Certain Underwriters at Lloyd's of London, et al. v. Federal Deposit Insurance Corporation, et al.

[DO NOT PUBLISH]
IN THE UNITED STATES COURT OF APPEALS
FOR THE ELEVENTH CIRCUIT
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No. 16-16702
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D.C. Docket No. 1:12-cv-01740-TCB
CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON,
Plaintiff-Counter Defendant-
Appellant,
FEDERAL DEPOSIT INSURANCE CORPORATION, et al.,
Consol. Plaintiffs,
versus
FEDERAL DEPOSIT INSURANCE CORPORATION,
as receiver for Omni National Bank,
Defendant-Consol. Defendant-
Appellee,
STEPHEN M. KLEIN,
Defendant-Consol. Defendant-
Consol. Counter Claimant-
Counter Claimant-Appellee,
EUGENE F. LAWSON, III, et al.,
Defendants-Counter Claimants,
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CONSTANCE E. PERRINE,
BENJAMIN J. COHEN,
Defendants-Consol. Defendants-
Appellees,
GREGORY W. PATTEN, et al.,
Defendants,
ALWEN HOUGH JOHNSON LIMITED, et al.,
Consol. Defendants,
PROGRESSIVE CASUALTY INSURANCE COMPANY,
Consol. Counter Defendant.
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Appeal from the United States District Court
for the Northern District of Georgia
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(January 23, 2018)
Before ED CARNES, Chief Judge, DUBINA, Circuit Judge, and ABRAMS,*
District Judge.
PER CURIAM:
Plaintiff-Appellant Certain Underwriters at Lloyd’s of London
(“Underwriters”) appeals the district court’s order denying its motion for summary
* Honorable Leslie Joyce Abrams, United States District Judge for the Middle District of
Georgia, sitting by designation.
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judgment and granting Defendant-Appellant Federal Deposit Insurance
Corporation’s (“FDIC”) cross-motion for summary judgment. In the district court,
Underwriters sought a declaratory judgment that it does not owe the $10 million
policy limit on the directors and officers insurance policy it issued to Omni
National Bank (“Bank”) on the basis that two exclusions preclude coverage: the
retroactive and the insured versus insured exclusions. The district court concluded
that neither exclusion applied and required Underwriters to provide the policy
coverage.
Underwriters sold the subject policy to the Bank in June 2008 for a one year
policy period. From 2005 through 2007, the Bank’s Community Development
Lending Division (“CDLD”) engaged in unsound lending practices, which
triggered internal and external regulatory investigations. In the 2007–2008
housing climate, the Bank foreclosed on many of the properties that served as
collateral for the risky loans. These properties, held in the Bank’s portfolio, were
known as Other Real Estate Owned (“OREO”) properties. After discovering these
abuses, the Bank closed in CDLD in December 2007. A short time later, certain
board members (the “OREO Defendants”)1 instituted a plan to renovate and hold
1 These board members were distinct from the CDLD board members who engaged in the
unsound lending practices.
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the OREO properties rather than to sell them “as-is” at the time of foreclosure.
The Bank’s regulators approved this plan in 2008, when the Bank had a CAMELS2
rating of 2, which signified the Bank was “fundamentally sound.” On September
15, 2008, the regulators issued a report and changed the Bank’s CAMELS rating to
5, indicating the Bank was failing or would fail imminently. The OREO
Defendants, however, continued to invest approximately $12.6 million into OREO
properties from that date through the Bank’s closure in March 2009. The FDIC
brought this action to recover from the policy for the CDLD and OREO Wrongful
Acts. This appeal focuses on the OREO Wrongful Acts and the two policy
exclusions: the retroactive exclusion for prior or “interrelated wrongful acts” and
the insured versus insured exclusion.
After hearing oral argument in this case, reading the parties’ briefs, and
examining the relevant portions of the record, we affirm the district court’s grant of
summary judgment for the FDIC based on the thorough and well-reasoned opinion
of the district court. We write briefly to address Underwriters’ misplaced reliance
2 CAMELS, a rating system to assess the soundness of a bank or financial institution,
uses a scale of one through five, with one being the highest and five being the lowest rating.
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on this Court’s recent decision in Zucker v. U.S. Specialty Insurance Company,
856 F.3d 1343 (11th Cir. 2017).3
In Zucker, this Court examined an insurance policy’s exclusion for “prior
acts” under the auspices of Florida law.4 See id. at 1349–51. The parent company
of a wholly-owned subsidiary bank admittedly engaged in risky lending practices
preceding the 2008 housing market crash that rendered it insolvent. Id. at 1345.
Shortly thereafter, the parent obtained a new directors and officers policy with U.S.
Specialty Insurance Company with a prior acts exclusion: U.S. Specialty would
“not be liable to make any payment of Loss in connection with a Claim arising out
of, based upon or attributable to any Wrongful Act committed or allegedly
committed, in whole or in part, prior to [November 10, 2008].” Id. at 1349
(emphasis and alteration in original). In 2009, during the U.S. Specialty policy
period, the parent transferred approximately $46 million to the subsidiary bank to
stabilize it. Id. at 1346. Despite this influx of money, regulators closed the
subsidiary bank in May 2009 and appointed the FDIC as the receiver. Id.
Immediately thereafter, the parent filed for bankruptcy under Chapter 11. Id.
3 We note the district court did not have the benefit of having the Zucker decision before
it issued its well-reasoned opinion.
4 Notably, the parties jointly agree that New York law controls in this case.
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Creditors sued the parent’s board, alleging the $46 million transfer was fraudulent,
and the board sought but was denied coverage under the insurance policy’s prior
acts exclusion. Id. at 1347.
This Court held the prior acts exclusion applied to the fraudulent transfer
claim because “the Parent Bank’s insolvency ‘arose out of’ wrongful acts that
occurred before November 10, 2008” and “share[s] ‘a connection with’ wrongful
acts covered by the” exclusion. Id. at 1350. The Court continued, “an essential
element of [plaintiff’s] claim—the Parent Bank’s insolvency—has a connection to
some prior wrongful acts of the Parent Bank’s officers and directors that occurred
before the policy’s effective date.” Id. at 1350–51. This holding, Underwriters
argues, necessitates the same outcome in this case on the basis that the OREO
Wrongful Acts necessarily arose from the CDLD Wrongful Acts and are
inextricably connected and thus “interrelated wrongful acts.”
This case, however, does not involve the “arising out of” language that was
at issue in Zucker’s retroactive exclusion. Furthermore, in its briefs to this Court,
Underwriters did not argue that the “arising out of” language in the policy here
excluded the FDIC’s claims. It raised that contention for the first time at oral
argument, and as a result, it is abandoned. Mesa Air Grp., Inc. v. Delta Air Lines,
Inc., 573 F.3d 1124, 1130 n.7 (11th Cir. 2009); see also Access Now, Inc. v. Sw.
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Airlines Co., 385 F.3d 1324, 1330 (11th Cir. 2004) (“[A] legal claim or argument
that has not been briefed before the court is deemed abandoned and its merits will
not be addressed.”).5 Even if we were to address that argument, Zucker still would
not apply.
The wrongful acts at issue in Zucker—the fraudulent transfer from the parent
company to the subsidiary bank—were wrongful because the parent company was
insolvent at the time they occurred. The parent company’s insolvency was the
result of wrongful acts that occurred before the policy period. Thus what
ultimately made those transfers wrongful were wrongful acts that occurred before
the policy’s effective date. Such was not the case here.
We conclude that the FDIC’s underlying claims for coverage demand the
opposite conclusion. Unlike the fraudulent transfer claim in Zucker, the claim for
coverage for the OREO Wrongful Acts is not inextricably linked to the Bank’s
unsound lending practices in the CDLD. Rather, the wrongful acts claimed are for
the particular expenditures to rehabilitate OREO properties that occurred after—
and only after—the Bank received the downgrade to the CAMELS 5 rating in
September 2008. The Board authorized these expenditures between September 15,
5 If anything , it appears that in its initial brief Underwriters expressly rejected any
argument based on the “arising out of” language. Appellant’s Br. at 13 (stating that “the district
court mistakenly believed that Underwriters asserted that the first prong of the Retroactive
Exclusion [the “arising out of” language] . . . applied to the OREO Wrongful Acts.”).
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2008, and March 2009, clearly within the policy period. The decision to continue
these expenditures, even when not necessary, occurred after the board knew of the
Bank’s impending failure and thereby constituted an independent business decision
from the initial lending practices in the CDLD division. Before the CAMELS 5
rating the OREO Defendants’ investment in the OREO properties was not a
wrongful act. And Underwriters never claims nor proves that the CAMELS 5
rating “arose out of” the wrongful acts of the CDLD division.
Thus, the continuing investments into the OREO properties were not
“interrelated wrongful acts” under the policy but rather were independent wrongful
acts that occurred during the policy period. As such, Underwriters must afford the
coverage due under the Bank’s policy. Accordingly, we conclude Zucker is
inapposite to the claims herein, and we affirm the district court’s order granting
summary judgment to the FDIC.
AFFIRMED.
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