In this preview of an article from Issue XXIV, Volume 5 of the PLUS Journal (May 2011), authors John D. Hughes and Gregory D Pendleton look at the FDIC’s approach to dealing with failed banks and how the institutions’ D&O Policies are viewed.

For more on this topic, make sure to check out “Financial Institutions Underwriting: Is It Safe to Come Out Now?” as part of the 2012 PLUS D&O Symposium, February 8 & 9 in New York City. Registration is now open.

FDIC Renews Pursuit of Claims Against Directors and Officers of Failed Banks

Since September 2008, 333 banks have failed and been placed into the receivership of the Federal Deposit Insurance Corporation (FDIC). [1] The largest of these banks – indeed the largest bank failure in U.S. history – was the century-old Washington Mutual (WaMu). When WaMu’s doors were shuttered on September 25, 2008, it controlled assets of approximately $307 billion and deposits totaling $188 billion. The FDIC arranged for most of WaMu’s assets and deposits to be sold to JPMorgan Chase for $190 billion. The following day, Washington Mutual, Inc. (WMI), the surviving holding company, filed for Chapter 11 bankruptcy in Delaware, listing approximately $33 billion in remaining assets.

The demise of WaMu had an immediate impact on its shareholders, bondholders, and unsecured creditors. For the past two years, these parties, along with WMI, JPMorgan, and the FDIC have been battling over WaMu’s remaining assets. In 2009, WMI sued the FDIC in the United States District Court for the District of Columbia, seeking approximately $13 billion in damages for what it alleges was an unjustified seizure of WaMu and an unreasonably low sale price to JPMorgan. See Washington Mutual, Inc. v. FDIC, No. 09-cv-00533 (D. DC). [2]

Turning Back the Clock

The FDIC is responding in kind. As recently reported in the Wall Street Journal, [3] the FDIC is targeting a specific asset WaMu left behind: its D&O insurance program. The FDIC reportedly sent letters to WaMu’s former directors and officers threatening to bring suits against them in connection with their alleged contributions to WaMu’s downfall. It made good on that threat last month, filing claims for negligence, breach of fiduciary duty, and fraudulent conveyance in the Western District of Washington (No. 11-cv-00459). [4] Similar suits have also been instituted against former directors and officers of four of the 333 banks that have failed since the financial crisis began.

In taking this action, the FDIC is revisiting a litigation strategy it employed with modest success in the wake of the 1980s savings and loan crisis. At that time, the FDIC, acting as a receiver, filed claims against the former directors and officers of numerous failed savings and loan institutions. A key and frequent issue in these cases – one that is likely to be at the forefront of the cases the FDIC is presently pursuing – was whether or not the institutions’ respective D&O policies excluded coverage for the FDIC’s claims under so-called “insured versus insured” and/or “regulatory” exclusions.

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