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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 here,
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
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 tortfeasor'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
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.
Is Morrison the "Global Securities Case
of the Decade"?: In a very interesting and thorough
January 20, 2012 article on the Am Law Litigation Daily (here),
Michael Goldhaber asks the question whether or not the Supreme Court's 2010
decision in Morrison v. National Australia Bank is the Global
Securities Case of the Decade (so far, at least). Among other things, Goldhaber
reviews the wide swath that Morrison has cut through cases pending in
the district courts, noting that "perhaps no other precedent has ever cut
down so many claims of such value so rapidly." The article details
the effects that the Morrison opinion has had and is likely to continue
Teaching Fellowship at UCLA Law School:
Some readers of this blog may be very interested to know that the Lowell Milken Institute for Business Law
and Policy at the UCLA
Law School is now accepting applications for the Lowell Milken Institute
Law Teaching Fellowship. The fellowship is a full-time, year-round, one or
two-year academic year-position beginning in July 2012. The position involves
teaching, research and writing, as well as other duties. Applicants must
already hold a JD. The application deadline is March 1, 2012. Further
information about the fellowship program can be found here.
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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