A New York intermediate appellate court, applying New York law, has held that a shareholder class action complaint concerning the price of a merger and a bankruptcy adversary proceeding against an insured’s directors and officers concerning the same merger are separate claims. Am. Cas. Co. of Reading, Pa. v. Gelb, 2015 WL 3497863 (N.Y. App. Div. June 4, 2015). In so holding, the court rejected the insurer’s argument that the adversary proceeding brought by the insured’s creditors committee was precluded by the policy’s insured v. insured exclusion based on the argument that it was an “existing claim” related to the shareholder class action that was brought prior to an endorsement providing a bankruptcy coverage carve-back to the policy’s insured v. insured exclusion.

The insured company’s directors and officers were sued in a 2007 class action suit brought by a company shareholder seeking an injunction against an upcoming merger. The plaintiff alleged that the directors failed to get the best available price in connection with the transaction. In 2009, after the merger and after the company had filed for bankruptcy, a creditors committee received permission to pursue a course of action on behalf of the debtors’ estates, and a litigation trust was created to prosecute causes of action on behalf of the estate. The resulting adversary proceeding alleged that financing obtained by the directors to finance the merger overleveraged the company, forcing it into bankruptcy.

Following the exhaustion of the primary policy, the excess carriers filed coverage litigation seeking a declaration that the shareholder class action and the adversary proceeding arose from “interrelated wrongful acts,” and thus, coverage for the adversary proceeding was barred by the policy’s insured v. insured exclusion as it existed at the time the class action was filed. That version of the exclusion precluded claims brought by a creditors committee in a bankruptcy proceeding, so the insurers argued that coverage for the adversary proceeding accordingly was barred. The trial court disagreed, noting that, under the policy, “all Loss arising out of the same Wrongful Act and all Interrelated Wrongful Acts of Insured Persons shall be deemed one Loss     . . . .,” but that, while the two actions might be considered “one loss” for purposes of related claims under the interrelated wrongful acts provisions, they still remain separate “claims.” The trial court therefore held that the enhanced bankruptcy coverage carve-back in an endorsement to the policy added after the class action but prior to the filing of the adversary proceeding, which broadened the exception to the insured v. insured exclusion to include coverage for claims brought by a bankruptcy creditors committee, applied, restoring coverage for the defense costs for the adversary proceeding.

On appeal, the New York intermediate appellate court affirmed the trial court’s ruling. The court held that, “[t]he two proceedings, while arising from the merger, are wholly different, with different parties, different allegations, and different causes of action.” The court continued, stating that, “[i]n essence, the merger litigation was premised on the allegation that the price per share set by [the insured’s] directors and officers was too low, while the adversary proceeding is premised on the allegation that the price was in a sense too high, supported by unsustainable revenue projections and requiring excessive leverage by [the insured] to finance and consummate the transaction.” Because the adversary proceeding was commenced after the endorsement adding enhanced bankruptcy coverage was added to the policy, the court held that the insured v. insured exclusion did not apply to the adversary proceeding.