Appeals court affirms excess D&O insurer’s bankruptcy defense win

The 2nd Circuit U.S. Court of Appeals on Monday upheld the denial of an injunction requiring an excess directors and officers insurer to fund the defense of a director of three now-bankrupt health care entities against a trustee’s adversary proceeding.

The three-judge appellate panel said in the published decision in Daileader v. Certain Underwriters at Lloyd’s London Syndicate 1861 et al. that because the injunction sought by Timothy Daileader was mandatory rather than prohibitionary he had a higher standard to satisfy to obtain the relief.

The appeals court also found that Mr. Daileader failed to show that he would suffer irreparable harm if he did not obtain an order requiring the insurer to continue funding his defense or that he was likely to prevail on the merits of his claim.

Daniel McCollum was the owner of Oaktree Medical Center LLC, Oaktree Medical Centre PC and LabSource LLC. In 2015, the federal government and a number of individuals began filing suits accusing Mr. McCollum of violating the Anti-Kickback Statute.  He admitted in a civil proceeding to violating the statute and entered into a plea agreement to resolve allegations of conspiracy to pay illegal kickbacks and to defraud government health care programs, court records show.

The lawsuits against the entities resulted in their defaulting on multiple loans. Mr. Daileader was appointed as the sole director and sole manager of Oaktree Medical Centre PC and LabSource in July 2018. In June 2019, he was named the sole manager of Oaktree Medical Center LLC. 

Each of the Oaktree entities filed for Chapter 7 bankruptcy in September 2019. The bankruptcy trustee sent a letter to Mr. Daileader in April 2021, accusing him of breaching his fiduciary duties by failing to file for Chapter 11 bankruptcy and alleging damages ranging from $38 million to $925 million, court records show.

The trustee filed an adversary suit against Mr. Daileader in federal bankruptcy court in South Carolina in September 2021. Landmark issued a $1 million primary D&O policy to Oaktree that initially funded Mr. Daileader’s defense. After Landmark’s policy was exhausted, Lloyd’s of London and other excess D&O insurers refused to defend, citing a bankruptcy exclusion.

Mr. Daileader sued the excess D&O insurers in September 2022, seeking an injunction requiring them to continue funding his defense. The suit was later transferred to federal court in New York.

The trial judge denied Mr. Daileader’s request for a preliminary injunction. According to the judge, Mr. Daileader faced a higher level of showing that he was entitled to an injunction because unlike Landmark, Lloyd’s never agreed to defend him against the suit.

A representative for Lloyd’s declined comment. A representative for Mr. Daileader did not respond to a request for comment.