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Collecting D&O Insurance Proceeds
In the race between a debtor and a third party to recover the proceeds of a directors' and officers' insurance policy (a “D&O Policy”), it is critical that the debtor employ the correct strategy for the applicable jurisdiction in order to enjoin its competitor from reaching the proceeds first. Choosing the wrong strategy could mean the difference between collecting tens of millions of dollars and obtaining a judgment not worth the paper upon which it is written. Indeed, the proceeds of the D&O Policy (“D&O Proceeds”) may be the largest asset of the estate. As a result, a successful reorganization could depend upon filing in the right jurisdiction and implementing the correct litigation strategy.
Introduction
Faced with the prospect of receiving less than a 100% distribution on account of its allowed claim or interest, a creditor or shareholder (often as a class representative) may attempt to circumvent the priority scheme of the Bankruptcy Code by filing suit against the debtor's officers or directors for the purpose of reaching the D&O Proceeds. Because the policy will invariably have a coverage limit insufficient to satisfy the competing claims of both the competing shareholder/creditor (the “Competing Party”) and the debtor, it is essential that the debtor reach the proceeds first. If the debtor fails to anticipate the Competing Party's tactics, and files in a jurisdiction unwilling to enjoin the competing lawsuit, the debtor may lose its opportunity to recover upon the policy, thereby squandering a valuable asset.
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