debtor in possession

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As the story developed last month surrounding the spectacular collapse of auto-parts giant First Brands Group, I kept waiting for the lawsuit. The tale of the CEO’s supposed lavish personal spending, as well as the company’s massive debt and apparently missing funds, seemed scripted for a securities class action complaint. The securities suit I thought surely was coming never materialized – because, it turns out, Patrick James, the company’s founder and CEO, was also its sole equity owner. So, no shareholder suit. Which is not to say that there would never be a lawsuit.

Indeed, last week, the perhaps inevitable lawsuit did materialize, but not as a securities suit; rather, the lawsuit is in the form of an adversary proceeding against the former CEO and his affiliated entities brought by the company as debtor in its bankruptcy proceeding. And the complaint? It’s a doozy. And as discussed below, it also raises some interesting D&O insurance coverage questions as well.Continue Reading First Brands Sues Its Founder for “Grievous Misconduct”

Standard D&O insurance policies typically include an exclusion precluding coverage for claims brought by one insured against another insured. This exclusion also typically has a carve-back to the exclusion preserving coverage claims brought by bankruptcy officials, such as a trustee or received. One recurring question is whether or not a claim brought against an insured person by the company acting as debtor-in-possession is precluded by the exclusion, or whether the bankruptcy carve-back preserves coverage for the claim.

In an interesting October 3, 2024, decision, a bankruptcy court judge presiding over the Chapter 11 bankruptcy of Walker County Hospital Corporation, and applying Texas law, held that a claim by the Hospital acting as debtor-in-possession against the Hospital’s former CEO fell within the bankruptcy carve-back, and therefore that the insured vs. insured exclusion did not preclude coverage. The court’s analysis of this recurring question is interesting, as discussed below. A copy of the bankruptcy court’s October 3, 2024, opinion can be found here.Continue Reading Insured vs. Insured Exclusion Does Not Bar Coverage for Debtor-in-Possession’s Suit Against Former CEO

sixth circuit1The Insured vs. Insured exclusion is a standard provision found in most D&O insurance policies. As its name implies, the exclusion precludes coverage for claims brought by one insured against another insured. The exclusion is a frequent source of coverage disputes, particularly in the bankruptcy context,  due to frequent disagreements over the exclusion’s application to claims brought against company management by representatives of the creditors or of the bankrupt estate. One recurring dispute of this type is the question of the exclusion’s applicability to claims brought against company management by the company as debtor-in-possession. A recent appellate question considered a variation of this question – that is, whether the exclusion precluded coverage for claims brought against company management by the trustee of a liquidation trust as an assignee of the company as debtor in possession. In a June 20, 2017 opinion (here), the Sixth Circuit (applying Michigan law) held that the exclusion precluded coverage for the liquidation trustee’s claim. The appellate ruling raises some interesting issues, discussed below.
Continue Reading Insured vs. Insured Exclusion Precludes Coverage for Claim Assigned by Debtor in Possession to Liquidation Trustee

third circuitThe traditional Insured vs. Insured exclusion found in many D&O insurance policies is a frequent source of claims disputes, particularly in the bankruptcy context. As its name suggests, the Insured vs. Insured exclusion precludes coverage for claims brought by one Insured against another Insured. The typical Insured vs. Insured exclusion includes a provision (often…