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June 01, 2022, US Bankruptcy Court for Eastern Pennsylvania – Gary F. Seitz, in his capacity as bankruptcy trustee for City Line Behavioral Healthcare, LLC (“Debtor”) sues Wesco Insurance Company (“Wesco”) for breach of contract demanding coverage under the disputed insurance policy.
The case relates to a Wesco insurance policy covering director and officer and private company liabilities for the Debtor company for the period of July 27, 2018 to July 27, 2019.
In 2021, the Trustee had filed an adversary proceeding against the directors and officers of the Debtor company alleging breach of fiduciary duties and corporate waste claims. The Trustee’s claims were based on the allegations of “inadequate” settlement in a lawsuit filed by the Debtor at the instance of its directors and officers. The second allegation related to the acquisition of a Florida-based rehabilitation business called Life of Purpose, LLC by the Debtor at the time when the Debtor was allegedly “severely financially distressed”.
The Trustee had presented the insurer Wesco with a demand letter in 2019 over the above mentioned claims but was denied any coverage. The Trustee again demanded coverage after filing the complaint against directors and officers in 2021 but the coverage was denied again.
Wesco contended that the alleged claims were excluded under the insurance policy because they were based upon wrongful acts that were subject to exclusions in the Policy for certain prior criminal acts. Wesco asserted that the Trustee’s claims arose out of the alleged “fraudulent schemes” that occurred at the Debtor company since 2015.
The Trustee disputes that his claims all relate to alleged wrongful acts that first occurred during the policy period, and claims that they were allegedly perpetrated by an entirely new slate of directors and officers that had no involvement in the prior acts.
The Trustee seeks a declaration from the Court that his claims against the insured directors and officers are covered by the Wesco insurance policy up to its limit of $2,000,000. The Trustee also requests for compensatory damages alleging that Wesco’s failure to provide coverage under the policy constitutes a breach of contract and bad faith under 42 Pa.C.S. § 8371.
Gary F. Seitz v. Wesco Insurance Company, (In re City Line Behavioral Healthcare, LLC), AP No. 22-0057, US Bankruptcy Court for the Eastern District of Pennsylvania.