We’ve all seen it. The business opportunity looks enticing but is laced with risk about a potential bankruptcy filing down the road. As bankruptcy lawyers we are often asked how deals can be structured to prevent a potential bankruptcy filing.

The memorandum has been prepared on the basis of the law and practice in Guernsey as at 1 April 2010.

Introduction  

The United States District Court for the Southern District of Ohio, applying Ohio law, has held that a dishonesty exclusion barred coverage under primary and excess directors and officers (D&O) policies for the Wrongful Acts of the principals of a bankrupt company, all of whom were criminally convicted of securities fraud and related crimes.  The Unencumbered Assets Trust v. Great American Insurance Co., et. al., 2011 WL 4348128 (S.D. Ohio Sept.

The United States District Court for the Southern District of New York has affirmed a bankruptcy court's ruling that defense costs advanced by an insurer to a debtor under an Interim Fee Advancement and Non-Waiver Agreement (the Interim Agreement) were not held in trust and, therefore, constituted property of the debtor's estate. Great Am. Ins. Co. v. Bally Total Fitness Holding Corp. (In re Bally Total Fitness of Greater N.Y.), No. 09-CV-4052, 2009 WL 1684022 (S.D.N.Y. June 15, 2009).

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.

The United States District Court for the Western District of Pennsylvania dismissed an appeal of an order in Federal Insurance Co. v. Le-Nature's, Inc., 380 B.R. 747 (Bankr. W.D. Pa. 2008), in which the bankruptcy court granted the insurer's motion to compel discovery and ruled that the defendant waived all of his discovery objections, including objections based upon the Fifth Amendment's protection against self-incrimination, for failing timely to assert them. Federal Ins. Co. v. Le-Nature's, Inc., Civil Action No. 08-269 (W.D. Pa. July 25, 2008).

The United States Bankruptcy Court for the Western District of Pennsylvania has ruled that a defendant in a declaratory judgment coverage action waived all of his discovery objections, including objections based upon the Fifth Amendment, for failing timely to assert them. Federal Ins. Co. v. Le-Nature's, Inc., 380 B.R. 747 (Bankr. W.D. Pa. 2008). Wiley Rein LLP represented the insurer.

While investors and lenders brace for the next wave of chapter 11 filings, those who are parties to intercreditor agreements need to take stock on how their relationship with their fellow creditors and the borrower may be impacted by a bankruptcy filing by the borrower. If the borrower is in financial extremes, the primary lender who is secured by all the business assets may be unwilling or unable to extend additional credit to the troubled borrower.

BUSSON-SOKOLIK v. MILWAUKEE SCHOOL OF ENGINEERING (February 10, 2011)

German legislator finally introduces tax exemption for income resulting from debt waivers in restructuring scenarios with retroactive effect.