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| vol 15, num 1 | January 2019 |
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| Seventh Circuit Pierces Veil to Protect Dissenting Shareholder |
| Lees Inns of America (LIA) was a public company that built and operated hotels. Lester Lee (Lester) and his brother William each owned 25 percent of LIA. In 1994, LIA went private and Lester became the majority shareholder and chairman of the board. The balance of shares were held by a trust (the Trust) created by William with his two sons as co-trustees. In 1998, a falling out occurred between Lester and his nephews. LIA’s board removed them as directors, stripping the Trust of representation on the board. |
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| Rule 2004 Discovery Severely Limited After Invocation of Fifth Amendment Privilege Against Self‑Incrimination |
| Bankruptcy attorneys usually think of Rule 2004 of the Federal Rules of Bankruptcy Procedure as a near-unstoppable discovery tool that can be used by a debtor-in-possession (DIP), panel trustee or liquidating trustee to obtain documents needed to evaluate and successfully prosecute claims against insiders and others. This tool is a much-needed one, particularly in cases of insider malfeasance, where the insider — not the DIP or trustee — has the needed books and records. The all-powerful Rule 2004 meets its match, however, when faced with the Fifth Amendment privilege against self‑incrimination. |
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| Are Bankruptcy Courts Loosening Standards for Student Loan Discharge? |
| Student loan debt has now grown to over $1.5 trillion. Despite a relatively strong economy, more than 8 million borrowers are delinquent or are in default under their loans. Of particular concern to lenders is that these figures will only worsen if economists’ predictions for a slowing economy ring true. Lenders can no longer expect with certainty that a student loan will be virtually impossible to discharge.
The Brunner Test
Section 523(a)(8) of the Bankruptcy code allows for the discharge of student loan debt if “excepting such debt from discharge … would impose an undue hardship on the debtor and the debtor’s dependents.…” Although the term “undue hardship” is not defined by the Bankruptcy Code, the majority of courts have adopted the test set forth in Brunner v. New York State Higher Education Services Corp., 831 F.2d 395, 396 (2d Cir. 1987).
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| Pleading Fraud and Bad Acts in D&O Claims Litigation |
| An insurance policy covering directors and officers of a company can provide a valuable source of restitution for a bankruptcy estate and its creditors who have been wronged by actionable negligence and/or failures to act by corporate officers and directors. An informed plaintiff will read the applicable policy (prior to instituting suit if possible) closely, as such policies uniformly contain various exclusions to coverage.When a claim against a director or officer (D&O) falls under a policy exclusion, the policy’s coverage might not apply to that claim. The insurer may issue a “reservation of rights” letter to its insured detailing
those claims that the insurer has decided are not covered by the policy.
One mainstay exclusion to D&O policy coverage is the “fraud exclusion.” This exclusion is often quite generally applied by insurers who seek to avoid coverage for claims involving a D&O’s fraud or personal enrichment. On its face, a fraud exclusion will only apply “when there is an actual finding of dishonesty or fraud against a particular insured.” The term “actual finding” has spawned litigation over coverage provisions.
Generally, courts construe policy terms broadly “to protect the insured’s objectively reasonable expectations.”Arch Insurance Co. involved shareholder’s claims in the Delaware Court of Chancery alleging fraudulent activity related to a privatization transaction. Conversely, courts interpret exclusionary clauses strictly and narrowly.
In re Dole Food Co. typifies a court’s narrow interpretation of an exclusionary provision. The settlement order in Dole contained no findings with respect to the defendants’ fraud. The court held that the fraud exclusion provision did not apply because the court’s memorandum opinion finding fraud was not a “final and non-appealable” judgment (which was required by the terms of the policy). The only final and nonappealable order entered in the case was the settlement order, which did not address the court’s previous findings of fraud.
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©2019 American Bankruptcy Institute . All rights reserved.
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