Last week the Texas Supreme Court issued an emergency stay while it considers a petition for writ of mandamus in a massive securities fraud case involving an energy company accused of paying bribes to the Angolan government in exchange for offshore drilling concessions, an international investment brokerage house that backed the company, and the company’s dozen or so insurance carriers.
In re Illinois National Insurance Company (No. 22-0872) originated in a securities fraud class action brought by GAMCO as class representative against Cobalt International Energy Inc. and its directors and officers. The class action plaintiffs alleged that Cobalt had made substantial payments to the Angolan government through a partnership with three Angolan oil companies. In return, the Angolan government gave Cobalt rights to conduct offshore exploration and production. GAMCO offered to settle the litigation for $175 million, which Cobalt refused. Cobalt subsequently declared bankruptcy, leading to a nonrecourse settlement agreement with GAMCO relieving Cobalt and its directors and officers of all obligations in the securities fraud litigation. Instead, GAMCO agreed to seek recovery solely from the proceeds of Cobalt’s insurance policies. The settlement amount went up to $220 million, which was fine with Cobalt since the agreement didn’t obligate it pay anything. In fact, the agreement gave Cobalt a partial interest in any recovery from the insurers in an amount of more than $28 million. The bankruptcy court approved, but neither it nor the federal district court expressly validated GAMCO’s plan to sue the insurers or any opinion on the coverage issues.
GAMCO sued the insurers in a declaratory judgment action in a Harris County district court. In a series of head-scratching rulings, the trial court denied the insurers’ motion for summary judgment on the basis that GAMCO lacked standing to bring a direct action the insurers. It likewise denied the insurers’ summary judgment motion arguing that Cobalt suffered no loss because the settlement agreement not only let them off the hook but promised them a share of the proceeds should GAMCO succeed. To cap off this flurry of rulings, the trial court approved GAMCO’s motion allowing the settlement agreement into evidence and barring the insurers’ from attacking the agreement at trial, apparently ignoring a contrary SCOTX ruling in Great Am. Ins. Co. v. Hamel, 525 S.W.3d 655 (Tex. 2017). The insurers unsuccessfully sought mandamus from the Houston [14th] Court of Appeals.
This case raises multiple issues, to wit: (1) does GAMCO have standing to pursue an action against the insurers despite Texas law’s “no direct action” rule; (2) do Cobalt’s directors and officers (or GAMCO under the nonrecourse settlement agreement) have standing to assert an indemnity claim against the insurers when they have not and will not ever suffer a “loss” as defined by the policy; and (3) is the settlement agreement, which was concluded without a fully adversarial proceeding, binding on the insurers and admissible as evidence of Cobalt’s liability or damages in the underlying securities litigation? The upshot is that, unless mandamus is granted, the insurers face being dragged through a trial in a nine-figure case when the key issues have already been decided against them despite what appears to be well-settled law in their favor.
The trial court’s rulings in this case appear very problematic to us. By issuing an emergency stay, SCOTX has indicated its intention to get to the bottom of the matter and, hopefully, to prevent this case from bouncing up and down in the courts for next several years, as it most certainly will if the summary judgment issues are not properly resolved.