Georgia Court Says FIRREA Imposes Jurisdictional Bar To D&O Insurer's Failed Bank Coverage Action

Georgia Court Says FIRREA Imposes Jurisdictional Bar To D&O Insurer's Failed Bank Coverage Action

By: Michael Wolak

In a recent decision that could dramatically change the face of failed bank insurance coverage litigation, Judge Story of the Northern District of Georgia reaffirmed his earlier holding that a failed bank’s D&O insurer’s declaratory judgment action against the FDIC (as receiver for the failed bank) and against the bank’s former officers and directors was barred by the anti-injunction provision of the Financial Institutions Reform, Recovery and Enforcement Act (FIRREA).  See OneBeacon Midwest Ins. Co. v. F.D.I.C., 2013 WL 1337193 (N.D. Ga. Mar. 28, 2013), Reconsideration Denied, 2014 WL 869286 (N.D. Ga. Mar. 05, 2014).  After the Georgia-based bank failed, the FDIC claimed that several of the bank’s former officers and directors were liable for damages for their purported breaches of fiduciary duties to the bank.  The bank’s D&O insurer sought a declaratory judgment that the policy did not cover the FDIC’s claims.  The FDIC moved to dismiss the insurer’s lawsuit, arguing that Section 1821(j) of FIRREA presented a jurisdictional bar to the bank’s action.  Section 1821(j) states that “no court may take any action, except at the request of the Board of Directors by regulation or order, to restrain or affect the exercise of powers or functions of the [FDIC as receiver].”

Judge Story agreed with the FDIC and granted its motion, reasoning that the FDIC has a “future interest in the D&O coverage” and that issuing a judicial declaration on the insurer’s claims “would affect the FDIC’s ability to collect money due [the failed bank].”  Judge Story further held that the insurer’s declaratory judgment action against the bank’s former officers and directors was also barred because the action would “affect the FDIC’s interests in the policy if and when the FDIC attempts to assert its rights to the policy.”  On March 5, 2014, Judge Story denied the D&O insurer’s motion for reconsideration and refused to grant the insurer leave to amend the complaint to drop the FDIC as a party and proceed solely against the officers and directors.

The opinion will likely be appealed to the Eleventh Circuit Court of Appeals.  Critics view the decision as a “one-off” and argue that it is based on a tortured construction of Section 1821(j).  If, however, the decision is affirmed on appeal and/or other federal courts adopt Judge Story’s reasoning, we could see a significant shift in failed bank coverage litigation as insurers pursue their claims through the administrative process.  Judge Story emphasized that D&O insurers can still pursue their declaratory judgment claims through FIRREA’s administrative channels despite Section 1821(j)’s jurisdictional bar, and seek de novo review in a federal district court if its claims are not adequately addressed.  One could certainly argue that the ability to seek district court review of an agency’s decision regarding a claim that the district court otherwise had no original jurisdiction to hear is somewhat illogical.  Moreover, the insurer may be required to cover the former officers’ and directors’ defense costs in the FDIC litigation during the pendency of the administrative claim.

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