IndyMac CEO Michael Perry has reached an agreement with the FDIC to settle the lawsuit the agency filed against him in the Central District of California in July 2011 in its capacity as receiver of the failed bank. In the settlement agreement, filed with the court on December 14, 2012, Perry agreed to pay $1 million out of his own assets plus an additional $11 million in insurance funds. However, the insurers are not parties to the agreement; rather, the FDIC has accepted Perry’s assignment of his rights under the insurance policies, which the FDIC apparently will now seek to assert against the insurers. The parties’ stipulation of dismissal, to which their settlement agreement is attached, can be found here.
Perry’s settlement comes just a week after a jury entered a $168.8 million verdict in the separate case the FDIC filed against three other IndyMac officers. The agency filed the two lawsuits separately as part of an apparent strategy in the separate case against the three officers to recover under a second $80 million tower of D&O insurance. As noted here, in July 2012, Judge Gary Klausner held in a related insurance coverage action that all of the various IndyMac lawsuits relate back to the first lawsuit to be filed, and therefore only trigger a single tower of insurance. Klausner’s ruling is on appeal.
Just as the FDIC’s separate lawsuit against the three officers appears to be a part of an insurance-oriented strategy, the FDIC’s settlement with Perry also appears in large measure to be about the D&O insurance. (To be sure, Perry will also be paying $1 million out of his own pocket, but the remainder of the agreement pertains to the insurance issues.)
The settlement agreement specifies that the Insurers shall pay the $11 million insurance portion of the settlement within 30 days. However, the insurers are not parties to the agreement, and the agreement appears to fully anticipate that the insurers will not in fact fund the $11 million insurance portion. The settlement agreement includes detailed provisions for the assignment of Perry’s rights against the insurers, including his rights for alleged “breach of the covenant of good faith and fair dealing.” (Perry expressly reserves his rights to try to recover from the insurers his past and future attorneys’ fees.) The agreement specifies that Perry is not personally liable of the $11 million insurance portion of the settlement.
The settlement agreement recites that on July 20, 2012, certain of IndyMac’s D&O insurers (that is, insurers in the so-called first tower of insurance) filed an interpleader action in the Central District of California. As I previously noted on this blog in connection with the insurance issues in this case, IndyMac’s collapse has led to multiple lawsuits involving multiple parties, creating competition among the various claimants for the dwindling amounts of insurance available as accumulating defense expenses erode the available limits. Brian Zabcik’s December 14, 2012 Am Law Litigation Daily article about Perry’s settlement with the FDIC (here) quotes Perry’s counsel as saying that “Perry decided to settle the FDIC’s lawsuit in large part because the insurance funds available to fund his defense had been exhausted by all the various lawsuits brought against former IndyMac officers and directors,"
Perry’s settlement agreement with the FDIC specifies that the FDIC “agrees that, in its capacity as Mr. Perry’s assignee, it shall take no position in the Interpleader Action inconsistent with Mr. Perry’s position that the Insurers are obligated to fund other settlements to which Mr. Perry is a party.” (Among the other settlements identified in Perry’s settlement agreement with the FDIC is the $5.5 million settlement in IndyMac securities class action lawsuit known as the Tripp litigation, about which refer here.)
In other words, it appears that the $11 million insurance portion of Perry’s settlement with the FDIC basically represents a claim check for the agency to try to redeem in the interpleader action. Because there are numerous other claimants each attempting to assert their own claims to the insurance proceeds, it will remain to be seen how much of the $11 million insurance portion of its settlement with Perry the FDIC will ultimately collect.
As discussed here, the FDIC filed its lawsuit against Perry, in its capacity as receiver for Indy Mac bank, in July 2011. The FDIC’s complaint against Perry alleged that he caused over $600 million in losses by having the bank purchase mortgage loans in 2007, just as the mortgage marketplace was destabilizing. The complaint alleges that Perry acted negligently when he allowed IndyMac to generate and purchase $10 billion in loans when the secondary mortgage market was becoming illiquid. When IndyMac was later unable to sell the loans, the bank transferred them to its own investment portfolio, which then caused over $600 million in losses.
Interestingly, in its settlement stipulation with Perry, the FDIC expressly acknowledges that the FDIC’s complaint “does not allege that Mr. Perry caused the Bank to fail or that he caused a loss to the FDIC insurance fund.” Nevertheless, on December 14, 2012, the FDIC entered – apparently with Perry’s consent – an Order of Prohibition from Further Participation (here) reciting that Perry “engaged or participated in unsafe or unsound banking practices” at IndyMac; that these practices "demonstrate [his] unfitness" to serve as a director or officer at any FDIC-insured institution; and prohibiting him from involvement in any financial institution. The Am Law Litigation Daily article quotes Perry’s counsel as saying with respect to this order, to which Perry consented, that “the FDIC extracted this condition at the eleventh hour because they could,” and that “the FDIC knew Perry was out of insurance funds, and they took advantage of the situation."
Yet Another FDIC Lawsuit Involving a Failed Georgia Bank: For whatever reason, the FDIC’s lawsuits against former directors and officers of failed banks have been disproportionately concentrated in Georgia. On December 13, 2012, the FDIC filed yet another failed lawsuit in connection with a failed Georgia bank. A copy of the FDIC’s complaint, filed in the Northern District of Georgia against three former officers and four former directors of the failed RockBridge Commercial Bank of Sandy Spring, Georgia, can be found here.
RockBridge was closed by regulators on December 18, 2009. The complaint asserts claims against the seven individual defendants for negligence, gross negligence, and breach of fiduciary duty. In connection with the defendants alleged “numerous, repeated and obvious breaches and violations of the Bank’s Loan Policy and procedures, underwriting requirements, banking regulations, and prudent and sound banking practices,” as “exemplified” by 16 loans made between February 14, 2007 and November 12, 2008, which allegedly caused the bank losses of in excess of $27 million.
Interestingly, one of the defendants, Arnold Tillman, who has filed for Chapter 7 bankruptcy, was sued with leave of the bankruptcy court and “nominally to the extent of insurance coverage only.” (The FDIC proceeded in the same fashion against several individual defendants in the lawsuit it filed in November 2012 in its capacity as receiver of the failed Community Bank of West Georgia, of Villa Rica, Georgia, as I discussed in a prior post, here – second item in the blog post.)
The FDIC’s assertion of claims for ordinary negligence against the former directors and officers of RockBridge is interesting in light of the now several district court decisions holding that under Georgia law officers cannot be held liable for claims of ordinary negligence, as was discussed in a recent guest blog post on this site (This issue is now on an interlocutory appeal to the 11th Circuit in the Integrity Bank case.) The FDIC anticipated this argument, and specifically alleges in paragraph 58 of the complaint that the defendants are not entitled to rely on the business judgment rule and therefore liable for ordinary negligence.
The FDIC’s complaint against the former Rockbridge directors and officers is the 14th that the agency has filed in connection with a failed Georgia bank and the 42nd that the agency had filed overall, meaning that the FDIC’s D&O lawsuits involving failed Georgia banks represent one-third of all of the D&O lawsuits the agency has filed. The FDIC’s lawsuits against the failed Georgia banks represents a disproportionately high percentage of D&O suits; even though Georgia has had more bank failures than any other state, closed bank in Georgia still represent only about 18% of all bank failures. For whatever reason, the FDIC seems to be concentrating its litigation activity in Georgia. Indeed, the last four suits the agency has filed have involved failed Georgia banks.
Readers that follow the failed bank litigation closely will be interested to note that on December 11, 2012, the FDIC updated the page on its website that reports statistics and information on the agency’s failed bank litigation. In the latest update, the agency reports that it has authorized suits in connection with 89 failed institutions against 742 individuals for D&O liability. This includes 42 filed D&O lawsuits involving 41 institutions and naming 331 former directors and officers, inclusive of the latest suit against the former RockBridge directors and officers. The agency clearly will be filing many more lawsuits in the weeks and months ahead.
Special thanks to a loyal reader for providing a copy of the RockBridge complaint. Scott Trubey’s December 14, 2012 Atlanta Journal Constitution article about the FDIC’s latest lawsuit can be found here.
More About Securities Class Action Opt-Outs: In a recent post, I noted that the incidence of securities class action opt-outs seemed to be on the increase. In the prior post, I referred specifically to the high profile institutional investors that had chosen to opt out of the Pfizer securities litigation. Now it appears that there have been significant opt outs from the Citigroup subprime-related securities class action lawsuit settlement, as well.
As discussed here, in late August 2012, the parties to the high-profile Citigroup subprime-related securities class action lawsuit agreed to settle the case for $590 million, subject to court approval. However, as discussed in Nate Raymond’s December 13, 2012 On the Case blog post (here), several significant institutional investors have elected to opt out of the more than half a billion dollar settlement and are pursuing their own separate actions. The article, which notes that “opt-outs have become a regular feature fixture in any big securities class action,” reports that a total of 134 investors have chosen to opt out of the Citigroup settlement, including some institutional investors that had filed separate individual actions as long as two years ago.
The article notes that institutional investors choose to opt out where they think they can improve their recoveries by proceeding separately from the class. The article notes that this approach is “not without its risks,” including the exposure of the opting-out party to full discovery, depositions and document discovery.” Given these concerns, the allure for institutional investors in opting out will only be there, according to one commentator quoted in the article, if “the losses are substantial enough to grab the defendants’ attention.” The rise in class action opt-outs carries risks for defendants as well, as they are unable to ensure “global peace” through the class settlement, and even run the risk of the opt-outs triggering the “blow up” provision in the class settlement agreement.
As I noted in my recent post about opt-outs, class action lawsuits have for many years been a favored whipping boy for conservative commentators. But for all of the ills that the class action process can sometimes involve, the prospect of a litigation process in which mass group claims are fragmented and can only be resolved in a piecemeal fashion is no improvement. Given the apparently increasing institutional investor interest in pursuing claims separate from the larger investor class, we could very quickly be getting to the point where resolution of class litigation is only one part of a multistep process, at least in the class action lawsuits where larger losses are at issue.