Financially distressed companies often can only obtain D&O insurance coverage on a policy with a bankruptcy or insolvency exclusion precluding coverage for bankruptcy-related claims. The enforcement of these exclusions in the wake of a subsequent bankruptcy can produce harsh results, and insureds often argue that the exclusion does not apply or even that the exclusion is contrary to the provisions of the Bankruptcy Code. In a recent decision, the Second Circuit, applying New York law to the contractual issues, addressed these recurring issues and upheld a lower court’s denial of a preliminary injunction, affirming the district court’s holding that the bankruptcy exclusion applied to preclude coverage for the individual’s defense. As discussed below, the court’s analysis of the bankruptcy related issues is interesting. A copy of the appellate court’s March 18, 2024, opinion can be found here. An April 4, 2024, post on the Wiley Executive Summary blog can be found here.


Several affiliated healthcare companies, collectively referred to as Oaktree, found themselves in financial distress. In 2018, Timothy Daileader was appointed as the independent director and manager of the Oaktree entities. (Daileader took the position at the request of his employer which specializes in financial restructurings.) In September 2019, the Oaktree entities filed for Chapter 7 bankruptcy. In September 2021, the trustee initiated adversary proceedings against Daileader. Among other things, the trustee alleged that Daileader failed to take appropriate restructuring steps, but as assets were depleted and liabilities grew, collected professional fees, until there were no more funds to pay the fees, when Daileader filed the Chapter 7 petition.

At relevant times, Oaktree maintained a program of insurance that consisted of a layer of primary insurance and additional layers of excess insurance. Daileader submitted the adversary proceeding to the insurers. The primary insurer paid Daileader’s defense fees until its limits of liability were exhausted. Daileader then sought to have his defense fees paid by the first level excess insurer. The excess insurer denied coverage under the policy in reliance on the Bankruptcy Exclusion. Daileader sought a preliminary injunction requiring the excess insurer to pay his defense fees. The district court denied his petition. Daileader appealed to the Second Circuit, arguing that the district court had improperly denied his petition for injunctive relief.

The Bankruptcy Exclusion provides in pertinent part that “the insurer shall not be liable to make any payment for Loss under this policy in connection with any Claim made against the Insured: 1 Alleging, arising out of, based upon, attributable to, or in any way involving, director or indirectly, in whole or in part: a. The bankruptcy or insolvency of the Insured Organization; [or] b. The Insured Organization’s filing of a petition, or a petition being filed against the Insured Organization pursuant to the federal Bankruptcy Code or any similar state law.”

The Second Circuit’s Opinion

In a March 18, 2024, Opinion written by Judge John M. Walker Jr. for a unanimous three-judge panel of the Second Circuit, the appellate court affirmed the district court, holding that the district court had not abused its discretion in denying Daileader’s petition for a preliminary injunction.

Much of the appellate court’s opinion focuses on the nature of the injunctive relief Daileader sought and the appropriate standard to be applied given the relief sought. The court’s analysis of these issues is technical and need not detain us here.

Having worked its way through those issues, the court then turned to the question of whether Daileader had established that he was entitled to injunctive relief, and in the context of this case under the applicable standards, whether or not Daileader had demonstrated a clear or substantial likelihood of success on the merits in the coverage action. The appellate court agreed with the district court that he had not.

Daileader had tried to argue, in reliance on traditional insurance contract interpretation canons, that if the policy provided covered any of the causes of action in the adversary proceeding, then the insurer was obligated to defend the entire action. The appellate court rejected the argument in this context, in part because the policy defined the term “Claim” to mean the entire proceeding and not a single cause of action, and in part because all of the causes of action in the adversary proceeding were “arising out of,  based upon, attributable to, or in any way involving … the bankruptcy or insolvency of the Insured Organization.”

Daileader has also sought to argue that the insurer could not enforce the bankruptcy exclusion because it operated as an ipso facto clause prohibited under the Bankruptcy Code. (Ipso facto clauses are prohibited by Section 365(e)(1) of the Bankruptcy Code, which prohibits provisions in an executory contract  that provide for termination or modification based on the filing of a bankruptcy petition or the financial condition of the debtor, where the operation of the provision effects a forfeiture, modification, or termination of the debtor’s interest in property).

Daileader argued that the bankruptcy exclusion was prohibited because if enforced it would effect a prohibited forfeiture or termination of Oaktree’s estate’s property interests in the policy and the policy proceeds. The insurer argued that while the policy may be property of the estate, the policy proceeds were not. The appellate court said that while the estate might well have a property interest in the proceeds for purposes of satisfying a settlement or judgment against Daileader, his liability had not yet been established, and the estate’s potential claims to the proceeds did not created a property interest. Because Daileader could not show that the estate had a property interest in the proceeds, he could not show that enforcement of the bankruptcy exclusion would effect a prohibited forfeiture.

In an interesting coda that is worth noting, the appellate court observed that following oral argument in the coverage lawsuit, Daileader’s counsel had advised the court that Daileader and the trustee had entered into a settlement resolving the adversary proceedings. The appellate court said, “We express no view as to whether that agreement has accorded the Oaktree estate a property interest in the proceeds.” The appellate court added that it entrusted the consideration of that questions “insofar as it remains disputed, to the district court.”


I confess that I am fascinated with the question of the applicability of the Bankruptcy Code’s prohibition on ipso facto clauses to bar the application of a D&O insurance policy’s bankruptcy exclusion. As the final part of the appellate court’s opinion expressly recognizes, it is emphatically not the case that a D&O policy’s bankruptcy exclusion is never a prohibited ipso facto clause. Indeed, interested readers may want to refer to a prior post on this site dealing with these questions, here, in which I discuss a decision in which a court held that a D&O policy’s bankruptcy exclusion is a prohibited ipso facto provision.

Because the appellate court did not itself address the question of whether the settlement of the adversary proceeding would be sufficient to make the policy proceeds property of the debtor’s estate,  and therefore would make the bankruptcy clause a prohibited ipso facto provision, there is no way to tell in the end whether or not the bankruptcy exclusion ultimately will apply to preclude coverage here. The case will have to return to the lower court for the question to be answered through the further unfolding of the case.

For me, there are two very important take-aways here with respect to the question about ipso facto clauses. First, even though the insured did not succeed here in establishing his entitlement to injunctive relief, and even though the court held that the insured had not shown that the bankruptcy exclusion is a prohibited ipso facto clause, the court did NOT hold that a bankruptcy exclusion can never be an ipso facto clause. Second, as the court’s final comments about the possible effect of the adversary proceeding settlement highlight, whether or not a bankruptcy exclusion operates as a prohibited ipso facto provision is a factor of the applicable facts and circumstances. As the case to which I linked above expressly found, a D&O Policy’s bankruptcy exclusion can operate as a prohibited ipso facto provision.