At the hearing, Sun Trust's only witness was Joel Crisler, an appraiser. Crisler stated that in his expert opinion the fair market value of the Property was $ 460,000.00, a value which is based upon a future value of $ 1,197,800.00 with a five year holding period at a discount rate of twenty percent. Debtor's first witness, Johnnie Ganem, who is also an appraiser but did not conduct an independent appraisal of the Property, testified that in his opinion a three year holding period and a twelve percent discount rate were more appropriate valuation parameters. Adapting Crisler's appraisal with these changes, Ganem testified the value of the Property would yield a value of between $ 750,000.00 to $ 800,000.00. Debtor's second witness, Derek Pommerenck, a principal of Debtor, testified in his opinion the property was worth $ 1,200,000.00...

After considering the expert testimony of appraisers for both parties, I conclude that SunTrust did not carry its  burden as of the date of the hearing. SunTrust's expert established a value of $ 460,000.00 utilizing what he believed the value of the property would be in five years and discounting it to present day value at twenty percent per year. Debtor's expert believed that a three year holding period with a discount rate in the range of twelve to thirteen percent was more appropriate and concluded to a value in the range of $ 750,000.00 to $ 800,000.00. I am unable to conclude what the proper discount rate would be after hearing the testimony of these two appraisers, but assuming a five year holding period at a lower discount rate of twelve percent, the value of the property today would exceed $ 600,000.00. Similarly, a shorter three year holding period at a twenty percent discount rate would yield a value of roughly $ 675,000.00. Without reaching a precise conclusion as to what the value of the property is, however, I am able to conclude, given a pre-petition SunTrust   debt totaling approximately $ 550,000.00, that there remains some equity in this property. As a result, the burden is not carried under § 362(d)(1), and I move on to the consideration of the Motion based on 11 U.S.C. § 362(d)(3)...

SunTrust's motion requests that this Court determine that the Property securing its claim is "single asset real estate." Unless I so find, SunTrust can not rely on § 362(d)(3) but only § 362(d)(1) and (2), which would impose the burden of establishing that there is no equity in the property to obtain relief, a burden that SunTrust cannot meet as described above. See 11 U.S.C. § 362(g).

There is no doubt that the property meets the definition. It constitutes a single project and is not residential, Debtor is not a family farmer, and no business is being conducted on the property. See Statement of Financial Affairs, Dckt.No. 8, pgs. 14 & 19. Therefore, the Property qualifies as a "single asset real estate."

However, Debtor argues that (d)(3) does not apply because it has a counterclaim against Portrait Homes in Superior Court, which "is clearly not real property nor is it an attachment or appurtenance to the property." Brief, Dckt.No. 71, pg. 6. This fact does not change this Court's finding.Go to the description of this Headnote.The focus of the definition is not whether the case involves a "single asset" but rather whether the stay applies to "single asset real estate" held by a bankruptcy estate.

 Having concluded that there is, at the present time, some equity in this property, although slight equity, I hold that while it is mandatory that I grant stay relief under § 362(d)(3), it is not mandatory that I grant unconditional relief from stay. Instead, I am permitted under that section to condition or modify the stay in accordance with the evidence.

The Court lifted the stay based on judicial economy, the existence of other defendants, and the need for a jury trial against the non-debtor defendants.

Debtor's argument as to prejudice--e.g., the expense of litigation--is somewhat negated by its argument that Debtor has failed to state a claim. If Debtor is correct that Mr. Ellerbee's complaint lacks substance, the district court can dispense with it efficiently, with respect to time, money, and other resources, on a Rule 12(b)(6) motion. Consequently, any prejudice to Debtor is minimal.

On the other hand, at least two factors weigh heavily in Mr. Ellerbee's favor: judicial economy and the existence of other defendants. Even assuming Mr. Ellerbee waived any right he has to a jury trial against Debtor due to his participation in the bankruptcy proceedings, he is entitled to a jury trial against the non-debtor defendants, who also retain jury trial rights. This point is particularly significant as it relates to DT Carson. Because DT Carson and Debtor were joint employers of Mr. Ellerbee, the cases against them are likely to revolve around similar--if not identical--issues and evidence. If the Court grants stay relief, Mr. Ellerbee will have to prosecute what amounts to the same case in two different forums, with the possibility of inconsistent results. "[P]rinciples of judicial economy require that, without good reason, judicial resources should not be spent by duplicitous litigation, and that a lawsuit should only be tried once, if one forum with jurisdiction over all parties involved is available to fully dispose of all issues relating to the lawsuit..."

 

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

In re Tarpley, Ch. 13 Case No. 08-50669; Adv. No. 08-5081 (Bankr. M.D. Ga. June 23, 2009)(J. Walker).  The facts are summarized by the Court:

Defendant Cambridge Credit Counseling Corporation Click for Enhanced Coverage Linking Searchesoffers credit counseling and educational assistance on financial matters to consumers throughout the United States. In 2000, Debtor-Plaintiff Betty Tarpley engaged Defendant in response to its advertising. For approximately eight years, Debtor remitted monthly payments to Defendant, totaling more than $ 30,000. The payments were disbursed by Defendant to various creditors of Debtor after deduction of an administrative fee.

On November 25, 2003, customers of Defendant filed a class action lawsuit in the Eastern District of New York on behalf of all customers of Defendant who received [*2] debt management services from Defendant's date of incorporation in 1996 onward. The class action plaintiffs sought damages for alleged violations of the Fair Debt Collection Practices Act, the Credit Repair Organizations Act, the Racketeer Influenced and Corrupt Organizations Act, the Telemarketing and Consumer Fraud and Abuse Protection Act, and various similar state statutes, as well as claims of false advertising, breach of fiduciary duties, and unjust enrichment.

The parties to the class action entered into a settlement agreement. On December 18, 2006, the district court entered an order approving the compromise and setting forth various terms and conditions, including waiver and release of claims held by the class action plaintiffs...Debtor filed a Chapter 13 petition on March 15, 2008. On September 25, 2008, she initiated an adversary proceeding against Defendant. The complaint alleged violations of consumer protection statutes, breach of contract, and fraud. Defendant filed a motion for summary judgment contending that Debtor's suit is barred under the theory of res judicata by virtue of the class action settlement...Debtor was a party to a class action against Defendant that alleged various violations of consumer protection, tort, and contract laws. Debtor continued her contractual relationship with Defendant during the civil suit and after the settlement.

The Court held that as the debtor's complained alleged post-settlement misconduct on the part of the company, and no facts were provided to show that the company was entitled to judgment for those claims, their summary judgment motion was denied for those claims.  However, res judicata did apply to the debtor's allegations of pre-settlement misconduct, and thus the company was entitled to judgment for those claims.

 In re Hall, Ch. 7 Case No. 03-54624-RFH  (Bankr. M.D. Ga. September 24, 2009) (J. Hershner).   Prior to filing a Chapter 7, debtor retained an Alabama lawyer to handle his personal injury claim for 45% of the recovery, plus expenses.  The Alabama lawyer then agreed with a Georgia lawyer to be co-counsel in the personal injury case, and Debtor sighed a second retainer agreement with the Georgia lawyer, also with a fee of 45% and expenses.  Debtor understood that the combined fee for both lawyers would be 45% plus expenses.  Debtor subsequently filed a Chapter 7 petition and scheduled the personal injury claim as an asset, but apparently did not tel either personal injury lawyer about the case for several months.  The Georgia lawyer subsequently pursued the action on behalf of the Trustee.  

The facts are somewhat convoluted and are not repeated here, but after a fee dispute arose, the Court held that the Alabama lawyer did not provide sufficient evidence of a quantum meruit claim, as he provided no time records or means for the Court to determine the reasonable value of his services.  The lawyers was not entitled to a post-petition administrative claim as he was not approved as counsel for the Trustee, and provided no evidence that he provided value to the estate.  Finally, and dispute between the two personal injury lawyers over splitting the fee did not impact the estate.

Section 541 of the Bankruptcy Code provides that the Estate includes “all legal and equitable interests of the debtor in property as of the commencement of the case” except as provided in subsections (b) and (c)(2) of this section. 

Section 541(b)(6), added to the Code in October 2005 (the "BAPCPA" amendments) states that property of the estate does not include:

funds used to purchase a tuition credit or certificate or contributed to an account in accordance with section 529(b)(1)(A) of the Internal Revenue Code of 1986 under a qualified State tuition program (as defined in section 529(b)(1) of such Code) not later than 365 days before the date of the filing of the petition in a case under this title, but –

(A) only if the designated beneficiary of the amounts paid or contributed to such tuition program was a child, stepchild, grandchild, or stepgrandchild of the debtor for the taxable year for which funds were paid or contributed;

(B) with respect to the aggregate amount paid or contributed to such program having the same designated beneficiary, only so much of such  amount as does not exceed the total contributions permitted under section 529(b)(7) of such Code with respect to such beneficiary . . .;  and

(C) in the case of funds paid or contributed to such program having the same designated beneficiary not earlier than 720 days nor later than 365 days before such date, only so much of such funds as does not exceed $5,475[.]

 In In re Bourguignon, Ch. 7 Case No. 09-00766-TLM (Bankr. D. Idaho Sep. 23, 2009) (click here to download opinion), the Court discussed the application of these Code sections.  Debtor opened a Section 529 Plan for their daughter on March 10, 2009, and deposited an initial $14,500 into the account.  Debtor's Mother subsequently added $40,000 to the account.  Debtors filed a Chapter 7 petition two weeks later. Debtors did not list the account in Schedule B or on their Exemptions.

The Court found that the Debtors had a legal interest in the account as of the petition date, and it was property of the Estate. It was not excluded under § 541(c)(2): 

Debtors’ argument that § 541(c)(2) is applicable to the College Account fails. That exception deals with restrictions on transfer “of a beneficial interest of the debtor in a trust[.]” There is inadequate proof of a qualifying trust interest of Debtors. Debtors are not the “beneficiaries” of the College Account; Christian Bourguignon is, instead, the account owner. Debtors’ daughter is the designated beneficiary. Even if Debtors arguably have a contingent, beneficial interest in the College Account because either could potentially become a beneficiary the College Account does not contain the requisite anti-alienation and anti-assignment provisions required under nonbankruptcy law and recognized by § 541(c)(2).

The Court then addressed Debtors' primary argument that the account is excluded under Section 541(b)(2). 

Focusing on the term “not later than” and urging the Court to treat it as synonymous with “within,” Debtors contend that “not later than 365 days before the date of the filing” as found in § 541(b)(6) means that “if funds were put into a 529 account LESS THAN ONE YEAR before the petition day, they are NOT property of the estate.” ... Debtors’ interpretation of the Code lacks merit.

The natural reading of § 541(b)(6) provides an exclusion from property of the estate for 529 accounts on a sliding scale. Assuming the qualifying conditions of § 541(b)(6)(A) and (B) are met, any such contributions made to a 529 account more than 720 days prior to bankruptcy are fully excluded from property of the estate. Such  contributions made between 365 and 720 days prior to bankruptcy are excluded from property of the estate to the extent below $5,47513 but any such contributions over $5,475 in that same time frame remain property of the estate. Any amounts contributed within a year of bankruptcy are not excluded at all from property of the estate…

Thus, for funds to be excluded from property of the estate under § 541(b)(6), they must be contributed to a 529 account at least a year before the filing of the bankruptcy, and, even then, there is a monetary cap on the excluded funds contributed between 365 and 720 days prior to the filing. It is only those funds contributed more than 720 days before filing that are excluded without a monetary limit. ...In sum, Debtors’ desired construction is not supported by the language of the statute, plainly read; any plausible policy rationale; or their own account documents.

 In addition to the funds contributed by the Debtor being property of the Estate, the Court also held that the $40,000 contributed by Debtor's mother was also Estate property. 

Section § 541(b)(6) makes certain funds contributed into a 529 account property of the estate and excludes others, but that distinction is based on the timing of contribution, not the source of the contribution. Indeed, during the September 3 hearing, Debtors conceded the Code makes no distinction based on the source of the contributions.

Debtors instead rely on the language of their College Account’s plan description, which states that “Contributions . . . by an Account Owner” made within a year of filing bankruptcy are part of the account owner’s bankruptcy estate and are available to creditors, but which does not mention a third party’s contributions. See Ex. 201 at 13. The plan description’s silence on the subject of third party contributions does not suggest differential treatment under § 541(b)(6). More importantly, the description cannot alter the language and operation of the Code. The Court concludes that the source of the funds in the 529 account is immaterial.

This should be a warning to grandparents and other relatives who want to contribute to a Section 529 Plan.  If the account owner files a Chapter 7 within two years of the contribution, you risk losing all or part of your contribution.   

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

The AJC has posted an article by Rachel Ramos and David Markiewicz. 

In its 117-page bankruptcy petition, the company listed $4.3 million in debts and $5 million in assets. The filing shows a decline in gross income to $16.2 million in 2008 from $19.1 million in 2007. In 2009, year-to-date sales were $9.3 million through May. Atlanta bankruptcy attorney Scott Riddle said spending on luxury items such as spa treatments has fallen in the recession...

The bankruptcy filing lists $2.25 million in unsecured debt. Of that, $743,000 is owed on leases for the six retail locations. Hundreds of unsecured creditors are listed, mostly for trade debt, from radio station and newspaper advertising to business cards, shipping and catering. The only secured creditor listed is BB&T, with a $1.8 million loan. The company also owes the Georgia Department of Revenue more than $200,000.

As I noted to Rachel, spending on "luxury" items are down in this economy as people have to tighten their belts to make house payments or rent.  A trip to the day spa could be two weeks of groceries for the family.   If we project Spa Sydell's 2009 income (noting that the petition states the $9.3 million income is through the petition date, not May), and compare it with 2008, income is down about 24%.  That is a significant amount for a retailer, and could lead to a significant rise in debt, as reflected in the petition.

However, Chapter 11 provides the Spa with an opportunity to save a significant amount of money by rejecting, or terminating, leases that are unfavorable.  It is likely that Spy Sydell, like many other businesses, leased commercial space at a time when rates were much higher than they are today.  In some instances, the same space next door might be leasing for half of what a debtor is currently paying for its three or four year old lease.  The Bankruptcy Code allows a debtor to reject these bad leases and either move to another space, or to negotiate a much lower rate with the current landlord, who no doubt  will not want to have empty space. 

The savings on leases for a debtor with several locations could alone be enough for a debtor to successfully reorganize. 

One bright spot for Spa Sydell is that spending on personal grooming is actually rising, according to studies in the Wall Street Journal Wallet Blog:

As car sales have plummeted, shopping online has climbed 8.6% in the last 12 months. More people are spending on gym memberships (up 6.7%), bar drinks (up 5.8%) and sports and hobbies (up 4.7%). Dining at full-service restaurants is up 3.1%, and personal care — haircuts, massages and manicures — is up 2.5%.

“I think people are looking for comfort in small things,” says Melinda Crump, a spokesperson for Sageworks. “You may not be able to take a vacation in Tahiti or Hawaii, but you can join a gym.”

 

 

Scott Riddle’s practice focuses on bankruptcy and litigation. Scott has represented Chapter 7 and 11 debtors, creditors, trustees and other interested parties in bankruptcy cases and bankruptcy litigation.  For more information, click here.

It is important that you take these demands seriously, as a failure to respond could lead to a lawsuit filed against you in the Bankruptcy Court in which the case is filed, which often could be in a completely different state.  Further, because often these letters are sent to every creditor receiving a payment in the 90 days prior to the filing, with little research as to the validity of the claims, it is important to review the payments at issue and avoid having to fight a lawsuit. 

The purpose of this post is to provide a brief outline of the law of preferential transfers.

1.  What is a "preferential transfer?" 

A preferential transfer is "a transfer of an interest of the debtor in property."  This is usually money, but could be other property.  Did a customer return goods to you for a credit?  The next element is that the transfer was for, or on account of, an antecedent debt.  In short, this means that as of the date of the transfer, the debtor owed you money.  Next, the transfer was made while the debtor was "insolvent."  It is presumed that the debtor was insolvent in the 90 day period, although there are occasions where this is disputed.  Next, the transfer was made in the 90 day period before the bankruptcy case was filed, or within one year if the creditor was an "insider" of the debtor (i.e, close relative, officer/director of the debtor).  While the date of the transfer is often undisputed, keep in mind that the date for checks is the date it cleared the debtor's bank, and not the date the creditor received or deposited the check. 

Finally, the transfer allows you to receive more than you would have had the transfer not been made, and the case is a case under Chapter 7.  This is often a complicated and litigated element.  In short, it means that by receiving the payment, you ended up better off than you would have if you had not received the payment, and simply relied on the Chapter 7 process to get paid a portion of your debt.  Keep in mind that the overwhelming majority of Chapter 7 cases result in no payment ro creditors, or a very small payment.  Thus, in most situations, creditors who receive a pre-petition payment are better off having received the payment, and this element will be met.

Thus, the first question you must ask is whether the payment(s) at issue meet the definition of preferential transfer. You will want to check your records and, if necessary, ask the lawyer for copies of the checks (including the back of the check showing the date it cleared) or other records of the transfer.   If the transfers at issue do not come within the definition, you or your lawyer will want to point this out to opposing counsel. 

What is missing from this definition?  There is no requirement that the creditor (or debtor) acted improperly in taking the payment.  It is simply the Bankruptcy Code's way of trying to make sure all creditors are treated equally and no creditor benefits because they were "fortunate" to receive a payment just before the bankruptcy case was filed. 

If the transfers do come within the definition, you are not out of luck.  You may have defenses to the claim, which are discussed after the break....

2.   What are the defenses to preferential transfers?

You have determined that you have received preferential transfers from the debtor? Does that mean you should write a check and pay it back? Not necessarily, as there are several defenses that could eliminate or reduce your liability.  These are listed in (11 U.S.C. § 547(c)) and each one is discussed below:

A. Contemporaneous Exchange. 

The first defense is that the transaction was intended to be, and in fact was, a contemporaneous exchange for "new value."    An example of this is where the debtor comes to your location, picks up a load of goods, and pays cash (or cashiers check, etc.) on the spot. This seems straightforward, but it can get murky.  What if the debtor handed you a check, but you did not deposit it for a week?  What if you deposited it that day, the checked was returned for insufficient funds, and the debtor wrote you another (good) check or paid you cash a few days later? What if the debtor did not pay on the spot, but went back to their office and immediately mailed out a check the same day? These are all facts that need to be explored.

B.  The transfer was made in the "Ordinary Course of Business."

The second defense is that the transfer was made in the "ordinary course of business" between the parties, and according to ordinary business terms.  For example, if you have been doing business with the debtor for several years, and the history between you is that you have delivered goods to the debtor, and the debtor always pays invoices by the due date, that is your "ordinary course of business."  When the trustee asks you to return the 90 day payments, you will want to point out to the trustee that you have a long history with the debtor that did not change during the preference period and, therefore, you have a defense. What if the debtor suddenly started paying late in the several months prior to the bankruptcy filing, or only paid when you sent reminders, which is common for companies in trouble?  You will have a problem, as the recent payments differ from the "ordinary course."  But what if the history of the relation was such that the debtor always paid late and this continued during the 90 day period?  This could give you a valid defense!  What if the debtor has a history of late payments, but suddenly started paying on time just prior to filing?  What if you just started doing business with the debtor 5-6 months before the filing, but the debtor made all payments on time?  Was there enough time to establish an "ordinary course of business?"  These are all issues that need to be reviewed in detail.  It is common, and often required, that creditors prepare a chart or spreadsheet that details the history of the parties going back several years.  This often pays off when the creditor is able to persuade the trustee that the payments were not recoverable.  If the analysis gets to this point, it is important to see a lawyer to discuss the strategy.

C.  The creditor provided "new value" to the debtor after the transfer at issue.

You may have a defense to a preferential transfer where you have provided new value to the debtor after the transfer(s) at issue.  For example, perhaps the debtor pays off an old debt to you, but it was within the 90 day preference period.  Because the debt was paid, you decide to start doing business with the debtor again, and ship goods to the debtor on credit.  The debtor then files for bankruptcy without paying for this goods, and you get a demand letter to return the money they did pay you.  This is bad news, as you are out the payment and the goods.  Not necessarily, as you have a defense to the demand, up to the value of the goods you shipped to the debtor after the payment was made.  This defense acknowledges that you enhanced the value of the bankruptcy estate for the benefit of all creditors, and you get creditor for that.  If you have several payments and shipments, you will need to chart out the transactions to match up payments and "new value" to the debtor. Note that the new value must be provided after the payment.  What if the debtor pays you (during the 90 day period) $5,000, you then ship $10,000 of goods ("new value"), and then the debtor pays you another $5,000?  You have been paid $10,000, and you have provided $10,000 in new value, so it is a wash, correct? No.  You have a defense to the first payment, but no new value was provided after the second payment. 

The three defenses set forth above are the most common in business situations.  However, there are several other defenses that may apply:

D.   The preferential transfer at issue was a transfer the created a security interest (such as the recording of a security deed or UCC Financing Statement), where the creditor contemporaneously provided the goods subject to the security interest, or provided the funds with which to purchase the goods.  Examples are the closing of a house, where the debtor "transfers" the security deed to the lender, or where the supplier delivers goods to the debtor and takes an immediate security interest.   This protects creditors who act diligently in taking steps to take a security interest.  It does not protect creditors who do not act diligently, such as lenders who fail to properly  and timely record the security deed.

E.  Transfers that creates a perfected security interest in inventory or a receivable or the proceeds of either, except to the extent the secured creditor improved its position (relative to the value of the collateral) during the preference period.

F. Some statutory liens.

G. Transfers made pursuant to a domestic support obligation, such as alimony or child support.

If you have made it this far, you realize that there are defenses that cover many situations that arise in normal business relationships.  As many trustees simply mail demand letters to everyone in the check register, it is important to review the facts before responding, and figure out the amount of the recoverable transfers (preferential transfers, less transfers subject to defenses).   Trustees do not want to spend their time on lawsuits that will not lead to a recovery, and will almost always offer to settle for less than the amount of the recoverable transfers. 

Finally, I am often asked by a creditor whether they should accept payments from a customer who is headed toward bankruptcy.  They have often heard horror stories about the "90 day rule" and lawsuits against creditors.  The answer is usually yes, take the money.  Just be prepared for the chance you will get the demand letter and you will need to review the defenses discussed above.  The best case scenario is that the customer never files for bankruptcy, or files more than 90 days in the future, or that no one ever asks for the money back.  The worst case is you have to give the money back, or settle for a lower amount. 

The second closing was First Coweta Bank, based in Newnan, Georgia.  It was closed by the Georgia Department of Banking and Finance, and the FDIC was appointed receiver.  All deposit accounts, excluding brokered deposits, have been transferred to United Bank, Zebulon, GA.  Read more about the closing in the Atlanta Business Chronicle. 

Eighteen banks in Georgia have now failed this year, and the nationwide total is 79 failures. 

Francis Pileggi has some recent discussions on his Delaware Corporation Litigation Blog on the fiduciary duties of officers and directors of failing companies.  In January, he reviewed the Delaware case of Gantler v. Stephens.  

In Gantler v. Stephens, (Del. Supr., Jan. 27, 2009), read opinion here, the Delaware Supreme Court, yesterday,  issued a major decision on important matters of Delaware corporate law. Delaware's High Court  for the first time confirmed and clarified that officers of Delaware corporations have the same fiduciary duties as directors of Delaware corporations.

In addition, the Delaware Supreme Court clarified and enunciated Delaware common law on the issue of  "shareholder ratification"...

More recently, Francis blogged from the annual ABA Meeting in Chicago and posted an article entitled Fiduciary Duties of Failing Companies.

This post includes a few highlights from a panel presentation entitled “The Expanding Role of Fiduciary Duties in Challenging Times”, and addresses a topic of great interest to readers of this blog: The duties of directors and officers in the context of a failing business, or one in the “zone of insolvency”

Delaware Supreme Court Justice Henry duPont Ridgely and Kurt Heyman, an experienced Delaware corporate litigator, were on the panel that discussed recent Delaware opinions that describe fiduciaries duties in general as well as in the context of a failing business...The Gantler case held that officers have the same fiduciary duties as directors, but also noted that the protections of DGCL Section 102(b)(7) do not protect officers. Kurt explained that the Gantler decision raises three (3) fundamental questions:

(1) what is an officer?
(2) what does it mean for officers to have “identical” fiduciary duties to directors”
(3) what are the consequences of the foregoing?

Finally, The Harvard Law School Forum on Corporate Governance published an article today on Officers and Directors Insurance, which includes a discussion about bankruptcy. 

D&O policies should be reviewed with an eye on how the coverage provided would be affected by the bankruptcy of the insured company. The best time for such a review is when the company is financially stable. Certain policy provisions may help insureds respond to an argument by a bankruptcy trustee or creditors committee that a D&O insurance policy is an asset of the bankrupt estate and is subject to the automatic bankruptcy stay. These provisions include, for example, ones that provide (a) that insured individuals seeking payments from the insurer have priority over claims for coverage by the insured company, and (b) that it is the intention of the insurer and the insureds that insurance payments to individuals are not to be subject to a bankruptcy stay. Other beneficial bankruptcy-related terms provide (y) that, if the company is legally permitted to indemnify an individual but cannot do so because of financial insolvency, the insurer will provide coverage to that individual without the deductible that would usually apply to an indemnifiable claim, and (z) that a claim brought by a bankruptcy trustee or creditors committee on behalf of the estate is carved-out from the “insured versus insured” exclusion.