Bank Executives Under Heightened g Scrutiny by the FDIC Defending - - PowerPoint PPT Presentation

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Bank Executives Under Heightened g Scrutiny by the FDIC

Defending FDIC Lawsuits and Agency Enforcement Actions and Maximizing D&O Insurance Coverage

Today’s faculty features:

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific TUES DAY, OCTOBER 9, 2012

Today s faculty features:

Mary C. Gill, Partner, Alston & Bird, Atlanta S teven C. Morrison, Counsel, Professional Liability/ Financial Crimes Group, FDIC, Jacksonville, Fla. Linda D. Kornfeld, Partner, Jenner & Block, Los Angeles

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FDIC LITIGATION FDIC LITIGATION AGAINST BANK OFFICERS & DIRECTORS

A POI N T / COU N T ERPOI N T DI SCU SSI ON A POI N T / COU N T ERPOI N T DI SCU SSI ON

MARY C GILL STEVEN C MORRISON MARY C. GILL Partner – Alston & Bird LLP Securities Litigation & Regulatory Enforcement mary.gill@alston.com STEVEN C. MORRISON Counsel – FDIC Professional Liability & Financial Crimes stemorrison@fdic.gov

FDIC LITIGATION BY THE NUMBERS FDIC LITIGATION BY THE NUMBERS

• FDIC has filed 33 lawsuits against former D&Os of

closed banks in 10 states: closed banks in 10 states:

• Georgia – 8
• California Illinois – 6

California, Illinois 6

• North Carolina – 3
• Puerto Rico – 2
• Arizona, Florida, Michigan, Kansas, Washington – 1

6

FDIC LITIGATION BY THE NUMBERS C G O U S

• FDIC has authorized lawsuits against D&Os at an

increasing pace: g p

• 2009 – 11
• 2010 – 98
• 2011 – 264
• 9/2012 – 274

7

Bank Date Filed (Court) Case Name/Number Defendants Claims Asserted Status 07/02/10 FDIC v. Van Dellen No The former CEO, CCO and senior loan officers of Negligence IndyMac 07/02/10 (C.D. Cal.) Dellen, No. 2:10-cv-04915- DSF-SH IndyMac’s Homebuilder Division (HBD), each of whom was a member of HBD’s loan committee. Negligence Breach of Fid. Duty Motion to dismiss denied Heritage Comm. 11/01/10 (N.D. Ill.) FDIC v. Saphir,

• No. 1:10-cv-

07009 Ten former officers and directors of Heritage Community, each of whom either served on the loan committee or approved some of the loans at issue as members of the Board, as well as the Negligence Gross Negligence Breach of Fid. Duty Settled Stipulation of Dismissal Filed former CFO. y Integrity 01/14/11 (N.D. Ga.) FDIC v. Skow,

• No. 1:11-cv-

0111 Eight former directors of Integrity, each of whom was a member of the bank’s loan committee. Negligence Gross Negligence Breach of Fid. Duty Motion to Dismiss granted in part/denied in part. Plaintiffs’ Motion to Strike granted in part 1st Centennial 01/14/11 (C.D. Cal.) FDIC v. Appleton, No. 2:11-cv-00476- DDP-PLA Twelve former officers and directors of 1st Centennial, each of whom either served on the bank’s loan committee or approved some of the loans at issue as members of the Board. Negligence Gross Negligence Breach of Fid. Duty Failure to Supervise Motion to Strike Affirmative Defenses granted Corn Belt Bank & 03/01/11 FDIC v. Stark,

• No. 3:11-cv-

Four former officers and directors of Corn Belt B&T each of whom was a member of the bank’s Negligence Settled Bank & Trust Co. (C.D. Ill.) 03060-JBM- BGC B&T, each of whom was a member of the bank s loan committee. Gross Negligence Dismissed with prejudice Washington Mutual 03/16/11 (W.D. Wash.) FDIC v. Killinger, No. 2:11-cv-000459 The former CEO, COO and senior loan officer of Washington Mutual, as well as two of the former executives’ spouses. Negligence Gross Negligence Breach of Fid. Duty Fraudulent Conveyance Settled with former execs to pay $64M in total Case dismissed Conveyance Wheatland 05/05/11 (N.D. Ill.) FDIC v. Spangler, No. 10-cv-4288 Four former directors of Wheatland—two of whom were officers of the bank and two of whom were non-officer directors who served on the loan committee—as well as the former CFO and senior loan officer. Negligence Gross Negligence Breach of Fid. Duty Failure to Supervise Motion to strike certain affirmative defenses denied IndyMac II 07/06/11 (C.D. Cal.) FDIC v. Perry,

• No. 11-cv-5561-

ODW-MRWx IndyMac’s former CEO. Negligence Amended Order denying Defendant’s Motion to Dismiss Pending interlocutory appeal

8

Bank Date Filed (Court) Case Name/Number Defendants Claims Asserted Status Haven Trust 07/14/11 FDIC v. Briscoe, No. Thirteen former directors of Haven Trust— each of whom either served on the bank’s loan committee or approved some of the loans at Negligence Gross Negligence Order granting in part/denying in Haven Trust (N.D. Ga.) 1:2011-cv-002303 committee or approved some of the loans at issue as members of the Board—as well as the former CFO and senior loan officer. Gross Negligence Breach of Fid. Duty g g p y g part Motion to Dismiss Michigan Heritage 08/08/11 (E.D. Mich.) FDIC v. Cuttle, No. 2:11-cv-13442-BAF MHB’s former Senior Loan Officer. Negligence Gross Negligence Breach of Fid. Duty Answer Filed Pending Discovery C l bi 08/09/11 (D FDIC v. McCaffree, Former directors of Columbian; each of the Negligence O d ti M ti t Di i Columbian B&T 08/09/11 (D. Kan.) FDIC v. McCaffree,

• No. 2:11-cv-02447-

JAR-KGS Former directors of Columbian; each of the Defendant Directors was on Columbian’s loan committee. Negligence Gross Negligence Breach of Fid. Duty Order granting Motions to Dismiss certain parties Cooperative 08/10/11 (E.D.N.C.) FDIC v. Willetts, No. 7:11-cv-00165-BO Seven former directors and two former officers

• f Cooperative Bank in Wilmington, NC.

Negligence Gross Negligence Breach of Fid. Duty Order denying Motion to Dismiss Motion to Strike Defendants’ Fifth Affi ti D f Breach of Fid. Duty Affirmative Defense Silverton 08/22/11 (N D G ) FDIC v. Bryan, et al.,

• No. 1:11-cv-02790-

Fifteen former directors and two former

• fficers of Silverton Bank, as well as the

Corporate Waste Negligence G N li Consent Judgment entered against

• ne loan officer

Motions to Dismiss filed (N.D. Ga.) JEC (N.D. Ga.) , bank’s D&O insurers. Gross Negligence Breach of Fid. Duty Stayed pending resolution of insurance coverage claims 08/23/11 (D FDIC v. Gary A. Dorris and Phillip A. Two former inside directors of First National Negligence Defendants entered consent FNB Nevada 08/23/11 (D. Ariz.) p Lamb,

• No. 11-cv-01652-

GMS Bank Holding, First National Bank Arizona, and First National Bank Nevada. g g Gross Negligence Breach of Fid. Duty Defendants entered consent judgments for $20M and assigned insurance rights to FDIC Alpha Bank & Trust 10/07/11 (N.D. Ga.) FDIC v. Blackwell,

• No. 11-cv-3423-RWS

(N D Ga ) Eleven former directors of Alpha Bank. Negligence Gross Negligence Motion to Dismiss granted in part/denied in part Trust (N.D. Ga.) Mutual Bank 10/25/11 (N.D. Ill) FDIC v. Mahajan, et al., No. 1:11-cv- 07590 (N.D. Ill.) Seven former directors and two former loan

• fficers of Mutual Bank, as well as former

General Counsel and his law firm. Negligence Gross Negligence Breach of Fid. Duty Legal Malpractice Motions to Dismiss granted in part and denied in part

9

Bank Date Filed (Court) Case Name/Number Defendants Claims Asserted Status FDIC v Johnson et Negligence Westsound 11/18/11 (W.D. Wash.) FDIC v. Johnson, et al., No. 3:11-cv- 05953 (W.D. Wash.) Eleven former officers and directors of Westsound Bank. Negligence Gross Negligence Breach of Fid. Duty Notification of Settlement Bank of 12/29/11 FDIC v. Greenwood, et al., No. 1:11-cv- Seven former directors of the Bank of Asheville each of whom served on the Bank’s Negligence Gross Negligence Order Denying Motions to Dismiss Asheville (W.D.N.C.) 00337-MR-DLH (W.D.N.C.) Asheville, each of whom served on the Bank s loan committee. Gross Negligence Breach of Fid. Duty Motion to Strike Affirmative Defenses Filed R-G Premier 01/18/12 (D.P.R.) FDIC v. Victor J. Galan-Alvarez, et al.,

• No. 3:12-cv-01029

(D P R ) Five former inside directors and fourteen former outside directors of R-G Premier Bank, as well as the D&O insurer Gross Negligence Motions to Dismiss Filed (D.P.R.) as well as the D&O insurer. Westernbank Puerto Rico 01/20/12 (D.P.R.) FDIC v. Garvia, et al., No. 3:11-cv- 02271-GAG (D.P.R.) Certain former officers and directors of Westernbank Puerto Rico, as well as the bank’s D&O insurer. Gross Negligence Breach of Fid. Duty Adverse Domination Motions to Dismiss Filed FDIC Th T County Bank 01/27/12 (E.D. Cal.) FDIC v. Thomas T. Hawker, et al., No. 1:12-cv-00127-LJO- DLB (E.D. Cal.) Two former inside directors and three former loan officers of Community Bank in Merced, CA. Negligence Breach of Fid. Duty Order Denying Motion to Dismiss Silver State 02/19/12 (D. FDIC v. Corey L. Johnson, et al., No. Two inside directors and two loan officers of Gross Negligence Motion to Dismiss Filed Silver State Ariz.) 2:12-cv-00209 (D. Ariz.) Silver State Bank in Henderson, NV. Breach of Fid. Duty Motion to Dismiss Filed Community B&T 02/24/12 (N.D. Ga.) FDIC v. Charles M. Miller, et al, No. 2:12- cv-00042-WCO (N.D. Ga.) Former CEO/director and former SVP of Community B&T in Cornelia, GA. Breach of Fid. Duty Negligence Gross Negligence Motion to Dismiss Filed ) Freedom Bank 03/02/12 (N.D. Ga.) FDIC v. Richard Adams, et al., No. 1:12-cv-00726-JOF (N.D. Ga.) Eleven former directors and one former loan

• fficers of Freedom Bank of GA.

Negligence Gross Negligence Breach of Fid. Duty Motions to Dismiss Filed

10

Bank Date Filed (Court) Case Name/Number Defendants Claims Asserted Status Broadway Bank 03/07/12 (N.D. Ill.) FDIC v. Demetris Giannoulias, No. 1:12-cv-01665 (N.D. Ill.) Six former directors and two former loan

• fficers of Broadway Bank.

Negligence Gross Negligence Breach of Fid. Duty Motions to Dismiss Filed Florida FDIC v Price et al Florida Community Bank 03/13/12 (M.D. Fla.) FDIC v. Price et al,

• No. 2:12-cv-00148

(M.D. Fla.) Seven former directors of Florida Community Bank. Negligence Gross Negligence Order granting in part/denying in part Motion to Dismiss Omni National Bank 03/16/12 (N.D. Ga.) FDIC v. Klein et al,

• No. 1:12-cv-00896-

RLV (N D Ga ) Three former directors and seven former

• fficers of Omni National Bank.

Negligence Gross Negligence Corporate Waste Answers Filed Discovery Motions Filed RLV (N.D. Ga.) Corporate Waste Discovery Motions Filed Cape Fear 04/04/12 (E.D.N.C.) FDIC v. Coburn et al,

• No. 7:12-cv-00082

(E.D.N.C) Three former directors and four former

• fficers of Cape Fear Bank in NC.

Negligence Gross Negligence Breach of Fid. Duty Answer Filed FDIC v Fagin et al Negligence First Bank of Beverly Hills 04/20/12 (C.D. Cal.) FDIC v. Fagin et al,

• No. 12-cv-03448

(C.D. Cal.) Seven former directors and three former

• fficers of First Bank of Beverly Hills.

Negligence Gross Negligence Breach of Fid. Duty Motions to Dismiss Filed Innovative Bank 05/23/12 (N.D. Cal.) FDIC v. Hong et al,

• No. 12-cv-2658

President & CEO, nine former directors and four former offices of Innovative Bank. Negligence Gross Negligence Breach of Fid. Duty Answer Filed y Community Bank of Arizona 07/13/2012 (Ariz.) FDIC v. Jamison 12-cv-01508 (Ariz.) Seven former directors (three of whom were also officers) of Community Bank of Arizona. Negligence Gross Negligence Breach of Fid. Duty Motion to Dismiss Filed Piedmont Bank 07/13/2012 (N D Ga ) FDIC v. Whitley 12 cv 170 (N D Ga ) Six former directors (one of whom was also an officer) of Piedmont Bank Negligence Gross Negligence Motion to Dismiss Filed Bank (N.D. Ga.) 12-cv-170 (N.D. Ga.) an officer) of Piedmont Bank. Gross Negligence Benchmark Bank 10/02/2012 (N.D. Ill.) FDIC v. Samuelson 12-cv-07907 Six former directors and/or officers of Benchmark Bank. Negligence Gross Negligence Breach of Fid. Duty Complaint Filed.

11

POST LITIGATION SETTLEMENTS

• FDIC v. Saphir, No. 1:10-cv-07009 (N.D. Ill.).
• FDIC v. Stark, No. 3:11-cv-03060-JBM-BGC (C.D. Ill. ).

, ( )

• FDIC v. Killinger, No. 2:11-cv-000459 (W.D. Wash.).
• FDIC v. Dorris, No. 11-cv-01652-GMS (D. Ariz.).

( )

• FDIC v. Johnson, et al., No. 3:11-cv-05953 (W.D. Wash.).

12

FOLLOWING A BANK CLOSURE

• D&Os of closed banks face scrutiny by one or more

regulators with the most likely threat of litigation by the FDIC regulators with the most likely threat of litigation by the FDIC.

• The FDIC investigates each closed bank to determine

whether there are grounds to assert claims against the bank’s D&Os, among others.

• At or before the closing of a bank, members from FDIC’s

Professional Liability and Financial Crimes Section begin to Professional Liability and Financial Crimes Section begin to review documents and interview bank

• fficers

and employees.

13

ADMINISTRATIVE SUBPOENAS S SU O S

• FDIC subpoena power arises under 12 U.S.C.A. §1818(n) (providing

that FDIC “shall have the power . . . to issue, revoke, quash, or p , , q , modify subpoenas and subpoenas duces tecum”).

• Subpoenas typically include extensive requests for financial records,

enabling FDIC to determine whether individual: (i) has the resources enabling FDIC to determine whether individual: (i) has the resources to satisfy judgment or (ii) has transferred assets in recent past.

• Standard for administrative subpoenas: (i) inquiry is within authority

f (ii) d d t t i d fi it d (iii) l t i f ti

• f agency, (ii) demand not too indefinite, and (iii) relevant information
• sought. U.S. v. Morton Salt Co., 338 U.S. 632 (1950).
• Before seeking personal financial information to determine net

worth, FDIC must articulate “specific grounds for its suspicion of liability.” In re McVane, 44 F.3d 1127 (2nd Circuit. 1995).

14

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE NEGLIGENCE OR GROSS NEGLIGENCE

• The

Financial Institutions Reform, Recovery and E f t A t f 1989 (“FIRREA”) t bli h d Enforcement Act of 1989 (“FIRREA”) established gross negligence as a national minimum standard for officer and director liability. y

• The FDIC may also pursue claims against officers and

directors under a stricter standard for liability (ordinary li ) if i ibl d l negligence), if permissible under state law.

• In most states, gross negligence remains the minimum

standard for imposing liability upon bank officers and standard for imposing liability upon bank officers and directors.

15

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE NEGLIGENCE OR GROSS NEGLIGENCE

• Federal

courts in Georgia, Florida and Illinois have dismissed FDIC claims based on ordinary negligence.

• Georgia
• “Georgia’s business judgment rule relieves officers and directors

from liability for acts or omissions taken in good faith compliance from liability for acts or omissions taken in good faith compliance with their corporate duties. Such rule forecloses liability in

• fficers and directors for ordinary negligence in discharging

their duties.” FDIC v. Skow, No. 1:11-CV-0111-SCJ (N.D. Ga. Aug. 14, 2012) (quoting Flexible Prods. Co. v. Ervast, 643 S.E.2d 560 (2007)).

• “When Georgia’s business judgment rule is applied to claims for
• rdinary negligence, Georgia courts hold that such claims are not

viable. A dismissal of [FDIC’s] ordinary negligence claims is thus, proper . . .” Id.; see also FDIC v. Briscoe, No. 1:2011-cv-002303 (N D Ga Aug 14 2012); FDIC v Blackwell No 11-cv-3423-RWS (N.D. Ga. Aug. 14, 2012); FDIC v. Blackwell, No. 11 cv 3423 RWS (N.D. Ga. Aug. 3, 2012).

16

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE NEGLIGENCE OR GROSS NEGLIGENCE

• Florida

“[Fl id ’ di li bili ] di i di i l li bili

• “[Florida’s director liability] statute conditions directorial liability
• n something beyond ordinary negligence[.]

[The] FDIC’s count asserting a claim for ordinary negligence must therefore be dismissed ” FDIC v Price No 2:12 cv 00148 UA DNF (M D be dismissed. FDIC v. Price, No. 2:12-cv-00148-UA-DNF (M.D.

• Fla. Aug. 8, 2012).
• Illinois
• “[C]ourts have the authority to dismiss duplicative claims if they

allege the same facts and the same injury . . . the negligence claims, Counts II, V, and VIII of the complaint are dismissed as , , , p duplicative of the breach of fiduciary duty claims.” FDIC v. Saphir, No. 1:10-cv-07009 (N.D. Ill. Sept. 1, 2011).

17

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE NEGLIGENCE OR GROSS NEGLIGENCE

• But what standard of liability did the FDIC v. Skow

d i i l f ffi d di t ? decision leave for officers and directors?

• Assuming these allegations are true, a jury might reasonably

conclude that Defendants were “grossly negligent” as defined by g y g g y Georgia law. O.C.G.A. § 51-1-4 (“gross negligence” is the absence of that degree of care “which every man of common sense, however inattentive he may be, exercises under the same or similar circumstances”)

• This standard is fairly low, compared to some states where

gross negligence is somewhere near willful and wanton. g g g

• And the court held that directors could not shield themselves

from liability with insulating statutes and exculpatory provisions in the articles of incorporation in the articles of incorporation.

18

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE NEGLIGENCE OR GROSS NEGLIGENCE

• Two federal courts in North Carolina have permitted FDIC claims for

simple negligence to proceed past motion to dismiss stage. simple negligence to proceed past motion to dismiss stage.

• “[T]he North Carolina Supreme Court has stated that directors and

managing officers of a corporation are liable for either willful or negligent failure to perform their duties.” FDIC v. Willetts, No. 7:11-cv- g g p , 165-BO (E.D.N.C. Apr. 16, 2012), affirmed on reconsideration.

• “Because the business judgment rule presupposes the exercise of

reasonable care, ‘North Carolina law may recognize director liability for y g y simple negligence to the extent that such negligence falls outside the protection of the business judgment rule.’” Id. (citing Resolution Trust

• Corp. v. Bernard, 94-cv-475, 1994 WL 17164886, at *4 (M.D.N.C.

1995)) See also FDIC v Greenwood No 1:11 cv 00337 MR DLH 1995)). See also FDIC v. Greenwood, No. 1:11-cv-00337-MR-DLH (W.D.N.C.).

• At least one California federal court has held that the BJR applies to

directors but not officers FDIC v Perry No 2:11 cv 05561 (C D directors but not officers. FDIC v. Perry, No. 2:11-cv-05561 (C.D.

• Cal. Dec. 13, 2011), pending appeal to Ninth Circuit.

19

AVAILABILITY OF AFFIRMATIVE DEFENSES

• Pre-O’Melveny & Myers v. FDIC
• Affirmative defenses raised by bank D&Os in post-S&L

crisis litigation were often rejected or stricken by courts because of so-called “no-duty” rule because of so-called no-duty rule.

• The

policy behind “no-duty” rule was that “any affirmative defense calling into question the pre- or post-bank closing action of the FDIC [is] insufficient as a matter of law because the FDIC owes no duty to the D&Os

• f

a failed bank either in its pre-failure p regulation of a bank or in its post-failure liquidation of the same.” FDIC v. Schreiner, 892 F. Supp. 848, 853 (W.D. Tex. 1985). ( )

20

AVAILABILITY OF AFFIRMATIVE DEFENSES

• O’Melveny & Myers v FDIC 512 U S 79 (1994)
• O’Melveny & Myers v. FDIC, 512 U.S. 79 (1994)
• In O’Melveny & Myers v. FDIC, the Supreme Court

rejected the premise of “federal common law,” upon j p , p which the FDIC had primarily relied in arguing that the “no duty” rule afforded it unique protections from affirmative state-law defenses. affirmative state law defenses.

• The Court held that neither federal policy nor FIRREA

itself created a federal rule to protect the FDIC, l di th t “ d f d i t th i i l concluding that “any defense good against the original party is good against the receiver.” Id. at 86.

21

AVAILABILITY OF AFFIRMATIVE DEFENSES

• Post-O’Melveny & Myers v. FDIC – Courts that have rejected

“ d t ” l “no-duty” rule:

• FDIC v. Skow, No. 1:11-CV-0111-SCJ (N.D. Ga. Aug. 14, 2012)

(denying FDIC’s motion to strike certain affirmative defenses and d li i t d t d l th l “ d t ” l ) declining to adopt and apply the common law “no duty” rule).

• FDIC v. Willetts, No. 7:11-cv-165-BO (E.D.N.C. Oct. 3, 2012)

(denying FDIC’s motion to strike affirmative defenses and holding “[t]hat after O’Mel en ‘state la controls hat defenses are “[t]hat after O’Melveny, ‘state law controls what defenses are available against the FDIC when the agency is acting as the receiver of a failed financial institution.’”)

• See also RTC v Mass Mut Life Ins Co

93 F Supp 2d 300 306

• See also RTC v. Mass. Mut. Life Ins. Co., 93 F. Supp. 2d 300, 306

(W.D.N.Y. 2000); FDIC v. Ornstein, 73 F. Supp. 2d 277, 282 (E.D.N.Y. 1999); FDIC v. Gladstone, 44 F. Supp. 2d 81, 89 (D.

• Mass. 1999); FDIC v. Haines, 3 F. Supp. 2d 155 (D. Conn. 1997);

RTC v. Liebert, 871 F. Supp. 370 (C.D. Cal. 1994).

22

AVAILABILITY OF AFFIRMATIVE DEFENSES

• Post-O’Melveny

& Myers v. FDIC – Courts that have ti d t t “ d t ” l continued to accept “no-duty” rule:

• FDIC v. Van Dellen, No. 2:10-cv-04915-DSF-SH (C.D. Cal. Sept. 27,

2011) (barring defendants from raising certain affirmative defenses t t t th b d FDIC’ t i hi to extent they were based on FDIC’s post- or pre-receivership conduct, because the defenses could not have been asserted against the bank). FDIC Appleton No 2 11 c 00476 JAK PLA (C D Cal J l 23

• FDIC v. Appleton, No. 2:11-cv-00476-JAK-PLA (C.D. Cal. July 23,

2012) (holding that “the no duty rule remains viable following the Supreme Court’s decision in O’Melveny & Myers v. FDIC”).

• See also FDIC v Skow No 1:11 CV 0111 SCJ (N D Ga Aug 14
• See also FDIC v. Skow, No. 1:11-CV-0111-SCJ (N.D. Ga. Aug. 14,

2012) (holding that there is a substantial ground for difference of

• pinion with respect to “no-duty” rule and certifying issue for appeal

to Eleventh Circuit); FDIC v. Healey, 991 F. Supp. 53 (D. Conn. 1998); Grant Thornton, LLP v. FDIC, 535 F. Supp. 2d 676 (S.D. W.

• Va. 2007); FDIC v. Raffa, 935 F. Supp. 119 (D. Conn. 1995).

23

POTENTIAL DEFENSES

• Business Judgment Rule / state laws on standard of liability
• Failure to establish elements of liability (causation damages)

Failure to establish elements of liability (causation, damages)

• Failure to mitigate damages
• Comparative fault or contributory fault

Comparative fault or contributory fault

• Reliance on regulatory/government agencies
• Reliance on management, committees, or advisors

Reliance on management, committees, or advisors

• Statute of limitations

24

STATUTE OF LIMITATIONS

• Generally, FDIC has three years from the date of receivership to bring

claims of gross negligence or breach of fiduciary duty for claims that were viable on the date of the bank closing viable on the date of the bank closing.

• 12 U.S.C. § 1821(d)(14)(A):
• (i) in the case of any contract claim, the longer of: (1) the 6-year period

beginning on the date the claim accrues; or (2) the period applicable under State law; and

• (ii) in the case of any tort claim, the longer of: (1) the 3-year period

b i i th d t th l i (2) th i d li bl beginning on the date the claim accrues; or (2) the period applicable under State law.

• 12 U.S.C. § 1821(d)(14)(B): Date on which the SOL begins to run on any

l i d ib d i h b h h ll b th l t f claim described in such subparagraph shall be the later of:

• (i) the date of the appointment of FDIC as conservator or receiver; or
• (ii) the date on which the cause of action accrues.

( )

25

ADVERSE DOMINATION & STATUTE OF LIMITATIONS OF LIMITATIONS

• The statute of limitation does not begin to run while the

alleged wrongful directors are in control of the bank.

• “To permit bank directors who control and dominate

th ff i f b k t b fit f th i i ti the affairs of a bank to benefit from their own inaction by finding that, as a matter of law, limitations run from the moment of their commission of improprieties, is a result which justice could not tolerate.” FDIC v. Bird, 516 F. Supp. 647 (D.P.R. 1981).

26

FDIC V. BIRD

• Bird has never been overturned and has been cited as authority

in 56 federal and state court decisions. Cit d b

• Cited by:
• 1st Circuit – 3 times
• 10th Circuit – 2 times
• Cited by district courts* for the following states:
• Kansas (4); Tennessee (4); Arkansas (2); Delaware (2); Florida (2);

Illi i (2) M l d (2) N b k (2) Okl h (2) O (2) Illinois (2); Maryland (2); Nebraska (2); Oklahoma (2); Oregon (2); Texas (2); Alabama (1); Arizona (1); California (1); Colorado (1); Michigan (1); Mississippi (1); Missouri (1); North Carolina (1); Ohio (1); Pennsylvania (1); Utah (1); and Washington, D.C. (1). ( ); y ( ); ( ); g , ( )

• includes bankruptcy courts
• Cited by state courts:
• California (1); Kansas (1); Kentucky (1); Maryland (1); Oklahoma

(1); Oregon (1).

27

FDIC V. BIRD

• Possible problem: FDIC v. Bird was decided before

O’Melveny and there is discussion in the case about a y federal common law.

• But the case also talks about adopting the relevant

t t l f t t t f li it ti state law for statute of limitations.

• Key:

Does the state where the bank exists have a rule delaying the accrual of the right of action? y g g

• Many states do have a discovery rule; some states do

not.

28

OTHER ISSUES: HOW MUCH CONTROL?

• Majority Rule:

j y

• The majority of jurisdictions toll the statute of limitations as

long as a majority of the board was culpable.

• See Resolution Trust Corp. v. Farmer, 865 F. Supp. 1143,

1156 (E.D. Pa. 1994). But also see Hecht v. Resolution Trust Corp., 635 A.2d 394, 403 (Md. 1994) (Shareholder p , , ( ) ( could have acted).

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OTHER ISSUES: HOW MUCH CONTROL?

• Minority Rule:

Minority Rule:

• A minority of jurisdictions require the plaintiff to show “full,

complete and exclusive control in the directors or officers h d ” F & M h t N t’l B k B 902 charged.” Farmers & Merchants Nat’l Bank v. Bryan, 902 F.2d 1520, 1522) (10th Cir. 1990).

• Does not require a majority of the board of to be “culpable or

disinterested” but instead depends on “the degree of control the culpable individual or individuals have over the entire board.” FDIC v. Henderson, 61 F.3d 421, 427 (5th Cir. 1995) ( d T l ) (di t ) (under Texas law) (dicta).

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FDIC V. BIRD AND ITS PROGENY ARE NO LONGER GOOD AUTHORITY NO LONGER GOOD AUTHORITY

• The FDIC as receiver acquires only those claims still

available at the time it becomes receiver available at the time it becomes receiver.

• The statute of limitations prior to receivership is governed

by state laws and state legal doctrines. y g

• FDIC v. Bird was decided prior to O’Melveny and did not apply

the law of the state in which the court sat [Puerto Rico].

• The Supreme Court expressly rejected the principle that there

was a body of federal common law that afforded the FDIC with more substantive rights than the bank had under state law. O’Melveny 512 U S at 84 85 O’Melveny, 512 U.S. at 84-85.

31

TRUSTEE LITIGATION – THE FDIC AND THE D&OS ARE ALIGNED

• The bankruptcy trustee for the holding company and
• The bankruptcy trustee for the holding company and

the FDIC, as receiver for the bank, compete for claims against the D&Os.

• The resolution of this issue turns upon state law and

the distinction between direct shareholder claims and derivative claims.

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DERIVATIVE CLAIMS

• FDIC in its capacity as receiver (“FDIC-R”) owns derivative

claims, but does not own direct claims.

• FDIC-R succeeds to “all rights . . . of the insured depository

institution, and of any stockholder . . . with respect to the institution and the assets of the institution.” 12 U.S.C. § institution and the assets of the institution. 12 U.S.C. § 1821(d)(2)(A)(i).

• “[U]nder FIRREA, any . . . Derivative action belong[s]

l i l t th FDIC i i t t t th exclusively to the FDIC as successor in interest to the shareholders of the subsidiary bank.” In re Southeast Banking Corp., 69 F.3d 1539, 1549 (11th Cir. 1995).

• FDIC-R may intervene to protect its rights in the derivative

claim.

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EXAMPLES OF DERIVATIVE CLAIMS EXAMPLES OF DERIVATIVE CLAIMS

• Derivative Claims:
• Breach of fiduciary duties to bank
• Negligent lending
• Derivative Injuries:
• Lost bank profits
• Lost value of stock

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NOMINALLY, WHO BRINGS THESE CLAIMS?

• Bankruptcy Trustees on behalf of the bank holding

company

• In re Southeast Banking Corp., 827 F. Supp. 742 (S.D. Fla.

1993). )

• Lubin v. Skow, 382 Fed. App’x. 866 (11th Cir. 2010).
• Vieira v. Anderson (In re BeachFirst Nat’l Bancshares), No. 11-

CV-0055, 2011 WL 3794234 (D.S.C. 2011).

• Unsecured

Creditors’ Committees by Motion for Derivative Standing and Adversary Action Derivative Standing and Adversary Action

• Official Committee of Unsecured Creditors of BankUnited

Financial Corporation v. FDIC/R BankUnited, No. 1:11-cv- 20305 FAM (S D Fl 2011) 20305-FAM (S.D. Fl. 2011).

35

NOMINALLY, WHO BRINGS THESE CLAIMS?

• Plan Administrators from the Bankruptcy Court
• Plan Administrators from the Bankruptcy Court

by a Plan of Liquidation

• Clifford A. Zucker, as Chapter 11 Plan Admin of R&G

Clifford A. Zucker, as Chapter 11 Plan Admin of R&G Financial Corp. v. Rolando Rodriguez, No 12-1408 (D.P.R. 2012).

• In re Imperial Capital Bancorp, Inc., No. 09-19431-

11-LA (C.D. Cal. 2012) [Holdco Advisors].

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WHO ARE BEHIND THESE CLAIMS?

• Attorneys
• Contingent Agents for HDC Bond Holders

Contingent Agents for HDC Bond Holders

• HoldCo
• Tricadia
• Litigation Trusts
• Crescent Resources Litigation Trust v. Duke Energy Corp.

(In re Crescent Resources LLC, debtor), Adversary Action 10-01111 (W.D. Tex. 2010).

• Kirschner, as trustee of the Refco Litigation Trust v.

, g KPMG, 938 N.E. 2d 941 (N.Y. 2010).

37

PROTECTING FDIC’S RIGHTS PROTECTING FDIC’S RIGHTS

• FDIC Strategy
• Intervene, plead, and move to dismiss.
• Remove the bankruptcy referral so the case is

decided by the district court.

• Stay discovery until the district court decides the

ti t di i motion to dismiss.

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NARROWING THE LITIGATION FRONTS

D&O’s Strategy

• D&O’s Strategy
• Remove the bankruptcy referral so the case is

decided by the district court decided by the district court.

• Move to dismiss on the ground, inter alia, of lack
• f standing.
• Seek to stay discovery until the district court

decides the motions to dismiss.

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CONCLUSION CONCLUSION

• FDIC litigation against former bank D&Os will likely increase
• ver the next year.
• e t e

e t yea

• State laws governing the standard of liability and the

business judgment rule will limit the claims in many states.

• Anticipate

motions to strike affirmative defenses, the

• utcome
• f

which will depend upon state law and interpretation of O’Melveny.

• Discovery disputes will likely arise based upon defenses

and other issues (i.e. cost sharing).

• First FDIC trial (IndyMac) is scheduled for November 2012

First FDIC trial (IndyMac) is scheduled for November 2012.

• Other

significant developments to watch: insurance coverage litigation.

40

The Failed Bank Crisis: D&O Insurance I li ti Implications

Linda Kornfeld Linda Kornfeld Jenner & Block lkornfeld@jenner.com 213 239 5176 213.239.5176

#2797095

WILL INSURANCE DRIVE THE CLAIMS AGAINST FORMER D’s and O’s? AGAINST FORMER D s and O s?

• Status of the coverage litigation
• What is the relevant coverage—Side A, B or C?
• Who has interests in the coverage?

Who has interests in the coverage?

• Is the insurance driving who gets sued?

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43

Wh t tit t “ l i ”? What constitutes a “claim”?

D d l tt ?

• Demand letters?
• Subpoenas?
• “Informal investigations”?

44

D t t “ d ” d f f Duty to “advance” defense fees

“P t ti lit ” t d d

• “Potentiality” standard
• “Prior to final adjudication”—the “timing” question

45

A t t f “ l d d” l i Amounts spent for “excluded” claims

C ld b d if “b fit ” d l i

• Could be covered if “benefits” covered claims
• Parties shall use “best efforts” to allocate between covered

and uncovered claims and uncovered claims

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“I t ti l d t l i ” “Intentional conduct claims”

Sh ld t i t t f d f f

• Should not impact payment of defense fees
• e.g., Cal Ins Code section 533

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STRATEGIC USE OF LIMITED INSURANCE STRATEGIC USE OF LIMITED INSURANCE RESOURCES

D&O policies are “depleting” assets D&O policies are depleting assets. Depending upon applicable law, among individual insureds, getting to the table early could matter. getting to the table early could matter. first come first served v. insurer must protect interests of all insureds. Check the law and policy language.

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STRATEGIC USE OF LIMITED INSURANCE STRATEGIC USE OF LIMITED INSURANCE RESOURCES

Strategies for executives to protect their insurance rights:

• Early notice •
• Early notice •
• Timely submissions of legal bills •

Sti l ti t i d

• Stipulations amongst insureds •

Early settlements Seek, or stipulate with FDIC to, stay underlying issues while coverage issues addressed Notify insurer of objection to payments to other insureds

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USE OF SETTLEMENTS/ASSIGNMENTS TO USE OF SETTLEMENTS/ASSIGNMENTS TO MUTUALLY BENEFIT FDIC/EXECUTIVES

• Generally speaking the insurers, not the executives have

the deep pockets.

• The FDIC seeks access to the insurance proceeds and has

a deeper pocket to pursue coverage litigation.

• Executives should consider using the

settlement/assignment approach to resolve the FDIC’s claims for minimal financial exposure claims for minimal financial exposure.

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USE OF SETTLEMENTS/ASSIGNMENTS TO USE OF SETTLEMENTS/ASSIGNMENTS TO MUTUALLY BENEFIT FDIC/EXECUTIVES

• FNB Nevada (D. Ariz.)
• Defendants and FDIC agreed to $20 million settlement.
• Defendants agreed to entry of consent judgment against

them.

• Defendants assigned rights to insurance proceeds to

FDIC.

• FDIC agreed not to execute on judgment
• FDIC agreed not to execute on judgment.

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USE OF SETTLEMENTS/ASSIGNMENTS TO USE OF SETTLEMENTS/ASSIGNMENTS TO MUTUALLY BENEFIT FDIC/EXECUTIVES

• IndyMac (C.D. Cal)—alternative approach
• Defendants in Trustee litigation agreed to $35 million in

ttl t ith T t settlements with Trustee.

• Defendants and Trustee did not agree to consent

judgments, instead: j g ,

• Defendants assigned the insurance.
• The parties agreed to dismiss the litigation.
• But, dismissal was conditioned upon Trustee

prevailing in coverage litigation prevailing in coverage litigation.

52

USE OF SETTLEMENTS/ASSIGNMENTS TO USE OF SETTLEMENTS/ASSIGNMENTS TO MUTUALLY BENEFIT FDIC/EXECUTIVES

• The Benefit:
• FDIC or Trustee can get direct access to insurance.
• Defendants can avoid paying for settlement and

liti ti coverage litigation.

• The Negative:
• Defendants may be required to have judgment

y q j g entered against them.

• Practice Pointer:
• Insurer must have denied coverage for assignment
• Insurer must have denied coverage for assignment

to work.

• Insurers will argue that the settlement is collusive,

so make sure that the settlement is arms length and

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reflects good faith evaluation of exposure.

POLICY EXCLUSIONS:

54

Insured vs. Insured Exclusion

• Is underlying action “collusive”?
• Does the policy contain a “bankruptcy trustee” carveout?

y y

• Is the FDIC truly acting as or on behalf of the “company”?
• Is the FDIC a “genuinely adverse party”?

Is the FDIC a genuinely adverse party ?

• Is the FDIC acting as a creditor representing other

creditors? c ed o s

• Is the exclusion at least “ambiguous” with respect to

application to FDIC? pp

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Insured vs. Insured Exclusion su ed s su ed c us o

• Silverton Bank (N.D. Ga.)—Dec 2011 insurer motion to

dismiss denied. dismiss denied.

• “no collusion”
• FDIC acting on behalf of shareholder, depositors, creditors.

FDIC acting on behalf of shareholder, depositors, creditors.

• Is the FDIC truly acting as or on behalf of the “company”?
• Is the FDIC a “genuinely adverse party”?
• Is the FDIC a genuinely adverse party ?
• Is the FDIC acting as a creditor representing other

creditors? creditors?

• Is the exclusion at least “ambiguous” with respect to

application to FDIC? application to FDIC?

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Insured vs. Insured Exclusion

Michigan Heritage Bank (E.D. Mi)—Sept 24, 2012, insurer summary judgment motion denied: denied: “the FDIC has shown that some ambiguity exists in the insured vs. insured exemption exists in the insured vs. insured exemption [sic] due to the 'security holder exception,' the omission of a regulatory exclusion, and statements by plaintiff that regulatory suits statements by plaintiff that regulatory suits, which might include the instant action are covered.”

57

“Regulatory” Exclusion

• Since 2008 inclusion in at least community bank policies

significantly increased.

• No impact if talking about claims by BK trustee or

shareholder or derivative litigation.

• Do such exclusions create “illusory” coverage given the

primary nature of the risks confronted by bank directors and officers these days? and officers these days?

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“Regulatory” Exclusion

• Extensively litigated in S&L crisis, but not necessarily here.
• FDIC not necessarily pursuing cases with solid exclusion

FDIC not necessarily pursuing cases with solid exclusion.

• Silverton—the question litigated there is whether the policy

contains the exclusion. contains the exclusion.

• Insurer claims that it “inadvertently” failed to include the

exclusion in the policy and seeks reformation. p y

• Insureds and FDIC argue against reformation and

based upon the facts seek to enforce the policy as issued.

59

“Related Claims/Sub-Prime Exclusions

• Potentially relevant when multiple lawsuits or claims made

during different policy years during different policy years.

• In 2008, insurers sought to “ring fence” failed bank

exposure through “related claims,” “subprime” exclusions. p g , p

• Insurer effort to limit exposure to one policy period, thereby

reducing available limits to insureds.

60

60

“Related Claims/Sub-Prime Exclusions

• IndyMac (C.D. Cal)

S iti liti ti i 2008 li

• Securities litigation in 2008 policy year.
• FDIC and Trustee litigation in 2009.
• Insurers rely on interrelated wrongful acts/prior litigation

exclusion to force all claims into 2008 year and benefit from one limit from one limit.

• The lawsuits are based on different acts, transactions,

at different times but court broadly applied exclusion

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at different times, but court broadly applied exclusion.

• On appeal to the 9th Circuit.

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• Silverton—I vs.I/Reg. exclusion

I d M P i liti ti l i

• IndyMac—Prior litigation exclusion
• Heritage—I vs.I
• St. Paul Mercury v. Miller (N.D. GA

Sept 21, 2012)—I vs. I/”Unpaid Loan Carve-Out” language Loan Carve-Out language.

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Biography

Linda D. Kornfeld is a partner in the Firm’s Litigation Department and a member of the Insurance Litigation and Counseling Practice. A nationally recognized insurance coverage litigator whom Chambers USA has described as one of “the best attorneys in coverage litigator whom Chambers USA has described as one of the best attorneys in California” for coverage litigation, Ms. Kornfeld has extensive trial and appellate experience representing corporate and individual policyholders in high-stakes litigation in California and across the country.

• Ms. Kornfeld has assisted clients in obtaining substantial recoveries in various types of

g yp insurance matters. Linda presently is representing clients in Directors and Officers coverage litigation both inside and outside of California related to failed banks.

• Ms. Kornfeld has been repeatedly cited as an exceptional insurance litigator and one of

the top women lawyers in California by leading legal publications and directories, including Chambers USA, since 2007; and in 2011 she was included as one of Lawdragon’s top 500 “leading lawyers” in America, and named by Benchmark Litigation as a “Litigation Star” both nationally and in California.

• Ms. Kornfeld also has been recognized by the Daily Journal as one of California’s top

100 liti t b B i I f th t ’ “50 W t 100 women litigators, by Business Insurance as one of the country’s “50 Women to Watch” in insurance, in Southern California Super Lawyers, as one of the top 50 women lawyers in Southern California. Ms. Kornfeld also is included in the Legal Media Group’s Guide to the World’s Leading Insurance and Reinsurance Lawyers.

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