By Kevin M. LaCroix, Esq., Executive Vice President, OakBridge Insurance Services
In the FDIC's latest lawsuit filed in its role as receiver of a failed bank, the FDIC not only named as defendants nineteen former directors and officers of the failed bank, but also included as defendants seventeen of their spouses and the failed bank's D&O insurer. A copy of the FDIC's January 18, 2012 complaint, filed in the agency's capacity of receiver of the failed R-G Premier Bank of Puerto Rico, can be found here. UPDATE: See also the note below regarding the separate action filed in the District of Puerto Rico, involving the directors and officers of the failed Westernbank Puerto Rico, which also involves D&O insurer defendants.
As discussed at the FDIC web site, R-G Premier Bank failed on April 30, 2010. According to the FDIC's complaint, its closure represented "one of the largest bank failures in Puerto Rico's history, costing the Deposit Insurance Fund over $1.46 billion in losses."
In its complaint, the FDIC asserts claims for gross negligence against certain former directors and officers of the failed bank, alleging that the bank's losses and ultimate failure arose from the bank's aggressive commercial lending. The complaint alleges that the commercial lending operations were essentially unsupervised, even though the commercial lending department "recklessly" pursued "explosive commercial loan growth." The complaint alleges that the director and officer defendants "ignored numerous warnings from multiple sources about serious problems" in the bank's management and lending operations."
The complaint alleges that the director and officer defendants "exacerbated and accelerated" the bank's loan losses "by robotically approving virtually any loan request that crossed their desks, even though such loan requests had been processed through the obviously deficient lending structure they had created at the Bank." The FDIC bases its claims against the directors and officers on the individuals' alleged "grossly negligent failure to exercise due care and any business judgment"; "grossly negligent failure to inform themselves about and to exercise adequate oversight over the Bank's lending functions" and on the allegations that the defendants "knew or should have known" that the alleged problem loans identified in the complaint "were extremely unlikely to be paid back, and also the equally clear risks of injury to the Bank from the Bank's inappropriate lending structure."
The FDIC seeks to recover damages "in excess of $257 million" the bank allegedly incurred "as a result of the breaches of fiduciary duties and gross negligence" of the director and officer defendants in connection with 77 transactions identified in the complaint. The claims against the 17 spouses and conjugal partners who are also named as defendants "are based on their legal relationship to the Directors and Officers."
The complaint also names as a defendant the insurer that issued two D&O liability insurance policies to the bank's holding company. The two policies consist of a primary $25 million policy and a $10 million excess policy, both issued by the same insurer. Both policies are alleged to have had policy periods running from November 30, 2008 to December 30, 2009, with an optional extension period until December 30, 2010. The FDIC alleges in its complaint that the optional extension period was exercised on December 29, 2009. The complaint also alleges that on December 23, 2010, the FDIC sent a demand for civil damages to the directors and officers, with a copy of the demand also sent to the D&O insurer.
In Count III of the complaint, which is denominated as a "Claim for Direct Relief," the FDIC alleges that its claims against the directors and officers "fall within the coverage provided" under its policies, and that the insurer is "liable" for "$35 million in damages caused to the Bank by the gross negligence of the Defendants." The complaint seeks a judgment against the insurer "for at least $35 million."
In prior posts discussing the FDIC's litigation against former director of failed banks, I have suggested that the real battleground for many of these suits may be the FDIC's coverage disputes with the failed bank's D&O insurer. This case, in which the FDIC named the D&O insurer as a defendant along with the former directors and officers, seems to make that aspect of these circumstances explicit.
This is not the first occasion on which the FDIC has directly named a failed bank's D&O insurer as a defendant in a liability action. (For a prior example, refer here). Those readers uncertain how the FDIC is purporting to proceed directly against the insurer without first obtaining a judgment against the individual insureds may be interested to know that, at least according to sources I have reviewed online, Puerto Rico has a direct action statute, allowing those claiming injury from a torfeasor's action to proceed directly against the tortfeasor's liability insurer. At least based on my quick review of the subject, that would seem to explain the FDIC's move of including the D&O insurer as a defendant in the suit.
Without being able to go behind the scenes it is hard to know for sure what the basis of the coverage action may be. Just based on the date on which the D&O policies originally incepted, it is not unlikely that the policies when issued included a regulatory exclusion. Some insurers have also taken the position that the insured vs. insured exclusion found in most D&O policies precludes coverage for claims brought by the FDIC as receiver, which is an issue that undoubtedly will be litigated heavily in connection with many of these failed bank coverage disputes.
It is also possible that the D&O insurer is asserting coverage defenses arising from the fact that the bank did not fail and the FDIC did not assert claims against the directors and officers until after the inception of the policies' extensions. The insurer may be asserting defenses based on the timing of these various events relative to the policies termination dates and reporting deadlines. At least according to the FDIC's recitation in the complaint, it appears that the FDIC did assert its claim against the directors and officers prior to the expiration of the extension.
The FDIC's assertion of claims against the spouses and conjugal partners are obviously designed to allow the FDIC to be able to enforce any judgment against property jointly held by the individual directors and officers and their spouses. This is not the first occasion on which the FDIC has asserted claims against spouses of failed bank directors and officers. For example, in connection with the FDIC's lawsuit against the certain former officers of Washington Mutual, the FDIC also asserted claims there against two of the officers' spouses. The FDIC's assertion of claims against the spouses is an illustration of the importance of the language found in many D&O policies which extends the definition of the term "Insured Persons" to include the spouses or domestic partners of the insured entity's directors and officers, but only to the extent the spouses or partners is a party to a claim as a spouse to the director or officer.
One anomalous feature of the bank's D&O insurance structure is that the both the bank's primary D&O insurance policy and its excess D&O insurance policy were both issued by the same D&O insurer. That is an unusual arrangement for many reasons, not the least of which is that many insurers would be reluctant to have such concentrated exposure to any one risk. The extent of the insurer's exposure is one more reason I suspect that the insurer may considered its insurance of this risk as well defended, for example through the inclusion of a regulatory exclusion or even perhaps the preclusion of coverage for acts that incurred prior to the policies' November 30, 2008 inception.
Of course, I could be wrong about the presence of these defensive features, but I still think it is unusual that the insurer would have take a full $35 million exposure to one financial institution, especially given the events that were taking place in the global financial marketplaces at that time.
The FDIC's lawsuit against the former directors and officers of R-G Premier Bank of Puerto Rico is the nineteenth lawsuit the FDIC has filed in connection with the current wave of bank failures, and the second so far during 2012. The FDIC undoubtedly will be filing many more suits in the months ahead. Indeed, on the FDIC's website page providing information about the agency's litigation efforts, the FDIC states that as of January 18, 2012, the FDIC has authorized suits in connection with 44 failed institutions against 391 individuals for D&O liability with damage claims of at least $7.7 billion. This includes 19 filed D&O lawsuits (2 of which have been dismissed after settlement with the named directors and officers) naming 161 former directors and officers. In other words, even just looking at the suits authorized so far, there are many law suits yet to come. And the FDIC has been authorizing increased numbers of suits every month, so the likelihood is that many more lawsuits will be authorized and filed as we head forward in 2012 and beyond.
UPDATE: Following my initial publication of this post, a loyal reader provided me with a copy of the January 20, 2012 Amended and Restated Complaint in Intervention that the FDIC filed in the District of Puerto Rico in an action involving both the former directors and officers of the failed Westernbank and certain of their spouses, as well as the D&O insurers for Westernbank's holding company. A copy of the FDIC's complain can be found here.
Regulators closed Westernbank on April 30, 2010, which according to the FDIC's complaint, cost the insurance fund $4.25 billion. In October 2011, certain of the former Westernbank directors and officers had sued the bank's primary D&O insurer in state court in Puerto Rico. The FDIC as receiver for Westernbank moved ot intervene in the state court action, and on December 30, 2011, removed the state court action to the District of Puerto Rico. On January 20, 2012, the FDIC filed its amended complaint in intervention, in which it named as defendants certain additional directors and officers, as well as the excess D&O insurers in the bank's D&O insurers program. The FDIC expressly asserts its claims against the D&O insurers under Puerto Rico's direct action statute. Certain of the individual direcrors and officers have moved to remand the action back to state court.
The FDIC's action against the former directors and officers of Westernbank represents the twentieth action that the agency has filed so far as part of the current wave of bank failures, and also represents yet another example of a case where the real battleground may be the D&O insurance coverage dispute.
The First Bank Closures of 2012: This past Friday night, the FDIC also took control of the first three failed banks of 2012, as reflected here. The FDIC closed banks in Florida, Pennsylvania and Georgia, the first three banks to fail in over a month. The presence of a Georgia bank among the first group of bank failures is hardly a surprise, as the bank's 74 bank failures during the period January 1, 2008 through December 31, 2011 is by far the highest total for any state during the period. Florida, with 58 bank failures during that period, has the second highest total.
Read more at The D & O Diary.
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Directors and Officers Insurance, in New Appleman on Insurance Law Library Edition (Matthew Bender)
Insurance: Directors And Officers Liability, in Liability of Corporate Officers and Directors (Matthew Bender).
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