Hey, Federal Deposit Insurance Corporation, you just won a $168 million dollar jury verdict against three former officers of
IndyMac. What are you going to do next?
You're going to the 9th Circuit Court of Appeals against
IndyMac's insurers! (A piece of trivia: Onetime New York Giants
quarterback Phil Simms was the first to utter the hallowed slogan, "I'm going to Disney World!" in 1987.)
You probably heard about the stunning verdict the FDIC's
outside counsel from Nossaman won Friday from a jury in federal
court in Los Angeles. Jurors found three former officials of the
notorious (and now defunct) IndyMac -- Scott Van Dellen, Richard
Koon and Kenneth Shellem -- liable for negligence and breach of
fiduciary duty for approving 23 deficient loans despite warnings
of an imminent market collapse. But collecting on that verdict
(assuming it holds up on appeal) will be another big fight --
and the FDIC has already lost the first few rounds.
The problem is a ruling last July by U.S. District Judge
Gary Klausner of Los Angeles, who said that IndyMac's insurance
carriers do not have to cover claims in the FDIC's suit.
Klausner's judgment, rendered in a declaratory judgment action
by IndyMac's directors and officers insurers, was that the
FDIC's case involved wrongdoing related to the alleged
misconduct described in a 2007 securities class action against
the bank. IndyMac's $80 million D&O coverage for 2008 and 2009
included a clause barring claims based upon or related to the
allegations in the class action, so, according to Klausner,
IndyMac defendants couldn't rely on D&O coverage in the FDIC
case.
That ruling, according to FDIC counsel Thomas Long of
Nossaman, leaves the FDIC fighting with other IndyMac creditors
for a piece of the $30 million that remains from the bank's D&O
policies for 2007 and 2008. But the FDIC has also asked the 9th
Circuit Court of Appeals for permission to substitute into the appeal of Klausner's ruling. The agency's motion explains that
when it reached a $4.75 million settlement with former IndyMac
lending officer William Rothman, Rothman assigned his rights to
D&O coverage to the FDIC. The Nossaman lawyer said he's
optimistic that the 9th Circuit will grant the FDIC's motion to
join former IndyMac officers in the appeal.
Long said that the FDIC wants to tell the 9th Circuit that
its case against Van Dellen and the other two defendants is not
related to the 2007 class action, since the three officials
worked in a different division and applied different lending
policies. None of the three was named in the 2007 case, Long
added. "All of these factors were disregarded by Klausner," he
said.
If the FDIC manages to overturn Klausner's judgment for the
insurers, Long said, there's an argument to be made that under
California law, insurers are liable for the entire verdict, not
just the $80 million in policy coverage for 2008 and 2009.
That's because, according to Long, the defendants and their
insurers rejected the FDIC's pretrial offer to settle the case
for $40 million, which is within the limits of the 2008-09
policy. (Of course, the insurers by then had won Klausner's
ruling that the policy doesn't cover the FDIC's claims.) I asked
Long whether the FDIC planned to go after the personal assets of
the IndyMac defendants if the verdict survives; he said that
hasn't been determined. (The FDIC agreed not to go after
Rothman's personal assets in its $4.75 million settlement with
him.)
One final noteworthy point on IndyMac's D&O coverage:
There's no exclusion in the policies for claims brought by the
bank against its own directors and officers, according to Long.
That's an important point in FDIC litigation, in which the
agency stands in the shoes of a failed bank to bring claims
against former employees and board members. As Britt Latham and
Jason Hale of Bass, Berry & Sims wrote Monday in commentary for
Thomson Reuters, so-called "insured v. insured" exclusions have
been litigated around the country in FDIC suits, with some
courts holding that the exclusions apply and others issuing
contrary rulings. Kevin LaCroix of the D&O Diary has also
written extensively on the insured v. insured exception in FDIC
litigation, including a post on a ruling in October that the
exception doesn't preclude coverage for the FDIC's claims
against a failed Puerto Rican bank's directors and officers.
I left messages for defense lawyers Kirby Behre of Paul
Hastings and Robert Corbin of Corbin Athey & Martinez but didn't
hear back.
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