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reorganize and no assets to distribute. On December 31, 2007, Icon sued (the "Icon Litigation") certain non-debtor former officers (the "Individual Defendants") of InPhone for their roles in the financing agreement. Additionally, there are class action lawsuits (the "Class Action Claims") that have been filed against the debtors and the Individual Defendants. The Individual Defendants have asserted indemnification claims against the debtors for their costs in defending against the Icon Litigation. The debtors have three insurance policies which may provide coverage to the Individual Defendants.
Rules: When the liability insurance policies provide the debtor with indemnification coverage that has been asserted, the proceeds of the insurance policies are property of the bankruptcy estate.
Holding: The insurance proceeds are property of the estate; Icon violated the automatic stay by commencing the Icon Litigation, and a preliminary injunction is issued to stay the Icon Litigation.
Reasoning: On the facts of this case, the automatic stay is implicated on two bases. First, because Icon filed a proof of claim against the bankruptcy estate for the full amount of its alleged loss, and the resolution of the issues in the Icon Litigation could be used in the prosecution of the Icon claim, collateral estoppel concerns arise and the debtors may be forced to participate in the Icon Litigation. Second, it is not possible to treat all creditors fairly when one creditor proceeds with its lawsuit and the debtors' insurance proceeds are therefore diminished by their participation in that lawsuit. Therefore, a preliminary injunction is issued but the debtors are ordered to appear and report to the court their plan in dealing with the Icon Litigation and the Class Action Claim.
Facts: Oakwood made and retailed manufactured homes. Prior to filing for bankruptcy, United States Fire Insurance Co. ("US Fire") provided Oakwood surety bonds and Oakwood posted collateral with US Fire. Post-petition, Oakwood directed US Fire to cancel all outstanding bonds; but, under certain state laws, US Fire continues to have exposure to outstanding bonds. In November 2004, the Oakwood post-confirmation trust, the OHC Trust, sued US Fire alleging that US Fire was holding funds (the "Funds") far in excess of what it needed to satisfy its outstanding bond obligations and sought a return of the excess funds. The parties litigated and, at some point, US Fire agreed to return $3.5 million to the OHC Trust. The parties are still fighting as to the remaining collateral and US Fire recently informed the OHC Trust that around $500,000 of the Funds had been used by US Fire to defend itself in this adversary proceeding pursuant to an indemnification clause in the parties' prepetition contracts. The OHC Trust objects to US Fire's use of the Funds for its legal fees.
Issues: Whether, under the terms of the indemnification clause, US Fire is entitled to use the Funds for its attorneys' fees. Holding: The indemnification clause is read to relate "only to expenses incurred in enforcing the Agreement as to Oakwood's promise to deposit funds on demand by U.S. Fire... [it] does not, either explicitly or implicitly, provide for indemnity in a dispute over the amount of collateral held by U.S. Fire."
Rules: Under NY law, "indemnity agreements are valid and enforceable, including their provisions regarding attorneys' fees, and may be applied in bankruptcy proceedings."
