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Zucker v. U.S. Specialty Insurance Co.

United States Court of Appeals, Eleventh Circuit

May 16, 2017

CLIFFORD A. ZUCKER, not individually, but as Plan Administrator for BankUnited Financial Corporation, and as assignee of Humberto L. Lopez and Ramiro A. Ortiz, Plaintiff-Appellant,

         Appeal from the United States District Court for the Southern District of Florida D.C. Docket No. 1:14-cv-20893-UU.

          Before ED CARNES, Chief Judge, FAY and PARKER, [*] Circuit Judges.

          ED CARNES, Chief Judge:

         For want of good corporate officers, BankUnited Financial Corporation engaged in risky lending practices before November 2008. For want of good lending practices, BankUnited became insolvent. For want of solvency, BankUnited's transfers of money to its subsidiary were fraudulent.

         Wanting their money back, BankUnited's creditors sued its officers for authorizing those transfers. Wanting protection from the resulting liability, the officers asked their insurer - U.S. Specialty - to indemnify them. Not wanting to do that, U.S. Specialty refused based in part on a policy exclusion that barred coverage for claims "arising out of" conduct that occurred before November 2008. The question is whether the fraudulent transfers "arose out of" the officers' pre-November 2008 misconduct.


         BankUnited (the Parent Bank) was a holding company headquartered in Florida. Its wholly-owned subsidiary, BankUnited FSB (the Subsidiary Bank), was a federally-chartered savings bank. By November 2008 both of them were in serious financial trouble.[1]

         A. The Banks' Fiscal Difficulties

         The Treasury Department's Office of Thrift Supervision (OTS) began investigating the Subsidiary Bank in January 2008. By August, news reports were circulating that the Subsidiary Bank had engaged in risky lending practices during the housing boom that preceded the 2008 recession. The Parent Bank reported in a regulatory filing that, unless the Subsidiary Bank raised $400 million, OTS would downgrade its capitalization rating. The Parent Bank also announced that it was contributing $80 million in fresh capital to the Subsidiary Bank. This left the Parent Bank itself with only $40 million dollars to service $125 million in debt, not a good situation for any financial institution to be in.

         In September 2008 the Parent Bank's investors filed a class action against several corporate officers of the Parent Bank and the Subsidiary Bank, alleging that those officers had violated federal securities laws by knowingly or recklessly making "false and misleading statements about [the Parent Bank]." The investor plaintiffs based their allegations on, among other things, the Parent Bank's regulatory filings from 2006, which touted its "conservative underwriting standards that include evaluation of a borrower's debt service ability" and internal underwriting process. They also pointed to a 2007 filing by the Parent Bank that boldly asserted: "We expect that our historically conservative credit standards and relatively low loan to values will keep our loss experience well below industry averages." Even more boldly, the Parent Bank issued an April 2007 press release that included this statement by the company's CEO, Alfred Camner: "[O]ur levels came in better than we projected last quarter. This is because of our conservative underwriting. We do not engage in subprime lending and, as a portfolio lender, we treat each loan as if it is our own." And so on.

         As it turned out (we are beyond mere allegations now), the Subsidiary Bank did engage in risky lending practices. Around the same time that the Parent Bank was being sued by its shareholders, the banks entered into agreements with OTS stipulating in September 2008 that they had "engaged in unsafe and unsound practices that . . . resulted in [the Subsidiary Bank] being in an unsatisfactory condition." This was "primarily due to the rising delinquencies and defaults in its payment option [Adjustable Rate Mortgage] loan portfolio."

         B. The Parent Bank's Search for a New Insurer

         By September 2008 St. Paul Mercury Insurance Company (Travelers) had declined to renew the Parent Bank's directors and officers (D&O) insurance policy, which is not surprising given the banks' fiscal difficulties. The Parent Bank began searching for a new insurer.

         It found one in U.S. Specialty.[2] At the time, U.S. Specialty was aware that "[b]ad loans were affecting [the banks'] financial performance, " and that they were in a "distressed financial condition." It was also aware that OTS was threatening to downgrade the Subsidiary Bank's capitalization rating unless the Parent Bank raised $400 million. All of which made issuing a D&O policy covering the Parent Bank's officers a risky proposition.

         Margaret Kingsley, an underwriter and U.S. Specialty's designee under Rule 30(b)(6) of the Federal Rules of Civil Procedure, testified at her deposition that around the time the policy was issued, she thought it was unlikely that the Parent Bank would survive. She noted in the underwriting file that U.S. Specialty might be able to make an "opportunistic play" if it agreed to provide D&O coverage to the Parent Bank. Kingsley later testified that note in the file meant that insuring the Parent Bank was "an opportunity for [U.S. Specialty] to write a very restrictive policy and get some premium for it." In considering whether to issue a D&O policy to the Parent Bank, U.S. Specialty also considered that regulators would be watching the banks closely, which would "keep[ ] them honest."

         U.S. Specialty offered the Parent Bank a choice between two policies: one with a Prior Acts Exclusion (barring coverage for losses attributable to conduct of the officers before November 10, 2008) and one without that exclusion. The policy with the exclusion would cost $350, 000; the policy without it would cost $650, 000. The policy without the Prior Acts Exclusion would provide coverage only after the Parent Bank's other insurance policies had been exhausted.

         The Parent Bank decided to purchase the policy with the Prior Acts Exclusion, but asked U.S. Specialty to increase the coverage limit from $10 million to $20 million. The purchased policy included in addition to the Prior Acts Exclusion a Prior Notice Exclusion, which excluded coverage as to any losses reported to any insurers under earlier insurance policies. With those two exclusions, the one-year policy cost the Parent Bank $700, 000. And, at U.S. Specialty's request, the Parent Bank purchased an extension of the discovery period on the pre-existing Traveler's policy, increasing the amount of time it had to report claims to Traveler's. The first day of coverage under the U.S. Specialty policy was November 10, 2008.

         C. The Transfer of Two Tax Refunds to the Subsidiary Bank

         While the Parent Bank and the Subsidiary Bank were struggling to come to terms with the 2008 financial crisis, the Parent Bank's officers approved two transfers of money to the Subsidiary Bank that are the subject of this lawsuit. In January 2009 the Parent Bank received a tax refund check from the U.S. Treasury for approximately $20 million. It transferred all of that refund to the Subsidiary Bank. In March 2009 an officer of the Parent Bank directed that a second tax refund check from the Treasury for approximately $26 million that was supposed to be issued to the Parent Bank be wired directly to the Subsidiary Bank. Those $46 million in transfers occurred after November 10, 2008 (the inception date for the U.S. Specialty policy).

         D. The Bankruptcy Litigation

         The Parent Bank's and the Subsidiary Bank's financial conditions did not improve. And in May 2009 OTS closed the Subsidiary Bank and appointed the FDIC as its receiver. One day later, the Parent Bank filed for bankruptcy under Chapter 11 of the Bankruptcy Code. And a few days after that, an official committee of unsecured creditors (the Committee) was appointed in the bankruptcy action and began investigating whether claims might exist against, among others, the Parent Bank's corporate officers - the idea being that those claims could be pursued for the benefit of the bankruptcy estate.

         The Committee filed a derivative standing motion, seeking "an order granting the Committee standing to investigate, assert and prosecute any and all claims that [the Parent Bank might have] against [its] current and former officers and directors . . . ." [3] The motion asserted that:

Based on [the Parent Bank's] financial collapse, the issues raised in the [September 2008] Securities Litigation, and information obtained by its professionals, the Committee believes that Claims on behalf of [the Parent Bank's bankruptcy estate] may exist against certain of [its] current and former officers and directors . . . including without limitation Claims arising from breaches of duties owed by [those insiders] to [the ...

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