What happened: A D&O insurer alleges a creditors exclusion bars coverage for a pharma company sued by its own lender
Who's involved: Scottsdale Insurance Company (Nationwide) and BioQ Pharma
What's at stake: Up to $4 million in D&O policy limits, plus defense costs already incurred
Why it matters: Tests whether a creditors exclusion applies when the claimant is both a secured creditor and a shareholder
Where it stands: Filed September 25, 2026, in federal court
Sixteen forbearance agreements, more than $50 million in unpaid debt, and an investor from Abu Dhabi who, according to court filings, turned out to be a company co-founded by the borrower's own CEO.
That is the backstory behind a D&O coverage fight now unfolding in a Northern California federal court. Scottsdale Insurance Company has asked a judge to confirm it does not have to defend or pay claims against BioQ Pharma and seven of the San Francisco pharmaceutical company's current and former directors and officers.
Scottsdale, a Nationwide subsidiary, issued a D&O policy to BioQ with a $4 million maximum aggregate, running from August 2025 to August 2026. When the underlying lawsuit landed, Scottsdale stepped up - appointing three separate law firms to defend BioQ and its directors while reserving its right to dispute coverage. Now it wants to walk away. And it wants its defense costs back.
The policy contains a creditors exclusion - a provision that says the insurer does not have to cover any claim brought by, on behalf of, or for the benefit of anyone who is a creditor of the insured company, whether secured or unsecured.
The underlying lawsuit was filed on June 23, 2026, in San Francisco Superior Court by Madryn Health Partners and several affiliated entities. According to Scottsdale's complaint, Madryn is both a shareholder and a secured creditor of BioQ - meaning it holds both an ownership stake and a loan against the company. Scottsdale's argument is simple: the people suing are creditors, so the exclusion applies and coverage falls away.
BioQ's CEO, acting on behalf of the other defendants, has told Scottsdale they disagree.
The underlying complaint, attached in full to Scottsdale's filing, tells a story of a company allegedly driven into the ground by its own leadership.
According to that filing, Madryn loaned BioQ $25 million in 2017 under a credit agreement, becoming both a secured creditor and a shareholder in the process. BioQ allegedly defaulted within two years and has been in continuous default since November 2019. By January 2024, the filing states, BioQ owed Madryn more than $50 million.
The underlying complaint alleges Madryn offered BioQ a restructuring deal in February 2024 that would have converted $25 million of debt into equity - cutting BioQ's outstanding debt by more than half - and raised $20 million in new capital. The board rejected it, the filing alleges, because accepting the deal would have diluted the directors' personal stakes in the company.
What followed, according to the underlying complaint, was a pattern of "gross mismanagement, corporate waste, and blatant disregard of fiduciary duties." The filing alleges the CEO pushed an alternative plan with no committed investors and no way to address BioQ's crushing debt. It went nowhere. Three board members resigned in June 2024, each citing the CEO's conduct in their departure letters. A fourth submitted a resignation letter acknowledging the same failures - then took it back, the filing states, allegedly at the urging of the CEO and a major shareholder.
The most striking allegation involves an investor from Abu Dhabi. According to the underlying complaint, BioQ's CEO and two other board members notified Madryn in September 2024 that the company had found a potential outside investor through the Abu Dhabi Investment Office, promising $50 million in capital. The filing alleges Madryn's representatives on BioQ's board were shown only a redacted memorandum of understanding with no identifying information about the investor.
The investment never materialized. And shortly before filing its lawsuit, the underlying complaint states, Madryn learned the CEO had co-founded the very company he had presented as an outside savior.
None of these allegations have been tested in court.
Scottsdale's filing raises a single question for the court: does the creditors exclusion bar coverage? If the answer is yes, Scottsdale says it can stop defending BioQ and its directors and recover every dollar it has already spent on their defense.
The case puts a sharp point on a question D&O claims teams deal with regularly - how creditors exclusions apply when the party bringing the lawsuit wears more than one hat. Madryn is not just a lender chasing a debt. It is also a shareholder suing on the company's own behalf, arguing the directors harmed the very business they were supposed to protect.
The allegations in the underlying lawsuit have not been tested in court, and no judge has ruled on the merits of either action.
