Delta Financial files lawsuit against insurers over coverage dispute

By Rebecca Melvin

New York, Feb. 15 - Mortgage lender Delta Financial Corp. filed suit against Westchester Surplus Lines Insurance Co. seeking almost $9 million plus expenses for Westchester's failure to cover directors and officers in relation to an underlying lawsuit.

U.S. Fire Insurance Co. and Axis Specialty Insurance Co. are also named as defendants in the suit as excess insurers, having denied coverage also in the original suit.

Insured persons include Sidney Miller, who was an officer and is chairman of the board of Delta Financial, and Hugh Miller, chief executive, president and board member of Delta Financial, as well as three others.

The suit, filed in the U.S. Bankruptcy Court for the District of Delaware, relates to an underlying action with roots in 2001 when Delta Financial exchanged its 9½% senior notes due 2004 for interests in Delta Funding Residual Exchange Co. LLC.

Various assets, namely certain of Delta Financials excess cash flow certificates representing Delta's economic interests in mortgages that had been assigned to securitization trust, were transferred to Delta LLC.

Delta LLC subsequently sued Delta Financial in 2003 alleging that Delta Financial and its officers and directors misrepresented the value of the cash flow certificates that it transferred to Delta LLC.

Delta Financial purchased from Westchester a management protection insurance policy that included directors, officers and company securities liability coverage for the period Jan. 2, 2003 to Jan. 2, 2004.

The company asserts that Westchester owes the directors and officers reimbursement and advance defense costs of $5 million and damages for breach of contract of $3.96 million.

Delta Financial filed for bankruptcy on Dec. 17. Its Chapter 11 case number is 07-11880.

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