W Holding Co. v. Aig Ins. Company—puerto Rico

• Decision Date: 31 March 2014
• Docket Number: No. 12–2008.,12–2008.
• Citation: 748 F.3d 377
• Parties: W HOLDING COMPANY, INC.; Frank Stipes–García; Juan C. Frontera–García; Héctor Del Río–Torres; William M. Vidal–Carvajal; César Ruiz; Pedro R. Domínguez–Zayas, Plaintiffs, Appellees, Luís Bartolomé Rivera Cuebas, as Trustee of the Socio Cultural Conservation Trust, Plaintiff, v. AIG Insurance Company—Puerto Rico, Defendant, Appellant. Marlene Cruz–Caballero; Conjugal Partnership Frontera–Cruz; Lilliam Díaz–Cabassa; Conjugal Partnership Río–Díaz; Gladys Barletta–Segarra; Conjugal Partnership Vidal–Barletta; Hannalore Schmidt–Michels; Conjugal Partnership Ruiz–Schmidt; Sonia Sotomayor–Vicenty; Conjugal Partnership Domínguez–Sotomayor; José M. Biaggi–Landrón; Jane Doe; Conjugal Partnership Biaggi–Doe; Miguel A. Vázquez–Seijo; Sharon McDowell–Nixon; Cindy M. Costas Santiago; Conjugal Partnership Vázquez–McDowell, Defendants, Appellees. Ricardo Cortina–Cruz; Conjugal Partnership Cortina–Aldebol; Elizabeth Aldebol De Cortina; Julia Fuentes Del Collado; Mario A. Ramírez–Matos; Cornelius Tamboer; Olga Morales–Pérez; Conjugal Partnership Tamboer–Morales; Jane Doe, as Trustee for the Domínquez Sotomayor Family Trust; John Doe, as Trustee for the Domínguez Sotomayor Family Trust; Carlos González Alonso; XL Specialty Insurance Company; Liberty Mutual Insurance Company; ACE Insurance Company, Defendants.
• Court: U.S. Court of Appeals — First Circuit

748 F.3d 377

W HOLDING COMPANY, INC.; Frank Stipes–García; Juan C. Frontera–García; Héctor Del Río–Torres; William M. Vidal–Carvajal; César Ruiz; Pedro R. Domínguez–Zayas, Plaintiffs, Appellees,Luís Bartolomé Rivera Cuebas, as Trustee of the Socio Cultural Conservation Trust, Plaintiff,

v. AIG Insurance Company—Puerto Rico, Defendant, Appellant.Marlene Cruz–Caballero; Conjugal Partnership Frontera–Cruz; Lilliam Díaz–Cabassa; Conjugal Partnership Río–Díaz; Gladys Barletta–Segarra; Conjugal Partnership Vidal–Barletta; Hannalore Schmidt–Michels; Conjugal Partnership Ruiz–Schmidt; Sonia Sotomayor–Vicenty; Conjugal Partnership Domínguez–Sotomayor; José M. Biaggi–Landrón; Jane Doe; Conjugal Partnership Biaggi–Doe; Miguel A. Vázquez–Seijo; Sharon McDowell–Nixon; Cindy M. Costas Santiago; Conjugal Partnership Vázquez–McDowell, Defendants, Appellees.Ricardo Cortina–Cruz; Conjugal Partnership Cortina–Aldebol; Elizabeth Aldebol De Cortina; Julia Fuentes Del Collado; Mario A. Ramírez–Matos; Cornelius Tamboer; Olga Morales–Pérez; Conjugal Partnership Tamboer–Morales; Jane Doe, as Trustee for the Domínquez Sotomayor Family Trust; John Doe, as Trustee for the Domínguez Sotomayor Family Trust; Carlos González Alonso; XL Specialty Insurance Company; Liberty Mutual Insurance Company; ACE Insurance Company, Defendants.

No. 12–2008.

United States Court of Appeals, First Circuit.

March 31, 2014.

Melissa A. Murphy–Petros, with whom James K. Thurston and Wilson Elser Moskowitz Edelman & Dicker LLP, and Luis N. Saldaña, Fernando Sabater–Clavell, and Carvajal & Vélez–Rivé, P.S.C. were on brief, for appellant.

Andrés Rivero, with whom Alan H. Rolnick, Charles E. Whorton, M. Paula Aguila, and Rivero Mestre LLP were on brief, for appellees.

Colleen J. Boles, Assistant General Counsel, Lawrence H. Richmond, Senior Counsel, and Jaclyn C. Taner, Federal Deposit Insurance Corporation, and John A. Gibbons, Andrew M. Reidy, Catherine J. Serafin, and Dickstein Shapiro LLP, on brief for amicus curiae Federal Deposit Insurance Corporation in support of appellees.

Before THOMPSON, BALDOCK,^* and LIPEZ, Circuit Judges.

THOMPSON, Circuit Judge.

PREFACE

In today's case (more procedurally complicated than substantively complex), a district judge issued an order requiring Chartis Insurance Company to advance defense costs to former directors and officers of Westernbank of Puerto Rico, who find themselves in the cross-hairs of the Federal Deposit Insurance Corporation (“FDIC,” for easy reading).¹ Chartis appeals.And after confirming our jurisdiction, we affirm.

HOW THE CASE GOT HERE

Westernbank's run as one of Puerto Rico's leading banks came to an end in the late 2000s when local regulators ordered it closed and appointed a federal regulator—the FDIC—receiver. Jumping in with gusto, the FDIC investigated what had gone on there. And it did not like what it found. Certain bank directors and officers had breached their “fiduciary duty” by jeopardizing the bank's financial soundness, the FDIC claimed in a letter sent to (among others) the directors and officers and their insurer, Chartis. Concluding that these breaches had caused more than $367 million in losses to the bank, the FDIC demanded that the directors and officers pay that amount.

Without missing a beat, the directors and officers notified Chartis of the FDIC's multimillion-dollar claim. And, naturally, they asked Chartis to confirm coverage under a directors' and officers' liability-insurance policy issued by Chartis to Westernbank's owner, W Holding Company, Inc. Known in the insurance world as a “D & O” policy, this particular policy declares (in capital letters) that Chartis “must advance defense costs, excess of the applicable retention, pursuant to the terms herein prior to the final disposition of a claim.” The policy's advancement provision (emphasis ours) repeats further on that Chartis “shall advance, excess of any applicable retention amount, covered Defense Costs.” “Defense Costs” include “reasonable and necessary fees, costs and expenses consented to by the Insurer.” The policy says, too, that Chartis shall pay for certain “Loss[es] of an Organization arising from a Claim made against an Insured Person for any Wrongful Act of such Insured Person.” “Loss[es]” include defense costs. “Organization” includes the “Named Entity,” which is W Holding, plus its “Subsidiar[ies],” which include Westernbank. And “Insured Person[s]” include directors and officers.

Chartis denied coverage five months later, relying (most pertinently) on the policy's “insured versus insured” exclusion. A standard proviso in D & O policies, this exclusion says that Chartis

shall not be liable to make any payment for Loss in connection with any Claim made against an Insured ... which is brought by, on behalf of or in the right of, an Organization or any Insured Person other than an Employee of an Organization, in any respect and whether or not collusive.

“Claim,” the policy adds, includes “a written demand” for money. “Insured” means “Insured Person” or “Organization.” And, again, the directors and officers come within the policy's definition of “Insured Person[s],” while W Holding and Westernbank fall within the policy's definition of “Organization.” Also, the policy neither mentions the FDIC nor bars coverage for suits by FDIC-type regulators like some policies do.²

Convinced that the FDIC, “[a]s receiver,” had stepped squarely into Westernbank's“shoes,” Chartis also wrote that any claims that the FDIC had “against the directors and officers of Westernbank are ‘on behalf of’ or ‘in the right of’ Westernbank.” That triggered the insured-versus-insured exclusion, the FDIC added, which meant no coverage. The directors and officers were not willing to take this lying down, however. Together with W Holding, they sued Chartis in Puerto Rico superior court, seeking a declaratory judgment of coverage and saying that “coverage includes all costs and expenses ... incurred” in defending against the FDIC. They also alleged that the FDIC had asserted a claim against them on behalf of third-party creditors and depositors. Eventually, the FDIC got involved in this suit, filing a complaint in intervention. That complaint accused the directors and officers of violating their fiduciary duties to Westernbank, causing over $176 million in damages to the bank. The complaint also stressed that the FDIC had “succeeded to all of the rights and assets of Westernbank, including its rights and claims against its former officers and directors, and its rights, interests and claims in and to the policies against Chartis under” Puerto Rico's direct-action statute. See26 L.P.R.A. § 2003 (declaring that “[a]ny individual sustaining damages and losses” may sue an insurance company directly without joining the named insured, provided the suit is pursued in Puerto Rico).

The FDIC then promptly removed the entire case to federal court. See12 U.S.C. § 1819(b)(2)(B). It amended its complaint to bring more directors and officers (as well as their spouses and conjugal partners) into the case and to add cross claims against them, too. This pleading sounded a familiar theme: that the FDIC had sued in its capacity as Westernbank's receiver and that the directors and officers had breached their fiduciary duties, resulting in the bank's loss of over $176 million. But the FDIC also estimated there that the bank's closing could result in the federal deposit-insurance fund's losing over $4 billion.

Chartis fired back with a motion to dismiss all claims brought against it by the directors and officers and by the FDIC. SeeFed.R.Civ.P. 12(b)(6). What matters for our purposes is that Chartis asserted again that because the FDIC was pursuing the directors and officers “on behalf of or in the right of” Westernbank, there is no coverage under the insured-versus-insured exclusion and so their coverage claim should be jettisoned. The directors and officers opposed the dismissal motion, arguing (at the risk of oversimplification) that a clear “majority of courts” refuse to stretch the insured-versus-insured exclusion “to include the FDIC.”

Believing that there is at least a “remote possibility” of coverage, the directors and officers also moved the judge to order Chartis to advance their defense costs.³ “This is not a preliminary injunction motion,” they wrote in support of their motion. But they were quick to note that (a) they would be irreparably harmed if their motion failed, because many of them are “elderly,” “unemployed,” “retired,” and “living on fixed incomes,” and so cannot shoulder the defense costs; that (b) Chartis's duty to advance defense costs to them is plain as day; and that (c) the public's interest in making sure that insurers keep their commitments and that insureds get what they paid for cannot be questioned. Undaunted, Chartis opposed the cost—advancement motion, insisting that the insured-versus-insuredexclusion controls and bars coverage. And no coverage, the argument continued, means no obligation to advance defense costs—because costs tied to an excluded claim are not “covered Defense Costs.”

The FDIC chimed in, moving without opposition for leave to file a second amended complaint in intervention, seeFed.R.Civ.P. 15(a)—a motion the judge granted. As best we can tell, the big difference between the first and second amended complaints is the latter's saying that the FDIC, as receiver,

succeeded to all rights, claims, titles, powers, privileges, and assets of Westernbank and its stockholders, members, account holders, depositors, officers, or directors of Westernbank with respect to the institution and the assets of the institution, including the right to bring this action against the former officers and directors of Westernbank.

As support for its claim, the FDIC cited 12 U.S.C. § 1821(d)(2)(A)(i). That provision—one of many in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA,” for now on) ⁴—says...