Trenwick America Litigation Trust v. Ernst & Young, L.L.P.

OPINION

This case is unusual. The primary defendants in this case were directors of a publicly listed insurance holding company. All but one of the eleven directors was an independent director. The other director was the chief executive officer of the holding company.

In 1998, the holding company embarked on a strategy of growth by acquisition. Within a span of two years, the holding company acquired three other unaffiliated insurance companies in arms-length transactions. The two transactions at issue in this case involved the acquisition of publicly-traded entities and were approved by a vote of the holding company’s stockholders. The holding company’s stockholder base was diverse and the company had nothing close to a controlling stockholder.

In connection with the last acquisition, the holding company redomiciled to Bermuda, for the disclosed reason that tax advantages would flow from that move. Consistent with the objective of reducing its tax burden, the holding company reorganized its subsidiaries by national line, creating lines of United States, United Kingdom, and Bermudan subsidiaries. As a result of that reorganization, the holding company’s top U.S. subsidiary came to be the intermediate parent of all of the holding company’s U.S. operations. The top U.S. subsidiary also continued and deepened its role as a guarantor of the holding company’s overall debt, including becoming a primary guarantor of $260 million of a $490 million line of credit, a secondary guarantor of the remainder of that debt, and assuming the holding company’s responsibility for approximately $190 million worth of various debt securities. Nonetheless, after that reorganization, the financial statements of just the top U.S. subsidiary indicated that it had a positive asset value of over $200 million.

In 2003, the holding company had to place its insurance operations in run-off globally. The holding company and its top U.S. subsidiary filed for bankruptcy. The cause of the failure was that the claims made by the insureds against the holding company’s operating subsidiaries (including the insureds of the companies it had acquired) exceeded estimates and outstripped the holding company’s capacity to service the claims and its debt.

The reorganization plan for the top U.S. subsidiary resulted in the creation of a Litigation Trust. That Trust was assigned all the causes of action that the U.S. subsidiary owned.

The Litigation Trust then brought this case. The essential premise of its claims is that the majority independent board of the holding company engaged in an imprudent business strategy by acquiring other insurers who had underestimated their potential claims exposure. As a result of that imprudent strategy, the holding company and its top U.S. subsidiary were eventually rendered insolvent, to the detriment of their creditors. Not only that, because the top U.S. subsidiary took on obligations to support its parent’s debt and actually assumed some of that debt, the top U.S. subsidiary and its creditors suffered even greater injury than the holding company and its creditors.

Although the complaint is full of inflammatory adjectival assaults on the motives *173 of the holding company board, they are all of an entirely conclusory and unsupported nature. No pled facts suggest any plausible motive on the part of the holding company’s board to cause the company or its top U.S. subsidiary to become insolvent or to dishonor the rights of them creditors. In fact, what the complaint pleads is that the managers and directors of the holding company simply replaced their existing options in the previous public entity, which had been domiciled in Delaware, with identical options in the Bermuda entity resulting from the last acquisition.

Furthermore, although the complaint accuses the board of the holding company of a lack of diligence, it does so by conclusory insult, not by fact pleading. The complaint is entirely devoid of facts indicating that the board did not engage in an appropriate process of diligence before deciding to make its acquisitions and to reorganize its subsidiary structure. Instead, the complaint argues from hindsight, that the fact that the holding company’s strategy ultimately failed must mean that the process that led to its adoption was the product of culpably sloppy efforts. Even less does the complaint confront the reality that the holding company directors are immune from liability for breaches of their duty of care, due to the holding company’s exculpatory charter provision.

Had this claim been brought by a stockholder of the holding company, it would be easily stopped at the gate, because the complaint fails to plead a breach of fiduciary duty. This is not surprising given that it is unusual for arms-length transactions approved by majority independent boards and a diverse stockholder base to be subject to attack; after all, they are the quintessential transactions subject to the protection of the business judgment rule.

Here, what the Litigation Trust relies upon to make up for its pleading deficiencies is the later-arising fact of insolvency. But that fact does not aid it.

For one thing, the Litigation Trust has failed to plead facts supporting the inference that either the holding company or its top U.S. subsidiary were insolvent at the time of the transactions challenged in the complaint. For that reason, settled law indicates that the holding company owed no fiduciary duty to the top U.S. subsidiary or that entity’s creditors. If the holding company, as controlling stockholder, owed no such duties, it is impossible to fathom how the holding company’s directors owed such duties.

Moreover, the mere fact that the holding corporation caused its wholly-owned subsidiary to take on more debt to support the holding corporation’s overall business strategy does not buttress a claim. Wholly-owned subsidiary corporations are expected to operate for the benefit of their parent corporations; that is why they are created. Parent corporations do not owe such subsidiaries fiduciary duties. That is established Delaware law.

That is not to say that Delaware law leaves the creditors of subsidiaries without rights. That would be inaccurate. Delaware has a potent fraudulent conveyance statute enabling creditors to challenge actions by parent corporations siphoning assets from subsidiaries. And Delaware public policy is strongly supportive of freedom of contract, thereby supporting the primary means by which creditors protect themselves — through the negotiations of toothy contractual provisions securing their right to seize on the assets of the borrowing subsidiary.

What Delaware law does not do is to impose retroactive fiduciary obligations on directors simply because their chosen business strategy did not pan out. That is what the Litigation Trust seeks here, to *174 emerge from the wreckage wielding the club that the holding company’s own failed subsidiary can now accuse the holding company’s directors of a breach of fiduciary duty. To sanction such a bizarre scenario would undermine the wealth-creating utility of the business judgment rule.

As untenable is the Litigation Trust’s attempt to hold the former directors of the U.S. subsidiary liable for causing the subsidiary to support the holding company’s business strategy. Again, the Litigation Trust fails to plead any facts suggesting a disloyal motive on the part of these former directors. In fact, the motive the Litigation Trust points to does not create an inference that these directors would have wished the subsidiary to become insolvent. Each of them owed his livelihood to the subsidiary. Why would they have wished to put their jobs in jeopardy purposely by hazarding insolvency?

Likewise, the complaint fails to plead facts suggesting that the subsidiary directors were less than diligent or misunderstood their roles. A wholly-owned subsidiary is to be operated for the benefit of its parent. A subsidiary board is entitled to support a parent’s business strategy unless it believes pursuit of that strategy will cause the subsidiary to violate its legal obligations. Nor does a subsidiary board have to replicate the deliberative process of its parent’s board when taking action in aid of its parent’s acquisition strategies.

In the complaint, the Litigation Trust also has attempted to state a claim against the former subsidiary directors for “deepening insolvency.” As noted, however, the complaint fails to plead facts supporting an inference that the subsidiary was insolvent before or immediately after the challenged transactions. Equally important, however, is that Delaware law does not recognize this- catchy term as a cause of action, because catchy though the term may be, it does not express a coherent concept. Even when a firm is insolvent, its directors may, in the appropriate exercise of their business judgment, take action that might, if it does not pan out, result in the firm being painted in a deeper hue of red. The fact that the residual claimants of the firm at that time are creditors does not mean that the directors cannot choose to continue the firm’s operations in the hope that they can expand the inadequate pie such that the firm’s creditors get a greater recovery. By doing so, the directors do not become a guarantor of success. Put simply, under Delaware law, “deepening insolvency” is no more of a cause of action when a firm is insolvent than a cause of action for “shallowing profitability” would be when a firm is solvent. Existing equitable causes of action for breach of fiduciary duty, and existing legal causes of action for fraud, fraudulent conveyance, and breach of contract are. the appropriate means by which to challenge the actions of boards of insolvent corporations.

Refusal to embrace deepening insolvency as a cause of action is required by settled principles of Delaware law. So, too, is a refusal to extend to creditors a solicitude not given to equityholders. Creditors are better placed than equity-holders and other corporate constituencies (think employees) to protect themselves against the risk of firm failure.

The incantation of the word insolvency, or even more amorphously, the words zone of insolvency should not declare open season on corporate fiduciaries. Directors are expected to seek profit for stockholders, even at risk of failure. With the prospect of profit often comes the potential for defeat.

The general rule embraced by Delaware is the sound one. So long as directors are respectful of the corporation’s obligation to honor the legal rights of its creditors, they *175 should be free to pursue in good faith profit for the corporation’s equityholders. Even when the firm is insolvent, directors are free to pursue value maximizing strategies, while recognizing that the firm’s creditors have become its residual claimants and the advancement of their best interests has become the firm’s principal objective.

Along with dismissing the Litigation Trust’s fiduciary duty claims and its deepening insolvency claim, I dismiss its claims of fraud. The fraud claims are not pled with appropriate particularity and rest on the general assertion that because the holding company and subsidiary became insolvent nearly three years after the last challenged transaction, the books and records of the companies must have contained knowing misrepresentations of material fact. Because such conclusory allegations do not satisfy Rule 9(b) and for other reasons, the fraud claims are not viable.

Finally, the Litigation Trust advances a host of claims against third-party advisors. Rather than detail what the advisors did that was wrongful, the Litigation Trust devoted much of the complaint to setting forth accusations made against these prominent advisors in other lawsuits. For a myriad of reasons, the claims against these advisors are deficient and will also be dismissed.

I now turn to the facts underlying this case and then to the merits of the motions to dismiss.

I. Factual Background

A. The Parties

In 1999, Trenwick Group Inc. operated a specialty insurance and reinsurance organization issuing policies around the world. Trenwick Group Inc., which was a holding company, had five direct subsidiaries at that time and was a publicly-traded corporation. The most important of those subsidiaries for purposes of this case is Tren-wick America Corporation (“Trenwick America”), which eventually became a wholly-owned subsidiary of Trenwick Group Inc.’s successor, Trenwick Group Limited. For the sake of clarity, I refer to both Trenwick Group Inc. and Trenwick Group Limited simply as “Trenwick.” At all times, Trenwick was the ultimate parent and the company whose shares were publicly listed.

On August 20, 2003, both Trenwick and Trenwick America filed for chapter 11 bankruptcy protection in the U.S. District Court for the District of Delaware. 1 As part of Trenwick America’s Plan of Reorganization, the plaintiff Litigation Trust was formed and invested with the right to bring claims belonging to Trenwick America. Exercising that right, on September 20, 2005, the Litigation Trust filed this action.

The defendants in this case can be divided into three general groups: 1) the former directors of Trenwick, 2 the parent corporation; 2) the former directors of Trenwick America; 3 and 3) certain former *176 advisors of Trenwick. 4

B. The History Of The Trenwick Companies Leading Up To This Litigation

1.What Was Trenwick As Of The Beginning Of 1998?

The amended complaint (“complaint”) is a confusing muddle, laden with irrelevancies, and failing to set forth a coherent course of events. From the murk of the complaint, and certain public documents it relies upon, I will attempt to craft a more understandable rendition of Trenwick’s relevant history.

Critical to that endeavor is establishing a baseline understanding of what Trenwick was before the transactions that the Litigation Trust attacks occurred. As of the beginning of 1998, Trenwick was a specialty insurance underwriting organization. Its shares were listed on the New York Stock Exchange. Trenwick did not have a controlling stockholder or anything close to one.

At that time, Trenwick’s principally operated in the domestic United States as a provider of so-called “treaty reinsurance” to American insurers of property and casualty risks. 5 Trenwick conducted this business through an indirect, wholly-owned subsidiary, Trenwick America Re. Tren-wiek America Re was wholly-owned by a direct, wholly-owned subsidiary of Tren-wick called Trenwick America Corporation — that is, “Trenwick America.” As of 1997, the business Trenwick conducted through Trenwick America Re was its sole business, and Trenwick reported assets of almost $1.9 billion, stockholders’ equity of almost $358 million, and a book value of $29.93 per share. 6

2. The 1998 Transaction: Trenwick Expands Into The International Markets By Acquisition

In 1998, Trenwick entered the international insurance markets for the first time. In February of that year, Trenwick acquired Sorema (UK) Limited. Like the existing domestic operations of Trenwick, Sorema’s business consisted primarily of underwriting reinsurance. But Sorema also wrote certain specialty insurance policies. Upon acquisition, Trenwick renamed Sorema “Trenwick International Limited.” Trenwick International Limited immediately became a major part of Trenwick’s overall business.

As of December 31, 1998, Trenwick had assets of almost $ 1.4 billion, stockholders’ equity of almost $348 million, and a book value of $31.49 per share. 7

3. The 1999 Transaction: Trenwick Expands Again Through The Acquisition Of Chartwell

In October 1999, Trenwick consummated another major acquisition. That acquisition is challenged by the Litigation Trust in the complaint and therefore it is important to understand its precise nature.

The entity that Trenwick acquired by merger was Chartwell Re Corporation. Like Trenwick, Chartwell Re was an NYSE-listed company. The total cost of the acquisition to Trenwick was estimated *177 at $368 million, which included the cost of the eight million new Trenwick shares issued to the former Chartwell Re holders as the merger consideration, the assumption of Chartwell Re’s debt, and the costs to Chartwell of purchasing $100 million in reserve protection.

The latter issue is raised by the Litigation Trust prominently in the complaint. What it involved was a requirement, demanded by Trenwick, that Chartwell purchase $100 million in reinsurance to protect Trenwick against unanticipated increases in the reserves of Chartwell attributable to business Chart-well wrote before the merger. According to the complaint, the $100 million was exhausted quickly after the merger, as Chartwell’s claims exceeded even that excess coverage. 8

By merging with Chartwell Re, Tren-wick acquired several new U.S. and U.K. insurance businesses. The Chartwell insurance businesses were all rated by A.M. Best Company for claims-paying ability at an excellent level and by Standard & Poor’s at an A-for claims-paying ability. 9

In the merger proxy Trenwick issued in connection with the Chartwell merger, it was estimated that after the merger with Chartwell, Trenwick would have assets in excess of $3 billion and that the combined companies’ premiums for 1999 would be nearly $900 million, or more than double what Trenwick wrote in 1998 before the merger. 10 Thus, the acquisition was a major one.

After the merger, Trenwick reorganized itself into four operating units by rationalizing its holding company structure to take into account both the Chartwell and the prior Sorema transaction. The reorganization appears to have occurred primarily along functional and geographic lines.

The principal operating units and their functions thus became:

• Domestic Reinsurance — This unit comprised the domestic reinsurance operations of the' company and included both Trenwick’s former domestic reinsurance business and the reinsurance business of Chartwell Reinsurance ■ Company. Trenwick America was in this business line. The financials of Trenwick, the parent, aggregated all the business in this line, including those under the Trenwick America name. 11

• International Reinsurance and Specialty Insurance — This unit sold global reinsurance and specialty reinsurance internationally. Trenwick International was in this business line.

• Chartwell Managing Agents (Management of Lloyd’s Syndicates)— This unit was comprised of the . Lloyd’s syndicates formerly controlled by Chartwell.

• Domestic Specialty Insurance — Canterbury Financial Group, Inc. was *178 the name given to the U.S. specialty insurance businesses acquired from Chartwell. Those businesses, Insurance Corporation of New York and Dakota, were placed as subsidiaries under Canterbury.

As is typical after major merger transactions, Trenwick restructured its debt. Thus,, it entered into a $400 million credit facility in November 1999. A $170 million revolving credit facility for the use of Trenwick as a holding company comprised one major chunk of the debt. The other portion, $230 million, went to finance a five-year letter of credit for use by Chart-well Managing Agents in its Lloyd’s syndicate underwriting operations. The assets of several Trenwick subsidiaries, including the Trenwick America operating unit entities, were pledged as security for the $400 million debt, thereby rendering Trenwick America a primary guarantor of that debt.

As with the acquisition of Sorema, Tren-wiek’s merger with Chartwell did not involve a transaction with an affiliate. Chartwell was a listed company in its own right and both its stockholders, and the stockholders of Trenwick, voted to approve the merger. In Trenwick’s case, 82.8% of the electorate participated in the vote, with over 90% voting to approve the deal. 12 After the closing of the Chartwell acquisition, three members of Chartwell’s board joined the Trenwick board increasing the board from one 7/8 comprised of independent directors to one 10/11 comprised of such directors. 13

As of the end of 1999, Trenwick had reported assets-in excess of $3.24 billion, stockholders’ equity in excess of a $462 million, and a book value of $27.37 per share. 14

4. The 2000 Transaction: Trenwick Grows Again By Merging With Another Public Company, LaSalle Re Holdings Limited

Beginning in 1998, and continuing in 1999, Trenwick had explored an interest in acquiring yet another publicly-traded insurance company. That company, LaSalle Re Holdings Limited, was a Bermuda entity whose shares traded on the NYSE. The primary business of LaSalle Re was to operate as an underwriter of property catastrophe reinsurance on a worldwide basis. As a secondary line of business, LaSalle Re also wrote certain types of specialty insurance and provided capital support to certain Lloyd’s of London syndicates.

After LaSalle finished exploring its options, which included overtures from entities other than Trenwick, it decided to sign a merger agreement with Trenwick. That agreement contemplated that both the Trenwick and the LaSalle common stockholders would become stockholders in a new NYSE-listed entity, Trenwick Group Ltd., which would be domiciled in Bermuda. For each share of their Trenwick and LaSalle shares, stockholders would receive one share in the new Trenwick Group holding company. As a result, the former LaSalle stockholders received a premium to market and would hold a majority of the shares of the resulting entity i The Tren-wick stockholders voted to approve the merger on September 25, 2000. As a result of the LaSalle merger, the Trenwick board was increased to fourteen members *179 when three former LaSalle directors were added to the board. 15 The board’s independent supermajority grew from 10/11 to 13/14.

As the merger proxy issued by Trenwick in connection with the LaSalle deal makes clear, the redomiciliation of the Trenwick public holding company to Bermuda was designed to secure advantageous tax treatment. Moreover, the merger proxy made clear that Trenwick would conduct an internal restructuring of its various subsidiaries before the merger “into three separate groups: a chain of U.S. corporations, a chain of U.K. corporations and a chain of Bermuda corporations.” 16 Pages 54 and 55 of the merger proxy were largely devoted to explaining how the U.S. and non-U.S. subsidiaries would be taxed after the merger and the benefits of Trenwick Group’s new Bermuda status.

In the merger proxy, Trenwick’s financial status as of June 30, 2000 was reported. As of that date, Trenwick had assets of nearly $3.5 billion, stockholders’ equity of $439 million, and a book value per common share of $26.98. 17 In the same document, it was reported that “All of Tren-wick’s principal insurance and reinsurance subsidiaries are rated A (Excellent) by A.M. Best Company, an independent insurance rating organization. Standard & Poor’s Rating Services rates the financial strength of Trenwick’s principal insurance and reinsurance subsidiaries as A+. Standard & Poor’s also rates the Trenwick’s counterparty credit and senior debt as BBB + and its preferred stock as BBB -. On December 20, 1999, Moody’s Investors Service confirmed its previously issued Baa2 rating for Trenwick’s senior debt and revised its rating outlook to ‘stable.’ ” 18

As was also the case in the merger with Chartwell, both of the merger partners received fairness opinions. LaSalle’s investment banker estimated the resulting Trenwick entity’s value under a discounted cash flow analysis at $17.04 to $23.17 per share without synergies and $19.14 to $25.73 per share with operating synergies from the merger. 19

This is not to say that the financial statements and information were devoid of less rosey information. They were not. In particular, they plainly revealed that Trenwick operations had suffered operating losses in 1999 20 and Trenwick America operations (including the Chartwell U.S. reinsurance business as of their acquisition) had suffered operating losses in 1999 and 2000. 21

5. The Restructuring Of Trenwick Subsidiaries

Beginning April 1, 2000, Trenwick began a reorganization of its subsidiaries that was completed on September 27, 2000. During the first stage of the restructuring of Trenwick’s subsidiaries, Chartwell’s reinsurance businesses, including all its active U.S. and U.K. reinsurance subsidiaries were transferred to Trenwick America as indirect subsidiaries. That transfer left Chartwell Re, originally the parent entity of all the Chartwell businesses and the direct subsidiary of Trenwick, holding as *180 its only asset one inactive subsidiary. Also at this time, Trenwick America gained as indirect subsidiaries various U.K.-based Chartwell businesses, including Chartwell Managing Agents, which held the Lloyd’s syndicates. In sum, with the exception of the Chartwell Re entity itself, all of the former Chartwell businesses were transferred to Trenwick America briefly during the first stage of the restructuring. 22

In September, the second and third stages of the restructuring occurred. During the second stage, all of the Chart-well U.K. business lines (i.e., reinsurance and Lloyd’s) that were transferred into Trenwick America in April were transferred out of Trenwick America to another principal operating subsidiary known as Trenwick Holdings Limited, which held only U.K.-based businesses, including Trenwick International. That is, Trenwick America was left primarily holding the U.S.-based reinsurance and specialty insurance businesses while Trenwick Holdings Limited was left holding all the UK-based businesses, regardless of the type of insurance business. Also, during the second stage, Trenwick contributed all of its assets and liabilities to Chartwell Re except for the $135 million intercompany payable it was owed by Chartwell Re. Trenwick’s liabilities that were transferred included approximately $75 million in senior notes, approximately $113.4 million in subordinated deferrable interest debentures, and an additional $1 million in contingent interest notes that came from Chartwell during the 1999 merger (collectively, the “Assumed Notes”). The structural impact of this transfer of all or substantially all of Trenwick’s assets was that Chartwell Re remained as the only direct subsidiary of Trenwick while Trenwick "America and Trenwick Holdings became subsidiaries of Chartwell Re.

Finally, during the third stage of the restructuring of subsidiaries, which occurred the same day as the second stage, Chartwell Re sold back all the U.K. subsidiaries it had received in the second stage of the restructuring to Trenwick (i.e., the ultimate parent and publicly-listed entity) in exchange for reducing the $135 million intercompany held by Trenwick and owed by Chartwell Re. Thus, all the U.K. and foreign businesses were again wholly-owned subsidiaries of parent Tren-wick while the U.S. businesses held in Trenwick America remained the only subsidiaries of Chartwell Re.

6. The LaSalle Combination And The Creation Of Trenwick Group Limited

The day after Trenwick restructured its subsidiaries, September 27, 2000, LaSalle and Trenwick merged. They merged into a newly-created entity named Trenwick Group Limited. Chartwell Re then merged with and into its subsidiary Tren-wick America bringing to Trenwick America Chartwell Re’s only other subsidiary, which was inactive. Thus, when Chartwell Re merged into Trenwick America, Tren-wick America became responsible for the liabilities Chartwell Re had received from Trenwick (including the approximately $190 million in Assumed Notes) when Trenwick had transferred substantially all its assets to Chartwell Re in the second stage of the internal restructuring.

To summarize, before the restructuring began, Trenwick America consisted of only the Trenwick America domestic reinsur- *181 anee business and (at least operationally) the reinsurance business of Chartwell. But by the end of the internal corporate restructuring and the completion of the LaSalle merger, Trenwick America was the branch of Trenwick with all the U.S. businesses and entities, regardless of the specific business line in which they operated and whether the entities were acquired in the Chartwell or LaSalle acquisitions. In addition to gaining all the remaining U.S. businesses, by the end of the restructuring and the LaSalle merger, Trenwick America also held additional debt — the Assumed Notes — that was initially incurred by parent Trenwick. Trenwick America, therefore, gained both new assets and liabilities by the end of September 2000.

As described, the LaSalle and Trenwick merger resulted in Trenwick Group Limited. The Trenwick shareholders approved Trenwick Group Inc.’s dissolution, and accordingly, Trenwick’s board of directors filed a certificate of dissolution with the Delaware Secretary of State on September 26, 2000. Shortly after the LaSalle merger, the credit facility originally set up for the Chartwell acquisition was amended and increased to $490 million from the original $400 million. 23 The implications of that amended credit facility are discussed in the next section.

II. The Complaint And Procedural Background

Regrettably, I must now take the reader back through this chronology, tracking through it in a manner that identifies the aspects of the preceding course of events that the Litigation Trust challenges. Normally there would be no need for this sequential exercise. In this case, it is unavoidable because the complaint fails to articulate a coherent narrative.

A. The Chartwell Transaction

In chronological order, the complaint first challenges the Chartwell transaction. The allegations involving the Chartwell transaction are cursory. Essentially they involve the notion that it was a dumb business decision for Trenwick to merge with Chartwell. Specifically, the complaint alleges that:

• Chartwell turned out to be in worse shape than Trenwick estimated and ran through the $100 million adverse development policy purchased in connection with the merger within a year after the merger: In this connection, the complaint alleges that Trenwick conducted “due diligence” on Chartwell, including receiving an actuarial analysis by defendant Milliman, Inc., a well-known actuarial firm. That due diligence stimulated the requirement that Chartwell buy the $100 million coverage;

• Trenwick entered into the $¿00 million credit facility after the Chart-well purchase: In connection with that, Trenwick caused its Trenwick America subsidiary (which conducted its American reinsurance operations) to pledge its assets as security for the credit facility. The key Chart-well subsidiary’s assets were already pledged, but the Litigation Trust complains that its assets were also pledged to cover its own debt and that Trenwick America was therefore the most likely entity to have to make good on a default by parent Trenwick under the credit facility. According to the Litigation Trust, *182 Trenwick America derived no benefit from the pledge or the Chartwell transaction. This allegation, of course, ignores the fact that the stock of Trenwick America was wholly-owned by Trenwick, which had decided that the Chartwell acquisition was good for Trenwick.

• Touted the Chartwell merger as a success when it was not: Despite the fact that the losses at Chartwell exceeded the $100 million policy, Tren-wick claimed in an amended 10-K in August 2000 that the “acquisition of Chartwell provided Trenwick with additional cost-effective means of augmenting capital, accelerating premium growth and added structural platforms for expansion.” 24 Tren-wick also estimated that it would achieve operating synergies as a result of the Chartwell merger of between $15-25 million in 2000 and 2001, respectively. Because of the problems that Chartwell was already experiencing as of that time, the Litigation Trust says that the Trenwick directors must have known those claims were untrue.

• Trenwick America was insolvent before and after the Chartwell merger: The complaint alleges, without factual support, that Trenwick America was “insolvent” before Chartwell was acquired and after it was acquired. When I say without factual support, I mean that nothing in the complaint supports the assertion. Nothing. 25

B. The LaSalle Merger And Corporate Reorganization

The complaint then challenges the reorganization of Trenwick’s business lines in connection with the LaSalle merger and Trenwick’s redomiciliation in Bermuda. As explained in the previous section, the internal reorganization and LaSalle merger resulted in a corporate structure in which Trenwick had: (1) a chain of Bermuda subsidiaries; (2) a chain of American subsidiaries; and (3) a chain of U.K. subsidiaries.

On this score, the complaint achieves a level of obscurity and incomprehensibility that is truly remarkable. Describing the reorganization tritely as a “three card monte,” 26 the complaint then goes on to explain the reorganization in an unfathomable manner. Here is my best attempt to articulate what it is about the reorganization that offends the Litigation Trust.

First and foremost, the Litigation Trust contends that the reorganization was undertaken for the benefit of Trenwick, as a public holding company, and “without regard to the best interests of the [Trenwick America] stockholders.” 27 This, of course, is internally inconsistent. Trenwick owned all of the equity of Trenwick America. Therefore, if the reorganization was in the best interests of Trenwick and its stockholders, it was in the best interests of Trenwick America’s equity owners.

What is critical therefore is to figure out how some other constituency of Trenwick America was somehow injured by the reorganization. As of the beginning of the restructuring, we know that the Litigation Trust is upset that Trenwick America’s assets have been pledged as security for the $400 million credit facility Trenwick procured. In other words, even though Trenwick America did not own, for exam- *183 pie, the Chartwell Managing Agents business (to which $230 million of the credit facility was dedicated) or the Trenwick International line of businesses (for which the remaining $170 million revolving facility could be used at Trenwick’s discretion), Trenwick America was on the hook for the full $400 million if Trenwick defaulted. That is a given at the get-go, or ab initio, as some Latin lovers might prefer.

Before the internal reorganization began in March 2000, Trenwick America is at the top of a chain of subsidiaries comprising only its own U.S. reinsurance businesses, such as Trenwick America Reinsurance Corporation, and Chartwell’s U.S. reinsurance businesses. 28 By the end of the reorganization on September 27, 2000, Tren-wick America’s position is only slightly different from what it was at the get-go. Under Trenwick America were the following additional business lines: the U.S. specialty insurance businesses previously held under Canterbury, and an inactive subsidiary called Drayton Company Limited.

In other words, Trenwick America went from being the key entity in one business line comprised of domestic reinsurance operations for both Trenwick and Chartwell to being the parent of all the U.S. corporations in that line. The ownership of these entities is not really what the complaint challenges, it is the increase in Trenwick America’s debt that resulted from the reorganization. I describe that next.

Concurrently with the merger of Tren-wick and LaSalle, a new credit facility was entered for $490 million, a figure $90 million higher than the previous figure. Of the $490 million, $230 million was for a letter of credit dedicated to the Lloyd’s syndicates managed by Chartwell Managing Agents. Before the restructuring and LaSalle merger, Trenwick America had been on the hook for this portion of the credit facility in the event parent Trenwick defaulted. After the LaSalle merger, the primary obligor on the $230 million letter of credit became Trenwick Holdings Limited, that is, the top U.K. subsidiary, which was on top of all the Trenwick subsidiaries conducting business out of the U.K. Tren-wick America remained a guarantor, however, of that letter of credit. The remaining $260 million of the credit facility was for a revolver. After the LaSalle merger, Trenwick America went from being the secondary obligor to becoming the primary obligor for that part of the facility. According to the Litigation Trust, the revolver had no benefit for Trenwick America but simply was necessary for Trenwick’s other operations. Thus, Trenwick America’s liability exposure under the credit facility increased after the restructuring and LaSalle merger. That exposure was in addition to the obligation to service $190 million in Assumed Notes by Trenwick America that previously was owed by parent Trenwick.

Trenwick America’s 10-K filed in April 2001 reflected those changes, reporting that at year end Trenwick America had approximately $367 million in indebtedness. That debt was compromised of approximately $181 million in revolving loans outstanding at that time, $75 million in senior notes, $1 million in contingent interest notes, and $110 million in preferred securities. 29 According to the 10-K, that was an increase of approximately $46 mil *184 lion from the previous year. 30

In a conclusory manner unsupported by pled facts, the complaint alleges that Tren-wick America was insolvent after the reorganization. For example, the complaint alleges that the reorganization reduced the book value of Trenwick America from $565 million to $204 million because of the debt Trenwick had guaranteed. 31 Of course, $204 million in positive value is a long way from insolvency. But the complaint fills this gap through this conclusory paragraph:

On the books, [Trenwick America] appeared to be solvent. However, the public records did not give a true picture of the state of [Trenwick America’s] affairs. Instead, the [Trenwick America] Defendants and [Trenwick] Defendants and [Trenwick Group Limited] wrongfully hid the fact of [Trenwick America’s] insolvency through “creative accounting,” assisted by E & Y and PWC. To any objective observer, with access to its true books and records, [Trenwick America’s] assets were worth far less than its liabilities. In fact, its adjusted equity value after the reorganization was hundreds of millions of dollars in the red. 32

Absent from this paragraph are any real facts. Remarkably, the complaint entirely fails to address the reality that LaSalle was a public company not controlled by Trenwick. LaSalle and Trenwick merged in a stock-for-stock merger. Each side had financial advisors and each side’s stockholders approved the merger. The reality that the financial markets believed each company had positive economic value and that the resulting Trenwick has positive value is ignored in the complaint.

C. The Allegations That Trenwick’s Directors And Officers Somehow Enriched Themselves By The Chartwell And LaSalle Transactions

At all relevant times, the Trenwick board was comprised almost entirely of directors who were not officers of Tren-wick. Only one of the Trenwick directors was an executive, James F. Billett, Jr. Although the complaint does not bother to identify his title, Billett was the CEO of Trenwick during the period when the challenged transactions occurred.

The complaint’s allegations regarding the incentives of the Trenwick directors, frankly, make no economic sense. The complaint alleges that the Trenwick directors entered into the Chartwell and La-Salle mergers in order to enrich themselves but in a way that somehow “had nothing to do with earning a profit for shareholders or timely paying creditors, and everything to do with bonuses, gold parachutes, ego, and greed.” 33

This inflammatory, albeit banal, rhetoric is unaccompanied by pled facts supporting the assertion. At most, the complaint alleges that as part of the LaSalle acquisition, the Trenwick directors “received bonuses and stock (and cash in lieu of fractional shares) in the newly-formed” Bermuda holding company for their preexisting options and equity in the former holding company. 34 This exchange somehow is alleged to have “provided a financial benefit” to the Trenwick directors “beyond that enjoyed by the other shareholders of the corporation.” 35

*185 At most, this allegation suggests that the Trenwick directors .received treatment equivalent to that of other equityholders. When the new Bermuda holding corporation was formed it was to become the publicly-listed company. Thus, in order for option holders to retain their pre-exist-ing value, they had to receive options to buy stock in the new listed company. The receipt of such replacement options presents no conflict, in itself.

As important, that the Trenwick directors received options is at odds with the notion that they believed they were taking steps that would lead to the insolvency of Trenwick. If Trenwick became insolvent, the options would have no value.

As to the bonus compensation, the complaint fails to provide any specifics. The Litigation Trust had access to Trenwick’s books and records. The public filings it references in the complaint do not indicate that any bonus compensation was to be paid to the independent directors of Tren-wick as a result of the LaSalle acquisition or that Billett’s severance agreement was triggered in a manner that gave him a right to payments. In connection with the Chartwell acquisition, there is a disclosure that Billett received a bonus for his work on the transaction as CEO, but that the company had cut the bonus pool for the succeeding year from which Billett and other executives could potentially benefit. 36 There is no indication that the outside directors of Trenwick received bonuses.

The complaint is just as obscure when it alleges that the directors of Trenwick America were somehow conflicted. As one would expect, the Litigation Trust is able to allege that most of the directors of Trenwick America were employees of Trenwick and Trenwick America. This would be natural given that Trenwick America was a wholly-owned subsidiary. The directors of Trenwick America are alleged to have received options in the new Bermuda holding company after the La-Salle merger. That is a wholly innocuous fact. Moreover, these directors are alleged to have gotten bonuses. As executives, one would expect that they might get bonuses. Nothing in the complaint alleges that the bonuses were not determined at the Trenwick level — where the board was overwhelmingly independent — and nothing in the complaint alleges that the bonuses were out of order. Furthermore, the complaint makes one assertion that was likely true, which is that the executives who served on the Trenwick America board owed their livelihood to Trenwick. That assertion, however, would (as would the grant of options in the new Bermuda entity) give those executives a strong interest in maintaining Trenwick as a solvent entity capable of employing and paying them. Notably, the public disclosures of Tren-wick indicated, as I just mentioned, that the bonus pool for executives for the years 2000 and 2001 had been trimmed in the wake of the Chartwell acquisition.

All in all, the complaint essentially concedes that the Chartwell and LaSalle acquisitions, and the reorganization of Tren-wick, were overseen by a parent board with only one management director, Bil-lett. That management director is not alleged to have received excessive compensation, and he and other officers and directors simply received replacement options in the new publicly-listed holding company that replaced the options they held i