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Indian Harbor Insurance Co. v. Zucker

United States Court of Appeals, Sixth Circuit

June 20, 2017

Indian Harbor Insurance Company, Plaintiff-Appellee,
v.
Clifford Zucker (16-1695), in his capacity as Liquidation Trustee for the Liquidation Trust of Capitol Bancorp Ltd. and Financial Commerce Corporation; Joseph Reid (16-1697); Cristin K. Reid and Brian K. English (16-1698), Defendants-Appellants.

          Argued: March 8, 2017

         Appeal 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.

         ARGUED:

          Sheldon L. Solow, KAYE SCHOLER LLP, Chicago, Illinois, for Appellant in 16-1695.

          Leslie S. Ahari, CLYDE & CO U.S. LLP, Washington, D.C., for Appellee.

         ON BRIEF:

          Sheldon L. Solow, Jason J. Ben, Elise A. Neveau, KAYE SCHOLER LLP, Chicago, Illinois, for Appellant in 16-1695.

          Sharon M. Woods, Dennis M. Barnes, Josh J. Moss, BARRIS, SOTT, DENN & DRIKER, PLLC, Detroit, Michigan, for Appellants in 16-1697 and 16-1698.

          Leslie S. Ahari, TROUTMAN SANDERS LLP, Tysons Corner, Virginia, M. Addison Draper, TROUTMAN SANDERS LLP, Atlanta, Georgia, for Appellee.

          Before: DAUGHTREY, SUTTON, and DONALD, Circuit Judges.

          OPINION

          SUTTON, Circuit Judge.

         Capitol 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.

         I.

         A 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.

         The 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.

         Efforts 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 motion.

         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.

         Capitol 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.

         Many 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).

         In 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 ...


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