On December 7, 2012, in a comprehensive victory for the
FDIC in its capacity as receiver of the failed IndyMac bank, a jury in the
Central District of California entered a verdict of $168.8 million in the
FDIC's lawsuit against three former officers of the bank. As reflected in the
verdict form (a copy of which can be found here),
the jury found that the defendants had been negligent and had breached their
fiduciary duties with respect to each of the 23 loans at issue in this phase of
the FDIC's case against the three individuals
At the time its July 11, 2008
closure, IndyMac had assets of about $32 billion, making its failure the
fifth largest bank failure in U.S. history. But though there have been a few
larger bank failures, none have been costlier to the FDIC's deposit fund.
IndyMac's collapse has cost the fund nearly $13 billion.
In June 2010, the FDIC filed against a lawsuit several
former officers of the bank's homebuilder division, in what was the first
D&O lawsuit the agency filed during the current bank failure wave, as
discussed here.
The FDIC's lawsuit sought to recover damages from the individual defendants for
"negligence and breach of fiduciary duties" and alleged "significant departures
from safe and sound banking practices." As discussed here,
in July 2011, the FDIC filed a separate lawsuit against IndyMac's former CEO,
Michael Perry.
As discussed here,
trial in the FDIC's case against the former homebuilder division officers began
on November 6, 2012. The three individual defendants in the case that went to
trial are: Scott Van Dellen, the former President and CEO of IndyMac's
Homebuilders Division (HBD), who was alleged to have approved all of the loans
that are the subject of the FDIC's suit; Richard Koon, who was HBD's Chief
Lending Officer until mid-2006 and who was alleged to have approved a number of
the loans at issue; Kenneth Shellem, who served as HBD's Chief Compliance
Officer until late 2006, and who is also alleged to have approved many of the
loans. (The FDIC's original complaint had named a fourth individual, William
Rothman, as a defendant as well. According to pleadings filed in the case,
Rothman settled with the FDIC in exchange for Rothman's assignment to the FDIC
of Rothman's rights against IndyMac's D&O insurers.)
According to news reports, the jury reached its verdict
after 16 days of trial. During the trial, the defendants attempted to argue
that they and the bank were victims of an unanticipated downturn in the housing
market. The FDIC in turn argued that the bank officials disregarded danger
signals about the housing market and continued to approve loans in order to
meet production goals and obtain bonus compensation.
The jury verdict form reflects separate verdicts as to
each of the 23 loans that were at issue in this phase of the trial of the case.
With respect to each of the loans, the jury separately found that the specific
defendants who were named as to each of the loans had been negligent and had
breached their fiduciary duties. The jury assigned separate damages as to each
of the loans as well. The separate damage awards total $168.8 million. However,
each of the three defendants was held liable for differing amounts. All three
of the defendants were named only with respect to 14 of the 23 loans. With
respect to five of the 23 loans, only Van Dellen and Shellem were named, and as
to four of the loans, Van Dellen alone was named. Thus the jury found Van
Dellen liable as to all 23 of the loans, but found Shellem liable only as to 18
of the loams and found Koon liable only as to 14 of the loans.
The just completed trial apparently represents only the
first trial phase of this matter. There apparently will be a separate trial
phase that will address the FDIC's allegations as to scores of other loans as
well as allegations with respect to the bank's loan portfolio as a whole. The FDIC
apparently is seeking total damages of more than $350 million. In addition, the
FDIC's separate case against Perry, the bank's former CEO, will continue to go
forward as well.
Given the magnitude of the jury's verdict, there
undoubtedly will be post-trial motions and, after the conclusion of all
remaining trial phases, appeals as well. One issue that likely will be subject
of an appeal will be Central District of California Judge Dale Fischer's October
2012 determination under California law that the three defendants, as
former officers (but not former directors), could not rely on the business
judgment rule and therefore could be held liable for mere negligence. (The
potential appeal value of this issue for the defendants may be diminished
somewhat due to the fact that the jury specifically found that the defendants
had not only been negligent, but had also violated their fiduciary duty,
suggesting that the defendants would still have been found liable even if they
couldn't be held liable for negligence).
While the jury verdict unquestionably represents a
victory for the FDIC, the FDIC may face considerable challenges attempting to
collect on the verdict. There may be little or no remaining D&O insurance
out of which the FDIC might try to recover. As discussed at length here,
in July 2012, Central District of California Judge Gary Klausner held in a
related D&O insurance coverage case that all of the various lawsuits
related to Indy Mac's collapse (including the case that in which the jury
verdict was just entered) were interrelated to the first-filed lawsuit, and
thus triggered only the D&O insurance that was in force when the first suit
was filed. Because all of the later-filed lawsuits related back to the first
lawsuit, the later lawsuits - including the lawsuit in which the jury verdict
was entered -- did not trigger a second $80 million insurance program that was
in force when the later suits were filed. (The FDIC has filed an appeal of
Judge Klausner's ruling.)
In other words, unless Judge Klausner's insurance
coverage ruling is reversed on appeal, the only insurance available out of
which the FDIC might be able to try to realize the amount of the jury verdict
is whatever is left under the first tower of insurance. However, as I noted in
a prior
post, in pleadings that they filed in July 2012, the defendants represented
to the court that defense fees incurred in all of the various IndyMac-related
lawsuits, as well as settlements that had been reached in some of the suits,
had exhausted or would soon exhaust the first tower of insurance.
Pleadings that the three individuals filed in the case
state that "the FDIC specifically structured this lawsuit in order to reach the
Tower 2 Policy." Judge Klausner's ruling in the insurance coverage case
obviously upset the FDIC's strategy in this case. The outcome of the appeal in
the insurance coverage case may well determine whether or not the massive
verdict the FDIC just won results in any significant monetary benefits for the
agency.
This case was not only the first case the FDIC filed
against the former directors and officers of a failed bank as part of the
current bank failure wave, but it is also the first case to go to trial. Since
the FDIC filed this suit back in July 2010, the agency has filed forty more
cases against the directors and officers of failed banks. There undoubtedly
will be more lawsuits yet to come. Many of the individual defendants named in
these cases vigorously dispute the FDIC's allegations. However, the jury
verdict in the IndyMac case may communicate a sobering message about what it
might mean to force a case all the way to trial. Given this verdict, it may now
be even more unlikely that one of these cases would go to trial.
Scott Recard's December 8, 2012 Los Angeles Times article
about the jury verdict can be found here.
Special thanks to Thomas
Long of the Nossaman law firm for
sending me the jury verdict form. The Nossaman firm represented the FDIC at the
IndyMac trial.
D&O Insurer, FDIC Settle Claims Against
Former BankUnited Officials: The FDIC's efforts to try
to recover under failed banks' D&O insurance do not always involve a
lawsuit. Sometimes the FDIC asserts its claims in a demand letter that it
presents to the former directors and officers of a failed bank, with a copy of
the letter also send to the failed bank's D&O insurers. Sometimes these
kinds of letter demands result in a settlement without a lawsuit ever being
filed. That apparently is what has happened in connection with the FDIC's
claims against former directors and officers of BankUnited, a Coral Gables,
Florida bank that failed in May 2009, at least according to a December
6, 2012 article in the South Florida Business Journal.
As reflected here,
on November 5, 2009, the FDIC, in its capacity as BankUnited's receiver, sent a
letter to fifteen former directors and officers of the bank, in which the FDIC
presented its "demand for civil damages arising out of losses suffered as
a result of wrongful acts and omissions committed by the named Directors and
Officers." The letter, a copy of which can be found here,
explains that the demand for civil damages is "based on the breach of
duty, failure to supervise, negligence, and/or gross negligence of the named
Directors and Officers." Though the letter is nominally addressed to the
fifteen individuals, copies of the letters also were sent directly to the
bank's primary and first level excess D&O insurers.
In addition to the FDIC's claims against former directors
and officers of the failed bank, shareholders of the failed bank's holding
company (which is now bankrupt) filed a lawsuit against certain former bank
directors and officers. The bankruptcy trustee asserted claims against the
individuals as well.
According to the newspaper article, these various parties
have reached a settlement agreement, subject to bankruptcy court approval, to
divide the bank's $10 million primary D&O insurance policy four ways: $3.5
million to the class action plaintiff; $2.5 million to the FDIC; $1.65 to the
bankruptcy trustee; and the balance going to pay legal defense fees and other
costs. The settlement agreement also allows the FDIC to attempt to pursue a
recovery from the carrier that issued the bank's $10 million first level excess
D&O insurance carrier, which has refused to pay under its policy.
This settlement is interesting because it reflects the
tensions that can arise when multiple claims have been asserted against the
former directors and officers of a failed bank. When there are multiple claims
and only limited insurance, the various claimants are put in competition with
each other, as they each race to try to capture as much of the insurance as
they can while at the same time accumulating defense fees erodes what little
insurance there may be. The division here of the $10 million primary D&O
policy reflects an effort between and among the various claimants to try to
work out a split of the insurance so that each of the various sets of
claimants at least gets a part of the policy proceeds. The challenge for other
claimants trying to work out similar deals in other cases is to try and get a
deal done before defense fees exhaust the insurance fund.
Special thanks to a loyal reader for sending me a link to
the article about the BankUnited settlement.
Read other items of interest from the world
of directors & officers liability, with occasional commentary, at the D&O Diary, a blog by
Kevin LaCroix.
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