Litigation Against Debtor’s Directors and Officers is Cause to Lift Stay to Allow Access to Debtor’s D&O Insurance As part of the ongoing
Litigation Against Debtor’s Directors and Officers is Cause to Lift Stay to Allow Access to Debtor’s D&O Insurance As part of the ongoing
bankruptcy of the parent company of Silicon Valley Bank, the U.S. Bankruptcy Court for the Southern District of New York found cause to modify the automatic stay (to the extent it applies, which it did not decide) to allow the debtor’s insurers to
make payments under the debtor’s directors’ and officers’ liability insurance policies to, or on behalf of, the debtor’s directors and officers. The debtor’s directors and officers and, in some cases the debtor, were named defendants in several putative securities class actions based on alleged materially false or misleading statements and/or omissions of material facts in connection with the debtor's securities filings. As a result, the debtor’s directors and officers moved the court to modify the automatic stay, if applicable, to allow payments under the D&O policies.
The Official Committee of Unsecured Creditors objected. It argued that the proceeds of the D&O policies are property of the debtor's estate, and that uncontrolled payment of defense costs had the potential to severely diminish the debtor's estate.
The court declined to decide whether the policies were property of the estate, because even if they were property of the estate, there was cause to lift the stay.
Specifically, the court that allowance of payments under the debtor’s D&O policies would not result in substantial interference with the bankruptcy case and that the balance of harms favored lifting the stay. The Court disagreed with the Committee’s argument that such payments would exhaust coverage that could otherwise inure to the benefit of the estate.
For the Court, this was not a reason to deny a lift of stay since the policies contained a “priority of payment provision,” under which, if payments are due to both the debtor and the directors and officers at the same time, the directors and officers would be paid first.
In fact, the court concluded that allowing the payments should reduce the potential of the lawsuits at issue to interfere with the case, as a vigorous defense against the claims would also benefit the estate.