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The process of restructuring financially distressed
companies is complicated and fraught with challenges. Among the many
potentially complicating challenges that can arise is the possibility of claims
against the company's management. Because of the risks involved with these
kinds of claims, it is critically important that steps are taken to insure that
directors and officers are protected appropriately throughout and after the
The "best practices" for ensuring that directors and
officers are protected before, during and after a reorganization are reviewed
in an interesting March 14, 2012 memorandum from Shaunna
Jones and Jeffrey Clancy
of the Willkie Farr law firm entitled
"Reorganization and D&O: Not Always Business as Usual" (here).
The memo contains key observations and practical advice
regarding D&O insurance for companies involved in a financial
reorganization. I review the memo's key points below. However, it is important
to note at the outset that the specific requirements of any particular company
will be a reflection of the company's financial circumstances; the specific
reorganization process in which the company engages and how that process
unfolds; and the particulars of the D&O insurance program that the company
has in place at the time of its reorganization.
Because of these variables, there is no one single set of
insurance-related steps that will apply to every financial reorganization. In
order to determine the appropriate D&O insurance-related steps that any
particular financially distressed company should take, the company should
consult closely with its financial, legal and insurance advisors. That said,
however, there are certain considerations that should be taken into account
when these circumstances arise.
First, a company should determine whether the
reorganization process has triggered the "change in control" provisions of the
company's existing D&O insurance program, and if the process has or will
trigger those provisions, when the chance in control took place or will take
place. This question is relevant, because the existing D&O insurance program
will not provide coverage for any acts, errors or omissions that occur after
the change in control.
The typical D&O insurance policy will provide that a
change in control occurs when another person or entity acquires 50 percent or
more of the voting control or power to select a majority of the board of
directors of the insured company. Many policies also provide that that a change
in control is triggered upon the appointment of a receiver, liquidator or
trustee (although other policies do not have these trustee provisions, or the
provisions are deleted by endorsement).
Whether and when the provisions are triggered will depend
on the specific reorganization process in which the company has engaged. A
Section 11 bankruptcy filing may not trigger a change in control, particularly
where (as is often the case) no trustee has been appointed. The change in
control in a Chapter 11 bankruptcy may not take place until the reorganization
plan is implemented, on the plan's "effective date." The routine appointment of
a trustee in a Chapter 7 bankruptcy, by contrast, potentially could trigger the
change in control, depending on the applicable policy wording.
Regardless of the form of the reorganization and the
timing of the change in control, if there is to be a "going forward" business
following the reorganization, steps must be taken to protect the officers and
directors of the new entity, and to ensure that the "going forward" protection
dovetails with the insurance protection that is in place for the directors and
officers of the former entity or operation. To make sure that all of these
things are in place when and as they should be, without gaps in coverage,
several steps should be taken at the before and during the reorganization
The two critical insurance-related structures that
need to be addressed are the implementation of an appropriate "run-off" for the
directors and officers of the former entity and that "going forward" coverage
is available for the directors and officers of the new entity (if there is to
be one following the reorganization). The run-off coverage extends the period
within which claims arising in connection with pre-reorganization conduct may
be noticed. The "going forward" coverage is necessary to address claims
involving post-reorganization conduct.
One question that often arises is why directors and
offices need run-off coverage if the plan of reorganization involves a release
of claims that could be asserted by creditors. The fact is that
post-organization claims can and often do arise and they can be costly to
defend, even if the directors and officers have a defense based on the release.
There is also always the risk that the particular claim that arises may not be
precluded by the release.
A practical complication that often arises is that the
financial distress and/or the commencement of the restructuring process "may
complicate a company's ability to expend funds on D&O insurance." Also, a
potentially complicating factor that often arises is that the existing program may
expire before the date of the change in control, which could require the
company to go through a renewal transaction before the run off coverage is put
Many companies facing a renewal date during the
reorganization process will extend their existing program rather than acquiring
a renewal program. This approach may be less time-consuming and may actually be
more attractive to the insurer(s), who may not want to expose "fresh limits" to
a financially distressed company. There may be drawbacks to an extension,
particularly if the current program's limits are "impaired" by an existing
claim. The key is to ensure that the insurance protection remains in place
throughout the reorganization process.
It may be that the payment of the premiums for the
extension or renewal will require bankruptcy court approval. In some
situations, it may be possible to include within a restructuring support
agreement or plan support agreement a provision allowing for both the purchase
of both necessary extensions or renewals of the D&O insurance and for the
purchase of run-off coverage. Similarly, if the company is purchasing
debtor-in-possession financing, the company should take steps to ensure that
the costs associated with extensions and run-off purchases are including within
Provisions may be made for the post-reorganization entity
to indemnify the directors and officers of the former entity. This
indemnification may be structured in a variety of ways. The authors suggest
that the "best practice" is to confirm the indemnity arrangements with the
insurers, including adding the new entity as an insured under the run-off
policy to ensure coverage for the new entity's indemnification. The authors suggest
that it should be confirmed that notwithstanding the indemnification that no
retention would apply under the run-off policy and that the insured vs. insured
endorsement should be modified to insure coverage for claims by the new entity
against the directors and officers of the former entity. The authors
acknowledge that while all of these options may be available, they should be
considered and pursued.
The authors' memo is interesting and contains much sound
advice. Notwithstanding the authors' practical approach, the memo does
underscore how complicated the insurance issues can be for companies going
through financial reorganizations. The complications underscore how important
it is for companies planning a financial reorganization to coordinate with the
insurance advisors - as well as how important it is to have knowledgeable,
experienced financial advice before and during a financial reorganization.
One particular issue the authors do not address is the
way in which the "run-off" and "going forward" programs should be organized in
order to allow for the possibility of a claim that "straddles" the
past-acts/future acts dates of the two programs. It is important in protecting
against this possibility that the "other insurance" provisions of the policies
Although the memo contains many useful observations,
perhaps the most important is the authors' emphasis on the need for these
issues to be monitored and addressed before, during and after the
reorganization process. Advance planning can reduce the likelihood that
problems will arise, for example, in connection with payment for extensions and
run-off purchases. Reassessment may be required throughout the
reorganization process, particularly if the process unfolds differently than
was expected at the outset (if for example, the plan changes from a
reorganization to a liquidation).
I know that there is a lot more than can be said on these
topics and that there are additional issues involved beyond those discussed
above. I encourage readers to add their thoughts and comments on this topic,
using this blog's comment feature.
The Latest FDIC Failed Bank Lawsuit: On
March 16, 2012, the FDIC filed its latest failed bank lawsuit. In its complaint
filed in the Northern District of Georgia in its capacity as receiver of the
failed Omni Bank of Atlanta, the agency has sued ten of the bank's former
officers, seeking to recover over $24.5 million the bank allegedly sustained on
over two hundred loans on loans involving low income residential properties and
$12.6 million in wasteful expenditures on low income other real estate owned
properties. The complaint, which can be found here, asserts claims against
the defendants for negligence and for gross negligence.
As Scott Trubey reported in his March 16, 2012 Atlanta
Journal Constitution article about the suit (here),
since its failure, the bank has been the center of several criminal
investigations involving both banker and borrower misconduct. Jeffrey Levine, a
former bank executive vice president who was also named as a defendant in the
FDIC's lawsuit, is among those who have been hit with criminal charges.
The FDIC's latest lawsuit is the seventh that the agency
has filed so far involving a failed Georgia bank, the most of any state.
(Georgia has also had more bank failures than any other state). The latest suit
is the 27th that the agency has filed as part of the current wave of
bank failures and the ninth so far in 2012. It is interesting to note that the
agency filed this suit just short of the third anniversary of the bank's March 27, 2009
closure. As the current year progresses, the agency will be facing similar
anniversaries of bank closures, which coincides with the FDIC's three year
statute of limitations for bringing suit. Since the bank closure rate hit its
high water mark in 2009, we are likely to see increasing numbers of suits this
year. It already seems that the pace of lawsuit filing has picked up, as I
noted in a recent
Counsel Selected for Second Circuit Appeal of
Issues Surrounding the Settlement of the SEC's Enforcement Action Against Citigroup: As
I noted in a recent
post, the Second Circuit has stayed the SEC's enforcement action against
Citigroup, so that the appellate court can consider whether or not Southern
District of New York Judge Jed Rakoff erred in rejecting the parties settlement
of the case. One of the anomalous features of the case is that in connection
with the motions to stay and for interlocutory appeal, since both the SEC and
Citigroup had moved for the stay and for the appeal, the adversarial position
had not been represented. In its ruling staying the case and granted the motion
for appeal, the Second Circuit directed the Clerk of the district court to
appoint counsel so that the adverse position (that is, that Judge Rakoff had
not erred in rejecting the settlement) would be represented before the merits
The counsel to represent the adverse position has now
been selected - it will be John
"Rusty" Wing, of the Lankler, Siffert and Wohl law firm. As Susan Beck
notes in her March 16, 2012 Am Law Litigation Daily article about the
there are a variety of unusual aspects of this appointment. The first is that
it has been well over a decade since Wing argued before the Second Circuit. The
second is that Wing apparently was selected by Rakoff himsef, almost as if Wing
were to be representing Rakoff in person, rather than merely arguing in
support of his ruling rejecting the settlement. Wing is in fact a former
colleague of Rakoff's when the two served in the U.S. Attorney's office
together. The selection of Wing, and more particularly the process by which he
was selected, raise a number of interesting questions about who he is
representing and what his role will be. For example, should Wing be consulting
with Rakoff in preparing his appellate brief?
The selection of Wing represents just one more unexpected
and unusual twist in a case that has already had more than its fair share of
unexpected twists and turns. In any event, Wing will face an uphill
battle given the finding of the three-judge Second Circuit that granted the
stay that the SEC and Citigroup have demonstrated a "substantial likelihood" of
success on the merits.
Alison Frankel has an interesting March 16, 2012 post
about Wing's selection on Thomson Reuters News & Insight (here).
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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