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THE BANKRUPTCY EXCEPTION TO THE INSURED VS INSURED EXCLUSION IN THE DIRECTORS AND OFFICERS LIABILITY POLICY APPLIED TO THE CREDITOR TRUST WHICH WAS SET UP TO PURSUE THE BANKRUPTCY ESTATE’S LEGAL CLAIMS ON BEHALF OF UNSECURED CREDITORS; THE CREDIT TRUST SUED THE DIRECTORS AND OFFICERS OF THE INSURED ALLEGING BREACH OF FIDUCIARY DUTY (FIRST DEPT).

The First Department, in a full-fledged opinion by Justice Renwick, in a matter of first impression, determined that the bankruptcy exception to the insured vs. insured exclusion of a Directors and Officers (D & O) liability insurance policy applied to a Creditor Trust. The Creditor Trust was formed pursuant to a Chapter 11 bankruptcy reorganization plan for the insured, RCS Capital Corporation (RCAP), to pursue the bankruptcy estate’s legal claims on behalf of unsecured creditors of the insured:

… [T]he Creditor Trust sued RCAP’s directors and officers alleging they had breached their fiduciary duties to the company. The directors and officers sought coverage under RCAP’s D & O liability policy with Westchester (the insurer). Westchester commenced this action in response, seeking a declaratory judgment that it has no coverage obligations.

This appeal raises an issue of apparent first impression of whether a D & O liability policy’s bankruptcy exception, which allows claims asserted by the “bankruptcy trustee” or “comparable authority,” applies to claims raised by a Creditor Trust, as a post-confirmation litigation trust, to restore D & O coverage removed by the insured vs. insured exclusion. For the reasons that follow, we find that the bankruptcy exception, to the insured vs. insured exclusion, applies to restore coverage. Specifically, we interpret the broad language “comparable authority” to encompass a Creditor Trust that functions as a post-confirmation litigation trust, given that such a Creditor Trust is an authority comparable to a “bankruptcy trustee” or other bankruptcy-related or “comparable authority” listed in the bankruptcy exception. Westchester Fire Ins. Co. v Schorsch, 2020 NY Slip Op 02895, First Dept 5-14-20

 

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