The Failed Bank Crisis Current D&O Litigation Update - - PowerPoint PPT Presentation

The Failed Bank Crisis – Current D&O Litigation Update

Leveraging Developments in Standards of Liability, Statute of Limitations and Adverse Domination, Discovery, Insurance Coverage, and ESI

Today’s faculty features:

1pm East ern | 12pm Cent ral | 11am Mount ain | 10am Pacific

The audio portion of the conference may be accessed via the telephone or by using your computer's

• speakers. Please refer to the instructions emailed to registrants for additional information. If you

have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.

TUES DAY, OCTOBER 1, 2013

Presenting a live 90-minute webinar with interactive Q&A

Mary C. Gill, Part ner, Alston & Bird, At lant a S t even C. Morrison, Counsel, Professional Liabilit y/ Financial Crimes Group, FDIC, Jacksonville, Fla. Linda D. Kornfeld, Partner, Kasowitz Benson Torres & Friedman, Los Angeles

Tips for Optimal Quality

S

• und Qualit y

If you are listening via your computer speakers, please note that the quality

• f your sound will vary depending on the speed and quality of your internet

connection. If the sound quality is not satisfactory, you may listen via the phone: dial 1-888-450-9970 and enter your PIN when prompted. Otherwise, please send us a chat or e-mail sound@ straffordpub.com immediately so we can address the problem. If you dialed in and have any difficulties during the call, press *0 for assistance. Viewing Qualit y To maximize your screen, press the F11 key on your keyboard. To exit full screen, press the F11 key again.

FOR LIVE EVENT ONLY

Continuing Education Credits

For CLE purposes, please let us know how many people are listening at your location by completing each of the following steps:

• In the chat box, type (1) your company name and (2) the number of

attendees at your location

• Click the S

END button beside the box If you have purchased S trafford CLE processing services, you must confirm your participation by completing and submitting an Official Record of Attendance (CLE Form). Y

• u may obtain your CLE form by going to the program page and selecting the

appropriate form in the PROGRAM MATERIALS box at the top right corner. If you'd like to purchase CLE credit processing, it is available for a fee. For additional information about CLE credit processing, go to our website or call us at 1-800-926-7926 ext. 35.

FOR LIVE EVENT ONLY

Program Materials

If you have not printed the conference materials for this program, please complete the following steps:

• Click on the ^ symbol next to “ Conference Materials” in the middle of the left -

hand column on your screen.

• Click on the tab labeled “ Handouts” that appears, and there you will see a

PDF of the slides for today's program.

• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.

FOR LIVE EVENT ONLY

THE FAILED BANK CRISIS: D& O LITIGATION UPDATE

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

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

The FDIC has filed 81 lawsuits against former D&Os of closed banks in 22 states:

• Georgia – 18
• California – 12
• Illinois – 11
• Florida – 9
• Washington – 5
• Nevada – 4
• North Carolina, Puerto Rico – 3
• South Carolina, Arizona – 2
• Missouri, Oregon, Indiana, Nebraska, New Mexico, Iowa, W.

Virginia, Utah, Wyoming, Michigan, Kansas, Pennsylvania – 1

6

FDIC LITIGATION BY THE NUMBERS

• As of September 2013, the FDIC has authorized lawsuits

against 1007 D&Os in connection with 125 closed banks.

• Only one case has gone to trial, resulting in a jury verdict in

favor of the FDIC.

• The FDIC has published settlements in 50 cases, which

includes pre-litigation settlements.

• The amount of these settlements has ranged from $5,000 to

$39.5 million.

• The settlement agreements often do not disclose the amount

paid by D&O insurance or by the D&Os individually.

FDIC, Professional Liability Settlement Agreements, http://www.fdic.gov/about/freedom/plsa/index.html

7

Bank Amount of Settlement 1. ANB Financial (AR) $5,100,000 2. County Bank Merced (CA) $500,000 3. Mirae Bank (CA) $400,000 4. Temecula Valley Bank (CA) $4,100,000 5. Vineyard Bank (CA) $5,692,826.31 $5,000,000 6. Bank United (FL) $10,000,000 7. First Priority Bank (FL) $1,750,000 8. Freedom Bank (FL) $1,625,000 9. Haven Trust (FL) $50,000 $35,000

• 10. Metro Bank of Dade County (FL)

$3,000,000

• 11. Ocala National Bank (FL)

$2,000,000 $100,000

• 12. American Southern Bank (GA)

$600,000

• 13. First Georgia Community Bank (GA)

$896,996 $896,996

• 14. FirstBank Financial Services (GA)

$1,500,000 $150,000 $75,000

• 15. First National Bank of Savannah (GA)

$2,100,000

• 16. Georgian Bank (GA)

$6,750,000

• 17. Omni National Bank (GA)

$300,000 8

Bank Amount of Settlement

• 18. The Community Bank of Loganville(GA)

$740,000

• 19. Bank of Lincolnwood (IL)

$125,000 $75,000

• 20. Bank of Lincolnwood (IL)

$5,000

• 21. Corn Belt Bank (IL)

$266,000 $434,000

• 22. Elizabeth State Bank (IL)

$2,000,000

• 23. First State Bank of Winchester (IL)

$1,000,000

• 24. Founders Bank (IL)

$3,150,000

• 25. Heritage Community Bank (IL)

$3,150,000

• 26. Independent Banker’s Bank (IL)

$4,095,000

• 27. Rock River Bank (IL)

$1,000,000

• 28. Town Community Bank (IL)

$1,300,000

• 29. Wheatland Bank (IL)

Rights to bank dividends

• 30. Columbian Bank and Trust (KS)

$5,000,000

• 31. Columbian Bank and Trust (KS)

$85,000

• 32. Statewide Bank (LA)

$3,250,000

• 33. Suburban Federal Savings Bank (MD)

$4,000,000 9

Bank Amount of Settlement

• 34. Butler Bank(MA)

$225,000

• 35. Warren Bank (MI)

$1,750,000

• 36. Brickwell Community Bank (MN)

$1,750,000

• 37. Pinehurst Bank (MN)

$816,750.00

• 38. Carson River Community Bank (NV)

$12,500 $10,000 $7,500 $7,500

• 39. First National Bank of Nevada (NV)

$3,500,000 $10,000 $10,000,000 $7,500,000

• 40. Washington Mutual Bank (NV)

$39,575,000 $275,000 $100,000 $50,000

• 41. Citizens Community Bank (NJ)

$1,550,000

• 42. The Park Avenue Bank (NY)

$3,000,000

• 43. Silver Falls Bank (OR)

$1,300,000

• 44. Metropolitan Savings Bank (PA)

$350,000

• 45. America West Bank (UT)

$1,600,000

• 46. Bank of Clark County (WA)

$1,500,000

• 47. Horizon Bank (WA)

$9,100,000

• 48. Washington First International Bank (WA)

$200,000 $600,000

• 49. Westsound Bank (WA)

$1,730,000

• 50. Bank of Wyoming (WY)

$2,250,000 $250,000 10

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE

• The Financial Institutions Reform, Recovery and

Enforcement Act of 1989 (“FIRREA”) established gross negligence as a national minimum standard for officer and director liability.

• The FDIC may also pursue claims against officers and

directors under a stricter standard for liability (ordinary negligence), if permissible under state law.

• Gross negligence is the minimum standard for imposing

liability upon bank officers and directors in most states.

11

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE

Federal courts have dismissed FDIC negligence claims in the following jurisdictions: Georgia

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

from liability for acts or omissions taken in good faith compliance with their corporate duties. Such rule forecloses liability in officers and directors for ordinary negligence in discharging their duties.” FDIC v. Skow, No. 1:11-CV-0111-SCJ (N.D. Ga. Aug. 14, 2012); interlocutory appeal docketed); 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. 3, 2012); but see FDIC v. Adams,

• No. 1:12-cv-00726-JOF (N.D. Ga. Mar. 21, 2013).

Illinois

• FDIC v. Saphir, No. 1:10-cv-07009 (N.D. Ill. Sept. 1, 2011)

(negligence claim dismissed as duplicative).

12

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE

Florida

• “[Florida’s] statute conditions directorial liability on 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. Fla. Aug. 8, 2012); but see FDIC v. Florescue, 8:12-cv-02547 (M.D. Fla. June 10, 2013); FDIC v. Brudnicki, 5:12-cv-00398 (N.D. Fl. May 15, 2013).

California

• Courts have held that the business judgment rule applies to

directors but not officers. See e.g., FDIC v. Perry, No. 2:11-cv- 05561 (C.D. Cal. Dec. 13, 2011); California FDIC v. Van Dellen, No. 2:10-cv-04915-DSF-SH (C.D. Cal.); FDIC v. Faigin,

• No. 12-cv-03448 (C.D. Cal. July 8, 2013).

13

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE

Other courts have denied motions to dismiss FDIC negligence claims: North Carolina

• “Because the business judgment rule presupposes the exercise of

reasonable care, ‘North Carolina law may recognize director liability for simple negligence to the extent that such negligence falls outside the protection of the business judgment rule.’” FDIC

• v. Willetts, No. 7:11-cv-165-BO (E.D.N.C. Apr. 16, 2012); see also

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

Oregon

• FDIC v. Christensen, 3:13-cv-00109-PK (D. OR June 28,

2013)(holding that exercising ordinary care is threshold for BJR).

14

Arizona

• FDIC v. Jamison, 12-cv-01508 (D. Ariz. March 29, 2013)

(finding that facts sufficiently pled to overcome BJR at this stage of proceedings).

Illinois

• FDIC v. Spangler, No. 10-cv-4288 (N.D. Ill. Dec. 22,

2011)(BJR not available when complaint sufficiently sets for an absence of care); FDIC v. Demetris Giannoulias, No. FDIC v. Mahajan, No. 1:11-cv-07590 (N.D. Ill. July 26, 2012) (finding acts sufficiently pled to overcome presumption of BJR).

D&O STANDARD OF LIABILITY – NEGLIGENCE OR GROSS NEGLIGENCE

15

AVAILABILITY OF CERTAIN 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.

• 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 of a failed bank either in its pre-failure 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).

16

AVAILABILITY OF CERTAIN AFFIRMATIVE DEFENSES

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 which the FDIC had primarily relied in arguing that the “no duty” rule afforded it unique protections from affirmative state-law defenses.

• The Court held that neither federal policy nor FIRREA

itself created a federal rule to protect the FDIC, concluding that “any defense good against the original party is good against the receiver.” Id. at 86.

17

AVAILABILITY OF CERTAIN AFFIRMATIVE DEFENSES

Recent decisions that have rejected “no-duty” rule:

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

interlocutory appeal docketed); see also FDIC v. Briscoe, No. 1:2011-cv-002303 (N.D. Ga. Aug. 14, 2012)(denying FDIC’s motion to strike certain affirmative defenses and 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’Melveny, ‘state law controls what defenses are available against the FDIC when the agency is acting as the receiver of a failed financial institution.’”).

• FDIC v. Spangler, No. 10-cv-4288, 2012 WL 558941 (N.D. Ill. Nov.

15, 2012)(denying motion to strike defenses of comparative negligence and mitigation of damages).

18

AVAILABILITY OF CERTAIN AFFIRMATIVE DEFENSES

Recent decisions that have 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 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 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”).

• FDIC v. Mahajan, No. 1:11-cv-07590 (N.D. Ill 2012) (striking

defenses based upon regulatory conduct).

19

STATUTE OF LIMITATIONS

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

• f gross negligence or breach of fiduciary duty for claims that were 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

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

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.

20

TOLLING OF STATUTE OF LIMITATIONS

In a recent decision, a court refused to enforce a tolling agreement to extend a statute of limitations comparable to the FIRREA provision.

• National Credit Union Administration Board v. Credit Suisse

Securities USA LLC, No. 12-2648-JWL, 2013 U.S. Dist. LEXIS 95749 (D. Kan. July 10, 2013) (holding that extender statute may not be tolled by the agreement of the parties).

21

ADVERSE DOMINATION & STATUTE OF LIMITATIONS

“To permit bank directors who control and dominate 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).

• Adverse domination has been applied in some form to D&O suits

in Oregon, Arizona, Louisiana, Missouri, Michigan, Kansas, Maryland, Puerto Rico, and West Virginia. See W Holding Co., Inc., v. Chartis Insur. Co., No. 3:11-cv-02271-GAG (D.P.R. Oct. 23, 2012).

• Courts in Georgia, Tennessee, and Virginia have rejected

adverse domination as a matter of state law. See RTC v. Artley, 28 F.3d 1099 (11th Cir. 1994); RTC v. Wood, 870 F. Supp. 797 (W.D. Tenn. 1994); RTC v. Walde, 856 F. Supp. 281 (E.D. Va. 1994).

22

DISCOVERY AND ELECTRONICALLY STORED INFORMATION (“ESI”)

Discovery disputes over ESI protocols are prevalent, with the FDIC seeking to impose cost-shifting for production of ESI. Courts granting motions to compel and/or denying motions to impose cost-sharing on D&Os:

• FDIC v. Briscoe, No. 1:11-cv-02303-SCJ (N.D. Ga. June 4, 2013);
• FDIC v. Baker, No. 1:12-cv-4173-RWS (N.D. Ga. April 18, 2013);
• FDIC v. Hayden, No. 3:12-cv-00165-TCB (N.D. Ga. Mar. 25,

2013);

• FDIC v. Klein, No. 1:12-cv-00896-RLV (N.D. Ga. Dec. 13, 2012);
• FDIC v. Whitley, No. 2:12-cv-170 (N.D. Ga. June 25, 2013);
• FDIC v. Galan, No. 12-cv-1029 (D.P.R. June 12, 2013).

23

DISCOVERY AND ELECTRONICALLY STORED INFORMATION (“ESI”)

Courts entering ESI protocols that require cost sharing:

• FDIC v. Johnson, No. 2:12-cv-209-KJD-PAL (D. Nev.

March 22, 2013);

• FDIC v. Brudnicki, No. 5:12-cv-398 (N.D. Fla. June 14,

2013).

24

DISCOVERY – FDIC CORPORATE DOCUMENTS

Other discovery disputes have arisen over whether the FDIC must produce documents from FDIC-C related to the regulatory oversight of the bank. 12 U.S.C. § 1821(o) provides: “whenever the [FDIC] has been appointed as receiver for an insured depository institution, the appropriate Federal banking agency shall make available all supervisory records to the receiver which may be used by the receiver in any manner the receiver determines to be appropriate.”

25

DISCOVERY – FDIC CORPORATE DOCUMENTS

Courts that have compelled the FDIC to produce FDIC-C documents:

• FDIC v. Appleton, No 2:11-cv-476 (C.D. Cal. Aug. 26,

2012);

• FDIC v. Galan, No.12-cv-1029 (D.P.R. Apr. 9, 2013);
• W Holding Co., Inc., v. Chartis Insur. Co., No. 11-cv-2271

(D.P.R.). Courts that have declined to require the FDIC to produce FDIC-C documents:

• FDIC v. Brudnicki, No. 5:12-cv-398 (N.D. Fla. June 14,

2013).

26

The Failed Bank Crisis: Update On The Insurance Debate

Linda Kornfeld Kasowitz Benson Torres & Friedman lkornfeld@kasowitz.com 424.288.7902

27

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Introduction

• Multiple years in to this event, what issues are driving the

insurance discussion?

• Settlements/assignments
• Insured v. Insured exclusion
• “Loan Loss” exception
• Regulatory exclusion
• “Prior acts” exclusions/retroactive dates

28

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

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.

29

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

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.

30

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

USE OF SETTLEMENTS/ASSIGNMENTS TO MUTUALLY BENEFIT FDIC/EXECUTIVES

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

settlements with Trustee.

• Defendants and Trustee did not agree to consent judgments,

instead:

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

prevailing in coverage litigation.

31

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

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 coverage

litigation.

• The Negative:
• Defendants 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.

32

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Insured vs. Insured Exclusion

• Is underlying action “collusive”?
• Does the policy contain a “bankruptcy trustee” carveout?
• Is the FDIC truly acting as or on behalf of the “company”?
• Is the FDIC a “genuinely adverse party”?
• Is the FDIC acting as a creditor representing other

creditors?

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

application to FDIC?

33

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Insured vs. Insured Exclusion

Michigan Heritage Bank (E.D. MI 2012), insurer summary judgment motion denied: “the FDIC has shown that some ambiguity 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, which might include the instant action are covered.”

34

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Insured vs. Insured Exclusion

• W. Holding Co., v. Chartis (D. P.R. 2012)

Exclusion inapplicable because:

• When regulatory agency asserts claims on

behalf of both insured organization and third- party interests, its applicability is ambiguous.

• Purpose of exclusion is to deter collusion.
• Policy defined “organization” as named

entity, each subsidiary and debtors in BK proceedings; none of which were the FDIC.

35

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Insured vs. Insured Exclusion

Progressive v FDIC (N.D. Ga. 2013): Exclusion inapplicable because:

• it is unclear whether the FDIC as receiver’s

claims are “by” or “on behalf of” the failed bank.

• court cited multiple roles FDIC takes on in

representing the insured, depositors, creditors, and shareholders to support conclusion that exclusion is ambiguous.

36

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Insured vs. Insured Exclusion

• St. Paul v. Miller (N.D. Ga. 2013):

Exclusion applicable:

• court relied upon O’Melvany & Myers, 512

U.S. 79 (1994) and concluded that the exclusion unambiguously applied.

• court rejected all arguments relied upon by
• ther courts in finding the exclusion inapplicable.

37

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Insured vs. Insured Exclusion

• St. Paul v. Miller (N.D. Ga. 2013):

However:

• court expressly stated that its decision was

based upon the policy language before it.

• if policy also includes regulatory exclusion,
• pinion may not apply.
• not binding authority.
• public policy argument still may apply.

38

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Insured vs. Insured Exclusion

• St. Paul v. Miller (N.D. Ga. 2013):

Policyholders should consider the various rulings on the issue when purchasing coverage and consider language to address the issue.

39

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

“Loan Loss” Exception

Loss Definition sometimes excludes: “any unrepaid, unrecoverable or outstanding loan, lease or extension of credit to any … Borrower.”

• insurers now looking at this exception as

additional basis to deny coverage.

• is this language ambiguous?
• does it apply to individual loans to bank

executive?

40

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

“Regulatory” Exclusion

• Since 2008 inclusion in at least community bank

policies significantly increased.

• No impact if talking about claims by BK trustee
• r 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?

41

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

“Regulatory” Exclusion

• Extensively litigated in S&L crisis, but not necessarily

here.

• FDIC not necessarily pursuing cases with solid

exclusion.

• Silverton—the question litigated there is whether the

policy contains the exclusion.

• Insurer claims that it “inadvertently” failed to include

the exclusion in the policy and seeks reformation.

• Insureds and FDIC argue against reformation and

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

42

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP 43

“Related Claims/Sub-Prime” Exclusions

• Potentially relevant when multiple lawsuits or

claims made during different policy years.

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

bank exposure through “related claims,” “subprime” exclusions.

• Insurer effort to limit exposure to one policy

period, thereby reducing available limits to insureds.

43

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

“Related Claims/Sub-Prime” Exclusions

• IndyMac (C.D. Cal)
• 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.

• The lawsuits are based on different acts,

transactions, at different times, but court broadly applied exclusion.

• On appeal to the 9th Circuit.

44

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

“Retroactive” Date/”Prior Acts Exclusion

• FDIC v. Gallan (D. P.R.)
• Policy purported to exclude acts prior to 2007.
• XL pursuing summary judgment to relate all events

to pre-2007 date.

• Separate loans/separate events.

45

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Cases to Watch

• Silverton—I vs.I/Reg. exclusion
• IndyMac—Prior litigation

exclusion

• Gallan—Prior Acts Exclusion
• St. Paul Mercury v.

MillerUnpaid Loan Carve-Out” language.

46

kasowitz benson torres & friedman llp

KASOWITZ BENSON TORRES & FRIEDMAN LLP

Biography

Linda D. Kornfeld is a partner in the Kasowitz’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

• ne 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 insurance matters. Linda presently is representing clients in Directors and Officers coverage litigation related to failed banks.

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

47