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In re MILA

January 5, 2010

IN RE: MILA, INC., DEBTOR.
GEOFFREY GROSHONG, CHAPTER 11 TRUSTEE, APPELLANT,
v.
LAYNE E. SAPP, APPELLEE.



Appeal from the United States Bankruptcy Court Western District of Washington Honorable Samuel J. Steiner, Bankruptcy Judge, Presiding, Bk. No. 07-13059-SJS.

The opinion of the court was delivered by: Montali, Bankruptcy Judge

ORDERED PUBLISHED

OPINION

Argued and Submitted on October 23, 2009 at Pasadena, California

Ordered Published - January 29, 2010

Before: MONTALI, PAPPAS and HOLLOWELL, Bankruptcy Judges.

Appellant, chapter 11*fn1 trustee Geoffrey Groshong ("Trustee"), appeals a bankruptcy court order granting Appellee, Layne E. Sapp ("Sapp"), relief from the automatic stay allowing the Federal Insurance Company ("Insurer") to advance payments to Sapp for his legal defense costs under a directors and officers insurance policy ("D&O policy") held by corporate debtor MILA, Inc. ("MILA"). Because the bankruptcy court did not abuse its discretion in granting Sapp relief from the automatic stay, we AFFIRM.

I. FACTS

A. Background Facts

Sapp incorporated MILA in 1989 as a mortgage brokerage firm. Since that time, he was the sole director, chief executive officer, and majority shareholder of MILA. MILA ceased operations approximately three months prior its chapter 11 filing on July 2, 2007. The court appointed Trustee in MILA's case on July 27, 2007.

In October 2006, prior to filing its bankruptcy petition, MILA had purchased a D&O policy (the "Policy") which was to expire in October 2007. The Policy provides two types of coverage: liability and indemnification. The "Declarations" page of the Policy states that the "Parent Organization" is MILA, and further states that "THIS POLICY COVERS ONLY CLAIMS FIRST MADE AGAINST THE INSURED PERSONS DURING THE POLICY PERIOD." "Insured Person(s)" is defined to include only the directors and officers of MILA. Thus, MILA's directors and officers are the named insureds.

The "liability" part of the Policy, often referred to as "A-side" coverage, provides direct coverage to MILA's sole director Sapp and other MILA officers for losses they incur due to their wrongful acts including damages, judgments, settlements, and the like, which are not indemnified by MILA, and further includes payments for their legal defense costs. The "indemnification" part of the Policy, or "B-side" coverage, reimburses MILA to the extent that it has indemnified Sapp or other officers for their own losses.*fn2

The Policy has a maximum payout of $1 million for covered losses under both the A-side and B-side coverage, including directors' and officers' defense costs. These features are what make the Policy a "wasting" policy in that any payments for Sapp's (or other officers') defense costs or any liability payments made on their behalf under the A-side coverage reduce the amount available for B-side coverage to MILA and vice versa. The Policy is also a "claims made" policy, which requires that claims against Sapp or other officers be made during the policy period in order to trigger potential coverage.*fn3

MILA's bylaws provide that corporate directors and officers, past or present, "shall be indemnified by the corporation . . . against all costs, expenses, judgments and liabilities, including attorney's fees . . . in connection with or resulting from any claim, action, suit or proceedings" stemming from his or her conduct while acting as a director or officer of MILA. Therefore, MILA is legally obligated to indemnify Sapp and subordinate officers for the type of losses Sapp has incurred.

In December 2007, the Trustee paid approximately $21,000 in estate funds to purchase an extension of the Policy's coverage for an additional year, to include claims made against MILA's ...


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