Argued: March 8, 2017
from the United States District Court for the Western
District of Michigan at Grand Rapids. No. 1:14-cv-01017-Janet
T. Neff, District Judge.
Sheldon L. Solow, KAYE SCHOLER LLP, Chicago, Illinois, for
Appellant in 16-1695.
S. Ahari, CLYDE & CO U.S. LLP, Washington, D.C., for
Sheldon L. Solow, Jason J. Ben, Elise A. Neveau, KAYE SCHOLER
LLP, Chicago, Illinois, for Appellant in 16-1695.
M. Woods, Dennis M. Barnes, Josh J. Moss, BARRIS, SOTT, DENN
& DRIKER, PLLC, Detroit, Michigan, for Appellants in
16-1697 and 16-1698.
S. Ahari, TROUTMAN SANDERS LLP, Tysons Corner, Virginia, M.
Addison Draper, TROUTMAN SANDERS LLP, Atlanta, Georgia, for
Before: DAUGHTREY, SUTTON, and DONALD, Circuit Judges.
SUTTON, Circuit Judge.
Bancorp went bankrupt. After negotiations between
Capitol's officers and the company's creditors during
the bankruptcy process, Capitol created a Liquidation Trust
to pursue the estate's legal claims. The Liquidation
Trustee sued Capitol's officers for $18.8 million,
alleging they breached their fiduciary duties to the company.
Indian Harbor Insurance filed this lawsuit in response,
seeking a declaratory judgment that the Trustee's lawsuit
falls within the "insured-versus-insured" exclusion
in Capitol's liability insurance policy. The district
court agreed that the policy does not cover the Trustee's
action, and so do we.
holding company incorporated in Michigan, Capitol Bancorp
owned community banks in seventeen States. Joseph Reid
founded Capitol and served as its chairman and chief
executive officer. His daughter Cristin Reid served as
president, her husband Brian English as general counsel.
financial crisis was not good for Capitol. Many of its banks
took large losses as customers stopped repaying their loans.
The last time the company earned a profit was in 2007, and it
accepted oversight by the Federal Reserve in 2009. In 2012,
Capitol and its subsidiary, Financial Commerce Corporation,
sought to shed some debts and to repay other creditors on
reduced terms-in short to reorganize-under Chapter 11 of the
Bankruptcy Code. With the bankruptcy filing, Capitol's
assets became the property of the bankruptcy estate, and
Capitol became the custodian of the estate, what Chapter 11
calls a "debtor in possession." 11 U.S.C. §
1101(1). Soon afterward, the United States Trustee appointed
a creditors' committee to represent the interests of
Capitol's unsecured creditors.
to reorganize did not last long. In 2013, Capitol decided to
liquidate the company and submitted three proposed
liquidation plans to the bankruptcy court, each with a
provision that released the company's executives from
liability. The creditors' committee objected to these
provisions and asked the bankruptcy court to grant the
Committee derivative standing to sue the Reids for breach of
their fiduciary duties to Capitol. The court denied the
creditors and the debtor in possession, still under the
direction of the Reids, returned to the negotiating table. In
2014, they agreed to a liquidation plan that required Capitol
to assign all of the company's causes of action to a
Liquidating Trust, which could pursue those claims on behalf
of creditors. The plan stipulated that the Reids had no
liability for any conduct after they filed the bankruptcy
petition, and limited any pre-petition liability to amounts
recovered from Capitol's liability insurance policy. The
liquidation plan also required the Reids to sue Indian
Harbor, the company's Delaware-based insurer, if it
denied coverage under the management liability policy.
took out a one-year management liability insurance policy
from Indian Harbor in September 2011, a year or so before it
filed the bankruptcy petition. The company twice extended the
policy after the bankruptcy proceedings began. Under the
insurance contract, Indian Harbor agreed to pay for any
"Loss resulting from a Claim first made against the
Insured Persons"-a group that included Capitol's
directors, officers, and employees-"during the Policy
Period . . . for a Wrongful Act." R. 34-3 at 4-5. But
the contract excluded from coverage "any claim made
against an Insured Person . . . by, on behalf of, or in the
name or right of, the Company or any Insured Person, "
except for derivative suits by independent shareholders and
employment claims. Id. at 7, 25.
liability insurance contracts contain such
insured-versus-insured exclusions. Not unlike a homeowners
insurance policy that excludes coverage for a fire that the
policyholder intentionally sets, these exclusions limit the
management-liability insurance to claims by outsiders,
prohibiting coverage for claims by people within the insured
company. A company thus cannot hope to push the costs of
mismanagement onto an insurance company just by suing (and
perhaps collusively settling with) past officers who made bad
business decisions. See Biltmore Assocs., LLC v. Twin
City Fire Ins. Co., 572 F.3d 663, 670 (9th Cir. 2009).
August 2014, the Liquidation Trustee, Clifford Zucker, sued
the Reids for $18.8 million, alleging they breached their
fiduciary duties to Capitol through a number of improper
actions. Cristin Reid resigned from the Trust's
three-member Oversight Committee soon ...