A court appointed trustee for Boston Chicken Inc. has launched adversary action against ACE Bermuda Insurance Company and its legal counsel for alleged injunctive and declaratory relief, contempt, bad faith, breach of contract and anticipatory breach of contract.

BCI ? once a darling of Wall Street ? filed for bankruptcy protection in the US Bankruptcy Court for the District of Arizona in 1998.

The legal action, launched in Arizona by BCI?s court appointed trustee Gerald K. Smith, stems from a dispute with the Bermuda-based insurer over director and officer liability coverage that BC purchased for the company and its directors. Two of BCI?s directors have since signed over their rights and interests in the policies to Mr. Smith who has been assigned to collect, administer and distribute the retained assets of the company including all retained insurance policies including debtors? rights in the policies insuring their officers and directors.

The dispute is focused on whether ACE is obligated to honour the claims of BCI?s directors concerning their liabilities in a lawsuit launched by Mr. Smith. He had accused the directors of conspiring to misrepresent the financial condition of BCI, manipulating its reported earnings and overstating its asset values in order to sustain the firm long past the point of its insolvency.

According to his complaint against ACE that was filed with the Arizona court, the first five layers of D&O coverage provided by other insurers have now been exhausted while Reliance Insurance Company has paid no money owing to its insolvency. ACE?s $20 million excess policy is the only other outstanding despite ?repeated written and oral requests that ACE meet its policy obligations? for defence and indemnity coverage for the directors in connection with the trustee?s lawsuit against them.

Mr. Smith is seeking damages against ACE for breach of contract/anticipatory breach of contract for allegedly denying to defend and indemnify the former Boston Chicken officers and directors.

He has also complained to the court about the fact that ACE?s law firm, Conyers Dill and Pearman, secured an ex parte injunction from the Supreme Court of Bermuda restraining him and others involved in the bankruptcy case from taking any action against ACE anywhere except via arbitration proceedings in Bermuda.

ACE is also seeking damages for alleged breach of contract in the Bermuda action. He said his work for the court would be impeded if he was burdened with having to defend against suits by litigants arising out of his actions taken on the Bankruptcy Court?s behalf.

Mr. Smith alleges that the Bermuda action was in contempt of the Arizona court?s confirmation order as the Bermuda parties did not seek give prior notice to the Trustee or seek the leave of the US court.

Mr. Smith is also asking the Arizona bankruptcy court to grant a preliminary and permanent injunction restraining ACE and its legal counsel from continuing the Bermuda action.

He named ACE?s Bermuda law firm CD&P and US law firm Bailey Cavalieri LLC of Ohio and lawyer Dan Bailey in the Arizona suit because ?large insurance companies do not file lawsuits; their attorneys do.?

Mr. Smith has asked the Arizona court for costs, appropriate damages, a preliminary and permanent injunction enjoining all defendants from further prosecution of the Bermuda Action and declaratory relief to resolve all coverage issues including the obligation of ACE to defend and indemnify the insureds.

ACE and CD&P have until July 1 to respond to the complaint.

A spokesperson for ACE said that as a matter of policy, the company does not comment on ongoing legal action.