Skadden, Arps, Slate, Meagher & Flom LLP and Affiliates

Lessons From the Silicon Valley Bank Chapter 11: Preserving Indemnification and Contribution Rights

Skadden Publication

Shana A. Elberg Moshe S. Jacob Bram A. Strochlic

Executive Summary

  • What is new: A June 2024 court decision in the Silicon Valley Bank Chapter 11 case held that a bar date can extinguish indemnification and contribution rights against a debtor, even if the underlying lawsuit is initiated post-bar date.
  • Why it matters: This decision emphasizes the importance of directors, officers and other stakeholders proactively evaluating potential claims against a debtor and taking necessary protective measures to safeguard their rights.
  • What to do next: Current and former directors, officers and other interested parties should file protective proofs of claim to safeguard contingent rights, such as indemnification and contribution claims against a debtor.

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Can a bar date extinguish indemnification and contribution rights against a debtor even if the underlying lawsuit is initiated post-bar date? According to a June 2024 decision by Judge Glenn in the Silicon Valley Bank Chapter 11 case, the answer is yes. This ruling serves as a reminder for directors, officers and other stakeholders to proactively evaluate potential claims against a debtor and take necessary protective measures to safeguard their rights.

Background

1. The Boston Private Merger and Prepetition Controversy 

In July 2021, Silicon Valley Bank merged with Boston Private Financial Holdings and assumed its liabilities. In connection with the merger, Silicon Valley Bank submitted an amended registration statement to the SEC and distributed a prospectus to Boston Private shareholders. Morgan Stanley served as underwriter.

Opposition to the merger triggered a proxy battle and a September 2021 class action lawsuit by former Boston Private shareholders alleging securities law violations. The lawsuit was dismissed on pleading grounds. Boston Private faced eight more lawsuits, which it resolved through supplemental disclosures, resulting in voluntary dismissals.

2. Run on Silicon Valley Bank and Chapter 11 Filing

In March 2023, Silicon Valley Bank, the largest bank by deposits in Silicon Valley, reported a loss that set off a chain reaction, ultimately leading to the second-largest bank failure in U.S. history. Days later, its parent company filed for Chapter 11 bankruptcy.1

3. The Chapter 11 Cases

After the bankruptcy filing but before the bar date, several securities class actions were brought against the debtor, alleging misrepresentations and omissions by the debtor, its officers, directors, underwriters and auditors. Morgan Stanley was named in two lawsuits, but former Boston Private executives Christopher Cooper and Anthony DeChellis were not named.

The court set August 11, 2023, as the bar date. The debtor notified creditors and published a notice in national and local newspapers. In January 2024, the debtor filed a proposed plan of reorganization, followed by a disclosure statement in February 2024, which the court approved on May 30, 2024. 

Seven months after the bar date, in February 2024, Morgan Stanley, Cooper and DeChellis were named in a new class action alleging misrepresentations in the merger’s offering materials.

4. Late Proofs of Claim

Morgan Stanley, Cooper and DeChellis filed late proofs of claim to preserve their indemnification and contribution rights against Silicon Valley Bank in the event of liability in the class action. Each argued their filings satisfied the “excusable neglect” standard under Bankruptcy Rule 9006(b)(1).

  • Morgan Stanley: Argued it couldn’t have anticipated the class action’s novel liability theory, which alleged underwriter liability despite the firms’ advisory role.2
  • Cooper and DeChellis: Both maintained they first learned of the claims in February 2024, when served with the complaint. Cooper’s only connection to the offering materials was a letter he signed as corporate secretary regarding shareholder meeting logistics. He had not received the bar date order and had never filed claims in the bankruptcy case. DeChellis’ only connection to the offering materials was a letter recommending the merger to Boston Private shareholders. He had previously timely filed unrelated claims with broad reservations of rights for amendments.

The debtor and the official committee of unsecured creditors objected to the late proofs of claim, arguing the claims accrued prepetition, the class action was foreseeable and the delay in filing was unjustified.

Decision

Notice

The Court first addressed Cooper’s argument that if his claims were foreseeable enough to render his filing late, he should have received actual notice of the bar date instead of publication notice. Judge Glenn explained that “unknown” creditors have speculative claims not readily apparent to the debtor, even if discoverable. Cooper’s minimal involvement in the merger and nonemployee status post-merger classified him as “unknown,” making publication notice sufficient. The court held that failure to provide actual notice does not excuse a creditor’s duty to file a proof of claim.

Excusable Neglect

Turning to excusable neglect, Judge Glenn considered the Pioneer factors3 — prejudice to the debtor, length of delay, reason for delay and good faith — and stressed the Second Circuit’s “hard line” approach, rejecting the flexible approach advocated by DeChellis and Cooper.

  • Prejudice: The court noted that nearly 1,300 claims totaling over $7 billion had already been filed and required reconciliation, a substantial effort that would be hindered by litigating Rule 9006(b) motions for each tangentially co-liable third party.
  • Length of Delay: Filed seven months after the bar date, the motions came as the debtor prepared for plan confirmation and in the midst of both a reconciliation process. Allowing late claims risked hindering reorganization efforts.
  • Reason for Delay: The court emphasized that as sophisticated creditors with legal representation, each claimant had a duty to investigate and identify potential claims against the debtor. Their involvement, however minor, should have prompted them to file protective proofs of claim, as required under Lehman.4 The court also noted that Morgan Stanley and DeChellis had previously filed claims in the bankruptcy (though the indemnification and contribution rights did not “relate back” to those claims) and were named in other merger-related litigation.
  • Good Faith: The court found no evidence of bad faith but held this was not dispositive.

Aftermath and Appeal

Appeal

Morgan Stanley, Cooper and DeChellis each appealed the decision in the U.S. District Court for the Southern District of New York.5 The debtor argued that, pursuant to the Chapter 11 plan, Section 510(b) claims, which include indemnification and contribution claims, are not entitled to any distributions. The appeal would thus, in any case, be moot. Appellants successfully argued that the Bankruptcy Court should determine whether their underlying indemnification and contribution claims fall under Section 510(b). Following the remand, the parties entered into a stipulation resolving the dispute, which allowed Morgan Stanley, Cooper and DeChellis to file proofs of claim and provided for the allowance of such claims in amounts agreed upon by the parties and the estate.

While the parties ultimately reached a resolution, the decision raises several questions, including:

  • If Morgan Stanley’s initial proof of claim had referred to securities-related actions generally, would the court have allowed an amendment to cover the 2024 class action?
  • Does encouraging creditors to file protective proofs of claim for contingent and unliquidated claims unreasonably increase the burden on debtors during the reconciliation process?
  • How broad can a protective proof of claim and related reservation of rights be while still preserving a claimant’s ability to make post-bar date amendments or supplements in compliance with applicable case law?
  • For parties that do not receive actual notice of a bar date, are there due process concerns with barring claims deriving from lawsuits relating to prepetition conduct that have not yet been commenced?
  • Would the outcome have differed if the case had not been highly publicized due to Silicon Valley Bank’s collapse, government takeover and media attention?

Takeaways

  • Protective Proofs of Claim: Current and former directors, officers and other interested parties should file protective proofs of claim to safeguard contingent rights, such as indemnification and contribution claims against a debtor. Practitioners should strike a balance by providing sufficient detail to allow future amendments while avoiding excessive specificity that could exclude later claims. A “better safe than sorry” approach can be crucial to ensure rights are preserved rather than waived.
  • Examine Potential Claims: Creditors and potential creditors have a duty to investigate and identify existing and potential claims against a debtor. Working with counsel to evaluate these rights can help determine whether filing proofs of claim is necessary to preserve them.
  • Notice and Foreseeability: A creditor may be classified as “unknown” for notice purposes, receiving only publication notice of the bar date, yet their claims can still be deemed foreseeable, allowing the bar date to extinguish their rights. This shifts the burden to parties with even remote ties to a debtor to monitor bankruptcy cases and adhere to deadlines.

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1 The Wall Street Journal, “The Banking Crisis: A Timeline of Key Events” (May 11, 2023). 

2 Prior to the bar date, Goldman Sachs filed a proof of claim on behalf of itself and certain other parties, including Morgan Stanley. While Morgan Stanley initially sought to amend that proof of claim to include the indemnification and contribution rights in question, it withdrew its request prior to the hearing on the matter.

3 Pioneer Inv. Servs. Co. v. Brunswick Assocs. Ltd. P’ship, 507 U.S. 380 (1993)

4 In re Lehman Bros. Holdings, Inc., 433 B.R. 113 (Bankr. S.D.N.Y. 2010)

5 Morgan Stanley & Co., LLC v. SVB Fin. Grp. (In re SVB Fin. Grp.), 2024 U.S. Dist. LEXIS 218684* (Dec. 2 2024)

This memorandum is provided by Skadden, Arps, Slate, Meagher & Flom LLP and its affiliates for educational and informational purposes only and is not intended and should not be construed as legal advice. This memorandum is considered advertising under applicable state laws.

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