Post-Confirmation Settlement Agreements: The Implications on Insurance Proceeds

During the course of a bankruptcy, the directors and officers may become the target of multiple lawsuits by various constituents, including creditors and shareholders seeking to tap into the D&O Policy proceeds. Indeed, in some cases, the D&O Policy may be the most substantial asset through which the creditors will achieve any recovery. If litigation is brought against the debtor's directors and officers, whether in bankruptcy court or otherwise, oftentimes the parties seek to settle their claims. Among the many issues faced by the insurers and insureds (including the company, as well as the directors and officers) are the structure of any such settlement, the resolution of competing interests under the D&O Policy, and the rights of the respective parties to the proceeds of the D&O Policy. Questions arise as to whether the terms of any settlement, which if funded from the proceeds of such D&O Policies, may ultimately be approved by the bankruptcy court. Given that most bankruptcy courts find that where the company is the named insured, a D&O Policy is property of a debtor's bankruptcy estate (under certain circumstances, the 'proceeds' of the policy may also be a part of the debtor's estate), any settlement of litigation seeking payment from the D&O Policy must be approved by the bankruptcy court in accordance with Rule 9019(a) of the Federal Rules of Bankruptcy Procedure.