The process of restructuring financially distressed companies is complicated and fraught with challenges. Among the many potentially complicating challenges that can arise is the possibility of claims against the company’s management. Because of the risks involved with these kinds of claims, it is critically important that steps are taken to insure that directors and officers are protected appropriately throughout and after the reorganization process.


The “best practices” for ensuring that directors and officers are protected before, during and after a reorganization are reviewed in an interesting March 14, 2012 memorandum from Shaunna Jones and Jeffrey Clancy of the Willkie Farr law firm entitled “Reorganization and D&O: Not Always Business as Usual” (here).


The memo contains key observations and practical advice regarding D&O insurance for companies involved in a financial reorganization. I review the memo’s key points below. However, it is important to note at the outset that the specific requirements of any particular company will be a reflection of the company’s financial circumstances; the specific reorganization process in which the company engages and how that process unfolds; and the particulars of the D&O insurance program that the company has in place at the time of its reorganization.


Because of these variables, there is no one single set of insurance-related steps that will apply to every financial reorganization. In order to determine the appropriate D&O insurance-related steps that any particular financially distressed company should take, the company should consult closely with its financial, legal and insurance advisors. That said, however, there are certain considerations that should be taken into account when these circumstances arise.


First, a company should determine whether the reorganization process has triggered the “change in control” provisions of the company’s existing D&O insurance program, and if the process has or will trigger those provisions, when the chance in control took place or will take place. This question is relevant, because the existing D&O insurance program will not provide coverage for any acts, errors or omissions that occur after the change in control.


The typical D&O insurance policy will provide that a change in control occurs when another person or entity acquires 50 percent or more of the voting control or power to select a majority of the board of directors of the insured company. Many policies also provide that that a change in control is triggered upon the appointment of a receiver, liquidator or trustee (although other policies do not have these trustee provisions, or the provisions are deleted by endorsement).


Whether and when the provisions are triggered will depend on the specific reorganization process in which the company has engaged. A Section 11 bankruptcy filing may not trigger a change in control, particularly where (as is often the case) no trustee has been appointed. The change in control in a Chapter 11 bankruptcy may not take place until the reorganization plan is implemented, on the plan’s “effective date.” The routine appointment of a trustee in a Chapter 7 bankruptcy, by contrast, potentially could trigger the change in control, depending on the applicable policy wording.


Regardless of the form of the reorganization and the timing of the change in control, if there is to be a “going forward” business following the reorganization, steps must be taken to protect the officers and directors of the new entity, and to ensure that the “going forward” protection dovetails with the insurance protection that is in place for the directors and officers of the former entity or operation. To make sure that all of these things are in place when and as they should be, without gaps in coverage, several steps should be taken at the before and during the reorganization process.


 The two critical insurance-related structures that need to be addressed are the implementation of an appropriate “run-off” for the directors and officers of the former entity and that “going forward” coverage is available for the directors and officers of the new entity (if there is to be one following the reorganization). The run-off coverage extends the period within which claims arising in connection with pre-reorganization conduct may be noticed. The “going forward” coverage is necessary to address claims involving post-reorganization conduct.


One question that often arises is why directors and offices need run-off coverage if the plan of reorganization involves a release of claims that could be asserted by creditors. The fact is that post-organization claims can and often do arise and they can be costly to defend, even if the directors and officers have a defense based on the release. There is also always the risk that the particular claim that arises may not be precluded by the release.


A practical complication that often arises is that the financial distress and/or the commencement of the restructuring process “may complicate a company’s ability to expend funds on D&O insurance.” Also, a potentially complicating factor that often arises is that the existing program may expire before the date of the change in control, which could require the company to go through a renewal transaction before the run off coverage is put in place.


Many companies facing a renewal date during the reorganization process will extend their existing program rather than acquiring a renewal program. This approach may be less time-consuming and may actually be more attractive to the insurer(s), who may not want to expose “fresh limits” to a financially distressed company. There may be drawbacks to an extension, particularly if the current program’s limits are “impaired” by an existing claim. The key is to ensure that the insurance protection remains in place throughout the reorganization process.


It may be that the payment of the premiums for the extension or renewal will require bankruptcy court approval. In some situations, it may be possible to include within a restructuring support agreement or plan support agreement a provision allowing for both the purchase of both necessary extensions or renewals of the D&O insurance and for the purchase of run-off coverage. Similarly, if the company is purchasing debtor-in-possession financing, the company should take steps to ensure that the costs associated with extensions and run-off purchases are including within the financing.


Provisions may be made for the post-reorganization entity to indemnify the directors and officers of the former entity. This indemnification may be structured in a variety of ways. The authors suggest that the “best practice” is to confirm the indemnity arrangements with the insurers, including adding the new entity as an insured under the run-off policy to ensure coverage for the new entity’s indemnification. The authors suggest that it should be confirmed that notwithstanding the indemnification that no retention would apply under the run-off policy and that the insured vs. insured endorsement should be modified to insure coverage for claims by the new entity against the directors and officers of the former entity. The authors acknowledge that while all of these options may be available, they should be considered and pursued.



The authors’ memo is interesting and contains much sound advice. Notwithstanding the authors’ practical approach, the memo does underscore how complicated the insurance issues can be for companies going through financial reorganizations. The complications underscore how important it is for companies planning a financial reorganization to coordinate with the insurance advisors – as well as how important it is to have knowledgeable, experienced financial advice before and during a financial reorganization.


One particular issue the authors do not address is the way in which the “run-off” and “going forward” programs should be organized in order to allow for the possibility of a claim that “straddles” the past-acts/future acts dates of the two programs. It is important in protecting against this possibility that the “other insurance” provisions of the policies are coordinated.


Although the memo contains many useful observations, perhaps the most important is the authors’ emphasis on the need for these issues to be monitored and addressed before, during and after the reorganization process. Advance planning can reduce the likelihood that problems will arise, for example, in connection with payment for extensions and run-off purchases. Reassessment may be required throughout the reorganization process, particularly if the process unfolds differently than was expected at the outset (if for example, the plan changes from a reorganization to a liquidation).


I know that there is a lot more than can be said on these topics and that there are additional issues involved beyond those discussed above. I encourage readers to add their thoughts and comments on this topic, using this blog’s comment feature.


The Latest FDIC Failed Bank Lawsuit: On March 16, 2012, the FDIC filed its latest failed bank lawsuit. In its complaint (here), filed in the Northern District of Georgia in its capacity as receiver of the failed Omni Bank of Atlanta, the agency has sued ten of the bank’s former officers, seeking to recover over $24.5 million the bank allegedly sustained on over two hundred loans on loans involving low income residential properties and $12.6 million in wasteful expenditures on low income other real estate owned properties. The complaint, which can be found here, asserts claims against the defendants for negligence and for gross negligence.


As Scott Trubey reported in his March 16, 2012 Atlanta Journal Constitution article about the suit (here), since its failure, the bank has been the center of several criminal investigations involving both banker and borrower misconduct. Jeffrey Levine, a former bank executive vice president who was also named as a defendant in the FDIC’s lawsuit, is among those who have been hit with criminal charges.


The FDIC’s latest lawsuit is the seventh that the agency has filed so far involving a failed Georgia bank, the most of any state. (Georgia has also had more bank failures than any other state). The latest suit is the 27th that the agency has filed as part of the current wave of bank failures and the ninth so far in 2012. It is interesting to note that the agency filed this suit just short of the third anniversary of the bank’s March 27, 2009 closure. As the current year progresses, the agency will be facing similar anniversaries of bank closures, which coincides with the FDIC’s three year statute of limitations for bringing suit. Since the bank closure rate hit its high water mark in 2009, we are likely to see increasing numbers of suits this year. It already seems that the pace of lawsuit filing has picked up, as I noted in a recent post


Counsel Selected for Second Circuit Appeal of Issues Surrounding the Settlement of the SEC’s Enforcement Action Against Citigroup: As I noted in a recent post, the Second Circuit has stayed the SEC’s enforcement action against Citigroup, so that the appellate court can consider whether or not Southern District of New York Judge Jed Rakoff erred in rejecting the parties settlement of the case. One of the anomalous features of the case is that in connection with the motions to stay and for interlocutory appeal, since both the SEC and Citigroup had moved for the stay and for the appeal, the adversarial position had not been represented. In its ruling staying the case and granted the motion for appeal, the Second Circuit directed the Clerk of the district court to appoint counsel so that the adverse position (that is, that Judge Rakoff had not erred in rejecting the settlement) would be represented before the merits panel.


The counsel to represent the adverse position has now been selected – it will be John “Rusty” Wing, of the Lankler, Siffert and Wohl law firm. As Susan Beck notes in her March 16, 2012 Am Law Litigation Daily article about the appointment (here), there are a variety of unusual aspects of this appointment. The first is that it has been well over a decade since Wing argued before the Second Circuit. The second is that Wing apparently was selected by Rakoff himsef, almost as if Wing were to be representing  Rakoff in person, rather than merely arguing in support of his ruling rejecting the settlement. Wing is in fact a former colleague of Rakoff’s when the two served in the U.S. Attorney’s office together. The selection of Wing, and more particularly the process by which he was selected, raise a number of interesting questions about who he is representing and what his role will be. For example, should Wing be consulting with Rakoff in preparing his appellate brief?


The selection of Wing represents just one more unexpected and unusual twist in a case that has already had more than its fair share of unexpected twists and turns. In any event, Wing will face an uphill battle given the finding of the three-judge Second Circuit that granted the stay that the SEC and Citigroup have demonstrated a “substantial likelihood” of success on the merits.


Alison Frankel has an interesting March 16, 2012 post about Wing’s selection on Thomson Reuters News & Insight (here).