Fed. Deposit Ins. Corp. v. Arrillaga-Torrens

• Decision Date: 26 August 2016
• Docket Number: CIVIL NO. 13–1328 (PAD)
• Citation: 212 F.Supp.3d 312
• Parties: FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff, v. Rafael ARRILLAGA–TORRENS, Jr., et al. Defendants.
• Court: U.S. District Court — District of Puerto Rico

212 F.Supp.3d 312

FEDERAL DEPOSIT INSURANCE CORPORATION, Plaintiff,

v.Rafael ARRILLAGA–TORRENS, Jr., et al. Defendants.

CIVIL NO. 13–1328 (PAD)

United States District Court, D. Puerto Rico.

Signed August 26, 2016

Clint R. Latham, Robert R. Bell, Steven L. Hoard, Mullin Hoard & Brown LLP, Amarillo, TX, Hector J. Orejuela–Davila, Tessie Leal–Garabis, Jairo A. Mellado–Villarreal, Mellado & Mellado Villareal, San Juan, PR, Linette Vega–Ortiz, Aon Risk Solutions of Puerto Rico, Inc., San Juan, PR, Steven C. Morrison, Fdic Professional Liability & Financial Crimes, Jacksonville, FL, for Plaintiff.

Antonio Moreda–Toledo, Moreda & Moreda, San Juan, PR, Charles E. Whorton, Maria Paula Aguila, PHV Alan H. Rolnick, PHV Carlos Rodriguez, PHV Jorge A. Mestre, PHV Kadian Blanson, PHV Utibe Ikpe, Rivero Mestre LLP, Miami, FL, Irma R. Valldejuli–Perez, San Juan, PR, PHV Andres Rivero, Rivero Mestre, Coral Gables, FL, Ana Maria Barton–De Cardenas, Astigarraga Davis Mullins & Grossman, PA, Miami, FL, Adrian Sanchez–Pagan, Sanchez Pagan LLC, San Juan, PR, Jaime Sifre–Rodriguez, Luis Sanchez–Betances, Rosa L. Irizarry–Millan, Sanchez–Betances, Sifre & Munoz–Noya Law Offices, PSC, San Juan, PR, Damaris Ortiz–Gonzalez, Sifre & Munoz

Noya, San Juan, PR, Eric Perez–Ochoa, Mariel Y. Haack–Pizarro, Adsuar Muniz Goyco Seda & Perez Ochoa PSC, San Juan, PR, Jack A. Wilson, Jessica Lovejoy, Marc V. Ayala, Robin A. Henry, Boies, Schiller & Flexner LLP, Armonk, NY, Alejandro H. Mercado–Martinez, San Juan, PR, David Andrew Shedd, Michael Robert Goodstein, Bailey Cavalieri LLC, Columbus, OH, Francisco E. Colon–Ramirez, Colon & Colon PSC, San Juan, PR, Leslie S. Ahari, PHV John R. Gerstein, Stacey E. Rufe, Clyde & Co., Washington, DC, Harold D. Vicente–Colon, Vicente & Cuebas, San Juan, PR, for Defendants.

OPINION AND ORDER

Delgado–Hernández, District Judge.

The Federal Deposit and Insurance Corporation("FDIC") as receiver of Eurobank, initiated this action against Eurobank's former Directors, related spouses and conjugal partnerships to recover approximately $55 Million in losses that it attributes to the Directors' gross negligence in approving twelve "obviously risky and deficiently underwritten" unpaid loans, "which they knew or should have known were extremely unlikely to be paid back"(DocketNo. 1 at ¶ 81).As part of the same action, it sued Liberty Mutual Insurance Company, ACE Insurance Company, and XL Insurance Company, maintaining the insurers issued policies providing for coverage for the claims asserted against the Directors.Id.at ¶¶ 14, 15, 16.

Defendants answered the complaint denying liability (DocketNos. 29, 31, 45, 48, and 200).Liberty cross claimed against the Directors, and counterclaimed against the FDIC (Docket No. 29at pp. 22–49).Discovery followed (DocketNo. 104).In the meantime, the parties filed various motions seeking judgment on the pleadings or summary judgment, all of which have been opposed, and with respect to most of which the parties have replied and surreplied.The motions address (1) different aspects of FDIC's gross negligence claim and corresponding affirmative defenses (Category I); and (2) insurance coverage (Category II).Motions to strike were filed under both categories.All relevant issues have been exhaustively briefed.The motions under Category I awaiting disposition are:

1.The FDIC's "Motion of the Federal Deposit Insurance Corporation to Strike Certain Defenses Raised by the Director Defendants"(DocketNo. 54), which the Directors except Arrillaga opposed (DocketNo. 67).The FDIC replied (DocketNo. 69), and the Directors surreplied (Docket No. 77–1).Later, Arrillaga opposed the FDIC–R's motion (DocketNo. 78), and the FDIC replied (DocketNo. 80).

2.The FDIC's "Motion for Partial Summary Judgment"(DocketNo. 364), which Rafael Arrillaga opposed (DocketNo. 419).The FDIC replied (DocketNo. 455), and Arrillaga surreplied (DocketNo. 485).

3.Rafael Arrillaga's "Motion for Summary Judgment relating to the Statute of Limitations and Causation"(DocketNo. 378), which the FDIC opposed (DocketNo. 413).Arrillaga replied (DocketNo. 438), and the FDIC surreplied (DocketNo. 478).

4.Arrillaga's "Motion for Partial Summary Judgment as to the Jocar Loan"(DocketNo. 367), which the FDIC opposed (DocketNo. 397).Arrillaga replied (DocketNo. 441), and the FDIC surreplied (DocketNo. 486).

5.Arrillaga's "Motion for Partial Summary Judgment based on the FDIC's Admissions and Representations as to the Acor, Marat, and City Walk Loans"(DocketNo. 369), which the FDIC opposed (DocketNo. 406).Arrillaga replied (DocketNo. 443).The FDIC surreplied (DocketNo. 477).

6.The FDIC's "Motion to Preclude Rafael Arrillaga–Torréns from using Certain Affidavits obtained in Lieu of Depositions"(DocketNo. 354), which Arrillaga opposed (DocketNo. 360), the FDIC replied (DocketNo. 383) and Arrillaga submitted a surreply (DocketNo. 387).

In the same way, the following motions correspond to Category II:

1."Liberty Mutual Insurance Company's Motion for Judgment on the Pleadings"(DocketNo. 73), which the FDIC–R and the Directors opposed (DocketNos. 88 and 92, respectively).Arrillaga joined both responses (DocketNo. 95).Liberty Mutual replied (DocketNo. 102), and the FDIC and the Directors surreplied (DocketNos. 117 and 119, respectively).

2.The FDIC's "Motion for Partial Summary Judgment against Liberty Mutual Insurance Company and ACE Insurance Company"(DocketNo. 358).ACE and Liberty opposed (DocketNo. 427).

3."XL Specialty Insurance Company's Motion for Partial Summary Judgment"(DocketNo. 365), which the FDIC opposed (DocketNo. 399).XL replied (DocketNo. 447), and the FDIC surreplied (DocketNo. 476).

4.In addition, the FDIC filed "Federal Deposit Insurance Corporation as Receiver for Eurobank's Opposition to Liberty Mutual Insurance Company and ACE Insurance Company's Motion for Summary Judgment"(DocketNo. 404), and the Directors a "Director Defendants' Response in Opposition to Liberty–ACE's Joint Motion for Summary Judgment(DocketNo. 410).In response, Liberty and ACE filed "Liberty Mutual Insurance Company and ACE Insurance Company's Joint Reply to FDIC–R's and the Director Defendants' Responses in Opposition to the Insurers' Motion for Summary Judgment(DocketNo. 457), to which the FDIC surreplied (DocketNo. 482).

5."Liberty Mutual Insurance Company and ACE Insurance Company's Joint Motion to Strike"[the FDIC–R's Sur-reply at DocketNo. 482](DocketNo. 487), which the FDIC opposed (DocketNo. 490).

Careful evaluation of these motions leads the court to conclude that the action cannot be dismissed at this stage on timeliness grounds; some of the affirmative defenses are not amenable to resolution through summary judgment; there are grounds to conclude that Liberty's and ACE's policies are ambiguous; and that XL's policy should be considered an excess policy.The sworn statements under penalty of perjury procured—but not disclosed—will not be excluded, but must be produced for an in camera inspection.To facilitate review, the materials have been organized under the following topics:

I. BACKGROUND...327

II.STANDARD OF REVIEW ...329

III. DISCUSSION...329

A. Timeliness...337

B. Loans...337

1.Acor/MaratLoans...337

a. AcorLoan...337b. MaratLoan...337

c. Contentions...338

2.JocarLoan...340

C. FDIC's Role....343

a. Comparative Negligence/Mitigation ...345

b. Tortfeasors...346

c. Genesis/Functions...346

d. O'Melveny...347

e. FTCA...349

f. Setoff...349

g. DividingLine...351

D. GreatRecession...353

E.Articles of Incorporation...355

F. Insurers...356

1. Background...356

2.LegalStandard...357

3. Analysis...357

a. Insured v. InsuredExclusion...357

b. Professional ServicesExclusion...362

c. Disposition...364

d. ExcessCoverage...364

G. Third–Party Affidavits/Depositions...367

IV. CONCLUSION...370

I.BACKGROUND

Eurobank was established in 1980 as an uninsured trust company named Española de Finanzas Trust Company(DocketNo. 1 at ¶ 20).It became an FDIC-insured state nonmember bank in 1987, assuming its current name in 1993.Id.In 2001, it became a wholly-owned subsidiary of EuroBancshares, Inc., a one-bank holding company.Id.

According to the FDIC, in the early to mid–2000s, Eurobank began aggressively growing its commercial real estate ("CRE") portfolio, including acquisition, development, and construction ("ADC") loans, despite recognition that these loans carried a higher risk for the bank.From June 30, 2005 to June 30, 2009, the ADC portfolio grew by 240%, over six times the growth rate of its peer group for the same period.Id.at ¶ 21.

The growth of the CRE and ADC portfolios was largely responsible for the bank's assets growing from $1.3 Million as of December 31, 2003, to $2.9 Billion by December 31, 2008.Id.Yet from 2004 to 2007, the bank's income had plummeted 80%, with charge-offs increasing 250%.Id.at ¶ 28.From 2005 to 2008, various reports mentioned weaknesses in internal loan review, risk management, and lax underwriting and credit administration.In 2009, Eurobank's Directors consented to entry of a Cease and Desist Order, requiring the bank to cease and desist from certain unsafe and unsound banking practices, such as:

• operating with lax underwriting, poor credit administration practices, and ineffective loan review practices;

• operating with an excessive level of adversely classified loans and/or delinquent loans;

• operating with inadequate capital and reserves in relation to the kind and quality of assets held by the bank;

• operating with inadequate internal controls.Id.at ¶ 32.

On April 30, 2010, the Office of the Commissioner of Financial Institutions of Puerto Rico closed Eurobank and appointed the FDIC as Receiver.Id.at ¶ 1.For the FDIC, Eurobank's desire for rapid growth caused the bank to abandon sound underwriting, resulting in numerous collateral-dependent loans with no alternative source of repayment to borrowers who had no equity in the projects and no demonstrated...