The recent downturn in the financial sector and related bankruptcy filings have shed light on issues involving executive compensation, particularly in chapter 11 cases. Specifically, bankrupt companies often have paid substantial bonuses to executives prior to filing for bankruptcy protection and desire to retain those executives throughout the bankruptcy process through additional bonus payments and similar schemes. These types of payments have been criticized as giveaways to management.

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.

A federal district court in Illinois has held that a policyholder failed to provide sufficient notice of circumstances that could potentially give rise to a claim to trigger coverage under a D&O policy where the policyholder informed the insurers that it was "contemplating" filing for bankruptcy and expected claims to be filed against its directors and officers. Chatz v. Nat'l Union Fire Ins. Co. of Pittsburgh, PA, 2007 WL 1119282 (N.D. Ill. Apr. 12, 2007).

Following recall notices for its ignition switches in February 2014, General Motors, LLC (“New GM”) has been hit with at least 50 class actions and two individual suits in not less than 20 federal and two state courts asserting claims against New GM for defective vehicles and parts sold by Motors Liquidation Company, formerly known as General Motors Corporation (“Old GM”).

The United States District Court for the Middle District of Pennsylvania has held that an E&O policy issued to a now-bankrupt credit counseling company did not cover claims arising under unfair trade practices statutes, but did cover claims arising under fair debt collection statutes. Hrobuchak v. Fed. Ins. Co., 2013 WL 2291875 (M.D. Pa. May 24, 2013). The court also held that carve-outs from the policy’s definition of loss did not preclude coverage for statutory damages or damages representing the return of fees paid to the insured.

On May 24, 2012, the United States District Court for the Southern District of New York (District Court) issued an opinion with significant ramifications for law firms seeking to hire former partners from bankrupt law firms. At issue was whether, under New York partnership law, the law firms that hired former partners of Coudert Brothers LLP (Coudert), a dissolved and bankrupt law partnership, must account for profits that the former Coudert partners earned while completing work on open client matters they took with them from Coudert.

An Illinois appellate court, applying Indiana and federal law, has held that neither a bankruptcy exclusion nor an insured versus insured exclusion applied to bar coverage for claims brought by a bankruptcy trustee.  Yessenow v. Exec. Risk Indem., Inc., 2011 WL 2623307 (Ill. App. Ct. June 30, 2011).

In addition to the cases discussed in "Considerations in Terminating an Insolvent Franchisee" in the June 24, 2010, Franchise Alert (available at www.wileyrein.com/insolvent_franchisee), two recently reported decisions have looked at franchisor attempts to gain relief from bankruptcy stays in order to enforce post-termination provisions.

United States Supreme Court

Washington, D.C.

November 3, 2009

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).