652 B.R. 34
Bankr. S.D.N.Y.2023Background
- Debtors: Celsius Network LLC filed Chapter 11; a D&O insurance policy (Coverage A/B/C) was issued to Celsius that prioritizes payment of covered Losses for Individual Insureds (Coverage A) before payments to the Company.
- Since mid-2022 directors, officers, and employees faced lawsuits, subpoenas, and governmental investigations; Individual Insureds sought advancement/payment of Defense Costs under the Policy.
- D&O Insurers moved for relief from the automatic stay to advance defense costs to Individual Insureds; the Policy contains an "Order of Payments" prioritizing Individual Insureds.
- Debtor and Official Committee filed limited objections seeking (i) quarterly reporting and court approval for settlements, (ii) insureds’ consent to the Bankruptcy Court’s jurisdiction (for policy purposes), and (iii) a pro rata allocation if claims exceed policy limits. D&O Insurers agreed to reporting and settlement-approval conditions and to limited jurisdictional consent but opposed pro rata allocation.
- Ruling: Court granted relief from the automatic stay to permit advancement/payment of Defense Costs, adopted reporting and limited jurisdictional-consent conditions, and denied the requested pro rata allocation; the Court did not decide whether policy proceeds are property of the estate.
Issues
| Issue | Plaintiff's Argument | Defendant's Argument | Held |
|---|---|---|---|
| Whether to lift the automatic stay to permit advancement of defense costs under the D&O policy | D&O Insurers: precedent permits lift where policy prioritizes individuals; individual defense needs and policy wording justify advancement | Debtor/Committee: proceeds may be estate property; request conditions to protect estate and creditors | Lifted: Court finds cause under §362(d)(1); prioritized-policy language and precedent support relief; Court did not decide estate-property status |
| Whether to impose reporting and court-approval-for-settlements requirements | Insurers: agreed to reasonable reporting and to seek court approval for settlements | Debtor/Committee: requested quarterly reporting and court approval to monitor depletion | Adopted: Court requires quarterly reporting (recipients, claims, amounts, counsel, remaining limits) and court approval before settlement payments |
| Whether Individual Insureds must submit to Court jurisdiction to receive proceeds | Insurers: oppose blanket submission but accept jurisdiction limited to the Policy | Debtor/Committee: require insureds to consent to jurisdiction to enable potential clawback | Adopted (limited): Court requires insureds to consent to Bankruptcy Court jurisdiction for purposes of the Policy only |
| Whether to order pro rata allocation of policy proceeds if requests exceed limits | D&O Insurers: Policy does not mandate pro rata; no precedent; arbitrary cutoff date; would harm insureds | Debtor/Committee: seek pro rata to prevent a few insureds from exhausting the policy ("run on the bank") | Denied: Court refuses to impose pro rata allocation—no basis in stay-relief context or policy terms; existing reporting and settlement oversight suffice |
Key Cases Cited
- In re MF Global Holdings Ltd., 469 B.R. 177 (Bankr. S.D.N.Y. 2012) (permitting stay relief to advance defense costs under D&O policies where policy prioritized individual insureds)
- In re Adelphia Commc’ns Corp., 285 B.R. 580 (Bankr. S.D.N.Y. 2002) (granting stay relief to permit insurer to advance defense costs)
- Downey Fin. Corp. v. Certain Underwriters at Lloyd’s, 428 B.R. 595 (Bankr. D. Del. 2010) (lifting stay to permit use of D&O proceeds for defense costs)
- In re SVB Financial Group, 650 B.R. 790 (Bankr. S.D.N.Y. 2023) (recent S.D.N.Y. decision granting similar stay relief and imposing reporting/jurisdictional conditions)
- Sonnax Indus., Inc. v. Tri Component Prods. Corp., 907 F.2d 1280 (2d Cir. 1990) (articulating multi-factor test for "cause" to lift the automatic stay)