Avellone v. United States Liability Insurance Company

IN THE UNITED STATES DISTRICT COURT

FOR THE NORTHERN DISTRICT OF ILLINOIS

EASTERN DIVISION

WILLIAM AVELLONE, not individually )

but solely as the Subchapter V Trustee of ) No. 23-cv-12436

Ford City Condominium Association, )

) Judge Andrea R. Wood

Appellant, )

)

v. ) On Appeal from the United States

) Bankruptcy Court for the Northern

UNITED STATES LIABILITY ) District of Illinois,

INSURANCE COMPANY, ) Case No. 23 A 00090

)

Appellee. )

MEMORANDUM OPINION AND ORDER

Appellant William Avellone (“Trustee”), in his capacity as the subchapter V trustee of

Ford City Condominium Association (“Debtor”), has brought this appeal from the decision of the

Bankruptcy Court dismissing Counts I, II, and III of his adversary complaint (“Complaint”). The

Complaint sought, as relevant here, a declaratory judgment that United States Liability Insurance

Company (“USLI”) must provide insurance coverage under a Directors and Officers Liability

Policy (“Policy”), a finding that USLI was in breach of contract due to its failure to provide such

coverage, and a finding that USLI violated Illinois law through its vexatious and unreasonable

conduct when handling and investigating the Trustee’s claim.1 The Bankruptcy Court dismissed

all three counts, reasoning that the plain and unambiguous language of the Policy bars coverage

for the Trustee’s claim and finding that the Policy exclusion cited by USLI in denying coverage

1 Count IV of the Complaint requested a finding that Debtor’s former officers and board members

breached their fiduciary duties to Debtor and Debtor’s unit owners. (Compl. ¶¶ 66–123.) Count IV does

not contain allegations against USLI, and the Bankruptcy Court did not consider Count IV in its ruling.

is not an unlawful ipso facto clause. For the reasons stated below, the Court affirms the decision

of the Bankruptcy Court.

BACKGROUND

Debtor is a condominium association for a property consisting of seven apartment

buildings, 319 residential condominium units, and 38 garage units. (App. at 3–28 (“Compl.”),

Compl. ¶ 67, Dkt. No. 7-1.)2 On April 20, 2021, Debtor filed a voluntary petition for relief under

subchapter V of chapter 11 of the Bankruptcy Code, and the Bankruptcy Court subsequently

appointed the Trustee as the subchapter V trustee. (Id. ¶ 41.) Debtor filed for bankruptcy

following a series of financial and managerial errors, including “[m]ounting unpaid bills, poor

record keeping and accounting practices, decaying building systems, plus mismanagement.” (Id.

¶ 40.) On September 2, 2021, the Bankruptcy Court granted the Trustee’s motion to remove

Debtor as the debtor-in-possession and appointed the Trustee to perform Debtor’s duties under

11 U.S.C. §§ 704(a)(8) and 1106(a)(1), (2), and (6). (Compl. ¶¶ 6, 43.)

At the time of its bankruptcy, Debtor held the Policy with USLI, which was in effect

from at least July 11, 2019, to July 11, 2022. (Id. ¶ 35) The Policy provides coverage for “Loss”

arising from “Wrongful Acts” committed by the “Organization,” which as explained below is

defined to include Debtor, or by “Individual Insureds,” which include Debtor’s former officers

and board members. (Id. ¶¶ 36–37.) The Policy also contains a series of exclusions from

coverage, including an insured-versus-insured exclusion (“Insured vs. Insured Exclusion”),

which provides, in part:

[USLI] shall not be liable to make payment for Loss or Defense Costs . . . in

connection with any Claim made against the Insured arising out of, directly or

indirectly resulting from or in consequence of, or in any way involving: . . .

2 For references to the record on appeal, the Court primarily cites the Appendix submitted along with the

Trustee’s initial brief (“App.,” Dkt. No. 7-1).

(8) any Claim by, at the behest of, or on behalf of the Organization and/or any

Individual Insured . . . .

(Id. ¶ 38 (emphasis added); App. at 29–54 (“Policy”), Policy at 38–39 (emphasis added).) The

Policy goes on to identify an exception to the Insured vs. Insured Exclusion (“Derivative Action

Exception”), which provides:

[The Insured vs. Insured] Exclusion shall not apply to:

a. any derivative action on behalf of, or in the name or right of the Organization, if

such action is brought and maintained totally independent of, and without the

solicitation, assistance, participation or intervention of any of the Insureds . . . .

(Compl. ¶ 38 (emphasis added); Policy at 39 (emphasis added).)

Under the Policy, “Insured” means “the Organization and the Individual Insureds.”

(Policy at 36.) The Policy further defines “Organization” to mean Debtor, any subsidiary of

Debtor, and most relevant here:

[A]ny person or entity while acting in the capacity of receiver, bankruptcy trustee,

or debtor in possession of [Debtor] or [any subsidiary of Debtor] under the United

States bankruptcy law or equivalent status under the law of any other jurisdiction,

but only while performing such duties on behalf of any Insured.”

(Id. at 54 (emphasis added).)

Regarding the impact of bankruptcy proceedings, the Policy also features a provision

(“Bankruptcy Provision”) that states, in relevant part:

Any person or the legal representative thereof who has secured . . . judgment

[against USLI] . . . shall thereafter be entitled to recover under this Policy to the

extent of the insurance afforded by this Policy. . . . Bankruptcy or insolvency of

the Insured or their successors in interest shall not relieve [USLI] of its obligations

hereunder.

(App. at 108–18 (“Appellant’s Resp. to Mot. to Dismiss”), Appellant’s Resp. to Mot. to Dismiss

¶ 22 (emphasis added); Policy at 45 (emphasis added).)

On July 6, 2022, the Trustee issued a written demand to USLI, seeking coverage and

payment under the Policy for losses sustained by Debtor’s bankruptcy estate and creditors due to

alleged breaches of fiduciary duty and mismanagement by Debtor’s former officers and board

members. (Compl. ¶ 44; App. at 55–56.) USLI responded on July 15, 2022, denying coverage

based on the Insured vs. Insured Exclusion because the Trustee “is part of the ‘Organization’ and

he brings his claim against [Debtor] and its board members on behalf of the ‘Organization,’” and

further explaining that the Trustee “does not bring a derivative claim.” (Compl. ¶¶ 45–46; App.

at 60.) On March 2, 2023, the Trustee sent a follow-up letter to USLI, disputing USLI’s

application of the Insured vs. Insured Exclusion to his claim and arguing that the Policy requires

USLI to provide coverage. (Compl. ¶ 47; App. at 61–62.)

As the parties were unable to resolve their dispute on their own, the Trustee filed the

three-count Complaint against USLI on April 19, 2023. Count I sought a declaratory judgment

that USLI is obligated under the Policy to provide coverage “for the claims held by the Debtor’s

estate against the former board members and officers.” (Compl. ¶¶ 49–53.) Count II requested a

finding that USLI is in breach of contract for its failure to provide coverage under the Policy. (Id.

¶¶ 54–60.) Count III sought a finding that USLI has violated 215 ILCS 5/155(1) through its

vexatious and unreasonable conduct in handling and investigating the Trustee’s claim and an

order requiring USLI to pay penalties, including reasonable attorneys’ fees and costs. (Compl.

¶¶ 61–65.)

USLI filed a motion to dismiss the Complaint pursuant to Federal Rule of Civil

Procedure 12(b)(6). The Bankruptcy Court granted the motion and dismissed all three counts.

(Mem. Op. at 5, Dkt. No. 1-4.) In so doing, the Bankruptcy Court found that the Policy’s plain

language bars coverage. According to the Bankruptcy Court, the Policy’s language is

“unambiguous” in that “the ‘Organization’ expressly includes bankruptcy trustees and debtors-

in-possession,” thus subjecting them to the Insured vs. Insured Exclusion. (Id. at 3–4.)

Furthermore, the Bankruptcy Court determined that the Insured vs. Insured Exclusion does not

constitute an unlawful ipso facto clause under 11 U.S.C. § 541(c). Specifically, the Bankruptcy

Court expressly declined to follow a decision from an Illinois state appellate court, which held

that an exclusion with language similar to that at issue here was an unenforceable ipso facto

clause because it was “conditioned on the commencement of [a] bankruptcy case.” (Id. at 4

(quoting Yessenow v. Exec. Risk Indem., Inc., 953 N.E.2d 433, 441 (Ill. App. Ct. 2011)).)

Instead, the Bankruptcy Court determined that the Policy language did not generate a forfeiture,

modification, or termination of Debtor’s interest in property. (Id. at 4.) Accordingly, the

Bankruptcy Court dismissed Counts I, II, and III. This appeal followed.

DISCUSSION

Under 28 U.S.C. § 158(a), federal district courts have jurisdiction to review bankruptcy

court decisions. When considering a bankruptcy appeal, a district court reviews the bankruptcy

court’s findings of fact for clear error and its conclusions of law de novo. Stamat v. Neary, 635

F.3d 974, 979 (7th Cir. 2011); In re Brittwood Creek, LLC, 450 B.R. 769, 773 (N.D. Ill. 2011).

Accordingly, this Court reviews de novo the Bankruptcy Court’s dismissal of the Complaint

pursuant to Rule 12(b)(6). See Zedan v. Habash, 529 F.3d 398, 403 (7th Cir. 2008).

To survive a Rule 12(b)(6) motion, “a complaint must contain sufficient factual matter,

accepted as true, to ‘state a claim to relief that is plausible on its face.’” Ashcroft v. Iqbal, 556

U.S. 662, 678 (2009) (quoting Bell Atl. Corp. v. Twombly, 550 U.S. 544, 570 (2007)). This

pleading standard does not necessarily require a complaint to contain detailed factual

allegations. Twombly, 550 U.S. at 555. Rather, “[a] claim has facial plausibility when the

plaintiff pleads factual content that allows the court to draw the reasonable inference that the

defendant is liable for the misconduct alleged.” Adams v. City of Indianapolis, 742 F.3d 720, 728

(7th Cir. 2014) (quoting Iqbal, 556 U.S. at 678). In evaluating the Complaint in this case, the

Court must construe its allegations in the light most favorable to the Trustee, accepting as true all

well-pleaded facts and drawing all possible inferences in the Trustee’s favor. Jackson v. Blitt &

Gaines, P.C., 833 F.3d 860, 862 (7th Cir. 2016) (quoting Tamayo v. Blagojevich, 526 F.3d 1074,

1081 (7th Cir. 2008)). This Court may affirm the Bankruptcy Court’s dismissal on any grounds

supported by the underlying record. See McCarthy v. Kemper Life Ins. Co., 924 F.2d 683, 686

n.1 (7th Cir. 1991).

I. Applicability of the Insured vs. Insured Exclusion

Under Illinois law, “the construction of an insurance policy is a question of law,” and the

Court’s objective is “to determine the intent of the contracting parties.” Sokol & Co. v. Atl. Mut.

Ins. Co., 430 F.3d 417, 420 (7th Cir. 2005) (citing Outboard Marine Corp. v. Liberty Mut. Ins.

Co., 607 N.E.2d 1204, 1212 (Ill. 1992)). The Court “look[s] to the policy as a whole ‘with due

regard to the risk undertaken, the subject matter that is insured, and the purposes of the entire

contract.” Id. (quoting Outboard Marine, 607 N.E.2d at 1212). If the language of the insurance

policy is unambiguous, then the Court “give[s] [the language] its ‘plain, ordinary, and popular

meaning.’” Lyerla v. AMCO Ins. Co., 536 F.3d 684, 687 (7th Cir. 2008) (quoting Sokol & Co.,

430 F.3d at 1212). However, “if the words in the policy are susceptible to more than one

reasonable interpretation, they are ambiguous and will be construed in favor of the insured and

against the insurer who drafted the policy.” Outboard Marine, 607 N.E.2d at 1212 (citations

omitted).

The Court looks first to the language of the Policy to determine whether the Insured vs.

Insured Exclusion bars coverage for the Trustee’s claim. That exclusion bars coverage for claims

“against the Insured” brought “by . . . the Organization,” and the Policy defines “Organization”

as including a bankruptcy trustee. (Policy at 38–39, 54.) Thus, on its face, the plain language of

the Policy appears unambiguously to bar coverage for the Trustee’s claim. Indeed, that is what

the Bankruptcy Court found. But in reaching that conclusion, the Bankruptcy Court did not

expressly consider the language of the concluding clause of the provision defining

“Organization.” The question, then, is whether the language at the tail-end of the provision—

stating that the “Organization” includes a bankruptcy trustee and other listed persons “but only

while performing such duties on behalf of any Insured”—alters that conclusion. (Id. at 54.)

Arguably, this language suggests that a bankruptcy trustee could perform actions that are not on

behalf of a debtor and therefore would not fall within the exclusion.

Even considering the full definition, this Court agrees with the Bankruptcy Court that the

Policy’s definition of “Organization” unambiguously encompasses the Trustee in this case,

thereby barring his claim. In an effort to find ambiguity in the Policy, the Trustee argues that he

is acting not on behalf of Debtor but on behalf of Debtor’s unit owners and creditors because he

is marshalling assets to their benefit. In so arguing, however, the Trustee merely recounts the

general duties expected of a bankruptcy trustee. See In re Teknek, LLC, 563 F.3d 639, 645 (7th

Cir. 2009) (“The purpose and duty of the [bankruptcy] trustee is to gather the estate’s assets for

pro rata distribution to the estate’s creditors.”); see also Fisher v. Apostolou, 155 F.3d 876, 879

(7th Cir. 1998) (“[T]he [bankruptcy] trustee has the sole responsibility to represent the estate, by

bringing actions on its behalf to marshal assets for the benefit of the estate’s creditors.”).

This Court understands the concluding clause, if anything, as merely recognizing the

possibility that a duly appointed bankruptcy trustee may act in a personal capacity or otherwise

beyond the scope of his official duties, in which case the trustee would not fall under the

definition of “Organization” and the Insured vs. Insured Exclusion would not apply. See, e.g., In

re Markos Gurnee P’ship, 182 B.R. 211, 217 (Bankr. N.D. Ill. 1995) (“The situation in which

trustees have been most commonly found to have acted outside of their authority is in seizing

property which is found not to be property of the estate. The rationale for these decisions is clear:

trustees act on behalf of the estate, and obligate only the estate, insofar as they are carrying out

the duties required of their office. When they take action not within the scope of those duties,

they are acting on their own.” (citations omitted)); In re Weisser Eyecare, Inc., 245 B.R. 844,

848 (Bankr. N.D. Ill. 2000) (“A trustee ‘cannot be held personally liable unless he acted outside

the scope of his authority as trustee, i.e. ultra vires, or breached a fiduciary duty that he owed as

the trustee to some claimant.’” (quoting State of Ill., Dept. of Revenue v. Schechter, 195 B.R.

380, 384 (N.D. Ill. 1996))). Yet there is no such claim in this case. To the contrary, the Trustee

brought this case in his official capacity as Debtor’s subchapter V bankruptcy trustee, and there

is no indication that he has acted beyond his authority in doing so.

The cases on which the Trustee relies—where courts have declined to apply insured-

versus-insured exclusions to bankruptcy trustees’ claims—do not hold to the contrary. None of

the policies at issue in those cases included language that expressly defined the covered

“company” or “insured” as including a bankruptcy trustee, unlike the Policy’s definition of

“Organization” in this case. See In re Cnty. Seat Stores, 280 B.R. 319, 329 (Bankr. S.D.N.Y.

2002) (“The language of the insured v. insured exclusion is not ambiguous. The words ‘brought

by’ refer specifically to those entities and individuals who are defined and named in the policy.

‘Company’ as defined by the policy means [the debtor] and its subsidiaries and does not include

or contemplate a bankruptcy trustee.”); In re Molten Metal Tech., Inc., 271 B.R. 711, 725

(Bankr. D. Mass. 2002) (“‘Company’ is expressly defined to mean [the debtor] and its

subsidiaries. The definition includes no reference to successors or assigns of any nature.”);

Yessenow, 953 N.E.2d at 437 (“The [trial] court found that [the insurer] could have sidestepped

any ambiguity by including trustees and debtors-in-possession in either the definition of the

‘insured’ or the language of the insured versus insured exclusion.”). In short, USLI avoided any

ambiguity as to whether the Insured vs. Insured Exclusion applies to bankruptcy trustees by

expressly defining “Organization” to include them.

In the alternative, the Trustee argues that the Insured vs. Insured Exclusion does not bar

coverage because the Derivative Action Exception applies to his claim.3 According to the

Trustee, “he is bringing his Claim in the nature of a derivative action to enforce the USLI

Policy for harm by the Debtor’s former directors against the Debtor.” (Appellant’s Resp. to Mot.

to Dismiss ¶ 27 (emphasis added).) Notably, the Trustee does not state that he is bringing a

derivative action; he states that he is bringing a claim “in the nature of a derivative action.” The

Trustee’s careful word choice is not lost on the Court. “In plain terms, a derivative lawsuit is a

3 In his reply brief, the Trustee refers to an action by a group of Debtor’s unit owners in the Circuit Court

of Cook County, which he claims “met all of the criteria to qualify as an exception to the [I]nsured v[s].

[I]nsured Exclusion” but “was stayed by virtue of the Bankruptcy Code’s automatic stay provision (11

U.S.C. § 362) as of the date of the bankruptcy filing on April 20, 2021.” (Appellant’s Reply Br. at 4, Dkt.

No. 9.) The Trustee acknowledges that this other action is “a derivative claim with no involvement by any

member of the Organization or an Insured.” (Id.) His concession only supports the Court’s understanding

that the Trustee’s action here does not qualify as derivative action that triggers the Derivative Action

Exception. Moreover, the Trustee asks this Court to “order the bankruptcy court to approve [the

Trustee’s] right to grant relief from the stay for the Circuit Court Action to proceed.” (Id. at 5.) To the

extent the Trustee asks this Court to grant relief from the stay, it does not appear that request was raised

before the Bankruptcy Court. As such, the argument is waived and cannot be raised on appeal. See

Broaddus v. Shields, 665 F.3d 846, 854 (7th Cir. 2011) (“[A]rguments raised for the first time in a reply

brief are waived.”).

common mechanism shareholders employ against third parties to see relief for wrongs done to

the collective corporation when the board, i.e., the corporate body, refuses to sue.” Lara v. Naper

Place Condominium Ass’n, 2023 WL 2445585, at *4 (Ill. App. Ct. Mar. 10, 2023). See also In re

Abbott Laboratories Derivative Shareholder Litig., 325 F.3d 795, 803 (7th Cir. 2003)

(explaining that a derivative action is a particular type of action in which “an individual

shareholder seeks to enforce a right that belongs to the corporation”); In re Hearthside Baking

Co., Inc., 402 B.R. 233, 250 (Bankr. N.D. Ill. 2009) (“Under Illinois law, a shareholder may step

into the shoes of the corporation and bring a derivative action when the corporation’s officers,

directors, or controlling shareholders breach a fiduciary duty to the corporation.”). And indeed,

under Illinois law, unit owners in a condominium association may bring a derivative action

against current or former officers and directors of the condominium board for misconduct or

breach of fiduciary duty. See, e.g., Davis v. Dyson, 900 N.E.2d 698, 709 (Ill. App. Ct. 2008). But

here, the Trustee, not shareholders or unit owners, is asserting a claim against the former officers

and directors.

Regardless of whether this lawsuit qualifies as a derivative action, the Derivative Action

Exception to the Insured vs. Insured Exclusion does not apply, as the Bankruptcy Court correctly

observed. The exception only applies “if such action is brought and maintained totally

independent of, and without the solicitation, assistance, participation or intervention of any of

the Insureds.” (Policy at 39 (emphasis added).) Under the Policy, “Insured(s)” means “the

Organization and the Individual Insureds,” and as discussed above, the “Organization” includes

the Trustee. (Policy at 36, 54.) Therefore, based on its plain language, the Derivative Action

Exception does not apply to the Trustee’s claim because he brings the action as an “Insured”

under the Policy.4

In sum, the Court concludes that the relevant Policy provisions are unambiguous and thus

gives the language its plain meaning. Because the Policy expressly defines the “Organization” to

include a bankruptcy trustee and because the Insured vs. Insured Exclusion bars coverage for

claims “against the Insured” brought “by . . . the Organization,” the Trustee’s suit triggers the

exclusion. The Derivative Action Exception to the Insured vs. Insured Exclusion does not apply.

And so, the Policy bars coverage for the Trustee’s claim.

II. Applicability of 11 U.S.C. §§ 365(e)(1) and 541(c)(1)

The Trustee further argues that the Policy’s inclusion of a “bankruptcy trustee” in the

definition of “Organization” and the Policy’s Insured vs. Insured Exclusion, together, constitute

unenforceable ipso facto clauses in violation of 11 U.S.C. §§ 365(e)(1) and 541(c)(1) of the

Bankruptcy Code. Section 541(c)(1) provides, in relevant part:

[A]n interest of the debtor in property becomes property of the

estate . . . notwithstanding any provision in an agreement . . . that is conditioned on

the insolvency or financial condition of the debtor, [or] on the commencement of a

case under this title . . . and that effects . . . a forfeiture, modification, or

termination of the debtor’s interest in property.

11 U.S.C. § 541(c)(1). Relatedly, § 365(e)(1) of the Bankruptcy Code provides, in relevant

part:

[A]n executory contract or unexpired lease of the debtor may not be terminated or

modified, and any right or obligation under such contract or lease may not be

terminated or modified, at any time after the commencement of the case solely

because of a provision in such contract or lease that is conditioned on . . . the

4 In his reply brief, the Trustee raises for the first time the argument that he cannot be an “Insured” under

the Policy because the Policy “pre-dates his appointment.” (Appellant’s Reply Br. at 2–3.) Notably, the

Trustee does not cite any supporting case law for his position. Moreover, as the Trustee did not raise this

argument before the Bankruptcy Court or in his opening brief on appeal, the argument is waived.

insolvency or financial condition of the debtor at any time before the closing of the

case; [or] the commencement of a case under this title . . . .

Id. § 365(e)(1).

In other words, § 541(c) ensures that a debtor’s interests in property, including contracts

such as the Policy, become property of the debtor’s bankruptcy estate. See In re Allied Prods.

Corp., No. 03 C 1361, 2004 WL 635212, at *3 (N.D. Ill. Mar. 31, 2004) (“The parties agree that

the [insurance] [p]olicies are property of the estate in bankruptcy, under the broad definition of

§ 541(a) of the Bankruptcy Code, 11 U.S.C. § 541(a).”); see also In re Allied Digit. Techs.,

Corp., 306 B.R. 505, 509 (Bankr. D. Del. 2004) (“Generally a debtor’s liability insurance policy

is property of the bankruptcy estate.”). Whereas § 365(e)(1) renders unenforceable any provision

in an executory contract that modifies or terminates that contract based on the bankrupt status of

the debtor. See Sable v. Morgan Sangamon P’ship, 280 B.R. 217, 220 (Bankr. N.D. Ill. 2002)

(“Executory contracts are governed by 11 U.S.C. § 365, which provides that ipso facto clauses

that terminate an executory contract upon the bankruptcy of one of the parties are invalid.”).

“Both §§ 365 and 541 invalidate contractual ipso facto provisions for the reason that automatic

termination of a debtor’s contractual rights frequently hampers rehabilitation efforts[] by

depriving the chapter 11 estate of valuable property interests at the very time the debtor and the

estate need them most.” In re Allied Prods. Corp., 2004 WL 635212, at *4.

Applying these provisions to the present case, the Trustee argues that the Policy is

unenforceable because it characterizes a bankruptcy trustee as part of the “Organization” and

thus an “Insured,” whose claim is thereby excluded from coverage under the Insured vs. Insured

Exclusion. As the Trustee reasons, a bankruptcy trustee cannot exist without a bankruptcy, and

so, the Trustee’s appointment directly resulted from Debtor’s bankruptcy. As the Policy as

written precludes coverage for the Trustee’s claim, Debtor no longer can derive the benefit of the

Policy precisely because Debtor filed for bankruptcy. In other words, according to the Trustee,

Debtor’s bankrupt status triggered the Insured vs. Insured Exclusion and thus de facto terminated

the Policy by rendering it useless. Accordingly, the Policy’s provisions are unlawful ipso facto

clauses in violation of §§ 365(e)(1) and 541(c)(1).

This Court disagrees. The Court does not understand the Policy language as an attempt to

“terminate[] or modif[y]” Debtor’s contractual rights. 11 U.S.C. § 365(e)(1). Despite blocking

the Trustee’s claim here, the Policy’s language does not preclude Debtor’s estate from having the

benefit of the Policy, even while Debtor remains bankrupt. For example, while the Policy

excludes coverage for claims brought by bankruptcy trustees that fall under the definition of

“Organization” against other “Insureds,” it does not bar coverage for other types of claims. As

such, the Policy remains an asset of Debtor’s estate.

Furthermore, this Court agrees with the Bankruptcy Court’s treatment of Yessenow,

which holds to the contrary. See Yessenow, 953 N.E.2d at 441 (finding that a similar insured-

versus-insured exclusion was unenforceable under § 541(c)). In declining to follow Yessenow,

the Bankruptcy Court correctly observed that the Illinois Appellate Court did not cite supporting

case law for its holding and that the policy there did not expressly define a bankruptcy trustee as

an “insured.” (See Mem. Op. at 4.) For the reasons stated above, this Court joins the Bankruptcy

Court in concluding that the Policy language here does not “effect[] . . . a forfeiture,

modification, or termination of [D]ebtor’s interest in property,” where that interest in property is

the Policy itself. 11 U.S.C. § 541(c)(1). (See Mem. Op. at 4 (citing Michael D. Sousa,

Uncertainty Remains: the “Insured vs. Insured” and “Bankruptcy Exclusion” Provisions, 2018

Norton Ann. Surv. Bankr. L. 10 (explaining that an exclusion like the one at issue “is a

contractual limitation of rights, not a forfeiture of the policy for purposes of keeping it beyond

the estate under § 541(a)(1)’”)).)

Moreover, rather than rendering the Policy void upon Debtor’s bankruptcy, the Policy’s

Bankruptcy Provision provides that the “[b]ankruptcy or insolvency of the Insured or their

successors in interest shall not relieve [USLI] of its obligations [under the Policy].” (Policy at

45 (emphasis added).) By ensuring that USLI’s obligations under the Policy survive Debtor’s

bankruptcy, the Bankruptcy Provision guards against the very ipso facto clauses that the

Bankruptcy Code invalidates. The Trustee himself encourages the Court to “take[] [the

Bankruptcy Provision] into account when construing the Policy and interpreting the exclusion

that USLI is attempting to enforce.” (Appellant’s Resp. to Mot. to Dismiss 4 23.) As requested,

this Court takes the Bankruptcy Provision into account and, contrary to the Trustee’s argument,

determines that the provision weakens the Trustee’s search for an ipso facto clause in the Policy.

The Policy remains Debtor’s interest in property, and so, the Policy’s definition of

“Organization” and the Insured vs. Insured Exclusion, in concert, are not invalid ipso facto

clauses in contravention of 11 U.S.C. §§ 365(e)(1) and 541(c)(1).

CONCLUSION

For the foregoing reasons, the Court affirms the Bankruptcy Court’s dismissal of Counts

I, II, and III of the Complaint. The Clerk of the Court is directed to enter Judgment in favor of

USLI.

ENTERED:

Dated: March 31, 2025 lauihlop.

Andrea R. Wood

United States District Judge

1A