Know When to Fold 'em

A no-fault settlement agreement[1] has been negotiated between the Trustee and the inside directors, Terri McRae and Tim Durm, which allows the Trustee to proceed to lodge a claim against the D&O carrier for $3,000,000 using the cumulative adjusting transaction error in the sales order clearing account of $4.2 million dollars as a basis for establishing “loss” and a breach of management oversight responsibility. The basis for the D&O claim herein has been shifted from (1) the completely legal and disclosed transactions between the companies, to (2) the soc error with “errors and omissions,” which has been redefined as “the officers should have known this error existed” and because they didn't, they breached their fiduciary duties.

There is a difference between a material mistake and material misconduct. Remember the "Prudent Man Rule"? If the attorneys handling the D&O claim for Philadelphia Life Insurance have any sense at all, they will raise this as an issue to have the claim thrown out. It should be remembered that while the immediate assessment of the problem resulted in making a correction and immediate restatement of the balance sheet portion of the financial statements for the previous three year period, it had no functional bearing on the operation of the agency, its’ receivables, expenses, periodic interim reports to the lenders, or net return and overall financial position. That this error existed at all will be the basis for the claim made.

Collins, as Trustee, is suing simply because under the Act, he can sue the members of a Corporate Board under the presumption that if there is a bankruptcy filing, there is a “fault or breach.” With the complicity of the middle Tennessee Bankruptcy Court, they do not have to be related events and apparently, they don’t even have to have occurred under the control of management. So long as the presiding Judge does not impede the process, corporation directors are fair game for collection processes conducted against D&O policies or failing that, conversion of personal assets to pay down the estate of the bankrupt debtor corporation. The gap between D&O coverage and Board member protection is a canyon of absent protective coverage and creates an opportunity for overreaching Trustees to abscond with the personal assets of well meaning corporation organizational leadership for the purpose of repaying bankruptcy court fees and expenses under the theory that ‘because it happened it must be wrong.’ Any other branch of the legal advocacy system would refer to the conversion of personal assets by this process as ‘racketeering.’’ Indeed in some quarters, litigation against Trustees for conversion of personal assets is now occurring filed under Ricoh statutes.[2]

This suit against the D&O carrier will be filed by the Trustee’s attorney on behalf of the inside directors to reimburse the court for the costs of the legal proceedings. Upon the signing of this settlement agreement, the suit against the inside directors will be set-aside for the period of D&O litigation. Upon collection of the $3,000,000 the suit against the inside directors and the settlement agreement will terminate. Should the D&O claim be unsuccessfully resolved, the Trustee will revive the suit against the inside directors requiring them to sell their personal homes and possessions for reimbursement of a minimum of $50,000 and potentially up to $3,000,000 to the court. Should the worst case scenario occur, the inside directors can declare personal bankruptcy, which will allow them to keep a homestead exemption of up to $25,000, depending on the value of their personal possessions, which by no means approaches a figure even close to the $3,000,000 in question.[3] The Trustee may opt to place a lien on their future earnings. Additionally, the Trustee’s legal firm will file suit against Philadelphia Life, the D&O carrier, for failing to mount a defense of the inside directors as required by Tennessee law. Should the total collected sum exceed $8,000,000 the “inside” directors will become the beneficiaries of the excess proceeds. In the very remote event that this actually happens, it will not of course, even begin to compensate us for the destruction wreaked upon our personal and professional lives and reputations by these processes.

[1] Settlement Proposal
[2] See www.wellsofjustice.com. Case No ---- Florida
[3] See submitted, personal financial statements of Terri McRae and Tim Durm.