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The Supreme Court of Delaware has ruled that claims brought by a bankruptcy trustee against Verizon Communications Inc. were not securities claims for purposes of various insurance policies because the claims did not allege any violation of regulations, rules or statutes regulating securities.

The Case

In 2006, Verizon Communications Inc. divested its print and electronic directories business to its stockholders in a tax-free "spin-off" transaction. As part of the transaction, Verizon created Idearc Inc., and appointed John W. Diercksen, a Verizon executive, to serve as Idearc's sole director.

Idearc obtained Verizon's print and online directory business in exchange for about 146 million shares of Idearc stock, $7.1 billion in Idearc debt, and $2.5 billion in cash. Verizon then distributed Idearc common stock to Verizon shareholders. Idearc launched as a separate business with $9.1 billion in debt.

In connection with the Idearc spinoff, Verizon and Idearc purchased primary and excess executive and organizational liability insurance policies. Illinois National Insurance Co. issued the primary policy and Zurich American Insurance Co. and other carriers issued follow form excess policies.

The insurance policies covered certain claims made against the insureds during the six-year policy period that exceeded a $7.5 million retention. An endorsement (Endorsement No. 7) to the policies stated that "in connection with any securities claim," and "for any loss … incurred while a securities claim is jointly made and maintained against both the organization and one or more insured person(s), this policy shall pay 100% of such loss up to the limit of liability of the policy."

The policies defined "securities claim" as a claim against an insured "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)."

The policies also provided that Verizon could recover its defense costs when a securities claim was brought against it and covered directors and officers and Verizon indemnified those directors and officers.

Idearc operated as an independent, publicly traded company until it filed for bankruptcy in 2009. During the reorganization, the bankruptcy court appointed U.S. Bank N.A. as trustee of a litigation trust to pursue claims against Verizon and others on behalf of creditors.

In 2010, U.S. Bank filed suit in Texas federal court against Verizon, two related entities, and Diercksen, the Idearc director at the time of the spinoff. U.S. Bank as trustee sought $14 billion in damages allegedly caused by saddling Idearc with excessive debt at the time of the spinoff. Its complaint alleged violations of fraudulent transfer statutes; payment of unlawful dividends in violation of Delaware General Corporation Law; and common-law counts for breach of fiduciary duty, aiding and abetting a breach of fiduciary duty, promoter liability, unjust enrichment, and alter ego liability.

After a bench trial, Verizon prevailed and the U.S. Court of Appeals for the Fifth Circuit subsequently affirmed.

During the nearly five years of litigation, Verizon and Diercksen incurred more than $48 million in defense costs.

Verizon notified Illinois National of the U.S. Bank action and sought coverage for its joint defense costs under the insurance policies it had acquired from Illinois National and the excess carriers.

The insurers refused to cover Verizon's defense costs, claiming that the U.S. Bank complaint did not constitute a securities claim.

Verizon sued its insurers and the parties cross-moved for summary judgment on whether the U.S. Bank action fell within the policies' definition of a securities claim

The trial court granted summary judgment in favor of Verizon, and the dispute reached the Supreme Court of Delaware.

The insurers claimed, among other things, that the U.S. Bank complaint did not raise a violation of any "regulation, rule or statute regulating securities" because the words "regulating securities" limited coverage to specific securities activities as opposed to matters of general applicability.

For its part, Verizon argued that the plain language of the securities claim definition included claims alleging a violation of "any … regulation, rule or statute regulating securities (including but not limited to, the purchase or sale … [of] securities." According to Verizon, the use of the word "any" showed the parties did not intend to exclude common law "rules" or claims that did not "specifically" or "principally" regulate securities.

The Delaware Supreme Court's Decision

The Supreme Court of Delaware reversed, finding that the definition of a securities claim was unambiguous and that the insurers' reading of the definition was the proper one based on the term's "plain meaning."

In its decision, the court explained that, looking at the definition of securities claim "as a whole" and applying the "plain and ordinary meaning of the words," two things stood out: the words used in the definition mirrored those in a specific area of the law recognized as "securities regulation," and securities laws typically involved not only statutes but also rules and regulations.

The court added that its understanding also was confirmed by the parties' use of the limiting phrase "regulating securities."

The court then stated that, using the "plain meaning of the words of the policy" and not stretching their meaning to create an ambiguity, the regulations, rules or statutes must be those that "regulate securities." In other words, the court continued, regulations, rules or statutes regulating securities were those "specifically directed towards securities, such as the sale, or offer for sale, of securities. They would not be directed at the common law or statutory laws outside the securities regulation area."

Because the causes of action against Verizon alleged fiduciary duty violations, unlawful dividends under Delaware law, statutory fraudulent transfer claims, and unjust enrichment and alter ego common law claims, and because none of the claims implicated a "regulation, rule or statute" specifically directed towards securities law, none of the causes of action fell under the securities claim definition of the insurance policies, the court held.

Accordingly, it concluded that the U.S. Bank litigation did not involve a securities claim as defined by the insurance policies and, therefore, that Verizon was not entitled to recover its defense costs from the insurers.

The case is In re Verizon Insurance Coverage Appeals.

Attorneys involved include: for Illinois National Insurance and National Union Fire Insurance Co. of Pittsburgh, Kurt M. Heyman and Aaron M. Nelson of Heyman Enerio Gattuso & Hirzel in Wilmington; Scott B. Schreiber, James W. Thomas Jr. and William C. Perdue of Arnold & Porter Kaye Scholer in Washington, D.C., and Robert Reeves Anderson in Denver.

For Zurich American Insurance, Bruce W. McCullough of Bodell Bové in Wilmington; and Ronald P. Schiller, Daniel J. Layden and Jason A. Levine of Hangley Aronchick Segal Pudlin & Schiller in Philadelphia.

For U.S. Specialty Insurance, John C. Phillips Jr. and David A. Bilson of Phillips, Goldman, McLaughlin & Hall in Wilmington; and Joseph A. Bailey III of Clyde & Co in Washington, D.C.

For Verizon Communications Inc., Verizon Financial Services LLC and GTE Corp., Jennifer C. Wasson and Carla M. Jones of Potter Anderson & Corroon in Wilmington; and Robin L. Cohen, Keith McKenna and Michelle R. Migdon of McKool Smith in New York City.

Steven A. Meyerowitz, a Harvard Law School graduate, is the founder and president of Meyerowitz Communications Inc., a law firm marketing communications consulting company. Meyerowitz is the director of the Insurance Coverage Law Center and editor-in-chief of journals on insurance law, banking law, bankruptcy law, energy law, government contracting law, and privacy and cybersecurity law, among other subjects. He can be contacted at [email protected].