In re Nanovation Technologies, Inc.

Decision Date27 July 2006
Docket NumberBankruptcy No. 01 B 26090.,Adversary No. 02 A 1680.
Citation347 B.R. 314
PartiesIn re NANOVATION TECHNOLOGIES, INC. and Nanovation Technologies of Michigan, Inc., Debtors. Barry Chatz, Chapter 7 Trustee of the Estates of Nanovation Technologies, Inc. and Nanovation Technologies of Michigan, Inc., Plaintiff, v. National Union Fire Insurance Co., et al., Defendants.
CourtU.S. Bankruptcy Court — Northern District of Illinois

Kathryn Gleason, Office of the U.S. Trustee, Chicago, IL.

Barry Chatz, Trustee, Thomas P. Yardley, Arnstein & Lehr, LLP, Chicago, IL, for trustee.

Diane M. Baron, Clausen Miller P.C., Chicago, IL, for National Union.

Michael P. Tone, Kimberly E. Blair, Ross, Dixon & Bell, LLP, Chicago, IL, for Twin City.

Janet R. Davis, Anne L. Blume, Meckler, Bulger & Tilson, Chicago, IL, for Federal.

Michael E. Geltner, Geltner & Associates, PC, Washington, DC, for James Davidson.

Michael D. Freeborn, Todd J. Ohlms, Freeborn & Peters, LLP, Chicago, IL, for Stephen Barney, Dr. Gary Bjorklund, Howard Gitten.

Michael O'Rourke, Brian M. Dougherty, O'Rourke, Katten & Moody, Chicago, IL, for Joseph Carr.

Therese King, Mayer, Brown, Rowe & Maw, Chicago, IL, for Daniel Dorman.

Garrett B. Johnson, Steven C. Seeger. Kirkland & Ellis, LLP, Chicago, IL, for David Grubb.


PAMELA S. HOLLIS, Bankruptcy Judge.

Nanovation Technologies, Inc., along with its affiliate Nanovation Technologies of Michigan, Inc. (collectively, "Nanovation"), was a high tech company founded in the mid-1990s with the goal of developing and marketing a photonic integrated circuit. Like so many of the companies working on cutting-edge technology products during the dot-com boom, Nanovation eventually closed its doors without ever turning a profit or even bringing in more than nominal revenues. Unlike many of those companies, however, Nanovation filed for relief under Chapter 11 of the Bankruptcy Code in the summer of 2001.

On November 20, 2001, Nanovation's bankruptcy case converted to Chapter 7, and Barry Chatz was appointed as the case trustee. Chatz sold Nanovation's equipment and intellectual property, and then on May 7, 2002, he filed an adversary complaint against certain of Nanovation's directors and officers (the "D & O Complaint"). Or, as one defendant characterized the Trustee's description of work in this case: "[first we sold all the equipment, then we sold the IP, and then the next step is we're going to go after the D & O insurance.1

The defendants in the D & O Complaint are former directors Stephen Barney, James Davidson, Joseph Carr, David Grubb and Daniel Dorman, former officers and directors George Robert Tatum (and a related limited partnership), Robert Chaney, John Kenning, Gary Bjorklund and Robert Bratter, former officers Seth Joseph (and two related limited partnerships) and Melba Chan, and former general counsel Howard Gitten. Davidson is also the third party plaintiff in an action against National Union, Federal and Twin City. His third party complaint was consolidated with this underlying adversary by order dated December 27, 2002.

Shortly after filing the D & O Complaint, Chatz filed another lawsuit, seeking declaratory judgment against the three insurance companies that had issued Nanovation's directors and officers liability policies: National Union Fire Insurance Company of Pittsburgh, PA, Federal Insurance Company and Twin City Fire and Insurance Company. The insurers had all denied coverage under the policies to the defendants in the D & O Complaint. In the declaratory judgment complaint, Chatz seeks a finding that the policies are assets of the bankruptcy estate and that coverage exists under the policies.

Six cross-motions for summary judgment were filed in that declaratory judgment complaint. The parties fully briefed the motions, and the court took them under advisement. For the reasons stated in this Memorandum Opinion, the motions for summary judgment brought by National Union, Federal and Twin City are granted, and those brought by the Trustee, by the Intervenor & — Plaintiffs (Barney, Bjorklund, Carr, Dorman, Grubb and Gitten) and by James Davidson are denied.


1. This adversary proceeding is a civil proceeding arising under the Bankruptcy Code or arising in or related to a case under the Bankruptcy Code within the meaning of 28 U.S.C. & sect; 1334(b).

2. This court has jurisdiction over this adversary proceeding pursuant to 28 U.S.C. & sect;§ 157 and 1334, and Internal Operating Procedure 15(a) of the U.S. District Court for the Northern District of Illinois because this action is related to Nanovation's underlying bankruptcy case.

3. This is a core proceeding under 28 U.S.C. & sect; 157. Venue of this adversary proceeding is proper in this court under 28 U.S.C. & sect; 1409(a).

The Insurance Policies

4. At the time of the acts alleged in the D & O Complaint, Nanovation had three separate directors and officers liability policies of insurance. Joint Statement of Undisputed Material Facts at & para; 25 ("JS"). The primary policy was issued by National Union with an original policy period of October 8, 2000 to October 8, 2001, and a limit of $5 million (the "Primary Policy"). JS at & para; 27. National Union is a subsidiary of American International Group, Inc. ("AIG"). Second Amended Complaint (Adv. No. 02-1680) and Answer of National Union at & para; 8.

5. Although Nanovation was a Delaware corporation, at the time the Primary Policy was issued its executive offices were located in Florida and its research facilities in Michigan. JS at & para; 29. By July 2001, Nanovation's principal offices had moved to Northville, Michigan. Ex. 25 at 35:4-6.

6. The Primary Policy was delivered to Nanovation's office in Florida. JS at & para; 29. Additionally, the Nanovation employee who negotiated the policies, Vice President of Finance and Treasurer John Ofenloch, did so at the company's Florida office. JS at & para; 37. Ofenloch worked with Marsh & McClennan in obtaining quotes for the D & O insurance and other types of insurance on Nanovation's assets. Ex. 25 at 9:13-16.

7. Pursuant to Endorsement # 14 to the Primary Policy, effective July 26, 2001, National Union extended the term of the Primary Policy six months so that the policy remained in effect from October 8, 2000 to April 8, 2002. Ex. 4 and JS at ¶ 30.

8. Federal issued a first layer excess policy to Nanovation, with effective dates from October 8, 2000 to October 8, 2001 (the "First Layer Excess Policy"). This policy provided $10 million in additional coverage. Twin City also issued a $10 million excess policy to Nanovation with effective dates from October 8, 2000 to October 8, 2001 (the "Second Layer Excess Policy"). JS at 31-34.

9. The First Layer Excess Policy and Second Layer Excess Policy are what are commonly known in the insurance industry as "following form" policies, which means that they followed and included the terms and conditions of the Primary Policy. JS at & para; 35. The excess policies provided that:

The Company shall provide the Insureds with insurance during the Policy Period in excess of the Underlying Insurance. Coverage hereunder shall attach only after such Underlying Insurance has been exhausted and shall then apply in conformance with the terms, conditions and endorsements of the Primary Policy, except as specifically set forth in any terms, conditions and endorsements of this policy.

JS at & para;¶ 41-42. Federal and Twin City delivered their policies to the same Florida address as did National Union. JS at & para; 36.

10. Ofenloch received quotes from Nanovation's insurance broker, Marsh, on extending all three policies, but the board of directors extended only the Primary Policy. "At the time, given the cash & — or cash situation at the time, we went with the policy we could afford." Ex. 25 at 41:16-18.

11. The Primary Policy is a claims-made policy & — in other words, it covers only claims made during the policy period rather than claims arising out of occurrences during the policy period. The coverage provided as follows:


This policy shall pay the Loss of each and every Director, Officer or Employee of the Company arising from a Claim first made against such Insureds during the Policy Period or the Discovery Period (if applicable) and reported to the Insurer pursuant to the terms of this policy for any actual or alleged Wrongful Act in their respective capacities as Directors, Officers or Employees of the Company except when and to the extent that the Company has indemnified such Insureds. The Insurer shall, in accordance with and subject to Clause 8, advance Defense Costs of such Claim prior to its final disposition.

JS at & para; 38.

12. If Nanovation became aware of any circumstances that might give rise to a claim, it could trigger coverage under a special "notice of circumstances" clause in the Primary Policy, even if no claim was made during the policy period:


(c) If during the Policy Period or during the Discovery Period (if applicable) the Company or the Insureds shall become aware of any circumstances which may reasonably be expected to give rise to a Claim being made against the Insureds and shall give written notice to the Insurer of the circumstances and the reasons for anticipating such a Claim, with full particulars as to dates, persons and entities involved, then any Claim which is subsequently made against the Insureds and reported to the Insurer alleging, arising out of, based on or attributable to such circumstances or alleging any Related Wrongful Act to such circumstances, shall be considered made at the time such notice of such circumstances was given.

JS at & para; 39.

13. Nanovation also had a...

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