an independent inquiry of the appropriateness of counsel’s fee for a

particular filing or litigation tactic.”188 Where, as here, the litigation’s history demonstrates that

the Insurers denied coverage, declined to involve themselves with the defense, had possession of

the insured’s invoices for six years,189 and only challenged Defense Costs in response to a

dispositive motion,190 the Court declines the invitation to probe counsel’s fees.191 “The

[Insurers] had the ability to raise a fairness and reasonableness issue when [they] initially denied

coverage based on the Securities Claim definition as well as during the [six-year] period [they]

had [Verizon’s] Defense Costs invoices[.]”192 They did not. The Court is not equipped to

second-guess the “reasonableness” that the Insurers now untimely bemoan.

        The Insurers’ best reply is that they “reserved all their rights” in their letters. The Court

is unclear as to what “rights” the Insurers intended to reserve when they unequivocally refused to

entertain the FairPoint Action at all. It certainly was their “right” not to participate. But it also

was Insureds’ “right” to assume their Defense Costs were reasonable in the face of the Insurers’

silence. The Insurers cannot have it both ways. The Court finds the Insurers fail to raise a

“genuine issue of material fact”193 regarding the Insureds’ Defense Costs. The Court finds the

Defense Costs are reasonable as a matter of law. Accordingly, the Insureds’ Defense Costs are

covered under the FairPoint Policy.

188
    Id. (citation omitted).
189
    D.I. 99, Exs. I-M.
190
    Cf. Ethica Corp. Fin. S.r.L. v. Dana Inc., 2018 WL 3954205, at *3 (Del. Super. Aug. 16, 2018) (“Courts may
disregard or deem waived any arguments made in a reply brief which [were] not raised in the opening brief.”
(citations omitted)); see also id. n.37 (collecting cases).
191
    See Viking Pump, Inc. v. Century Indem. Co., 2013 WL 7098824, at *28-29 (Del. Super. Oct. 31, 2013), rev’d on
other grounds sub nom., In re Viking Pump, Inc., 148 A.3d 633 (Del. 2016).
192
    Id., at *9, see also In re Verizon Ins. Coverage Appeals, 222 A.3d 566.
193
    Del. Super. Ct. Civ. R. 56(c) (emphasis added).

                                                       31
                                 VI. CONCLUSION

       For the reasons set forth above, the Court will GRANT the Insureds Motion and DENY

the Insurers Motion.

Dated: February 23, 2021
Wilmington, Delaware

                                         /s/ Eric M. Davis
                                         Eric M. Davis, Judge

cc: File&ServeXpress

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