On May 22, 2023, the U.S. Bankruptcy Court for the Southern District of New York entered a memorandum opinion granting a motion by sixteen current and former directors for relief from the automatic stay to allow the payment of defense costs under certain directors and officers insurance policies.
The official committee of unsecured creditors objected, raising multiple concerns. Among other things, the committee argued that the proceeds of the so-called “ABC” policies are property of the estate. The committee was particularly concerned about “side C” coverage, the purpose of which is to protect the debtor entity itself. The committee also raised fears that unchecked payment of defense costs could drastically reduce the available proceeds, especially given that they are “wasting policies,” meaning that the available coverage diminishes with each payout.
This is amidst the context of several securities class actions that have been filed against the movants and the debtor, and additional similar lawsuits that are sure to follow. Also, there are ongoing regulatory investigations concerning the events leading up to Silicon Valley Bank’s collapse.
The movants countered that the estate would benefit from a robust defense by the insureds, asserting that without protection from the D&O policies, the directors’ attention might be diverted from the debtor’s operations.
As a backup position, the committee requested safeguards be put in place, and the movants agreed to provide quarterly reporting and to seek further relief before using policy proceeds to pay any settlement.
In the end, the court agreed with the movants that the balance of harms favored lifting the stay, stating that denying access to defense costs would cause imminent and significant harm, and that potential harm to the debtor was speculative. The court adopted the movants’ proposed requirements of reporting and settlement approval but declined to impose any cap.