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Enron Corporation’s highly publicized tumble into bankruptcy has turned a national spotlight on the potential liability that former directors and officers of bankrupt corporations face for alleged mishandling of the debtor-company’s financial affairs. In today’s economic climate, executives of struggling corporations are well served to take a hard look at their directors and officers liability insurance policies (D&O policies) to evaluate the likelihood of coverage in the event of bankruptcy. Directors and officers should pay particular attention to what coverage exists should the trustee of the bankruptcy estate file claims against them for breaches of their fiduciary duties. While D&O policies are intended to cover such claims, insurers often argue that claims by the trustee are barred by the “insured vs. insured” exclusion, which is common to many D&O policies. These exclusions bar coverage for suits brought “by or on behalf of” one insured against another, including claims asserted by the insured corporation. SeeMathias, Burns, Neumeier, & Burgdoerfer, Directors and Officers Liability: Prevention, Insurance and Indemnification � 8.02 (Law Journal Press 2000), for a general description of a standard insured vs. insured exclusions in D&O policies. THE ALSTRIN DECISION: NO COLLUSION, NO EXCLUSION Although few courts have addressed the issue directly, a recent decision, Alstrin v. St. Paul Mercury Insurance Co., 179 F. Supp.2d 376 (D. Del. Jan. 16, 2002), has given policyholders fresh ammunition in the battle over the insured vs. insured exclusion. In Alstrin, executives of a bankrupt corporation’s predecessor filed suit against their D&O insurer, seeking coverage for liabilities arising from consolidated shareholder class actions, as well as for claims filed by the bankruptcy estate representative. The insurer contended that the policy’s preprinted form exclusion, barring coverage for claims made against an insured “brought by any Insured or by the Company,” precluded coverage of the estate representative’s claims. According to the insurer, the estate representative shared the identity of the insured debtor-corporation and thus the insured vs. insured exclusion applied. The court, however, held that the exclusion did not apply because the estate representative and the debtor-corporation were separate entities, representing distinct interests. In reaching its decision, the Alstrincourt relied heavily on the underlying purpose of the insured vs. insured exclusion — that is, to prevent collusive suits between the insured corporation and its insured officers and directors. Id. at 404, citing Reiser v. Baudendistel (In re Buckeye Countrymark Inc. ), 251 B.R. 835, 840-41 (Bankr. S.D. Ohio 2000). The Alstrincourt found no collusion and, therefore, no rationale for applying the exclusion: Here, there is no collusion between the Estate Representative and the D&O plaintiffs. While it is true that the company itself could have brought such claims against its directors and officers, the Estate’s claims are asserted on behalf of the Debtor’s creditors and not on behalf of the Debtor itself. Thus, the Estate Representative is acting as a genuinely adverse party to the Debtor’s former directors and officers. Alstrin, 179 F.Supp. 2d at 404. The court also rejected the insurer’s attempt to hide behind the “plain language” rule to avoid coverage. The insurer argued that courts cannot consider the intent behind insured vs. insured exclusions unless an ambiguity is found in the provision. The court disagreed, noting that it was required to interpret the language of the policy in a manner that gives effect to the intention of the parties at the time the contract was made. In this case, the court held that it “ha[d] not varied the plain language of the agreement, but rather, in determining that the Estate is not the Debtor, ha[d] resolved the insured vs. insured dispute by determining that due to the status of the Debtor Estate, the adversary proceeding claims do not fall within the plain language of the exclusion.” Id. at 404-05. The Alstrindecision sets useful precedent for future D&O coverage cases. THE MOLTEN METAL TECH DECISION: TRUSTEE DISTINGUISHED FROM DEBTOR The Alstrindecision came on the heels of another recent case dealing with the insured vs. insured exclusion in the bankruptcy arena. In Molten Metal Tech. Inc. v. Executive Risk Indem. Inc., 271 B.R. 711 (Bankr. D. Mass. Jan. 3, 2002), a Chapter 11 trustee brought an adversary proceeding in bankruptcy court for a determination that the exclusion was not triggered by its claims against the debtor-corporation’s directors and officers. As in Alstrin, the central issue was whether the trustee was a different entity from the debtor for purposes of the insured vs. insured exclusion. In deciding in favor of the trustee, the court first looked to the plain language of the policy, noting that the policy expressly defined “Company” to mean Molten Metal Technology and its subsidiaries, not the trustee, and that “brought by” in the exclusion was not broad enough to encompass claims brought on behalf of the bankruptcy estate rather than the company. Id. at 728. The court then examined the differences between the powers and rights of the trustee vs. those of the debtor-corporation and found that the trustee was not the legal equivalent of the debtor for purposes of the insured vs. insured exclusion. Id. at 728-31. Although not a final judgment on the issue, the court’s proposed conclusions of law and recommendations to the district court in favor of the trustee should prove useful to parties seeking D&O coverage, particularly in bankruptcy cases. (Note that because the adversary proceeding brought by the trustee for determination whether the insured vs. insured exclusions were triggered by its claims against directors and officers did not concern rights arising under the Bankruptcy Code, the court could only exercise “related to” jurisdiction and enter proposed conclusions of law pursuant to 28 U.S.C. � 157(c)(1). Id. at 714-15. The recent Alstrinand Molten Metaldecisions seem to confirm a trend of cases recognizing the legal distinction between the insured corporation and the bankruptcy trustee, and thus rejecting the application of the insured vs. insured exclusion in the bankruptcy context. While the first published decision addressing the applicability of the insured vs. insured exclusion, Reliance Insurance Co. of Illinois v. Weis, 148 B.R. 575, 583 (E.D. Mo. 1992), aff’d in part, 5 F.3d 532 (8th Cir. 1993), cert. denied, 510 U.S. 1117 (1994), held in favor of the insurers, courts in all subsequent cases have decided the issue in favor of the former directors and officers. In Reliance, a committee of unsecured creditors of an insured debtor corporation asserted a claim against the corporation’s former directors and officers for breaches of their fiduciary duties. The district court held that the insured vs. insured exclusion barred coverage under the policy, reasoning that the committee “stands in the shoes of the debtor,” 148 B.R. at 581-82, acquiring the right to assert the debtor’s causes of action against the directors and officers. In the court’s view, “for the purposes of this litigation, there [was] no significant legal distinction between [the debtor corporation] and its bankruptcy estate.” Id. at 583. At this point in time, however, Reliancestands alone in applying the insured vs. insured exclusion. All later decisions have acknowledged the different interests between a bankruptcy trustee and the debtor-corporation and have refused to apply the exclusion. For example, in Pintlar Corp. v. Fidelity & Casualty Co. of New York (In re Pintlar Corp. ), 205 B.R. 945 (Bankr. D. Idaho 1997), aff’d sub nom., CIGNA Ins. Co. v. Gulf USA Corp., 1997 WL 1878757 (D. Idaho 1997), the insurers argued that the bankruptcy litigation trustees were mere “alter egos” of the corporation, and thus the insured vs. insured exclusion relieved the insurers of any liability on claims asserted by the trustees against insured officers and directors. The court disagreed. Similarly, in Reiser v. Baudendistel (In re Buckeye Countrymark Inc. ), 251 B.R. 840 (Bankr. D. Ohio 2000), a bankruptcy court in Ohio held that the corporation and bankruptcy trustee were separate legal entities. Therefore, the court concluded that the exclusion did not apply to the trustee’s claims because “[a]s representative of the estate, the Trustee brings his claims on behalf of the Debtor’s creditors rather than on behalf of the debtor making this exclusion inapplicable.” The limited case law to date makes clear that the courts’ willingness to recognize a legal distinction between the prepetition insured corporation and the trustee of the bankruptcy estate is pivotal to the application of the insured vs. insured exclusion. Policyholders seeking to avoid the application of the exclusion should develop facts demonstrating the separate interests and obligations of the insured corporation on the one hand, and the trustee, on the other. As the court demonstrated in Alstrin, this will enhance the policyholder’s ability to enforce its coverage. As corporate bankruptcies increase, courts will begin to see more bankruptcy insurance disputes about the insured vs. insured exclusion. D&O policyholders should keep close at hand the recent decision in Alstrinin the event that they face claims brought by a representative of a bankruptcy estate, as the case bolsters the conclusion that the insured corporation and bankruptcy trustee are separate entities with distinct interests. David J. Bradford is a partner with Chicago’s Jenner & Block, www.jenner.com/. He is a member of the firm’s management committee as well as the firm’s Complex Business Litigation Practice Group and Insurancce Litigation and Counseling Practice Group. Timothy W. Burns is a partner in the firm’s Securities Practice Group. Traci M. Braun is an associate in the firm’s Insurance Litigation and Counseling Group.

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