Nightclub Insurer’s Troubles Spill Into Bankruptcy Court

Companies linked to a Maryland man who was pushed out of the nightclub insurance company he founded have filed for Chapter 7 bankruptcy protection, less than two weeks after a Delaware corporate law tribunal turned down his bid to shield his collection of action figures from seizure by Insurance Commissioner Karen Weldin Stewart.

Vice Chancellor Travis Laster on Jan. 16 gave the green light to the rehabilitation of the insurance company, Indemnity Insurance Corp., over the protests of Jeffrey B. Cohen, the sole member of the limited-liability company that owns the Agency LLC, which filed for bankruptcy liquidation Thursday, along with a related company, Insurance Designers of Maryland Inc.

Mr. Laster found that if the insurance commissioner sells the collection of action figures and other toys Mr. Cohen left behind when he was pushed out of the company, such a sale will not constitute irreparable harm to Indemnity’s founder and former chief executive, Mr. Cohen.

Mr. Cohen contended the toy collection is valuable and cited the possibility of its loss in a failed effort to hold Delaware insurance regulators at bay while he appeals decisions that placed the company in receivership.

Delaware’s insurance commissioner last year won an order from the state’s Court of Chancery entitling it to seize Indemnity Insurance on the grounds the nightclub insurer was in precarious financial condition due to alleged multiple acts of fraud by Mr. Cohen. Efforts have been made to rehabilitate the company in receivership, but a liquidation petition is being processed.

Mr. Cohen denies the fraud allegations, has challenged a number of decisions involving Indemnity Insurance to the Delaware Supreme Court, and is fighting to intervene as a party in the insurance proceeding. At base, he says he’s been accused of wrongdoing but never has been given a chance to defend himself. Much more is at stake than the personal effects Mr. Cohen left in his office, such as the toy collection, said his attorney, Theodore A. Kittila of Greenhill Law Group. The seizure of Indemnity was inappropriate, involved heavy-handed tactics, and deprived Mr. Cohen of due-process rights, according to his court papers.

“I don’t want to comment on the commissioner’s allegations. The commissioner needs to prove the allegations,” Mr. Kittila said. “They keep alleging things and yet there’s not an opportunity for us to actually go and contest them.”

The Delaware Insurance Commissioner and Indemnity Insurance were listed as creditors of the Agency in bankruptcy-court filings. The Agency played a role in the insurance company’s operation, collecting premiums as managing general agent. Not all the premiums wound up in Indemnity’s hands, the insurance commissioner alleges. Bankruptcy-court estimates peg the Agency’s debts and assets somewhere in the range of $10 million to $50 million.

As chronicled in Delaware Court of Chancery opinions, Mr. Cohen had a tough time letting go of Indemnity after resigning as its chairman and chief executive and being ousted from the board of directors last year. In court papers, Mr. Cohen’s attorney says insurance regulators have cast him in a “negative light” and have subjected him to “a distracting campaign of sanctions motions” in the Court of Chancery. The alleged campaign began at a court session last year, a hearing that Mr. Cohen was not told was happening, but one where he said regulators “poisoned the well” in an effort to discredit him.

Earlier this month, Vice Chancellor Laster recounted complaints that Mr. Cohen threatened an employee in an effort to block regulators from access to the company’s computer servers, tried to have the electricity cut off, and persuaded Verizon to “shut off Indemnity’s phone service, telling them that Indemnity had ‘moved.’”

Then there were the cars.

Ordered to return the company’s luxury automobiles, Mr. Cohen parked the 2011 Aston Martin diagonally across the entrance to the Indemnity parking lot, with one of its tires apparently intentionally deflated, according to Mr. Laster.  Mr. Cohen drove the company’s 2013 Ford Mustang Shelby GT up on the sidewalk and parked it, blocking the main entrance to the company’s office, he admitted under questioning from Mr. Laster.

“Indemnity had no way of moving the vehicles because the keys had not been returned,” Vice Chancellor Laster noted in a Jan. 2 ruling on Indemnity’s motion to impose sanctions on Mr. Cohen.

Mr. Cohen held on to the 2012 Range Rover past a court-ordered deadline for turning it over, Mr. Laster wrote.

So far, sanctions imposed by Delaware’s Court of Chancery for violating orders have run to $133,331, plus towing charges. “The court declines to impose any additional sanction on Cohen for the flat tire on the Aston Martin. It is not clear from the evidence that Cohen placed the stick in the valve stem of the Aston Martin’s tire,” Mr. Laster wrote.

The penalties are at a level the court reckoned Mr. Cohen could afford. According to personal financial statements he presented Indemnity’s auditors last year, Mr. Cohen has more than$19 million in net assets, most of it cash, the Delaware Court of Chancery said.

Write to Peg Brickley at [email protected].