"Insured vs. Insured" Exclusions in D&O Liability Policy

n In re Molten Metal Technology Inc., 271 B.R. 711 (Bankr. D. Mass. 2002), the bankruptcy court addressed whether it has jurisdiction over a trustee's adversary seeking a determination that the "insured vs. insured" exclusion in the D&O liability policies purchased by the debtor were not triggered when the trustee, acting on behalf of the bankruptcy estate (but not on behalf of the debtor), asserted claims against the debtor's officers and directors. The court held that the matter was not core and that it could exercise only "related to" jurisdiction. The bankruptcy court recommended to the district court that the trustee's claims against the officers and directors not be excluded from coverage under the relevant insurance policies based on the "insured vs. insured" exclusions. While the opinion is grounded on Massachusetts law, it contains an exhaustive analysis of "insured vs. insured" exclusions contained in many D&O policies.

Gov't. Funds for Crop Losses Are Not Estate Property

"Timing is Everything" is the theme of In re Vote, 276 F.3d 1024 (8th Cir. 2002). The debtor did not plant a crop in 1999 because the soil was saturated. In September, the debtor filed chapter 7. In October, Congress passed the Omnibus Consolidated Appropriations Act, which in turn funded the Market Loss Assistant Payment program and the Crop Disaster Program, both in order to compensate farmers for 1999 losses related to crop disasters. Between November 1999 and April 2000, the debtor received in excess of $33,000 in payments under these programs. The trustee filed an unsuccessful motion to compel turnover of the funds. On appeal, the Eighth Circuit held that, as of the commencement of the case, the debtor had no rights in any of the payments because, simply put, they did not exist on the date of the filing of the bankruptcy case, citing In re Schmitz, 270 F.3d 1254 (9th Cir. 2001). In that case, the Ninth Circuit found that profits from a debtor's sale of fishing quotas were not property of the bankruptcy estate where the debtor had filed more than one year before the promulgation of the regulations that entitled him to the fishing quota rights.

Covenant Not to Compete on Personal Services Contract Enforceable

In In re Alongi, 272 B.R. 148 (Bankr. D. Md. 2001), the chapter 7 debtor entered into a pre-petition personal services contract that contained a covenant not to compete. The personal services agreement was deemed rejected as a result of the chapter 7 trustee's failure to assume the contract within 60 days. The chapter 7 debtor then filed a declaratory judgment action regarding her right and obligations under the agreement. Bankruptcy Judge E. Stephen Derby analyzed the effect of rejection under §365, noting that the rights and obligations of a debtor and a non-debtor party to an executory contract are essentially the same after rejection of the contract as they would have been if the contract was breached by the debtor pre-petition. The court noted that because a rejected contract is treated as breached and not terminated, the respective rights and obligations that arise as a result of the effective breach must be analyzed under state law and under the contract in question. Under the terms of the contract, the breach did not trigger the covenant not to compete. Those provisions were triggered upon termination of the contract. Termination of the contract was not actually initiated until the debtor sent the letter of resignation, which was not effective until 90 days from the date of the letter. As a result, the non-competition provisions were activated post-petition, and any claims arising from these provisions were post-petition claims and were not subject to the chapter 7 discharge. Thus, the covenant not to compete was enforceable and damages for breach of that provision could be awarded pursuant to state law.

Undue Hardship for Student Loans

In In re Speer, 272 B.R. 186 (Bankr. W.D. Tex. 2001), Bankruptcy Judge Frank R. Monroe addressed the "undue hardship" standard for dischargeability of a student loan debt. The debtor had incurred the debt to pay for vocational training at a trade school that "supposedly provided instruction in aircraft mechanics and repair." The court noted that of the 50 students in the debtor's graduating class, less than five were able to pass the mandatory federal test and secure employment. The court noted that the debtor had attempted other post-graduate education, albeit unsuccessfully, and was currently employed as a carpenter assistant/roofer working 40 hours a week in a market that was showing signs of weakening. The job required him to be outside eight hours a day in temperatures that could exceed 90 degrees, building houses with closets that were larger than the travel trailer he lived in. The court noted the travel trailer was owned by his mother and that his parents often helped with expenses, including the purchase of a replacement refrigerator. The court also noted that the student loan lender's pre-petition behavior in granting forbearances was in direct contrast to its post-petition activities where, as a general rule, the lender rarely agreed to any type of settlement "even when it is obvious the debtor cannot repay the total debt with interest within the debtor's lifetime. The most often-heard excuse is that there is no one at the agency with authority to "make a deal." The court then attempted to reconcile the undue hardship standard with the underlying fresh-start policy of the Bankruptcy Code. In addition, the court addressed the standards set forth in Brunner v. New York State Higher Educational Service Corp., 831 F.2d 395 (2nd Cir. 1987), which Judge Monroe characterized as "let's make it as tough as humanly possible to discharge a student loan." The court found that all the tests were satisfied and that excepting the debt from discharge would impose an undue hardship within the meaning of §523(a)(8).

Creditor Exception Precluded by §523

In re Standing Order with Reasons Regarding Objections to Discharge under 11 U.S.C. §727 and Purported Settlement of Actions, 272 B.R. 917 (W.D. La. 2001), involved the appeal of a standing order entered by the bankruptcy court that precluded the settlement of any complaint to deny the debtor's discharge if combined with a §523 action, except on payment to the creditor class as a whole. In other words, a creditor who filed an exception to dischargeability with an objection to discharge would be precluded, under the standing order, from settling a §523 or other exception to discharge action. On appeal, the district court held that while the bankruptcy court is authorized to issue case-appropriate remedies to resolve the friction between §§727 and 523, it could not issue a standing order that modified existing substantive rights. As the bankruptcy rules do not prohibit settlement of a §523 complaint when combined with §727 action, the standing order inappropriately modified existing substantive rights of creditors.

Miscellaneous

• In re Cincinnati Cordage & Paper Co., 271 B.R. 264 (Bankr. S.D. Ohio 2001) (severance benefits that arose from pre-petition executive employment agreements do not qualify as administrative expense claims, even though the post-petition services were beneficial to the orderly liquidation of the debtor's assets);
• In re Bame, 271 B.R. 354 (Bankr. D. Minn. 2001) (marshalling could be enforced against the taxing authorities that had liens again real estate, thus reducing the unsecured claims of the taxing authorities);
• In re Flooring America Inc., 271 B.R. 911 (Bankr. N.D. Ga. 2001) (reclaiming seller will not be granted an administrative claim when there is an undersecured lien on all inventory);
• In re Cain, 272 B.R. 304 (Bankr. D. Wyo. 2001) (creditor with actual knowledge of chapter 7 is guilty of willful violation of automatic stay due to failure to prevent state court from setting hearing on motion filed pre-petition);
• In re Welzel, 275 F.3d 1308 (11th Cir. 2001) (over-secured creditor is entitled to reasonable fees as part of its secured claim, and the balance of unreasonable contractual fees are to be treated as an unsecured claim);
• Petro v. Mishrer, 276 F.3d 375 (7th Cir. 2002) (absent exceptional circumstances, bankruptcy court may not use its equitable powers under §105 to supplement the six statutory requirements for confirmation of a chapter 13 plan); and
• In re Marvel Entertainment Group Inc., 273 B.R. 58 (D. Del. 2002) (debtor's subsidiary was unsuccessful in attempt to obtain the value of lost future net operating losses generated by subsidiary while it was a member of parent's consolidated tax group).

Footnotes

¹ Board-certified in business bankruptcy by the American Board of Certification. Return to article