IT’S 2021, HOW MUCH RESTITUTION DID THE FDIC RECEIVE?
There was a judgment of $168m but LIT questions if any of the judgment was collected at all. Remember, Michael Perry settled for a solitary million dollars when his annual bonuses were in the $30 million plus range alone…and not a single minute spent in jail.
DEC 10, 2012 | REPUBLISHED BY LIT: MAY 12, 2021
FDIC WINS $168M IN INDYMAC FAILURE
DEC 10, 2012 | REPUBLISHED BY LIT: MAY 12, 2021
In the first case filed against bank executives who sold toxic loans in the recent financial collapse, a Los Angeles jury took just five hours to return the entire $168M sought by the government. D&O Diary has written extensively on the case, including the verdict.
The Met News quoted Patrick Richard of Nossaman, lead counsel for the FDIC, as saying that the fundamental issue was
“what kind of bankers do we want in this country?”
“The defendants tried to blame bank regulators and the economy, but the jury got it right.”
FDIC general counsel Richard Osterman said in a statement that the agency was pleased with the verdict.
“While most of our cases have settled short of trial, we remain committed to pursuing actions where necessary to maximize recoveries and hold those responsible for losses to failed financial institutions accountable,” he said.
The government accused four IndyMac execs of negligently approving 23 loans to developers and homebuilders that were never repaid.
The verdict was delivered against three former executives of IndyMac’s Homebuilder Division, including Scott Van Dellen (president and CEO); Richard Koon (chief credit officer); and Kenneth Shellem (chief lending officer).
Another exec, William Rothman, was sued and settled for $4.75M in October.
The government further claimed the execs profited from the loans, earning bonuses based on their loan generation.
Lawyers for the bankers said financial executives can’t get fair trials in the current climate.
“Today’s verdict is the result of a deliberate effort by the government to scapegoat a few men for the impact that the unforeseen and unprecedented housing collapse in 2007 had at IndyMac and at many, many other financial institutions. Mr. Shellem and Mr. Koon used the utmost care in making loan decisions, and there is no doubt that all of the loans at issue would have been repaid except for the housing crash,” said Kirby Behre of Paul Hastings. “By unfairly using hindsight to call into question these lending decisions, the government sought to pin the blame on these men for results not of their making. Unfortunately, in the current climate, it is difficult for anyone involved in the banking industry to be treated fairly.”
The defendants were also represented by Damian Martinez of Corbin Athey.
Federal Judge Dale Fischer presided over the 16-day trial.
IndyMac was seized in July 2008 and cost taxpayers an estimated $128B.
The case is FDIC v. Van Dellen CV-10-4915-DSF.
FDIC Wins $168.8 Million Jury Verdict Against Former IndyMac Officers
DEC 10, 2012 | REPUBLISHED BY LIT: MAY 12, 2021
On December 7, 2012, in a comprehensive victory for the FDIC in its capacity as receiver of the failed IndyMac bank, a jury in the Central District of California entered a verdict of $168.8 million in the FDIC’s lawsuit against three former officers of the bank.
As reflected in the verdict form (a copy of which can be found here), the jury found that the defendants had been negligent and had breached their fiduciary duties with respect to each of the 23 loans at issue in this phase of the FDIC’s case against the three individuals
At the time its July 11, 2008 closure, IndyMac had assets of about $32 billion, making its failure the fifth largest bank failure in U.S. history.
But though there have been a few larger bank failures, none have been costlier to the FDIC’s deposit fund.
IndyMac’s collapse has cost the fund nearly $13 billion.
In June 2010, the FDIC filed against a lawsuit several former officers of the bank’s homebuilder division, in what was the first D&O lawsuit the agency filed during the current bank failure wave, as discussed here.
The FDIC’s lawsuit sought to recover damages from the individual defendants for “negligence and breach of fiduciary duties” and alleged “significant departures from safe and sound banking practices.”
As discussed here, in July 2011, the FDIC filed a separate lawsuit against IndyMac’s former CEO, Michael Perry.
As discussed here, trial in the FDIC’s case against the former homebuilder division officers began on November 6, 2012.
The three individual defendants in the case that went to trial are:
Scott “Wayne” Van Dellen, the former President and CEO of IndyMac’s Homebuilders Division (HBD), who was alleged to have approved all of the loans that are the subject of the FDIC’s suit;
Richard Koon, who was HBD’s Chief Lending Officer until mid-2006 and who was alleged to have approved a number of the loans at issue;
Kenneth “Ken” Shellem, who served as HBD’s Chief Compliance Officer until late 2006, and who is also alleged to have approved many of the loans.
(The FDIC’s original complaint had named a fourth individual, William Rothman, as a defendant as well. According to pleadings filed in the case, Rothman settled with the FDIC in exchange for Rothman’s assignment to the FDIC of Rothman’s rights against IndyMac’s D&O insurers.)
According to news reports, the jury reached its verdict after 16 days of trial.
During the trial, the defendants attempted to argue that they and the bank were victims of an unanticipated downturn in the housing market.
The FDIC in turn argued that the bank officials disregarded danger signals about the housing market and continued to approve loans in order to meet production goals and obtain bonus compensation.
The jury verdict form reflects separate verdicts as to each of the 23 loans that were at issue in this phase of the trial of the case.
With respect to each of the loans, the jury separately found that the specific defendants who were named as to each of the loans had been negligent and had breached their fiduciary duties.
The jury assigned separate damages as to each of the loans as well.
The separate damage awards total $168.8 million.
However, each of the three defendants was held liable for differing amounts. All three of the defendants were named only with respect to 14 of the 23 loans. With respect to five of the 23 loans, only Van Dellen and Shellem were named, and as to four of the loans, Van Dellen alone was named. Thus the jury found Van Dellen liable as to all 23 of the loans, but found Shellem liable only as to 18 of the loams and found Koon liable only as to 14 of the loans.
The just completed trial apparently represents only the first trial phase of this matter. There apparently will be a separate trial phase that will address the FDIC’s allegations as to scores of other loans as well as allegations with respect to the bank’s loan portfolio as a whole. The FDIC apparently is seeking total damages of more than $350 million.
In addition, the FDIC’s separate case against Perry, the bank’s former CEO, will continue to go forward as well.
Given the magnitude of the jury’s verdict, there undoubtedly will be post-trial motions and, after the conclusion of all remaining trial phases, appeals as well.
One issue that likely will be subject of an appeal will be Central District of California Judge Dale Fischer’s October 2012 determination under California law that the three defendants, as former officers (but not former directors), could not rely on the business judgment rule and therefore could be held liable for mere negligence.
(The potential appeal value of this issue for the defendants may be diminished somewhat due to the fact that the jury specifically found that the defendants had not only been negligent, but had also violated their fiduciary duty, suggesting that the defendants would still have been found liable even if they couldn’t be held liable for negligence).
While the jury verdict unquestionably represents a victory for the FDIC, the FDIC may face considerable challenges attempting to collect on the verdict.
There may be little or no remaining D&O insurance out of which the FDIC might try to recover.
As discussed at length here, in July 2012, Central District of California Judge Gary Klausner held in a related D&O insurance coverage case that all of the various lawsuits related to Indy Mac’s collapse (including the case that in which the jury verdict was just entered) were interrelated to the first-filed lawsuit, and thus triggered only the D&O insurance that was in force when the first suit was filed.
Because all of the later-filed lawsuits related back to the first lawsuit, the later lawsuits – including the lawsuit in which the jury verdict was entered — did not trigger a second $80 million insurance program that was in force when the later suits were filed.
(The FDIC has filed an appeal of Judge Klausner’s ruling.)
In other words, unless Judge Klausner’s insurance coverage ruling is reversed on appeal, the only insurance available out of which the FDIC might be able to try to realize the amount of the jury verdict is whatever is left under the first tower of insurance.
However, as I noted in a prior post, in pleadings that they filed in July 2012, the defendants represented to the court that defense fees incurred in all of the various IndyMac-related lawsuits, as well as settlements that had been reached in some of the suits, had exhausted or would soon exhaust the first tower of insurance.
Pleadings that the three individuals filed in the case state that “the FDIC specifically structured this lawsuit in order to reach the Tower 2 Policy.” Judge Klausner’s ruling in the insurance coverage case obviously upset the FDIC’s strategy in this case.
The outcome of the appeal in the insurance coverage case may well determine whether or not the massive verdict the FDIC just won results in any significant monetary benefits for the agency.
This case was not only the first case the FDIC filed against the former directors and officers of a failed bank as part of the current bank failure wave, but it is also the first case to go to trial.
Since the FDIC filed this suit back in July 2010, the agency has filed forty more cases against the directors and officers of failed banks. There undoubtedly will be more lawsuits yet to come. Many of the individual defendants named in these cases vigorously dispute the FDIC’s allegations.
However, the jury verdict in the IndyMac case may communicate a sobering message about what it might mean to force a case all the way to trial. Given this verdict, it may now be even more unlikely that one of these cases would go to trial.
Scott Recard’s December 8, 2012 Los Angeles Times article about the jury verdict can be found here.
D&O Insurer, FDIC Settle Claims Against Former BankUnited Officials: The FDIC’s efforts to try to recover under failed banks’ D&O insurance do not always involve a lawsuit.
Sometimes the FDIC asserts its claims in a demand letter that it presents to the former directors and officers of a failed bank, with a copy of the letter also send to the failed bank’s D&O insurers.
Sometimes these kinds of letter demands result in a settlement without a lawsuit ever being filed.
That apparently is what has happened in connection with the FDIC’s claims against former directors and officers of BankUnited, a Coral Gables, Florida bank that failed in May 2009, at least according to a December 6, 2012 article in the South Florida Business Journal.
As reflected here, on November 5, 2009, the FDIC, in its capacity as BankUnited’s receiver, sent a letter to fifteen former directors and officers of the bank, in which the FDIC presented its “demand for civil damages arising out of losses suffered as a result of wrongful acts and omissions committed by the named Directors and Officers.”
The letter, a copy of which can be found here, explains that the demand for civil damages is “based on the breach of duty, failure to supervise, negligence, and/or gross negligence of the named Directors and Officers.”
Though the letter is nominally addressed to the fifteen individuals, copies of the letters also were sent directly to the bank’s primary and first level excess D&O insurers.
In addition to the FDIC’s claims against former directors and officers of the failed bank, shareholders of the failed bank’s holding company (which is now bankrupt) filed a lawsuit against certain former bank directors and officers.
The bankruptcy trustee asserted claims against the individuals as well.
According to the newspaper article, these various parties have reached a settlement agreement, subject to bankruptcy court approval, to divide the bank’s $10 million primary D&O insurance policy four ways:
$3.5 million to the class action plaintiff;
$2.5 million to the FDIC;
$1.65 to the bankruptcy trustee;
and the balance going to pay legal defense fees and other costs.
The settlement agreement also allows the FDIC to attempt to pursue a recovery from the carrier that issued the bank’s $10 million first level excess D&O insurance carrier, which has refused to pay under its policy.
This settlement is interesting because it reflects the tensions that can arise when multiple claims have been asserted against the former directors and officers of a failed bank.
When there are multiple claims and only limited insurance, the various claimants are put in competition with each other, as they each race to try to capture as much of the insurance as they can while at the same time accumulating defense fees erodes what little insurance there may be.
The division here of the $10 million primary D&O policy reflects an effort between and among the various claimants to try to work out a split of the insurance so that each of the various sets of claimants at least gets a part of the policy proceeds.
The challenge for other claimants trying to work out similar deals in other cases is to try and get a deal done before defense fees exhaust the insurance fund.
Directors and officers (D&O) liability insurance
Directors and officers (D&O) liability insurance protects the personal assets of corporate directors and officers, and their spouses, in the event they are personally sued by employees, vendors, competitors, investors, customers, or other parties, for actual or alleged wrongful acts in managing a company.
The insurance, which usually protects the company as well, covers legal fees, settlements, and other costs. D&O insurance is the financial backing for a standard indemnification provision, which holds officers harmless for losses due to their role in the company.
Many officers and directors will want a company to provide both indemnification and D&O insurance.
Directors and officers are sued for a variety of reasons related to their company roles, including:
Breach of fiduciary duty resulting in financial losses or bankruptcy
Misrepresentation of company assets
Misuse of company funds
Failure to comply with workplace laws
Theft of intellectual property and poaching of competitor’s customers
Lack of corporate governance
Illegal acts or illegal profits are generally not covered under D&O insurance.
Does Your Business Need D&O Coverage?
It’s a common misconception that D&O claims are mostly a public company phenomenon. In fact, a recent Towers Watson survey showed that public, private, and non-profit companies all face D&O litigation risks.
Any business with a corporate board or advisory committee should consider investing in D&O insurance, including non-profit organizations. Your company does not have to post revenues in the tens of millions of dollars for your directors and officers to be personally sued over their management of company affairs. In fact, smaller businesses with fewer assets may need the protection just as much as large, deep-pocketed corporations.
Thomas D. Long
F 213.612.7801777 South Figueroa Street, 34th Floor
Los Angeles, CA 90017
Tom Long is a trial lawyer with more than 30 years of experience in complex civil litigation. He has litigated numerous cases to judgment in bench and jury trials in both federal and state court, as well as in arbitrations. His experience includes handling disputes under a number of different types of insurance policies, partnership disputes and other business disputes. Mr. Long also serves as Nossaman’s risk management partner.
Mr. Long often represents public agencies and is particularly sensitive to their needs. He has served in various volunteer capacities for his home city of Rancho Palos Verdes for nearly 16 years and served as its Mayor in 2007 and 2011.
Mr. Long was named to the Daily Journal’s list of “Top 100 Lawyers in California” in 2013. He is also AV Preeminent® Peer Review Rated by Martindale-Hubbell and was recognized as a Southern California “Super Lawyer” for Business Litigation from 2010-2015.
Federal Deposit Insurance Corp. v. Van Dellen (United States District Court, Central District of California 2012) Led the FDIC’s professional liability investigation of the failure of IndyMac Bank and one of two resulting claims that progressed to suit, the first lawsuit filed by the FDIC in connection with the 2008 U.S. bank failures. The 18 month investigation examined dozens of large land acquisition, development and construction loans and was followed by 2 1/2 years of hotly contested litigation in federal court. Pre-trial rulings eliminated all of the defendants’ affirmative defenses including the business judgment rule, mitigation of damages, regulatory conduct and the economy as an intervening cause of loan losses. Part of a three lawyer trial team that took the case though a month long jury trial before Judge Fischer. The trial brought the FDIC a unanimous jury verdict on December 7, 2012 of all of its claimed damages of nearly $169 million after less than five hours of jury deliberations. The National Law Journal ranked the verdict as number 13 in its annual national “Top Verdicts” list. The verdict was also recognized by the Daily Journal in 2012 as having the most significant impact of any plaintiff’s verdict in California and for being the second largest dollar verdict in the state.
Los Angeles County Metropolitan Transportation Authority v. Parsons-Dillingham et al. (Los Angeles County Superior Court Ongoing.) Mr. Long served as lead counsel in a complicated cost accounting bench trial involving the construction management contract for the Metro Red Line project. MTA sought recovery of defendents’ overbillings for overhead expense and for improperly documented costs. Phase 1 resulted in a ruling dismissing the contractor’s cross-complaint and a subsequent ruling in plaintiff’s favor on liability under the complaint. The court entered judgment for the MTA on breach of contract claims on February 13, 2014 for $93.2 million. The Daily Journal recognized the verdict as one of the top 10 verdicts by dollar amount in California for 2014.
TAMCO v. South Coast Air Quality Management District. Nossaman represented TAMCO and its purchaser Gerdau in proceedings in 2014 before the SCAQMD’s independent hearing board. Gerdau had discovered TAMCO’s failure to report the majority of its Sulfur Oxide (SOx) emissions for decades shortly after purchasing TAMCO. Gerdau promptly reported TAMCO’s emissions under-reporting and was ordered by SCAQMD to amend its emissions reports. Gerdau applied for a new starting allocation for SOx emissions under the SCAQMD’s RECLAIM cap and trade program based on the amended emissions reports. SCQAMD staff denied the application and Gerdau appealed to the independent hearing board. After 7 days of both evidentiary and legal hearings before the board in which a 4-1 majority initially rejected SCAQMD staff’s motion to dismiss Gerdau’s claim, the hearing board ultimately ruled in favor of SCAQMD on a 3-2 vote with a written dissent. A favorable settlement for Gerdau was reached before any appeal was taken to Superior Court. The dispute was the first actively litigated dispute involving a starting emissions allocation under SCAQMD’s RECLAIM cap and trade program and is the only one so far.
Sonora HOA vs. Regency Skyport, et al., (Santa Clara County Superior Court 2012) Served as lead counsel defending the developer and general contractor in a major construction defect matter with related insurance coverage litigation. The dispute involved homeowner association’s claims of multiple defects in a 315-unit condominium building. The accompanying insurance coverage disputes involved potential coverage under a $25 million “wrap” policy issued for the project, and additional insured coverage under policies issued to subcontractors. Nossaman attorneys negotiated favorable confidential settlements of the main action and most of the insurance disputes. The total settlement was less than half of plaintiff’s original damage claims and over two-thirds of the settlement and defense costs were recovered from other parties and insurers.
SSR Marlowe LLC vs. Taisei et al. (Los Angeles Superior Court 2011) Represented public agency plaintiff in construction defect litigation relating to a 121 unit luxury apartment building. Massive defects in the building required complete reconstruction of the building envelope. Negotiated a settlement of $19.8 million which recovered the vast majority of plaintiff’s out-of-pocket repair costs.
Castaic Lake Water Agency et al. v. Whittaker Corp. et al. (United States District Court, Central District of California 2010)
Assisted several water producer agencies in obtaining a favorable settlement of their contamination claims providing remediation valued at over $100,000,000 as well as obtaining insurance coverage to defend counterclaims in environmental litigation resulting in the reimbursement of over $6 million in attorneys’ fees.
San Gabriel Basin Watermaster v. AISLIC (Orange County Superior Court 2007)
Represented policyholder in obtaining defense cost reimbursements and an adjudication of coverage under an environmental liability insurance policy. Established that the policy’s description of covered operations as “groundwater monitoring” included the Watermaster’s actions in directing pumping in the basin which other parties claimed exacerbated contaminant plumes.
Los Angeles City Employees’ Retirement System (“LACERS”) v. Connecticut General (USDC Central District, California 2006)
Represented the Los Angeles City Employees’ Retirement System in a dispute with its former health insurer regarding the proper treatment of reserves for incurred but not reported (IBNR) claims at policy termination and whether or not there was a reconciliation agreement for such reserves. Successfully resisted the insurer’s motion for summary judgment even after the court issued a tentative ruling in the insurer’s favor. Obtained settlement that recovered a significant portion of IBNR reserves withheld by the insurer.
Casmalia Resources v. Industrial Indemnity et al.(Los Angeles County Superior Court 2003)
Represented Casmalia Resources, the prior owner of California’s second largest Class I toxic waste disposal site near Santa Maria, California, in an insurance coverage suit. Obtained summary adjudication establishing the insurance carriers’ duty to defend despite pollution exclusions. The court’s decision was one of only two decisions favorable to policyholders before the Supreme Court’s decision in Montrose. (See 7 Mealey’s Lit. Reports – Insurance at 3 (May 25, 1993) and at 9 (July 1, 1993))
Chemstar v. Liberty Mutual Ins., 797 F. Supp. 1541 (C.D. Cal. 1992), aff’d 41 F.3d 429 (9th Cir. 1994)
Represented an insured in a multi-party coverage action relating to construction defects that included issues under a retrospective premium plan. Obtained a favorable settlement recovering improperly charged premiums for the client.
Contemporary Services Corp. v. National Union Ins. Co., et al. (United States District Court, Central District of California 1994)
Represented the plaintiff policyholder, a security business specializing in crowd control at major sports events and entertainment venues, in obtaining a defense for unfair competition and defamation claims through a settlement and a fee arbitration under Civil Code Section 2860.
J.D., Stanford Law School, 1982, Member, Stanford Law Review
A.B., Stanford University, 1979, History, Phi Beta Kappa, with university distinction and departmental honors
United States Supreme Court
All federal courts in the State of California
The United States Ninth Circuit Court of Appeals
American Bar Association, Litigation Section
Los Angeles County Bar Association
Association of Professional Responsibility Lawyers
Association of Business Trial Lawyers
Rancho Palos Verdes City Council, Member 2003-2011, Mayor 2007 and 2011
City of Rancho Palos Verdes View Restoration Commission, 1996-2000; Chairman 1998-2000; Planning Commission 2000-2003; Vice Chairman 2002; Chairman 2003
Awards & Honors
Named to The National Law Journal’s list of “Top 50 Litigation Trailblazers & Pioneers” in 2014
Recipient of 2014 California Lawyer Attorney of the Year (“Clay”) Award
Named to the Daily Journal’s list of “Top 100 Lawyers in California” in 2013
AV Preeminent® Peer Review Rated by Martindale-Hubbell
Named a Southern California “Super Lawyer” for Business Litigation in 2010-2015 by Los Angeles magazine