1. David Brennan AIC CPCU Directors & Officers Liability Insurance and Bankruptcy Denver Southwest Chapter PLUS Conference April 16, 2009

2. D&O Insurance Policy Considerations in Bankruptcy Parties Involved Parties Involved Trustee Trustee Collect/Sell property of the Estate Collect/Sell property of the Estate Challenge pre-petition transfers Challenge pre-petition transfers Negate preferential transfers Negate preferential transfers Object to creditors’ claims Object to creditors’ claims Accept/Reject Executory Contracts Accept/Reject Executory Contracts Sue/Be Sued on behalf of Estate Sue/Be Sued on behalf of Estate Distribute Estate & pay expenses Distribute Estate & pay expenses Debtor-In-Possession (“DIP”) Debtor-In-Possession (“DIP”) Creditors’ Committee Creditors’ Committee Official committee of unsecured creditors appointed after a Chapter 11 case is commenced Official committee of unsecured creditors appointed after a Chapter 11 case is commenced Consults with the trustee or DIP concerning administration of bankruptcy proceeding Consults with the trustee or DIP concerning administration of bankruptcy proceeding Investigates the conduct and financial condition of the debtor Investigates the conduct and financial condition of the debtor Participates in formulating a plan of reorganization Participates in formulating a plan of reorganization

3. Claim Types-Allegations Recoveries sought for alleged wrongful activities pre-petition filing Recoveries sought for alleged wrongful activities pre-petition filing Transfers within 90 days of petition voidable Transfers within 90 days of petition voidable Fraudulent Transfers within 1 year of petition Fraudulent Transfers within 1 year of petition Allegations of Corporate Waste, Mismanagement, Breach of Fiduciary Duty Allegations of Corporate Waste, Mismanagement, Breach of Fiduciary Duty Goals of Trustee to Maximize Recoveries for Bankruptcy Estate Goals of Trustee to Maximize Recoveries for Bankruptcy Estate

4. Key Concepts Voidable Preferences Voidable Preferences Trustee has power to avoid “preferential” transfers Trustee has power to avoid “preferential” transfers Transfer benefits creditor Transfer benefits creditor Transfer for an antecedent debt Transfer for an antecedent debt Transfer while debtor insolvent Transfer while debtor insolvent Transfer within 90 days before petition Transfer within 90 days before petition Creditor to receive more than Chap. 7 liquidation amount Creditor to receive more than Chap. 7 liquidation amount Fraudulent Transfers Fraudulent Transfers Trustee has power to avoid fraudulent conveyances occurring within 1 year before bankruptcy Trustee has power to avoid fraudulent conveyances occurring within 1 year before bankruptcy Actual intent to hinder, delay or defraud; or Actual intent to hinder, delay or defraud; or Constructive fraud: transfer for less than reasonably equivalent value and Constructive fraud: transfer for less than reasonably equivalent value and Debtor insolvent or became insolvent due to transfer Debtor insolvent or became insolvent due to transfer Debtor left with unreasonably small capital Debtor left with unreasonably small capital Debtor incurred debt beyond ability to pay Debtor incurred debt beyond ability to pay

5. Liability Defenses for Individuals Waste, Mismanagement, Fiduciary Breach subject to defense of business judgment Waste, Mismanagement, Fiduciary Breach subject to defense of business judgment “Deepening Insolvency” theory discredited-directors are not the guarantors of success “Deepening Insolvency” theory discredited-directors are not the guarantors of success Trenwick v Ernst & Young, et al. 906 A.2d 168, 173 (Del. Ch. 2006 Trenwick v Ernst & Young, et al. 906 A.2d 168, 173 (Del. Ch. 2006 Fiduciary Breach duty of care, loyalty in many cases reduces to loyalty only as result of charter exculpation clauses. Fiduciary Breach duty of care, loyalty in many cases reduces to loyalty only as result of charter exculpation clauses. To prevail on loyalty claims, plaintiffs must demonstrate conflicting self-interest To prevail on loyalty claims, plaintiffs must demonstrate conflicting self-interest Fraud claims face significant proof hurdles on intent Fraud claims face significant proof hurdles on intent

6. Insurance Issues Policy Language Policy Language ABC Contracts-Non-applicability of B, C pursuant to Bankruptcy ABC Contracts-Non-applicability of B, C pursuant to Bankruptcy Side A and Excess contracts continue to follow form Side A and Excess contracts continue to follow form “Asset of the Estate” “Asset of the Estate” Policy ownership transferred to Trustee Policy ownership transferred to Trustee Deductible Deductible Typically inapplicable for Side A coverage Typically inapplicable for Side A coverage

7. D&O Policy Who is Insured? Insured Insured Former D&Os are insured, possibly other individuals Former D&Os are insured, possibly other individuals Creditor Committee Creditor Committee Not an insured, but close relationship with Trustee or future Trustee creates special issues relative to complaint drafting Not an insured, but close relationship with Trustee or future Trustee creates special issues relative to complaint drafting TrusteeAn Insured on Policy? TrusteeAn Insured on Policy?

8. Insured vs. Insured Exclusion Circumstance: Trustee sues directors and officers for breach of fiduciary duty Circumstance: Trustee sues directors and officers for breach of fiduciary duty Policy excludes coverage for claims brought by (or on behalf of) one insured against another insured Policy excludes coverage for claims brought by (or on behalf of) one insured against another insured Market responded with I v. I carve-outs Market responded with I v. I carve-outs Majority finds exclusion does not apply to trustee’s claim Majority finds exclusion does not apply to trustee’s claim

9. Insured vs. Insured Exclusion Exclusion does not apply: Exclusion does not apply: In re County Seat Stores, Inc., 280 B.R. 319 (Bankr. S.D.N.Y. 2002) In re County Seat Stores, Inc., 280 B.R. 319 (Bankr. S.D.N.Y. 2002) Alstrin v. St. Paul Mercury Ins. Co., 179 F.Supp.2d 376 (Del. 2002) Alstrin v. St. Paul Mercury Ins. Co., 179 F.Supp.2d 376 (Del. 2002) In re Buckeye Countrymark, Inc., 251 B.R. 835 (Bankr. S.D. Ohio 2000) In re Buckeye Countrymark, Inc., 251 B.R. 835 (Bankr. S.D. Ohio 2000) In re Pintlar Corp., 205 B.R. 945 (Bankr. Idaho 1997) aff’d Cigna Ins. Co. v. Gulf USA Corp., 1997 U.S. Dist. LEXIS 23816 (Idaho 1997) In re Pintlar Corp., 205 B.R. 945 (Bankr. Idaho 1997) aff’d Cigna Ins. Co. v. Gulf USA Corp., 1997 U.S. Dist. LEXIS 23816 (Idaho 1997) In re Molten Metal Technology, Inc., 271 B.R. 711 (Bankr. D. Mass. 2002) aff’d Gray v. Executive Risk Indemnity, Inc., 2002 WL 923936 (D. Mass. May 6, 2002) In re Molten Metal Technology, Inc., 271 B.R. 711 (Bankr. D. Mass. 2002) aff’d Gray v. Executive Risk Indemnity, Inc., 2002 WL 923936 (D. Mass. May 6, 2002) Exclusion applies: Reliance Co. of Illinois v. Weis, 148 B.R. (E.D. Mo. 1992) aff’d in part 5 F.3d 532 (8th Cir. 1993) cert. denied 510 U.S. 1117 (1994) National Union Fire Ins. Co. v. Olympia Holding Corp., Case No. 1:94-cv-2081-GET (9/18/95) aff’d without opinion National Union Fire Ins. Co. v. Olympia Holdings, 148 F.3d 1070 (table) (11th Cir. 1998)

10. Coverage Considerations Defense costs evaluation, allocation Defense costs evaluation, allocation Presence of loss allocation clauses, (including defense costs) Presence of loss allocation clauses, (including defense costs) Undertaking language Undertaking language Relief sought uninsurable as matter of law, public policy Relief sought uninsurable as matter of law, public policy Loss Definition does not include restitution, disgorgement Loss Definition does not include restitution, disgorgement Applicable Exclusions Applicable Exclusions Profit-Advantage Profit-Advantage Fraud, typically final adjudication Fraud, typically final adjudication Settlement Consent Clause Settlement Consent Clause

11. Questions & Discussion