Duty to Defend a Liquidating Trust Created in Bankruptcy Proceedings

In Fairchild Corp. v. Arrowpoint Capital Corp., Fairchild Corp. (“Fairchild”) filed an amended complaint on November 9, 2007, seeking a declaratory judgment against Arrowpoint Capital Corp. (“Arrowpoint”) and National Union (“National”) that they had a duty to defend and indemnify Fairchild in the Profiler litigation that had been brought against Fairchild. The complaint also sought damages for a breach of the applicable contracts of insurance. On April 6, 2009, Fairchild filed a petition for relief under Chapter 11 Bankruptcy.

A liquidating trust had been created in the bankruptcy proceedings and had been assigned all interests Fairchild had in any and all insurance policies. Under the terms of the proposed settlement agreement, each insurance company, including Arrowpoint and National, was assigned an amount to contribute to the settlement of the Profiler litigation. In return, Fairchild, which was defined to include its attorneys, inter alia, agreed to release all of its insurers from any other claims, including attorney fees, and agreed to dismiss the instant action within 10 days. The signed order approving the settlement agreement found that the liquidating trustee had agreed to execute the settlement agreement and authorized the trustee to sign the agreement. However, a signed agreement does not appear of record, although Fairchild does not affirmatively represent that the agreement was not consummated and does not dispute that a liquidating trust was established and assigned all of Fairchild’s rights under its insurance policies.

The court addressed the question of whether National had a duty to defend in light of the creation of a liquidating trust. The court held that it is clear from the documents from the bankruptcy proceeding that all of Fairchild’s interests in its insurance policies were transferred to the liquidating trustee by order of the bankruptcy court, which had exclusive jurisdiction over all of the property of Fairchild as of the commencement of its bankruptcy. Fairchild does not dispute National’s contention that the settlement agreement was consummated, nor does it dispute that the settlement agreement required that the instant litigation be dismissed.

Fairchild Corp. v. Arrowpoint Capital Corp., 2013 WL 5310441 (Ill.App. 5 Dist.). (This order was filed under Supreme Court Rule 23 and may not be cited as precedent by any party except in the limited circumstances allowed under Rule 23(e)(1).).