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In re Community Memorial Hospital

United States District Court, E.D. Michigan, Southern Division

July 23, 2019

IN RE COMMUNITY MEMORIAL HOSPITAL, Debtor,
v.
NATIONAL UNION FIRE INSURANCE COMPANY OF PITTSBURG, PA, Defendant. CMH LIQUIDATING TRUST, Plaintiff, Adv. Proc. No. 14-2082

          HON. DANIEL S. OPPERMAN

         OPINION & ORDER (1) OVERRULING DEFENDANT NATIONAL UNION'S OBJECTIONS TO THE BANKRUPTCY COURT'S SECOND REPORT & RECOMMENDATION (Dkt. 11); (2) ADOPTING THE BANKRUPTCY COURT'S SECOND REPORT & RECOMMENDATION (Dkt. 18); AND (3) REMANDING THE CASE TO THE BANKRUPTCY COURT FOR FURTHER PROCEEDINGS

          MARK A. GOLDSMITH UNITED STATES DISTRICT JUDGE.

         This matter is before the Court on the second Report & Recommendation (“R&R”) of the Bankruptcy Court (Dkt. 18), which recommends finding that the insurance policy at issue is an executory contract as to which the Bankruptcy Code's prohibition against ipso facto provisions applies. Defendant National Union Fire Insurance Company of Pittsburgh, PA (“National Union”) filed objections to the R&R (Dkt. 11), to which Plaintiff CMH Liquidating Trust (the “Trust”) filed a response (Dkt. 12).[1] Because oral argument will not aid the decisional process, the objections to the R&R will be decided based on the parties' briefing. See E.D. Mich. LR 7.1(f)(2); Fed.R.Civ.P. 78(b). For the reasons set forth below, the objections are overruled, and the R&R is adopted.

         I. BACKGROUND

         Community Memorial Hospital (“CMH”) filed for bankruptcy on March 1, 2012. At the time, it had a directors and officers liability insurance policy (“D&O Policy”) from National Union, which ran from March 11, 2011 to March 11, 2012. See 2011-2012 Policy, Ex. A to Def. Obj. (Dkt. 11-2). After filing its petition, CMH renewed its D&O Policy, which ran from March 11, 2012 to March 11, 2013. See 2012-2013 Policy, Ex. I to Def. Obj. (Dkt. 11-10). The renewed policy was identical to the one that ran for the prior twelve-month period. CMH began to wind down operations on April 4, 2012. Following the wind-down decision, CMH requested that National Union add an endorsement to the renewed policy - known as tail or run-off coverage - to provide coverage for any claims made during the three-year period following April 4, 2012. See Run Off Policy Endorsement, Ex. N to Def. Obj. (Dkt. 11-15). National Union complied with that request and issued the tail coverage endorsement effective April 4, 2012. Id. The Trust, to which CMH's rights had been assigned, subsequently filed suit against former directors and officers of CMH in February 2014, asserting claims for breach of fiduciary duty and negligence. See Underlying Compl., Ex. O to Def. Obj. (Dkt. 11-16).

         The D&O Policy provided three types of coverage: (i) Type A coverage indemnified directors and officers for liability, provided they were not indemnified by CMH; (ii) Type B coverage indemnified CMH to the extent that it was duty-bound to reimburse or indemnify the directors and officers; and (iii) Type C coverage protected CMH in the event that it was sued directly for the wrongful acts of its directors and officers. Id.

         The D&O Policy included an endorsement - Endorsement 10 - stating that coverage was subject to a bankruptcy/insolvency/creditors exclusion:

[National Union] shall not be liable to make any payment for Loss in connection with any Claim made against any Insured:
(1) alleging, arising out of, based upon, attributable to, or in any way involving, directly or indirectly:
(i) any Wrongful Act which is alleged to have led to or caused, directly or indirectly, wholly or in part, the bankruptcy or insolvency of the Organization, or to the Organization filing a petition, or a petition being filed against the Organization, pursuant to the federal Bankruptcy Code or any similar state law, or the Organization assigning its assets for the benefits of its creditors; or
(ii) the Organization having sustained a financial loss due, directly or indirectly, wholly or in part, to a Wrongful Act of the Insured(s), but only if such Claim is made after the Organization has been determined to be insolvent, or has filed a petition for bankruptcy, or a petition has been filed against it, or the Organization has assigned its assets for the benefit of its creditors; or
(2) brought by or on the behalf of any creditor or debt-holder of the Organization, or arising out of any liability (whether alleged or actual) to pay or collect accounts, including but not limited to Claims alleging misrepresentation in connection with the extension of credit or purchase of a debt instrument, or Claims alleging any deterioration in the value of the debt as a result of (wholly or in part) the bankruptcy or insolvency of the Organization.

See id. at 70. The same endorsement was found in the 2012-2013 policy for which tail coverage ...


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