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Directors and officers (D&O) insurance was at the forefront of two recent high-profile bankruptcy court decisions. Those diverging decisions highlight the importance of carefully crafted language in D&O policies.

Emanating from FTX’s collapse and resulting bankruptcy, founder Sam Bankman-Fried sought to lift an automatic stay imposed by 11 USC §362 to help fund his defense costs in connection with various proceedings. He sought a “comfort order” seeking to utilize the D&O policy proceeds, arguing that the automatic stay in bankruptcy does not prevent him from accessing policy proceeds for payment of his defense costs and that, even if it did, the stay should be lifted because he would suffer substantial and potentially irreparable harm without access to FTX's D&O policies. FTX and its creditors opposed the motion on various grounds. Despite the policy containing a) a priority of payment provision and b) a bankruptcy waiver provision, the court – in an infrequently observed decision - denied Bankman-Fried’s motion without prejudice.1

Conversely, in another high-profile bankruptcy, Silicon Valley Bank’s (SVB) bankruptcy proceeding also resulted in a D&O insurance decision. Recently, the bankruptcy court issued an order permitting D&O’s of SVB to tap into their $210 million D&O insurance tower. The decision was issued over objections of SVB’s unsecured creditors committee. The court found that cause existed to lift the stay under 11 USC § 362(d) to allow D&Os to access proceeds of D&O policies to fund their defenses in covered actions. Further, the court found that the D&Os were entitled to rely upon the priority of payment provision in the policy to fund their defense.2

These two cases highlight 1) the issues that can arise when insureds try to access policies during bankruptcy; and 2) the importance of ensuring the bankruptcy provisions in a D&O policy are properly crafted to best address an uncertain litigation environment.

1 In re: FTX Trading Ltd., et al., 22-11068-JTD (Bankr. DE; April 17, 2023)
2 In re SVB Fin. Grp., 2023 Bankr. LEXIS 1339 (Bankr. SDNY 2023)

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