In re Imperial Corp. of America
| Citation | 144 BR 115 |
| Decision Date | 18 August 1992 |
| Docket Number | Adv. P. 90-90369-A11.,Bankruptcy No. 90-01585-LM11 |
| Parties | In re IMPERIAL CORPORATION OF AMERICA, a Delaware corporation, Debtor. IMPERIAL CORPORATION OF AMERICA, a Delaware corporation, Plaintiff, v. MILBERG, WEISS, BERSHAD, SPECTHRIE & LERACH, etc., et al., Defendants. |
| Court | United States Bankruptcy Courts. Ninth Circuit. U.S. Bankruptcy Court — Southern District of California |
Patrick C. Shea, Sue J. Hodges, Lori Partrick, Pillsbury, Madison & Sutro, San Diego, Cal., for plaintiff, Imperial Corp. of America.
Ronald L. Leibow, Stroock, Stroock & Lavan, Michael H. Weiss, Weiss, Scolney & Spees, Los Angeles, Cal., for Ronald L. Durkin, trustee of The Benchmark Irrevocable Trust.
James P. Hill, Susan E.H. Ragsdale, Sullivan, Hill, Lewin & Markham, San Diego, Cal., for defendants Milberg, Weiss, Bershad, Spechthrie & Lerach; Greenfield & Chimicles; Barrack, Rodos & Bacine; Clemens, Glassman and Clemens; Berger & Montague, P.S.; Sirota & Sirota; Stull, Stull & Brody; Goodkind, Labaton & Rudoff; and Schiffrin & Craig, Ltd.
Defendants Milberg, Weiss, et al., bring a motion to dismiss or, in the alternative, for summary judgment in Imperial Corporation of America's ("ICA") complaint to avoid and recover preferential transfers pursuant to 11 U.S.C. §§ 547 and 550. At issue is whether a settlement of a securities class action and derivative suit for $13 million within 90 days of the filing of ICA's bankruptcy petition may be avoided. Of the total settlement fund, ICA contributed $503,835.61 directly from its funds; its insurer contributed the remaining $12.5 million plus interest. Having considered the pleadings, arguments of counsel and the cases cited by the parties, the Court adheres to the tentative ruling to grant the motion in part and deny it in part.
The class action lawsuit,1 was commenced in January 1989, in the United States District Court for the Southern District of California. The action sought recovery on behalf of all persons who purchased the common stock of ICA during the period of March 26, 1987 through July 7, 1989, and who sustained damages as a result of those purchases. The class action stated causes of action for violations of §§ 10(b), 14(a) and 20 of the Securities Exchange Act of 1934 and Rule 10b-5 and 14a-9, as well as for violations of California state law. The class action also asserted claims derivatively on behalf of ICA against certain of the officers and directors of ICA, as well as other parties for securities law violations, violations of the Racketeer Influenced and Corrupt Organizations Act ("RICO"), breach of fiduciary duty and waste of corporate assets. (Def.'s Mem. of P. & A. at 2-3.)
On December 8, 1989, the parties entered into a stipulation for settlement which was preliminarily approved by a magistrate judge on January 11, 1990. The settlement terms apportioned $10 million of damages to satisfaction of the class action claims for securities laws violations and $2.5 million to satisfaction of the derivative claims asserted by the class plaintiffs. Although the exact amount contributed by ICA appears to be in contention, American Casualty, ICA's insurer, transferred $12.5 million to a settlement fund created to pay the damages awarded.
On or about February 22, 1990, the magistrate judge entered an order awarding Milberg, Weiss et al., $3.9 million in fees and expenses of $411,333.67. The firm disbursed the fees and expenses to themselves and other counsel from the Settlement Fund on February 26, 1990. ICA's Chapter 11 petition was filed February 28, 1990. The remaining settlement funds were paid to class members sometime in July 1990. This complaint to recover the alleged preferential transfers was filed on August 1, 1990.
The complaint seeks to avoid transfers on two main theories:
1. That the $10 million paid to the class plaintiffs for securities laws violations and the $2.5 million paid them in satisfaction of the derivative claims is a voidable transfer; and,
2. That the $4,311,333.67, in attorneys' fees and costs paid to Milberg, Weiss and others is recoverable as a payment on an antecedent debt.
I. Is any part of the proceeds of the indemnity/liability insurance coverage of ICA property of the estate?
II. Is any part of the $4,311,333.67, paid to counsel for the class plaintiffs recoverable as a payment on an antecedent debt?
The directors' and officers' liability insurance policies provided direct coverage to ICA's officers and directors for liability arising out of their positions with the company:
(a) With the Directors and Officers of ICA that if, during the policy period, any claim or claims are made against the Directors and Officers, individually or collectively, for a Wrongful Act, the Insurer will pay in accordance with the terms of this policy, on behalf of the Directors and Officers or any of them, their heirs, legal representatives or assigns, all Loss which the Directors and Officers or any of them shall become legally obligated to pay.
The insurance policies further provided for indemnification coverage for ICA in the event it was obligated to pay losses on behalf of the directors or officers:
(b) With ICA that if, during the policy period, any claim or claims are made against the Directors and Officers, individually or collectively, for a Wrongful Act, the Insurer will pay, in accordance with the terms of this policy, on behalf of ICA all loss for which ICA is required to indemnify or for which ICA has to the extent permitted by law, indemnified the Directors and Officers.
The policy defines the term "Wrongful Act" as:
Any actual or alleged error, misstatement, misleading statement, act or omission, or neglect or breach of duty by the Directors or Officers in the discharge of their duties solely in their capacity as Directors or Officers of ICA, individually or collectively, or any matter claimed against them solely by reason of their being Directors or Officers of ICA. (Park Decl. Ex. A at 4.)
There is no controlling Ninth Circuit precedent directly addressing the question of whether the proceeds of a liability insurance policy covering officers of the debtor are property of the debtor's estate. Although plaintiff has cited In re Minoco Group of Cos., Ltd., 799 F.2d 517 (9th Cir.1986), in support of its position, that case does not directly apply to these facts. In Minoco, the question was whether the policies which the insurer was seeking to cancel were property of the debtor's estate. The policies in Minoco appear to have had virtually identical language to those under consideration in this case. The appeals court found that not only did the policies benefit the officers and directors, but also Minoco, ". . . because the policies insure Minoco against indemnity claims made by officers and directors." Minoco at 519. The court further found that were the policies canceled, Minoco would be required to indemnify present and former officers and directors for legal expenses arising out of their activities, thereby rendering reorganization difficult, if not impossible. Id. at 518. The Court of Appeals affirmed the bankruptcy court, adopting the reasoning of the Fourth Circuit in the A.H. Robins case that liability policies, ". . . meet the fundamental test of whether they are `property of the estate' because the debtor's estate is worth more with them than without them." Id. at 519; A.H. Robins Co. v. Piccinin, 788 F.2d 994 (4th Cir.1986).
While the Minoco logic is compelling as applied to ownership of the policy, the question of entitlement to the proceeds is not addressed by the case. In re Louisiana World Expo., Inc., 832 F.2d 1391 (5th Cir.1987). L.W.E. wrestled with the question of ownership of liability insurance proceeds where an official creditors' committee sought to stop the payment of proceeds of a directors' and officers' liability insurance policy to the debtor's officers and directors as reimbursement for their legal expenses. In arriving at its decision, the Court of Appeals was careful to define the issue:
The question is not who owns the policies, but who owns the liability proceeds. Although the answer to the first question quite often supplies the answer to the second, this is not always so. . . . At 1399.
The L.W.E. court went on to hold that the debtor had no ownership interest whatever in the proceeds of the liability coverage for the officers and directors. The obligation of the insurance company ran to the directors and officers and the proceeds would be payable only to them in the event they incurred covered legal expense or liability. The court distinguished its holding from the question of whether L.W.E. had a property interest in its indemnification coverage, as that was not an issue before the court.
However, in this case, the Court is not persuaded that the question of ownership of the indemnification proceeds should be resolved differently from the way in which the L.W.E. court determined ownership of liability proceeds. The indemnification coverage compensates ICA for losses arising out of its obligation to indemnify its officers and directors. The policy had an express exclusion:
IT IS UNDERSTOOD AND AGREED that the Insurer shall not be liable to make any payment for Loss as defined in Clause 1(d) hereof, which is based upon or attributable to any claim made against Director or Officer by any other Director or Officer or by the Institution. Defined in Clause 1(a) of the Policy (hereinafter called "Institution") except for a shareholder\'s derivative action brought by a shareholder of the Institution other than an insured. (See Park Decl., Ex. A at 18)
In other words, the policy expressly excluded any payment to the insured ICA for damages it may have suffered by reason of its directors' or officers' wrongdoing. The exclusion makes clear that ICA's coverage was limited to indemnification for sums it was forced to pay...
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