October 10, 2011
Authored by: Jake Bielema
A recent negotiated settlement in an FDIC failed bank lawsuit, which has as its sole focus potentially available funds under a D&O policy, and in fact assigns claims under that policy to the FDIC, further suggests that the FDIC’s real focus in failed bank litigation is on proceeds that may be available under D&O policies, as opposed to the personal assets of former directors and former officers.
The First National Bank of Nevada (“FNB Nevada”) failed on July 25, 2008, less than thirty days after First National Bank of Arizona (“FNB Arizona”) was merged with an into FNB Nevada. On August 23, 2011, the FDIC filed an action in the District of Arizona against the former CEO and Vice Chairman of the Bank’s holding company as well as of both FNB Nevada and FNB Arizona and additionally against the holding company’s Executive Vice President (“EVP”), who was also the EVP of FNB Nevada and FNB Arizona. There was nothing remarkable about the FDIC’s complaint, which basically alleged negligence and gross negligence in lending, primarily at FNB Arizona, which allegedly resulted in millions of dollars of bad loans that ultimately contributed to the Bank’s failure.
What is remarkable about the FNB Nevada case is that shortly after the complaint was filed, on September 2, 2011, the FDIC and the two named defendants jointly filed a Motion for Entry of Judgment which would in effect settle all of the FDIC’s claims against the two named defendants. In the proposed settlement contemplated by the Motion for Entry of Judgment, each of the individuals consented to the entry against them of separate judgments in the amount of $20 million. Notably, however, those amounts were to be paid only through what the FDIC is able to recover from the D&O carrier, Catlin, which had denied coverage and refused to defend the FDIC’s claims on behalf of the named defendants. The settlement specifically provides that the FDIC will not pursue any aspect of the judgment against the named defendants individually, and will limit its efforts at recovery to its claims for wrongful denial of coverage against the D&O carrier.
This settlement no doubt had some appeal to the two named defendants, in that it, if approved, it will result in a full release of any and all claims against them individually, as well as an agreement not to pursue any aspect of the agreed upon judgment from them individually. However, the insurance company is likely to take the position that the settlement, which was entered into without development of any actual evidence or proof that either of the named defendants engaged in any kind of actionable wrong-doing, was collusive and was entered into without any rational analysis, and solely at the expense of the carrier. The response to that, however, is likely to be that the D&O carrier should not now be heard to criticize the manner and extent to which the FDIC’s claims were analyzed or defended, after it refused to provide any coverage under the policy or to provide any defense to the named defendants.
In any event, it is yet another indication that the FDIC’s primary focus in the failed bank litigation is the proceeds of directors and officer liability policies, not the personal assets of former officers and directors of failed institutions.