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MEGLIOLA v. MAXWELL

May 23, 2003

LEONARD MEGLIOLA, JR. AND JON LOGAN NELSON, ON BEHALF OF THEMSELVES AND ALL OTHERS SIMILARLY SITUATED, APPELLANTS,
v.
ANDREW J. MAXWELL, CHAPTER 7 TRUSTEE FOR THE BANKRUPTCY ESTATE OF DEBTORS, APPELLEE.



The opinion of the court was delivered by: John Grady, Senior District Judge.

MEMORANDUM OPINION

This is an appeal from an order of the bankruptcy court that preliminarily enjoined prosecution of the district court action captioned Sutton et al. v. Bernard et al. For the reasons explained below, the order of the bankruptcy court is affirmed.

BACKGROUND

The Class Action

Sutton v. Bernard, No. 00 C 6676 (the "Class Action"), is a class action lawsuit pending before this court in which the shareholder plaintiffs allege securities fraud against three officers of Marchfirst, Inc. ("Marchfirst"), a Chicago-based consulting corporation.*fn1 The complaint, which was filed in October 2000, alleges that defendants misled the investing public and thereby artificially inflated the price of Marchfirst's stock by publicly issuing materially false and misleading statements and failing to disclose material facts necessary to make those statements not false and misleading.

The Bankruptcy and the Trustee Action

In April 2001, Marchfirst filed a voluntary petition for reorganization, pursuant to Chapter 11 of the United States Bankruptcy Code, in the United States Bankruptcy Court for the District of Delaware. The case was soon converted to a Chapter 7 bankruptcy, and in July 2001, it was transferred to the United States Bankruptcy Court for the Northern District of Illinois. Andrew J. Maxwell was appointed Trustee of Marchfirst's estate. In February 2002, the Trustee filed an action (the "Trustee Action") against eleven former directors and officers of Marchfirst, including all three of the Class Action defendants. The Trustee alleges that the former directors and officers breached their fiduciary duties to Marchfirst.

The Insurance Policies

Prior to the filing of the bankruptcy case, Marchfirst had purchased a directors' and officers' corporate liability insurance policy (the "Primary Policy") from Illinois National Insurance Company ("Illinois National"). The Primary Policy covers (1) losses sustained by Marchfirst's directors and officers while acting in those capacities; and (2) losses sustained by Marchfirst arising from any securities fraud claim brought against it or from amounts paid to indemnify the officers and directors for claims brought against them. The limit of liability under the Primary Policy is $25 million.

Marchfirst had also bought two excess directors' and officers' liability policies (the "Excess Policies") from North American Specialty Insurance Company ("North American") and Federal Insurance Company ("Federal"), which provided excess coverage of $15 million and $10 million, respectively. The terms of the Excess Policies mirror the terms of the Primary Policy.

Both the Class Action plaintiffs and the Trustee seek to satisfy potential judgments in their actions from the assets of Marchfirst's former directors and officers and from the proceeds of the insurance policies. The insurers, however, are contesting coverage. Illinois National asserts an "insured vs. insured" exclusion to coverage. North American and Federal assert the same exclusions and also take the position that a "claim" by the insureds was not made during the policy period.

The Adversary Proceeding Against the Class Action Plaintiffs

On May 7, 2002, the Trustee brought an adversary proceeding and moved to preliminarily enjoin the Class Action plaintiffs from prosecuting their suit and to prohibit them from making any attempts to obtain possession of or control over the proceeds of the insurance policies. The Trustee also sought a declaration that the proceeds of the policies are property of the bankruptcy estate of Marchfirst. The Trustee relied on sections 105(a) and 362(a)(3) of the Bankruptcy Code.

Following briefing and oral argument, the bankruptcy court issued its opinion regarding the Trustee's motion. The court denied the relief sought pursuant to ยง 362(a), the automatic stay provision, reasoning that the insurance policy proceeds are not "property of the estate." However, the court ...


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