The United States District Court for the Western District of Michigan has held that an Insured v. Insured Exclusion in a D&O policy bars coverage for a suit by a post-bankruptcy liquidation trustee against former officers of the insured company. See Indian Harbor Ins. Co. v. Zucker, No. 1:14-cv-01017, 2016 U.S. Dist. LEXIS 43148 (W.D. Mich. March 31, 2016). Troutman Sanders represents Indian Harbor in the case.
In the Indian Harbor action, the insured bank holding company and a subsidiary had filed for bankruptcy, and remained debtors in possession, with the same pre-petition officers controlling the companies throughout the bankruptcy proceedings. To gain creditors' support for their bankruptcy plan, the debtors agreed to create a liquidating trust to which any causes of action against their own officers would be assigned. However, the Liquidating Trust agreed not to pursue the officers' personal assets, but instead would limit its recovery to the company's D&O insurance. For their part, the officers agreed to sue the insurer if it denied coverage, and agreed not to settle any coverage dispute without the trustee's consent. One of the officers was appointed to the trust's oversight committee. Post-confirmation, the trust filed suit against the officers alleging that they had breached their fiduciary duties to the insured and seeking $18 million in damages. The officers sought coverage under the company's D&O policy. The insurer filed a declaratory judgment action against the trustee and the officers seeking a ruling that the Insured v. Insured exclusion applied to bar coverage for the trustee action.
Ruling on the insurer's pre-discovery motion for summary judgment, the District Court agreed that the Insured v. Insured exclusion applied. After noting the split in authority on the applicability of Insured v. Insured exclusions in the context of bankrupt entities, the District Court found persuasive the decision in Biltmore Associates, LLC v. Twin City Fire Insurance Co., 572 F.3d 663 (9th Cir. 2009), which involved similar facts, and easily distinguished cases holding that the exclusion does not apply to bankruptcy trustees. Based on the facts before it, the Court found "a direct connection between the debtor/company/insureds and the Liquidation Trust." The arrangement, whereby the debtors and the creditors established the Liquidation Trust and transferred to it the debtors' causes of action against the officers while limiting any recovery to the insurance proceeds, was "clearly to the advantage of the debtors/company directors and officers." The debtors' agreement with the creditors "effectively permitted the Trust/Liquidation Trustee to step into the proverbial shoes of the Debtors for the purposes of suing the directors/officers." The trustee's action was "in effect an intracompany claim" and the relationship between the debtors and the Liquidation Trust was not "genuinely adversarial." Under these circumstances, the exclusion was unambiguous and applied.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
