In a May 28, 2014 opinion (here), the Delaware Supreme Court held that an action by the bankrupt Washington Mutual bank holding company’s liquidating trust seeking a judicial declaration of coverage under the bank’s D&O insurance program for claims asserted by the trust against the failed bank’s directors and officers must be dismissed on ripeness grounds. The Court determined that the parties’ dispute “has not yet assumed a concrete or final form” and therefore that “any judicial determination at this stage would necessarily amount to an impermissible advisory opinion.”
In the days just before WaMu’s collapse in September 2008, the bank holding company made a $500 million “downstream” capital contribution in what proved to be a futile attempt to alleviate the bank’s liquidity crisis. The FDIC took control of the bank on September 28, 2008 and the bank holding company filed for bankruptcy. Following the bankruptcy filing, the committee of unsecured creditors sent the holding company’s former directors and officers a demand letter, asserting that the downstream capital contribution was wrongful and had been made in breach of their fiduciary duties and seeking damages.
For the policy period May 1, 2007 to May 1, 2008, WaMu’s bank holding company (hereafter, WaMu) had a $250 million D&O insurance program arranged in twelve layers. For the following period, May 1, 2008 to May 1, 2009, WaMu had a separate $250 million D&O insurance tower also consisting of twelve layers.
The former directors and officers to whom the creditors committee had sent the demand letter submitted it to the D&O insurers. The primary insurer denied coverage for the creditors’ committees claims under its 2008-09 policy; however, the insurer indicated that the claims would be covered under the 2007-08 program. The directors and officers have incurred defense fees in connection with the creditors committees’ claims which have been paid under the 2007-08 program. However, due to the numerous claims arising out of WaMu’s collapse, the 2007-08 program has been significantly depleted.
To date, the trust has not initiated any formal legal action against the former directors and officers to enforce the claims arising from the downstream capital contribution.
In October 2012, the liquidating trust, as successor to the creditors’ committee’s claims, filed an action in Delaware Superior Court disputing the insurers’ denial of coverage under the 2008-09 policies. The trust asserted three claims: one alleging breach of contract and another alleging breach of the implied duties of good faith and fair dealing for the denial of coverage under the 2008-09 policies, and a third claim seeking a judicial declaration that coverage under the 2008-09 policies is available for the claims concerning the downstream capital contribution and that the $50 million retention on the primary policy does not apply.
The insurers moved to dismiss the trust’s lawsuit arguing that the trust lacks standing to assert the first two claims and that the trust’s declaratory judgment claim does not allege an “actual controversy” that is ripe for adjudication. The trial court denied the insurers’ motion to dismiss, based on its determination that the trust has standing and that the declaratory judgment action presents a claim that is ripe for adjudication. The insurers sought leave to pursue an interlocutory appeal, which the trial court granted. The Delaware Supreme Court accepted the interlocutory appeal.
The May 28 Opinion
In a May 28, 2014 opinion by Justice Jack B. Jacobs, the Delaware Supreme Court reversed the ruling of the court below and remanded the case to the trial court to be dismissed without prejudice. The Supreme Court found that the dispute was not yet ripe for resolution because it has “not yet reached a concrete or final form” and therefore “any judicial resolution at this stage would necessarily be based on speculation and hypothetical facts, and ultimately could prove unnecessary.” Because the Court resolved the appeal on the basis of the ripeness issue, the Court did not address the question of whether or not the trust had standing to assert the claims.
The ripeness doctrine under which the Supreme Court dismissed the case is sometimes expressed in the adage that the courts “do not render advisory or hypothetical opinions.” The purpose of the principle is to “conserve limited judicial resources” and to “avoid rendering a legally binding decision that could result in premature and possibly unsound lawmaking.”
To illustrate the point that “any judicial determination at this stage would necessarily amount to an impermissible advisory opinion,” the Court reviewed a series of hypotheticals. It could turn out, for example, that the trust might decide not to initiate a legal action against the directors and officers. Or, if the trust files a lawsuit, the directors and officers might prevail. Even if the trust were to file a lawsuit and ultimately obtain a settlement or judgment, determination in the case could affect the availability of coverage and could even affect the applicability of the retention.
Because the court determined that the parties’ dispute is not yet ripe for resolution, the court determined that the trust’s claims for breach of contract and breach of the implied duties of good faith and fair dealing are also not yet ripe. As the court noted, it would be “logically inconsistent for this Court to rule that a dispute is not sufficiently ripe to warrant entertaining a declaratory judgment claim, yet is sufficiently ripe to warrant entertaining and deciding claims for contractual breach.”
WaMu’s collapse was the largest bank failure in U.S. history and its demise led to a flood of litigation. (To see my views about the bank failure at the time it occurred, refer here.) Among other things, the collapse has led to extensive coverage litigation. As discussed here, one of the recurring insurance coverage disputes is whether or not the various lawsuit are all interrelated and therefore trigger only the single tower of D&O insurance that was in force at the time the first claim was made or whether the second tower of insurance was also triggered. The question of whether or not the second tower has been triggered is significant because defense costs and settlement amounts have largely exhausted the first tower.
The coverage lawsuit the liquidating trust filed is another effort to try to get at the second tower of insurance. The creditors’ committee’s and the liquidation trust’s claims against the former WaMu directors and officers over the downstream capital contribution come down to a bid to try to nab some of the insurance money in the second insurance tower. Since the 2007-08 tower of insurance is substantially depleted, the liquidating trust’s claims against the former directors and officers only have value if the liquidating trust can hope to recover against the 2008-09 insurance program. The liquidating trust filed this coverage lawsuit because if it can’t get at the second tower of insurance, its claims aren’t worth bringing.
The Supreme Court recognized that what the trust was really trying to do with its coverage action was to try to find out if it would be worth filing a lawsuit against the individual directors and officers. The Supreme Court observed that “the Trust’s only interest in having its dispute litigated now is apparently to receive judicial guidance about how much coverage would be available to the Ds&Os if the Trust were to initiate litigation against them.”
However, the Court said, while the trust was seeking guidance, it was doing so “not as a contractual counterparty seeking to vindicate the D&Os’ contractual rights, but rather as a potential claimant against the Ds&Os.” The trust’s desire to “receive advice” is “not a cognizable interest that will justify a Delaware court exercising its jurisdiction to decide this dispute.”
The Supreme Court remanded the case to the lower court to have it dismissed — but dismissed without prejudice. In other words, if the liquidating trust manages to get a settlement from or judgment against the former WaMu directors and officers on its claims, the trust would then be free to reinstitute its coverage action. It will only be at that point that the trust will find out whether or not it can get at the second tower. The trust will have to figure out if the costs and effort required to get to that point are worth the effort, especially allowing for the possibility that the trust could go through all of the intervening steps and then find out in the end that there wasn’t any coverage under the second tower any way.
Special thanks to a loyal reader for providing me with a copy of the Delaware Supreme Court’s opinion.