prOn July 9, 2014, in yet another in the ever growing line of cases examining whether or not separate D&O claims involving interrelated wrongful acts, District of Puerto Rico Judge Gustavo Gelpi, applying Puerto Rico law, held that the FDIC’s claims against the former directors and officers of the failed Westernbank did not involve the “facts alleged” against the directors and officers in an earlier lawsuit, and therefore were not deemed made at the time of the earlier lawsuit. Because he found the FDIC’s claims to be unrelated, the claims were covered by the policy in effect at the time the FDIC filed the claims rather than the prior policy that had been substantially eroded by the earlier claim.


However, in an unusual twist, Judge Gelpi did conclude that one part of the FDIC’s claim was related to the earlier lawsuit and therefore that that portion (and that portion alone) was deemed made at the time of the earlier suit. A copy of Judge Gelpi’s July 9 opinion can be found here.



Regulators closed Westernbank on April 30, 2010, which according to the FDIC cost the insurance fund $4.25 billion. In October 2011, certain of the former Westernbank directors and officers sued the bank’s primary D&O insurer in state court in Puerto Rico, seeking a judicial declaration that the insurer must defend that against claims the FDIC had asserted against them  (about which refer here). The FDIC, as receiver for Westernbank, moved to intervene in the state court action, and on December 30, 2011, removed the state court action to the District of Puerto Rico. On January 20, 2012, the FDIC filed its amended complaint in intervention, in which it named as defendants certain additional directors and officers, and, in reliance on Puerto Rico’s direct action statute, the various D&O insurers in the bank’s D&O insurance program. A copy of the FDIC’s amended complaint can be found here.


In its complaint, the FDIC, as Westernbank’s receiver, seeks recovery of over $176 million in damages from the former bank’s directors and officers as well as their conjugal partners, based on various alleged grossly negligent commercial real estate, construction and asset-based loans approved and administered from January 28, 2004 through November 19, 2009. In its complaint in intervention in the directors and officers coverage action against the bank’s D&O insurers, the FDIC seeks a judicial declaration that its claims against the directors and officers are covered under the policies.


As discussed here, on October 12, 2012, Judge Gustavo Gelpi denied all of the motions to dismiss. A copy of the court’s October 23, 2012 decision can be found here. Among other things, Judge Gelpi ruled that the insured vs. insured exclusion did not preclude coverage for the FDIC’s liability action against the former directors and officers, in part because at least in this case the FDIC not only sought to enforce the rights of the failed bank to which it succeeded as the failed bank’s receiver, but also because the FDIC also sought to enforce the rights of “depositors, account holders, and a depleted insurance fund.” As discussed here, on March 31, 2014, the First Circuit affirmed Judge Gelpi’s ruling that the insurers were obligated to advance the directors and officers defense expenses.


The insurers subsequently renewed their motion in the district court for summary judgment on the insured vs. insured exclusion issue, while the FDIC and the directors and officers moved for summary judgment on the issue of whether or not the FDIC’s claims against the directors and officers involved alleged wrongful acts that were interrelated with wrongful acts that had been alleged against the directors and officers in an earlier lawsuit. (Update: Counsel for one of the parties to the Westernbank case clarified for me that the FDIC did not move for summary judgment on the interrelatedness issue. One of the individual defendants moved for summary judgment on the issue, while the FDIC moved for clarification of the Court’s prior rulings on defense cost advancement issues. The insurers then moved for summary judgment seeking a ruling that the FDIC’s claims all related back to the earlier lawsuit.)


The earlier lawsuits, involved the Inyx loans and alleged that the directors and officers were, according to Judge Gelpi, “purportedly derelict in loan approvals and administration surrounding the Inyx loans.” The earlier suits (the “Prior Suits”) were filed in 2007 and 2008 and triggered the bank’s 2006-2007 D&O insurance program. According to Judge Gelpi, payment s in settlement of the Prior Suits substantially diminished the 2006-2007 insurance program.


The insurers contend that because the FDIC’s claims against the bank’s former directors and officers also allege negligent approval and administration of loans, the FDIC’s claims were interrelated with the claims in the Prior Suits and therefore were deemed made at the time of the earlier lawsuits and triggered coverage only under the depleted 2006-2007 insurance program. The FDIC contends that its claims were distinct from those asserted in the Prior Suits and therefore that their claims fall under the bank’s 2009-2010 insurance program.


The primary insurance policy in the 2009-2010 program provides that:


If written notice of a Claim has been given to the Insurer … then a Claim which is subsequently made against an Insured and reported to the Insurer alleging, arising out of, based upon or attributable to the facts alleged in the Claim for which such notice has been given, or alleging any Wrongful Act which is the same as or related to any Wrongful Act alleged in the Claim of which such notice has been given, shall be considered related to the first Claim and made at the time such notice was given.


The July 9 Opinion 

In his July 9 opinion, Judge Gelpi denied the insurers’ motion for summary judgment based on the insured vs. insured exclusion and granted the motions of the FDIC and of the individual directors and officers on the question of whether or not the FDIC’s claims are interrelated with the Prior Suits.


In granting the FDIC’s and individual directors’ and officers’ motion for summary judgment on the interrelatedness issue, Judge Gelpi rejected the insurers’ argument that because both the Prior Suits and the FDIC’s lawsuit allege a “general pattern of grossly negligent behavior” with respect to the bank’s lending activities, the FDIC’s claims are interrelated with the Prior Suits.


Judge Gelpi acknowledged that “while the D&O’s general course of conduct is similar … the only specific factual allegations in the FDIC’s complaint and the Prior Suits meriting a comparable reading” are related to the Inyx loans to which Prior Suits related. The other loans referenced in the FDIC’s complaint “were either issued or administered by D&Os before and after the Inyx loans, and six of the seven non-Inyx loans originated or were administered in the commercial real estate and construction departments, not the asset-based lending department.” To highlight the similarities and differences between the FDIC’s claims and the Prior Suits’ allegations, Judge Gulpi attached a detailed appendix to his opinion. Judge Gelpi said that based on his detailed review that “to find the complaints substantially related would ignore the divergent fact-specific nature of the FDIC’s claims.”


Judge Gelpi then said that “while similarity between the complaints in  this case and the Prior Suits is not substantial, to the extent the Prior Suits’ complaints highlights the same course of grossly negligent conduct regarding the Inyx loans, there is a simple solution” – that is “to sever the Inyx loans from coverage under the 2009-2010 tower to remain in the 2006-2007 tower.” Under this simple solution, the FDIC’s allegations relating to the Inyx loans are covered by the 2006-2007 policy and “the rest of the claims concerning other borrowers are covered by the 2009-2010 policy. “


Judge Gelpi concluded his analysis of the interrelatedness issues with a swipe at the insurers, commenting that they “knew or reasonably should have known they were assuming a great risk by insuring the D&Os,” and that the Prior Suits and various examiner’s reports “should have given any reasonably prudent insurance company cause for concern,” yet they agreed to accept the risk without adding a Regulatory Exclusion to protect them from claims and without adding an express exclusion for claims for conduct during the prior policy period.


Finally, Judge Gelpi rejected the insurers’ effort to revisit the Insured vs. Insured exclusion issues. Judge Gelpi had previously rejected the insurers’ arguments that the exclusion precluded coverage because, as the failed bank’s receiver, the FDIC “stepped into the shoes” of the failed bank and therefore was acting as an insured. In his prior ruling Judge Gelpi had said that the exclusion did not apply because the FDIC was filing its lawsuit “on behalf of depositors, account holders, and a depleted insurance fund.”


In their renewed motion, the insurers argued that the FDIC did not represent depositors and account holders because the FDIC could provide no evidence identifying the depositors and account holders it purports to represent. Judge Gelpi rejected this argument, among other reasons, based on the FDIC’s argument that the bank’s failure had produced substantial losses to the deposit insurance fund. While the FDIC will have to prove these losses at trial, the agency’s representation of its losses provides a sufficient issue of material fact to preclude summary judgment. He added that “the court does not accept AIG’s argument that the FDIC fails to specify who or what it represents and that such failure merits summary judgment.”



Judge Gelpi’s opinion in this case underscores a point I have frequently made on this blog (most recently here) about the frustratingly elusive nature of relatedness issues. The difficulty here, as in all coverage cases involving relatedness issues, is determining what degree or quantum of relatedness is sufficient to make alleged wrongful acts interrelated. Here, it is not just that the Prior Suits and the FDIC’s claim involve substantially similar kinds of allegations (that is, misconduct in connection with loan approvals and administration) during overlapping time periods, but that the Prior Suits and the FDIC’s suits involved allegations in connection with some of the same loans.


I don’t know how satisfied others might be with Judge Gelpi’s “simple solution” of gerrymandering the overlapping allegations involving the Inyx loans into the prior policy period while shifting all of other loan allegations into the subsequent policy period, but that seems to me like a contrivance to avoid the implications of the interrelated wrongful acts provision. The provision states that if the subsequent claim is “alleging, arising out of, based upon or attributable to the facts alleged in the Claim for which such notice has been given” then the subsequent claim “shall be considered related to the first Claim and made at the time such notice was given.” The provision does not say that only the overlapping “facts alleged” in the subsequent claim are to be considered related, but rather it says that if the “facts alleged” overlap then the claims are related and the subsequent claim is deemed first made at the time of the earlier claim.


Judge Gelpi’s parting swipe at the insurers suggests that he views all of this as the insurers’ own damn fault, for even getting on this risky account in the first place, and for not taking defensive measures that, had they taken them, would have protected them from this claim. This aside seems irrelevant to me on the question of whether or not the Prior Suits and the FDIC’s are sufficiently interrelated to be deemed a single claim first made at the time of the Prior Suits.


I am not sure why Judge Gelpi included these remarks. It is almost as if he is justifying his conclusion on the interrelatedness issue by, in effect, saying the insurers on the 2009-2010 program should have to pick up the costs of the FDIC’s claims because the insurers were imprudent enough to have agreed to insure a clearly troubled financial institution. (I note that these remarks appear in a different part of the opinion from his analysis of the Insured vs. Insured exclusion issues, but to the extent these remarks were meant to apply to the insurers’ arguments about the Insured vs. Insured exclusion, they arguably make more sense.)  


The one thing I will say about Judge Gelpi’s opinion is that it illustrates why court decisions on interrelatedness issues are all over the map. They are, like this case, intensely fact-specific disputes. As a result, it is difficult to make generalizations.


Special thanks to the several loyal readers who sent me copies of Judge Gelpi’s opinion.


Upcoming PLUS Event in Singapore: Here is an important message for readers in Asia. On August 21, 2014, I will be participating in a PLUS Regional Professional Liability Symposium in Singapore. The event will take place at the Singapore Cricket Club. The evening event is scheduled to begin at 6:00 pm, and in addition to a presentation I will be giving on hot topics in D&O, the event will feature a keynote presentation by Chelya Rajah of Tan Rajah & Cheah. I hope that everyone in the region will plan on attending this event and encourage others to attend as well. Information about the event including instructions on how to register can be found here. I look forward to seeing everyone in Singapore.