Irony Doesn't Pay | South Bay Law Firm
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Irony Doesn’t Pay

Irony Doesn’t Pay

Litigation has always been an important tool for unsecured creditors looking to augment their returns from a bankruptcy estate.  Besides preference, fraudulent transfer, and subordination claims, creditors typically look to the boards of bankrupt corporations and to their pre-petition advisors – or perhaps more accurately, to their professional liability insurers – as possible sources of recovery in a bankruptcy case.

Last week, OakBridge Insurance Services’ Kevin M. LaCroix offered a solid round-up of the factors driving director and officer litigation in the present financial crisis.  In a post covering the real or perceived culpability of corporate boards and officers for the tsunami of business failures accompanying this downturn, Mr. LaCroix points to recent reporting from the Washington Post suggesting that incoming SEC Chairwoman Mary Schapiro’s first task will be to ascertain “‘whether the boards of banks and other financial institutions conducted effective oversight leading up to the financial crisis,’ as part of an SEC effort to ‘intensify scrutiny at the top levels of management.'”  Mr. LaCroix goes on to predict the likely effect of such increased scrutiny on directors’ litigation exposure:

Were there to be an SEC initiative targeting boards, plaintiffs’ attorneys’ undoubtedly would be emboldened to bring even further litigation in the SEC’s wake . . . .  The prospect of the SEC deliberately targeting financial boards unquestionably elevates directors’ potential liability exposures. This heightened exposure extends not only to the boards of the high profile companies that have already failed, been bailed out or been merged out of existence. It also extends to the boards of the many other banks, insurance companies and other financial institutions, and even companies outside the financial sector, that are currently struggling.

Mr. LaCroix further observes the irony attendant to this scrutiny, brought by regulators who themselves failed to see the present crisis and covered by a media likewise formerly blind to the mis-judgment of now-discredited “masters of the [financial] universe.”

Unfortunately, irony cannot pay.

Only well-insured boards and their equally well-insured professionals can pay.

And so the D&O litigation beat goes on – and grows ever more intense as companies continue to fail and their creditors attempt to salvage what they can.

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