SVB’s bankruptcy case faces bumps, three months on

In a potentially significant decision that favors former officers and directors of the defunct Silicon Valley Bank, the US bankruptcy court presiding over the bank’s chapter 11 case has allowed for the payment of those officials’ defense costs under director and officer liability insurance policies.

The ruling came on 22 May in response to a motion by 16 of the debtor’s current and former directors, including Gregory W Becker, the chief executive officer at the time of the bankruptcy filing in March. The official committee of unsecured creditors objected, and the judge offered a detailed review of the facts and law in response.

In a 21-page opinion, Judge Martin Glenn of the US Bankruptcy Court for the Southern District of New York wrote that there are already seven class actions underway in other jurisdictions against certain of the insured movants. In one, the lead plaintiff is the City of Hialeah Employees’ Retirement System.

The unsecured creditors argued that the uncontrolled payment of defense costs to Becker and the others could severely diminish proceeds that could otherwise benefit the debtor estate. At worst, individual defendants might sop up all the available money, leaving the estate without any coverage.

In considering this motion, the court looked at the “balance of harms”, Glenn wrote in the opinion. Since both sides have an interest in the money the insurance companies have available for legal defense, the side to be favoured is the side that is least hurt by a loss on this point. The potential harm to the debtor, the depletion of assets it may need later, is now a matter of speculation. On the other hand, prospective harm to the movants is “imminent and significant since there are current lawsuits pending for which the Movants require access to defense funds”, the document stated.

Accordingly, the court approved of the motion: the directors and officers will be able to afford defending themselves against lawsuits.

There will likely be additional overlaps between the civil litigation and the bankruptcy proceedings. From early indications, both are likely to be ongoing for some time.

On 17 May, Judge Glenn granted a motion by the SVB Financial Group (“Debtor”), authorising it to reject certain unexpired leases of nonresidential real estate, returning the properties to the respective landlords. Glenn offered an eight-page explanation in this uncontested matter, noting that the premises specified on the leases are no longer used in the debtor’s continuing operations and that the rejection of the leases now will save the debtor millions of dollars in rent, more than could have been gained by continuing the leases and subleasing.