How far will the bankruptcy court go in exercising post-confirmation jurisdiction in an adversary action based on a pre-petition state law claim? The answer, as shown in the caseIn re Washington Mutual (Washington Mutual v. XL Specialty Insurance ), Bankr. Del., Oct. 4, 2012, is not far at all.
Washington Mutual Inc. (WaMu) filed an adversary action against the issuers of 12 liability insurance policies affording liability coverage for WaMu’s directors and officers. (The WaMu Liquidating Trust was subsequently substituted in place of WaMu.) WaMu alleged breach of contract and breach of the implied duty of good faith and fair dealing and sought declaratory relief and attorney fees for the insurers’ failure to pay defense costs and denial of coverage for a demand letter made by WaMu against its former officers and directors. The complaint was filed after confirmation of WaMu’s Chapter 11 plan and one day before the plan’s effective date. In the plan, WaMu agreed to establish a contingent reserve of $65 million for D&O claims, with $55 million set aside for defense costs associated with the claims.
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