The Bankruptcy Hotline

Debtor Does Not Have a Property Interest in D&O Policy

The District Court for the Southern District of New York has ruled that the proceeds of the Directors' and Officers' insurance policy covering legal expenses of the Rigas family and Adelphia Communications Corp. officers is not an asset of the bankrupt company. In re Adelphia Communications Corp., No. 03-06946 (August 25).

Four members of the Rigas family were charged with multiple counts of corporate fraud in managing the communications company and applied for $300,000 each in legal defense costs under Adelphia's D & O policy. The bankruptcy court found that these proceeds were an asset of Adelphia, and that litigation over them was subject to the automatic stay until after the criminal prosecution against the Rigas family was complete. On appeal, the district court reversed, finding that the bankruptcy court incorrectly held that litigation over the insurance proceeds was subject to an automatic stay under ' 362(a)(3), but that the bankruptcy court could extend a stay if additional evidence was presented.

The court acknowledged that this issue has divided circuits elsewhere in the country, but that here the debtor did not yet have a property interest in the proceeds of the insurance policies. “Such argument would be akin to a car owner with collision coverage claiming he has a right to proceeds from his policy simply because there is a prospective possibility that his car will collide with another tomorrow, or a living person having a death benefit policy, and claiming his beneficiaries have a property interest in the proceeds even though he remains alive.” the court stated. The court remanded the matter, reasoning that the bankruptcy court simply did not provide sufficient supporting findings to lay a “proper foundation” to extend the automatic stay.

Debtor Does Not Have a Property Interest in D&O Policy

The District Court for the Southern District of New York has ruled that the proceeds of the Directors' and Officers' insurance policy covering legal expenses of the Rigas family and Adelphia Communications Corp. officers is not an asset of the bankrupt company. In re Adelphia Communications Corp., No. 03-06946 (August 25).

Four members of the Rigas family were charged with multiple counts of corporate fraud in managing the communications company and applied for $300,000 each in legal defense costs under Adelphia's D & O policy. The bankruptcy court found that these proceeds were an asset of Adelphia, and that litigation over them was subject to the automatic stay until after the criminal prosecution against the Rigas family was complete. On appeal, the district court reversed, finding that the bankruptcy court incorrectly held that litigation over the insurance proceeds was subject to an automatic stay under ' 362(a)(3), but that the bankruptcy court could extend a stay if additional evidence was presented.

The court acknowledged that this issue has divided circuits elsewhere in the country, but that here the debtor did not yet have a property interest in the proceeds of the insurance policies. “Such argument would be akin to a car owner with collision coverage claiming he has a right to proceeds from his policy simply because there is a prospective possibility that his car will collide with another tomorrow, or a living person having a death benefit policy, and claiming his beneficiaries have a property interest in the proceeds even though he remains alive.” the court stated. The court remanded the matter, reasoning that the bankruptcy court simply did not provide sufficient supporting findings to lay a “proper foundation” to extend the automatic stay.