tenthcircuitIn an important decision concerning D&O insurance coverage in connection with failed bank claims, the Tenth Circuit, applying Kansas law, held that a D&O policy’s insured vs. insured exclusion unambiguously precluded coverage for claims brought by the FDIC as receiver of a failed bank against the bank’s former directors and officers. The Tenth Circuit’s decision arguably contrasts with the Eleventh Circuit’s December 2014 decision in the Community Bank & Trust case (about which refer here), in which the Eleventh Circuit had held that the insured vs. insured exclusion at issue in that case was ambiguous with respect to the question of whether it precluded coverage for FDIC’s failed bank claims. However, the specific language in the exclusion at issue in this case precluding coverage for claims brought a “receiver” of the insured company – language not present in the policy the Eleventh Circuit considered — was a dispositive factor in the Tenth Circuit’s conclusion about the exclusion’s applicability. A copy of the Tenth Circuit’s August 6, 2015 decision can be found here.



Columbian Bank & Trust of Topeka, Kansas closed its doors on August 22, 2008 and the FDIC was appointed as its receiver. In September 2008, the FDIC as receiver sent the bank’s D&O insurer a notice of potential claims it intended to assert against the bank’s former directors and officers. In 2011, the FDIC filed a lawsuit against certain of the bank’s former directors and officers, alleging claims of negligence, gross negligence, and breach of fiduciary duty. At about the same time, the D&O insurer filed an action in Kansas state court seeking a judicial declaration that there was no coverage under its policy for the FDIC’s claims. The FDIC joined the declaratory judgment proceeding and removed the action to state court.


The question of whether or not the D&O insurance policy provided coverage for the FDIC’s claims related to two exclusions. The base form of the bank’s D&O insurance policy has a so-called regulatory exclusion, precluding coverage for “any action or proceeding brought by or on behalf of any federal or state regulatory or supervisory agency or deposit insurance organization.” However, the bank’s policy also had a “regulatory exclusion endorsement” that amended the policy “by the deletion of” the regulatory exclusion and the specification of a $5 mm liability cap for claims brought by “any federal or state regulatory or supervisory agency or deposit insurance organization.” The endorsement added further that “nothing contained herein shall be held to vary, waive or to extend any of the terms, conditions, provisions, agreements or limitations of the above mentioned policy other than as stated above.”


The policy also contained an insured vs. insured exclusion that among other things precluded coverage for loss arising from a claim “by, or on behalf of, or at the behest of, any other Insured Person, the Company, or any successor, trustee, assignee or receiver of the Company.” (Emphasis added).


In asserting that the policy provided coverage, the directors and officers and the FDIC referred to a number of statements that had been made by the D&O insurer about the policy’s coverage. For example, according to materials the D&O insurer provided to the bank before the bank purchased the policy, “there is full coverage for actions by regulatory agencies.” In addition, in interrogatory answers that the D&O insurer provided during earlier proceedings between the parties, the D&O insurer indicated that the FDIC’s claims would be covered under the policy as long as the D&O insurer was provided with proper notice of claims.


The parties to the FDIC’s liability lawsuit against the former directors and officers settled the case based on directors’ and officers’ confessed judgment of $5 million and payments by the D&O insurer and by the individual defendants in favor of the FDIC. The D&O insurer and the director defendants have made payments in partial satisfaction of the judgment. The settlement allowed the D&O insurer to seek reimbursement if it were to succeed in the coverage litigation.


On February 27, 2014, the district court granted the D&O insurer’s motion in the coverage action for summary judgment, holding that the insured vs. insured exclusion unambiguously precluded coverage for claims by the FDIC as receiver. The district court also held that the D&O insurer was not judicially estopped from denying coverage by its prior statements and interrogatory answers supportive of coverage. The FDIC appealed. In the interim, the D&O insurer was placed into receivership and the Kansas Insurance Guaranty Fund intervened to defend the now-defunct insurer’s rights.


The August 6 Opinion

In an August 6, 2015 opinion written by Judge Paul Joseph Kelly, Jr. for a unanimous three-judge panel, the Tenth Circuit affirmed the district court’s entry of summary judgment in the insurer’s favor.


In affirming the district court’s holding with respect to the Insured vs. Insured exclusion, the appellate court noted that the Insured vs. Insured exclusion precluded coverage for claims brought by a “receiver of the Company,” and that the FDIC was the failed bank’s receiver. Thus, the court said, “the plain language of the insured v. insured exclusion appears to unambiguously bar coverage by the FDIC-R against director-defendants.” The appellate court added that “other courts interpreting identical insured v. insured exclusions have reached the same conclusion.”


The appellate court rejected the FDIC and the individual defendants’ arguments that the derivative action exception to the Insured vs. Insured exclusion created an ambiguity with respect to the exclusion’s applicability to claims by the FDIC. The court said that the decisions on which the FDIC relied in making this argument involved exclusions that “did not explicitly apply to claims by a receiver of the company,” and thus the courts have had to “grapple with the question whether the receiver ‘stepped into the shoes’ of the institution, such that claims by the receiver were excluded as would be claims by the institution itself.” The appellate court also noted that the decisions that found the Insured vs. Insured provisions to be ambiguous as to claims by a receiver “relied on the absence of policy language present here.” Here, the court noted, “we have no such ambiguity,” and thus, the court said, we “will not strain to create an ambiguity where, in common sense, there is none.”


The appellate court also rejected the arguments that the deletion of the regulatory exclusion, the endorsement’s creation of the $5 million liability cap, and the D&O insurer’s statements affirming coverage for claims by regulators rendered the Insured vs. Insured ambiguous. With respect to regulatory exclusion’s removal and the insertion of the liability cap, the appellate court said “we see no language in the endorsement that affirmatively grants coverage over all those claims previously excluded by the regulatory exclusion.” The exclusion’s removal “permits such coverage,” but “does not require it, as removing an exclusion is not the same thing as affirmatively providing coverage.” The Court added that it could find no authority under Kansas law that the removal of an exclusion gives rise to an inference of coverage. The court said that “there simply is no indication in the endorsement that, by removing the regulatory exclusion, the parties sought to provide coverage over all regulatory actions, even those for which coverage was unambiguously barred by other exclusions.”


Finally, the appellate court rejected the appellants’ arguments that the D&O insurer’s statements affirmative of coverage for regulatory claims precluded the insurer from arguing against coverage. The appellate court said that the theory of “judicial estoppel” on which the appellants relied “applies only when the position to be estopped is one of fact, not one of law.” However, the court said, the question “whether such claims are covered under the policy is a question of law, not fact.” Thus, the court held, the doctrine of judicial estoppel is inapplicable.



One of the recurring D&O insurance coverage issues that has arisen during the current wave of failed bank litigation has been the question whether coverage for an action by the FDIC in its role as receiver of a failed bank against the bank’s former directors and officers is precluded by the Insured vs. Insured exclusion in the failed bank’s D&O insurance policy. As discussed here, a number of courts have found the language of the Insured vs. Insured exclusion to be ambiguous on the issue whether it precludes coverage for an action by the FDIC in its capacity as receiver. However, other courts have held that the exclusion unambiguously precludes coverage for an action brought by the FDIC in its capacity as receiver of a failed bank against the failed bank’s former directors and officers.


The Tenth Circuit’s decision in the Columbian Bank & Trust case represents an important decision relating to these recurring issues. However, it is very important to note that the specific language in the policy at issue here was instrumental in the court’s conclusion. In particular, the exclusion’s explicit preclusion of coverage for claims brought by a receiver of the insured institution clearly was a determinative factor in the court’s decision.


Many of the decisions finding the applicability of the exclusion to claims brought by the FDIC as receiver to be ambiguous have involved exclusions that did not have this same language as the policy at issue here precluding coverage for claims brought by a receiver. For example, the Eleventh Circuit’s decision in the Community Bank & Trust case to which I linked at the outset of this post, involved a policy exclusion that did not expressly preclude coverage for claims brought by a receiver. In addition, as discussed here, the October 8, 2014 decision in the coverage litigation arising from the failure of Pacifica Coast National Bank of San Clemente, by Northern District of California Judge Andrew Guilford held that applicability of the insured vs. insured exclusion to FDIC claims as receiver of a failed bank to be ambiguous, specifically noting that the insurer, as a repeat party to these contracts, has the ability to ensure that ambiguities are eliminated over time by the inclusion of language target to the FDIC as receiver.


Though at times it has appeared that the court rules on the applicability of the Insured vs. Insured exclusion to the FDIC’s failed bank claims were all over the map, there are at least some guiding principles that can help to sort these issues out. At a minimum, it would appear given the current state of the case law that the argument that the insured vs. insured exclusion precludes coverage for the FDIC’s claims as receiver of a failed bank is strongest when the exclusion expressly refers to and precludes coverage for claims brought by a receiver, as the Tenth Circuit’s decision here shows. Indeed, now that there is a federal appellate court ruling to this effect, this principle is even likelier to hold in court’s interpretation of policy language.


However, where the exclusion at issue does not have the language precluding claims for coverage brought by a receiver, the question of whether or not the exclusion is ambiguous likely will continue to be thrashed out in the courts. In that regard, I am somewhat struck by Judge Guilford’s conclusion in the Pacifica case that the exclusion is ambiguous as “evidenced by the fact that courts considering this exclusion have reached varying conclusions,” adding that “there can be little doubt that repeated disputes over the IvI Exclusion have placed insurers on notice that it is ambiguous.” Certainly the Eleventh Circuit’s finding in the Community Bank & Trust case that the insured vs. insured exclusion at issue in that case is ambiguous is corroborative of this point.


While the Tenth Circuit was quite confident in its conclusion about the exclusion’s preclusive effect because of its reference to claims by a “receiver,” I will say that I find the outcome of this case somewhat unsatisfying, given the overall record about the policy at issue. Taken as a whole, I think the record shows that the bank thought it was buying and, even more importantly, the insurer thought it was selling, a D&O insurance policy that would provide coverage up to limits of $5 million for claims brought by the FDIC. The removal by endorsement of the regulatory exclusion, the inclusion of the $5 million limit for regulatory claims, and the insurer’s own statements, clearly evince an intent of the parties to the insurance placement transaction to provide coverage up to the $5 million sublimit for claims brought by the FDIC. The fact that the preclusion of coverage as a result of the Tenth Circuit’s ruling will result only in the FDIC recovering less than it had hoped when it entered the settlement with the parties to the underlying lawsuit – and apparently will not leave the individual directors facing ongoing claims without the benefit of insurance – makes this outcome less unpalatable. However, the conclusion that the policy does not provide coverage for claims by the FDIC does appear to be inconsistent with what the parties to the insurance transaction has in mind at the time the policy was put in place.


The court’s conclusion that the Insured vs. Insured exclusion precludes coverage for FDIC-R claims notwithstanding the removal of the Regulatory Exclusion represents an important lesson for anyone involved in D&O insurance placement. I am sure it would come as news to those that were involved in the placement of this coverage, that, as the appellate court said here, the removal of the regulatory exclusion does not provide coverage for regulatory claims. I am certain those that were involved in the process to add the endorsement removing the Regulatory Exclusion thought that was exactly what they were doing.


At a minimum, the lesson for others involved in bank D&O insurance placements now is that it is not enough in seeking to ensure coverage for regulatory claims to ensure that the policy does not include a Regulatory Exclusion. The language of the Insured vs. Insured exclusion must be considered as well. If the parties’ intent is for the policy to provide coverage for claims brought by the FDIC, then any provisions in the Insured vs. Insured exclusion precluding coverage for claims brought by a “receiver” should be removed as well. More generally, it is important in making all policy revisions to ensure that all potentially applicable policy provisions have been modified in order facilitate the intended outcome. In fairness to the parties involved in the placement of the policy at issue here, it seems pretty clear that they thought that by removing the Regulatory Exclusion here, they believed they had taken the steps necessary to provide coverage for claims brought by the FDIC.


FDIC Adopts Pay Ratio Rules: Because I was on travel at the end of this past week, I did not have an opportunity to write earlier about the SEC’s August 5, 2015 adoption of Pay Ratio Disclosure Rules. As discussed in the agency’s August 5, 2015 press release (here), the rules, which the agency was required to adopt by the Dodd-Frank Act, was  “require a public company to disclose the ratio of the compensation of its chief executive officer (CEO) to the median compensation of its employees.” The press release contains a fact sheet about the rules. The final rules 294-page adopting release can be found here.


The agency’s delays in adopting the rules had been the target of criticism from more liberal members of Congress. For example, as discussed here, Senator Elizabeth Warren has sent SEC Chair Mary Jo White a scathing letter in which the Senator criticized White for, among other things, the delays involved in the final Pay Ratio rules release. However, as discussed here, the proposed rules were from their very promulgation back in 2013, controversial. And in the end, when the final rules were finally issued this past week, they were only approved over stinging dissents from the two Republican SEC Commissioners Daniel Gallagher (whose dissenting statement can be found here) and Michael Piwowar (whose two dissenting statements can be found here and here).


There are those who think the introduction of the rules will have a positive impact on corporate governance. For example, in an August 6, 2015 New York Times article (here), Gretchen Morgenson argues that the new Pay Ratio disclosures will provide “an easily graspable and often decidedly shocking number,” that “may energize a cadre of new combatants in the executive pay fight.” Others have been more critical of the rules, particularly with respect to the costs associated with compliance and the likelihood that differing labor forces between companies will lead to widely differing reports that cannot be compared. Many are convinced that, as noted in an August 5, 2015 Law 360 article (here, subscription required) the rules are inevitably headed toward “courtroom showdown.”


There are a number of important practical things to keep in mind about the new rules, as Broc Romanek points out an August 6, 2015 post on his TheCorporateCounsel.net blog (here). The most important is that the rules are not effective until each company’s first fiscal year after January 1, 2017 .  The requirements will not apply to emerging growth companies, smaller reporting companies, foreign private issuers, filers under the U.S.-Canadian Multijurisdictional Disclosure System and registered investment companies.


An August 6, 2015 memo from the Skadden law firm (here) provides a good short summary of the rules.  The Sullivan & Cromwell law firm’s August 7, 2015 memo summarizing the rules in more detail can be found here.


PetroChina Corruption-Related Securities Suit Dismissed: In several post, most recently here, I have noted the rise in the number of U.S. securities lawsuits against non-U.S. companies facing corruption investigations in their home countries. Just days ago, I noted that the U.S. securities lawsuit involving Petrobras survived a dismissal motion (as discussed here). But given that I have been noting this litigation trend and commenting on developments in some of these cases, I felt I should note here the dismissal order recently entered in PetroChina Company Ltd. securities suit.


The Chinese oil and gas company had been sued in the Southern District of New York in 2013 in connection with allegations arising out of the corruption crackdown in China. The plaintiff shareholders alleged that the company and certain of its directors and officers had misrepresented the company’s internal controls, corporate governance, and ethics policies. The defendants moved to dismiss.


In an August 3, 2015 order (here), Southern District of New York Edgardo Ramos granted the defendants’ motion to dismiss. As Jonathan Stempel summarized in his August 3, 2015 Reuters article about the court’s ruling (here), Ramos concluded said the plaintiffs failed to show that PetroChina made false statements about its corporate governance practices or its internal controls over financial reporting. He also said there was no showing that the individual defendants knew of or recklessly disregarded alleged corruption at PetroChina at the time. While the complaint “certainly suggests” that the Chinese government suspected wrongdoing by PetroChina officials, “plaintiffs never specify when that conduct occurred or how it rendered PetroChina’s public statements false,” Ramos wrote.


At a minimum, the PetroChina dismissal suggests that it will not be enough to state a securities class action lawsuit against a non-U.S. company to assert that the revelation of a corruption investigation against the company in its home country is inconsistent with the company’s prior public statements about its controls or practices. Notwithstanding the claimants’ success thus far in the Petrobras case, it is clear that not all cases filed against non-U.S. companies caught up on corruption investigations will be successful.


Another Stock Promotion-Related Securities Suit Survives Dismissal Motion: In recent a recent post, I noted how the stock promotion-related securities suit filed against biotech firm CytRx had survived a dismissal motion. A similar lawsuit had been filed against Galena Biopharma, Inc., which company had actually spun out of CytRx in 2007. Both companies had used the services of The DreamTeam stock promotion firm. Both companies were alleged to have participated in a scheme with the stock promotion firm to try to drive up each company’s share price.


In a detailed August 5, 2015 order (here), District of Oregon Judge Michael H. Simon largely granted in part and denied in part the defendants’ motions to dismiss the plaintiff shareholder complaint. Judge Simon granted the motion to dismiss as to certain of the individual defendants and as to certain of the statement on which the plaintiffs sought to rely, but otherwise denied the motions.


The ruling has a number of interesting features, including in particular Judge Simon’s ruling that the plaintiffs’ scheme liability allegations against The Dream Team individual defendants were sufficient to survive a dismissal motion. With respect to sponsored articles that the Dream Team circulated (without disclosing the firm’s or the authors’ relationship with Galena), Judge Simon found that the U.S. Supreme Court’s ruling in Janus was no barrier to allegations against the company and its defendant directors and officers, notwithstanding the argument that the company defendants allegedly did not “make” these statements, given the plaintiffs’ scheme liability allegations.


Special thanks to a loyal reader for sending me a copy of the Judge Simon’s decision.


Today’s Coolest Video: Five hundred years of women in Western art. Watch and Enjoy. (Sorry about the commercial at the beginning. At least it is short.)