In a unusual procedural maneuver, the FDIC has intervened in a pending insurance coverage dispute to assert claims against the former directors and officers of Westernbank of Mayaguez, Puerto Rico.  Westernbank was closed on April 30, 2010.  At the time of its failure, Westernbank was the second largest bank in Puerto Rico.  The FDIC alleges that Westernbank’s failure will result in a loss to the Deposit Insurance Fund of approximately $4.25 billion.

The case was originally a coverage dispute filed by some of the former directors of Westernbank against their D&O carrier Chartis.  The FDIC intervened in the case and asserted claims against a much broader set of defendants, including all of the former bank directors, several former bank officers, and three additional D&O carriers.  The claims against Chartis and the other D&O carriers were brought pursuant to a Puerto Rico statute that grants a right of direct action against the insurers.  For a copy of the FDIC’s Amended and Restated Complaint, click here.

In support of its gross negligence claim against the former directors and officers, the FDIC alleges that the defendants approved and/or administered numerous CRE, construction and asset-based commercial loans in violation of bank policies, federal safety and soundness regulations, and prudent banking practices.  The FDIC seeks to recover $176 million in damages attributable to losses suffered on 21 specific bad credits.

Interestingly, the FDIC also asserts a fiduciary breach claim against a single former director, Cornelius Tamboer.  It contends that Tamboer breached his fiduciary duty to the Bank by failing to disclose his de facto 50% interest in a construction project for which the Bank had loaned $12 million, and by voting for the loan and multiple extensions.  The FDIC specifically contends that had Tamboer disclosed his interests in the loan, it would not have been approved, funded, renewed or extended by the Bank.  Therefore, the FDIC seeks to hold Tamboer solely liable for the losses suffered on that loan.