Corporate

A Closer Look at an FDIC Failed Bank Lawsuit Settlement

 According to the FDIC’s website (here), as of March 24, 2015, 44 of the 106 failed bank lawsuits the agency has filed have settled. So there is nothing particularly newsworthy about the fact that the parties to another one of the failed bank lawsuit had reached a settlement. Just the same, however, the recent news that one of the failed bank cases had been settled caught my attention, both because of the higher-profile history of the case and because of the unusually detailed features of the settlement disclosed in the settlement documents.

The recent settlement relates to the lawsuit that the FDIC had filed as receiver for the failed Puerto Rican Bank, Westernbank. Regulators closed Westernbank on April 30, 2010, which, according to the FDIC, cost the insurance fund $4.25 billion. In October 2011, certain of the former Westernbank directors and officers sued the bank’s primary D&O insurer in state court in Puerto Rico, seeking a judicial declaration that the insurer must defend that against claims the FDIC had asserted against them  (about which refer here). The FDIC, as receiver for Westernbank, moved to 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, and, in reliance on Puerto Rico’s direct action statute, the various D&O insurers in the bank’s D&O insurance program. A copy of the FDIC’s amended complaint can be found here.

One of the reasons that this case had a higher profile (in addition to the magnitude of the losses to the FDIC insurance fund) is that there were a series of coverage rulings in the case addressing the question of whether or not coverage under the D&O insurance policies was precluded by the policies’ insured vs. insured exclusion.

As discussed here, on October 12, 2012, Judge Gustavo Gelpi  ruled that the insured vs. insured exclusion did not preclude coverage for the FDIC’s liability action against the former directors and officers, in part because at least in this case the FDIC not only sought to enforce the rights of the failed bank to which it succeeded as the failed bank’s receiver, but also because the FDIC also sought to enforce the rights of “depositors, account holders, and a depleted insurance fund.” As discussed here, on March 31, 2014, the First Circuit affirmed Judge Gelpi’s ruling that the insurers were obligated to advance the directors and officers defense expenses.

The insurers subsequently renewed their motion in the district court for summary judgment on the insured vs. insured exclusion issue, while one of the directors moved for summary judgment on the issue of whether or not the FDIC’s claims against the directors and officers involved alleged wrongful acts that were interrelated with wrongful acts that had been alleged against the directors and officers in an earlier lawsuit. The earlier suits (the “Prior Suits”) were filed in 2007 and 2008 and triggered the bank’s 2006-2007 D&O insurance program. Payments in settlement of the Prior Suits substantially diminished the 2006-2007 insurance program.

As discussed here, on July 9, 2014, Judge Gelpi, applying Puerto Rico law, held that the FDIC’s claims against the former directors and officers of the failed Westernbank did not involve the “facts alleged” against the directors and officers in an earlier lawsuit, and therefore were not deemed made at the time of the earlier lawsuit. Because he found the FDIC’s claims to be unrelated, the claims were covered by the policy in effect at the time the FDIC filed the claims rather than the prior policy that had been substantially eroded by the earlier claim. However, in an unusual twist, Judge Gelpi did conclude that one part of the FDIC’s claim was related to the earlier lawsuit and therefore that that portion (and that portion alone) was deemed made at the time of the earlier suit. The upshot of the ruling is that both the earlier and the subsequent insurance programs were in play.

The parties to the case now apparently have reached an agreement to settle both the liability and the insurance coverage portions of the lawsuit. As discussed in a March 31, 2015 Law360 article (here, subscription required), Judge Gelpi has signed off on the parties’ $34 million settlement of the case. The settlement is detailed in the parties Settlement and Release Agreement (here). According to the agreement, the insurers are contributing $33 million toward the settlement, and “some of the D&O defendants have contributed $1 million toward the settlement.” The agreement does not specify which individuals were contributing toward the settlement or in what amount.

The settlement agreement includes a detailed description of the two insurance programs that were at play in connection with this lawsuit as a result of Judge Gelpi’s July 2014 ruling. The 2006-2007 program has total limits of $50 million, arranged in a primary layer of $20 million and three excess layers of $10 million each. The settlement agreement does not say how much of $50 million 2006-2007 program had been eroded by the earlier claim. The 2009-2010 program (the one in force at the time the failed bank claim was launched) also has total limits of $50 million, arranged in a five layers of $10 million each. The lineup of carriers changed slightly between the two programs, though the same carrier is in the primary position on both programs; that same carrier also had 10 x 30 layer on the 2009-2010 program.

For those interested in a “inside baseball” look into how a case like this gets settled, the settlement agreement also details how much each of the carriers involved are contributing toward the $33 million insurance portion of the $34 million settlement.

All of the carriers involved in the two programs contributed at least something toward the settlement amount. The carrier that is primary on both programs and that also has an excess position on the 2009-2010 program is contributing the largest amount toward the settlement ($16.33 million). The two lower level excess carriers that are on both programs are each contributing $6.33 million, and the two carriers that are in the top level excess position on the two programs are each contributing $2 million.

The failed bank litigation wave is now nearly five years old, as the first of the FDIC’s failed bank lawsuit following the financial crisis was filed in July 2010. As noted at the top of the post, more than a third of the lawsuits have already settled, and more of them will be settling in the months ahead. I suspect that Judge Gelpi’s various rulings in this case provided a motivation for the carriers to try to settle this case (as in, the carriers had had just about as much of this fun as they could stand). But, just the same, if a contentious, complicated case like this one can settle, many of the other cases can be settled as well.

As the cases are gradually worked out, the failed bank litigation wave will slowly wind down. To be sure, the FDIC is still filing lawsuits. It has already filed two more failed bank suits in 2015, after filing nineteen in 2014. With new lawsuits still accumulating, it will be a while yet before the litigation has finally wound down. But because the pace of new lawsuits has definitely slowed and because many of the other cases are moving toward settlement, we definitely seem to have moved into the wind down phase of failed bank litigation phenomenon.

 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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