Daileader v. Certain Underwriters at Lloyds London Syndicate 1861

Background

Timothy Daileader sued Certain Underwriters at Lloyd’s London — Syndicate 1861, subscribing to Policy No. ANV122398A, in an insurance-coverage dispute. Daileader was formerly a director and manager of Oaktree entities. After Oaktree filed Chapter 7 bankruptcy petitions, a bankruptcy trustee brought three adversary proceedings against Daileader and others. The proceedings alleged, among other things, breach of fiduciary duty, negligence, fraud, civil conspiracy, unjust enrichment, fraudulent transfers, preference liability, and breach of contract.

Syndicate 1861 denied coverage based on the policy’s Bankruptcy/Insolvency Exclusion and did not defend Daileader after the primary insurer stopped providing coverage. Daileader later settled the adversary proceedings with the trustee. The settlement required Daileader and two other defendants to pay $650,000, while they continued to deny liability; the proceedings ended without a finding of wrongdoing against Daileader.

This action remained pending after the court denied Daileader’s request for a preliminary injunction requiring Syndicate 1861 to defend him and pay his legal expenses. The Court of Appeals for the Second Circuit affirmed that decision. The earlier rulings concluded that the adversary proceedings fell within the Bankruptcy/Insolvency Exclusion and that Daileader had not shown that the exclusion was invalid under 11 U.S.C. § 541(c)(1). The Second Circuit noted that the settlement could affect whether Oaktree’s bankruptcy estate had a property interest in the policy proceeds, leaving that issue for the district court.

The Motion to Stay Discovery

Syndicate 1861 moved under Federal Rule of Civil Procedure 26(c)(1) for a protective order staying discovery until the court resolved its anticipated motion for summary judgment. A protective order may limit discovery for good cause when discovery would cause undue burden or expense. The court considered the strength of the anticipated motion, the scope and burden of the requested discovery, and the risk of unfair prejudice to Daileader.

Syndicate 1861 argued that the anticipated summary-judgment motion involved primarily legal issues and could dispose of the case, so additional discovery was unnecessary. It also argued that Daileader’s proposed discovery was overly broad and expensive. Daileader argued that he needed discovery about the insurer’s knowledge of facts outside the adversary complaints, the insurer’s claims handlers, and Landmark’s handling and interpretation of the exclusion.

Court’s Analysis

The court found that Syndicate 1861 had made a strong showing on two issues that it expected to raise in its summary-judgment motion.

First, the court relied on its earlier decision and the Second Circuit’s decision concluding that the Bankruptcy/Insolvency Exclusion applied to the adversary proceedings. The policy defined a “Claim” to include a civil proceeding and applied the exclusion to claims alleging, arising out of, or in any way involving certain wrongful acts connected to bankruptcy, insolvency, or financial loss. The court determined that the trustee’s allegations, viewed as a whole, alleged conduct that contributed to Oaktree’s bankruptcy or financial losses before the bankruptcy filing.

The court rejected Daileader’s argument that later deposition testimony and the settlement showed that the exclusion did not apply. It explained that the duty to defend generally turns on the allegations in the underlying complaints, not on whether those allegations were ultimately proven. The court also found that Daileader had not shown that the trustee’s testimony was inconsistent with the complaints or that any such inconsistency would make the exclusion inapplicable.

Second, the court found that Syndicate 1861 had made a strong showing that the exclusion was not invalid under § 541(c)(1) of the Bankruptcy Code. That provision protects certain interests of a debtor in property from provisions that terminate or modify those interests based on insolvency or bankruptcy. Relying on the statutory text and a bankruptcy decision discussed by the parties, the court reasoned that § 541(c)(1) applies to property interests that become part of the estate under specified provisions, not to policy proceeds acquired after the bankruptcy filing as profits or proceeds. Daileader did not cite contrary authority that persuaded the court.

The court also found that Daileader had not shown unfair prejudice from a discovery stay. He already possessed the trustee’s deposition testimony and the settlement order, which were the principal materials outside the adversary complaints that he identified as relevant. He did not explain why additional discovery about Syndicate 1861’s knowledge or claims handlers would affect the coverage analysis. The court likewise found that discovery about Landmark’s handling of the claim would not alter the earlier conclusion that Landmark’s decision to provide a defense did not bind Syndicate 1861.

Finally, the court found that some of Daileader’s discovery requests were overly broad and burdensome. The requests sought extensive materials concerning Syndicate 1861’s other directors-and-officers insurance policies, underwriting, and claims handling. An affidavit submitted by Syndicate 1861’s agent stated that the requests could encompass hundreds of thousands or millions of documents and require hundreds of thousands of hours to review. Because the requested material was not shown to be relevant and proportional to the narrow issues remaining, this factor also favored a stay.

Disposition

Judge Paul G. Gardephe granted Syndicate 1861’s motion to stay discovery pending resolution of its anticipated summary-judgment motion. The court directed the clerk to terminate the motion and set briefing deadlines: April 15, 2025, for Syndicate 1861’s opening brief; April 30, 2025, for Daileader’s opposition; and May 9, 2025, for any reply. The order did not decide the anticipated summary-judgment motion.