4th Cir.: Fluharty v. Philadelphia Indemnity- No Standingor Settlement Control for Trustee in D&O Policy Dispute

Summary:

In two intertwined bankruptcy cases—one corporate (Geostellar, Inc.) and one personal (David and Monica Levine)—the respective trustees sought a declaratory judgment that they, not David Levine, controlled the right to settle claims under a $3 million wasting D&O policy issued by Philadelphia Indemnity. Their aim: to access the policy proceeds as the only meaningful source of recovery for claims that would otherwise be discharged. But both the bankruptcy court and the district court found the trustees lacked standing

The Court of Appeals affirmed,  holding that  the Geostellar Trustee lacked standing because the policy did not provide first-party coverage to the debtor-corporation—only to individual directors and officers. And under West Virginia law, third-party plaintiffs cannot sue an insurer unless coverage is denied or a judgment is unpaid—neither of which applied.  

The Levine Trustee lacked standing because any personal liability of Levine had already been discharged. As such, the estate had no economic interest in the outcome of the adversary action or in the right to settle the claim.

Section 541(a)(1) did not help either trustee, because the proceeds of the D&O policy were not estate property. Courts have consistently held that when a policy offers only direct coverage to directors and officers (rather than indemnity to the debtor entity), the proceeds belong to the insured individual—not the estate.

Implications for Consumer Bankruptcy and Debtor Protections
While primarily a corporate insurance case, In re Levine carries several important implications for individual consumer debtors and Chapter 7 and 13 trustees:

Commentary:

North Carolina is even more restrictive on the rights of third-party plaintiffs  than West Virginia appears to be, which have led to involuntary bankruptcies being filed in order that a Trustee can assert this sort of claim against automobile insurers for the eventual benefit of third-party plaintiffs as creditors.  See In re Carter.

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