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Bankruptcy Court Holds D&O Policy Proceeds Payable to Non-Debtors Not Estate Property

A Bankruptcy Court in the Middle District of Pennsylvania recently held that proceeds of a D&O policy owned by a Chapter 7 debtor were not property of the estate. In Brothers v. Neblett (In re Valley Forge Composite Techs., Inc.), 2015 Bankr. LEXIS 4296 (Bankr. M.D. Pa. Dec. 21, 2015), two of the Debtor's officers filed a motion for relief from the automatic stay to allow the advancement of their defense costs under the D&O policy and, in the alternative, sought a declaratory judgment that the automatic stay does not apply to bar the advancement of defense costs. The Bankruptcy Court cited precedent from the Third and Fifth Circuits and the District Court for the Southern District of New York in holding that proceeds payable to directors and officers under a D&O policy are not property of the Debtor's estate. "The automatic stay, therefore, does not apply, and the Movants need not obtain this Court's permission to seek payment under the policy."

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