## Facts

- Capitol Bancorp Ltd., a bank holding company, experienced financial decline during the financial crisis and later came under Federal Reserve oversight.
- Capitol’s founder and CEO was Joseph Reid; Cristin Reid served as president; Brian English served as general counsel.
- Capitol purchased a management liability (D&O-style) insurance policy from Indian Harbor Insurance Co. covering the company and its directors and officers.
- The policy contained an insured-versus-insured exclusion barring coverage for any claim brought “by, on behalf of, or in the name or right of” the company or any insured, subject to limited exceptions not applicable to the dispute.
- Capitol filed for Chapter 11 and operated as a debtor-in-possession; its bankruptcy negotiations culminated in a liquidation plan.
- The confirmed plan assigned the estate’s/company’s causes of action to a liquidation trust, with Clifford Zucker appointed as liquidation trustee, and limited certain officer/director liability to available insurance proceeds.
- Zucker, as trustee, sued the Reids and English for approximately $18.8 million for alleged prepetition breaches of fiduciary duty and related misconduct.
- Indian Harbor denied coverage and sought a declaratory judgment that it owed no duty to defend or indemnify because the trustee’s suit fell within the insured-versus-insured exclusion.

## Issues

1. Whether a liquidation trustee’s lawsuit asserting claims assigned from the debtor/company is a claim “by, on behalf of, or in the name or right of” the insured company under an insured-versus-insured exclusion.
2. Whether the debtor’s status as a debtor-in-possession alters the policy’s definition of the insured “Company” so as to avoid the exclusion.

## Decision

- The Sixth Circuit affirmed judgment for Indian Harbor, holding there was no duty to defend or indemnify.
- The court held the liquidation trust was a voluntary assignee of the company’s claims and therefore stood in the company’s shoes for purposes of policy defenses and limitations.
- The trustee’s action was a claim brought “by, on behalf of, or in the name or right of” the company because it prosecuted the company’s own causes of action.
- The company’s Chapter 11 debtor-in-possession status did not change its identity as the “Company” defined in the policy.
- The absence of collusion did not defeat application of the exclusion where the policy text broadly barred such claims.

## Legal Principles

- A voluntary assignee takes assigned claims subject to the same contractual defenses and limitations that could have been asserted against the assignor, and has no greater rights than the assignor.
- Insured-versus-insured exclusions that bar claims “by, on behalf of, or in the name or right of” the insured company reach suits asserting the company’s own claims, including when prosecuted by an assignee such as a liquidation trust.
- Contract interpretation of an insurance policy is governed by the policy’s text; a background anti-collusion rationale does not restrict an exclusion that is not textually limited to collusive suits.
- Absent an express carve-out, bankruptcy-related plaintiffs pursuing assigned debtor/company claims may trigger insured-versus-insured exclusions.

## Conclusion

The Sixth Circuit held that a liquidation trustee suing former directors and officers on claims assigned from the debtor/company brings a claim in the company’s right, triggering the insured-versus-insured exclusion and eliminating D&O coverage, even without evidence of collusion and despite the company’s debtor-in-possession status.


Indian Harbor Ins. Co. v. Zucker (In re Capitol Bancorp Ltd.), 860 F.3d 373 (6th Cir. 2017)