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Liquidation Trustee Cannot Recover Under D&O Policy Due to Insured-vs.-Insured Exception

By: Erin Fay, Counsel, Bayard, P.A.

In a variety of contexts where reorganization through a plan is not possible, a liquidating plan is frequently the best end result for a chapter 11 case.  This is often the preferred exit strategy for cases where sale processes have concluded and the primary remaining assets in the estate are potential causes of action. These assets are sometimes the only possible source of recovery for unsecured or undersecured creditors.  As a part of the plan process, these creditors typically negotiate for the creation and control of liquidation trusts to pursue the actions.

However, a recent Sixth Circuit decision restricts the utility of this approach when underlying director and officer (D&O) liability insurance policies include “insured vs. insured” coverage exclusions. In Indian Harbor Insurance Company v. Clifford Zucker, et al., — F.3d –, 2017 WL 2641085 (6th Cir. June 20, 2017), the Sixth Circuit held that an insured vs. insured exclusion precluded coverage for a liquidation trustee’s claims against a debtor’s D&O’s, finding that the debtor in possession (DIP) and the prebankruptcy company were the same legal entity for purposes of the insured vs. insured exclusion.  As the DIP was bound by the exclusion and voluntarily assigned the claims to the trust, the exclusion applied with equal force to the trustee’s claims.

Read the full article here.

This article was featured in the October 2017 issue of the American Bankruptcy Institute Journal. Click here to learn more about ABI.

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