Claims and Bad Faith Law Blog

FIDUCIARY RULES IN PENNSYLVANIA, AND U.S., INSURANCE ADJUSTING.

            A rule of extracontractual liability applied by most if not all Courts to measure the Settlement Conduct of Liability Insurers, has even been extended to First-Party Insurers in some jurisdictions.  That is what happened as well in the recent decision in the case of Berg v. Nationwide Mutual Insurance Company,  2012 PA Super. 88, 44 A.3d 1164 (Pa. Super. April 17, 2012), Download Berg v. Nationwide Mut. Ins. Co. (Pa. Super. Ct. No. 12 MDA 2008, Opinion Filed April 17, 2012) PUBLIC ACCESS.

          The Berg case involved a claim of First-Party Bad Faith based on an Auto Insurance Company's denial that a vehicle was a total loss, despite an appraisal that the vehicle was a total loss, among other things.  In that Pennsylvania case, the Superior Court held:

The duty of good faith originates from the insurer's status as a fiduciary for its insured under the insurance contract, which gives the insurer the right, inter alia, to handle and process claims.

Berg v. Nationwide Mut. Ins. Co., 2012 PA Super. 88, 44 A.3d 1164, 1170 (Pa. Super. April 17, 2012).

            Parenthetically, the Berg v. Nationwide decision is an interesting new decision for many other reasons, including that the appellate court held that when the case is retried, the Trial Court should admit evidence that Nationwide paid its attorneys nearly $1 Million to defend the lawsuit which Nationwide's Policyholders filed against it.  Nationwide allegedly paid these rather large defense fees pursuant to a litigation strategy documented by its own claims manual, to deter the filing of small value claims.  The Superior Court noted that this assertion would have also been supported at Trial by other evidence which the Policyholders proferred and which the Trial Judge excluded, concerning Nationwide's practices followed in this case including the large amounts paid to its attorneys.  Berg v. Nationwide Mut. Ins. Co., 2012 PA Super. 88, 44 A.3d 1164, 1176-77 (Pa. Super. April 17, 2012).  The Court accordingly held that it was reversible error to exclude all this evidence, which the Trial Court should admit into evidence, all other things being equal more or less, when it retries the case.

            What the Court wrote in that new case concerning the adjustment and evaluation of claims is relevant to both Liability Insurance Companies and First-Party Insurers adjusting claims, alike:

A claim must be evaluated on its merits alone, by examining the particular situation and the injury for which recovery is sought.

Berg v. Nationwide Mut. Ins. Co., 2012 PA Super. 88, 44 A.3d 1164, 1177 (Pa. Super. April 17, 2012).  There may not be many areas of overlap between the handling of Casualty Claims and the handling of Property Claims.  This quoted judicial observation, however, is among the truths of claim adjusting and evaluation regardless of the type of Policy under which a claim is being adjusted.

 

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FAIR DEALING: THE LAW ALREADY GOT THERE. Update: MORE IS NEEDED.

Not From the Law.  From the Lawyers.  This is an update to the post here on Tuesday, August 14, 2012.

         As was noted in the previous post, much has been written about Municipal Bond Insurance and related matters including issues involved in bond issuance.  See in addition posts here and especially under the category of Bond Insurance addressing the roles of duties of Good Faith and Fair Dealing in this arena.  The previous post in particular addressed duties of Fair Dealing in agency rules and regulations. 

          It turns out that there is a higher authority in place.  By Act of Congress, municipal advisers are "fiduciaries".    The statute's effect is that municipal advisers owe an undivided loyalty not simply to investors but to issuers of municipal securities, really, to so-called "munis" (municipalities, school boards, water management districts, and so on) in their issuance of bonds to finance things like municipal wastewater projects, sewers, schools, and other local community projects.

          The statute, to say again, has been passed.  The Act of Congress in question is known as the Dodd-Frank Act.  As it is wont to do, Congress left it to regulatory bodies to define key words and phrases in rules and regulations.  One of those key words is "fiduciaries".

          The Municipal Securities Rulemaking Board was given jurisdiction by Congress to propose the necessary rules.  The Board duly proposed that its preexisting "fair dealing" rule be expanded to require securities underwriters "to make sure local officials understand the risks of complex  bond deals, and to disclose any incentives they may have for supporting certain transactions."  Mary Williams Walsh, "Municipal Bond Rule Mired in Legislative Limbo" p. B1, col. 4 (New York Times Nat'l ed., "Business Day" Section, Tuesday, August 14, 2012).   The Securities and Exchange Commission is required to approve rules promulgated by the Municipal Securities Rulemaking Board, and the SEC approved this proposed rule change by a vote of 3-to-2.

          The two dissenters in the SEC were the only two Republicans who sit on the SEC.  Although their dissent is reported in the linked newspaper article, the fact that they are the only Republicans on the SEC is not reported there.  That fact is reported here. 

          So far so good.

          Then the proposed rule change, and the provision of the Dodd-Frank Act which authorizes the change in the first place, was attacked by a bill filed by a Republican Congressman which was finally reported out of a House Subcommittee just as Congress recessed.  The bill would eliminate the provision of the Dodd-Frank Act that municipal advisers should be treated as fiduciaries in the issuance of securities by munis.

          When the House of Representatives (finally) returns to work in September, more argument, er, debate is expected.  One of the debates left hanging is a proposal by banks that they should be excluded from the rule definition of "fiduciaries," even though in reality "bankers often do advise municipalities."  Mary Williams Walsh, "Municipal Bond Rule Mired in Legislative Limbo" p. B1, col. 4 (New York Times Nat'l ed., "Business Day" Section, Tuesday, August 14, 2012).

          Apropos of the observation in Tuesday's article that "the Securities and Exchange Commission seems to be overloaded with George W. Bush-era political appointees who still see their mission as doing nothing so that others can accuse the Federal Government of not acting":  The SEC reportedly settled another subprime mortgage investigation for pennies on the dollar, rather than trying the case.  This settlement was with Wells Fargo for less than the cost of doing business:  4/100 or 1/25 of one percent of its earnings last year.  Just a few days ago, the SEC announced for the first time in recorded history, or just about, that it, the SEC, was not going to pursue criminal charges against Goldman Sachs.  See Ben Protess, "Wells Fargo Settles a Securities Case" p. B7, col. 1 (New York Times Nat'l ed., "Business Day" Section, Wednesday, August 15, 2012).  The SEC is not the place to go for Fair Dealing, it seems.

          Note to Mary Schapiro, the current Chair of the SEC:  You get good press.  Why?  It is because of who you are -- or who you are not, and not what because of what you do.  You are not your predecessor.  All in all, that is not much but it is something. 

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Fair Dealing: The Law Already Got There. More is Needed.

    Much has been written about Municipal Bond Insurance.  That includes posts here and especially under the category of Bond Insurance which address the need for enforcement of duties of Good Faith and Fair Dealing in this arena.

    Now comes news that "fair-dealing rules" have been in place "for decades" in the municipal bond market.  "Rules requiring fairness in this market state that participants must not be deceptive, dishonest or unfair in their practices.  The regulations apply to the sale of municipal bonds to investors and to underwriters' interactions with issuers; fraud need not be alleged in a fair-dealing case."  Gretchen Morgenson, "Fair Game / Police Protection, Please, for Municipal Bonds" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, August 5, 2012).

    From recent news coverage it is clear that at least certain firms and individuals who make their money from Wall Street, have taken advantage of relatively less financially sophisticated school board members or water management district board members, for example.  Even so, the Securities and Exchange Commission seems to be overloaded with George W. Bush-era political appointees who still see their mission as doing nothing so that others can accuse the Federal Government of not acting.  The SEC has recently asked for more power to enforce regulations in the municipal bond market while ignoring the regulations that have existed for almost as long as the SEC itself.  This is perhaps an exaggeration, but only a slight one.

    This is an area deserving of research.  "So far, the commission's reticence to act on behalf of municipal issuers has left those issuers to take on Wall Street alone.  Few have done so."  Gretchen Morgenson, "Fair Game / Police Protection, Please, for Municipal Bonds" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, August 5, 2012).

    There does not seem to be a similar impediment to lawsuits involving allegedly failed advice to munis when they are investors rather than issuers.  The City of St. Petersburg is one example.  The City successfully sued for over $10 Million in a case involving alleged failure or unfair dealing in financial advice to the City on an investment.  See "Bad Faith Financial Services:  No Comparative Negligence in Lawsuit," posted on April 5, 2012.

    This area is worth taking time to research the law so that the law may be applied.

    It is worth your time, too.

 Please Read The Disclaimer.

    

    

Force-Placed Insurance Issues in New York: Your State, Too.

     The New York State Department of Financial Services has issued an order to three Insurance Companies to submit new Premium rates for force-placed Insurance, because the companies overcharged millions of dollars for it.  The three companies have until July 6, 2012 to respond.  The companies receiving the order are Assurant (a unit of American Security Insurance Company), QBE, and American Modern Home Insurance Company.  These three companies "make up more than 90 percent of the so-called force-placed insurance market in New York."  Zachary Tracer, "New York Asks Insurers of Lapsed Borrowers for New Rates" (Bloomberg.com, posted June 12, 2012).

    Other reports previously estimated that Assurant and QBE alone control about 90 percent of the force-placed insurance market in New York State.  See "Forced-Placed Insurance Under Investigation," posted here on May 22, 2012.     

    And here is a link to the New York State Department of Financial Services' Press Release announcing this action and the requirement that responses must be submitted by July 6, 2012:  Press Release, "Governor Cuomo Announces DFS Action Could Save Some New York Homeowners Millions in Overcharges to Home Insurance," June 12, 2012.

    Do not think that the issues of force-placed Insurance belong only to New York State.  The issues of force-placed Insurance apply across the nation.  The issues include Premium charges, forced placement of Insurance selected by the Lenders and their Mortgage Servicers when homeowners are not actually in default in carrying the Insurance which the homeowners selected, and issues involving an implied covenant of Good Faith and Fair Dealing not only by the Force-Placed Insurance Companies, but allegedly by Banks, Lenders, and Mortgage Servicers too.  See, e.g., "Force Placed Insurance and the Duty of Good Faith," posted here on June 12, 2012; "Good Faith in Lender-Placed Insurance?" posted here on April 12, 2012. 

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Fiduciary Law Solutions to Corporate Governance Issues Criminal Law Ignores.

   "I couldn't find a case of an executive at a major American-based, publicly traded company who was successfully prosecuted and sent to jail." 

James B. Stewart, "Common Sense / Bribes Without Jail Time" p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, April 28, 2012).

   "This case could turn out to be a poster child for individual liability."

Prof. Andrew Spalding, quoted by Stewart, New York Times, supra, commenting on allegations published in the New York Times that Wal-Mart executives allegedly participated in foreign corrupt practices including bribery in Mexico.  The Law Faculty Blog of the Chicago-Kent College of Law, where Prof. Spalding is an Assistant, Visiting Professor, provided a recent postwith links to other places where Prof. Spalding's various comments can be found.

   Criminal Law apparently has not been doing a very good job of policing corporate governance issues.  In particular, a common pattern reportedly emerges of companies admitting the facts of alleged corrupt foreign practices, followed by the corporation paying a fine, and ending with no individuals charged with a crime.  Stewart, New York Times, supra.

   This undoubtedly has something to do with the fact that officials at the Department of Justice and at the Securities and Exchange Commission who are charged with executing U.S. criminal laws, including the Foreign Corrupt Practices Act, have entirely avoided criminal prosecutions of corporate officers who, clearly, have the money at their disposal to contest criminal charges and force a criminal trial. 

   What is also clear is that the current system of criminal justice simply is not equipped to deal satisfactorily with -- including incapable of deterring  -- potential breaches of Fiduciary obligations.  In at least one field of corporate governance, Corporate Compensation, the field of Fiduciary Law lies open with solutions to the problems.  "Fiduciary Issue on Corporate Compensation, And How to Solve It," posted on Insurance Claims and Bad Faith Law Blog on Thursday, April 26, 2012.

   It is time to try the solutions offered by Fiduciary Law.  If it is good enough, as they say, for the claim handling practices of Insurance Companies, then it is certainly good enough for the alleged corrupt practices of corporations.

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Fiduciary Issue on Corporate Compensation, And How to Solve It.

    Corporate board members sit on compensation committees considering the compensation of corporate officers.  The corporate officers, in turn, return the favor with lavish endorsements to their shareholders to elect and retain the most generous board members who vote for increasing their compensation.

    In one representative example, corporate officers both submitted a compensation committee member for re-election and endorsed him:  "The board has recommended shareholders re-elect Mr. X.  He has served them well since 1999 and will continue to do so."  A proxy statement they filed on behalf of the corporation -- on behalf of the shareholders? -- praised Mr. X as one who "offers deep insight into governmental affairs and the regulatory process, gained from" a record which did not list any specific encounters with reality, perhaps because there were few if any positive encounters to list.  See Andrew Ross Sorkin, "Dealbook / 'Tainted,' But Sheltered On Boards" p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Tuesday, April 24, 2012).

    There are many reasons that this arrangement is arguably unholy, that it is not in the best interests of the corporation or its shareholders.  My concern here is to address one of those reasons.  The board members have a Fiduciary Duty toward the shareholders of the corporation and so do the corporate officers.  The cozy relationship between board members and corporate officers is nowhere more in conflict with the interests of the shareholders than in the arena of corporate compensation.  Accordingly, here is the first step in a proposal which would eliminate that source of conflict in which the interests of board members and corporate officers are often preferred to the interests of their shareholders:

    1.  To completely eliminate the actual and apparent conflict of interest in this arena, completely eliminate the capacity of corporate officers to do anything more than nominate board members.  They should no longer have the authority to do anything more than nominate board members for election or retention (which comes at corporate expense, not at their own expense in any case).

    Then take another step:

    2.  Submit issues of compensation during the tenure of any corporate officer to a vote at an annual shareholder's meeting.  Let the shareholders determine the amount of money that a corporate officer ought to receive for her or his job performance since the last time their compensation came up for a vote.  In the case of a newly hired officer, allow the corporation's board to make a job offer of course including starting pay and benefits -- and then submit that offer, if accepted, to a vote at the next annual shareholder's meeting if the next meeting is scheduled to take place within the next 6 months, say, and if not, then no additional compensation will be considered or offered for 1 year or the next annual shareholder's meeting, whichever comes later.

    I am sure that these proposals will not be pleasant for corporate compensation committees or for corporate officers.

    If that is the only objection, I can live with that, as they say.  I would be curious to receive whatever other objections there might be, though.  I cannot imagine any valid objections but perhaps those more familiar with corporate governance and its hidden ways can enlighten all of us.

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Fiduciary Settlement?

    Lawyers retained by two Plaintiffs have reportedly settled claims for alleged Breaches of Fiduciary Duties by "the directors of Bank of America over its purchase of Merrill Lynch".  The settlement requires Court approval in a Federal class action lawsuit pending in the United States District Court for the Southern District of New York (Manhattan).  Gretchen Morgenson, "Bank of America Accord in Lawsuit is Challenged" p. B1, col. 5 (New York Times Nat'l ed., "Business Day" Section, Saturday, April 21, 2012).

    The tentative settlement has been challenged in the Federal Court by other Plaintiffs who filed their lawsuit in Delaware apparently against the same Bank of America Defendants, and also on account of BOA's purchase of Merrill Lynch.  The Delaware Plaintiffs' claims would arguably be terminated if the New York settlement is approved by the Federal Court.  Id.

    The New York Plaintiffs are reportedly willing to settle their $5 Billion Breach of Fiduciary Duties claims for $20 Million.  Id.

    The Delaware Plaintiffs' challenge to the tentative New York settlement is based on grounds that "the settlement [is] grossly inadequate and the result of collusion".  Id.

    To put it another way, the Delaware Plaintiffs apparently contend that the New York Plaintiffs are acting in Bad Faith with the New York Defendants.

    Time -- and a Federal Judge in New York -- will tell.

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Good Faith in Lender-Placed Insurance?

    Force-placed Insurance is also known as lender-placed Insurance.  The right to place Insurance is a right borrowers give up by contract.  If borrowers fail to keep Insurance in place on mortgaged property, they give lenders the right to place Insurance on the property and send the Premium bill to the borrowers.

    There are apparent problems in practice with how lenders exercise lender-placed Insurance rights.  At least in New York State, there is reported evidence of scams to direct placement of that Insurance to selected companies for higher Premiums.  Sometimes, there is evidence of kickbacks and added fees for Reinsurance to protect these Insurance Companies but not the borrowers of course, in New York State.  See Liz Rappaport and Leslie Scism, "Insurers Facing Greater Scrutiny" p. C1, col.6 (Wall Street Journal, Thursday, April 5, 2012).

    Although there is a reported ongoing investigation of underway in New York State, the exposure of Insurance Companies issuing the lender-placed Insurance is said to be particularly high in Florida in part because of the high number of Florida Foreclosures.  Id.

    If a borrower gives up a right to place Insurance on mortgaged property, it seems that at least arguably, lenders should, do or may have a corresponding Fiduciary duty of Good Faith in the exercise of that right and to Deal Fairly with the borrower who not only has given up the right exercised by the lender, but pays the bill for the Insurance product selected by the lender.

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Bad Faith Financial Services: No Comparative Negligence in Lawsuit.

    The Verdict is in:  Federal Jury awards every penny St. Petersburg put on the board in Closing.

    Many cities claim that they lost money by relying on bad advice or, in some cases, allegedly relying on no advice, from the cities' financial advisers before the Great Collapse.  One of those cities among many is the City of St. Petersburg, Florida.

    The City sued because it allegedly lost money buying Lehman Brothers bonds after Lehman's financial condition began a death march.  The Defendants in the City's Federal lawsuit is the City's financial adviser:  Wachovia Global Securities, now owned by Wells Fargo.  According to the City's claims, the Defendant did not tell St. Petersburg that Lehman's financial condition  had begun rapidly deteriorating.  

    The Defendant defended on a reported contention that the City of St. Petersburg knew or should have known that Lehman bonds were a bad investment at the time.

    Regardless of what the Defendant told the City, or did not tell the City, their client.

    All of these contentions were previously posted here on March 27, 2012, "City Sues For Alleged Bad Faith Financial Services, $16 Million Damages".  (The amount of money reflected in the title of that post comes from a newspaper article which is linked in the post.  That amount is apparently the amount lost by the City as of the time the City filed ts lawsuit.)

    Now, the Verdict is in.  A Federal Jury awarded the City of St. Petersburg every penny it asked for: $10,387,500.00.  This represents the difference between what the City paid for the Lehman bonds, and what the Lehman bonds are worth now.  See Michael Van Slicker, "City of St. Petersburg Wins $10.4 Million Verdict Against Big Bank" (Tampa Bay Times Online, Tuesday, April 3, 2012).

    Two of the Jurors who were interviewed for the linked newspaper report, revealed that they were not happy with the conduct of the City's chief financial-investment official, who reportedly went ahead with the investments despite apparent knowledge at least that Lehman was in bad straits financially.  However, according to the Jurors, the Jury in this case concentrated on the conduct of the Defendants, which reportedly impressed them even more.

    As the Jurors saw it, the City's financial advisers breached their duties to advise the City about these and other risky financial investments.  "'But the evidence showed that Wachovia didn't do its fiduciary duty.'" Id., quoting the man whom the Jury elected as its Foreman.

    The City sued its financial advisers for alleged breach of contract, breach of alleged Fiduciary Duties, and negligence.  As a matter of law, a matter perhaps unknown to financial advisers at least before this Verdict, 'comparative negligence' is not a defense to claims other than negligence when, as the Jury found in this case, financial advisers breach the duties they assume when their offer to be paid in exchange for their financial advice are accepted.  When that happens, they owe duties to their new-found clients.  In this case, a Federal Jury found one more thing:  These Defendants breached their duties to the tune of every penny their client lost as a result, which the Jury awarded.

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City Sues for Alleged Bad Faith Financial Services, $16 Million Damages

    The Trial began on Monday in a Florida municipality's Federal lawsuit against its financial services "bank"/financial adviser.  The City of St. Petersburg has sued Wachovia Global Securities for failing to disclose the condition of Lehman Brothers to the City even as Wachovia allegedly advised St. Petersburg to invest in Lehman bonds and Lehman was going bankrupt.

    The bank reportedly counters that the City of St. Petersburg was fully aware of Lehman's condition, which Wachovia itself of course knew.  Wachovia Financial Services has since been acquired by Wells Fargo.

    As the result of a pretrial ruling in the case, the City of St. Petersburg will be allowed to put on evidence of similar circumstances resulting in losses to other cities.  For example, the City of Sarasota reportedly lost $40 Million in a similar investment in Lehman bonds apparently at or about the same time.

    The common thread in cities' litigation against their former financial advisers is known as "securities lending".  In essence, the cities leased bonds they held, or the right to receive income from them in the future, in exchange for cash payments now.  "The risk comes when the city makes an investment that loses money, which would then have to be repaid."  Michael Van Slicker, "St. Petersburg Seeks to Recover $15.8 Million in Lost Investments in Trial Monday" (Tampa Bay Times Online, Saturday, March 24, 2012).

    Who bears the risk of nondisclosure, on the one hand, or of the equivalent of assumption of the risk, on the other hand, is at issue in such lawsuits.

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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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HEALTH INSURANCE: MORE ON "FORCE PLACED INSURANCE" ...

... Herein of its profitable performance as a financial planning tool for lenders, its lack of deductibles, and its effects on Fiduciary Relations.  This updates the post here on January 15, 2012.

    In addition to the many features of "force placed" or "forced place" Insurance that were addressed in a post here last week, force placed Insurance also has these prominent features as well:

1. At this time, it generates $6 Billion annually, or $6,000,000,000.00 a year.  It has grown 6 times in recent years, largely at the expense of Homeowners.
2. "[L]ender-placed insurance" is strictly for the benefit of Lenders.  Homeowners are not protected by it and there is ordinarily no Deductible.
3. Lenders of course are the ones who require Borrowers-Homeowners to agree that Lenders can force the placement of Insurance to protect the Lenders' interests.  A Lender's Mortgage Servicer may be, and often is, connected or affiliated with the Insurance Company which issues the force placed Policy.  The Mortgage Servicer may not disclose the conflict of interest in that situation and, if there is a loss, the Mortgage Servicer may be reluctant to submit a Claim to its affiliate, the Insurance Carrier which issued the force placed Insurance.  In the meantime, the Homeowner of course is charged for the high Premium and, if the Homeowner cannot pay that Premium, the Lender frequently forecloses -- paying the Lender's Mortgage Servicer to bring the Foreclosure proceedings.

See  Gretchen Morgenson, "Fair Game / Hazard Insurance With Its Own Perils" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, January 22, 2012).   "Mind you, force-placed policies do not protect homeowners from loss.  Only lenders are covered.  But homeowners must pray the freight."  Id.

 Please Read The Disclaimer.

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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FDIC's Bad Faith Claims Dismissed, Claims Handling Evidence Permitted Anyway.

   A Motion in Limine was granted to ALLOW evidence at Trial of Claim Handling on the FDIC's Fiduciary Claims against Safeco Insurance Company of America, even though the FDIC's Bad Faith Claims were all previously dismissed, in FDIC as Receiver for Netbank, FSB v. Safeco Insurance Co. of America, 2011 5865867 *1 (D. Nev. November 18, 2011), Download FDIC as Reciever for Netbank, FSB v. Safeco Ins. Co. of Am. (D. Nev. ENTERED ON PACER AS Case No. 2.02cv10151, Order November 18, 2011) PUBLIC ACCESS.

   Fiduciary Breach is often so closely related to alleged Bad Faith Claims Handling that the same evidence can prove even the different elements of one or the other.  The lesson?  Objectively verifiable Good Faith Claims Handling defeats a host of troubles.  What is objectively verifiable?  It is Good Faith Claims Handling which can be proven, sometimes so clearly, that no further evidence of it is required to defeat any Claim based on that set of facts.

   Even objectively verifiable Good Faith Claims Handling does not come with absolute guarantees, however.  Sometimes it will take a finder of fact to decide whether Claims Handling was a Fiduciary Breach, as it will take a finder of fact to decide that issue at Trial under the ruling in this case.

PACER, the Online Electronic Docket of the Federal Courts, reveals that the Jury returned a Verdict in this case for the Plaintiff FDIC on December 8, 2011, in the amount of $60,475,293.90.

Please Read The Disclaimer.

"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.

Please Read The Disclaimer.

ASYMMETRICAL INFORMATION OVERLOAD.

 ...  Today is the 48th year after the assassination of President John F. Kennedy.  God rest his soul.

 

    Unbalanced access to information is increasingly reported as a part of many otherwise unrelated relationships.  "Information asymmetry," for example, is a recognized stimulus for many insurance companies to initiate settlement negotiations even before First-Party Bad Faith Claims are filed against them.  It is enough for those companies that their claim handling behavior, known to them but not to their Policyholders, will likely result in First-Party Bad Faith Claims including fraud, unfair claim settlement practices, and the like.

   Whether they can defeat those claims is besides their point at the time they initiate settlement negotiations to prevent First-Party Bad Faith Claims from being filed.  Settlements of First-Party Bad Faith Claims which have not yet been made, based on so-called asymmetrical information, are less expensive in settling claims which could be made than paying settlements or judgments after First-Party Bad Faith Claims are made.  See Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 9:5, "The Question of Bad Faith--Presence or Absence of Fault" (Third Edition 2011 West Publishing Co.).

    Unbalanced access to information also pervades the dealings of financial firms, particularly their dealings in derivatives.  The counterparty paying for the presumed protection of a Credit Default Swap, for example, ordinarily does not have nearly as much knowledge about how that derivative will function in that particular situation as the intermediary has or as the issuer has.

   Counterparties may not even know the identities of the people who will issue a binding ruling on when that CDS pays off for a "credit event," meaning "payout".  See Gretchen Morgenson, "Fair Game / Scare Tactics in Greece" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, November 20, 2011).

   Unbalanced information in relationships is one of the elements of a Fiduciary relationship.  Fiduciaries are recognized by Law and by Equity in a whole range of situations.  One of their common elements is unbalanced access to information, i.e., one party to the relationship -- the Fiduciary -- has greater knowledge than the other.  See Wall, "Litigation and Prevention of Insurer Bad Faith," supra, § 3:34, "Legal Bases of Liability in Settlement--Final Elements:  Remedies for Fiduciary Bad Faith".  Fiduciaries are not allowed to abuse their Fiduciary relationships by putting their own interests above the interests of the other party.  See id., § 3:32, "Legal Bases of Liability in Settlement--First Element:  Fiduciary Relation".

   Unbalanced access to information is also a frequent element in fraud claims and causes of action.  Fraud need not be intentional.  Florida is an example of a place where the Courts recognize negligent misrepresentation.

   Asymmetrical information overload.  Fraud allegations and Breach of Fiduciary Duties claims should not frighten anyone, except perhaps the Securities and Exchange Commission and the parties engaged in the sorts of business practices that time after time lead to such allegations and claims.  What such parties do now, they and others did in the past.  Their conduct used to be called "deception," "flim-flam," and "lying."  Currently their conduct is described as proceeding from "asymmetrical" or "unbalanced access to information".

   By whatever name, it smells the same.

 

 Please Read The Disclaimer.

When is there a "Duty to Initiate Settlement Negotiations"?

    Another decision under Florida Law has been issued which again applies and clarifies the Duty of a Liability Insurer to Initiate Settlement Negotiations with an Injured Claimant.  In a case where the claimant does not make a settlement demand, and also the Insured's liability is "clear," and also the injuries are so serious that a judgment in excess of the Liability Insurance Policy Limits is "likely," then a Liability Insurer has a Duty to Initiate Settlement Negotiations under Florida Law.   Download MacHalette v. Southern-Owners Insurance Co. (M.D. Fla. Case No. 8.10cv600, Order Filed August 23, 2011) PUBLIC ACCESS, also published as 2011 WL 3703368 *5 (M.D. Fla. August 23, 2011)(authorized password required to access Westlaw).

    In the case at bar, the Federal Judge determined that there was no Insurer Bad Faith as a matter of law.  In that case, the Liability Insurance Company did not have medical information to confirm the asserted injuries for which its Insured might be held liable, and it "went to great lengths to obtain verification" of the claimant's damages.  Id.  "The record is undisputed that Walker [the Injured Claimant's Attorney] did not provide the necessary information for more than five months, despite Southern-Owners' numerous requests for same."  When the information was ultimately provided, "and Southern-Owners was able to verify the extent" of injuries, "it tendered a check" for the policy limit.  Id. at *6.

    On a  record which did not reveal a genuine issue of material fact, the Federal Court granted Southern-Owners' Motion for Summary Judgment on this "bad-faith insurance claim". 

 Please Read The Disclaimer. 

Judicial Assignment of Bad Faith Claims.

   In the case of Gallegos v. Malco Enterprises of Nevada, Inc., 127 Nev. Adv. Op. 51 (Nev. Opinion Filed August 4, 2011) PUBLIC ACCESS, also published as 2011 WL 3359926 *1 (Nev. August 4, 2011)(authorized password required to access Westlaw), a three-Justice panel of the Nevada Supreme Court held that in Nevada, Bad Faith Claims can be judicially assigned just like any other property that is not judicially exempt from execution and so "can be judicially assigned in a proceeding supplementary to the execution of a judgment."  Gallegos v. Malco Enterprises of Nevada, Inc., 2011 WL 3359926 at *2.  On assignment of Bad Faith Claims to Third Parties, including by Judicial assignment, see generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" §§ 7:1, "Actions by Third Parties," and 7:2, "Assignment" (West Publishing Co. Third Edition 2011).

   The precise claims or rights of action judicially assigned here were "unasserted claims for 'Breach of Contract, Breach of Fiduciary Duties, [and] Breach of Duty of Good Faith and Fair Dealing.'"  id. at *1.  [Bracketed material inserted by the Supreme Court of Nevada.]  "The assigned claims related to [the Judgment Debtor's-Insured's Third-Party or Liability] insurance policy with respondents."  Id.

  The 22nd Annual Bad Faith Litigation Conference of the American Conference Institute is being held in 2011 in Orlando, Florida.  The author will be speaking.  As a result, the ACI will offer you a large  discount if you choose to register for the Conference.  In order to register and receive this discount from the ACI, contact Amanda Waltmon, Esquire, Legal Analyst and Program Director at the ACI and the deadline most recently announced by the ACI for requesting this discount is August 31, 2011.  Ms. Waltmon's direct dial is 212.352.3220, ext. 5231 or send Ms. Waltmon an EMail at a.waltmon@americanconference.com.  Here is a link to the American Conference Institute Website Page which features this Conference including registration, if you or anyone you know would like to attend.

Please Read The Disclaimer.

  

FDIC to Sue Failed Bankers to Recover Lost Deposits.

    Newspapers report that the Federal Deposit Insurance Corporation is poised to sue Bankers to recoup lost profits of people who invested in their Banks.  See, e.g., Suzanne Kapner & Paul Davies, "U.S. Watchdogs to Sue Executives of Failed Banks" (Financial Times Online, published April 10, 2011).

   It seems likely that any lawsuits filed by the FDIC in this regard will or should include claims for Breach of Fiduciary Duties, and alleged Bad Faith, as well as Recoupment and Restitution.  See, e.g., posts here in the Category of "Recoupment and Restitution" on April 15, 2009,  May 13, 2010, and July 30, 2010.  

 Please Read The Disclaimer.

Serving Hidden Masters.

   This is the right moment for my first post on Bad Faith since February.  The author's initial manuscript of my Third Edition of "Litigation and Prevention of Insurer Bad Faith" has been sent to West Publishing Company, my Publisher.  Page proofs are weeks away.  Current events present many opportunities to address Bad Faith issues in the meantime.

    No more so than this week.  To put the events of this past week into perspective, the Courts in the United States have without any exceptions required Fiduciaries to serve the interests of the ones who put their trust in the Fiduciaries, and on whose behalf the Fiduciaries exist to act.  Fiduciaries are never, however, required to eliminate their own interests or the interests of others, only to subordinate their own interests to the interests of those trusting souls for whom the Fiduciaries are supposed to act.

   And not to serve hidden masters instead.

   Members of the U.S. Congress are fiduciaries.  They act on behalf of the people, and the people put their trust in the Members so to act (they may have no choice).  This week, the U.S. Congress with the President's approval passed a law they called a "budget bill".  What was released to the newspapers was a story that the "budget bill" was about spending and revenue; basically, about cutting spending and not raising certain people's taxes.  However, that was not all.  See Julie Mianecki, "Gray Wolves, Abortion Funding and Other Policy Changes in the Budget Bill" (Los Angeles Times Online, posted Friday night, April 15, 2011).  There were also these earmarks which were hidden, with other earmarks, until after the "budget bill" was signed into law:

• Parents of school-age children in Washington, D.C. who send their children to public schools, most having no choice, will find that funds intended to improve schools, classrooms, and public education in general have been switched to paying for vouchers for people who can afford to send their children to private schools.
• Certain animals were removed from the endangered species list in certain States.  This is the first time in history that the U.S. Congress removed any animals from the endangered species list.
• Guantanamo Bay prisoners cannot be tried in U.S. Courts (where most have been convicted) but instead must be tried in Guantanamo by members of the U.S military, since a provision in the "budget" law prohibits their transfer.

 Here are two items in the law that might actually end up cutting the Federal budget down, at least a little:

•  Cutting or eliminating Federal funding available to poor women in the District of Columbia to have abortions.  Unable to enact restrictions on abortion procedures which would apply to women who can afford to pay for abortions, the U.S. Congress and the President decided to require poor women to go to unsafe providers of abortions as they were forced to do back in the day.  I am personally opposed to abortions.  But this is not addressing abortions, nor is it about budget reformation. 
• Cutting or eliminating funding for the Climate Service, a branch of the Federal Government.  The Service, a recent addition to the National Oceanic and Atmospheric Administration ("N.O.A.A."), was supposed to gather information regarding climate change.  Perhaps the more cherished purpose of Congress and the President in this "budget" provision is to bar information regarding climate change in their belief or hope that this will bar climate change itself.

 Fiduciaries are not supposed to serve a hidden master.  In enacting this law, they have not just saved money (assuming that they have done that). 

 They have acted in Bad Faith with the people, for whose interests they hold office to act.

 Please Read The Disclaimer.

More On Foreclosure Fraud, Modification Madness Lawsuits.

   In the same week as the Nevada Attorney General (and the Arizona Attorney General) filed suit over Foreclosure Fraud and Modification Madness, posted here on Sunday, December 19, 2010, a Jury in U.S. District Court in Nevada awarded $79,000.00 in Compensatory Damages and assessed $5,100,000.00 ($5.1 Million) in Punitive Damages in a Foreclosure and Modification Fraud case.  The Nevada Jury award is reported by Gretchen Morgenson, "Fair Game/Opening the Bag of Mortgage Tricks" p. 1, col. 1 (New York Times Nat'l ed., "SundayBusiness" Section, Sunday, December 19, 2010).

   The Jury reportedly returned a Verdict on all Counts.  The Complaint contained causes of actions or Claims for Conspiracy, Breach of Contract, Breach of Fiduciary Duty, and Breach of Good Faith and Fair Dealing.  Id.

   The suit was filed against loan servicers by a group of 50 Plaintiff investors in commercial loans.  "Loan servicers act as intermediaries between borrowers and their lenders, collecting monthly payments and real estate taxes and forwarding them to the appropriate parties."  Id.  In that case, the Defendant loan servicers allegedly:

1.  Took money rightfully owed to the Plaintiff investors holding the loans, by "improperly charging" various items, including:

   a.  "default interest,"

   b.  "late fees and"

   c.  "loan origination fees".

 2.  Constructed obstacles to loan repayments and hid them from the Plaintiffs when Borrowers "tried to pay off or otherwise resolve disputed loans," including:

   a.  They refused to negotiate, or

   b.  They counseled Borrowers to seek loan modifications for which the Defendant loan servicers allegedly "reaped undisclosed fees".

Id.

   More and other investors are expected to grow the list of lawsuits over Foreclosure Fraud and Modification Madness.  Id.  The results of the past week are certainly no inhibition to that happening.

The harmful effects of Foreclosure Fraud and Modification Madness on Mortgage Insurance Claims are explored by Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" § 3:106, "Mortgage Insurance" (West Publishing Co. 2010 Supplement).

Please Read the Disclaimer.

Remember the Neediest!

  

  

Florida: Economic Loss Rule No Bar to Fiduciary Breach Claims.

   In a significant opinion, disguised by its concise length, a United States District Judge has denied a Motion to Dismiss filed by Optimum Title, LLC against a Claim of Fiduciary Breach by the Federal Deposit Insurance Corporation.  The identities of the Defendant and of the Plaintiff are irrelevant to the outcome in this case.

   The Defendant argued that the Fiduciary Breach Claim filed against it should be dismissed because of the Economic Loss Rule.  The Court disagreed.  The Economic Loss Rule in Florida does not bar a Fiduciary Breach Claim alleged in the same Complaint with a Breach of Contract Claim:

   Because a claim for breach of fiduciary duty addresses the breach of a duty imposed by law for reasons that serve the public and enforce public policy but a claim for breach of contract addresses the breach of a duty imposed by a discrete contract for reasons serving the interest of the contracting parties, the plaintiff properly maintains each claim.  The motion (Doc. 10) is DENIED.

Federal Deposit Insurance Corp. v. Optimum Title, LLC, Download Federal Deposit Insurance Corp. v. Optimum Title, LLC (M.D. Fla. Case No. 8.10cv1486, Order Filed October 15, 2010) PUBLIC ACCESS, also published as 2010 WL 4674427 *1 (M.D. Fla. October 15, 2010)(authorized password required to access Westlaw).

   Note from Westlaw to the Westlaw publication of this Order:  "This decision was reviewed by West editorial staff and not assigned editorial enhancements."

Fiduciary Duties of Liability Insurance Companies are analyzed along with hundreds of decided cases in §§ 3:26-3:30 by Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith" (Shepard's/McGraw-Hill Second Edition, West Publishing Company 2010 Supplement), and Fiduciary Duties in First-Party Insurance Cases are analyzed in § 9:8, id. 

Please Read The Disclaimer.

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.

Please Read The Disclaimer.

Elizabeth Warren, Fiduciary Breach, and the Consumer Financial Protection Bureau.

   In my Church we heard these words this weekend:  "No one can serve two masters.  They will either hate one and love the other, or be devoted to one and despise the other."  These words provided inspiration.  They also made me think.

   Elizabeth Warren will now serve two masters, so to speak.  She will report to President Barack Obama and to Treasury Secretary Timothy Geithner in her position as an adviser to the President.

   She will not be appointed to head the new Consumer Financial Protection Bureau.  Not at this time.  See, e.g., Jackie Calmes and Sewell Chan, "Obama Chooses Warren to Set Up Consumer Bureau" p. B5, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, September 18, 2010);  Ron Lieber, "Your Money/7 Tasks to Get the Consumer Chief Off to a Good Start" p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Saturday, September 18, 2010).  Submitted for your consideration:  That appointment will not happen at any time.

   It seems that Ms. Warren was told that she would not be confirmed by the Senate because the votes are not there.  See Jackie Calmes and Sewell Chan, "Obama Chooses Warren to Set Up Consumer Bureau," supra.  (I am not saying that is true, i.e., that the votes are not actually there, just that that is what Ms. Warren was apparently told by the faceless "Obama Administration.  See id.)

   Assume that she was told that she should be a good soldier.  She should sacrifice herself for the cause, for something bigger than herself, i.e., for the Consumer Financial Protection Bureau.  Assume that she was told that she should subordinate her best instincts, compromise her desires, and be an adviser instead of the head, one who does not need to be confirmed and thus will not put the Obama Administration through a confirmation battle.

   Assume that, in exchange, she was also told that she could have "a voice," or input, into how the Consumer Financial Protection Bureau is established in the first place.  Hers will be the guiding hands, as it were.  Perhaps she was told these things.  We know for certain, however, that she was told that she will be reporting to President Obama and Treasury Secretary Geithner, who has his own pick in mind to head the CFPB.  Jackie Calmes and Sewell Chan, "Obama Chooses Warren to Set Up Consumer Bureau," supra. 

   Here is how to verify whether this sketch is accurate.  I predict that Professor Warren, head of the Congressional Oversight Panel, will be gone from her adviser post within 1 to 2 years.  During that time, she will find herself constantly undermined.  She will depart, in the end, as a good soldier, keeping quiet at that time about the treatment she received in the 1 to 2 years that preceded her departure.

   Thereafter, maybe, we will know what really happened.  In the meantime, Ms. Warren's decisions have real implications for Fiduciary Duties.  The Consumer Financial Protection Bureau  -- probably in 2 years or longer -- will address Fiduciary Relationships in ways which will affect the outcomes of Claims including Claims of alleged Fiduciary Breaches by Insurance Companies.  Elizabeth Warren will not be around to affect the outcome then, if the predictions in this post become true.

Please Read The Disclaimer.

 

Florida Small Business Administration Fiduciary Fiasco: MORE.

   This updates a post here on November 9, 2009 entitled, "Federal Fraud Investigation of Florida State Board of Administration Investing".  In turn, that earlier post drew upon a large background reported on Insurance Claims and Issues Web Log:

Readers of previous posts in this space and on Insurance Claims and Issues Web Log at www.insuranceclaimsissues.typepad.com know that questions concerning Fiduciary Duties were raised at and ever since the time that unprotected investments, made by the SBA with funds from Local Governments that were provided to the SBA to invest in only safe venues, soured and eventually went bust.

  More recent reporting has developed the distinct possibility that the investors at Florida SBA did not have enabling authority to make some of the riskier investments which they made anyway.  See Sydney P. Freedberg, "Risk Won; Taxpayers Lost/State Money Managers Skirted Legal Advice and Gambled on Securities That Lost Hundreds of Millions in Value" p. 1A, col. 1 (St. Petersburg Times, Sunday, September 19, 2010).  It bears recognition that the SBA's investments, of any kind, were always made with money from Florida Local Governments and which the Local Governments were assured would not be put at risk.  As was noted in the linked newspaper report:

   Three former securities regulators and a nationally known expert said the investment misfortune may be a case of "unclean hands" -- the legal doctrine that a party to a lawsuit who has done wrong should not recover from another who may have done wrong as well.

Id.

   No-one at the Florida SBA has been admonished for neglect of duty.  See id.  Three people still with the Florida State Board of Administration who were allegedly involved in the unauthorized investing, forfeited one year's bonus.  Id.  There are greater consequences extant in the reported Case Law for alleged breaches of Fiduciary Obligations.  See also "CATClaims:  Insurance Coverage for Natural and Man-Made Disasters", § 2:12, "Claims Handling Practices Issues:  The Common Law of Good Faith and Fair Dealing, Acts, and Regulations:  Generally" by Dennis J. Wall (West 2008; 2010 Supplements in Process).  See generally Dennis J. Wall, "Litigation and Prevention of Insurer Bad Faith", §§ 3:26 - 3:30, from "The Unarticulated Majority View is Fiduciary," to "Summary:  Fiduciary Relation and Fault" (Shepard's/McGraw-Hill Second Edition; West Publishing Co. 2010 Supplement).

Please Read The Disclaimer.

 

Fiduciary Disclosure Requires Duty First, Based on Relationship.

   In Badger v. Southern Farm Bureau Life Insurance Co., 612 F.3d 1334 (11th Cir. 2010)(Subscription required to access Federal Reporter Third), the Eleventh Circuit Court of Appeals held firmly that there is simply no Fiduciary Duty to disclose any and all nonpublic information about a security that is the subject of a transaction.  The Eleventh Circuit panel based its holding in this case on what it said is clearly settled Federal and Florida law.

   The District Judge in that case, Judge Mary Scriven of the Middle District of Florida in Orlando, seems to have reached beyond the allegations and contentions of the parties and their Claims and Defenses.  That case was a shareholders' derivative suit filed on behalf of Plaintiffs' Shareholders Corporation ("PSC") against Southern Farm Bureau Life Insurance Company ("Southern Farm").  Southern Farm purchased a "debenture held by PSC, which was PSC's primary asset.  In the course of negotiations, Southern Farm gave to PSC an actuarial valuation it had commissioned of the debenture and stated that the valuation [which was $3.3 Million] represented a 'fair price.'"  Id. at 1336.  Not to be outbid by a fair price, PSC and Southern Farm agreed to pay a higher price than Southern Farm's evaluation -- $4.4 Million.  Id. at 1336-37.

   The Plaintiffs sued on various Fraud theories on the alleged grounds that Southern Farm omitted certain material facts "about the debenture sale".  See id. at 1338.  The District Court gave Jury Instructions consistent with the idea of a legal duty to disclose the information.   However, in that case, "the parties agree that Southern Farm and PSC were engaged in an arm's-length transaction; PSC has not asserted the existence of a fiduciary relationship or other similar relationship of trust and confidence between PSC shareholders and Southern Farm."  Id. at 1341.  [Emphasis added.]  For good measure, the Eleventh Circuit's opinion repeated this fact:

   The Plaintiffs have never asserted the existence of any fiduciary relationship between Southern Farm and PSC.

Id. at 1345.

Under both Federal Securities Law (Rule 10b-5) and Florida Common Law, the Eleventh Circuit pointed out that "such a duty 'arises when one party has information "that the other [party] is entitled to know because of a fiduciary or other similar relation of trust and confidence between them."'"  Id. at 1340-41.  [Emphasis added.]

   The Eleventh Circuit accordingly reversed a Jury Verdict based on a finding of Fraud, under erroneous Jury Instructions which included an Instruction that to the contrary, such a legal duty existed in that case, holding:

   This is an incorrect statement of the law.

Id. at 1343.  The Appellate Court cited to nine (9) decided Cases, including one decided by the United States Supreme Court, in which Courts across the Nation previously and uniformly rejected such a legal duty.  Id. at 1343-44.

   In short, the Eleventh Circuit held, the correct rule "is that a party to a transaction has a duty to disclose to the counterparty's shareholders only when failure to disclose would result in the breach of a fiduciary or other duty."  Id. at 1345.

   The implications for all Fiduciaries facing fulfillment of their respective duties, perhaps, and in particular for Insurance Companies' Fiduciary Duties are clear:  Alleged Failures to Disclose will be actionable at Common Law when they rest upon a preexisting Fiduciary or other relationship of trust and confidence between the parties involved.

Please Read The Disclaimer.

Financial Innovations Forge Fiduciary Faults.

   Financial innovations are sometimes not good.  This was the testimony of Federal Reserve Chair Ben Bernanke to the Financial Crisis Inquiry Commission at the "FCIC Meeting on 'Too Big to Fail'--Day 2," Thursday, September 2, 2010 (video archive provided by the Financial Crisis Inquiry Commission and by C-Span).  For reporting on this testimony, see, e.g., this summary by Sewell Chan, "Bernanke Says He Failed to See Financial Flaws: p. B3, col. 1 (New York Times Nat'l ed., "Business Day" Section, Friday, September 3, 2010):

   Asked about the role of financial innovation in the economy, Mr. Bernanke, said that "innovation is not always a good thing."  Some innovations [1] have unpredictable consequences, [2] are used primarily "to take unfair advantage rather than to create a more efficient market," and [3] create systemic risks, he said.

[Bracketed numbers added.]

   Financial innovations are not good, in particular, when they are destructive of the financial system and the relations among the participants in the financial system, as they were in the actions that led to the recent Financial Catastrophe through which we are now living.

   Financial innovations led to the recent Financial Catastrophe largely because they fostered Fiduciary Breach.

Dennis Wall is Co-Author of the leading book on Insurance Coverage for Insurance Claims that are a result of natural and man-made Catastrophes:  "CATClaims:  Insurance Coverage for Natural and Man-Made Disasters" (West Publishing Company 2008; 2010 Supplement in process).  Mr. Wall will be a featured speaker on several panels which will address the BP Oil Spill Catastrophe.  On September 15, 2010, he will be a featured speaker on a panel addressing "BP Oil Spill Damages Claims:  The Coverage Predicates" at the September 15, 2010 Seminar of the Insurance Law Committee sponsored by the Orange County Bar Association in Orlando, Florida.   Mr. Wall will speak on a panel at the American Conference Institute's Bad Faith Litigation Conference in Orlando, Florida on November 30, 2010 on "Dealing With Catastrophic Disasters:  How to Properly Investigate and Handle Overwhelming Claims".  The American Conference Institute is offering a discount to readers of this Blog:  Download ACI Advises Readers of the Insurance Claims and Issues and Insurance Claims and Bad Faith Law Blog are entitled to a discount.

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D&O's Disclose Finances? Fiduciary Flyball Out?

   Baseball Owners are batty about unauthorized financial disclosures.  It hurts Baseball, they think, to let fans known that the Pittsburgh Pirate owners are making money hand over fist with a depleted ballclub that loses, loses, loses on the field.  Fingers point not to the Wrigley outfield (with apologies to the Bambino), but to D&O Liability Insurance Carriers as stealing the signals of Owners' finances.  See Richard Sandomir, "Insurance Companies Focus of Investigation" p. B11, col. 1 (New York Times Nat'l ed., Wed., August 21, 2010).

   Say it ain't so, D&O!

Please Read The Disclaimer.

'And a Little Unknown Agency Shall Lead Them': ...

  ... The Federal Housing Finance Agency Leads The Way on the Road to Recoupment.

   The Federal Housing Finance Agency is investigating Trustees for pools of Mortgages and Servicers of the pooled Mortgages.  The FHFA has subpoenaed unidentified records from 64 different entities.  Subpoenas became necessary when polite requests were ignored.

   "Among the bigger trustees in the business are Deutsche Bank and the Bank of New York, while loan servicers include Bank of America and many more.  None of the banks would confirm if they had received subpoenas."  Gretchen Morgenson, "Fair Game/Holding Bankers' Feet to the Fire" p. 1, col. 1 (New York Times, "SundayBusiness" Section, Sunday, July 18, 2010).

   The FHFA is the Conservator of Fannie Mae and Freddie Mac.  It is charged with recouping the Federal Taxpayers' payments and losses on failed Mortgages where the circumstances warrant recoupment.  That clearly seems to be the focus of the FHFA investigation:  "Once that question has been answered, Fannie and Freddie can force the institutions that sold the securities to repurchase the improper loans, allowing taxpayers to recover some of the losses they've swallowed on Fannie's and Freddie's federal bailout."  Id.

   Reports of the demise of recoupment and restitution following the Great Collapse are premature.

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Too Clever By Half: The Secret Story of AIG's "Releases".

   This adds to posts about AIG's attempted Secret Releases of its Counterparties given during its near-death throes in late 2008, which are posted here on June 30, 2010 entitled, "Fed Demanded Secret Waiver Immunity by AIG:  Bad Faith Too?"; also a post here on July 6, 2010, "AIG's Secret "Unknown Claims" Release Worthless Paper?", and another post exploring the Release and its language on Insurance Claims and Issues Web Log also on July 6, 2010, "Who Fleeced the Fiduciaries?  AIG's "Unknown Claims" Release Could Be ... Worthless Paper".  The contentions of the New York Fed, that these abnormal conditions are normal, are stated and addressed in a post here on July 12, 2010, "New York Fed:  'Not me'; Denies Forcing AIG Secret Release".

   The insureds or "Counterparties" on certain Credit Default Swaps or Credit Insurance issued by AIG apparently wrote up a form "Termination Agreement" for AIG to sign for each of their CDS's.  Here is a copy courtesy of New York Times reporter Ms. Louise Story:  Download AIG Termination Agreement With Release Incl. of .Unknown Claims.  The overly broad Release language is found in Paragraph 1(b)(ii) on page 2, and their "Unknown Claims" definition is just as overly broad in paragraph 1(b)(v) on page 3.

   Note that the Release language includes "claims based on breach of fiduciary duty ..., aiding and abetting fraud or breach of fiduciary duty, ... [and] breach of the implied dovenant of good faith and fair dealing".

   I have proofed and compared them to the provisions input on July 6, 2010 in the post,  "Who Fleeced the Fiduciaries?  AIG's "Unknown Claims" Release Could Be ... Worthless Paper".  All the words quoted from the "Termination Agreement" are correctly and completely quoted in the post.

   The conclusion of the July 6 post on Insurance Claims and Issues is accurate too:  "The validity and effect of the secretly kept AIG Release of Counterparties, which was unearthed by New York Times reporters Louise Story and Gretchen Morgenson, are unlikely to be accepted at face value by the Courts in the United States."  That includes the State and Federal Courts in New York.  Paragraph 11 of the "Termination Agreement" provides that it "shall be governed by and construed in accordance with the law of the State of New York," and that each of the parties to it submits to jurisdiction both in the United States District Court for the Southern District of New York, and in any New York State Court "sitting in New York City".

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