Plano Texas Bankruptcy Lawyer & Attorney : Sean McCaffity : Rochelle Hutcheson & McCullough Law Firm : Insolvency, Creditors Rights

Kevin LaCroix over at The D&O Diary has a great post today about a recent decision out of California related to excess D&O insurance and the inability to oftentimes actually access those insurance monies to pay claims.  I would encourage you to go check it out.  While I am new to the blogosphere myself, I have been following Kevin's blog for some time now (I think since he started it) and it is one of the most thorough, well written and timely blogs out there on issues related to director and officer liability.  It is highly recommended reading.  Hopefully, this blog will someday achieve that kind of success. 

Kevin's blog post highlights a problem that I have recently run into with excess insurance carriers -- namely, their unwillingness to even discuss settlement or claims resolution until the primary carriers have fully paid out all monies under their policy.  I have even had an excess carrier request an invitation to a mediation, attend by telephone, drop off the phone and the settlement conference (apparently intentionally when it became clear the mid-level carrier may not exhaust to resolve the claim) and then later claim during extensive settlement negotiations that they were not invited to that mediation and it did not matter because the underlying insurance policies had not paid out all monies.  Thus, their argument was that their attendance was neither required or needed.  Perplexing behavior to say the least.  At the end of the day we were able to secure a settlement that involved the excess carrier, but only after extensive negotiations, threats of additional litigation and the ability to finally achieve a truly global resolution of the dispute.  Kevin's idea that global claims resolutions will likely be the only way to secure excess carriers' participation is, in my experience, spot on. 

The million dollar question, however, is how to get the excess carriers to even engage in a global discussion in the first place.  Many of the policies with strict exhaustion trigger language provide an easy out for excess carriers to simply refuse to play ball with the policyholder during settlement negotiations.  Questions of defense cost burn rate on the underlying policies, true damage exposure, absence of coverage defenses and reasonableness of the particular excess carrier involved will all have a drastic impact on whether the premiums paid for excess insurance have actual value at the end of the day.

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Check out www.bankruptcyvisuals.com for a nice visual roadmap of the bankruptcy process.  I know a lot of the bankruptcy lawyers out there either used or created something like this during law school for studying purposes in many of their classes.  Flow charts or roadmaps can often be invaluable for brainstorming new ideas, even if it is a path many already know.

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I thought it would be interesting to look back a year or so and see what some leading U.S. economists thought of the subprime mortgage crisis back in early 2007. 

According to CNN, in March 2007, Federal Reserve Chairman Ben Bernanke told Congress that problems in the subprime mortage sector may not affect the overall economy.  Remarkably, he apparently said "At this juncture ... the impact on the broader economy and financial markets of the problems in the subprime markets seems likely to be contained." 

What is going on one year later?  Oh, nothing much.  Only $260 billion in short-term loans from the Federal Reserve to banks since December 2007.  And don't forget about the continual decline in interest rates in the first calendar quarter of 2008, in large part, to ward off a recession caused by the purportedly "contained" subprime mortgage crisis. 

Think Bernanke wants a "do over" on his prediction last year?

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The BAPCPA added a provision allowing for direct appeal to the Circuit Court level from bankruptcy court.  28 U.S.C. 158(d)(2) provides that "the appropriate court of appeals shall have jurisdiction of appeals" if the "bankruptcy court, the district court, or the bankruptcy appellate panel involved" certifies that "(i) the judgment, order, or decree involves a question of law as to which there is no controlling decision of the court of appeals for the circuit or of the Supreme Court of the Unites States, or involves a matter of public importance; (ii) the judgment, order, or decree involves a question of law requiring resolution of conflicting decisions; or (iii) an immediate appeal from the judgment, order, or decree may materially advance the progress of the case or proceeding in which the appeal is taken; and if the court of appeals authorizes the direct appeal..."

Importantly, 28 U.S.C. 158(d)(2)(A) provides that "the appropriate court of appeals shall have jurisdiction of appeals described in the first sentence of subsection (a) if the bankruptcy court, the district court, or the bankruptcy appellate panel involved" go on to certify the appeal.  What does the critical "subsection (a)" referenced here say, you may ask? 

Well, it states that "the district courts of the United States shall have jurisdiction to hear appeals (1) from final judgments, orders and decrees; (2) from interlocutory orders and decrees [issued under 11 U.S.C. 1121(d)]; and (3) with leave of the court, from other interlocutory orders and decrees; and, with leave of the court, from interlocutory orders and decrees, of bankruptcy judges entered in cases and proceedings referred to the bankruptcy judges...An appeal under [subsection (3)] shall be taken only to the district court for the judicial district in which the bankruptcy judge is serving."

After looking at all these sections together, the question must be asked:  can the appropriate court of appeals authorize a direct appeal from an order certifying an interlocutory order for direct appeal under 28 U.S.C. 158(d)(2)?

The Fifth Circuit has recently requested briefing on the issue in a case currently slated for oral argument on March 31, 2008 -- In re OCA, Inc. (Orthodontic Centers of Texas, Inc. v. Douglas R. Crosby), Case No. 07-30430.  [Full Disclosure:  Our firm represents an amicus curiae in this appeal.  Specifically, we represent an orthodontist challenging the legality of the Appellants' management service contracts under Texas law and have filed an amicus brief elaborating on the contours of Texas law and the illegal corporate practice of dentistry.  We have not taken any position on the jurisdictional issue in the appeal.] 

The Appellants in the OCA appeal have argued that because Congress used the words "first sentence of subsection (a)" that Congress clearly intended for interlocutory appeals to be capable of certification for direct appeal because it did not limit the direct appeal certification procedure to subsection(a)(1) encompassing only final judgments, orders and decrees.  Instead, Congress used the broader language "first sentence of subsection (a)," which would necessarily include subsection (a)(1), (a)(2) and the first half of (a)(3).  The Appellants, therefore, argue that interlocutory appeals are encompassed in the direct appeal certification process set forth in 28 U.S.C. 158(d)(2).  Appellants principally rely on Ransom v. MBNA America Bank, 380 B.R. 809 (B.A.P. 9th Cir. 2007).  Appellants also argue that the legislative history of BAPCPA provides evidence that interlocutory orders were intended to be included in the direct appeal process.  See Weber v. United States Trustee, 484 F.3d 154 (2d Cir. 2007).

The Appellants do not address how 28 U.S.C. 158(d)(2) interplays with the second sentence of 28 U.S.C. 158(a) or if such an interplay even exists.  The second sentence provides "An appeal under [28 U.S.C. 158(a)(3)] shall be taken only to the district court for the judicial district in which the bankruptcy judge is serving."  If an interlocutory order of a bankruptcy judge is appealed, with proper leave of court, then an appeal is "taken only to the district court."  Could it be that the second sentence of 28 U.S.C. 158(a) necessarily self-limits the scope of 28 U.S.C. 158(a) for purposes of determining what orders are directly appealable to the appropriate court of appeals?  In other words, is 28 U.S.C. 158(d)(2) only concerned with direct appeals of final judgments, orders or decrees and interlocutory orders under 11 U.S.C. 1121(d) because any other interlocutory appeal under 28 U.S.C. 158 must be "taken only to the district court?" 

It will be interesting to see how the Fifth Circuit comes down on this issue or if they will even address it, although it appears that the Fifth Circuit is keenly aware of the issue and the need for some clarity in this area.  Check back for status updates.

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