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Bankruptcy Court Lifts Automatic Stay to Permit Officers of Silicon Valley Bank to Access D&O Coverage
Posted in D&O Policies

On May 23, 2023, SDNY Bankruptcy Judge Martin Glenn issued an order in In re: SVB Financial Group, Case No. 23-10367(MG), lifting an automatic stay to permit Silicon Valley Bank’s D&O insurers to advance to defense costs to the bank’s officers in connection with litigation arising from the bank’s collapse.

A typical D&O policy offers coverage both to the corporation and to its officers and directors.  SVB D&O insurance program consists of 16 so-called “ABC Policies”, which provides three categories of coverage: (1) “Side A” coverage goes directly to directors and officers who are not indemnified by the bank; (2) “Side B” coverage reimburses the bank for indemnification payments to the directors and officers; and (3) “Side C” coverage applies to the bank’s own losses, arising from securities claims.  SVB also has five additional “Side A” only policies, providing additional coverage for individual officers and directors.  The ABC Policies are subject to aggregate limits that apply to all three coverages.  However, a “Priority of Payments” clause provides that “coverage under this Policy is principally intended to protect and benefit the Insured Persons (i.e., the individual officers and directors), and accordingly, claims for “Side A” coverage are to be made first.

Current and former SVB directors and officers moved to lift the automatic stay to permit SVB’s D&O insurers to advance their defense costs.  Counsel for the creditors’ committee objected to the motion, arguing that the D&O policies are property of the estate and should not be depleted.  In evaluating the motion, Judge Glenn provided a concise overview of the relevant legal principles, explaining: 

It is well-settled that a debtor’s liability insurance is considered property of the estate.  However, courts are in disagreement over whether the proceeds of a liability insurance policy are property of the estate.  Courts that have addressed whether the proceeds of a liability insurance policy are property of the estate are guided by the language and scope of the specific policies at issue.

When an insurance policy only provides direct coverage to a debtor, courts generally rule that the proceeds are property of the estate.  However, when an insurance policy provides exclusive coverage to directors and officers, courts have generally held that the proceeds are not property of the estate.

In cases whether liability insurance policies provide direct coverage to both directors and officers and debtors, courts have held that the proceeds will be property of the estate if depletion of the proceeds would have an adverse effect on the estate to the extent the policy actually protects the estate’s other assets from diminution.

If the Courts finds that an insurance policy or its proceeds are property of the estate the parties seeking access to the funds must establish “cause” to modify the automatic stay.  In evaluating whether cause exists, courts in the Second Circuit analyze, [various factors, including] . . . the lack of any connection with or interference with the bankruptcy case; [and] . . . the impact of the stay on the parties and the balance of harms. . . .

(Citations omitted).

The Court declined to decide whether the ABC Policies were part of the bankruptcy estate, finding that even if they are, there is cause to lift the stay. 

First, the Court held that granting the motion would not interfere with the bankruptcy case.  To the contrary, allowing SVB’s directors and officers to access D&O coverage would ultimately benefit the bankruptcy estate by facilitating the “vigorous defense” of the underlying litigation.  The Court rejected the argument of the creditors’ committee that lifting the stay risked depleting the “Side C” coverage that would otherwise be available to SVB, noting that under the Policies’ “Priority of Payments” provision the directors and officers claims would have to be paid first, in any event.

Second, the Court found that the balance of harms favors lifting the stay, as “the harm in denying Movants access [to the Policy proceeds] is imminent and significant since there are current lawsuit pending or which the Movants require access to defense funds.”  The harm to SVB was “merely speculative” as all claims against the bank were subject to the automatic stay.  The creditors’ committee protested that the directors and officers “are not blameless individuals merely seeking to defend against frivolous litigation,” but rather bore responsibility for the “mismanagement” that led “to the collapse of the Bank.”  However, the Court observed that “directors’ and officers’ insurance is ‘[i]n essence and at its core . . . a safeguard of officer and director interests and not a vehicle for corporate protection.  Ochs v. Lipson (In re First Central Financial Corp.), 238 B.R. 9, 16 (Bankr. E.D.N.Y. 1999).”  Thus, “[e]ven if it is true that Directors and Officers do have liability, that is precisely why such insurance exists,” and such insureds need not demonstrate that they are “‘blameless’ to access insurance that is specifically intended to cover their defense costs and liability in these situations.”  Finally, the fact that the policies are “wasting policies” (i.e., “a policy where any proceeds used for defense deplete the proceeds that can be used to settle judgment”) did not change the analysis, given the “Priority of Payments” provision, which mandates that the claims of directors/officers be paid first even if they deplete the coverage before any of the bank’s potential claims are paid.

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