Claims and Bad Faith Law Blog

"Oh, Bedvidere! Come here boy!" Foghorn Leghorn goes silent with SPO.

A Stipulated Protective Order was signed in the insurance case of Bedivere Ins. Co. v. Blue Cross & Blue Shield of Kansas, Inc. & Allied World Specialty Ins. Co., Nos. 18-cv-02371 & 18-cv-02515, 2020 WL 1140394 (D. Kan. March 9, 2020) (O'Hara, USMJ). It was written by the parties, all of them insurance companies, and their lawyers of course. The lawyers of record came from Miami and Chicago and California, as well as local counsel from Kansas. They came bearing a proposed stipulated protective order.

    The Clerk wrote this on the Docket Entry for the proposed order, which Westlaw did not pick up in its report: "AGREED PROTECTIVE ORDER. The court finds good cause to enter the order submitted by the parties. Signed by Magistrate Judge James P. O'Hara on 3/9/2020." Bedvidere Ins. Co. v. Blue Cross & Blue Shield of Kansas, Inc., Case Nos. 18-cv-02371-DDC & 18-cv-02515-DDC, DE #88, proposed "Agreed Protective Order," filed March 9, 2020.

    The ones who wrote the proposed order said that their "Agreed Protective Order is based on the District of Kansas Model Protective Order." Bedvidere, 2020 WL 1140394, at *1. Except that it isn't.

    The lawyers included three categories of protection for "confidentiality" that the lawyers select in the first place. Interestingly, the lawyers wrote categories of confidentiality based on lawyers and not on their clients seeing the materials: "In particular, the parties have included three levels of confidentiality -- Confidential, Confidential -- Attorneys' Eyes Only, and Confidential -- Outside Counsel Only[.]" Bedvidere, 2020 WL 1140394, at *1. The District of Kansas Model Protective Order does not include such categories of secrecy, and neither do the District of Kansas Guidelines for the Model Protective Order.

    And what was so important that it has to be kept secret and available only in these two consolidated lawsuits and no others? This is an insurance coverage case. It involves competing coverages under Directors' and Officers' and Errors and Omissions insurance policies. See Download Bedvidere Ins. Co. v. Blue Cross & Blue Shield of Kansas Inc. No. 18-cv-02371-DDC DE #55 Amended Complaint filed 10.14.19 (D. Kan.).

    Very hush-hush indeed.

    Seriously, though: If you can get a stipulated protective order signed to keep your insurance coverage secrets, then what if anything must be disclosed?

Please read the disclaimer. ©2020 Dennis J. Wall. All rights reserved.

 

DELAWARE INSURANCE JUDGE REJECTS ANOTHER DELAWARE JUDGE'S "INTENTIONAL AND BAD FAITH" FRAUD RULING.

In an insurance case, a Delaware judge reportedly ruled on March 1, 2018 that Delaware law should apply to an insurance case.  The Delaware judge in the insurance case reportedly ruled that "'[a]lthough it may strain public policy to allow a director to collect insurance on a fraud, it does not appear to be explicitly prohibited by Delaware statutory law.'"

Don't strain yourself judge.  Another Delaware judge already determined that the fraud involved was "intentional and in bad faith."

The insurance case in Delaware grew out of an earlier fraud case in Delaware.  The fraud case involved the same individuals who are apparently claiming Directors and Officers Coverage in the insurance case.  Their fraud was actually proven in a trial in the Delaware fraud case.  The fraud was that the individuals gave the board of directors of Dole Food Co. false estimates of "how much money the company could save" from accepting a buyout offer from one of the individuals.  James Rufus Koren, "A Court Found That an L.A. Billionaire Duped Dole Investors.  Now He Wants to Stick Insurers With The Bill" (Los Angeles Times Online, Friday, March 9, 2018).

After the trial of the Delaware fraud case concluded, the Delaware judge presiding wrote that the defendants' "'actions were not innocent or inadvertent, but rather intentional and in bad faith.'"  James Rufus Koren, supra, quoting the 2015 opinion of Delaware Chancery Court Chancellor J. Travis Laster.

Stop and reflect with me for a moment.  Has an insurance coverage trial lawyer ever been born who would not be really happy with Judge Laster's quoted ruling, if you had to prove intentional and bad faith conduct that barred all coverage for it?  Now back to the rest of the story so to speak.

Judge Laster held in the Delaware fraud case that the two individuals who would later claim coverage as directors' and officers' policy "insureds" should accordingly pay $148 million.  Apparently before judgment was entered in that amount, the individuals settled -- for that amount together with interest. 

The Directors and Officers Carriers Raise the Fraud Ruling as a Defense to Coverage.

 The Directors and Officers Carriers filed an action in Delaware to declare that their insurance policies did not cover the "intentional and bad faith" fraud.  They argued in particular that their position was a "slam dunk" under California law, but the judge in the Delaware insurance case declined to bar the coverage claim under any State's law.  As noted, the Delaware judge in the insurance case reportedly ruled that Delaware law should apply, and anyway, "'[a]lthough it may strain public policy to allow a director to collect insurance on a fraud, it does not appear to be explicitly prohibited by Delaware statutory law.'"

So there you have it.  Where are the "fortuity" ideologues when they might do some good?  The fortuity ideologues are people who claim, at least when they have a dog in the fight and it is to their advantage, that insurance does not apply unless the covered risk was fortuitous and, moreover, that the party claiming coverage has a burden to prove that the risk involved was fortuitous.  There can be no judicial declaration of coverage, the fortuitous ideologues continue, unless the risk is fortuitous.

A trial in the insurance case in Delaware is reportedly currently scheduled for July, 2018.

Stay tuned.

Please Read The Disclaimer.  ©2018 by Dennis J. Wall.  All Rights Reserved.

NINTH CIRCUIT REVERSES COVERAGE UNDER BANK D&O FOR FIDUCIARY BREACHES.

In a 2-to-1 unsigned decision which was not released for publication nor for citation within the Ninth Circuit, a panel of the Ninth Circuit¹ reversed a District Court's declaratory judgment that a failed bank's D&O policy covered the bank's directors' and officers' alleged fiduciary breaches that allegedly caused the alleged bank to fail.  FDIC v. Bancinsure, Inc., ___ F. App'x ___, No. 14-56132, 2017 WL 83489 (9th Cir. January 10, 2017).  Chief Judge Rawlinson dissented.

In a fairly unique opinion, in which the two judges in the unsigned majority included one Judge from the Court of International Trade where apparently insurance issues are not often found, the appellate panel held, in dicta and in effect, that well, no, the D&O policy's "insured-to-insured" exclusion preempted Federal law and would bar the Federal Deposit Insurance Corporation from suing the banks' directors and officers for their alleged breaches of fiduciary duties even if the bank's board of directors had authorized a direct action.  Here, the bank's board of directors had not authorized a direct action against the alleged perpetrators, but even if that fact existed (which, again, it did not) it would not have made any difference, the two judges wrote, because the insured-to-insured exclusion would have barred the FDIC's lawsuit in this case.

Since the insured-to-insured exclusion is universally found in D&O policies, future cases may see this decision cited for its eye-opening dicta, even in cases filed in courts outside of the Ninth Circuit's boundaries.

In addition, the appellate panel deciding this insurance question offered their opinion on banking and finance law that, although this case did not present the fact of a shareholder resolution authorizing a derivative action to sue the alleged perpetrators, either, i.e., there was no shareholder resolution to sue the former directors and officers of the corporation, that even if there was such a corporate resolution that it would not have made any difference.

¹It may be of interest to readers that none of the three judges on this panel decided the recent case involving immigration and refugees.

Please Read The Disclaimer.  ©2017 by Dennis J. Wall.  All Rights Reserved.

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TAKING A TRIP TO BERMUDA TO AVOID PAYING SETTLEMENT.

"You can run, but you can't hide."

The Barton doctrine is a rule of law that says that if a Court has appointed a receiver, then you cannot sue that receiver without leave of that Court.  The Barton doctrine extends to court-appointed officers in bankruptcy proceedings.  Simple enough.  It seems.

MF Global was a policyholder.  It had many claims against it.  MF Global filed for bankruptcy, the claims against MF Global were settled and a Bankruptcy Judge approved the settlement.  MF Global's plan administrator, appointed by the Bankruptcy Court, participated in the settlements.

Rather than fund the settlements, of which it seems they may have been aware during settlement negotiations or at least they certainly became aware of the Bankruptcy Court's Order approving the settlements in any case, MF's E&O liability insurance carriers sought refuge in Bermuda.  In Bermuda, they convinced a Bermuda judge to enjoin MF from suing them to pay for the settlements back in the U.S. and to order arbitration in Bermuda instead.

These are the absconding defendants:

• Allied World Assurance Company Ltd.;
• Iron–Starr Excess Agency Ltd.;
• Ironshore Insurance Ltd.; and
• Starr Insurance & Reinsurance Limited.

To say again, at the time the carriers filed their lawsuit in Bermuda, they were involved in MF Global's bankruptcy proceedings in the United States.  They went to Bermuda anyway.

In fact, these carriers had already filed a motion in the Bankruptcy Court to compel arbitration.  They successfully petitioned the Bermuda courts to prevent MF Global from responding to the arbitration motion in the United States, however.

The Bankruptcy Court, like MF Global, did not take kindly to what they surely thought of as forum shopping at best, and perhaps other things at worst.  MF Global filed a motion in the Bankruptcy Court to hold the carriers responsible under the Barton doctrine.

The Bankruptcy Judge agreed with MF Global, holding that the carriers violated the Barton doctrine when the carriers filed their lawsuit in Bermuda to compel MF Global's plan administrator and the assignee of MF Global's rights under the policies, to arbitrate policy claims in this case.  It bears repeating that the carriers did not even request leave to sue from the Bankruptcy Court, which is the Court that happens to have appointed MF Global's administrator.

Further, the Barton doctrine is not simply wielded as a sword, the Bankruptcy Judge held, in effect; it is also a protection against being sued, as in this case. 

A case management conference is scheduled in the case for today.  Will the carriers try again to go off to Bermuda?  Stay tuned.

Please Read The Disclaimer.  ©2017 by Dennis J. Wall.  All Rights Reserved.

INSURANCE FOR NEW JERSEY PUBLIC OFFICIALS AND ENTITIES?

          New Jersey public officials past and present have caused a lot of people to be angry with them, it seems:

The news in January that Ms. [Bridget Anne] Kelly, a deputy chief of staff to Mr. [Chris] Christie, had given the signal for the lane closings set off other accusations -- about Mr. [David] Samson's conflicts, and misuse of funds intended for recovery from Hurricane Sandy.

Kate Zernike, "Official is Out Amid Scandal on Shut Lanes / Ally Quits Port Agency as Christie Steps Out" p. A1, col. 5 (New York Times Nat'l ed., Saturday, March 29, 2014).

          There is also the matter of untold millions of dollars of Taxpayer money taken from the New Jersey Treasury to pay lawyers for a report of sorts on Governor Christie.  Mr. Christie's current aides refused to disclose the exact amount.  Id.

          This raises questions of insurance availability if and when all this anger turns to actions of some kind in the future.  Will Public Entities and Public Officials Liability Insurance provide coverage to any of these people?

          Is there a potential Directors and Officers Liability insurance policy or policies at risk as a result, as well?

          These are questions which cannot be answered at this time.  One question seems to have been resolved, however.  Even before reports surfaced about past possible conflicts of interest in the payment of Taxpayer funds to his law firm from the Treasury of the Port Authority of New York and New Jersey, Mr. David Samson reportedly was planning to resign from his office as Chair of the Port Authority.  Id.

 © 2014 by Dennis J. Wall.  All rights reserved.  No claim to original U.S. Government works.

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FIRREA IS NOT A FURRY CREATURE FOR D&O INSURER DJA.

          The Federal Deposit Insurance Corporation became the Court-appointed Receiver for Habersham Bancorp in Georgia.  In that capacity, the FDIC sued certain Habersham Directors and Officers to get back over $4 Million in losses based on "allegedly improper dividends" approved by the underlying defendants-Directors-and-Officers in violation of their Fiduciary Duties.  OneBeacon Midwest Insurance Co. v. Federal Deposit Insurance Corp., 2013 WL 1337193 *1 (N.D. Ga. March 28, 2013).

          The Plaintiff issued a Management and Professional Liability Insurance Policy to Habersham under which the Directors and Officers could claim Coverage.  The Liability Insurance Company filed a Declaratory Judgment Action as a preemptive strike to obtain a declaration of no coverage for various reasons.  The D&O Defendants filed a Motion to Dismiss the DJA based on lack of Subject Matter Jurisdiction.  OneBeacon Midwest Insurance Co. v. Federal Deposit Insurance Corp., 2013 WL 1337193 *2 (N.D. Ga. March 28, 2013).

          The Federal Court GRANTED the D&O Defendants' Motion to Dismiss for Lack of Subject Matter Jurisdiction, and here's why.  The ruling is potentially significant to D&O Insurers seeking DJ's of no Coverage for bank Directors and Officers, as in this case.

          The D&O Defendants in this DJA based their no-subject-matter-jurisdiction argument on a Federal Statute which, of course, applies throughout the jurisdictions of the United States (and not just Georgia, where this case was filed):

D & O Defendants assert that Plaintiff's claim is precluded by Section 1821(j) of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”). (Def.s' MTD, Dkt. [33] at 7.) Under § 1821(j), “no court may take any action, except at the request of the Board of Directors by regulation or order, to restrain or affect the exercise of powers or functions of the [FDIC] as a conservator or a receiver.” At issue here is the FDIC's power to “collect all obligations and money due the institution” that has been placed into receivership. See 12 U.S.C. § 1821(d)(2)(B)(ii). The so-called “anti-injunction provision” (§1821(j)) was “intended to permit the FDIC to perform its duties as conservator and receiver promptly and effectively without judicial interference.”

OneBeacon Midwest Insurance Co. v. Federal Deposit Insurance Corp., 2013 WL 1337193 *2 (N.D. Ga. March 28, 2013).

           Following the holding in a 2010 decision by the Northern District of Illinois, the Federal Judge in the Northern District of Georgia held in this case that a "preemptive determination of rights with respect to the D & O policy was jurisdictionally barred by Section 1821(j).  OneBeacon Midwest Insurance Co. v. Federal Deposit Insurance Corp., 2013 WL 1337193 *3 (N.D. Ga. March 28, 2013).  The Federal Judge in Georgia elaborated:

   The FDIC Claim seeks to recover sums owed to the bank because of the D & Os' alleged wrongful conduct; if the FDIC succeeds, the D & O Coverage would help satisfy any judgment for the bank.  Section 1821(j)'s language is broad: “no court may take any action ... to restrain or affect the exercise of powers or functions of the [FDIC].” (emphasis added). According to the Eleventh Circuit, “[t]he exceptions to § 1821(j)'s jurisdictional bar are extremely limited.”  [Citation to Eleventh Circuit decision omitted here.] The Court finds that issuing a declaratory judgment on Plaintiff's claims would affect the FDIC's ability to collect money due to Habersham. Consequently, the claim is barred by § 1821(j).

OneBeacon Midwest Insurance Co. v. Federal Deposit Insurance Corp., 2013 WL 1337193 *4 (N.D. Ga. March 28, 2013).

          The Plaintiff D&O Liability Insurer is not left without a remedy by this holding, however.  "Plaintiff's claims can be pursued through FIRREA's administrative process' authorized by Section 1821(d).  OneBeacon Midwest Insurance Co. v. Federal Deposit Insurance Corp., 2013 WL 1337193 *5 (N.D. Ga. March 28, 2013).

          FIRREA is not a furry woodland creature for certain D&O Liability Insurance Companies.  This decision applies to bar DJA's apparently whenever the FDIC sues "insured" bank Directors and Officers to get the defunct banks' money back as an alleged result of the D&O Defendants' "Bad Faith" Breach of Fiduciary Duties.

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Regulators, Like People, Matter.

FEDERAL DEPOSIT INSURANCE COVERAGE EXPLORED FOR BANK OFFICERS AND EMPLOYEES.

   There is information available for Bank Officers and Employees made available on the Federal Deposit Insurance Corporation website through telephone seminars.  There is a telephone seminar coming up later this week about Federal Deposit Insurance Coverage for those who wish to learn about it and about the FDIC's working procedures.

   Interest in such information is heightened after surprising revelations of previously secret FDIC settlements with individual Bank Directors and Officers allegedly responsible for the Great Financial Fiasco through which we are now living.  The secrecy provisions are apparently in violation of Federal law.  See "Say It Ain't So, Sheila:  The FDIC's Secret Settlements" posted on Insurance Claims and Bad Faith Law Blog on Monday, April 1, 2013.

   Access to this information is provided here today because the information comes through FDIC webinars/telephone seminars where the host requires registration at least two (2) business days before the event.  The next FDIC-sponsored Comprehensive Seminar on Deposit Insurance Coverage is offered on April 4, 2013.  It is scheduled to begin at 3:00 P.M. EDT and last for two (2) hours.  Here is a link to the page of the FDIC site to begin registration.  If you cannot attend on April 4th, there are other dates on which this seminar is offered through December 3, 2013.

    Registration is also available through the FDIC webpage for Bank Officers and Employees to a seminar on Deposit Insurance Coverage -- Revocable Trusts.

Please Read The Disclaimer.

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Keeping the Profits, Outsourcing the Pain.

   The role of Insurance in public policy is not usually a field I travel in.  However, in the area of Directors and Officers Insurance, it is striking to me that the Insurance Carriers bear the burden of Directors' and Officers' wrongdoing, and the Directors and Officers do not.  The no-admission-of-guilt settlements favored by the Securities and Exchange Commission and other Federal agencies with corporations and their directors and officers who allegedly acted badly, and even faced criminal prosecutions and penalties, bring this public role of Insurance to light.

   "But these no-admission settlements can be little more than a wrist slap -- and certainly do not qualify as punishment.  Most financial penalties end up being paid for by the company's shareholders or its insurance policies.  That's not much of a deterrent."  Gretchen Morgenson, "Fair Game / Making Them Pay (And Confess)" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, January 27, 2013).  [Emphasis added.]

   Altering the public policy of pursuing no-admission-of-guilt settlements short of going to Trial, will take more than Insurance.  "It won't be easy to change the mindset at the S.E.C. from one that regularly allows defendants to avoid culpability.  Most of all, pursuing a more aggressive litigation stance requires that the agency's prosecutors be ready and able to go to trial."  Id.  [Emphasis added.]

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MEDITATIONS.

            Recent newspaper reports have led to speculation about the influence of insurance of the conduct of Catholic Church leaders.  The focus of this article will be on the question of which kinds of Insurance Coverages might apply to the reported conduct of a sample case now (kind of) in the news.   A criminal conviction of a Catholic Bishop in a Kansas City Court on Thursday was reported in the  newspapers on Saturday.  The timing could not have been better if someone wanted to minimize the impact.

            According to the newspaper reports, a Catholic Bishop and a Catholic Diocese settled criminal charges against them in Kansas City.  The charges included an alleged misdemeanor for failing to report suspected child abuse.

            These charges were reportedly resolved against the bishop without a Jury Trial, at his request.  The bishop agreed with the prosecutor to a stipulated set of facts.  The charges against the Catholic Diocese were dropped.  Laurie Goodstein, "Defying Civil and Canon Laws, Church Failed to Stop a Priest" p. A1, col. 1 (New York Times Nat'l ed., Saturday, September 8, 2012).

            Before reaching out to more of the newspaper reporting, this case presents more than one noteworthy feature which deserves comment.  It seems unusual that a criminal defendant who for a long while has been scheduled for a date-certain Jury Trial of his case, consented to a Trial by a Judge immediately and with little notice.  I do not practice criminal law, but this strikes me as unusual conduct for a criminal defendant.

            In addition, it seems unusual that a criminal defendant in this case apparently did not 'plead' to the charges, but agreed that the facts were true.  This may not have the same evidentiary effect in pending civil lawsuits filed against the bishop and the Diocese after the alleged child abuse, but "stipulating to the facts" of a crime is certainly the functional equivalent of entering a guilty plea whether it is a usual or unusual procedure.

            The criminal charges against the Catholic Diocese have been dropped.  The bishop faced jail time but he will not have to serve any.  Many other misdemeanor defendants serve jail time.  Further, the bishop faced a monetary penalty but he will not have to pay any.  Again, many other misdemeanor defendants pay their fines.  Instead, the bishop was sentenced to serve two years on probation.  Reportedly, this was not among the possibilities usually available to defendants charged with such crimes in Kansas City.

            Now on to the newspaper reporting of the facts of this case.  They concern Robert W. Finn, currently and at all material times the Bishop of the Catholic Diocese of Kansas City-St. Joseph.  Bishop Finn was scheduled to defend a criminal Jury Trial which was set in the near future.  The charges against him included failing to report suspected child abuse.  A then-priest employed in Bishop Finn's Diocese, named Shawn Ratigan, allegedly exposed the genitals of small girls and then took photographs of them, among other things.

The photographs were found on Ratigan's laptop by a computer tech who tried to fix the computer in May or June, 2010.  Upset with what he found there, the tech told a deacon in his parish, who apparently told superiors.

            It appears that the prosecutor expected the evidence to reflect that Bishop Finn was also warned about Ratigan's behaviors, including by the principal of a parochial school located next to Ratigan's parish, and by another computer tech, this one employed by the Diocese who had also witnessed Ratigan's laptop photos.  "The next day, Dec. 17, 2010, Father Ratigan attempted suicide.  He left messages apologizing to his family for 'the harm caused to the children or you.'"  Laurie Goodstein, "Defying Civil and Canon Laws, Church Failed to Stop a Priest" p. A1, col. 1 (New York Times Nat'l ed., Saturday, September 8, 2012).

            The prosecution also apparently expected the evidence to show that Bishop Finn assigned Ratigan to a position where he allowed Ratigan to have contact with children.  The extent or type of the permitted contact may have been  disputed.  It is not disputed that the bishop did not tell anyone what he knew about Ratigan at that time. 

            In May, 2011 Ratigan was arrested.  He was charged with possession of child pornography.  He was convicted in August, 2012.  Ratigan still reportedly awaits sentencing.

            Bishop Finn changed his mind last week about a Jury Trial on his criminal charges.  As noted, he effectively entered a guilty plea to the misdemeanor of failing to report suspected child abuse.   The bishop's criminal Trial then reportedly took less than an hour and a half.  That includes the time it took for the bishop to say he was sorry.  Laurie Goodstein, "Defying Civil and Canon Laws, Church Failed to Stop a Priest" p. A1, col. 1 (New York Times Nat'l ed., Saturday, September 8, 2012).

            We are familiar with how lawyers think, you and I.  It seems likely that Robert Finn's defense lawyers evaluated the evidence and told their client that he, Bishop Finn, faced a high risk of being convicted.

            For the Diocese, which will undoubtedly be argued to be a unit of the Catholic Church and subject to the command and control of the Vatican, it is worth speculating what consequences a conviction would carry for its Insurance Coverage.

            I do not know for sure whether, under Missouri law, evidence of a felony or misdemeanor conviction would have been admissible in any later proceedings against the bishop or the Diocese.  However, as noted, there are reportedly civil lawsuits pending at this time against them, filed on behalf of the children and their families in question.  Insurance Coverage questions abound for all kinds of Insurance, including Director's and Officer's Insurance -- or the equivalent -- for the Diocese and for the bishop.  Was the bishop an "officer" or "director"?  Is the Vatican or the Diocese responsible for the bishop's conduct as a matter of legal liability in this matter?

            I was under the impression that bishops do not make decisions independently of the Vatican command.  If the Vatican, or the Catholic Diocese, would be held liable for the conduct of Bishop Finn, what other kinds of Insurance Coverage could be available to any of them?

            Employer Practices Liability Insurance may be implicated.  Was the Diocese the "employer" of Bishop Finn?  Does the fact that the Vatican adopted disclosure practices that the bishop did not reportedly obey, have an effect on EPLI Coverage, for the bishop or for the Diocese, or anyone else?

            A final possibility is Commercial or Comprehensive General Liability Insurance.  That would likely raise questions of the "intentional act" Exclusion (or perhaps more accurately called the "intentional damages" Exclusion).  In addition, was there an occurrence neither expected nor intended from the standpoint of the insured?  If so, how many "occurrences" were here?

            These and many other potential Insurance Coverage questions arise from this case.  This would be a good focus for a discussion of these issues.  Forward your thoughts to me by mail or EMail.  I myself do not necessarily have the answers in this one.  I look forward to hearing from you.

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ARE COUNTRYWIDE'S ALLEGED SINS VISITED UPON NEW PARENT, BANK OF AMERICA?

... One Federal Court Answers "no," Not in That Case.  Court Dismisses Amended Complaint at Issue, With Prejudice.

    In Allstate Insurance Co. v. Countrywide Financial Corp., 2012 WL 335730 (C.D. Cal. February 2, 2012), Download Allstate Insurance Co. v. Countrywide Fin. Corp. (C.D. Cal. Case No. 2.11CV05236, Order Filed February 2, 2012) PUBLIC ACCESS, a Federal Judge dismissed Fraud claims against Bank of America ("BOA") with prejudice.  The Fraud claims were based on BOA's Merger and Acquisition activity and alleged vicarious liability for the Residential Mortgage-Backed Securities sales of Countrywide Financial Corporation.

   Allstate filed this "securities action [over] residential mortgage-backed securities ('RMBS')" it purchased "in multiple offerings structured and sold by several of the defendants."  The Defendants in that case included Bank of America, and they include Officers and Directors of Countrywide.  More specifically, Allstate alleged misrepresentations by or on behalf of the Defendants "regarding the quality of Countrywide-issued [RMBS] that Allstate purchased between 2005 and 2007."  Id. at *1.

   Allstate alleged that when Bank of America bought Countrywide, BOA also bought liability in the event that Allstate recovers Damages in this lawsuit.  Allstate alleged Causes of Action Nine, Ten and Eleven against BOA for "Successor and Vicarious Liability," "Intentional Fraudulent Conveyance," and "Constructive Fraudulent Conveyance," respectively.  Id.

   For reasons primarily related to Illinois law, the Federal Judge dismissed with prejudice Allstate's alleged claims of Fraudulent Transfer, whether "constructive fraudulent transfer" (id. at *5 - *7) or "actual fraudulent transfer" (id. at *8 - *10).

   Next, citing a Third Circuit Court of Appeals decision, the Federal Judge in California dismissed with prejudice Allstate's alleged claim of "assumption of liabilities" by BOA of Countrywide's liabilities.  Id. at *11.

   The Federal Court then dismissed with prejudice any alleged claim by Allstate against BOA for "successor liability" as to Countrywide's alleged fraudulent activities.  In reaching this decision, the Federal Court relied on Federal decisions from Illinois, California, and Delaware, and on Delaware State Court decisions, all applying Delaware law in this regard.  Id. at *11 - * 13.  Although the California Federal Court observed in this case that "Delaware law is clear that directors owe a fiduciary duty only to the corporation and its shareholders," and not to "a creditor such as Allstate at all,"  id. at *12 n.11,  "[t]he Court need not address this issue" in this case, the Court ruled.  Id.

   Parties allegedly defrauded during the Great Financial Fiasco, including parties who allege that they were defrauded during the sale and origination of Residential Mortgage-Backed Securities, and their legal counsel, are provided by this opinion with a roadmap for alleging sustainable Fraud claims.  Specifically, the Court's opinion in this case provides such a roadmap for parties and their counsel alleging claims against successor entities which may be held vicariously liable for those allegedly fraudulent RMBS activities, dependent upon the facts of each case.

 

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Suffer to be Called "Litigious": Lawsuits Cross the Pond ...

... At Least When Lots of Money is Involved.

   Following a tradition, American shareholders of Lloyds Banking Group of Britain (NOT Lloyd's the insurance syndicates) has filed a class action because they claim a lot of damages.

   They have filed suit in New York against Lloyds Bank itself, its former Chair of the Board, and its former CEO.  (At this time, it is unknown whether the action has been filed in New York State Court or in Federal Court but that information will be provided when it becomes available here.)

   The allegations apparently center on a reported "'reckless disregard for the truth'," based on the following allegations of failure to inform.  Lloyds Bank bought HBOS, plc.  HBOS was the holding company behind the Bank of Scotland.  See Wikipedia, "HBOS".  Lloyds Bank was high on the acquisition, until they were not.

   Things turned sour for the Lloyds Bank shareholders allegedly when shortly after the acquisition of HBOS, Lloyds Bank had to give up a 43% stake to the government in return for an infusion of $26,400,000,000.00 or $26.4 Billion in Taxpayer Funds.

   The suing shareholders of Lloyds Bank allegedly were not told of HBOS' decline in fortunes, so to speak, until they read about it in the newspapers, i.e., when a loss in the Billions was posted by the bank.  Reuters Report, "U.S. Shareholders Sue Lloyds" (New York Times Online, January 2, 2012).

   More to come, no doubt.

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FDIC Recovery Actions: Federal Primary Jurisdiction, Inherent Stay No Bars.

   Columbian Bank and Trust Company lost some $52 Million before it was taken over by the Federal Deposit Insurance Corporation.  The FDIC filed suit to recover these losses from some of the Bank's former Directors and Executive Officers on the grounds that these people allegedly caused the losses through their alleged Negligence and alleged Breach of Fiduciary Duties.

   These individual Defendants filed a Motion to Stay the FDIC's recovery action against them.  The asserted grounds behind their Motion to Stay essentially boiled down to alternative reasons for the Federal Court in this case to rule that the FDIC had been appointed Receiver of the defunct Bank "prematurely".  One of the asserted reasons was that although the Kansas State Bank Commissioner had declared that the Bank was insolvent and accordingly was in need of receivership, the Bank filed an appeal from that State administrative ruling, and the appeal was "remanded" to the Kansas Administrative Agency by the Kansas Court.

   The Defendants in the FDIC recovery action argued for a Stay of that action because Kansas should have "primary jurisdiction" and the FDIC's recovery action against them would, they argued, be preempted for purposes of a Federal Court Stay under theories of "primary jurisdiction," abstention, or inherent Stay powers.  The Federal Judge disagreed completely in this case.

   First, and factually most significant to her ruling in this case, the Federal Judge wrote that "[t]his court is not deciding the same issue that is being reviewed in the state administrative proceeding.  This Court is not reviewing the decision to declare the Bank insolvent or the decision to appoint a receiver."  Federal Deposit Insurance Corp. as Receiver of the Columbian Bank & Trust Co. v. McCaffree, et al., 2011 WL 625785 *2 (D. Kan. December 15, 2011), Download Federal Deposit Insurance Corp., Receiver of Coumbian Bank and Trust Co. v. McCaffree (D.Kan. Case No. 11.2447, Memo. and Order Dec. 15, 2011) PUBLIC ACCESS.

    Second, and legally most significant to the District Judge's ruling in this case, the FDIC filed its recovery action while acting pursuant to Federal statutory authority.  Federal Courts are therefore forbidden to enjoin -- or stay, by another name -- the FDIC's recovery actions because those recovery actions are authorized by Federal Statute.  "This case involves an area of enforcement that carries with it a strong congressional policy in favor of prompt enforcement....  This case was filed by the FDIC-R pursuant to its statutory authority as receiver....  The FDIC-R's filing of this director and officer liability action is in keeping with its statutory duty to maximize recoveries for the receivership."  Id. at *4.

   The Federal Deposit and Insurance Corporation's authority by Federal Statute to recover monies from Directors and Executive Officers of statutorily defined "banks," lends new light to any attempt to understand the intensity with which many Directors and Officers of investment banks vowed not to ever subject themselves or their institutions to the FDIC. 

 HAPPY HOLIDAYS TO ALL, AND TO ALL A HAPPY NEW YEAR!

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"And a Large Investor Shall Lead Them."

   We are all now living through the Great Financial Fiasco.  Most of us are burdened with the consequences of it.  A few have profited from it.  No-one and no corporation has yet been held accountable for it.

   Civil and criminal actions filed by the Securities and Exchange Commission result in pathetic settlements with "banks".  The S.E.C. thinks that settlements are as good as Judgments for Damages.  See Louise Story, "Investors Scrutinizing JPMorgan's Mortgages" p. B1, col. 6 (New York Times Nat'l ed., "Business Day" Section, Saturday, December 17, 2011).  The rest of the Federal "enforcement" departments think so too.

   There is no known record of criminal enforcement actions against major profiteers after the Great Fiasco.  Recoveries have all been greater in civil lawsuits filed by private investors than in civil enforcement actions filed by the Government.  See, in addition, Louise Story & Gretchen Morgenson, "A.I.G. Sues Bank of America Over Mortgage Bonds" (New York Times Online, August 8, 2011).

   If fault is going to be assessed for the Great Financial Fiasco, it may have to be assessed in privately-filed, individual civil lawsuits and class actions.

   Those lawsuits may in turn trigger Directors' and Officers' Coverage actions.  The end result may be finding out who was at fault for the Fiasco which you and I did not make.

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SEC Settlement Practices Continue to Face Judicial Scrutiny.

   In Securities and Exchange Commission v. Vitesse Semiconductor Corp. et al, 771 F. Supp. 2d 304 (S.D.N.Y. 2011) Download SEC v. Vitesse Semiconductor Corp. (S.D.N.Y. Case No. 10CIV9239, Opinion and Order Filed March 21, 2011), the Securities and Exchange Commission defended its recent settlement practices in cases it brings alleging fraud against directors and officers.  Its settlement practices are codified in the Code of Federal Regulations.  They include filing cases against Defendants in which the SEC alleges fraud, and which the SEC practice is to settle without requiring the Defendants to admit or deny guilt.  The SEC claimed in this case that it instituted this practice in 1972.

   That claim caused the Federal Judge in that case, Judge Jed Rakoff, to set the record straight, as it were, as to the history and effects of this SEC practice:

Long before 1972, the S.E.C. had already begun entering into consent decrees in which the defendants neither admitted nor denied the allegations. This was strongly desired by the defendants because it meant that their agreement to the S.E.C.'s settlements would not have collateral estoppel consequences for parallel private civil actions, in which the defendants frequently faced potential monetary judgments far greater than anything the S.E.C. was likely to impose. But there were benefits for the S.E.C. as well. First, the practice made it much easier for the S.E.C. to obtain settlements. And second, at a time (prior to 1972) when the S.E.C.'s enforcement powers were largely limited to obtaining injunctive relief, the S.E.C.'s focus was somewhat more centered on helping to curb future misconduct by obtaining access to the Court's contempt powers than on obtaining admissions to prior misconduct.

   But, by 1972, it had become obvious that as soon as courts had signed off on such settlements, the defendants would start public campaigns denying that they had ever done what the S.E.C. had accused them of doing and claiming, instead, that they had simply entered into the settlements to avoid protracted litigation with a powerful administrative agency. Thus, the real change effected by the S.E.C. in 1972 was the requirement that a defendant who agreed to a consent judgment “without admitting or denying the allegations of the Complaint” nevertheless agree that the defendant would not thereafter publicly deny the allegations. To this end, each of the proposed Consent Judgments now presented to this Court is accompanied by a *309 formal written “Consent” of the defendant agreeing, pursuant to 17 C.F.R § 205.5, “not to take any action or to make or permit to be made any public statement denying, directly or indirectly, any allegation in the complaint or creating the impression that the complaint is without factual basis.”

   The result is a stew of confusion and hypocrisy unworthy of such a proud agency as the S.E.C. The defendant is free to proclaim that he has never remotely admitted the terrible wrongs alleged by the S.E.C.; but, by gosh, he had better be careful not to deny them either (though, as one would expect, his supporters feel no such compunction). Only one thing is left certain: the public will never know whether the S.E.C.'s charges are true, at least not in a way that they can take as established by these proceedings.

   This might be defensible if all that were involved was a private dispute between private parties. But here an agency of the United States is saying, in effect, “Although we claim that these defendants have done terrible things, they refuse to admit it and we do not propose to prove it, but will simply resort to gagging their right to deny it.”

   The disservice to the public inherent in such a practice is palpable.

Id. at 308-09.  [Emphasis added.]  The Court announced in that case that SEC Settlements containing such provisions would receive a heightened level of scrutiny as a result.  In that unique case, however, the circumstances caused the Court to approve the settlement.  The Court was careful to conclude with the notice that approval of the settlement brokered by the SEC in this case, did not at all mean that SEC settlements in other cases would escape judicial scrutiny:

  

 No reasonable observer of these events could doubt that the company has effectively admitted the allegations of the complaint in the way that, for a company, is particularly appropriate: by letting its money do the talking. Under these unusual circumstances—but reserving for the future substantial questions of whether the Court can approve other settlements that involve the practice of “neither admitting nor denying”—the Court approves the proposed Consent Judgments.

 

Id. at 310.  [Emphasis added.]

 

   Judge Rakoff is the Federal Judge assigned to scrutinize the settlement brokered by the SEC with Citigroup in which "Citigroup had agreed to pay $285 million to settle a civil complaint that it had defrauded investors in a mortgage securities deal.  The bank [Citigroup] did so 'without admitting or denying' the government's accusations."  See Peter Lattman, "Citigroup Deal to Go to Judge Critical of S.E.C. Practices" p. B4, col. 1 (New York Times Nat'l ed., "Business Day" Section, Friday, October 21, 2011).

 

Time will tell what happens once this alleged settlement is subjected to the promised level of judicial scrutiny.

 

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Class Action Dismissed With Leave, Involves Countrywide's "MBS".

   Investors reportedly are filing Federal Cases to try to compel originators of "MBS" or "Mortgage-Backed Securities" to buy back the Plaintiffs' investments and perhaps to pay them Interest and even Damages.  Lawsuits are generally filed under the Federal Securities Act of 1933 and allege that the Defendant "made materially untrue or misleading statements or omissions" regarding the Defendant's "loan origination practices in public offering documents".  Download Maine State Retirement System v. Countrywide Financial Corp. (C.D. Cal. Case No. 2.10cv00302, Order Dismissing Amended Class Action With Leave, Filed November 4, 2010)PUBLIC ACCESS, Slipsheet Opinion attached at 2.

   These Lawsuits and allegations can have the effect of raising a wide range of Insurance Coverage Issues when the Defendant and its Officers and Directors claim Coverage for their alleged actions and omissions.

   In the linked Order Dismissing Amended Class Action With Leave, the U.S. District Court for the Central District of California was faced with an Amended Class Action Complaint against Countrywide and others.  The amount at stake came from Countrywide's origination or purchase between 2005 and 2007 of $1,400,000,000.00 or $1.4 Trillion in mortgage loans.

   The issue at hand in that Federal Case, however, did not involve the merits of the Plaintiffs' Claims.  The Federal Court held that the Plaintiffs' Amended Class Action Complaint was legally deficient for two reasons unrelated to the substance of the Plaintiffs' charges against Countrywide.

   First, the Court held that as a matter of settled Federal Law the Plaintiffs in that Case could not "represent the interests of investors in MBS offerings in which the plaintiffs did not themselves buy."  Download Maine State Retirement System v. Countrywide Financial Corp. (C.D. Cal. Case No. 2.10cv00302, Order Dismissing Amended Class Action With Leave, Filed November 4, 2010)PUBLIC ACCESS, at 5.  Accordingly, the Plaintiffs were given leave to amend to specifically allege the MBS offerings in which they did buy.  Id. at 7.

   Second, the Federal Court held that, for reasons related at least in part to its Standing ruling in this case, Download Maine State Retirement System v. Countrywide Financial Corp. (C.D. Cal. Case No. 2.10cv00302, Order Dismissing Amended Class Action With Leave, Filed November 4, 2010)PUBLIC ACCESS, at 11-12, the Amended Class Action Complaint raised questions about whether some or any of the Plaintiffs' Claims were filed on time, or whether instead some or any of those Claims are barred by the Statute of Limitations.  Accordingly, said the Federal Judge in this Case, although the Statute of Limitations is an Affirmative Defense which Countrywide and the other Defendants must prove in that Case, the Plaintiffs are given leave to amend -- ordered to amend, actually -- their Class Action Complaint to also specifically allege the dates on which they purchased their securities from Countrywide.  Id. at 12-13.

   The next round of allegations and dispositions in this Case is coming.

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FDIC Policy Plan to Trigger D&O Insurance Coverage Issues.

   It is reported by usually reliable sources that the Federal Deposit Insurance Corporation is about to institute a change in its policy.  Reportedly, the FDIC plans to sue Officers and Directors of "failed banks" to recoup funds they received before the banks failed.  See Chad Hemenway, "D&O Liability/FDIC Plan to File Lawsuits Creates D&O Policy Coverage Questions" p. 8 (National Underwriter P&C, October 18, 2010).  The FDIC policy plan raises Directors and Officers Insurance Coverage Issues.

   One such issue is whether there is anything left on these Directors' and Officers' Liability Coverage.  Reportedly these Policies have already responded to "securities lawsuits" in which Breach of Fiduciary Duties was alleged based on the same or similar transactions.  See id.

   Another issue involves "a regulatory exclusion" under which D&O Insurance Coverage is apparently excluded, in basic and simple terms, for actions filed by administrative or regulatory agencies.  Another such issue involves a Coverage grant in the first place for Claims in which "fraud or dishonesty" are alleged, requiring a "final adjudication" in order for Coverage to be triggered concerning such Claims.  See id.

   Time will tell how these and other related Coverage Issues will play out in the Courts.

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You Cannot Hide All the Consequences, All of the Time: ...

  

... Shareholders Pay For Corporate Settlements.  Taxpayers Foot the Bill.

   A newspaper report published in The New York Times on Tuesday, August 24, 2010 captures some of the reasons that different Federal Judges in different Courts in different locales in this country are questioning the Federal Government's policy of settling light and easy with corporate fraud Defendants and ignoring many potentially culpable, individual Directors and Officers.  See Binyamin Appelbaum, "U.S. Judges, Perceiving Leniency in Bank Settlements, Sound Off" p. B1, col. 2 (New York Times Nat'l ed., "Business Day" Section, Tuesday, August 24, 2010).

   The Government's new policy was displayed in posts previously published here on Monday, August 23, 2010, and on Insurance Claims and Issues Web Log on Thursday, August 19, 2010.  It was openly questioned in Court by the Federal Judges and in their Opinions which are linked on those posts.  It is however not to be found in newspaper reports so far.  Not a whisper, not even a hint.

  There are two parts to the Federal Government's policy of reaching light and easy settlements with alleged frauds.  The first part was laid bare by more than one Federal Judge:  Corporate shareholders pay the settlements reached by corporate Defendants with the Government in these fraud cases.

   The other part of the Federal Government's policy involves the relative absence of individual Directors and Officers as Defendants in those fraud cases.  The absence of individual Directors and Officers removes the possibility of recovering anything from their Director's and Officer's Liability Insurance Coverages.  Taxpayers cannot look to those sources for payment.  That is more a consequence than an explanation, perhaps.  The explanation may lie more in Federal Government officials cultivating friendships with the Directors and Officers of the private businesses who may or will employ them when their government tenure is at an end.

 Please Read The Disclaimer.

UPDATE: Two Different Courts, Two Different Judges, Same Rejection: Settlement Deals.

  This is an  update to a post published on Insurance Claims and Issues Web Log on Thursday, August 19, 2010.

   A third Federal Judge continued to question a proposed Federal Settlement of Criminal penalties with Barclays Bank, but approved it last week nonetheless.  Reportedly, at a Hearing last week the Judge "expressed concerns that Barclays was not pleading guilty, that no individuals were being prosecuted, and that the $298 million [settlement amount] would be paid by shareholders, not corporate executives."  He approved the deal anyway.  See "Barclays Deal With U.S. Over Trade Sanctions is Approved" p. B9, col. 1 (New York Times Nat'l ed., Reuters Report, Thursday, August 19, 2010).

   The Federal Judge asking those questions also reportedly stated that "it wasn't his job to micromanage how the Justice Department handles prosecutions."  Brent Kendall and Michael Rothfeld, "Barclays Judge Says 'Yes, but ...'" p. C3, col. 1 (Wall Street Journal, Thursday, August 19, 2010), published online under the headline, "Green Light on Barclays Pact" (Subscription required to access Wall Street Journal online).

   Good Faith should enter into the Government's settlement deals.  Good Faith is certainly a required concept for Insurance Companies and other settling parties.  If Good Faith does not enter into Settlements to which the Government is a party, then what does?

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Many Questions About "AIG" Director's and Officer's Coverage for Goldman.

  The SEC's Lawsuit against Goldman Sachs and "fabulous fab," a/k/a Fabrice Tourre, is well known.  Perhaps lesser known are at least three (3) lawsuits pending in the New York State Supreme Court, filed against Goldman and/or its Board of Directors, by its Shareholders.  See Bob Van Voris, "AIG May be on the Hook in Lawsuits Against Goldman Sachs Board" (Bloomberg.com, Saturday, April 24, 2010).  The lawsuits are said to based on common allegations that Goldman's directors and officers lost value on Goldman's shares because they allegedly "failed to exercise oversight of the deals, exposing Goldman Sachs to billions of dollars in possible liability and damage to its reputation."  Id.  The other lawsuits in question also reportedly share common Claims for alleged Breach of Fiduciary Duties.  Id.

   Even if, as reported in the linked newspaper article, an unidentified AIG Company issued Goldman a Director's and Officer's Liability Policy, ordinarily such a Policy contains an Exclusion for alleged Breach of Fiduciary Duties.  Such a Policy also ordinarily contains an Exclusion for Fraudulent Acts and Willful Violations, an Exclusion which was applied to bar all Coverage for requested indemnification of Defense Fees and Costs under a D&O Policy in the case of Herley Industries, Inc. v. Federal Insurance Cos., Download Herley Industries, Inc. v. Federal Insurance Co., Inc. (E.D. Pa, Opinion filed 08.24.09) also published as 2009 WL 2596072 *11 (E.D. Pa. Opinion Issued August 21, 2009)(Westlaw subscription required to access Westlaw).  Moreover, one of these other reported lawsuits has been pending since at least last September, when the Plaintiffs, the Public Employees' Retirement System of Mississippi, filed an Amended Complaint in the U.S. District Court for the Southern District of New York.

   Whichever Insurance Company or Companies issued Director's and Officer's Liability Insurance Policies to Goldman Sachs must have issued a Reservation of Rights to address these other pending lawsuits before now.  That newer lawsuits have been filed does not mean a thing in that regard.  Further, the Policy or Policies are unchanged from case to case; they only change when the Insurance Company or Companies agreed to change them.  I am sending a copy of this post to the newspaper reporter who wrote the subject linked article, and to the lawyers representing the parties in one or more of these other cases, to request a copy of any Reservation of Rights and the D&O Policy or Policies.   Do not hold your breath for me to post further on this matter, unless you like the color blue.  I have sincere doubts that these questions will ever be answered.  It would be a pleasant surprise to receive answers, however.

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.

Bad Faith Penalties in Approving Settlement: A Factor to Consider.

    **Author's Note:  If you have reached this blog through a list that carries advertising, your computer may or may not be put at risk either through the list or through the advertising.  I do not accept or authorize any commercial advertising of any kind on any list or post.  Placing commercial advertisements with or near any of my web log posts is prohibited.  Further, I do not recommend any products or services advertised with or near any of my posts or any list of my posts.**   

   "Bad Faith" Claims against Directors and Officers can be a factor which Courts will consider in approving, or rejecting a Settlement arranged by the same or other Directors and Officers, of Claims against the Corporation which will ultimately require the Shareholders to pay money:

   An even more fundamental problem, however, is that a fine assessed against the Bank, taken by itself, penalizes the shareholders for what was, in effect if not in intent, a fraud by management on the shareholders.  This was among the major reasons the Court rejected the earlier proposed settlement.  [Citation omitted.]  Where management deceives its own shareholders, a fine most directly serves its deterrent purposes if it is assessed against the persons responsible for the deception.  If such persons acted out of negligence, rather than bad faith, that should be a mitigating factor, but not a reason to have the shareholder victims pay the fine instead.

 Download Securities and Exchange Comm'n v. Bank of Am. (SDNY Case Nos. 09 Civ 6829 and 10 Civ 0215, Opinion Filed 02.22.10 Approving Settlement), attached Official Slipsheet Opinion at 11-12; also published as Securities & Exchange Comm'n v. Bank of Am. Corp., 2010 WL 624581 *5 (S.D.N.Y. February 22, 2010)(subscription required to access Westlaw).  [Emphasis added.]

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Bankruptcy Code Treatment of Preferential Transfers: Recoupment D&O Covered "Loss"?

   **Author's Note:  If you have reached this blog through a list that carries advertising, your computer may or may not be put at risk either through the list or through the advertising.  I do not accept or authorize any commercial advertising of any kind on any list or post.  Placing commercial advertisements with or near any of my web log posts is prohibited.  Further, I do not recommend any products or services advertised with or near any of my posts or any list of my posts.**   

   The principles underlying the treatment of Preferential Transfers and getting the money back  under the Bankruptcy Code, as outlined in an excellent new article, seem to be very similar to the Equitable Doctrines of Recoupment and Exoneration:  See J. Henk Taylor & Justin Henderson, "Preferences/When Can a Trustee Claw Back Payments to Creditors?" 19 Business Law Today 60 (American Bar Association, Business Law Section, March/April 2010).

   A question arises, then:  Is the repayment of an established Preferential Transfer under the Bankruptcy Code a Covered "Loss" under Director's and Officer's Liability Insurance Coverage, or is it instead in the nature of a penalty for restitution which, it has been held, is not a covered "Loss" under a D&O Policy?  See, e.g., the post on Insurance Claims and Issues on March 10, 2010.

"Reimbursement and Exoneration" are the featured topics of Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 7:18 (Second Edition Shepard's/McGraw-Hill; 2009 Supplement West Publishing Company).

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Huge Securities Class Action Jury Verdict Tags Vivendi, Exonerates Officers.

   Reportedly "the largest securities class action jury verdict in history" tagged Vivendi with potentially $9.3 Billion in Damages.  In 57 separate claims, Vivendi was sued for allegedly making misstatements or omitting information that misled shareholders and inflated the company's stock.  Associated Press copyrighted story published as "Court Finds Vivendi Liable for Misleading Investors" p. B3, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, January 30, 2010); Richard Verrier, "Company Town/Federal Jury Finds Vivendi Liable in Shareholder Lawsuit" (Los Angeles Times Online, Saturday, January 30, 2010).

The class action lawsuit also named two additional Defendants who were Officers (including the Chief Financial Officer) of Vivendi.  The jury's verdict exonerated the individual Defendants and put 100% of the responsibility on Vivendi.  New York Times/Associated Press, supra; Los Angeles Times, supra.

   The defense expenses incurred by the individual Defendants must have been enormous.  This is the kind of lawsuit which gives rise to Insurance Coverage Questions, and it may have already done so.  It certainly appears likely that there will be future Insurance Coverage Issues surfacing over the available Director's and Officer's Insurance Coverage as a result of this lawsuit.

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This is Fulfilling Fiduciary Duties?

   A newspaper report identifies several "big banks that are struggling in the postbailout world".  Eric Dash, 'Taking Their Cut/Once Banks Hand Out Pay, a Pittance for Shareholders" p. B1, col. 2 (New York Times Nat'l ed., "Business Day" Section, Wed., January 27, 2010).  According to the report, these institutions are approving bonuses and payments to their employees which, aggregated, total nearly as much or more than their total profits last year:

• 88 cents out of every $1.00 "it made in 2009 to compensate all workers," id., in the case of one;
• 94 cents out of every dollar, in another case; and
• In another case, more than the total of its 2009 income in what might be called 'deficit dealing,' or "$1.45 for every dollar the company took in last year."  Id.

Who told these companies that making these bonus payments at the obvious expense of the Shareholders fulfilled their Directors' and Officers' Fiduciary Duties?

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Directors and Officers, Coverage: To Boldly Go Beyond Fiduciary Duties.

   It appears to be unquestionable that Directors and Officers today owe Fiduciary Duties enforceable by Shareholders of public corporations:

   As fiduciaries for the owners of the companies on whose boards they serve, directors have a duty to act in shareholders' interests.  After all, they are the shareholders' representatives, and they are charged with ensuring that their companies are operated soundly and with long-term profitability in mind.  Yet it doesn't always seem to work out that way.

Gretchen Morgenson, "Fair Game/What Iceberg?  Just Glide to the Next Boardroom" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, December 27, 2009).  The Insurance Company which issues a Directors and Officers Liability Insurance Policy will often and understandably contend that a claim for alleged Breach of Fiduciary Duty is, including under all the circumstances alleged, a claim for an alleged and Excluded "dishonest, fraudulent or criminal Wrongful Act".  Parenthetically, in order to be Excluded conduct "arising from" deliberately fraudulent conduct, an adjudication or plea of guilty may be required, i.e., a determination of the conduct as deliberately fraudulent may be required in order for such an Exclusion to be applied.  See Download Herley Indus., Inc. v. Federal Insurance Co. (E.D. Pa. Opinion Signed August 21, 2009; Filed August 24, 2009), attached Official Slipsheet Opinion at 18 (plea of guilty in a related criminal proceeding based on the same alleged deliberately fraudulent conduct as viewed by the U.S. District Court, was held to furnish a sufficient adjudication and thus the basis for applying such Exclusion:  "The securities and derivatives actions therefore arose from the adjudicated criminal actions and are thus barred from coverage under the policy.").  The Online Docket in this case reflects that a Notice of Appeal was filed on September 22, 2009 and that appeal is apparently still pending.

   There are duties owed by Directors and Officers, however, that may not trigger Exclusions.  Acting with ordinary care based on their past experience serving as Directors and Officers at previous companies may be taken into account.  Past experience with the same practices and the same results at previous companies seems relevant at least to evaluating whether the individual Director or Officer allegedly knew or should have known that certain practices would likely lead to certain ends, particularly when those results have included the experience that the practices included causing Damage to Shareholders and others.  See generally Gretchen Morgenson, "What Iceberg?", supra.

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Marsh Settles Shareholder Dilution Lawsuit, Half Insurance, Half Marsh's Money.

   "It's a legacy issue."

Brian Duppereault, CEO of Marsh & McLennan, quoted by Jamie McGee and Erik Holm, "Marsh & McLennan Agrees to Pay $400 Million in Suit (Update 3)" (Bloomberg.com, Friday, November 13, 2009).

   Marsh & McLennan reportedly settled a lawsuit that was pending in the United States District Court for the Southern District of New York.  The lawsuit was reportedly filed by shareholders against Marsh & McLennan based on allegations that the value of Marsh shares was diluted by violations of law allegedly not disclosed by Marsh.  See Jamie McGee and Erik Holm, supra. 

   The reported amount of the settlement is $400,000,000.00, half of which will be paid from Marsh's unidentified "insurance," and half of which will be paid with Marsh's own money.  "The cost will be included in fourth quarter results, [Marsh CEO] Duperreault said."  Jamie McGee and Erik Holm, supra.

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Duke Sues D&O Carrier for Alleged Bad Faith, Unfair Practices.

   As posted yesterday on Insurance Claims and Issues Web Log, last November Duke University and one of its related subsidiaries sued its D&O Carrier, National Union Fire, for alleged Bad Faith.

   The alleged Bad Faith was in handling Duke's Coverage Claims for settlement costs and defense expenses which Duke claimed under its Directors and Officers Liability Insurance Coverage with National Union.  Duke alleged that it paid these unreimbursed costs and expenses, including attorney's fees, in connection with unfounded criminal charges against three Duke lacrosse players.  The charges included sexual assault.

   In addition, Duke sued National Union for alleged Unfair and Deceptive Trade (Claim Settlement) Practices under North Carolina's version of the model Unfair Claim Handling Practices Act.   Here is a copy of Duke's Complaint:  Download Complaint.Filed112408.DukevNationalUnion (MDNC).

   National Union Fire's 44 page Answer was filed in 2 parts, with 30 alleged Affirmative Defenses, a Counterclaim in 5 Counts, and a Third-Party Complaint against United Educators Insurance.  Here are copies of the first 22 pages:  DownloadFirst22Pages.AnswerADsCCofNationalUnion.Filed01.16.09 (MDNC) .

And here are the last 22 pages, without attached Exhibits:  Download Last22PagesAnswerADsCCandTPCofNationalUnionFire.Filed 01.16.09 (MDNC). 

   On Tuesday, October 20, 2009 the Magistrate Judge assigned to the case as of that date, recused himself.  Another Magistrate Judge has just been assigned.

 Please Read The Disclaimer.

Eleven D&O Carriers Tentatively Settle Claims By, Against Broadcom, Officials.

Investors of Broadcom Corporation, a maker of microchips headquartered in Irvine, California, sued Broadcom and many of its officials.  There were several lawsuits, and all grew out of alleged manipulation of stock option grant dates.  Breaches of Fiduciary Duties were alleged among the claims and causes of action in the investors' Complaints.

At least three of the lawsuits were consolidated as In re Broadcom Corporation Derivative Litigation in the United States District Court for the Central District of California under Case No. 06-3252-R (CWx).  The Defendants variously claimed Insurance Coverage under or from Broadcom's many Directors and Officers Liability Insurance Policies.

The Insurance Coverage Claims of many of the Defendants, and the Claims of many of the Plaintiffs, have tentatively been settled under a Stipulation and Agreement of Partial Settlement which was filed with the Federal Securities and Exchange Commission on Friday, August 28, 2009.  It awaits approval by the United States District Judge.

Under the tentative settlement, eleven (11) Directors and Officers Liability Insurance Companies are identified by name as agreeing to pay certain amounts totaling $118,000,000.00.  Individual payments are apparently not disclosed at this time.  The eleven named D&O Carriers are National Union; Twin City Fire; XL Specialty; Axis Re; Continental Casualty; XL Insurance (Bermuda); Arch; Starr Excess; Federal; Allied World Assurance; and Great American.

The publicly available terms of the tentative settlement, subject to judicial approval as noted, are contained in the attached Stipulation.

Please Read The Disclaimer.

Lawsuits and Subpoenas: Whither the Fiduciary Duty?

    This news report by Gretchen Morgenson, "Fair Game/The Eyeshade Smelled Trouble" p.1, col. 2 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, June 28, 2009), tells of a person who was never sued but instead was forced to incur attorney's fees and costs in fighting subpoenas for information he used in putting together a couple of reports about possible drawbacks of a cold remedy.  The manufacturer of the cold remedy issued the subpoenas.  The recipient was bankrupted or nearly so, in fighting the subpoenas.

    His reports about possible drawbacks of the cold remedy were true.

    A question concerning Fiduciary Duties arises from this report.  This does not appear to have been the situation in the linked report, but it is a question which arises from it instead.  Is it ever in the best interests of the shareholders of a publicly traded corporation, in which the Officers and Directors are recognized by the Courts to owe Fiduciary Duties to the shareholders, to demand subpoenaed production of documents or testimony from whistle-blowers or other corporate critics, after it is known or should be known that a point has been reached whereby the corporate critics are being silenced by causing them to incur unreimbursed expenses in defending their interests?

    It also raises a question from the standpoint of the subpoenaed critics.  Is it not abuse of process to be forced to incur expenses to defend your interests including by successfully contesting the subpoenas?

    And, at what point will the Directors and Officers Liability Insurance not provide Coverage?

    Please Read The Disclaimer.

Still With The Bonuses? What Effect on Fiduciary Duties?

"You just kind of have to do some analysis of why that change was made.  Is the actual change a good one?" 

Mr. Michael McCauley, identified as the Corporate Governance Officer of the Florida State Board of Administration, quoted by Jonathan D. Glater, "Companies Reset Goals For Bonuses" p. B1, col. 6 (New York Times Nat'l Ed., "Business Day" Section, Saturday, April 18, 2009). 

    

    Bonuses are still the favored way to compensate people who work at corporations, particularly on Wall Street.  See Jonathan D. Glater, "Companies Reset Goals For Bonuses" p.B1, col. 6 (New York Times Nat'l Ed., "Business Day" Section, Saturday, April 18, 2009).  The linked newspaper report advises that since most corporations are not increasing revenues, bonuses are no longer dependent on revenue growth.  Bonuses are still being paid, however, although pay for performance of what, exactly, seems at least open to question.  See id.

    Compensation committee members should have their own questions, clearly, including whether the suggested bases for bonuses at their corporations supports their own Fiduciary Duties to shareholders.

    And whether these same compensation committee members would, or would not, have a good claim to Insurance Coverage if and when their conduct in awarding bonuses is challenged in the future.

Please Read The Disclaimer.  

AIG, Feds Ordered "Counterparties" Paid Face Value, Not Market Value.

    The counterparties or policyholders of AIG's credit insurance policies (Credit Default Swaps) were paid at face value after AIG received Federal Taxpayer Monies in its bailout package.  The market value however was half that amount, it is reported.

    AIG is being asked why it did not negotiate.  If any Federal officials had a role in paying, rather than negotiating, perhaps they will also be asked why, or why not.  The difference to Goldman Sachs, for example, was $14 Billion at face value and $6 Billion less at market value.  That is in addition to the separate Federal Taxpayer Monies that have been paid to Goldman to bail it out.  See Cyrus Sanati, "Inspector to Audit A.I.G.'s Counterparty Payouts" in Dealbook Blog at The New York Times Online, Tuesday, April 7, 2009.

    In addition to being asked why AIG did not negotiate, perhaps AIG's Directors and Officers who authorized the face-value payments to AIG's contract partners can address the issue of how this conduct measures as Good Faith and Fair Dealing with AIG's largest shareholders, then and now--the American Taxpayers.

    Perhaps Federal officials, if any, in charge of how AIG decided to spend the Federal Taxpayer Monies will also address that issue.

Please Read The Disclaimer.