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Facts: Visitalk.com, Inc. ("Visitalk") bought director and officer ("D&O") insurance from Reliance Insurance Company and Twin City Fire Insurance Company. The policies (the "Policies") named Visitalk, and its D&Os as insureds, and promised to pay losses that any of the insureds became liable to pay as a result of covered claims, as those were defined in the Policies. The Policies had certain exclusions, including, inter alia, "claims brought by Visitalk itself against its own officers and directors." However, there was an exception to this exclusion for "stockholder derivative actions and claims by former officers and directors for wrongful termination, discrimination, or sexual harassment." More specifically, the exclusion (the "D&O Exclusion") provided: "'[t]he Insurer shall not be liable to make any payment for Loss in connection with any Claim made against the Directors and Officers Š brought or maintained by or on behalf of an Insured in any capacity." The listed exclusion arose when Visitalk filed for chapter 11 bankruptcy and, as a "'debtor and debtor-in-possession, sued some of its recently discharged officers and directors for breaches of their fiduciary duties." Visitalk then assigned the claims against its D&Os to a trust established for its creditors (the "Visitalk Creditors Trust") and named Biltmore Associates (the "Trustee") as trustee. The Trustee and the D&Os against whom Visitalk had asserted claims agreed to settle for around $175 million. The D&Os then assigned their rights against the insurers to the Visitalk Creditors Trust. The Trustee sued the insurance companies, and the insurers declined coverage. The district court dismissed the case based upon 12(b)(6). The district court also awarded attorneys' fees to the insurers against Biltmore personally. Biltmore appealed both decisions.
Issue: "There are two issues: (1) what the insured versus insured exclusion means; and (2) how bankruptcy law affects its application." Lastly, the Ninth Circuit determined whether the Trustee was personally liable for attorneys' fees in light of the Uniform Trust Code.
Holding: Affirm the dismissal of the complaint, but on different grounds. Remand on the issue of attorneys' fees.
Rule:
(1) D&O Exclusion applied here because the corporation itself sued the D&Os.
(2) Bankruptcy did not affect the nature of the lawsuit and the application of the D&O Exclusion because the Ninth Circuit concluded that "for purposes of the insured versus insured exclusion, the prefiling company and the company as debtor in possession in chapter 11 are the same entity. The bankruptcy code defines a Chapter 11 debtor in possession as the debtor. The debtor, in turn, is defined as the 'person or municipality concerning which a case under this title has been commenced.' Bankruptcy cases can be filed only with respect to pre-bankruptcy persons. Thus the debtor in possession is the debtor, and the debtor is the person, Visitalk, that filed for bankruptcy. Applying these statutory provisions literally, Visitalk, the debtor in possession, is the same person for bankruptcy purposes as Visitalk, the pre-bankruptcy corporation. There is no good reason to interpret the language other than literally in this context.'"
(3) The Uniform Trust Code, which is in force in Arizona, provides that "the trustee is personally liable only if he is personally at fault for the obligation. Otherwise, the trustee is liable only in his representative capacity."
Reasoning:
(1) The D&O Exclusion: The court first noted that insurance against derivative suits and employment claims is really just liability insurance. "The trigger for liability insurance is a claim by someone not under the control of the insured himself. By contrast, people buy casualty insurance against the risks created by their own bad luck or carelessness." In fact, the risks that one insures against differ when one buys casualty vs. liability insurance. Here, Biltmore argues that because it is suing on behalf of the Visitalk Creditors Trust, not the debtor/insured, the D&O Exclusion does not apply. The court has three answers to this argument: (1) "the underlying lawsuit, for which coverage is sought, alleged that the directors and officers of Visitalk breached their statutory and fiduciary duties. A cause of action for mismanagement belongs to the corporation." And, although true that shareholders or creditors can sue derivatively, that is not what happened here; Visitalk sued the D&Os. "That the creditors rather
©2010 Leif M. Clark
