Though 268 banks have failed since January 1, 2008, there
has been relatively little litigation related to the failed banks, as least so
far. For example, the FDIC only recently filed its first action against former
directors and officers of a failed bank (as discussed here). There have also been relatively few suits brought by
private investors as well, though that could change. The failed bank lawsuits
do continue accumulate, however, including an investor lawsuit recently filed
in state court in Georgia that both has some interesting features and that may
present some interesting potential D&O insurance coverage issues.
The case in question was initiated on July 22, 2010 in
Fulton County (Georgia) State Court by three investors in Georgian
Bankcorporation. The company operated Georgian Bank in Atlanta, which was taken
over by regulators on September 25, 2009. The defendants are two of the
company's former directors and officers, one of whom was the company's Chairman
and CEO for several years, and the other of whom was the successor Chairman and
All three of the plaintiffs were investors in the bank
holding company. Two of the three plaintiffs served as company directors until
2003. All of the parties are residents of Georgia.
The complaint seeks damages for negligent
misrepresentation. The plaintiffs allege that the defendants negligently
misrepresented the negative effects of the economic slowdown was having on the
bank; negligently failed to timely and fully report to plaintiffs various
adverse regulatory actions taken against the bank and related regulatory
findings; and negligently failed to inform plaintiffs that a key depositor was
withdrawing its more than $200 million in deposits.
The complaint is emphatic that it is asserting claims
only for negligent misrepresentation. Paragraph 11 of the complaint states that
the plaintiffs "exclude and disclaim" any allegations under the
federal and state securities laws; common law fraud; intentional, reckless or
knowing misconduct; breach of fiduciary duty or mismanagement. In addition, in
paragraph 12 the complaint emphasizes that the claims of it asserts are direct,
on behalf of plaintiffs, and not derivative, on behalf of the company.
There are a number of interesting things about this
complaint, beyond just the fact that it represents an example of a recent bank
failure that resulted in a D&O lawsuit.
First, the complaint's insistence that the plaintiffs are
"disclaiming" a number of kinds of allegations suggests the narrow
line the plaintiffs are trying to walk. Their disavowal of all securities law
claims seemingly is calculated to try to avoid the initial pleading hurdles and
defenses to which securities claims are vulnerable, as well as to avoid any
possible federal question jurisdiction that might facilitate the case's removal
to federal court.
The other claims plaintiffs disavow, particularly the
fraud and intentional misconduct allegations, may reflect a desire to avoid the
conduct exclusions typically found in D&O insurance policies.
The plaintiffs' insistence that they are asserting only
direct not derivative claims is clearly an effort to fend off the FDIC, which
might otherwise (and who knows, may yet) intervene to assert its rights as
receiver under FIRREA to control litigation asserted in the right of the failed
bank itself. (For more about the FDIC's rights under FIRREA, refer here). The plaintiffs' wariness about the FDIC's interest
in the lawsuit is apparently well founded, because, as I discussed in a prior post, the FDIC has sent letters to former officials
at the failed bank detailed potential claims the FDIC may assert against them.
The complaint also raises a number of potential D&O
insurance coverage issues.
The first has to do with the fact that two of the
plaintiffs are former directors of the company. The typical D&O insurance
policy has an "insured vs. insured" exclusion precluding coverage for
claims brought by one insured against another insured. The two former directors
would be insureds under most D&O policies, and so all else equal, their
claim would involve an insured vs. insured claim. The exclusion potentially
might preclude coverage for this claim.
However, the typical insured vs. insured exclusion also
usually has multiple exceptions that carve back coverage for certain kinds of
claims (derivative action, for example). In recent years, among the coverage
carve backs found in many D&O policies is a carve back for claims brought
by former directors and officers more than four year (sometimes three years)
after they left their position. This new lawsuit presents an interesting
example of a case where the inclusion of this coverage carve back could be
crucial to preserving coverage.
A second interesting thing about this case from an
insurance standpoint relates to the plaintiffs' insistence that they are
asserting only claims for negligent misrepresentation. The reason this is
interesting is though the plaintiffs are asserting harm to their investment
interests, they are not asserting claims base on the securities laws. Rather
they are quite deliberately asserting claims solely under the common law.
The reason this is interesting is in connection with the
definition of the term "securities claim" found in the typical public
company D&O insurance policy. Many policy forms do not include within the
definition claims asserted under common law, and so carriers are often
requested to amend the definition of the term to include common law claims.
Some carriers resist this change, arguing either that the change is unnecessary
or that claimants will not assert claims on that basis.
The deliberately narrowed way the plaintiffs have framed
their claims in this case both illustrates why the inclusion of common law
claims in the definition of "securities claims" is appropriate and
provides and example of a case in which the change could be critical.
The deliberately narrow way the plaintiffs framed their
complaint also underscores the challenges claimants may face in trying to
assert claims against former directors and officers of failed banks. Between
worries that the FDIC will sweep in and try to take over the claim and concerns
that D&O insurance coverage issues could eliminate possible insurance
recoveries, prospective claimants face some formidable obstacles. Indeed these
considerations may be among the reasons why there has been relatively little
D&O litigation (so far) as a result of the current round of bank failures.
A July 27, 2010 Atlanta Journal Constitution article
about the lawsuit can be found here.
Special thanks to Henry Turner, counsel for plaintiffs in
the case, for providing a copy of the complaint.
Read other items of interest from the world of
directors & officers liability, with occasional commentary, at the D&O Diary, a blog by