United States: The Insured v. Insured Exclusion And Section 1123: The Primacy Of Bankruptcy Law And The Importance Of Planning Ahead

The Insured v. Insured ("IVI") exclusion is a frequent and important issue for directors & officers ("D&O") liability coverage, particularly where the bankruptcy of an insured entity may blur the lines of who is an insured and who is acting on behalf of an insured. Nevertheless, because the exclusion generally bars coverage for a claim made against an insured individual that is "brought or maintained by or on behalf of" the insured entity, whether the IVI exclusion applies is often the single most important coverage issue for the many claims often asserted against a debtor's former directors and officers in bankruptcy.

Although the applicability of the IVI exclusion to bankruptcy-related claims has been litigated several times and often decided in favor of insurers, none of those cases has addressed the critical question of the primacy of Bankruptcy Code Section 1123, and how this provision may prevent application of the exclusion in such circumstances. Therefore, as insurers become more emboldened by their prior victories, debtors, their former directors and officers, as well as their bankruptcy and coverage counsel should be careful to consider Section 1123 both when drafting the debtor's plan of reorganization and in any subsequent insurance coverage litigation.

Bankruptcy plans often now provide that certain claims will be prosecuted by a litigation trustee for the benefit of a creditor trust post-bankruptcy. A number of cases have applied the IVI exclusion to defeat coverage for such claims. Most recently, in Indian Harbor Insurance v. Zucker, a federal district court in Michigan held that the IVI exclusion applied to bar a claim brought by a trustee appointed to a post-bankruptcy litigation trust. In reaching this conclusion, the Indian Harbor court followed earlier similar decisions in a number of other federal courts, including the Ninth Circuit (Biltmore) and district courts in Virginia (R.J. Reynolds) and Missouri (Weis).[1]

Although each of these decisions was in large part driven by its particular facts, the basic premise of each is that a post-bankruptcy trustee is an ordinary assignee of the debtor company—an insured—and therefore purportedly stands in the shoes of such insured debtor for purposes of the IVI exclusion. This finding of an alleged "ordinary assignment," however, ignores the fundamentally different nature of transfers pursuant to Bankruptcy Code Section 1123 when compared to ordinary assignments pursuant to state contract law and the fact that a post-bankruptcy trustee assumes special powers as an estate representative.

Section 1123 requires that a plan "provide adequate means for [its] implementation," including the final disposition of all estate property.[2] Two expressly sanctioned means for doing so are "transfer of all or any part of the property of the estate to one or more entities, whether organized before or after the confirmation of such plan" and "the retention and enforcement . . . by a representative of the estate appointed for such purpose, of any such claim or interest."[3] Importantly, Section 1123 expressly applies "[n]otwithstanding any otherwise applicable nonbankruptcy law."[4] Case law outside the insurance context already establishes that the transfer of a claim combined with a grant of standing to a representative of the estate to pursue that claim post-confirmation is not necessarily an "assignment" and certainly is not an ordinary assignment under state law.[5]

For example, in Metropolitan Creditors' Trust v. Pricewaterhousecoopers, LLP, 463 F. Supp. 2d 1193 (E.D. Wash. 2006), the issue was whether such an appointment and transfer pursuant to Section 1123 violated a "nonassignment" clause in the defendant's engagement letters.[6] Citing Section 1123, the court held that the transfer of the claim pursuant to the debtor's bankruptcy plan was not an "assignment," suggesting that "courts should follow a case-by-case approach in determining whether an appointed party is serving as an assignee or as a representative of the estate." Id. (citations omitted). In reaching this conclusion, the court set forth a two-prong test for making this determination: (1) "whether recovery by the appointed party would benefit the debtor's estate and its unsecured creditors," and (2) "whether the appointment in question was approved by the bankruptcy court." Id. at 1199. If the answers to both of these questions is yes, the third party is treated as a representative of the estate and the transfer is not an assignment barred by contractual "nonassignment" clauses.

In Metropolitan, this test was easily satisfied: the bankruptcy court had "approved the Joint Reorganization Plan, which incorporate[d] the Trust Agreement," the "aim of establishing the Trusts was to liquidate [the debtors'] assets for the benefit of their creditors," and a "reference to Section 1123 in the trust agreement . . . manifest[ed] a clear intent to appoint the Trusts as representatives, rather than assignees, of the debtors' claims." 463 F. Supp. 2d at 1199-1200. Accordingly, estate claims that are transferred to a post-bankruptcy trust pursuant to the superseding bankruptcy powers of Section 1123 are done so free and clear of any restrictions that would undermine the transfer's purpose.[7]

Insureds and their insurance coverage counsel generally have neglected the importance of these Bankruptcy Code mechanisms in arguing against the application of the IVI exclusion to claims brought or maintained by post-bankruptcy trustees.[8] Insureds should be more careful not to leave such arguments on the table. Likewise, debtors, creditors' committees, other plan proponents, and their respective bankruptcy counsel should be aware of these important issues when drafting the debtor's plan of reorganization and related documents, and should draft such documents to avoid any mention of an alleged "assignment" and specifically state that any transfer of a claim is being executed pursuant to the controlling provisions of Section 1123.

As Metropolitan makes clear, perhaps the best time to ensure that a Section 1123 transfer will not implicate an IVI exclusion is at the time plan documents are completed and submitted to the bankruptcy court for approval. Although often overlooked, even in insurance coverage disputes an ounce of prevention can be worth a pound (or policy limit) of cure.

Footnotes

[1] Indian Harbor Ins. v. Zucker, No. 1:14-CV-1017, 2016 WL 1253040 (W.D. Mich. Mar. 31, 2016); see also Biltmore Associates, LLC v. Twin City Fire Ins. Co., 572 F.3d 663 (9th Cir. 2009); In re R.J. Reynolds, 315 B.R. 674 (Bankr. W.D. Va. 2003); Reliance Ins. Co. of Illinois v. Weis, 148 B.R. 575 (E.D. Mo. 1992), aff'd in part, 5 F.3d 532 (8th Cir. 1993).

[2] 11 U.S.C. § 1123(a)(4).

[3] 11 U.S.C. § 1123(a)(5)(B) (emphasis added); 11 U.S.C. § 1123(b)(3)(B) (emphasis added). See also 11 U.S.C. § 1123(a)(3)(A) (emphasizing that the "debtor" and the "estate" are separate legal entities with separate claims and interests).

[4] 11 U.S.C. § 1123(a).

[5] See, e.g., Citicorp Acceptance Co. v. Robison (In re Sweetwater), 884 F.2d 1323, 1327-30 (10th Cir. 1989); Guttman v. Martin (In re Railworks Corp.), 325 B.R. 709, 719 (Bankr. D. Md. 2005).

[6] Anti-assignment clauses also have been addressed in the context of insurance policy transfers, with courts likewise concluding that Section 1123 and other provisions in the Bankruptcy Code permit such transfers notwithstanding any anti-assignment clauses in the policies or contrary state law. E.g., In re Fed.-Mogul Global Inc., 385 B.R. 560, 566, 571 (Bankr. D. Del. 2008), aff'd, 402 B.R. 625 (D. Del. 2009), aff'd, 684 F.3d 355 (3d Cir. 2012).

[7] See, e.g., Jewel Recovery, L.P. v. Skadden, Arps, Slate, Meagher & Flom (In re Zale Corp.), Adv. No. 395-3599, 1996 Bankr. LEXIS 1933 (Bankr. N.D. Tex. Sept. 5, 1996); Parrett v. Nat'l Century Fin. Enters., Inc., No. 2:04-CV-489, 2006 WL 783361, at *4-5 (S.D. Ohio Mar. 23, 2006); see also Cirka v. Nat'l Union Fire Ins. Co. of Pittsburgh, Pa., No. 20250-NC, 2004 WL 1813283, at *8 (Del. Ch. Aug. 6, 2004).

[8] The only coverage litigation where the issue appears to have been raised is American Casualty Company of Reading, Pa. v. Gelb in the New York Supreme Court and Appellate Division, First Department. In that case, attorneys now at this firm raised the argument but ultimately prevailed on other grounds. Neither the trial nor appellate court addressed the Section 1123 arguments. The insureds' briefing for this case is available here.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
 
In association with
Related Topics
 
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions