Why it matters

In an important victory for directors and officers of a bankrupt company, a New York court removed a cap that had previously limited the amount of insurance proceeds directors and officers could access to fund their defenses. After exhausting the cap in the defense of claims, the insured directors and officers asked the court to increase available policy proceeds. Over the bankruptcy administrator’s objections, the court allowed the insured directors and officers almost unlimited access to the policy proceeds. The court reasoned that the D&O policies contained direct “Side A” coverage, which generally protects individual directors and officers from having to use their own resources to pay the costs of any claims for which they are not indemnified by the company. Because of the Side A coverage and the advanced stage of the bankruptcy proceedings, the court ruled that MF Global had no property interest in the D&O insurance proceeds and, therefore, it was no longer part of the estate. The court ruled that it could no longer regulate how the insurance was used.

Detailed Discussion

In October 2011, MF Global filed for bankruptcy protection in New York federal court. In quick succession, the officers and directors of MF Global were named as defendants in several lawsuits.

The insured D&Os sought bankruptcy court approval to access the proceeds of MF Global’s D&O policies to pay defense costs in an array of lawsuits filed against them by, among others, securities holders, commodity customers and other plaintiffs.

The court had previously lifted the automatic stay of Section 362(a) of the Bankruptcy Code to allow the insured D&Os access to the insurance, but had set a cap on draws of $30 million. The insureds succeeded in having this “cap” raised to cover $43.8 million in defense costs.

For the third time, the insureds asked the court for more money. The insureds argued that the court no longer had the right to limit access to the policies because they were not property of the bankrupt company. The court agreed, stating the D&O insurance policies in question provided direct Side A coverage which afforded protection against individual directors and officers having to use their own resources to pay the costs of any claims for which they are not indemnified by the company.

The court noted that under such provisions, as well as the current procedural posture of the case, MF Global had no property interest in the D&O insurance proceeds and therefore it was not proper for the bankruptcy court to make determinations about their disposition.

The court, however, did hold back about $13 million to cover the estimated maximum amount of indemnification claims the executives filed against the bankrupt company – otherwise granting the insureds access to most of the $200 million in D&O policy proceeds.

To read the order in In re MF Global Holdings Ltd., click here.