Opposition Brief — Plan Committee of Bank Building & Equipment Corp. of America v. Reliance Insurance Co. of Illinois, 114 S. Ct. 1066 (1994) (No. 93-1028)
Supreme Court brief1994
Ask Donna
What actually matters in this document.
Text
rb
| JAN 2 1 1994
No. 93-1028
IN THE
Supreme Court of the United States
Ocroser Term, 1993
BANKRUPTCY PLAN COMMITTEE OF THE
BANK BUILDING & EQUIPMENT CORP.
OF AMERICA, IN LIQUIDATION,
Petitioner,
vs.
RELIANCE INSURANCE CoO.,
Respondent.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
BRIEF OF RESPONDENT
RELIANCE INSURANCE CO., IN OPPOSITION
Perry KREIDMAN
Counsel of Record
WiLson, Eisen, Moskow!rTz,
EDELMAN & DICKER
Attorneys for Respondent
Reliance Insurance Co.
150 East 42nd Street
New York, New York 10014
Of Counsel: (212) 490-3000
Wayne E. Borceest
JONATHAN C, THAU
Davip S. HEBBELER
&, : a ee
cad \
if Be hy
. BEST AVAILABLE COPY |”
a ee ae ge ee ee
—
QUESTIONS PRESENTED
1. Where the court appointed bankruptcy representative asserts
breach of fiduciary duty claims of the bankrupt company against
the company’s former officers, seeking to recover damages sus-
tained by the company due to the officers’ breach of duties to
the company, under Delaware law does a directors and officers
liability insurance policy excluding claims by or on behalf of the
company against such officers preclude coverage for that lawsuit?
2. Where the Bankruptcy Code vests a bankruptcy repre-
sentative with the exclusive right to pursue claims on behalf of
the company, and the representative brings suit on such a claim
against the company’s officers without referring to the company’s
shareholders or satisfying any of the pre-requisites for a
shareholders’ derivative suit, under Delaware law is that action
a shareholders’ derivative suit that fits within an exception for
such actions in an exclusion in a director and officers liability
insurance policy that excludes claims by or on behalf of the com-
pany against its officers?
PARTIES TO THESE PROCEEDINGS
Petitioner is the Plan Committee of Bank Building and Equip-
ment Corporation of America, In Liquidation.
Myron Carpenter, Douglas Clements and The Boatmen’s Na-
tional Bank of St. Louis are not parties to the proceeding in the
court whose judgment is sought to be reviewed by this Court.
EE
TABLE OF CONTENTS
Page
QUESTIONS PRESENTED
PARTIES TO THESE PROCEEDINGS ii
TABLE OF AUTHORITIES \
OPINION BELOW ]
JURISDICTION 2
STATUTES INVOLVED 2
STATEMENT OF THE CASE 2
REASONS FOR DENYING THE WRIT 10
I. THERE IS NO CONFLICT AMONG THE
CIRCUIT COURTS ON THE QUESTIONS
PRESENTED l]
Il. THIS CASE IS BASED UPON THE
INTERPRETATION OF AN EXCLUSION
IN A DIRECTORS AND OFFICERS
LIABILITY INSURANCE POLICY
GOVERNED BY DELAWARE LAW 13
III. THE QUESTIONS DECIDED IN THIS
CASE WILL NOT GENERATE
EXTENSIVE LITIGATION . 14
IV. THE COURT OF APPEALS CORRECTLY
DECIDED THE QUESTIONS PRESENTED 16
A. Because A Bankruptcy Representative’s
Causes of Action Are Derived From
Those Previously Held By The Debtor
Company, The Plan Committee Action Is
‘ An Action On Behalf Of BBC 16
iv
Page
B. The Plan Committee Action Is Not A
Claim On Behalf Of BBC’s Creditors 19
C. The Bank Failure Cases Extensively
Relied Upon By Petitioner Have No
Bearing Upon The Interpretation Of A
Directors and Officers Liability Insurance
Policy In The Bankruptcy Of A
Commercial Corporation Under The U.S.
Bankruptcy Code 20
D. As Found By The Lower Courts Herein,
Because The Plan Committee Action Is
Not A Shareholders’ Derivative Action, It
Does Not Fall Within The Narrow
Derivative Suit Exception To The
“Insured vs. Insured” Exclusion 24
THERE ARE NO SIGNIFICANT MATTERS
OF PUBLIC POLICY IMPLICATED BY
THIS CASE, WHICH MERELY INVOLVES
THE INTERPRETATION OF AN
EXCLUSION IN AN INSURANCE POLICY
ISSUED TO DIRECTORS AND OFFICERS 26
CONCLUSION 28
APPENDIX
A
THE INSURANCE POLICY AND
DECLARATIONS A-1
FIRST AMENDED JOINT PLAN OF
LIQUIDATION OF BBC B-]
DISCLOSURE STATEMENT C-]
COMPLAINT IN THE PLAN COMMITTEE
ACTION D-1
TABLE OF AUTHORITIES
Page
Aetna Casualty & Surety v. Kenner, 570 A.2d
1172 (Del. Supr. 1990) 26
American Casualty Co. vs. FDIC, 791 F. Supp.
276 (W.D. Okla. 1992) 15, 19
American Casualty Company of Reading, Pa. v.
FDIC, 944 F.2d 455 (8th Cir. 1991) 15
American Casualty Company v. Baker, 758 F.
Supp. 1340 (C.D. Cal. 1991) 13, 23
Bendis v. Federal Ins. Co., No. 89-2035-S, 1989
WESTLAW 161437 (D. Kan. Dec. 4, 1989),
aff'd on other grounds, 958 F.2d 960 (10th
Cir. 1991) 15
Braxton v. U.S., 111 S. Ct. 1854, 114 L. Ed. 2d
385 (1991) 13
Caplin v. Marine Midland Grace Trust Co., 406
U.S. 416, 92 S. Ct. 1678 (1972) 19
Commodity Futures Trading Commission v.
Weintraub, 471 U.S. 343, 105 S. Ct. 1986,
(1985) 18
Continental Casualty Co. v. Allen, 710 F. Supp.
1088 (N.D. Texas 1989) 21
In re Daisy Systems Securities Litigation, 132
B.R. 752 (N.D. Cal. 1991) .. 17, 18
Evanston Insurance Company v. FDIC, 1988
U.S. Dist. LEXIS 16263 (C.D. Cal. 1988) .. 25
v!
F.D.1.C. v. American Casualty Co., 814 F. Supp.
1021 (D. Wyo. 1991)
FDIC v. Zaborac, 773 F. Supp. 137 (C.D. Ill
1991), aff'd sub nom FDIC wv. American
Casualty Co. of Pennsylvania, 998 F.2d 404
(7th Cir. 1993) ..
In re Feiereisen, 56 B.R. 167 (D. Oregon 1985)
In re Fidelity America Financial Corp., 43 B.R
74 (Bkrtcy. E.D. Pa. 1984)
Fidelity and Deposit Co. of Maryland
Zandstra, 756 F. Supp. 429 (N.D. Cal. 1990
Fidelity and Deposit Co. of Maryland v. Conner,
973 F.2d 1236 (5th Cir. 1992)
Finci v. American Casualty Co. of Reading, Pa..,
323 Md. 358, 593 A.2d 1069 (1990)
Gary v. American Casualty Co., of Reading, Pa..
753 F. Supp. 1547 (W.D. Okla. 1990), affd on
other grounds sub nom FDIC V. American
Casualty Co., 975 F.2d 677 (10th Cir. 1992)
Hallowell v. State Farm Mutual Automobile Ins
Co., 443 A.2d 925 (Del. 1982)
International Ribbon Mills, Ltd. v. Arjan
Ribbons, Inc., 36 N.Y.2d 121, 325 N.E.2d 137.
365 N.Y.S.2d 808 (1975)
Levy v. National Union Fire Ins. Co., 889 F.2d
433 (2d Cir. 1989)
In re Light, 23 B.R. 482 (E.D. Mich. 1982)
In Re Louisiana World Exposition, Inc., 832 F.2d
1391 (5th Cir. 1987)
Page
1S,
vil
New Castle County v. Hartford Accident &
Indemnity Co., 970 F.2d 1267 (3d Cir. 1992)
Niemuller v. National Union Fire Insurance
Company of Pittsburgh, Pa., 92 Civ. 0070 (SS),
1993 U.S. Dist. LEXIS 18476 (December 29.
1993)
Office and Professional Employees’ Int? Union,
Local 2 v. FDIC, 962 F.2d 63 (D.C. Cir. 1992)
In Re Ozark Restaurant Equipment Company.
Inc., 816 F.2d 1222 (8th Cir. 1987)
Pepper vs. Litton, 308 U.S. 295, 60 S. Ct. 238
(1939)
In re Petroleum Corp. of America, 417 F.2d 929
(8th Cir. 1969)
Powell v. American Casualty Insurance Company
of Reading, Pa., 772 F. Supp. 1188 (W.D. Okl
1991)
Reliance Insurance Co. v. Weis et al.. 148 B.R
975 (E.D. Mo. 1992), affd 5 F.3d 532 (8th
Cir. 1993)
Septembertide Publishing, B.V. v. Stein and Day.
Inc., 884 F.2d 675 (2d Cir. 1989)
STATUTES
11 U.S.C. § 541(a)(1)
11 U.S.C. § 1102(a)(1)
U.S. Sup. Ct. Rule 10.1(a), 28 U.S.C.A
Del. Code Ann. Chancery Court Rule 23.1
Del. Corp. Law Ann. § 327
Page
26
20
19
15
9°
=
a
No. 93-1028
IN THE
Supreme Court of the United States
Octoser Term, 1993
BANKRUPTCY PLAN COMMITTEE OF THE
BANK BUILDING & EQUIPMENT CORP.
OF AMERICA, IN LIQUIDATION.
Petitioner.
VS.
RELIANCE INSURANCE CA)..
Respondent.
ON PETITION FOR A WRIT OF CERTIORARI
TO THE UNITED STATES COURT OF APPEALS
FOR THE EIGHTH CIRCUIT
BRIEF OF RESPONDENT
RELIANCE INSURANCE CO., IN OPPOSITION
OPINION BELOW
The decision of the Court of Appeals for the Eighth Circuit.
Reliance Insurance Co. v. Weis. et al., 5 F.3d 532 (8th Cir. 1993),
affirmed the District Court's finding, Reliance Insurance Co.
v. Weis, et al., 148 B.R. 575 (E.D. Mo. 1992), that the petitioner's
action was brought “on behalf of” the bankrupt company against
its own officers and that such claims were excluded from
coverage by the “insured v. insured” provision of the directors
and officers liability insurance policy issued to the company by
the respondent. The decisions of the Court of Appeals and the
District Court are reproduced in the petitioner's appendix at
P. App. 23a-24a and P. App. 7a-22a! respectively.
JURISDICTION
The respondent adopts by reference the petitioner's statement
of jurisdiction.
STATUTES INVOLVED
The respondent adopts by reference the petitioner's statement
of the statutes involved in this proceeding.
STATEMENT OF THE CASE
The petitioner, the Bankruptcy Plan Committee (the “Plan
Committee”), was established and authorized to act on behalf
of the bankrupt Bank Building & Equipment Corporation of
America (“BBC”) in accordance with BBC Plan of Liquidation
(the “Plan”), as approved by the bankruptcy court. The Plan
specifically states that the Plan Committee was created to act
on behalf of BBC and its estate. (Relevant portions of the Plan
are reproduced in the appendix’ to this brief.)
The Plan Committee's authority is governed by the U.S.
Bankruptcy Code, 1] U.S.C. § 54]l(a)(1), which states that a
bankruptcy estate is comprised of “all legal or equitable interests
of the debtor,” ie. BBC. The Plan Committee's and the estate's
rights are derived exclusively from BBC; they do not acquire
or possess any other rights. The Plan Committee cannot, as sug-
gested by the petitioner, pursue claims emanating from third
parties such as BBC’s creditors.
' Reference to the Appendix of the Petition for a Writ of Certiorari to the United
States Court of Appeals for the Eighth Circuit, shall be made as (P. App
a).
* References to the Respondent's Appendix to this brief shall be made as (Resp
App. ).
en
The lower courts resolved a simple, straightforward question:
Under Delaware law, is the action commenced by the Plan Com-
mittee against BBC’s former officers excluded from coverage
under the directors and officers liability insurance policy issued
to BBC by the respondent, the Reliance Insurance Company
(hereinafter “Reliance”), pursuant to the provision that excludes
claims by or on behalf of the Company? Both the District Court
and the Court of Appeals applied Delaware law, the law that
governs the interpretation of the Reliance policy, found the
exclusion applied, and granted judgment to Reliance.
The Plan Committee is an entity created solely as a result of
BBC's bankruptcy, with only those powers and authority
prescribed in the Plan and the U.S. Bankruptcy Code. The Plan
itself states that the Plan Committee was selected to act on behalf
of BBC, with the authority to assert claims on BBC's behalf.
Section 1.31 of the Plan unequivocally states that the Plan Com-
mittee was appointed on behalf of BBC:
The Plan Committee shall mean the Committee of
three individual representatives, selected on behalf of
BBC by BBC's unsecured creditors committee ap-
pointed in BBC’s case pursuant to ll U.S.C. §
1102(a)(1). . .
P. App. 5a, (Emphasis added.)
In addition, Article XII, Section 12.1 of the Plan authorizes
the Plan Committee to prosecute the claims held by BBC’s estate:
This Plan contemplates the liquidation of all of the
property of the Consolidated Debtors. . . and the
prosecution of any all claims or causes of action held
by the estates of the Consolidated Debtors by the Plan
Committee. . . on behalf of the Estate prior to and
after the Effective Date to the extent that the Plan
Committee believes such prosecution to be feasible and
warranted.
Resp. App. B-l1, (Emphasis added.)
The Plan, Article I, Section 1.12, identifies BBC as one of the
consolidated debtors:
Consolidated Debtors shall mean the procedurally
combined estates of In re Bank Building and Equip-
ment Corporation of America, .. . In re BBC Manu-
factured Buildings, Inc., . . . and In re Accesseron
Products, Inc. .. .
Resp. App. B-1.
Similarly, Article XII, Section 12.3 of the Plan, provides that
the Plan Committee “... shall be responsible for prosecuting
and defending any and all claims relating to the Consolidated
Debtors’ estate. . ” Resp. App. B-1. Accordingly, the Plan Com-
mittee was authorized to pursue BBC’s rights and claims,
including BBC’s claim against its officers for their breach of
fiduciary duties and BBC’s corresponding losses and damages.
Other provisions of the Plan confer upon the Plan Committee
the authority to act as BBC’s board of directors and pursue
claims belonging to BBC, and describe the procedures to be
followed by the Plan Committee. Article XIV, section 14.1 states:
... The Plan Committee shall have the same authority
to act for the Consolidated Debtors as a board of
directors for each of the Consolidated Debtors . . .
Upon confirmation, all causes of action belonging to
any of the Consolidated Debtors shall vest and be
brought in the name of the Plan Committee, on behalf
of the particular Consolidated Debtor or Debtors in
which the cause of action had been previously vested.
Resp. App. B-1, B-2.
A Disclosure Statement was also filed in BBC’s bankruptcy
proceedings, to obtain approval of the objectives of the Plan from
BBC’s creditors and other interested parties. Relevant portions
of the Disclosure Statement are reproduced in the appendix to
this brief. Under the “First Amended Disclosure Statement Filed
a
in Connection with the [Plan]” (hereinafter “the Disclosure
Statement”), Article VII, section (C)6, provides that BBC’s “Plan
Committee .. . shall have the right to bring all actions and pro-
ceedings belonging to the Consolidated Debtors or their
Estates...” Resp. App. C-l.
Article V of the Disclosure Statement, entitled “Ongoing
Liquidation Efforts,” identifies the very claim against BBC’s
former officers which became the subject of the Plan Committee
Action and the instant declaratory judgment action:
One of the potential causes of action is a claim by BBC
against certain of its former officers ... arising out
of the alleged failure and fraud by Loughman Divi-
sion officers and employees at the Loughman Divi-
sion of BBC. The alleged misconduct of management
of the Loughman Division and the potential causes
of action are set forth in the report of the Court ap-
pointed Examiner, ...
* . *
... Proponents expect the Plan Committee to employ
special counsel to review the findings of the Examiner's
report in order to determine in greater detail the possi-
ble legal actions available against certain officers of
BBC, . . . and to assess and calculate any damages and
to pursue any appropriate action on behalf of BBC.
Resp. App. C-l, (Emphasis added).
Special counsel (the very attorneys who filed this petition)
were, in fact, retained by the Plan Committee to review the find-
ings in the bankruptcy examiner’s report and prosecute BBC’s
claim against its officers.
The authority to bring suit on BBC’s causes of action was
exercised by the Plan Committee in November of 1991, when
it brought an action against BBC’s former officers entitled
Richard Miller ... acting in the name of the Plan Committee
for the Bankruptcy Estate of Bank Building and Equipment
Corp. of America v. Doug Clements, et al. in the Circuit Court
of the County of St. Louis, State of Missouri (the “Plan
Committee Action”).
The Complaint in the Plan Committee Action alleged that
“pursuant to the Plan, all causes of action belonging to the
bankruptcy estate of Bank Building & Equipment Corp. vest
and shall be brought in the name of the Plan Committee which
has the sole responsibility for implementing the plan.” Resp.
App. D-2. Relevant portions of the Complaint are reproduced
in the appendix to this brief.
The Plan Committee alleged that Doug Clements was an of-
ficer of BBC, and “ . .had a fiduciary duty to BBC to act in
the best interests of BBC.” Resp. App. D-2. Similarly, the com-
plaint asserted that “Weis, as Chief Executive Officer, and
Carpenter, as Chief Financial Officer, of BBC owed a duty to
BBC to exercise the care that an ordinarily careful and prudent
person would use in managing BBC and its subsidiaries and
supervising their subordinates.” Resp. App. D-2, D-3. The Plan
Committee alleged that “Weis and Carpenter breached their
‘duty of care to plaintiffs by negligently and carelessly failing
to supervise Clements. . .” Resp. App. D-3. Thus, it was asserted
that as a direct result of Clements’ conduct, “. . . BBC lost in excess
of $8,000,000.” Resp. App. D-2. Further, it was alleged that:
“lajls a direct result of Weis’ and Carpenter’s
negligence, as aforesaid, BBC lost in excess of
$8,000,000. Moreover, as a direct result of their
negligence, BBC was unable to survive as a profitable
business which reasonably could have been expected
to earn profits in excess of $15,000,000.”
Resp. App. D-3.
Certain former BBC officers requested that the respondent,
Reliance, provide coverage for the Plan Committee Action under
the directors and officers liability insurance policy issued by
Reliance to BBC.
Reliance, however, denied coverage because the Plan Com-
mittee Action was brought against the officers on behalf of BBC
and asserted claims on BBC’s behalf arising out of the breach
ee
of fiduciary duties owed to BBC by its officers. Reliance’s
disclaimer was based upon Endorsement No. | of the policy,
which states:
The Insurer shal! not be liable to make any payment
for loss in connection with any claim made against
the Directors or Officers: . . . by or on behalf of a
director and/or officer or by or on behalf of the “Com-
pany’, except for stockholder(s) derivative actions
brought by a shareholder(s) of the Company other
than a Director and/or Officer.
P. App. 4a.
The policy, under Section VI(J), provided that it would be
governed by Delaware law:
This policy, to the extent permitted by applicable law,
shall be construed in accordance with the law of the
jurisdiction of the incorporation of the Company
named in Item A of the Declarations. . .
Resp. App. A-l.
BBC is named in the Declarations and is incorporated in the
state of Delaware. Relevant portions of the Declarations are
reproduced in the appendix to this brief. Resp. App. A-l. Thus,
the policy should be construed in accordance with Delaware law.
It is important to note that under the policy, it was stated
that BBC’s bankruptcy did not alter the rights and obligations
of any party to the insurance contract. Reliance’s obligations
remain unchanged upon the bankruptcy of any insured, pur-
suant to Section VIII(C):
Bankruptcy or insolvency of a Director or Officer or a
Director's or Officer's estate or of the Company shall not
relieve the Insurer of any its obligations hereunder. . .
P. App. 4a.
Endorsement No. 4 of the policy conferred certain benefits
upon the insured officers in the event of BBC’s bankruptcy, in
that a smaller $2,500 retention would be charged to them if BBC
went bankrupt, rather than the $150,000 company reimburse-
ment which would apply if BBC declined to indemnify the
officers for reasons other than bankruptcy. Resp. App. A-l, A-2.
While the policy therefore contains express provisions deal-
ing with an insured’s bankruptcy, it is devoid of any indication
that Endorsement No. 1 would be eliminated or altered in the
event of any such bankruptcy.
Reliance commenced the instant declaratory judgment ac-
tion, Reliance Insurance Co. v. Carl Weis, et al., 148 B.R. 575,
(E.D. Mo. 1992), in the United States District Court for the
Eastern District of Missouri, seeking a declaration that it had
no obligation to defend or indemnify the former officers of BBC
under its directors and officers liability insurance policy. It
asserted that the Plan Committee Action was brought on behalf
of BBC and thus excluded from coverage by the exclusion in En-
dorsement No. 1.
Reliance moved for summary judgment arguing that the Plan
Committee Action was commenced by or on behalf of BBC, or
by the Plan Committee as BBC’s representative in bankruptcy
“standing in the shoes” of BBC for the purpose of prosecuting
all claims by BBC.
The Plan Committee cross-moved for summary judgment urg-
ing the Court to find coverage for this claim. It argued that the
Plan Committee Action was commenced on behalf of the BBC
bankruptcy estate and/or for BBC’s creditors. In addition, the
Plan Committee argued that because the Plan Committee Ac-
tion was the equivalent of a shareholders’ derivative action, it
was not excluded under Endorsement No. 1.
The District Court granted summary judgment in favor of
Reliance, finding that the Plan Committee Action was brought
“on behalf of BBC” against its own officers and excluded by En-
dorsement No. 1. That ruling was based upon the Plan and its
the provisions authorizing suit against BBC’s officers, the Plan
Committee’s Complaint, the Bankruptcy Code, and the policy.
The District Court stated that under the United States Bank-
ruptcy Code § 541(a)(1), the property of a bankruptcy estate is
defined as “all legal or equitable interests of the debtor in prop-
erty as of the commencement of the case.” P. App. 16a. (Em-
phasis added.) It found that the estate inherited all causes of
actions by BBC against others, and that BBC’s bankruptcy
representative may pursue such claims on behalf of the debtor.
The Court stated:
It is significant that the definition of the estate
embraces causes of action belonging to the debtor at
the time of the commencement of the action. .. Under
Section 541, the estate succeeds to any right of action
a debtor corporation may have to recover for damages
for misconduct, mismanagement or neglected duty by
a corporate officer or a director, and the trustee has
the authority to bring such actions on behalf of the
debtor corporation.
P. App. 16a.
The District Court also found that a trustee or, in this case.
a liquidation and distribution agent, “stands in the shoes of a
debtor corporation”, P. App. 16a, and can only prosecute causes
of action belonging to the debtor. It found that the claims in
the Plan Committee Action could have been brought by BBC,
as “the estate's legal and equitable interest in property rise no
higher than those of the debtor”. P. App. 17a. The District Court
concluded that BBC’s right of action against its officers and
directors was transferred to its bankruptcy estate upon the filing
of the bankruptcy petition and that the Pian Committee had the
authority to pursue this action to recover assets for the estate.
Thus, it was clear that the Plan Committee Action was filed
on behalf of BBC, within the meaning of Endorsement No. 1.
The District Court rejected as “meritless” the Plan Commit-
tee's argument that the action was actually a shareholders’
derivative action, as none of the prerequisites under Delaware
law for such a suit had been met. P. App. 2la.
In an unpublished decision, the United States Court of Ap-
peals for the Eighth Circuit affirmed “on the basis of the well-
reasoned opinion of the District Court.” P. App. 23a-24a.
10
REASONS FOR DENYING THE WRIT
The writ should be denied since none of the “special and im-
portant reasons” for granting a petition for a writ of certiorari
are present. Simply stated, the central issues involve whether
a bankruptcy representative of a commercial corporation acts
on behalf of the bankrupt company in asserting a breach of
fiduciary duty claim against the company’s officers and, cor-
respondingly, whether under Delaware law this claim is excluded
under a directors and officers liability insurance policy that
excludes coverage for claims against such officers “by or on behalf
of” the bankrupt company. This case does not involve a con-
trolling question of federal law, but merely focuses on the in-
terpretation of an insurance policy pursuant to state law; there
is no conflict between the U.S. circuit courts on this issue; it does
not relate to any significant question of public policy; and the
lower court correctly ruled in favor or the respondent.
The considerations governing this Court's review of a writ of
certiorari are, in part, as follows:
.l. A review on writ of certiorari is not a matter of
right, but of judicial discretion. A petition for a writ
of certiorari will be granted only when there are
special and important reasons therefor. The follow-
ing, while neither controlling nor fully measuring the
Court’s discretion, indicate the character of reasons
that will be considered:
(a) When a United States court of appeals has
rendered a decision in conflict with a decision of
another United States court of appeals on the same
matter; or has decided a federal question in a way in
conflict with a state court of last resort; or has so far
departed from the accepted and usual course of
judicial proceedings, or sanctioned such a departure
from a lower court, as to call for an exercise of this
Court's power of supervision.
U.S. Sup. Ct. Rule 10.1(a), 28 U.S.C.A.
This case does not embrace any of the above considerations.
An important question of federal law was not decided, as the
Court of Appeals affirmed the lower court's interpretation of
an insurance policy pursuant to Delaware law. Indeed, the peti-
tioner admits that Delaware law applies. Petitioner's Brief, p. 17,
n. 7. Moreover, it is well established that state law controls the
interpretation of insurance policies and federal courts sitting in
diversity should follow those decisions. Supreme Court review of
such issues controlled by state law is unwarranted and unnecessary.
There is no conflict on any pertinent issue in this case between
the United States courts of appeals. This is highlighted by the
petitioner's brief, which refers only to decisions of the lower
federal courts. In fact, the District Court herein essentially found
that the decisions cited by the petitioner on similar exclusions
in directors and officers policies (“D&O” policies) involved bank
failures governed by federal banking laws and interests, rather
than commercial bankruptcies affected by such federal concerns.
Such decisions were rendered only by federal district courts. In
any event, they are not controlling in this case, where there are
no federal banking statutes or entities at issue.
To the extent that reference was made to the Bankruptcy Code
and caselaw to construe the exclusion, the opinion below is con-
sistent with the longstanding principle that a bankruptcy repre-
sentative “stands in the shoes” of the bankrupt company under
its contracts and insurance policies. There is nothing controversial
or earth-shattering about that principle or its application to D&O
policies or any other insurance policies or contracts. The decision
follows rather than departs from controlling precedent relating
to insurance coverage for bankrupt companies, and is consistent
with the “accepted and usual course of judicial proceedings.”
For the foregoing reasons, this Court should not accept the
petitioner's writ.
I. THERE IS NO CONFLICT AMONG THE CIRCUIT
COURTS ON THE QUESTIONS PRESENTED
The petitioner erroneously asserts that this Court should exer-
cise its judicial discretion because there is a conflict among the
“lower federal courts” on the issues in this case. Petitioner’s Brief,
12
p. 10. This is an utterly inadequate basis for Supreme Court
intervention, as only a conflict among United States courts of
appeals justifies such a review.
The petitioner has not cited a single case from any jurisdic-
tion, let alone a circuit court of appeals, interpreting the
Bankruptcy Code in a way so as to decline, under Delaware or
any other state’s law, to enforce an insured v. insured exclusion
against a claim by a bankruptcy representative of a commercial
corporation against its officers. The petitioner only cited district
court decisions declining to enforce such exclusions, and then
only in the context of bank failure cases governed not by the
Bankruptcy Code but by federal banking laws.
In the petition’s only reference to a purportedly conflicting
circuit court decision, the petitioner asserts that the appeal did
not even address the insured v. insured exclusion:
... FDIC v. Zaborac, 773 F. Supp. 137, 144 (C.D. Il.
1991), affd sub nom FDIC wv. American Casualty Co.
of Pennsylvania, 998 F.2d 404 (7th Cir. 1993)(not
reaching issue of scope of “insured v. insured exclusion).”
Petitioner's Brief, p.12. (Emphasis added).
In fact, the Seventh Circuit's opinion in that case tacitly ap-
proves the insured vs. insured exclusion:
...[T]he plain language of Endorsement #8 [the in-
sured vs. insured exclusion] of the policy would have
excluded from coverage an action by the Bank itself
against the directors or officers.
998 F.2d at 408.
There is clearly no conflict among the federal circuits on the
pertinent issue, i.e., Delaware's treatment of the insured v.
insured exclusion under a contract of D&O insurance in a private
commercial bankruptcy.
13
Il. THIS CASE IS BASED UPON THE INTERPRETA.
TION OF AN EXCLUSION IN A DIRECTORS AND
OFFICERS LIABILITY INSURANCE POLICY
GOVERNED BY DELAWARE LAW
This writ should also be denied since the Court of Appeals
did not ultimately decide a controlling question of federal law.
It merely affirmed the District Court's interpretation of the
Reliance policy under Delaware law.
This Court has stated that a “principal purpose for which we
use our certiorari jurisdiction . . . is to resolve conflicts among
the Circuit Courts of Appeals and state courts concerning the
meaning of provisions of federal law.” Braxton v. U.S., 111 S.
Ct. 1854, 114 L. Ed.2d 385 (1991). Fedc.al courts sitting in diver-
sity must apply state, not federal law in construing D&O policies.
Reliance Insurance Co. v. Weis, et al., 148 B.R. 575 (E.D. Mo.
1992), affd 5 F.3d 532 (8th Cir. 1993) (Delaware law); Fidelity
and Deposit Co. of Maryland v. Zandstra, 756 F. Supp. 429 (N.D.
Cal. 1990) (California law); American Casualty Company v.
Baker, 758 F. Supp. 1340 (C.D. Cal. 1991) (Oklahoma law); Gary
v. American Casualty Co., 753 F. Supp. 1547 (W.D. Okla. 1990)
(Oklahoma law), affd on other grounds sub nom. FDIC v.
American Casualty Co., 975 F.2d 677 (10th Cir. 1992).
The District Court below found the policy's choice of law provi-
sion controlling and determined that Delaware law must be applied:
[T]he insurance policy in question clearly states
that Delaware law shall control in cases regarding in-
terpretation and application of the policy. Section VI,
subsection J... . [T]herefore this Court elects to apply
Delaware law as to the interpretation and validity of
the insurance policy at issue, especially with regard
to Endorsement 1.
P. App. 12a.
The petitioner concedes that Delaware law “is the law ap-
plicable to the [Reliance policy]. . .” Petitioner's Brief, p. 17,
n. 7. Reliance can conceive of no compelling reason why this
Court should use this case to jump into the thicket of insurance
14
policy interpretation, an area long governed by state law. As
there is no controlling federal question at issue, this Court should
deny the petitioner's writ of certiorari.
Insofar as the opinion below states that the Plan Committee,
as BBC’s bankruptcy representative, merely stands in BBC's
shoes, that decision is in total accord with federal and state prece-
dent. See Point IV below. As such, this decision fosters no con-
flict with any circuit.
Ill. THE QUESTIONS DECIDED IN THIS CASE WILL
NOT GENERATE EXTENSIVE LITIGATION
The petitioner baldly contends that the questions presented
here will arise in every bankruptcy in which there is a claim
against the directors or officers and a policy of directors and
officers liability insurance. However, the petition has failed to
identify a single precedent interpreting an “insured vs. insured”
exclusion in a claim in a commercial bankruptcy.
The impact of this decision on cases arising out of private,
corporate bankruptcies cannot under any stretch of imagination
be as great as predicted. If the issue was as significant as por-
trayed by the petitioner, surely a similar dispute would have sur-
faced in other commercial bankruptcies where D&O insurance
was involved, and the petitioner would rely upon the decisions
from those bankruptcy cases rather than the bank failure cases
to which it is forced to analogize.
Directors and officers of companies with D&O policies are
quite capable of reading their policies and apprehending that
the insurer is unwilling to cover certain defined risks, such as
the company’s claims against its own officers. Knowing that their
insurance policies in plain and unequivocal terms exclude such
claims asserted before the bankruptcy of their company, it is
easy enough for them to understand that they will not be covered
for the same claim post-bankruptcy. If they are unhappy with
the policy, they can either try to negotiate its terms before pur-
chasing it, or buy a better policy from another insurer. Disputes
between bankrupt corporations, their officers, and their D&O
insurers on the scope of the insured v. insured exclusion thus will
15
not often arise, as all parties must readily recognize that such
a claim constitutes a risk that the insurer is not willing to in-
sure and one the courts are unwilling to compel it to cover.
Of interest, other courts have upheld similar insured vs. in-
sured exclusions in directors and officers policies. Fidelity and
Deposit Company of Maryland v. Conner, 973 F.2d 1236 (5th
Cir. 1992); Bendis v. Federal Ins. Co., No. 89-2035-S, 1989
WESTLAW 161437 (D. Kan. Dec. 4, 1989), affd on other
grounds, 958 F.2d 960 (10th Cir. 1991); Levy v. National Union
Fire Ins. Co., 889 F.2d 433 (2d Cir. 1989); Powell v. American
Casualty Insurance Company of Reading, 772 F. Supp. 1188
(W.D. Okl. 1991). In so doing, these courts have implicitly re-
jected the view that such exclusions would have the detrimental
effect on corporate life suggested by the petitioner. In the Conner
case, the Fifth Circuit enforced the exclusion in a third-party
claim by a director against former directors:
We find that there is no interpretation of the insured
v. insured exclusion as it pertains to the third party
claims asserted by Conner - that is, the plain language
of the insured v. insured exclusion bars Conner’s claims
against his former colleagues.
973 F.2d at 1245.
In American Casualty Company of Reading, Pa. v. FDIC,
944 F.2d 455 (8th Cir. 1991), which upheld the “regulatory ex-
clusion” of a D&O policy issued to a bank later taken over by
the FDIC, the court expressed views equally applicable to the
petitioner's contention:
The parties are sophisticated business people who
dealt [with each other] at arm’s length ... We will
not discard their agreement and remake their business
relationship ... Nor can we agree that. . . [the policy]
was unconscionable. It was a bargain struck by adult
business people. We have no reason to suppose that
a better deal could have been gotten for the bank from
any other insurer.
944 F.2d at 459-460.
16
While the petitioner asserts that the decision below removed
the protection of insurance coverage “at the very moment when
it is of the greatest value”, Petitioner's Brief, p. 18, BBC's officers
had to know in advance, merely by reading the Reliance policy,
that claims against them by or on behalf of BBC would not be
covered. As insurance policies remain intact and binding after
bankruptcy, this decision will not have any major impact on
such proceedings, deter officers from such employment, or
generate new sources of disputes between such parties.
In fact, Endorsement No. | is for all practical purposes unaf-
fected by the filing of a petition in bankruptcy. The insureds
under the policy have no lesser protection as a result of this en-
dorsement post-petition as they would have pre-petition.
IV. THE COURT OF APPEALS CORRECTLY
DECIDED THE QUESTIONS PRESENTED
The court below correctly concluded that the Plan Committee
Action is a claim on behalf of BBC against its former officers.
It followed the longstanding rule that a bankruptcy represent-
ative “stands in the shoes” of the debtor corporation under its
contracts and insurance policies, subject to the same defenses
that could have been raised against the bankrupt corporation
and possessing the same rights and causes of action of the cor-
poration. The Court of Appeals also correctly held that the Plan
Committee Action was not a shareholders derivative action, as
none of the prerequisites for filing such a suit were met.
A. Because A Bankruptcy Representative's Causes of Ac-
tion Are Derived From Those Previously Held By The
Debtor Company, The Plan Committee Action Is An
Action On Behalf Of BBC
The lower courts held that pursuant to the Bankruptcy Code,
the Plan, and the relevant case law, the Plan Committee Ac-
tion is a claim on behalf of BBC. The courts correctly saw no
meaningful distinction in relation to the Plan Committee's causes
of action between BBC and its bankruptcy estate, as the estate
and the vehicle through which it acts, the Plan Committee,
merely derive their rights and claims from BBC.
17
The petitioner states that the opinion below erroneously “ig-
nored the separate legal existence of the bankruptcy estate and
the debtor. . .” Petitioner’s Brief, p. 14. Rather, the district court
stated that for the purpose of determining whether the “insured
v. insured” exclusion applied, there was “no significant legal
distinction” between BBC and its bankruptcy estate, since the
Plan Committee Action was a claim filed on behalf of BBC and
its estate. P. App. 2a. The action on behalf of either entity was
based on BBC’s rights, BBC’s officers’ misconduct, and BBC’s
damages, and is a claim “by or on behalf of” BBC within the
plain language of Endorsement No. 1.
The documents and pleadings in BBC’s bankruptcy pro-
ceeding creating the Plan Committee reveal that it could only
pursue claims which passed from BBC to the estate and then
to the Committee. BBC’s claim against its officers was transferred
to the Plan Committee, as were its rights under the D&O policy.
The Plan Committee acquired BBC’s rights subject to all con-
tractual and common law defenses and obligations that existed
when bankruptcy was filed. In re Feiereisen, 56 B.R. 167 (D.
Oregon 1985) (the bankruptcy trustee stands in the shoes of the
debtor and has the same rights and duties under the debtor's
insurance policy); In re Daisy Systems Securities Litigation, 132
B.R. 752 (N.D. Cal. 1991) (insurance policies are property of
the bankruptcy estate); In re Light, 23 B.R. 482 (E.D. Mich.
1982). In In re Light, supra, the Court described a bankruptcy
trustee's status under a debtor’s insurance policies as follows:
.. . atrustee in bankruptcy . . . is not an independent
co-insured under a policy of insurance. Rather, the
bankruptcy trustee takes interest in the insurance
policy pursuant to the interest of the debtor . .
“standing in the shoes”, as it were.
23 B.R. at 484.
The claim against BBC’s officers, now prosecuted by the Plan
Committee, must meet the same fate under the Reliance policy
as if it was pursued by BBC: it is excluded from coverage due
to Endorsement No. 1.
18
The lower courts’ opinions were also a proper application of
the principle that BBC’s bankruptcy did not alter or expand
Reliance’s obligations or BBC’s or any other insureds’ rights under
the Reliance policy. See In Re Ozark Restaurant Equipment
Company, Inc., 816 F.2d 1222 (8th Cir. 1987); In Re Louisiana
World Exposition, Inc., 832 F.2d 1391 (5th Cir. 1987); In Re
Daisy Systems Securities Litigation, 132 B.R. 752 (N.D. Cal.
1991). The policy’s terms, conditions, and exclusions, including
the “insured vs. insured” exclusion, remain fully enforceable after
BBC’s bankruptcy.
As the petitioner notes, bankruptcy is not intended to pro-
tect the bankrupt corporation’s insurance companies. Petitioner's
Brief, p. 19. No such protection has been granted to Reliance,
since a claim by BBC for breach of fiduciary duties against its
officers would have been excluded before or after BBC's
bankruptcy. The petitioner’s contention that the decision below
- constitutes an unjustifiable windfall for Reliance is therefore
preposterous.
The petitioner cites other irrelevant cases, Commodity Futures
Trading Commission v. Weintraub, 471 U.S. 343, 105 S. Ct. 1986
(1985) and Pepper vs. Litton, 308 U.S. 295, 60 S. Ct. 238 (1939)
in support of the proposition that the Plan Committee represents
the creditors and shareholders of BBC. In Commodity Futures,
the issue was whether a trustee could waive the corporation’s
attorney-client privilege on pre-bankruptcy communications.
That clearly has no bearing upon a bankrupt company’s status
under an insurance policy. The Court merely indicated that the
trustee has a fiduciary duty to the shareholders as well as the
creditors of the bankrupt corporation. Whether or not the Plan
Committee owes such duties, its rights under Reliance’s policy
are no greater than those previously possessed by BBC. Similarly,
Pepper v. Litton is inapplicable as it primarily involved the
disallowance by the bankruptcy court of a claim against the
estate by the dominant shareholder of the bankrupt company.
It in no way refutes the principle that a bankruptcy trustee or
other representative stands in the shoes of the debtor in assert-
ing the debtor’s claim.
19
B. The Plan Committee Action Is Not A Claim On
Behalf Of BBC’s Creditors
A representative in bankruptcy has no legal standing to assert
claims on behalf of the bankrupt’s creditors. See Caplin v.
Marine Midland Grace Trust Co., 406 U.S. 416, 429, 92 S. Ct.
1678, 32 L. Ed.2d 195 (1972); In re Ozark Restaurant Equipment
Co., Inc., supra; In re Petroleum Corp. of America, 417 F.2d
929 (8th Cir. 1969). The bank failure decisions cited by the peti-
tioner, such as American Casualty Co. vs. FDIC, 791 F. Supp.
276 (W.D. Okla. 1992), and Fidelity and Deposit Co. v.
Zandstra, 756 F. Supp. 429 (N.D. Cal. 1990), add nothing to
the analysis in this case, because in those cases federal banking
statutes provided that the FDIC and FSLIC could sue as suc-
cessors to the failed bank, in their own right as creditors, and
also on behalf of the bank’s creditors. Under the Bankruptcy
Code, the Plan, the Disclosure Statement, and the Reliance
policy, the Plan Committee merely stands in the shoes of BBC
when prosecuting its claims against BBC’s former officers. It
does not represent the creditors of that company.
The petitioner also argues that the Plan Committee acts on
behalf of creditors, because they benefit from any recovery ob-
tained by the Plan Committee. In rejecting this argument, the
lower court stated that “the pending State Court action was filed
on behalf of BBC and its estate, although the benefits sought
may eventually inure to the creditors.” P. App. 2la. Whether
BBC's creditors benefit from the Plan Committee action is ir-
relevant; the ultimate question is on whose behalf was the ac-
tion commenced? As a bankruptcy representative possesses on-
ly those rights or causes of action transferred to it by the debtor,
the answer must be “on behalf of” the debtor, BBC.
The petitioner quotes In re Fidelity America Financial C orp.,
43 B.R. 74 (Bkrtcy. E.D. Pa. 1984): “[t]he trustee acts as the
representative of the estate, managing its funds for the benefit
of its creditors.” Petitioner’s Brief, p. 15. This indicates that the
bankruptcy trustee acts as the estate's representative, not the
creditors. While the trustee may manage funds for the creditors’
benefit, the trustee in no official sense represents those creditors.
20
C. The Bank Failure Cases Extensively Relied Upon
By Petitioner Have No Bearing Upon The Inter-
pretation Of A Directors and Officers Liability
Insurance Policy In The Bankruptcy Of A Com-
mercial Corporation Under The U.S. Bankrupt-
cy Code
If the insured vs. insured exclusion is as significant in bank-
ing matters as averred by the petitioner, any case reaching this
Court on that point should undoubtedly arise out of an actual
bank failure handled by federal banking regulators. Only in such
a case would a full record be presented reflecting the purported
significance of the exclusion on the regulation and operation
of such institutions.
The District Court and the Court of Appeals correctly
recognized the inapplicability of precedent relating to failed
financial institutions:
The Court has carefully reviewed the caselaw cited
by the parties. Unfortunately, these cases are not ex-
tremely helpful in providing guidance to the Court.
The majority of cases cited deal with exclusion clauses
similar to the present one, however, the interpreta-
tion and application of the clause is limited to facts
involving bank failures. The principles espoused are
restricted to the unique situation of the FDIC or the
RTC taking control of a failed bank. The present situa-
tion deals with a bankrupt corporation no longer
physically or legally in existence as it had been before
the bankruptcy. The Court is constrained to draw
from the basic tenets of insurance law and bankruptcy
law in order to resolve this matter.
P. App. l4a.
In a case cited by the petitioner, Office and Professional
Employees’ Intl Union, Local 2 v. FDIC, 962 F.2d 63 (D.C.
Cir. 1992), the court found that as the claim procedures of the
Financial Institutions Reform, Recovery, and Enforcement Act
of 1989 (“FIRREA”) do not define the terms “claim” and “claim-
ant”, it was appropriate to borrow the bankruptcy law’s
21
definition of these terms. In the instant action, the provisions
of FIRREA or any other federal banking statute are not at issue.
Further, Office and Professional Employees did not find a direct
analogy between federal banking law and the Bankruptcy Code,
it merely stated that the terms of statutory scheme could be
borrowed to clarify a gap in another statute. From this limited
finding, the petitioner leaps to the faulty premise that the status
of the FDIC under the banking laws is similar to the Plan Com-
mittee under the Bankruptcy Code. BBC was not a bank and
the Plan Committee is simply not the FDIC.
The petitioner incorrectly relies upon bank failure cases such
as F.D.1.C. v. American Casualty Co., 814 F. Supp. 1021 (D.
Wyo. 1991) and Continental Casualty Co. v. Allen, 710 F. Supp.
1088 (N.D. Texas 1989) to assert that insured v. insured exclu-
sions are ambiguous unless they actually refer to the specific
person or entity in question. Petitioner’s Brief, p. 12. The
Reliance exclusion is quite clear, however, in referring to claims
“on behalf of” the company, which unambiguously encompasses
claims in or out of bankruptcy by BBC’s agents or represen-
tatives. Moreover, in the Allen case, the court found that the
exclusion was ambiguous primarily because there was proof in
the record of the insurer’s own witness’ “inability to understand
the definition of ‘insured’ and meaning of the endorsement.” 710
F. Supp. 1088 at 1098. There is absolutely no proof in the record
in the instant case that any party or any insured did not under-
stand the exclusion in the Reliance policy. Hence, under the
reasoning of Allen, there is no basis to support a finding of am-
biguity in Endorsement No. 1.
In the same vein, the Reliance exclusion would not have been
found ambiguous by the American Casualty court, as the ex-
clusion clearly applies to any claim brought not only by the in-
sured company but on its behalf, such as a claim passing from
BBC to its bankruptcy estate and the Plan Committee.
A very recent decision by the United States District Court,
Southern District of New York, further confirms that the decision
below is entirely consistent with the principles governing
bankruptcy representatives’ rights under insurance policies issued
to the debtor. Niemuller v. National Union Fire Insurance
22
Company of Pittsburgh, Pa., 92 Civ. 0070 (SS), 1993 U.S. Dist.
LEXIS 18476 (December 29, 1993). In a case involving the
assignment of a corporation’s breach of fiduciary duty claim
against its officer, the court enforced against the defendant a
comparable insured vs. insured exclusion in a D&O policy, find-
ing that an assignee “stands in the shoes” of the assignor cor-
poration and is subject to the same defenses as that corpora-
tion. The court emphatically rejected the defendant’s reliance
upon the bank failure cases (also cited by the petitioner herein)
relating to the insured v. insured exclusion.
Addressing the rights of an assignee of a corporation rather
than its bankruptcy representative, Niemuller applies with equal
force to the Plan Committee Action and the exclusion in the
Reliance policy:
It is clear law that an assignee steps into the shoes of
the assignor and gains only so much as that to which
the assignor is entitled. See Septembertide Publishing
B.V. v. Stein & Day, Inc., 884 F.2d 675, 681-82 (2d Cir.
1989), citing International Ribbon Mills, Ltd. v. Ar-
jan Ribbons, Inc., 36 N.Y.2d 121, 126, 325 N.E.2d 137,
365 N.Y.S.2d 808 (1975) (“It is elementary ancient law
that an assignee never stands in any better position
than his assignor. He is subject to all equities and
burdens which attach to the property assigned because
he receives no more .. . than his assignor.”) An assignee
is in no better or worse position than the assignor. . . .
This traditional rule is no less applicable to the present
case. DDCC and Sussex will become party plaintiffs
in the pending Qantel litigation claims solely due to
a transfer of interest... . They gain nothing more than
Qantel, but similarly they are placed in no worse a
position. Thus, if the Policies exclude <1e claims
brought by Qantel, which plaintiff admits they do,
then they also exclude those claims continued by
successors-in-interest.
1993 U.S. Dist. LEXIS 18476, pp. 7-9.
23 -
The court convincingly distinguished the banking cases cited
by the defendant and by the petitioner in the case at bar:
In support of his argument that the Exclusion Clause
extends only to a suit brought “by” Qantel and not
successors-in-interest as assignees, Niemuller relies
upon cases from other jurisdictions which involve
regulatory banking agencies. These cases, however, are
wholly distinguishable.
The primary and determinative distinction between
the entities involved in those cases and the assignees
in the instant case is that the assignees in the cases
noted by plaintiff are statutorily created entities
charged by federal or state law with the obligation
to pursue certain claims, including claims of other in-
terested parties such as creditors. Thus, the rights and
claims brought by these statutory entities are not
analogous to those of an ordinary assignee.
Plaintiff relies primarily on the reasoning of Fidelity
& Deposit Co. of Md. v. Zandstra, 756 F. Supp. 429
(N.D. Cal. 1990), and cases adopting its approach. See
American Casualty Co. of Reading, Pa. v. Baker, 758
F. Supp. 1340 (C.D. Cal. 1991) (following Zandstra);
Finci v. American Casualty Co. of Reading, Pa., 323
Md. 358, 383, 593 A.2d 1069 (1990) (citing Zandstra
and American Casualty Company)... . However, as
the court in Zandstra explicitly recognized, the FDIC
was not an ordinary assignee and, thus, deserved
dissimilar treatment from that accorded other
assignees in the same situation.
In reaching its decision that the Exclusion Clause
did not apply, the court noted the unique character
of the FDIC. As the court stated, regulatory banking
agencies have greater standing than ordinary
successors-in-interest because they, empowered by
statute, represent the bank as well as the creditors,
depositors and shareholders of the bank.... [T]he
24
Zandstra court concluded, “the FDIC did not merely
stand in the shoes of the original party.” . .
. o *
As noted previously, and in no way undermined by
the regulatory cases cited by Niemuller, ordinary
assignees have neither independent claims nor any
greater rights than those belonging to their assignors.
Therefore, there is no reason to rely upon the
regulatory cases cited by Niemuller in interpreting the
Exclusion Clause at issue in this case.
Id. 9-12.
Whatever special right the FDIC may have to circumvent
exclusions in a bank’s D&O policy, that right simply was not
conferred upon the Plan Committee in the instant matter or
the assignees of Qantel in Niemuller.
D. As Found By The Lower Courts Herein, Because
The Plan Committee Action Is Not A Share-
holders’ Derivative Action, It Does Not Fall
Within The Narrow Derivative Suit Exception
To The “Insured vs. Insured” Exclusion.
The Plan Committee Action is neither a shareholders’
derivative action nor comparable to such an action, since it fails
to comply with Delaware's statutory requirements for a
shareholders’ derivative suit. Even if the Plan Committee Ac-
tion is, in the petitioner’s words, in “the nature of a derivative
suit,” Petitioner’s Brief, p. 16, it would not fall within the nar-
row exception of the exclusion that encompasses only actual
derivative suits. The lower courts correctly found the petitioner's
construction of the shareholders’ derivative suit part of Endorse-
ment No. 1 to be “meritless.” P. App. 2la.
None of the requirements for a derivative action under
Delaware law have been met by the Plan Committee Action:
... the complaint shall allege that the plaintiff was a
shareholder or member at the time of the transaction
25
of which he complains for his share or membership
thereafter devolved on him by operation of law. The
complaint shall also allege with particularity the
efforts, if any, made by the plaintiff to obtain the
action he desires from the directors or comparable
authority and the reasons for his failure to obtain the
action or for not making the effort.
Chancery Court Rule 23.1 Del. C. Ann. See also § 327 Del. Corp.
Law Annotated.
The lower court correctly found that the Plan Committee
Complaint lacked any allegations about shareholders or their
efforts to obtain through the BBC’s directors the relief sought
in the Complaint. As “[n]Jone of the prerequisites under Delaware
law for filing a shareholders derivative action have been met”
the action did not fall within the exception to the exclusion. P.
App. 2la.
In any event, it is clear that this entails Delaware law, and
not a matter of federal law warranting review by this Court.
The petitioner also contends that the Plan Committee Action
is in “the nature of a derivative suit,” in asserting claims for
breach of fiduciary duty that could have been asserted by
shareholders. Asserting claims that could have been pressed by
shareholders does not transform this suit into an actual
shareholders derivative action. F idelity and Deposit Company
. Of Maryland v. Conner, supra; Evanston Insurance Company
v. FDIC, 1988 U.S. Dist. LEXIS 16263 (C.D. Cal. 1988). An
actual shareholders derivative action is the only exception to the
exclusion in the Reliance policy. See also, FDIC v. American
Casualty Company of Reading, Pa., 998 F.2d 404, 409 (7th Cir.
1993): “The FDIC's complaint contains none of the allegations
necessary to maintain a shareholder derivative action under Fed.
R. Civ. P. 23.1, such as the Bank’s refusal to file suit.”
By the guise of artful construction, the petitioner seeks to
impose an obligation upon Reliance to which it never agreed.
However, the controlling Delaware rules of construction pro-
hibit a court from crafting an interpretation that is inconsistent
26
with the intent of the parties or the clear language of their agree-
ment. New Castle County v. Hartford Accident & Indemnity
Co., 970 F.2d 1267, 1270 (3d Cir. 1992); Hallowell v. State Farm
Mutual Automobile Ins. Co., 443 A.2d 925 (Del. 1982); Aetna
Casualty & Surety v. Kenner, 570 A.2d 1172, 1174 (Del. Supr.
1990); Delaware’s Supreme Court has stated that the words of
an insurance policy should not be destroyed or twisted under
the guise of construing them. Aetna Casualty & Surety v. Ken-
ner, 570 A.2d at 1174; Hallowell v. State Farm Mutual, 443 A.2d
at 926. The lower courts herein were well aware of Delaware's
rules of construction in refusing to stretch the shareholders’
derivative exception in Endorsement No. | to the unwarranted
lengths sought by the petitioner.
V. THERE ARE NO SIGNIFICANT MATTERS OF
PUBLIC POLICY IMPLICATED BY THIS CASE,
WHICH MERELY INVOLVES THE INTERPRETA-
TION OF AN EXCLUSION IN AN INSURANCE
POLICY ISSUED TO DIRECTORS AND OFFICERS
If the petitioner’s dire views of this decision were accepted,
every time a corporation with a dispute over the exclusions in its
insurance policy entered bankruptcy, an overriding question of
federal bankruptcy law would be triggered. From the petitioner's
perspective, if the insured v. insured exclusion is upheld in bank-
ruptcies, no prudent person would serve on a board or act as an
officer of a corporation. A series of cases, however, have already
upheld insured v. insured exclusions, both in the corporate and
failed bank settings. Of course, our economy has not come to a
screeching halt occasioned by the abrupt resignation of corporate
directors and officers, or the inability of companies to find new,
qualified, and willing candidates for such positions. Seasoned
executives are no more likely to withdraw from corporate life
because of the insured v. insured exclusion in a D&O policy than
homeowners are likely to give up their homes because of exclu-
sions in their homeowners’ liability insurance policies.
Furthermore, if the exclusion is as onerous as suggested by
the petitioner, perhaps insureds should negotiate with their in-
surers to eliminate it from their D&O policies.
en
27
When insurance policies are issued to corporations whose of-
ficers and directors can gauge the scope of coverage and the ef-
fect of the exclusions by simply reading their terms and condi-
tions, no overriding federal public policy concern is created. The
interpretation of such policies has long been a matter of state
law. The petitioner asks this Court to rule on a matter of
Delaware insurance law, without demonstrating how the opinion
below unduly impairs or affects urgent matters of federal public
policy. There is simply no persuasive reason for this Court to
become involved in such a straightforward interpretation of an
insurance policy governed by Delaware law.
28
CONCLUSION
For the reasons discussed above, the petition for a writ of cer-
tiorari should be denied by this Court.
Dated: New York, New York
January 21, 1994
Respectfully submitted,
PERRY KREIDMAN
Counsel of Record
WILSON, ELSER, MOSKOWITZ,
EDELMAN & DICKER
150 East 42nd Street
New York, New York 10017-5639
(212; 490-3000
Attorneys for Respo.dent
Reliance Insurance Company
Of Counsel:
WayNeE E. BorGEEST
JONATHAN C. THaAu
Davin S. HEBBELER
APPENDIX
A-1
A. THE INSURANCE POLICY AND DECLARATIONS
INSURANCE POLICY
Endorsement No. 4
It is understood and agreed that:
1. Insuring Agreement I.A is amended by adding the
following:
If the Company is permitted or required by law to
ultimately indemnify a Director or Officer, or to ad-
vance costs and/or defense expenses on their behalf
and does not in fact do so other than for reason of
the Financial Insolvency of the Company, then the
Insurer shall pay all loss on behalf of the Director or
Officer, subject to the third listed deductible amount
set forth in Item D, Retention, of the Declarations and
all provisions, terms and conditions of this policy.
* * *
VII GENERAL CONDITIONS
J. Situs
This policy, to the extent permitted by applicable law, shall
be construed in accordance with the law of the jurisdiction of
incorporation of the Company named in Item A of the Declara-
tions or, in the case of matters pertaining to a Subsidiary, the
law of the jurisdiction or incorporation of such Subsidiary.
DECLARATIONS
ITEM A: Name of Insured and Address:
Bank Building & Equipment Corporation of America
3630 South Geyer Road
St. Louis, Missouri 63127
A-2
ITEM D: RETENTION
$ 2,500.00
$ 10,000.00
$ 150,000.00
each Director or Officer, each loss, including
claim expense, but in no event exceeding
in the aggregate each loss, including claim
expense, as respects Directors and Officers
in the aggregate each loss, including claim
expense, as respects Company Reimbursement
* . al
B-1
B. FIRST AMENDED JOINT PLAN
OF LIQUIDATION OF BBC
1.12 Consolidated Debtors shall mean the procedurally com-
bined estates of In re Bank Building and Equipment Corporation
of America, Case No. 90-02011-BKC-DPM, In re BBC Manufac-
tured Buildings, Inc., Case No. 90-02571-BKC-DPM and In re
Accesseron Products, Inc., Case No. 90-02572-BKC-DPM.
* * .
12.1 This Plan contemplates the liquidation of all the property
of the Consolidated Debtors . . . and the prosection of any and
all claims or causes of action held by the estates of the Con-
solidated Debtors by the Plan Committee . .. on behalf of the
estates both prior to and after the Effective Date, to the extent
the Plan Committee believes such prosecution to be feasible and
warranted.
12.3 ... Once appointed, the Plan Committee .. . shall be
responsible for prosecuting and defending any and all claims
and causes of action relating to the Consolidated Debtors’ estate,
including, without limitation (1) claims of each estate against
any Person (including, without limitation, any claims or causes
of action arising under Sections 544, 545, 547, 548, 549 and
553(b) of the Bankruptcy Code), (b) claims of any Person against
the estates or related Persons which affect the estates or interests
of Creditors therein, and (c) objections to Disputed Claims
scheduled or filed against the estates.
14.1 ... The Plan Committee thereafter shall have the same
authority to act for the Consolidated Debtors as a board of
directors for each of the Consolidated Debtors and it shall
B-2
continue to act until all assets are liquidated, al] distributions
are made to Creditors pursuant to this Plan and a final decree
is entered closing each bankruptcy estate, whereupon all of its
powers and rights shall terminate and it shall be deemed
dissolved. Upon confirmation, all causes of action belonging to
any of the Consolidated Debtors shall vest and be brought in
the name of the Plan Committee, on behalf of the particular
Consolidated Debtor or Debtors in which the cause of action
had been previously vested ...
C-]
C. DISCLOSURE STATEMENT
* * *
V. ONGOING LIQUIDATION EFFORTS
One of the potential causes of action is a claim by BBC against
certain of its former officers . . . arising out of the alleged failure
of certain BBC officers ... to detect and take significant ac-
tion to prevent certain misconduct and fraud by Loughman Divi-
sion officers and employees at the Loughman Division of BBC.
The alleged misconduct of management of the Loughman Divi-
sion and the potential causes of action are set forth in the report
of the Court appointed Examiner David A. Warfield, who con-
ducted an in depth review of the allegations at BBC’s Loughman
Division.
In the event legal action is not instituted prior to the Con-
firmation Date, Proponents expect the Plan Committee to
employ special counsel to review the findings of the Examiner's
report in order to determine in greater detail the possible legal
actions available against certain officers of BBC ... , to further
investigate insurance coverage available under the D&O policy,
to assess and calculate any damages and to pursue any ap-
propriate legal action on behalf of BBC.
VII. THE PLAN OF LIQUIDATION
6. Reservation of Rights. The Plan Committee, by and through
the Agent, shall have the right to bring all actions and proceed-
ings belonging to the Consolidated Debtors or their Estates . . .
D-1
D. COMPLAINT IN THE PLAN COMMITTEE ACTION
IN THE CIRCUIT COURT OF THE COUNTY OF ST. LOUIS
STATE OF MISSOURI
RICHARD MILLER, as the Liquidation
and Distribution Agent on behalf of H.
BERNARD ENGEL; JAMES BURZYNSKI
as the representative of Jim & Slim’s Tool
Supply; and ARTHUR SHAFER, as the
representative of Morgan Drive-Away, Inc.,
acting in the name of the Plan Committee
for the Bankruptcy Estate of Bank
Building and Equipment Corporation of
America,
Plaintiffs,
Vv.
DOUG CLEMENTS,
Serve: 205 West Fourth
Waterloo, IL 62298
Monroe County, Illinois
CARL J. WEIS JR.,
Serve: 721 Twin Fawns Drive
St. Louis, MO 6313]
St. Louis County, Missouri
MYRON CARPENTER,
Serve: 843 Gardenway Drive
Ballwin, MO 63011
St. Louis County Missouri
Defendants.
?
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
)
Cause No.
Team/ Division
D-.2
PETITION
Plaintiffs, for the Petition against Defendants and each of
them, state as follows:
Parties
1. On or about April 30, 1990, Bank Building and Equipment
Corporation of America (“BBC”) filed for relief under Chapter
1] of the United States Bankruptcy Code. On July 22, 1991, the
First Amended Joint Plan of Liquidation of BBC (“Plan”) was
confirmed by the court. Pursuant to the Plan, all causes of action
belonging to the bankruptcy estate vest and shall be brought
in the name of the Plan Committee, which has sole responsibility
for implementing the Plan.
95. As President of Loughman, Clements had a fiduciary duty
to BBC to act in the best interests of BBC.
96. Clements instead used his position as an officer and
employee of BBC to further his own interests at the expense of
BBC, as aforesaid, thereby breaching his fiduciary duty .. .
98. ... Asa direct result of the contracts wrongfully accepted
by Clements, BBC lost in excess of $8,000,000.
99. Additionally, if Clements had not breached his duty to
BBC as alleged, BBC would not have been forced to liquidate
and would be an ongoing, profitable business. Clements
therefore also damaged BBC by denying it the profits it could
reasonably have been expected to earn, reasonably estimated
to be in excess of $15,000,000.
102. Weis, as Chief Executive Officer, and Carpenter, as Chief
Financial Officer, of BBC owed a duty to BBC to exercise the care
D-3
that an ordinarily careful and prudent person would use in man-
aging BBC and its subsidiaries and supervising their subordinates.
103. As more particularly alleged above, Weis and Carpenter
breached their duty of care to plaintiffs by negligently and care-
lessly failing to supervise Clements and the operations of Lough-
man, thereby permitting Clements to destroy Loughman — and
with it BBC ...
104. As a direct result of Weis’ and Carpenter's negligence,
as aforesaid, BBC lost in excess of $8,000,000. Moreover, as a
direct result of their negligence, BBC was unable to survive as
a profitable business which reasonably could have been expected
to earn profits in excess of $15,000,000.
This is a copy of a public record, reproduced as it was published. It is not legal advice, and it may not be the version a court would rely on. Check the official source before you cite it.