Yessenow v. Executive Risk Indem. Inc.

• Decision Date: 30 June 2011
• Docket Number: No. 1–10–2920.,1–10–2920.
• Citation: 352 Ill.Dec. 194,2011 IL App (1st) 102920,953 N.E.2d 433
• Parties: Jeffrey YESSENOW and Vijay Patel, Plaintiffs–Appellees,v.EXECUTIVE RISK INDEMNITY, INC., Defendant–Appellant.
• Court: United States Appellate Court of Illinois

2011 IL App (1st) 102920

953 N.E.2d 433

352 Ill.Dec. 194

Jeffrey YESSENOW and Vijay Patel, Plaintiffs–Appellees,

v.EXECUTIVE RISK INDEMNITY, INC., Defendant–Appellant.

No. 1–10–2920.

Appellate Court of Illinois, First District, Third Division.

June 30, 2011.

Meckler, Bulger, Tilson, Marick & Pearson LLP, Chicago (James H. Kallianis, Jr., Gary L. Gassman, of counsel), for appellant.Patterson Law Firm, LLC, Chicago (Thomas E. Patterson, Kristi L. Browne, Joseph W. Barber, Christine Rosso, of counsel), for appellees.

OPINION

Presiding Justice QUINN delivered the judgment of the court, with opinion.

¶ 1 Defendant, Executive Risk Indemnity, Inc. (Executive), appeals from an order of the circuit court of Cook County granting partial summary judgment in favor of plaintiffs, Jeffrey Yessenow and Vijay Patel, former directors of two bankrupt Indiana entities, holding that, pursuant to a directors and officers liability policy, Executive must defend plaintiffs in an underlying lawsuit filed by the bankruptcy trustee. On appeal, Executive contends that the trial court erred in finding (1) that the policy's bankruptcy exclusion was unenforceable; and (2) that the policy's “insured versus insured” exclusion was ambiguous and must be resolved in favor of the insured. For the reasons set forth below, we affirm.

¶ 2 I. BACKGROUND

¶ 3 Plaintiffs are physicians and former directors and officers of iHealthcare, Inc. (iHealthcare), and Illiana Surgery and Medical Center, LLC (Illiana). Illiana was organized as an Indiana limited liability company in February 1999 and renamed Heartland Memorial Hospital, LLC (Heartland), in May 2006. Heartland operated several for-profit, physician-owned, healthcare practices in Indiana and Illinois. iHealthcare is an Indiana corporation formed in June 2002 and was the sole owner of the equity of Heartland, which was managed by a committee of iHealthcare's board of directors. In October 2005, Executive issued to plaintiffs, as directors of iHealthcare, a “Diversified Healthcare Organization Directors and Officers Liability Insurance Policy” (D & O policy), which covered the period of October 2, 2005 to October 2, 2006 with a runoff endorsement extending the reporting period to October 2, 2007.

¶ 4 In January 2007, Heartland was brought into involuntary bankruptcy by its creditors. In March 2007, iHealthcare petitioned for chapter 11 (11 U.S.C. § 101 et seq. (2006)) relief, and in April 2007, the cases were consolidated. In February 2009, the court-appointed trustee for Heartland, David Abrams, filed two lawsuits in the hospital's bankruptcy proceeding against plaintiffs and several other former directors of iHealthcare. Three additional lawsuits were filed against plaintiffs, one by iHealthcare in its bankruptcy proceeding alleging mismanagement and self-dealing and two by other former directors of iHealthcare. Plaintiffs submitted timely notice of each of the five lawsuits to Executive seeking coverage under the D & O policy. In April 2009, Executive notified plaintiffs that it was denying coverage. In September 2009, Abrams filed an amended complaint and plaintiffs again demanded coverage from Executive. Over the next several months, plaintiffs received no response from Executive to several e-mail requests, and in January 2010, they filed a complaint naming Executive and the trustee, Abrams, as defendants, and seeking a declaration that the D & O policy provides coverage for the five underlying actions filed against them.

¶ 5 On March 11, 2010, plaintiffs filed a motion for partial summary judgment seeking a declaration that the D & O policy requires Executive to provide a defense in one of the underlying actions filed by the trustee in the Heartland bankruptcy, Abrams I, which alleged that plaintiffs mismanaged the corporation and breached their fiduciary duties. Executive filed a cross-motion for summary judgment seeking a finding that the D & O policy did not afford coverage for the Abrams I action, as well as the other four underlying actions on the grounds that coverage was precluded by two exclusions in the policy, the “insured versus insured exclusion” and the “bankruptcy exclusion.”

¶ 6 The policy's insured versus insured exclusion provides as follows:

“This policy does not apply to:

* * *

(E) any Claim by or on behalf of, or in the name or right of, the Company or any Insured Person,¹ except that this EXCLUSION (E) will not apply to:

(1) any derivative action by a security holder of the Company on behalf of, or in the name or right of, the Company, if such action is brought and maintained independently of, and without the solicitation of, the Company or any Insured Person.

(2) any Claim in the form of a crossclaim, third party claim or other claim for contribution or indemnity by an Insured Person which is part of or results directly from a Claim which is not otherwise excluded by the terms of this Policy; or

(3) any Claim for an Employment Practices Wrongful Act.”

¶ 7 Before the trial court, Executive asserted that Abrams, as bankruptcy trustee and manager of Heartland, is an “insured” for purposes of the D & O policy, and that iHealthcare is the company itself and, therefore, also an insured. As a result, Executive argued, coverage is precluded under the insured versus insured exclusion. Plaintiffs contended that Abrams is not a normal director or manager because as trustee, he has formed a separate entity that is acting on behalf of Heartland's creditors, subject to the supervision of the bankruptcy court and not on behalf of Heartland itself.

¶ 8 The trial court, citing Biltmore Associates, LLC v. Twin City Fire Insurance Co., 572 F.3d 663 (9th Cir.2009), found that the issue of whether a trustee or debtor in possession is an insured for the purposes of an insured versus insured exclusion is unsettled law and that “ambiguities and doubts in insurance policies are resolved in favor of the insured, especially those that appear in exclusionary clauses.” Outboard Marine Corp. v. Liberty Mutual Insurance Co., 154 Ill.2d 90, 121, 180 Ill.Dec. 691, 607 N.E.2d 1204 (1992). The court found that Executive could have sidestepped any ambiguity by including trustees and debtors-in-possession in either the definition of the “insured” or the language of the insured versus insured exclusion. Because it did not write with such specificity, the court interpreted the policy in favor of the insured and held that neither Abrams nor iHealthcare is an insured under the policy and that the insured versus insured exclusion does not preclude coverage.

¶ 9 The D & O policy's bankruptcy exclusion states:

“(1) In the event that a bankruptcy or equivalent proceeding is commenced by or against the Company, no coverage will be available under the Policy for any Claim brought by or on behalf of:

(a) the bankruptcy estate or the Company in its capacity as a Debtor in Possession; or

(b) any trustee, examiner, receiver, liquidator, rehabilitator, conservator, or similar official appointed to take control of, supervise, manage or liquidate the Company, or any assignee of any such official (including, but not limited to, any committee or creditors or committee of equity security holders).

(2) For the purposes of this endorsement, the term Debtor in Possession means a debtor under Chapter 11 of the United States Bankruptcy Code unless a person that has qualified under Section 322 of Title 11 of the U.S.Code is serving as trustee of such debtor.”

¶ 10 In their motion before the trial court, plaintiffs argued that the exclusion was unenforceable because it violates section 541(c) and section 365(e)(1) of the Bankruptcy Code (Code). 11 U.S.C. § 541(c), 365(e)(1) (2006). The trial court agreed with plaintiffs' first contention, noting that section 541(c)(1)(B) of the Code states in pertinent part that a debtor's property—in this case the D & O policy—“becomes property of the [bankruptcy] estate * * * notwithstanding any provision in an agreement * * * that is conditioned on the insolvency or financial condition of the debtor [or] on the commencement of a case under this title * * * and that effects * * * a forfeiture, modification, or termination of the debtor's interest in property.” 11 U.S.C. § 541(c)(1)(B). The court acknowledged that under the plain language of the exclusion, coverage was barred for the Abrams I action but found that it was unenforceable under section 541(c) of the Code because its “sole purpose is to forfeit, modify or terminate iHealthcare's D & O policy by rendering the policy useless.” The court rejected Executive's argument that section 541(c) is not applicable because it only protects the rights of debtors and that plaintiffs are not debtors as defined in the Code, finding that coverage arises from the debtor companies' property interest in the policy and that interest is protected by section 541(c).²

¶ 11 Therefore, based on its findings that neither the bankruptcy exclusion nor the insured versus insured exclusion precluded coverage, the trial court granted plaintiff's motion for partial summary judgment and found that Executive is obligated under the D & O policy to defend the plaintiffs in the Abrams I action.³ The trial court entered a final and appealable order to that effect on September 3, 2010, and Executive filed a timely notice of appeal on October 1, 2010.

¶ 12 II. ANALYSIS

¶ 13 Summary judgment is proper where the pleadings, depositions, and admissions on file reveal that there is no genuine issue as to any material fact and that the moving party is entitled to judgment as a matter of law. 735 ILCS 5/2–1005(c) (West 2008). Where cross-motions for summary judgment are filed in an insurance coverage case, the parties acknowledge that no material questions of fact exist and only the issue of law regarding the construction of an insurance policy is present. American Family Mutual Insurance Co. v. Fisher Development, Inc., 391 Ill.App.3d 521, 525, 330 Ill.Dec....