Pillsbury Secures Sweeping Appellate Victory for Directors and Officers of Tower Group International, Ltd.

Holders of $228 million in trust preferred securities issued by subsidiaries of Tower Group, an insurance holding company, pursued contract, fraud, tortious interference, fiduciary duty, and related aiding and abetting claims, along with successor and alter ego liability theories. Plaintiffs initially secured a favorable summary judgment ruling and subsequently obtained the money judgments against the securities’ issuers.

However, on appeal, Pillsbury Litigation partner Rolando T. Acosta and associates Dante W. Apuzzo and Ahmed Halim, working alongside teams from Quinn Emanuel Urquhart & Sullivan and Dorf Nelson & Zauderer in representing defendants, secured dismissal of all claims against the non-issuer defendants.

Acosta presented oral argument for the directors and officers, with Quinn Emanuel’s John Bash and Dorf Nelson & Zauderer’s Mark C. Zauderer also arguing the appeals. The First Department’s unanimous decision in Alesco Preferred Funding VIII, Ltd. v. ACP Re, Ltd. and Preferred Term Securities XXV, Ltd. v. ACP Re, Ltd. rejected an effort by investors, including hedge funds and collateralized debt obligation vehicles, to recover from the issuers’ parent companies and individual directors and officers.

The Court recognized that the rescue transaction, designed to preserve Tower’s struggling insurance businesses and protect policyholders, was an arm’s-length deal approved by eight regulatory bodies with no viable alternative. It found no evidence of fraud or bad faith concerning the transaction and highlighted unrebutted expert evidence tying the securities’ nonpayment to unforeseen liabilities on earlier insurance policies.

Applying Bermuda law, the Court held that directors of a parent company do not owe fiduciary duties to creditors of its subsidiaries, even when the parent or subsidiary is insolvent or approaching insolvency. The Court also dismissed the fraud claim against Tower’s former CFO, rejecting investors’ reliance on his statements about anticipated interest payments and capital levels as a basis for concluding that another company had assumed the debt. Pillsbury and its co-counsel turned an adverse summary judgment ruling into a complete dismissal of the claims against the non-issuer defendants.