FDIC Suits Against Outside Advisors to Banks: Latest

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

FDIC Suits Against Outside Advisors to Failed Banks: Latest DevelopmentsDefending 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

WEDNESDAY, APRIL 17, 2013

Today’s faculty features:

Mary C. Gill, Partner, Alston & Bird, Atlanta

Steven C. Morrison, Counsel, Professional Liability/Financial Crimes Group, FDIC, Jacksonville, Fla.

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

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FDIC Claims AgainstFDIC Claims Against Outside Bank Advisors

Mary C. GillAlston & Bird LLPAlston & Bird LLP

[email protected]

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FDIC Post-Financial Crisis D&O Litigation

The number of lawsuits filed by the FDIC against D&Os of failed bankshas steadily increased over the past four years.

The FDIC generally has three years from the closing of a bank tog y y ginitiate a lawsuit. The number of bank closings reached a crescendoin 2009 and 2010, which explains the increased number of lawsuits inthe past months.

As of April 16, 2013, the FDIC has authorized suits in connection with109 failed institutions against 888 D&Os and filed 54 lawsuits against407 D&Os.0 &Os

The FDIC has settled a number of claims against D&Os, many ofwhich were resolved prior to litigation. The FDIC has recently begunto post these settlements on its websiteto 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 exceptionallyThe D&Os pursued a strategy of undue risk with an exceptionallyhigh 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, underwritingstandards 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 theseloans to the bank/FDIC.

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FDIC Litigation Against Bank AdvisorsTh FDIC l i ti t d l i i t The FDIC also investigates and may pursue claims againstoutside bank advisors, including:

AttorneysAttorneys

Accountants

Appraisers Appraisers

The FDIC has authorized 51 lawsuits against an array of thirdparties, 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 theAllegations of aiding and abetting directors and officers in theviolation of bank policies and federal regulations; and

Alleged failure to advise the bank client about violations ofregulations and statutes usually concerning loans or failing toregulations and statutes, usually concerning loans, or failing tosufficiently 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 of fiduciary duty, legal malpractice,negligent misrepresentation, breach of contract, breach of express orimplied warranty, unjust enrichment, aiding and abetting, fraud, anddeceptive trade practices.

The FDIC may bring claims against an entire law firm on theories ofThe FDIC may bring claims against an entire law firm on theories ofvicarious liability or failure to monitor the lawyer’s compliance withprofessional standards.

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

of 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 recordswas 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 thewiring of payoff funds prior to obtaining a release of a security deed ong p y p g ycollateral 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 andjudgment in preparation of a security deed, and the bank was damaged due toits 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 breachedFDIC alleged that bank lawyers committed malpractice and breachedfiduciary duty by (i) closing a loan without obtaining assignment of an optionto purchase a portion of the subject property; (ii) failing to obtain a writtenwaiver of the requirement to secure an assignment of the option prior tol i th l d (iii) f ili t d i b k f d f d t ’ fli t fclosing 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 engagementwith 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 bankwould 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 Bankg 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 tifor failing to follow closing instructions.

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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, legalmalpractice, 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 ofmaterial information concerning a closing and collect and/or disburse closingfunds 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, andnegligent misrepresentation against attorney.

The FDIC’s claims are based on the following alleged conduct by theattorney: (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 CLTVratio cap requirements; (c) failing to notify the bank that the borrower's downratio cap requirements; (c) failing to notify the bank that the borrower s downpayment would not pass through escrow; (d) misrepresenting the true salesprice; and (e) disbursing proceeds in a manner not necessary to clear title. 15

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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 variousl t tt i d l d f ll f th lregulatory 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 inconnection with several of the loans “Despite the knowledge of theconnection with several of the loans. Despite the knowledge of thegross imprudence and, in some instances, unlawful nature of thesetransactions, Regas and the Firm repeatedly failed to protect their clientfrom the foreseeable injury inherent in these transactions.”

On July 26, 2012, the U.S. District Court for the Northern District ofIllinois granted the defendants’ motion to dismiss with respect to theFDIC’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 ofy y pthe 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 bringe C as t ee yea s to b g a to t c a a d s yea s to b ga contract claim from date of the receivership or the applicable statestatute, whichever is longer, but claims that have expired understate law will not be revived by the appointment of the FDIC. 12U S C § 1821(d)(14)U.S.C. § 1821(d)(14).

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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 againstwho have harmed the entity cannot be expected to take legal action againstthemselves.” 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 claimsagainst 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 fOct. 23, 2012) (allowing claims that might have otherwise been barred by the statute oflimitations under the “adverse domination” theory).

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Any defense that is good against the original party is goodagainst 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 AttorneysPost-S&L Crisis

FDIC v. Mmahat, 907 F.2d 546 (5th Cir. 1990) (affirming districtcourt’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 fmalpractice but finding that defendants were entitled to credit foramount paid to FDIC by settling directors and officers).

FDIC v. Clark, 978 F.2d 1541 (10th Cir. 1992) (affirming districtcourt’s judgment holding defendant attorneys liable forprofessional negligence).p g g )

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FDIC/RTC Litigation Against AttorneysPost-S&L CrisisPost-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 ofSupp. 2d 503 (D.N.J. 1999) (holding that attorney owed duty ofcare to non-client lender and that law firm was liable forattorney’s actions under doctrine of respondeat superior).

FDIC v. Nathan, 804 F. Supp. 888 (S.D. Tex. 1992) (denyinglaw firm’s motion to dismiss and finding that law firm could beheld 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 defensebased 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’sgrant of summary judgment in favor of defendant attorneys on basis, inter alia,that “adverse domination” doctrine was limited to suits against a corporation’sofficers and directors).)

FDIC v. Alexander, 78 F.3d 1103 (6th Cir. 1996) (affirming district court’sgranting of summary judgment in favor of defendant attorneys because actionwas barred by Ohio’s one-year statute of limitations for legal malpracticeactions).

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) (grantingdefendant attorneys’ motion for summary judgment because neither theinsolvent institution nor the FDIC suffered any loss for which attorneys couldinsolvent institution nor the FDIC suffered any loss for which attorneys couldbe held liable) aff'd, 26 F.3d 1119 (5th Cir. 1994) and aff'd, 26 F.3d 1119 (5thCir. 1994). 22

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FDIC Claims Against Failed Bank Accountants

The FDIC has filed only one lawsuit in the current post-financialThe FDIC has filed only one lawsuit in the current post financialcrisis 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 accountingmalpractice) rev'd sub nom Ellis v Grant Thornton LLP 530 F 3dmalpractice) rev d sub nom. Ellis v. Grant Thornton LLP, 530 F.3d280 (4th Cir. 2008) (holding that auditor could not be liablebecause it did not know that third parties would receive auditreport).p )

In contrast, the FDIC/RTC filed 139 accounting malpractice claimsin 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 ofimplied covenants, negligent misrepresentations, and breach offiduciary duty.y y

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

to discover irregularities;

Providing a “clean” audit opinion when the bank’s financialstatements were not in accordance with GAAP; or

Failing to require appropriate loan loss allowances or to write-offimpaired loans.

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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 of contract and negligentmisrepresentation claims against PwC and Crowe Horwath, two ofC l i l B k’ ditColonial Bank’s auditors.

The FDIC’s claims are based on the auditors’ alleged failure todetect a massive fraud by two of the bank’s employees and thebank’s largest mortgage banking customer, which the FDIC claimswould have prevented additional losses suffered by Colonial.

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Both accounting firms in FDIC v. PricewaterhouseCoopers LLPhave 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-partycriminal conduct; (ii) in pari delicto; (iii) contributory negligence;(iv) reliance; and (v) proximate causation.

With respect to contract claims: (i) bank was not third partybeneficiary; and (ii) bank’s parent company failed to performunder the contract.

With respect to negligent misrepresentation claims: (i) no privityof 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 accountantsreduce 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

other 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.27

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FDIC/RTC Litigation Against AccountantsPost-S&L Crisis

RTC v. KPMG Peat Marwick, 844 F. Supp. 431 (N.D. Ill. 1994) (grantingin part and denying in part accounting firm’s motion to dismiss, findingthat negligence claim for economic damages against accounting firmg g g g gwas barred under Illinois law).

FDIC v. Ernst & Young, 967 F.2d 166 (5th Cir. 1992) (affirming districtg, ( ) ( gcourt’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) (affirmingdistrict court’s granting of summary judgment in favor of accountantsbased on statute of limitations).

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FDIC Claims Against AppraisersCl i b d i i l th t i h t t l d Claims are based upon principle that appraisers have contractual andcommon law duties to act with the degree of care, skill and competenceexercised by competent appraisers and to render appraisals that complywith federal regulations.g

Claims include professional negligence, gross negligence, negligentmisrepresentation, breach of contract, and fraud.

Based upon alleged inaccurate appraisals that fail to comply withp g pp p yappraisal 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 dincorrect methods and techniques that were necessary to produce acredible appraisal; and (v) failure to note whether level of appreciationwas sustainable or whether it was the product of real estatespeculation.

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FDIC Claims Against Appraisers

FDIC v. Kirkland, No. 2:10-3286 GAF, 2010 U.S. Dist. Lexis143688 (C.D. Cal. Oct. 28, 2010) (dismissing FDIC’s

f i l li l i b FDIC tprofessional negligence claims because FDIC was notappraiser’s client).

FDIC v. Levitt, No. 11cv1284, 2011 U.S. Dist. LEXIS 113420(S.D. Cal. Oct. 3, 2011) (denying appraiser’s motion to dismissFDIC’s breach of contract and negligent misrepresentationg g pclaims).

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Possible Defenses to FDIC Claims Against Appraiserspp


N D t No Duty

Economic Loss Rule

Contributory Negligence

Lack of Causation

Comparative Fault

Failure to Mitigate Damages

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FDIC S it A i t O t id FDIC Suits Against Outside Advisors to Failed Banks

Steven C. Morrison

FDIC

[email protected]

Each Depositor InsuredEach Depositor Insured…

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FDIC SUITS AGAINST ADVISORSFDIC SUITS AGAINST ADVISORS

A presentation in part by:

Steven C. Morrison Counsel Counsel Professional Liability & Financial Crimes Federal Deposit Insurance Corporation [email protected] g904-256-3854

The opinions expressed in this presentation are the author’s only and do not necessarily reflect the opinion of the FDIC. Presented 4/17/2013.

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FDIC STATUTORY RIGHTSFDIC STATUTORY RIGHTS

FDIC succeeds to all rights, titles, powers, privileges and assets FDIC succeeds to all rights, titles, powers, privileges and assets of the failed institution.

12 U.S.C. § 1821(d)(2)(A)(i)

FDIC-Receiver has duty to pursue viable claims of the failed institution against those who may have caused losses.

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FDIC Professional Liability UnitFDIC Professional Liability Unit

Purposes of Professional Liability ProgramPurposes of Professional Liability Program

• Maintain public trust, ensure accountability

P t d t d di i li• Promote good corporate governance and discipline

• Maximize asset recovery for Receiverships

PLU investigates the causes of every failure

PLU pursues meritorious and cost-effective claims against those ibl f f ilresponsible for failures

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FDIC Professional Liability UnitFDIC Professional Liability Unit

Safeguards to Ensure Meritorious and Cost-Effective ClaimsSafeguards to Ensure Meritorious and Cost Effective Claims

C D l t Th h I ti ti• Case Development – Thorough Investigation

• Board Approval Required Before Bringing Claims

• Ongoing Case Review by Management

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FDIC Statute of LimitationsFDIC Statute of Limitations

FIRREA re-starts the limitations period to permit FDIC to bring FIRREA re starts the limitations period to permit FDIC to bring claims viable at failure

• Torts – 3 years from failure

• Contracts – 6 years from failure

State law applies if it provides a longer period

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Elements of Malpractice

• Dutyy

• Breach of Duty

C ti• Causation

• Damages

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Possible Grounds For Liability

Mistakes to the financial detriment of the Bank Closings Failure to secure lien or priority of lien Failure to close as instructedFailure to close as instructed Straw borrowers/HUD-1s/Fees

Incorrect advice to Bank

Conflict of Interest

F d i t ti l i d t Fraud or intentional misconduct

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P t C i i E lPresent Crisis Examples

FDIC A d T t C PC Chi FDIC v. Andersen, Tate & Carr, PC & Chicago Title, No. 1:10-CV-3383 (N.D. Ga. Oct. 9, 2010). FDIC alleges that law firm failed to get a release on 272 acres from prior

lienholder (Colonial Bank) before wiring $10 million payoff; and Stayed: FDIC allegation that law firm failed to get a owner’s affidavit of

no work done. Subsequent mechanic’s lien claim for excavation was filed for $1.54 million. Chicago Title paid for the defense of that lien filed for $1.54 million. Chicago Title paid for the defense of that lien and the FDIC won priority.

FDIC v. Jampol, Schleicher, Jacobs & Papadakis, L L P N 1 10 CV 3382 (N D G O t 19 2010) L.L.P., No. 1:10-CV-3382 (N.D. Ga. Oct. 19, 2010). FDIC alleges that bank lawyers failed to properly prepare a security

deed in the name of the owner of the property.Challenges of fail re to mitigate Challenges of failure to mitigate.

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A iAppraisers

S it i t i f i j i d t th f il d b k Suits against appraisers for injuries caused to the failed bank by failing to use the degree of care, skill and competence required of professional appraisers.Cl i b f li f d• Claims because of negligence or fraud.

• Inaccurate appraisals that fail to comply with USPAP.• Significantly overvalued appraisalg y pp• Improper comps, including failing to use known

comps in the subdivision• Adjustments with reasonable basisAdjustments with reasonable basis• Based upon unreasonable assumptions

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Defenses


Lack of causation

Failure to mitigateg Before the Bank Closes FDIC’s Actions

N li f B k Offi i M ki th Negligence of Bank Officers in Making the Underlying Loan (i.e. If the Bank hadn’t made this bad loan, my

malpractice would not have harmed them)malpractice would not have harmed them)

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FDIC Lawsuits Against Banks’ Outside Professionals:Outside Professionals:

Insurance Considerations April 17, 2013

Linda KornfeldJenner & Block LLPJenner & Block LLP

[email protected](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 feesDuty to advance defense fees

• “Potentiality” standardPotentiality standard

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

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Amounts spent for “excluded” claimsAmounts spent for excluded claims

• Could be covered if “benefits” covered claimsCould 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 “panelBefore 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 feesShould 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” assetsE&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 lMutually Benefit FDIC/Professionals

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

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

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• 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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• 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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• 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 EXCLUSIONSPOLICY EXCLUSIONS INSURERS MAY RAISE

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Fraud/Deliberate Conduct ExclusionFraud/Deliberate Conduct Exclusion

• Does not impact defense dutyDoes 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” ExclusionPersonal Profit Exclusion

• Final adjudication/in fact languageFinal 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 or 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 out of … the insolvency or bankruptcy of the Insured or 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 anyMany 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 surplusagep 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 ExclusionsPotentially 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 iinsurers.

• Insurer has burden of proof

• Exclusion may arguably be ambiguous

6262

• Notice of potential claims under prior policies with less restrictive exclusions?

• Notice today of possible future claims?Notice today of possible future claims?

6363

Issues to Consider When Purchasing Future Coverage

• Professionals that provide services in significant partProfessionals 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 toregulatory 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 onerecognized insurance 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 typesMs. 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 both inside and outside of California related to failed banks.

Linda D. KornfeldMs. 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 AngelesPhone: 213 239-5176Email: [email protected]

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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