Directors & Officers Liability Insurance and Bankruptcy

1. Directors & Officers Liability Insurance and Bankruptcy Denver Southwest Chapter PLUS Conference April 16, 2009 David Brennan AIC CPCU

2. D&O Insurance Policy Considerations in Bankruptcy • Parties Involved • Trustee • Collect/Sell property of the Estate • Challenge pre-petition transfers • Negate preferential transfers • Object to creditors’ claims • Accept/Reject Executory Contracts • Sue/Be Sued on behalf of Estate • Distribute Estate & pay expenses • Debtor-In-Possession (“DIP”) • Creditors’ Committee • Official committee of unsecured creditors appointed after a Chapter 11 case is commenced • Consults with the trustee or DIP concerning administration of bankruptcy proceeding • Investigates the conduct and financial condition of the debtor • Participates in formulating a plan of reorganization

3. Claim Types-Allegations • Recoveries sought for alleged wrongful activities pre-petition filing • Transfers within 90 days of petition voidable • Fraudulent Transfers within 1 year of petition • Allegations of Corporate Waste, Mismanagement, Breach of Fiduciary Duty • Goals of Trustee to Maximize Recoveries for Bankruptcy Estate

4. Key Concepts • Voidable Preferences • Trustee has power to avoid “preferential” transfers • Transfer benefits creditor • Transfer for an antecedent debt • Transfer while debtor insolvent • Transfer within 90 days before petition • Creditor to receive more than Chap. 7 liquidation amount • Fraudulent Transfers • Trustee has power to avoid fraudulent conveyances occurring within 1 year before bankruptcy • Actual intent to hinder, delay or defraud; or • Constructive fraud: transfer for less than reasonably equivalent value and • Debtor insolvent or became insolvent due to transfer • Debtor left with unreasonably small capital • Debtor incurred debt beyond ability to pay

5. Liability Defenses for Individuals • Waste, Mismanagement, Fiduciary Breach subject to defense of business judgment • “Deepening Insolvency” theory discredited-directors are not the guarantors of success • Trenwick v Ernst & Young, et al. 906 A.2d 168, 173 (Del. Ch. 2006 • Fiduciary Breach duty of care, loyalty in many cases reduces to loyalty only as result of charter exculpation clauses. • To prevail on loyalty claims, plaintiffs must demonstrate conflicting self-interest • Fraud claims face significant proof hurdles on intent

6. Insurance Issues • Policy Language • ABC Contracts-Non-applicability of B, C pursuant to Bankruptcy • Side A and Excess contracts continue to follow form • “Asset of the Estate” • Policy ownership transferred to Trustee • Deductible • Typically inapplicable for Side A coverage

7. D&O Policy Who is Insured? • Insured • Former D&Os are insured, possibly other individuals • Creditor Committee • Not an insured, but close relationship with Trustee or future Trustee creates special issues relative to complaint drafting • Trustee An Insured on Policy?

8. Insured vs. Insured Exclusion • Circumstance: Trustee sues directors and officers for breach of fiduciary duty • Policy excludes coverage for claims brought by (or on behalf of) one insured against another insured • Market responded with I v. I carve-outs • Majority finds exclusion does not apply to trustee’s claim

9. Exclusion does not apply: In re County Seat Stores, Inc., 280 B.R. 319 (Bankr. S.D.N.Y. 2002) Alstrin v. St. Paul Mercury Ins. Co., 179 F.Supp.2d 376 (Del. 2002) In re Buckeye Countrymark, Inc., 251 B.R. 835 (Bankr. S.D. Ohio 2000) In re Pintlar Corp., 205 B.R. 945 (Bankr. Idaho 1997) aff’dCigna Ins. Co. v. Gulf USA Corp., 1997 U.S. Dist. LEXIS 23816 (Idaho 1997) In re Molten Metal Technology, Inc., 271 B.R. 711 (Bankr. D. Mass. 2002) aff’d Gray v. Executive Risk Indemnity, Inc., 2002 WL 923936 (D. Mass. May 6, 2002) Exclusion applies: Reliance Co. of Illinois v. Weis, 148 B.R. (E.D. Mo. 1992) aff’d in part 5 F.3d 532 (8th Cir. 1993) cert. denied 510 U.S. 1117 (1994) National Union Fire Ins. Co. v. Olympia Holding Corp., Case No. 1:94-cv-2081-GET (9/18/95) aff’d without opinionNational Union Fire Ins. Co. v. Olympia Holdings, 148 F.3d 1070 (table) (11th Cir. 1998) Insured vs. Insured Exclusion

10. Coverage Considerations • Defense costs evaluation, allocation • Presence of loss allocation clauses, (including defense costs) • Undertaking language • Relief sought uninsurable as matter of law, public policy • Loss Definition does not include restitution, disgorgement • Applicable Exclusions • Profit-Advantage • Fraud, typically final adjudication • Settlement Consent Clause

11. Questions & Discussion