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recognizes, under principles of both comity and practicality, that the most efficient and most sensible cross-national use of judicial and parties' resources is to have the Israeli Court decide what the debtor-creditor relationships are as between FIBI, GH Ltd. and GH LP, and how to effectuate each parties' rights and remedies, particularly given the choice of law provisions in the parties' agreements, the situs of FIBI and GH Ltd. being in Israel, and most of the relevant assets being located in Israel."
Facts: Petters Company, Inc. ("PCI") and Petters Group Worldwide, Inc. ("PGW") (collectively, the "Debtors") are the debtors in these chapter 11 cases. Before September 2008, the Debtors were owned and controlled by Thomas J. Petters ("Petters"). In October 2008, Petters was arrested and later charged with a crime. In connection with the criminal case against Petters, Douglas A. Kelley was appointed as receiver (the "Receiver") for Petters and, inter alia, PCI and PGW. The Receiver put the Debtors, along with a number of other related companies, into chapter 11. Kelley was appointed as chapter 11 trustee (the "Trustee"). In the bankruptcy, Greenwich Insurance Company ("Greenwich") and XL Specialty Insurance Company ("XL Specialty") filed motions seeking relief from the stay so that they could pay defense costs under the D&O policies they had issued to the Debtors prior to the bankruptcies. The Greenwich and XL Specialty policies impose shared limits of liability capping the aggregate amount of its duty of payment to $10 million. Additionally, the D&O policies are paid out on a first come, first serve basis. Petters has been defending himself in his criminal case and has been racking up legal fees. Additionally, the Receiver has been incurring legal fees defending the civil suits that have been filed against the Debtors. So far, prior to the bankruptcy, the District Court allowed the Receiver to pay around $2.1 million in attorneys' fees from the funds the Receiver had recovered. But, the Receiver was to seek reimbursement from the D&O insurance. "PCI, PGW, Tom Petters, and directors, officers, and other individuals within the definitions of the D & O policies continue to incur expenses in their defense of the legal proceedings related to the Petters business entities, or their participation in those proceedings." Before the court were motions filed by Greenwich and XL Specialty asking the court to lift the stay so that they could make a payment for the defense costs that had been incurred.
Issue: Should the automatic stay be lifted so that Greenwich and XL Specialty can pay for the parties' defense costs?
Holding: The motions seeking that the stay be lifted were granted.
Rule: The ownership interest in a D&O policy becomes property of the debtor's estate in bankruptcy. But, with respect to the proceeds of such policy, "[w]hen [a D & O] insurance policy provides coverage only to the debtor, courts will generally rule that proceeds are property of the estate.... On the other hand, when a policy provides coverage only to directors and officers, courts will generally rule that the proceeds are not property of the estate."
Reasoning: Case law has held that an individual insured other than the debtor "has a contractually-distinct status that runs directly between itself and the insurer." In bankruptcy, a policy that is paid out on a first-come, first-serve basis may affect the estate to the extent the estate does not get any of the proceeds because it did not come to the insurer first. Thus "in any bankruptcy case where the debtor is the policyholder, but not the only insured, the first-come, first served approach can materially jeopardize the interests of the estate." Some courts take this reality to characterize "the entire value of unexhausted coverage, and any cash proceeds to be disbursed on any claims against the coverage, [as] property of the bankruptcy estate of the debtor-policyholder." But, the court said that there is nothing about the estate's interest in the proceeds that should trump the non-debtor insured's interest. For this reason, some measure of control over the proceeds of a policy is certainly necessary and should be preserved for the benefit of the estate. However, the portion of the proceeds over which the estate has no interest should be disbursed. The court felt that, here, "the appropriate structure for the control was a grant of relief from the stay, to the extent of a certain value of the unexhausted coverage; this would remove the cloud of a potential violation of the stay from the payment of any and all claims as to that amount. To the extent that any component amount of the aggregate unexhausted coverage is traceable to claims that have been made or could
©2010 Leif M. Clark
