FDIC Suits Against Outside Advisors to Failed Banks: Latest - - PowerPoint PPT Presentation

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FDIC Suits Against Outside Advisors to Failed Banks: Latest Developments

Defending Agency Claims Against Auditors, Law Firms and Other Professionals; Maximizing E&O Insurance Coverage

T d ’ f l f

1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific WEDNES DAY, APRIL 17, 2013

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 Linda D. Kornfeld, Partner, Jenner & Block, Los Angeles

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FDIC Claims Against FDIC Claims Against Outside Bank Advisors

Mary C. Gill Alston & Bird LLP Alston & Bird LLP mary.gill@alston.com

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FDIC Post-Financial Crisis D&O Litigation

• The number of lawsuits filed by the FDIC against D&Os of failed banks

has steadily increased over the past four years.

• The FDIC generally has three years from the closing of a bank to

g y y g initiate a lawsuit. The number of bank closings reached a crescendo in 2009 and 2010, which explains the increased number of lawsuits in the past months.

• As of April 16, 2013, the FDIC has authorized suits in connection with

109 failed institutions against 888 D&Os and filed 54 lawsuits against 407 D&Os. &Os

• The FDIC has settled a number of claims against D&Os, many of

which were resolved prior to litigation. The FDIC has recently begun to post these settlements on its website to post these settlements on its website.

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FDIC Litigation Against D&Os

Most lawsuits filed by the FDIC against D&Os follow a similar pattern. The FDIC alleges that:

• The D&Os pursued a strategy of undue risk with an exceptionally

The D&Os pursued a strategy of undue risk with an exceptionally high concentration of acquisition, development and construction (“ADC”) or commercial real estate (“CRE”) loans. Th ADC d CRE l i l t d b k l li i d iti

• The ADC and CRE loans violated bank loan policies, underwriting

standards and applicable rules and regulations.

• The D&Os are personally liable under theories of negligence,

The D&Os are personally liable under theories of negligence, gross negligence, or breach of fiduciary duty for losses from these loans to the bank/FDIC.

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FDIC Litigation Against Bank Advisors

Th FDIC l i ti t d l i i t

• The FDIC also investigates and may pursue claims against
• utside bank advisors, including:
• Attorneys

Attorneys

• Accountants
• Appraisers
• Appraisers
• The FDIC has authorized 51 lawsuits against an array of third

parties, which include these categories.

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FDIC Litigation Against Failed Bank Attorneys

• Lawsuits filed by the FDIC against bank attorneys in the current post-

financial crisis include claims relating to:

• The collection of bank documents prior to closing of the bank;
• Alleged failure to follow closing instructions;
• Alleged failure to follow closing instructions;
• Alleged failure to record liens;
• Allegations of aiding and abetting directors and officers in the

Allegations of aiding and abetting directors and officers in the violation of bank policies and federal regulations; and

• Alleged failure to advise the bank client about violations of

regulations and statutes usually concerning loans

• r failing to

regulations and statutes, usually concerning loans, or failing to sufficiently oversee a particular transaction.

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FDIC Litigation Against Failed Bank Attorneys

• Causes of action against bank attorneys have included negligence,

gross negligence, breach

• f

fiduciary duty, legal malpractice, negligent misrepresentation, breach of contract, breach of express or implied warranty, unjust enrichment, aiding and abetting, fraud, and deceptive trade practices.

• The FDIC may bring claims against an entire law firm on theories of

The FDIC may bring claims against an entire law firm on theories of vicarious liability or failure to monitor the lawyer’s compliance with professional standards.

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FDIC Litigation Against Failed Bank Attorneys: Claims Relating to the Possession

• f Closed Bank Documents
• FDIC v. Bryan Cave LLP, No. 1:10-CV-3666 (N.D. Ga. Nov. 9, 2010).
• Claim that law firm’s acquisition and possession of copied bank records

was improper and unlawful under state and federal law.

• Voluntary Dismissal with Prejudice filed August 8 2011
• Voluntary Dismissal with Prejudice filed August 8, 2011.
• McKenna Long & Aldridge LLP v. FDIC, No. 1:10-CV-3779 (N.D. Ga. 2011).
• Declaratory judgment sought that law firm lawfully and properly acquired

and possessed certain bank documents.

• Voluntary Dismissal with Prejudice filed April 12, 2011.

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FDIC Litigation Against Failed Bank Attorneys: Claims Against Closing Attorneys for the Bank

• FDIC v. Andersen, Tate & Carr, PC, No. 1:10-CV-3383 (N.D. Ga. Oct. 19, 2010).
• FDIC alleged that law firm failed to use ordinary care, skill and judgment in the

wiring of payoff funds prior to obtaining a release of a security deed on g p y p g y collateral property, resulting in bank’s inability to foreclose on the property.

• Stipulation of Dismissal with Prejudice, contemplating settlement, filed May 2,

2012.

• FDIC v. Jampol, Schleicher, Jacobs & Papadakis, L.L.P., No. 1:10-CV-3382

(N.D. Ga. Oct. 19, 2010). FDIC ll d th t b k l f il d t th di kill d

• FDIC alleged that bank lawyers failed to use the ordinary care, skill and

judgment in preparation of a security deed, and the bank was damaged due to its inability to foreclose on the property intended to be secured by the deed.

• Stipulation of Dismissal with Prejudice filed August 24 2012
• Stipulation of Dismissal with Prejudice filed August 24, 2012.

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FDIC Litigation Against Failed Bank Attorneys:

Claims Against Closing Attorneys for the Bank

• FDIC v. Icard, Merrill, Cullis, Timm, Furen & Ginsberg, P.A., No. 8:11-CV-02831-

VMC-MAP (M.D. Fla. Dec. 23, 2011).

• FDIC alleged that bank lawyers committed malpractice and breached

FDIC alleged that bank lawyers committed malpractice and breached fiduciary duty by (i) closing a loan without obtaining assignment of an option to purchase a portion of the subject property; (ii) failing to obtain a written waiver of the requirement to secure an assignment of the option prior to l i th l d (iii) f ili t d i b k f d f d t ’ fli t f closing the loan; and (iii) failing to advise bank of defendants’ conflict of interest and to obtain a written waiver of the conflict prior to its engagement with the bank. D f d t h fil d ti f j d t i th t th b k

• Defendants have filed a motion for summary judgment arguing that the bank

would have made the loan regardless of defendants’ purported malpractice.

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FDIC Claims Against Failed Bank Attorneys: Claims Against Closing Attorneys for the Bank g g y

• On December 3 and December 4, 2012, the FDIC filed over 30

lawsuits against outside bank professionals, including bank attorneys.

• Majority of lawsuits filed in New York and Florida.
• Lawsuits include claims for breach of contract breach of fiduciary
• Lawsuits include claims for breach of contract, breach of fiduciary

duty, legal malpractice, and negligent misrepresentation.

• The FDIC generally alleges that the attorneys are personally liable

f f ili t f ll l i i t ti for failing to follow closing instructions.

14

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FDIC Claims Against Failed Bank Attorneys: Claims Against Closing Attorneys for the Bank

• FDIC v Sarcona No 12-cv-05965 (E D N Y Dec 4 2012)
• FDIC v. Sarcona, No. 12-cv-05965 (E.D.N.Y. Dec. 4, 2012).
• The FDIC asserts breach of contract, breach of fiduciary duty, legal

malpractice, and negligent misrepresentation claims against closing attorney. Cl i b d th tt ’ ll d f il t d i th b k f

• Claims are based on the attorneys’ alleged failure to advise the bank of

material information concerning a closing and collect and/or disburse closing funds in accordance with HUD-1 and closing instructions. FDIC G errero No 1 12 c 24257 (S D Fla Dec 3 2012)

• FDIC v. Guerrero, No. 1:12-cv-24257 (S.D. Fla. Dec. 3, 2012).
• The FDIC asserts claims for breach of contract, breach of fiduciary duty, and

negligent misrepresentation against attorney.

• The FDIC’s claims are based on the following alleged conduct by the

attorney: (a) allowing the borrower to not pay the required full down payment; (b) allowing the borrower's loan to be funded in excess of the bank’s CLTV ratio cap requirements; (c) failing to notify the bank that the borrower's down ratio cap requirements; (c) failing to notify the bank that the borrower s down payment would not pass through escrow; (d) misrepresenting the true sales price; and (e) disbursing proceeds in a manner not necessary to clear title.

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FDIC Claims Against Failed Bank Attorneys:

Claims Against Lawyer/Director and Law Firm

• FDIC v. Mahajan, No. 1:11-cv-7590 (N.D. Ill. Oct. 25, 2011).
• James Regas (“Regas”) served as a director and general counsel to the
• bank. The FDIC alleged that Regas counseled the bank about various

l t tt i d l d f ll f th l regulatory matters, reviewed loans, and was fully aware of the grossly negligent conduct of the bank’s officers.

• FDIC also sued Regas’s law firm, which represented the bank in

connection with several of the loans “Despite the knowledge of the connection with several of the loans. Despite the knowledge of the gross imprudence and, in some instances, unlawful nature of these transactions, Regas and the Firm repeatedly failed to protect their client from the foreseeable injury inherent in these transactions.”

• On July 26, 2012, the U.S. District Court for the Northern District of

Illinois granted the defendants’ motion to dismiss with respect to the FDIC’s claims for breach of fiduciary duty against Regas and his law firm. The court held that the breach of fiduciary duty claims were duplicative of y y p the FDIC’s legal malpractice claims.

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Possible Defenses to FDIC Claims Against Attorneys

• Statute of Limitations
• The FDIC has three years to bring a tort claim and six years to bring

e C as t ee yea s to b g a to t c a a d s yea s to b g a contract claim from date of the receivership or the applicable state statute, whichever is longer, but claims that have expired under state law will not be revived by the appointment of the FDIC. 12 U S C § 1821(d)(14) U.S.C. § 1821(d)(14).

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Possible Defenses to FDIC Claims Against Attorneys

• Theory of Adverse Domination to Toll Statute of Limitations
• May toll the state statute of limitations based on the “principle that officers and directors

who have harmed the entity cannot be expected to take legal action against who have harmed the entity cannot be expected to take legal action against themselves.” RTC v. Gallagher, 800 F. Supp. 595, 600 (N.D. Ill. 1992) (citation omitted), aff’d in part and rev’d in part on rh’g on other grounds, No. 92 C 1091,1992 WL 315218, at *2-3 (N.D. Ill. Oct. 23, 1992), aff’d on other grounds, 10 F.3d 416 (7th Cir. 1993). S h li d d d i i ll f li i i f l i

• Some courts have applied adverse domination to toll statutes of limitations for claims

against third parties. RTC v. O’Bear, Overholser, Smith & Huffer, 840 F. Supp. 1270 (N.D. Ind. 1993); RTC v. Gardner, 798 F. Supp. 790 (D.D.C. 1992).

• Elevated federal supervision of a bank may rebut application of adverse domination.

Elevated federal supervision of a bank may rebut application of adverse domination. See RTC v. Wood, 870 F. Supp. 797, 808-09 (W.D. Tenn. 1994); RTC v. O’Bear, Overholser, Smith & Huffer, 886 F. Supp. 658, 665-66 (N.D. Ind. 1995).

• See W Holding Co. v. Chartis Insur. Co., No. 3:11-cv-02271-GAG, Dkt. No. 304 (D.P.R.

O t 23 2012) ( ll i l i th t i ht h th i b b d b th t t t f

• Oct. 23, 2012) (allowing claims that might have otherwise been barred by the statute of

limitations under the “adverse domination” theory).

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Possible Defenses to FDIC Claims Against Attorneys

• Any defense that is good against the original party is good

against the receiver. O’Melveny & Meyers v. FDIC, 512 U.S. 79 (1994). (1994).

• Be wary of case law that pre-dates O’Melveny.
• Possible Defenses Include:

Possible Defenses Include:

• Contributory Negligence / Unclean Hands
• Comparative Fault
• Failure to Mitigate Damages
• Loss Causation / Speculative Damages

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FDIC/RTC Litigation Against Attorneys Post-S&L Crisis

• FDIC v. Mmahat, 907 F.2d 546 (5th Cir. 1990) (affirming district

court’s judgment holding attorney and his firm liable for legal l ti b t fi di th t d f d t titl d t dit f malpractice but finding that defendants were entitled to credit for amount paid to FDIC by settling directors and officers).

• FDIC v. Clark, 978 F.2d 1541 (10th Cir. 1992) (affirming district

court’s judgment holding defendant attorneys liable for professional negligence). p g g )

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FDIC/RTC Litigation Against Attorneys Post-S&L Crisis Post-S&L Crisis

• RTC Mortg. Trust 1994 N-1 v. Fid. Nat. Title Ins. Co., 58 F.

Supp 2d 503 (D N J 1999) (holding that attorney owed duty of

• Supp. 2d 503 (D.N.J. 1999) (holding that attorney owed duty of

care to non-client lender and that law firm was liable for attorney’s actions under doctrine of respondeat superior).

• FDIC v. Nathan, 804 F. Supp. 888 (S.D. Tex. 1992) (denying

law firm’s motion to dismiss and finding that law firm could be held directly liable for failure to supervise).

• FDIC v. Collins, 920 F. Supp. 30 (D. Conn. 1996) (holding that

“no duty” rule precluded attorneys from raising estoppel defense based on FDIC’s own alleged regulatory failures).

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FDIC/RTC Litigation Against Attorneys:

Rulings in Favor of Law Firms

FDIC Sh d & Y k 991 F 2d 216 (5th Ci 1993) ( ffi i di t i t t’

• FDIC v. Shrader & York, 991 F.2d 216 (5th Cir. 1993) (affirming district court’s

grant of summary judgment in favor of defendant attorneys on basis, inter alia, that “adverse domination” doctrine was limited to suits against a corporation’s

• fficers and directors).

)

• FDIC v. Alexander, 78 F.3d 1103 (6th Cir. 1996) (affirming district court’s

granting of summary judgment in favor of defendant attorneys because action was barred by Ohio’s one-year statute of limitations for legal malpractice actions).

• RTC v. Stroock & Stroock & Lavan, 853 F. Supp. 1422 (S.D. Fla. 1994)

(granting law firm’s motion to dismiss because RTC’s damages theories were l ti ) speculative).

• FDIC v. Thompson & Knight, 816 F. Supp. 1123 (N.D. Tex. 1993) (granting

defendant attorneys’ motion for summary judgment because neither the insolvent institution nor the FDIC suffered any loss for which attorneys could insolvent institution nor the FDIC suffered any loss for which attorneys could be held liable) aff'd, 26 F.3d 1119 (5th Cir. 1994) and aff'd, 26 F.3d 1119 (5th

• Cir. 1994).

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FDIC Claims Against Failed Bank Accountants

• The FDIC has filed only one lawsuit in the current post-financial

The FDIC has filed only one lawsuit in the current post financial crisis against bank accountants. See FDIC v. PricewaterhouseCoopers LLP, No. 2:12-cv-00957-WKW-TFM (M.D. Ala. Oct. 31, 2012). ( )

• See also Grant Thornton, LLP v. FDIC, 535 F. Supp. 2d 676

(S.D.W. Va. 2007) (holding auditor liable for accounting malpractice) rev'd sub nom Ellis v Grant Thornton LLP 530 F 3d malpractice) rev d sub nom. Ellis v. Grant Thornton LLP, 530 F.3d 280 (4th Cir. 2008) (holding that auditor could not be liable because it did not know that third parties would receive audit report). p )

• In contrast, the FDIC/RTC filed 139 accounting malpractice claims

in the post-S&L crisis.

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FDIC/RTC Claims Against Failed Bank Accountants in Post-S&L Litigation

• Negligence, breach of written and oral contracts, breach of

implied covenants, negligent misrepresentations, and breach of fiduciary duty. y y

• Basis of claims include:
• Failure to perform a competent audit and exercise reasonable care

to discover irregularities;

• Providing

a “clean” audit

• pinion

when the bank’s financial statements were not in accordance with GAAP; or

• Failing to require appropriate loan loss allowances or to write-off

impaired loans.

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FDIC Claims Against Failed Bank Accountants

• FDIC v. PricewaterhouseCoopers LLP, No. 2:12-cv-00957-WKW-TFM

(M.D. Ala. Oct. 31, 2012).

• The FDIC asserts professional negligence, gross negligence, third-

party beneficiary breach

• f

contract and negligent misrepresentation claims against PwC and Crowe Horwath, two of C l i l B k’ dit Colonial Bank’s auditors.

• The FDIC’s claims are based on the auditors’ alleged failure to

detect a massive fraud by two of the bank’s employees and the bank’s largest mortgage banking customer, which the FDIC claims would have prevented additional losses suffered by Colonial.

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FDIC Claims Against Failed Bank Accountants

• Both accounting firms in FDIC v. PricewaterhouseCoopers LLP

have filed motions to dismiss on the following bases: With t t li l i (i) FDIC li thi d t

• With respect to negligence claims: (i) FDIC relies on third-party

criminal conduct; (ii) in pari delicto; (iii) contributory negligence; (iv) reliance; and (v) proximate causation.

• With respect to contract claims: (i) bank was not third party

beneficiary; and (ii) bank’s parent company failed to perform under the contract.

• With respect to negligent misrepresentation claims: (i) no privity
• f contract; and (ii) reliance.
• Hearing on motions was held April 8 2013
• Hearing on motions was held April 8, 2013.

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Possible Defenses to FDIC Claims Against Failed Bank Accountants

• Comparative or Contributory Negligence / In pari delicto
• Actions of bank management caused the losses and bar claims or

reduce the amount of damages attributable to the accountants reduce the amount of damages attributable to the accountants.

• No Reliance or Lack of Causation
• Management did not rely upon the audit, management letters and/or
• ther statements made by the auditors.
• Acts or omissions of accountants did not cause the resulting

damages.

• No breach of duty
• GAAP and GAAS involve professional judgment.
• Experts opine on whether the auditor deviated from the accepted
• Experts opine on whether the auditor deviated from the accepted

standard of care.

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FDIC/RTC Litigation Against Accountants Post-S&L Crisis

• RTC v. KPMG Peat Marwick, 844 F. Supp. 431 (N.D. Ill. 1994) (granting

in part and denying in part accounting firm’s motion to dismiss, finding that negligence claim for economic damages against accounting firm g g g g g was barred under Illinois law).

• FDIC v. Ernst & Young, 967 F.2d 166 (5th Cir. 1992) (affirming district

g, ( ) ( g court’s dismissal of FDIC claims based on failure to state a claim, reasoning that savings and loan did not rely on accounting firm’s audit).

• FDIC v. Regier Carr & Monroe, 996 F.2d 222 (10th Cir. 1993) (affirming

district court’s granting of summary judgment in favor of accountants based on statute of limitations).

28

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FDIC Claims Against Appraisers

Cl i b d i i l th t i h t t l d

• Claims are based upon principle that appraisers have contractual and

common law duties to act with the degree of care, skill and competence exercised by competent appraisers and to render appraisals that comply with federal regulations. g

• Claims include professional negligence, gross negligence, negligent

misrepresentation, breach of contract, and fraud.

• Based upon alleged inaccurate appraisals that fail to comply with

p g pp p y appraisal methods set forth by USPAP, including:

• (i) inflated values; (ii) improper comparables (comparables were too far

away or were too dissimilar); (iii) material errors and omissions; (iv) i t th d d t h i th t t d incorrect methods and techniques that were necessary to produce a credible appraisal; and (v) failure to note whether level of appreciation was sustainable

• r

whether it was the product

• f

real estate speculation.

29

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FDIC Claims Against Appraisers

• FDIC v. Kirkland, No. 2:10-3286 GAF, 2010 U.S. Dist. Lexis

143688 (C.D. Cal. Oct. 28, 2010) (dismissing FDIC’s f i l li l i b FDIC t professional negligence claims because FDIC was not appraiser’s client).

• FDIC v. Levitt, No. 11cv1284, 2011 U.S. Dist. LEXIS 113420

(S.D. Cal. Oct. 3, 2011) (denying appraiser’s motion to dismiss FDIC’s breach of contract and negligent misrepresentation g g p claims).

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Possible Defenses to FDIC Claims Against Appraisers pp

• Statute of Limitations

N D t

• No Duty
• Economic Loss Rule
• Contributory Negligence
• Lack of Causation
• Comparative Fault
• Failure to Mitigate Damages

31

F DIC S it A i t O t id F DIC Suits Against Outside Advisor s to F aile d Banks

Ste ve n C. Mo rriso n F DI C Ste Mo rriso n@ F DI C.g o v

E a c h De po sito r I nsure d E a c h De po sito r I nsure d…

33

F DI C SUI T S AGAI NST ADVI SORS F DI C SUI T S AGAI NST ADVI SORS

A pre se nta tio n in pa rt b y: Ste ve n C. Mo rriso n Co unse l Co unse l Pro fe ssio na l L ia b ility & F ina nc ia l Crime s F e de ra l De po sit I nsura nc e Co rpo ra tio n ste mo rriso n@ fdic .g o v g 904-256-3854 T he o pinio ns e xpre sse d in this pre se nta tio n a re the a utho r’ s o nly a nd do no t ne c e ssa rily re fle c t the o pinio n o f the F DI C. Pre se nte d 4/ 17/ 2013.

34

F DI C ST AT UT ORY RI GHT S F DI C ST AT UT ORY RI GHT S

F DI C suc c e e ds to a ll rig hts, title s, po we rs, privile g e s a nd a sse ts F DI C suc c e e ds to a ll rig hts, title s, po we rs, privile g e s a nd a sse ts

• f the fa ile d institutio n.

12 U.S.C. § 1821(d)(2)(A)(i) F DI C-Re c e ive r ha s duty to pursue via b le c la ims o f the fa ile d institutio n a g a inst tho se who ma y ha ve c a use d lo sse s.

35

F DI C Pro fe ssio na l L ia b ility Unit F DI C Pro fe ssio na l L ia b ility Unit

Purpo se s o f Pro fe ssio na l L ia b ility Pro g ra m Purpo se s o f Pro fe ssio na l L ia b ility Pro g ra m

• Ma inta in pub lic trust, e nsure a c c o unta b ility

P t d t d di i li

• Pro mo te g o o d c o rpo ra te g o ve rna nc e a nd disc ipline
• Ma ximize a sse t re c o ve ry fo r Re c e ive rships

PL U inve stig a te s the c a use s o f e ve ry fa ilure PL U pursue s me rito rio us a nd c o st-e ffe c tive c la ims a g a inst tho se ib l f f il re spo nsib le fo r fa ilure s

36

F DI C Pro fe ssio na l L ia b ility Unit F DI C Pro fe ssio na l L ia b ility Unit

Sa fe g ua rds to E nsure Me rito rio us a nd Co st-E ffe c tive Cla ims Sa fe g ua rds to E nsure Me rito rio us a nd Co st E ffe c tive Cla ims C D l t T h h I ti ti

• Ca se De ve lo pme nt – T

ho ro ug h I nve stig a tio n

• Bo a rd Appro va l Re q uire d Be fo re Bring ing Cla ims
• Ong o ing Ca se Re vie w b y Ma na g e me nt

37

F DI C Sta tute o f L imita tio ns F DI C Sta tute o f L imita tio ns

F I RRE A re -sta rts the limita tio ns pe rio d to pe rmit F DI C to b ring F I RRE A re sta rts the limita tio ns pe rio d to pe rmit F DI C to b ring c la ims via b le a t fa ilure

• T
• rts – 3 ye a rs fro m fa ilure
• Co ntra c ts – 6 ye a rs fro m fa ilure

Sta te la w a pplie s if it pro vide s a lo ng e r pe rio d

38

E le me nts o f Ma lpra c tic e

• Duty
• Bre a c h o f Duty

C ti

• Ca usa tio n
• Da ma g e s

39

Po ssib le Gro unds F

• r L

ia b ility

• Mista ke s to the fina nc ia l de trime nt o f the Ba nk
• Clo sing s
• F

a ilure to se c ure lie n o r prio rity o f lie n

• F

a ilure to c lo se a s instruc te d F a ilure to c lo se a s instruc te d

• Stra w b o rro we rs/ HUD-1s/ F

e e s

• I

nc o rre c t a dvic e to Ba nk

• Co nflic t o f I

nte re st F d i t ti l i d t

• F

ra ud o r inte ntio na l misc o nduc t

40

P t C i i E l Pre se nt Crisis E xa mple s

F DI C A d T t C PC Chi

• F

DI C v. Ande rse n, T ate & Carr, PC & Chic ago T itle , No . 1:10-CV-3383 (N.D. Ga . Oc t. 9, 2010).

• F

DI C a lle g e s tha t la w firm fa ile d to g e t a re le a se o n 272 a c re s fro m prio r lie nho lde r (Co lo nia l Ba nk) b e fo re wiring $10 millio n pa yo ff; a nd

• Sta ye d: F

DI C a lle g a tio n tha t la w firm fa ile d to g e t a o wne r’ s a ffida vit o f no wo rk do ne . Sub se q ue nt me c ha nic ’ s lie n c la im fo r e xc a va tio n wa s file d fo r $1.54 millio n. Chic a g o T itle pa id fo r the de fe nse o f tha t lie n file d fo r $1.54 millio n. Chic a g o T itle pa id fo r the de fe nse o f tha t lie n a nd the F DI C wo n prio rity.

• F

DI C v. Ja mpo l, Sc hle ic he r, Ja c o b s & Pa pa da kis, LLP N 1 10 CV 3382 (N D G O t 19 2010) L .L .P., No . 1:10-CV-3382 (N.D. Ga . Oc t. 19, 2010).

• F

DI C a lle g e s tha t b a nk la wye rs fa ile d to pro pe rly pre pa re a se c urity de e d in the na me o f the o wne r o f the pro pe rty. Cha lle ng e s o f fa il re to mitig a te

• Cha lle ng e s o f fa ilure to mitig a te .

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A i Appra ise rs

S it i t i f i j i d t th f il d b k Suits a g a inst a ppra ise rs fo r injurie s c a use d to the fa ile d b a nk b y fa iling to use the de g re e o f c a re , skill a nd c o mpe te nc e re q uire d o f pro fe ssio na l a ppra ise rs. Cl i b f li f d

• Cla ims b e c a use o f ne g lig e nc e o r fra ud.
• I

na c c ura te a ppra isa ls tha t fa il to c o mply with USPAP.

• Sig nific a ntly o ve rva lue d a ppra isa l

g y pp

• I

mpro pe r c o mps, inc luding fa iling to use kno wn c o mps in the sub divisio n

• Adjustme nts with re a so na b le b a sis

Adjustme nts with re a so na b le b a sis

• Ba se d upo n unre a so na b le a ssumptio ns

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De fe nse s

• Sta tute o f L

imita tio ns

• L

a c k o f c a usa tio n

• F

a ilure to mitig a te g

• Be fo re the Ba nk Clo se s
• F

DI C’ s Ac tio ns

N li f B k Offi i M ki th

• Ne g lig e nc e o f Ba nk Offic e rs in Ma king the

Unde rlying L

• a n
• (i.e . I

f the Ba nk ha dn’ t ma de this b a d lo a n, my ma lpra c tic e wo uld no t ha ve ha rme d the m) ma lpra c tic e wo uld no t ha ve ha rme d the m)

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FDIC Lawsuits Against Banks’ Outside Professionals: Outside Professionals: Insurance Considerations

April 17, 2013 Linda Kornfeld Jenner & Block LLP Jenner & Block LLP lkornfeld@jenner.com (213) 239‐5176

Which Policies May Apply?

• Errors & Omissions Coverage — the critical

Which Policies May Apply?

Errors & Omissions Coverage the critical focal point

– Covers “claims” for allegations of “professional” misconduct – Must act within “professional” capacity as defined by policy

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What constitutes a “claim”?

• Demand letters?

What constitutes a claim ?

Demand letters?

• Subpoenas?
• “Informal investigations”?

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Duty to “advance” defense fees Duty to advance defense fees

• “Potentiality” standard

Potentiality standard

• “Prior to final adjudication” — the “timing”

question

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Amounts spent for “excluded” claims Amounts spent for excluded claims

• Could be covered if “benefits” covered claims

Could be covered if benefits covered claims

• Parties shall use “best efforts” to allocate

between covered and uncovered claims

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Panel counsel and insurer “consent” Panel counsel and insurer consent

• Before choosing counsel not on “panel

Before choosing counsel not on panel counsel” list, should discuss with insurer

• Impact of failure to obtain consent

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“Intentional conduct claims” Intentional conduct claims

• Should not impact payment of defense fees

Should not impact payment of defense fees

• e.g., Cal Ins Code section 533

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Strategic Use of Limited Insurance Resources

• E&O policies are “depleting” assets

E&O policies are depleting assets.

• Seek, or stipulate with FDIC to, stay underlying

issues while coverage issues addressed.

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Use of Settlements/Assignments to ll f / f l Mutually Benefit FDIC/Professionals

• The FDIC may be interested in insurance

The FDIC may be interested in insurance proceeds and have a deeper pocket to pursue coverage litigation coverage litigation.

• Consider settlement/assignment approach to

resolve the FDIC’s claims for minimal financial exposure.

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Use of Settlements/Assignments to ll f / f l Mutually Benefit FDIC/Professionals

• FNB Nevada (D Ariz )

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.

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Use of Settlements/Assignments to ll f / f l Mutually Benefit FDIC/Professionals

• Alternative approach:

Alternative approach:

– Defendant and FDIC agree to settlement. – Defendant and FDIC do not agree to consent judgments, instead:

• Defendant assigns the insurance.
• The parties agree to dismiss the litigation.
• But, dismissal is conditioned upon FDIC prevailing in

coverage litigation.

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Use of Settlements/Assignments to ll f / f l Mutually Benefit FDIC/Professionals

• The Benefit:

– FDIC can get direct access to insurance. – Defendant can avoid paying for settlement and coverage litigation.

• The Negative:

– Defendant may be required to have judgment entered against them.

• Practice Pointer:

– 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 reflects good faith evaluation of exposure.

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POLICY EXCLUSIONS POLICY EXCLUSIONS INSURERS MAY RAISE

13

Fraud/Deliberate Conduct Exclusion Fraud/Deliberate Conduct Exclusion

• Does not impact defense duty

Does not impact defense duty

• “Final adjudication”/“fraud in fact” language
• “Final” means “final” after all appeals
• If settle underlying complaints that contained

intentional/fraudulent conduct allegations, settlement should be covered

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“Personal Profit” Exclusion Personal Profit Exclusion

• Final adjudication/in fact language

Final adjudication/in fact language

• Did the professional reap an “illegal” profit or

gain?

• Did the professional commit “insider trading”

Did the professional commit insider trading

• r some other form of “theft”?
• Wrongful “bonus” not enough

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“Insolvency” Exclusion

• Some policies exclude coverage for claims: “arising

Insolvency Exclusion

Some policies exclude coverage for claims: arising

• ut of … the insolvency or bankruptcy of the Insured
• r any other person, firm or organization”
• Do FDIC claims related to failed banks “arise out of”

the “insolvency” of an “organization”? the insolvency of an organization ?

• Zurich Specialties London Limited v. Bickerstaff

(9th Cir Mar 28 2011) (9th Cir. Mar. 28, 2011)

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“Penalty” Exclusions

• What is the true nature of the claimed “fine” or

Penalty Exclusions

What is the true nature of the claimed fine or “penalty”?

• Many policies cover “the multiplied portion of any

Many policies cover the multiplied portion of any multiplied damages . . .”

• If the “penalty” can be characterized as “multiplied
• If the penalty can be characterized as multiplied

damages,” then applying the exclusion could render the “multiplied damages” coverage mere surplusage p g g p g

• At the very least, the competing provisions arguably

may create ambiguity

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may create ambiguity

Related Claims/Interrelated

• Potentially relevant when multiple lawsuits or

Wrongful Acts Exclusions

Potentially relevant when multiple lawsuits or claims made during different policy years. I ff li i li

• Insurer effort to limit exposure to one policy

period, thereby reducing available limits to insurers.

• Insurer has burden of proof
• Exclusion may arguably be ambiguous

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• Notice of potential claims under prior policies

with less restrictive exclusions?

• Notice today of possible future claims?

Notice today of possible future claims?

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Issues to Consider When Purchasing Future Coverage

• Professionals that provide services in significant part

Professionals that provide services in significant part to banks may face increased scrutiny in the underwriting process

• Carefully consider the breadth of proposed

regulatory exclusions and attempt to negotiate to regulatory exclusions and attempt to negotiate to increase protection

• Evaluate all potential claims and do not let “prior
• Evaluate all potential claims and do not let prior

acts” exclusions create challenges down the road

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Biography

Linda D. Kornfeld is a partner in the Jenner & Block 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 recognized insurance coverage litigator whom Chambers USA has described as one

• f “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

• Ms. Kornfeld has assisted clients in obtaining substantial recoveries in various types
• f insurance matters. Linda presently is representing clients in Directors and

Officers coverage litigation both inside and outside of California related to failed banks.

Linda D. Kornfeld

• Ms. Kornfeld has been repeatedly cited as one of the top women lawyers in

California and in insurance by legal publications and directories, including Chambers USA. She has twice been named among California’s top 100 women lawyers, as well as one of California’s top 100 women litigators, by the Daily Journal Benchmark Litigation ranks Linda as a “Litigation Star” and one of its “Top

Partner

Los Angeles Phone: 213 239-5176 Email: lkornfeld@jenner.com

• Journal. Benchmark Litigation ranks Linda as a Litigation Star and one of its Top

250 Women in Litigation”. She is also listed as one of Lawdragon’s top 500 “leading lawyers” in America.

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