Post-Confirmation Settlement Agreements: The Implications on Insurance Proceeds

During the course of a bankruptcy, the directors and officers may become the target of multiple lawsuits by various constituents, including creditors and shareholders seeking to tap into the D&O Policy proceeds. Indeed, in some cases, the D&O Policy may be the most substantial asset through which the creditors will achieve any recovery. If litigation is brought against the debtor's directors and officers, whether in bankruptcy court or otherwise, oftentimes the parties seek to settle their claims. Among the many issues faced by the insurers and insureds (including the company, as well as the directors and officers) are the structure of any such settlement, the resolution of competing interests under the D&O Policy, and the rights of the respective parties to the proceeds of the D&O Policy. Questions arise as to whether the terms of any settlement, which if funded from the proceeds of such D&O Policies, may ultimately be approved by the bankruptcy court. Given that most bankruptcy courts find that where the company is the named insured, a D&O Policy is property of a debtor's bankruptcy estate (under certain circumstances, the 'proceeds' of the policy may also be a part of the debtor's estate), any settlement of litigation seeking payment from the D&O Policy must be approved by the bankruptcy court in accordance with Rule 9019(a) of the Federal Rules of Bankruptcy Procedure.

Two recent bankruptcy court decisions shed some light on the difficulties of addressing competing claims to the proceeds of a D&O Policy under a settlement agreement for which bankruptcy court approval is sought in the post-confirmation period (i.e., the period after which the debtor's plan of reorganization is approved and, in effect, the debtor has emerged from bankruptcy) ' In re Adelphia Comm. Corp., 2007 WL 706884 (Bankr. S.D.N.Y. March 6, 2007) and In re Enivid, 2007 WL 806627 (Bankr. D.Mass. March 16, 2007). Both of these cases highlight the concerns of bankruptcy courts modifying/altering the rights of parties, both debtors and non-debtors, to a D&O Policy in the post-confirmation period. The bankruptcy court's reluctance to interfere with the rights and interests of the parties ' at least in this post-confirmation period ' appears to be premised on the fact that since the debtor has confirmed its plan of reorganization (and thus the primary purpose of the bankruptcy case has been completed), there is less chance that the settlement will impinge upon the administration of the estate. While these two cases do not answer all questions, they provide some guidance for parties seeking to settle litigation in a bankruptcy context involving a D&O Policy.