Saddleback Valley Community Church v. El Toro Materials Company, Inc. 2007 U.S. App. LEXIS 22991 (October 1, 2007) Client Alert

In a decision that should provide comfort to landlords confronting insolvent tenants, the Ninth Circuit recently ruled that the Bankruptcy Code’s limitation on the amount of damages a landlord is entitled to recover upon termination of a lease does not limit the landlord’s right to recover damages which are not based upon the loss of future rental income.

The United States Supreme Court held that reckless violations of the Fair Credit Reporting Act (“FCRA”) constitute a willful failure to comply, subjecting violators to liability for actual damages, statutory penalties and potentially punitive damages. Safeco Ins. Co. of America v. Burr, 551 U.S. _____ (June 4, 2007).

The United States Bankruptcy Court for the Southern District of New York has granted another preliminary injunction ordering an excess directors and officers liability insurer to advance defense costs, despite the fact that the insurer had denied coverage on the basis of a prior knowledge exclusion and three of the insured entity's principals have pled guilty to various offenses, including violations of the securities laws. Murphy v. Allied World Assurance Co. (U.S.), Inc. (In re Refco, Inc.), No. 08-01133 (Bankr. S.D.N.Y. Apr. 21, 2008).

The New York Insurance Department, as Liquidator of Nassau Insurance Company, pursued Jeanne Diloreto for 20 years to recover what it contended were assets diverted from Nassau, recovering a judgment in state court that it attempt to execute upon. Superintendent DiNallo ended up filing an involuntary bankruptcy petition against Ms. Diloreto, which was dismissed, in part based upon procedural infirmities.

The Ninth Circuit held on July 3, 2008, that an oversecured creditor’s claim for payment was entitled to a “presumption in favor of the loan agreement’s default rate (an additional 2% interest), subject only to reduction based upon any equities involved.” General Elec. Capt’l Corp. v. Future Media Productions, Inc., 2008 WL2610459, *2 (9th Cir. 7/3/08). Reversing the lower courts, the Court of Appeals held that the bankruptcy court had improperly applied a questionable Ninth Circuit precedent when denying the lender a default rate of interest. Id., at *4.

The United States District Court for the Western District of Pennsylvania has held that an excess liability insurer had no standing to object to a Chapter 11 bankruptcy debtor's reorganization plan where the plan, although requiring contributions from the insurer's policyholder, was not contingent on the policyholder obtaining any funds or proceeds from its insurer. Hartford Accident and Indemnity Co., et al. v. North Am. Refractories Cos. et al., Civ. Action No. 07-1750, Bankr. Case No. 02-20198 (JFK) (W. D. Pa. Jul. 25, 2008).

Participants in the multibillion-dollar market for distressed claims and securities had ample reason to keep a watchful eye on developments in the bankruptcy courts during each of the last three years. Controversial rulings handed down in 2005 and 2006 by the bankruptcy court overseeing the chapter 11 cases of failed energy broker Enron Corporation and its affiliates had traders scrambling for cover due to the potential that acquired claims/debt could be equitably subordinated or even disallowed, based upon the seller’s misconduct.

A federal bankruptcy court, applying New York law, has dismissed an adversary proceeding brought by a bankrupt home mortgage company against its directors and officers liability insurers, holding that coverage for a pre-petition lawsuit against the mortgage company was barred by application of an “inadequate consideration” exclusion. Delta Fin. Corp. v. Westchester Surplus Lines Ins. Co., Case No. 07-11880 (CSS) (Jointly Administered) (Bankr. D. Del. Dec. 15, 2008). The court also held that the coverage dispute was a non-core proceeding.

Under the “American Rule” concerning the recovery of attorney’s fees in pursuing breach of contract litigation, the prevailing party is awarded fees if the contract or an applicable statute provides for such recovery. Some states also allow a judgment creditor to recover fees incurred in enforcing the judgment, if the judgment was based on a contract or statute that authorized fees in the original litigation. See, e.g., California Code of Civil Procedure § 685.040.

The Superior Court of Delaware recently held that a D&O insurer failed to timely respond to it insured’s reimbursement requests and must therefore provide reimbursement for prior legal defense costs and advance future defense costs within sixty days of receipt of invoices. HLTH Corp. v. Axis Reinsurance Co., et al., No. 07C-09-102, 2009 WL 756306 ( Del. Sup. Ct. Mar. 23, 2009).