Bankruptcy Court Limits Estate’s Reach: Trustee Cannot Claim D&O Insurance Proceeds for the Estate
The United States Bankruptcy Court for the Southern District of Texas, applying federal bankruptcy law, has held that proceeds of a management and entity liability policy were not property of the entity debtor’s bankruptcy estate. In re Mountain Express Oil Co., 2025 WL 3030303 (Bankr. S.D. Tex. Oct. 29, 2025). The court further held that the automatic stay did not apply to the policy’s proceeds and permitted the insurer to pay covered defense costs on behalf of the insured directors and officers.
The insured entity filed for Chapter 11 bankruptcy protection. The case was later converted to a Chapter 7 proceeding, and a trustee was appointed to oversee the debtor’s bankruptcy estate. The trustee asserted claims against certain of the debtor’s former directors and officers, alleging that those individuals breached their fiduciary duties to the debtor and that such breaches caused more than $250 million in damages. These individuals moved the bankruptcy court for relief from the automatic stay to allow payment of their defense costs under the debtor’s management and entity liability policy. The directors and officers argued that the automatic stay did not apply to the policy’s proceeds because the bankruptcy estate had no interest in those proceeds. The trustee objected to the motion, arguing that the policy and its proceeds both constituted property of the bankruptcy estate.
The court granted the directors’ and officers’ motion for relief from the automatic stay, overruling the trustee’s objections. Although the court agreed with the trustee that the policy itself was the property of the bankruptcy estate because the debtor was the only named insured, it concluded that the policy’s proceeds did not constitute estate property because no covered claims had been made against the debtor.
In reaching this conclusion, the court first analyzed whether the bankruptcy estate had an interest in the policy’s Side C coverage, which covered losses that the debtor itself became legally obliged to pay. Although the trustee had timely submitted a letter to the insurer describing specific wrongful acts allegedly committed by the entity’s directors and officers, the letter did not identify names of potential claimants or indicate whether any claims had been or would be asserted against the debtor itself. The court concluded that this letter did not provide sufficient notice of a claim against the debtor and that Side C coverage was therefore not triggered.
The court next analyzed whether the bankruptcy estate had an interest in the policy’s Side A coverage, which covered losses that insured individuals became legally obligated to pay. The court concluded that the estate had no interest in these proceeds because the plain language of the policy limited Side A coverage to the benefit of insured individuals, not the debtor. The court rejected the trustee’s argument that the estate had an interest in any proceeds from Side A coverage merely because allowing the directors and officers to obtain reimbursement for defense costs would reduce the policy limits available to the estate.
