Page 1 Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite As: 2012 WL

Page 1

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico))

(Docket No. 182, ¶ 1.) The FDIC alleges Western- Only the Westlaw citation is currently available. bank's directors and officers (“D & O's”) irresponsibly governed Westernbank's loan approvals, thereby vi- United States District Court, olating several Puerto Rico and federal laws. D. Puerto Rico. W HOLDING CO., INC., et al, Plaintiffs, The D & O's purchased liability insurance from v. Chartis Insurance Company of Puerto Rico (“Char- CHARTIS INSUR. CO.-PUERTO RICO, et al, De- tis”). When the FDIC took over as receiver, the D & fendants. O's sought coverage under their Chartis policy, and Chartis denied the D & Os' requests. W Holding and Civil No. 11–2271 (GAG). the D & O's brought suit to enforce the agreement. Oct. 23, 2012. (See Docket No. 26–1.) The FDIC intervened, levying various claims against several D & O's, their conjugal partnerships, and trustees for negligence, breach of Carlos A. Lazaro–Castro, San Juan, PR, PHV Andres fiduciary duties, fraudulent conveyances, and adverse Rivero, Maria Paula Aguila, Rivero Mestre, Coral domination, as well as against Chartis and other in- Gables, FL, Alan H. Rolnick, Andres Rivero, Charles surers who provided excess policies to the D & O's for E. Whorton, Rivero Mestre LLP, Miami, FL, for enforcement of such policies. Plaintiffs.

I. Background Raul Gonzalez–Toro, San Juan, PR, for Plain- The FDIC intervened in a suit brought in the tiffs/Defendants. Puerto Rico Commonwealth Court by W Holding and the D & O's against Chartis for declarations of cov- Fernando Sabater–Clavell, Luis N. Saldana–Roman, erage under liability policies, pursuant to the Puerto Saldana, Carvajal & Velez–Rive, PSC., Anjali C. Das, Rico Direct Action Statute. (Id., ¶¶ 10, 28.) The FDIC, James K. Thurston, Wilson Elser Moskowitz Edelman as Westernbank's receiver, seeks recovery of $176.02 & Dicker LLP., Chicago, IL, PHV Andres Rivero, million in damages from former Westernbank D & O's Rivero Mestre, Coral Gables, FL, Ruben T. Nigag- and their conjugal partnerships FN1 for twenty-one lioni, Nigaglioni Law Offices PSC, Roberto Bu- allegedly grossly negligent commercial real estate, so–Aboy, Buso Aboy Law Office, Enrique Per- construction, and asset-based loans and transactions al–Soler, Enrique Peral Law Offices, P.S.C., Gary H. approved and administered from January 28, 2004, Montilla–Brogan, San Juan, PR, Jane W. Moscowitz, through November 19, 2009. (Docket No. 182, ¶¶ Norman A. Moscowitz, Moscowitz & Moscowitz, 2–3.) The FDIC also requests the court to enforce P.A., Miami, FL, Robert R. Long, Alston & Bird LLP, contracts for liability coverage between the D & O's Atlanta, GA, Antonio J. Amadeo–Murga, A.J. Ama- and Chartis, as well as excess liability policies with deo Murga Law Office, San Juan, PR, for Defendants. XL Speciality Insurance Company (“XL”), Liberty Mutual Insurance Company (“Liberty”), and Ace OPINION AND ORDER Insurance Company (“Ace”). (Id., ¶¶ 53–55.) Lastly, GUSTAVO A. GELPI, District Judge. the FDIC names Luis Bartoleme RiveraCuebas, Car- *1 This case stands in a long line of claims los Gonzalez–Alonso, and Jane Doe in their capacities brought by the Federal Deposit Insurance Corporation as trustees of the Socio Cultural Conservation Trust, (“FDIC”) against directors and officers of banks the Dominguez Sotomayor Family Trust, and the CT throughout the United States. To date, the FDIC has Family Trust, respectively, for administering funds filed thirty-three such suits in its capacity as a receiv- procured through allegedly fraudulent transfers. (Id., er. In sum, the FDIC became Westernbank's receiver ¶¶ 55(A)–55(C).) on April 30, 2010. W Holding Company (“W Hold- ing”) owned all outstanding shares of Westernbank's FN1. The D & O's comprise Frank C. corporate stock when the FDIC assumed receivership. Stipes–Garcia, Juan Carlos Frontera–Garcia,

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico))

Hector L. Del Rio–Torres, William M. Vid- auditor warnings of deficiencies in commercial lend- al–Carvajal, Cesar A. Ruiz–Rodriguez, and ing and administration.” (Id. at 8; see also ¶ 58 (ex- Pedro R. Dominguez–Zayas. The complaint ceeding ratio limits); ¶ 59 (loan approval despite in- lays out their respective roles within Wes- ternal admonishment of “severe deficiencies”); ¶¶ ternbank during the timeframe of the alleged 60–63 (detailing alleged disregard of regulator warn- grossly negligent behavior. Certain D & O's ings); ¶ 64 (D & O acknowledgment of malfeasance); served on Westernbank's Senior Lending ¶¶ 69–76 (levying specific allegations against the D & Committee (“SLC”) and Senior Credit O's), and; ¶ 84 (summarizing alleged gross negli- Committee (“SCC”). The FDIC asserts gence).) claims against the following former D & O's, as well: Jose Biaggi–Landron, Ricardo Cor- The FDIC discusses in detail several loans that tina–Cruz, Miguel A. Vazquez–Seijo, Julia allegedly led to the $176.02 million in losses issued to Fuentes del Collado, Mario A. Rami- Museum Towers, LP (“Museum Towers”), Yasscar rez–Matos, and Cornelius Tamboer. The Development Corporation (“Yasscar Development”), conjugal partnerships joined also include Yasscar Caguas Development Corporation (“Yasscar Marlene Cruz–Caballero, Lilliam Di- Caguas”), Sabana Del Palmar, Inc. (“Sabana”), Plaza az–Cabassa, Gladys Barletta–Segarra, Han- CCD Development Corporation (“Plaza CCD”), Inyx, nalore Schmidt–Michels, Sonia Soto- Inc. (“Inyx”), and Intercoffee, Inc. (“Intercoffee”). mayor–Vicenty, the partner of Jose Biag- The complaint details why and how the loan approvals gi–Landron (referred to as Jane Doe in the violated various internal policies, which D & O ap- complaint), Elizabeth Aldebol de Cortina, proved the loan and at what stage the D & O granted Sharon McDowell–Nixon, and Olga Mo- approval or administered the financing, and the ac- rales–Perez. (See id. ¶¶ 22–52.) countable percentage of the aggregate $176.02 million loss. (Id., ¶¶ 77–80.) The FDIC's complaint alleges several acts of purported gross negligence, such as Westernbank's The FDIC asserts seven claims in its complaint: violations of loan-to-value ratio limits, lack of re- (1) gross negligence; (2) breach of fiduciary duty quired borrower equity, inadequate real estate ap- against Tamboer; (3) adverse domination; (4)-(6) praisals, insufficient analyses of collateral or inade- fraudulent transfers against Stipes, Tamboer, and quate collateral, and insufficient borrower repayment Dominguez, and; (7) direct action claims against the information and repayment sources. (Id., ¶ 5.) The insurance carriers. (Docket No. 182, ¶¶ 83–100.) FDIC also asserts that the D & O's increased, ex- Presently before the court are seven motions to dis- tended, and renewed expired and deteriorating loans to miss the FDIC's complaint filed by the D & O's and enable continued funding of interest reserves, thereby their conjugal partnerships. (Docket Nos. 196, 198, delaying losses and defaults and increasing the losses 199, 200, 202, 205, & 291.) For the reasons stated on the loans. (Id.) herein, after reviewing the parties' memoranda of law, submissions, and attachments thereto, the court DE- *2 The FDIC claims Westernbank's officers vi- NIES all motions to dismiss. olated major loan terms by “administering and funding the construction and asset-based loans.” Specifi- II. Motion to Dismiss Standard cally, the FDIC states that the officers “continued “The general rules of pleading require a short and funding asset-based loans despite receipt of reports plain statement of the claim showing that the pleader showing dilution,” violated “borrower covenants and is entitled to relief.” Gargano v. Liberty Intern. Un- loan agreements,” approved ineligible collateral, en- derwriters, Inc., 572 F.3d 45, 48 (1 st Cir.2009) (cita- gaged in unilateral and unauthorized waiver of key tions omitted) (internal quotation marks omitted). borrower financial covenants relating to working “This short and plain statement need only ‘give the capital, disregarded net adjusted equity value and cash defendant fair notice of what the ... claim is and the flow ratios, manipulated loan monitoring systems, grounds upon which it rests.’ “ Id. (quoting Bell Atl. funded loans despite borrower defaults, and extended Corp. v. Twombly, 550 U.S. 544, 555 (2007)). expired loans. (Id. at 6.) The FDIC also alleges that the directors “failed to heed and act upon examiner and *3 Under Rule 12(b)(6), a defendant may move to

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico)) dismiss an action against him for failure to state a sponsible and competent director or officer claim upon which relief can be granted. See would execute in applying his/her business FED.R.CIV.P. 12(b)(6). To survive a Rule 12(b)(6) judgment in good faith or his/her best motion, a complaint must contain sufficient factual judgment in the case of nonprofit corpora- matter “to state a claim to relief that is plausible on its tions. Only gross negligence in the exer- face.” Twombly, 550 U.S. at 570. The court must cise of the duties and obligations men- decide whether the complaint alleges enough facts to tioned above shall result in personal lia- “raise a right to relief above the speculative level.” Id. bility (emphasis added). at 555. In so doing, the court accepts as true all well-pleaded facts and draws all reasonable inferences The statute does not distinguish between in the plaintiff's favor. Parker v. Hurley, 514 F.3d 87, directors and officers in imposing a gross 90 (1st Cir.2008). However, “the tenet that a court negligence threshold for liability. There- must accept as true all of the allegations contained in a fore, the court assesses directors and of- complaint is inapplicable to legal conclusions.” Ash- ficers equally. croft v. Iqbal, 556 U.S. 662, 678 (2009). “Threadbare recitals of the elements of a cause of action, supported A. The FDIC's Complaint Sufficiently Alleges by mere conclusory statements, do not suffice.” Id. at Gross Negligence 678–79 (quoting Twombly, 550 U.S. at 555). “[W]here The Financial Institutions Reform, Recovery, and the well-pleaded facts do not permit the court to infer Enforcement Act (“FIRREA”) imposes personal lia- more than the mere possibility of misconduct, the bility on directors or officers of insured depository complaint has alleged-but it has not ‘show[n]’—‘that institutions for gross negligence. Section 1821(k) of the pleader is entitled to relief.’ “ Iqbal, 556 U.S. at FIRREA provides that the definition of gross negli- 679 (quoting FED.R.CIV.P. 8(a)(2)). gence should be grounded in state law. Puerto Rico models its corporate statutes after Delaware corporate III. Discussion law. See Wylie v. Stipes, 797 F.Supp.2d 183, 196 (D.P.R.2012) (citing Marquis Theatre Corp. v. Con- 1. Counts 1–3: Gross Negligence, Fiduciary Duty, dado Mini Cinema, 846 F.2d 86, 91 (1 st Cir.1988)). Delayed Discovery & Adverse Domination Gross negligence constitutes a difficult threshold to reach. In assessing gross negligence claims, a re- The D & Os' motions to dismiss the FDIC's viewing court looks “for evidence as to whether a claims for negligence are DENIED. (Docket Nos. board has acted in a deliberate and knowledgeable 196, 198, 199, 200, 202, 205, & 291.) The FDIC must way in identifying and exploring alternatives.” Citron demonstrate the D & O's were grossly negligent, as v. Fairchild Camera & Instrument Corp., 569 A.2d directors and officers are shielded from ordinary neg- 53, 66 (Del.1989). Gross negligence “involves a de- ligence claims under Puerto Rico's Business Judgment vil-may-care attitude or indifference to duty amount- Rule.FN2 See W Holding, Inc. v. Chartis Insur. Co., ing to recklessness.” Zimmerman v. Crothall, 2012 P.R., 845 F.Supp.2d422,429 (D.P.R.2012). To reite- Del. Ch. LEXIS 64, at *20 (Del. Ch. Mar. 5, 2012) rate, the FDIC states sufficient facts to allege a (citing In re Lear Corp. Shareholder Litig., 2005 Del. plausible claim for gross negligence, thereby satisfy- Ch. LEXIS 133, 2005 WL 2130607, at *4 (Del. Ch. ing Twombly and Iqbal. Therefore, any claim arising Aug. 26, 2005)). Gross negligence constitutes “reck- under ordinary negligence is dismissed. The court less indifference or actions that are without the bounds considers the allegations and corresponding motions of reason.” McPadden v. Sidhu, 964 A.2d 1262, 1274 to dismiss in turn. (Del. Ch.2008). The “intentional dereliction of a known duty,” furthermore, “is a higher standard of FN2. P.R. LAW ANN. 14 § 3563 states, wrongdoing than gross negligence or recklessness.” In re Walt Disney Co. Deriv. Litig., 906 A.2d 27, 67 (Del. Ch.2005). The directors and officers shall be bound to dedicate to the affairs of the corporation and to the exercise of their duties the at- *4 Parallel FDIC actions against various directors tention and care which in a similar position and officers guide the court in its analysis. Although and under analogous circumstances a re- FIRREA dictates that state-based gross negligence

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico)) doctrine governs claims against directors and officers, up to ‘a recession.’ While it is too early in the case to and the facts of each case differ, these cases nonethe- know whether the evidence will show that Defendants less assist the court. See e.g., FDIC v. Briscoe, No. too were victims of the recession, the amended com- 11–CV–2303 (N.D.Ga. Aug. 14, 2012); FDIC v. plaint does not attempt to hold the Loan Committee Willetts, No. 7:11–DV–165, 2012 U.S. Dist. LEXIS Defendants accountable for failing to foresee future 55363 (E.D.N.C. Apr. 13, 2012); FDIC v. Skow, No. economic developments.” Id. at 11. The Spangler 11–111 (N.D.Ga. Feb. 27, 2012); FDIC v. Spangler, court considered vagueness claims, noting that the No. 10–CV–4288 (N.D.Ill.Dec. 22, 2011); FDIC v. defendants claimed the allegations were “nothing but Saphir, No. 10–7009 (N.D.Ill. Sept. 1, 2011). vague assertions that officers and directors did not conform to a loan policy or get a personal guarantee.” In Briscoe, the FDIC alleged violations of law and Id. at 12. The court found this argument unconvincing, regulations; failure to establish, enforce, and follow ruling that the FDIC met the gross negligence stan- loan policies; inadequate investigation; failure to heed dard. regulatory warnings; loans to noncreditworthy borrowers; inadequate financial information; inadequate *5 In Saphir, Judge Pallmeyer found sufficient loan documentation; unsecured and undersecured pleadings for gross negligence for alleged failure to loans; inadequate or non-existent appraisals; failure to adequately implement and supervise loan programs, perfect and maintain collateral; diversion of loan voting to approve the allegedly toxic loans, failing to proceeds; improper loan repayment programs; im- increase the bank's reserves, and approving large proper loan extensions and renewables; inadequate dividend and incentive payments that depleted the collection procedures; improper selection and super- bank's capital. See slip op. at 10. The court was not vision of officers; improper investment and liquidity “troubled by the FDIC's purported failure to say ‘how’ policy compliance; improper maintenance of capi- or ‘why’ the Defendants' conduct deviated from the tal-to-asset ratio; insider loans; and failure to properly applicable standard of care, or to attach [the bank's] exercise management and supervision duties. See slip charter ...” Id. at 12. op. at 12–13. The court found that the complaint alleged sufficient facts for gross negligence and re- In Skow, the court found sufficient allegations of quested the FDIC to replead sufficient facts as to each gross negligence where the FDIC asserted that the specific D & O in the group. Id. at 16, 19. directors and officers “deliberately pursued a speculative, high-growth lending strategy, the risks of which In Spangler, the FDIC alleged that “Loan Com- were compounded by their failure to implement sound mittee Defendants failed to follow the bank's written lending practices or to exercise appropriate oversight lending policies and ensure prudent underwriting in over loan officers and the lending function,” and failed approving the ‘Loss Loans.’ The Loan Committee to heed regulator warnings. See slip op. at 12–13. allegedly approved loans without current and com- plete financial information on the borrower and gua- Lastly, in Willetts, the court denied the defen- rantor and without obtaining a full guarantee on the dants' 12(b)(6) motion where the FDIC alleged that loans.” See slip op. at 4–5. The FDIC also alleged “directors were repeatedly warned about regulator failure to assess repayment abilities of borrowers and violations and were advised that loans were being creditworthiness before allowing generous interest made in violation of the loan policy but took no ac- reserves, as well as funding loans that were not fi- tion.” See 2012 U.S. Dist. LEXIS 55363, at * 12. The nancially feasible, failure to address repeated regula- FDIC also contended that “many loans were approved tory warnings about the state of the bank, and breach after an inappropriate level of review,” and that the of commitments to regulators that the bank would bank was improperly structured, lacked feasibility limit total loans. Id. at 5, 10. The court recognized studies, overstated value, and lacked sufficient ap- Illinois's gross negligence standard as “very great praisal bases. Id. at *12–13. negligence,” rejecting a “recklessness definition.” Id. at 8. In the instant case, the FDIC alleges “funding of loans in the face of repeated borrower defaults, in- In denying the motion to dismiss, the court noted, eligible collateral, cash diversions, and violations of “[I]t is not clear that Defendants' action can be chalked fundamental loan terms and covenants in order to

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico)) continue to collect interest and derive short term court required the FDIC to amend its complaint to profits,” “failure to obtain appraisals ... in violation of specify which allegedly negligent actions were attri- bank policy ...,” “failure to require compliance with buted to which director or officer. See slip op. at 19. loan to value ratio limits as required by bank policy,” Here, however, the FDIC explicitly chronicles which “failure to disclose personal interests in a loan or director or officer approved which purportedly grossly borrower, and self dealing [sic],” and failure to “heed negligent loan, when the approval occurred, whether and act upon escalating examiner and auditor warn- the loan constituted an initial loan, additional credit, ings of deficiencies in commercial lending and ad- extension of construction loan, or post-approval administration.” (See Docket No. 233 at 2–3) (citing ministration and funding. (See Docket No. 182, ¶ 79.) Docket No. 182 at ¶¶ 4, 56, 57, 80(D), 84; 5, 58, 77, The FDIC subsequently discusses in extensive detail 80(A), (B), (F), (G), and (H); 5, 58, 77, 80(A), (F), the various pitfalls in the D & Os' approval of the (G), and (H); 5, 77, 80(C)-(E); 7, 80(F), 82; 8, 60–63, loans. (Id. at ¶ 80.) The FDIC's memorandum oppos- 68, 69, & 84, respectively); see also Docket No. 182, ing the various motions to dismiss delves further into ¶¶ 66–67, 79, 80(d) (sufficiently alleging breach of specific allegations of wrongdoing and need not be banking procedure against Ruiz). The similarities recited here. (See Docket No. 233 at 9–16.) Several of between the allegations against the Westernbank D & the D & O's have also filed individual motions to O's and those in Illinois, North Carolina, and Georgia dismiss. Although these motions adopt by incorpora- are overwhelmingly evident. The FDIC's allegations tion the D & O's motion discussed above, they raise exceed the requirements set forth in Iqbal and Twom- separate concerns that the court considers below and bly. ultimately DENIES.

A critical distinction between the Delaware and i. Insurers on behalf of D & O's & Conjugal Part- Illinois–Georgia–North Carolina standards for gross nerships [196] negligence lies in Delaware's strict definition and The claims set forth in this motion to dismiss are merits mention. Where some states find gross negli- addressed in count 7. gence does not quite encompass recklessness, Dela- ware embraces it. Reckless indifference outside the ii. Stipes, Frontera, Del Rio, Vidal, Ruiz, & Domin- bounds of reason and a devil-may-care attitude cer- guez [198] tainly necessitate proffers of egregiousness beyond This motion alleges issue preclusion pursuant to those required in other jurisdictions recognizing gross this court's decision in Wylie v. Stipes. 797 F.Supp.2d negligence. Nonetheless, the FDIC alleges facts 193, 194 (D.P.R.2011). Issue preclusion “forecloses questioning “whether a board has acted in a deliberate relitigation in a subsequent action of a fact essential and knowledgeable way in identifying and exploring for rendering a judgment in a prior action ..., even alternatives” analogous to those encountered by our when different causes of action are involved.” Gen- sister courts in denying their respective motions to er–Villar v. Adcom Group, Inc., 417 F.3d 201, 205–06 dismiss. See Citron v. Fairchild Camera & Instrument (1st Cir.2005). The D & O's argue the Wylie plaintiffs Corp., 569 A.2d 53, 66 (Del.1989). The FDIC sup- brought derivative claims for breaches of fiduciary plements its bottom-line allegation of a grossly neg- duties based on allegedly negligent failure to imple- ligent loss of $176 million with over 90 pages of fact ment adequate internal controls at Westernbank, the and law that unquestionably put the defendants on issue of negligence was essential to judgment, and the notice of exactly that which they are accused. Fur- court dismissed the action on summary judgment. (See thermore, the motions to dismiss do not specifically Docket No. 198 at 34–35.) address Tamboer's alleged breach of fiduciary duty beyond their objections to the FDIC's claims for gross This allegation lacks merit. Wylie brought a negligence; thus, nor shall the court. shareholder derivative suit against certain D & O's of W Holding for alleged Sarbanes–Oxley violations, *6 Lastly, the D & O's in both this and several breach of fiduciary duties, waste of corporate assets, other FDIC–D & O cases argue that vagueness in the unjust enrichment, and violations of the Puerto Rico complaint precludes individual directors and officers General Corporations Law of 1995. 797 F.Supp.2d at from understanding with certainty for which actions 194. The court considered the appropriateness of a the FDIC holds them accountable. Indeed, the Briscoe Special Litigation Commission's determination to

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico)) quash the derivative suit. The court analyzed the SLC them from the present action until adverse judgment members' ability to independently assess plaintiff's against the D & O's. Each spouse, as an individual, is claims, allegations of improper delegation, the tho- not responsible for all the obligations of the conjugal roughness of the SLC's investigation, and the rea- partnership. However, when a spouse's negligent sonableness of the SLC's findings. Id. at 200–205. To conduct generates economic benefits for the partner- the extent the D & O's consider granting summary ship, the partnership is liable for the resulting dam- judgment on the “reasonableness of the SLC's find- ages. See Lugo Montalvo v. González Mafion, 104 ings” preclusive, the standard bears repeating to dispel D.P.R. 372, 378 (P.R.1975); Sepúlveda v. Maldonado, such a notion. The court determined whether “the 108 D.P.R. 530, 534 (P.R.1979). The conjugal part- report of the committee appears to be comprehensive nership will not be liable when no economic benefit and well documented and gives indication of a rea- for the partnership exists, when the spouse was in- sonable and thorough investigation of the plaintiff's volved in an illegal act that constitutes a crime of allegations.” Id. at 201. The court issued no judgment intention, and when the damages are caused by a as to the D & O's purported negligence, let alone spouse while acting as a public employee performing mentioned the word “negligence” once; rather, it listed official duties, such as a violation of civil rights or the various factors to consider in assessing the rea- sexual harassment. See generally Rosario v. Distri- sonableness of the SLC's recommendation, which buidora Kikuet, Inc., 151 D.P.R. 634, 648 (P.R.2000). included whether the directors should have known that Here, the complaint and reply name the partnerships, violations of law were occurring and took no steps in placing them on notice that elements of the partner- good faith to prevent the breach. Id. at 202. For es- ships may have engaged in a course of negligent toppel purposes, the relevant issue the court decided in conduct exposing them to liability. Therefore, the Wylie is whether the SLC presented reasonable rec- partnerships are properly included. ommendations based on certain criteria used to determine if the SLC could plausibly find a lack of iv. Fuentes [200], Biaggi [202], and Aldebol [291] oversight. Finding reasonableness in the recommen- The court addresses these issues in Part A and dation does not entail a final decision on whether the Part B of this Section. D & O's engaged in reckless behavior with a devil-may-care attitude resulting in $176 million in B. Statutes of Limitation and Adverse Domination losses. Consequently, the court rejects this argument. Preliminarily, the court observes that the FDIC timely files this suit under FIRREA. The FDIC's sta- iii. Barletta, Schmidt, Sotomayor, Diaz, & Cruz [199] tute of limitations for any action in tort is the longer of and McDowell [205] the three-year period beginning on the date the claim *7 The conjugal partners of the D & O's assert accrues; or the period applicable under State law. See that claims against them should be dismissed because 12. U.S.C. § 1821(d)(14)(A)(ii). The FDIC assumed they are not liable under FIRREA or Puerto Rico law. receivership of Westernbank on April 30, 2010. To reiterate, FIRREA adopts state law standards. Therefore, no question exists as to whether the FDIC Therefore, the court need only assess whether the timely files this suit under its federal limitations pe- claims against the conjugal partnerships plausibly riod. entitle the FDIC to relief according to Puerto Rico law. i. Statute of Limitations The D & O's assert that a one-year statute of li- This motion to dismiss first asserts the spouses mitations bars negligence claims of the allegedly cannot be subjected to personal liability. (Docket No. negligent loans and that codification of the Business 199 at 2.) The FDIC clarifies it “does not assert any Judgment Rule limitations period should not apply individual liability of the spouses beyond their inter- because it does not constitute “liability created by ests in the conjugal partnerships.” (See Docket No. law.” These arguments are inapposite. Actions against 233 at 25) (citing Docket No. 182, ¶ 28.) Therefore, directors or stockholders enjoy a three-year statute of the only questions remaining concern the conjugal limitations. FN3 Liability created by statute seemingly partnerships' liability. The movants claim the part- constitutes a liability created by law. See Platt v. nerships' liability for acts of one spouse is subsidiary Wilmot, 193 U.S. 602, 613 (1904) (finding that con- under Puerto Rico law and the court should exclude tract liability arising under statute constitutes “liability

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico)) created by statute.”) Distinguishing “liability created oping federal common law to govern the standard of by statute” from “liability created by law,” which care used to measure the legal propriety of the conduct applies to the Puerto Rico statute at issue here, offends of directors, holding instead that state common law common sense. Legislatures create new laws or create principles govern liability in tort. See Atherton v. new statutes by codifying common law. The court FDIC, 519 U.S. 213, 217–26 (1997); see also understands that “at law” invokes the common law; O'Melveny & Myers v. FDIC, 512 U.S. 79, 89 (1994). however, in this instance, the Puerto Rico legislature In O'Melveny & Myers, the Court rebuffed the “ru- codified a common law principle. It appears, thus, that naway tendencies of ‘federal common law’ untethered the Business Judgment Rule in Puerto Rico falls under to a genuinely identifiable (as opposed to a judicially the auspices of both common law and statutory law. constructed)” law, finding that “extraordinary cases” Either way, the liability at issue here arose under law. warrant judicial creation of a federal rule. 512 U.S. at Plaintiff–Officers also contend that the statute en- 89. While the FDIC alleges gross negligence pursuant compasses only directors and not officers. Indeed, the to P.R. LAWS ANN. 14 § 3563 rather than common wording only references directors and stockholders. law tort, negligence principles sound in both and, The court reserves judgment on this issue, as the of- therefore, merit consideration of whether Bird's ra- ficers are nonetheless amenable to suit for gross neg- tionale constitutes federal common law or state ligence because adverse domination and delayed common law. The answer is that the original opinion discovery rules toll the limitations period. created federal common law prior to the Court's holding in O'Melveny & Myers. But Puerto Rico ju- FN3. Actions against directors or stockhold- risprudence tolling statutes of limitation for delayed ers of corporations must be brought within discovery sufficiently embraces the principles es- three years after the discovery by the ag- poused in Bird. The First Circuit recognizes that grieved party of the facts upon which the Puerto Rico adheres to this rationale, holding that a penalty or forfeiture attached or the liability statute of limitations “does not begin to run until the was created. See P.R. LAWS ANN. 32 § 261. plaintiff possesses, or with due diligence would pos- sess, information sufficient to permit suit.” Villari- ii. Adverse Domination & Delayed Discovery ni–Garcia v. Hosp. Del Maestro, 8 F.3d 81, 84 (1 st *8 Adverse domination is “an equitable doctrine Cir.1993) (citing Santiago Hodge v. Parke Davis & which operates to toll the statute of limitations for a Co., 909 F.2d 628, 632–33 (1st Cir.1993) (discussing corporation's claims against its officers or directors Colon Prieto v. Geigel, 115 P.R. 232, 247 when the persons in charge of the corporation cannot (P.R.1984))). be expected to pursue claims adverse to their own interests.” In re Payroll Express Corp., 186 F.3d 196, The D & O's also argue that adverse domination 205 (2nd Cir.1999). This court decided the seminal should only apply to claims sounding in fraud; how- case on adverse domination in FDIC v. Bird. 516 ever, the Bird court weighed negligence claims in F.Supp. 647 (D.P.R.1981). In Bird, the district court implementing adverse domination. Distinguishing crafted the principle the court follows today: “Control negligence from fraud here would defeat the core of the association by culpable directors and officers purpose of the doctrine. Regardless of the D & Os' precludes the possibility of filing suit because these intent, if putative plaintiffs are not situated to become individuals can hardly be expected to sue themselves aware of egregious lending practices and the corpora- or to ‘initiate any action contrary to their own inter- tion neglects to sue the directors and officers, a harm ests.’ “ FSLIC v. Williams, 599 F.Supp. 1184, 1194 arises necessitating tolling. To toll the statute on the (D.Md.) (quoting Bird, 516 F.Supp. at 652). Several ground of adverse domination, “at least once the facts courts adopt this rationale and cite Bird to justify their giving rise to ... liability are known, plaintiff must decisions. See e.g., FDIC v. Manatt, 723 F.Supp. 99, effectively negate the possibility that an informed 105 (E.D.Ark.1989); FDIC v. Appling, 992 F.2d 1109, stockholder or director could have induced the cor- 1115 (10th Cir.1993); FDIC v. Paul, 735 F.Supp. 375, poration to sue.” Int'l Inv. Trust v. Cornfeld, 619 F.2d 377–78 (1990); Resolution Trust Corp. v. Fiala, 870 909, 930 (2nd Cir.1980) (quoting Int'l Ry. of Cent. Am. F. Supp 962, 972–73 (E.D.Mo.1990) (citing cases). v. United Fruit Co., 373 F.2d 408, 412–17 (2nd Cir.1967)). Although the D & O's expressly reject the The Supreme Court has squarely rejected devel- principle of adverse domination, the complaint states and the D & O's acknowledge that the restated Form

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico))

10–K filed by the W Holding Board on March 16, conveyance, the statute does not apply to them. 2009, placed any putative plaintiffs on notice of os- However, the court finds RTC v. Greif persuasive. 906 tensibly grossly negligent action. The FDIC's refer- F.Supp. 1457, 1465 (D.Kan.1995) (finding statutory ence to Form 10–K and the D & O's acknowledgment authority under Section 1821(d)(17) to determine that that the form disclosed potential dereliction of duty former directors and officers are institution-affiliated sufficiently raises the right to relief above a specula- parties). Holding otherwise would permit the D & O's tive level. to shield themselves from liability simply by resign- ing. *9 Adverse domination and lack of disclosure toll the limitations period for any grossly negligent actor, The question thus becomes one of concur- whether or not employed by Westernbank when it rence—whether the FDIC may simultaneously allege published the Form 10–K or when the FDIC assumed fraudulent conveyance without a judgment against the receivership. Thus, Fuentes and Biaggi are not ex- D & O's. The court finds such action permissible un- empt. Excluding D & O's under this rationale would der the federal scheme, but questions of ripeness arise reward grossly negligent actors who simply foresee for allegations under state law. Sucesion Almazan v. potential litigation and resign. Following discovery, Lopez holds that a petitioner must be “really and truly the D & O's may proffer evidence revealing practices a lawful creditor of defendants.” 20 P.R.R. 502, 506 discoverable prior to the Form 10–K filing on March (P.R.1914). Section 1821(d)(17), furthermore, permits 16, 2009 not obfuscated by adverse domination, so as the FDIC to determine who “is a debtor of the institu- to start running the three-year clock at an earlier date. tion.” While this provision hardly bestows omnipo- tence on the FDIC to simply label the D & O's “deb- 2. Counts 4–6: Fraudulent Conveyance—Stipes, tors,” claims for arbitrary and capricious interpretation Tamboer, and Dominguez are more appropriate at the summary judgment stage. The court DENIES motions to dismiss regarding In any case, the Lopez court found that if plaintiffs fraudulent conveyances attributed to Stipes and Do- obtain judgment during the course of an action for minguez.FN4 The FDIC may avoid a transfer of any rescission, “this would be a circumstance in corrobo- interest of an institution-affiliated party, or any person ration of the right of the plaintiff.” Id. If the trier of who the FDIC determines is a debtor of the institution fact finds the D & O's liable for gross negligence, the if such party or person made such transfer or incurred FDIC justifiably dubs Stipes and Dominguez debtors. such liability with the intent to hinder, delay, or de- In contrast, the fraudulent conveyance claims neces- fraud the insured depository institution or the FDIC. sarily falter if the FDIC fails to sufficiently demon- See 12 U.S.C. § 1821(d)(17). The statute requires: 1) strate gross negligence. Therefore, the FDIC satisfies the fraudulent transferor be an institution-affiliated the first prong of Section 1821(d)(17). party or debtor, and; 2) the transferor performs the transfer with the intent to hinder, delay, or defraud *10 Secondly, the FDIC must allege an intent to Westernbank or the FDIC. Stipes and Dominguez hinder, defraud, or delay. The First Circuit recognizes assert that the FDIC fails to establish either prong. that courts often find fraudulent conveyances through circumstantial evidence. See e.g., Max Sugarman FN4. The D & Os' do not address Tamboer's Funeral Home, Inc. v. A.D.B. Investors, 926 F.2d alleged fraudulent conveyance; thus, neither 1248, 1254 (1st Cir.1991). At this stage, the court shall the court. finds the allegations of badges of fraud in the complaint sufficient to make out a claim for an intent to The D & O's contest whether the FDIC appro- defraud, hinder, or delay, particularly because Stipes priately categorizes Stipes and Dominguez as debtors is the primary beneficiary of the trust into which he or institution-affiliated parties, calling to question the completed the allegedly fraudulent transfer. (See FDIC's interpretation of 12 U.S.C. § 1821(d)(17). Docket No. 182 at 30–33.) Discovery is necessary to Stipes and Dominguez comprise institution-affiliated clarify these questions; thus, the D & O's motion to parties because they were directors and officers of the dismiss is DENIED. institution during the purportedly negligent actions for which the FDIC seeks damages. The D & O's argue 3. Count 7: Insurers' Motions to Dismiss that because they were not affiliated at the time of Chartis, ACE, XL Speciality, and Liberty (col-

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico)) lectively “Insurers”) move to dismiss the FDIC's that the FDIC, acting as receiver, is in the same posi- claims against them for enforcement of the D & Os' tion as the institution. While the FDIC steps into the liability insurance policies, and Chartis moves to shoes of the predecessor bank, it is nonetheless in the dismiss the D & O's claims against it for enforcement unique position of representing the interests of itself, of the D & Os' liability insurance policies. (Docket shareholders, and all other creditors.”) (citations No. 197.) The court DENIES both motions. omitted); FDIC v. Zaborac, 773 F.Supp. 137, 144 (C.D.Ill.1991) (“In this case, the FDIC does not The Insurers claim the Insured vs. Insured Ex- merely stand in the shoes of [the bank], it can also clusion FN5 precludes the FDIC from bringing suit to stand in the shoes of the shareholders; therefore, as a recover on the D & Os' policies. The Seventh Circuit shareholder, it has the independent authority to bring a succinctly describes the Exclusion. “Director and suit against American Casualty.”); Branning v. CNA officer liability insurance policies commonly feature Ins. Cos., 721 F.Supp. 1180, 1184 (W.D.Wash.1989) so-called insured vs. insured exclusions that exclude (“The court finds, however, that [the] FSLIC does not from coverage losses for claims brought by one ‘in- merely stand in the shoes of Home Savings. By sta- sured’ against another ‘insured,’ “ which includes tute, [the] FSLIC represents depositors, shareholders, “current and former [D & O's] as well as the corpora- creditors and the federal insurance fund as well as the tion itself ... to limit moral hazard. Without such an failed institution.”); Am. Cas. Co. of Reading v. exclusion, a D & O policy could require the insurer to FSLIC, 704 F.Supp. 898, 901 (E.D.Ark.1989) pay for the business mistakes of insured directors and (“Moreover, because the FSLIC is required to marshal officers if the corporation ... or if former officers or the assets of a failed institution for the benefit of its directors brought suit ...” Miller v. St. Paul Mercury depositors and creditors and to minimize payouts from Ins. Co., 683 F.3d 871, 872 (7th Cir.2012). the insurance fund, it is motivated to bring suit by interests distinctly different from that of an institution FN5. The Exclusion in Section 4(i) of the which has remained solvent.”). Chartis–D & O Policy reads, “The Insurer shall not be liable to make any payment for *11 However, the Insurers maintain the appro- Loss in connection with any Claim made priate course of action requires applying the Exclusion against an Insured: ... which is brought by, on to FDIC claims. See Hyde v. Fidelity & Deposit Co., behalf of or in the right of, an Organization or 23 F.Supp.2d 630, 634 (D.Md.1998); see also Mt. any Insured Person other than an Employee Hawley Ins. Co. v. FSLIC, 695 F.Supp. 469, 484 of an Organization, in any respect and (C.D.Cal.1987); Powell v. Am. Cas. Co. of Reading, whether or not collusive.” (Docket No. 772 F.Supp. 1188, 1191 (W.D.Okla.1991) (holding 197–4 at 9.) that the “insured vs. insured” exclusion applies to actions brought by the FDIC “which stands in the Where a regulatory agency asserts claims against shoes of the ... [b]ank in prosecuting claims.”). The insured directors and officers on behalf of both the Insurers assert that the FDIC stands directly in Wes- insured organization and third-party interests, the ternbank's shoes and should therefore be precluded applicability of the Exclusion is ambiguous. Fed. Ins. from bringing suit under the Exclusion. See also Fid. Co. v. Hawaiian Elec. Indus. Inc., No. 94–00125, & Deposit Co. of Md. v. Conner, 973 F.2d 1236, 1240 1995 WL 1916123, 7 (D.Haw. Dec. 15, 1995). “A (5th Cir.1992) (holding that an “insured vs. insured” majority of better-reasoned opinions holds that the exclusion applied to the FDIC when the complaint ‘insured v. insured’ exclusion does not unambi- filed by the FDIC made “no attempt to show an in- guously exclude suits by the FDIC from coverage.” dependent breach of duty towards the bank's deposi- Peter D. Rosenthal, Have Bank Regulators Been tors or shareholders.”). Missing the Forest for the Public Policy Tree? The Case for ContractBased Arguments in the Litigation With these differences in mind, the court turns to of Regulatory Exclusions in Director and Officer the purpose of the Exclusion, the complaint, and the Liability Policies, 75 B.U. L.REV. 155, 173 (1995). specific terms in the policy for guidance. The obvious Several cases support this notion. See e.g., FDIC v. intent behind the Exclusion is to protect insurance Am. Cas. Co. of Reading, 814 F.Supp. 1021, 1026 companies from collusive suits among insured parties. (D.Wyo.1991) (“Finally, the Court is not convinced See Michael D. Sousa, Making Sense of the Bram-

Slip Copy, 2012 WL 5334115 (D.Puerto Rico) (Cite as: 2012 WL 5334115 (D.Puerto Rico)) ble–Filled Thicket: the “Insured v. Insured” Exclu- sion in the Bankruptcy Context, 23 BANK. DEV. J.. D.Puerto Rico,2012. 365, 391 (2007) (citing Fid. & Dep. Co. of Md. v. W Holding Co., Inc. v. Chartis Ins. Company-Puerto Zandstra, 756 F.Supp. 429, 431 (N.D.Cal.1990)). Rico Here, the FDIC reaps no benefits comparable to those Slip Copy, 2012 WL 5334115 (D.Puerto Rico) enjoyed by collusive actors who seek to swindle insurance companies. END OF DOCUMENT

The policy, however, encompasses claims “brought by, on behalf of or in the right of, an Or- ganization or any Insured Person, ... whether or not collusive. ” (See Docket No. 197 at 9) (emphasis added). The court must assess whether FDIC brings suit on behalf of or in the right of an “Organization,” as defined in the policy. The policy defines “Organi- zation” as the named entity, each subsidiary, and debtors in bankruptcy proceedings. (See Docket No. 197–4 at 7–8.) Accordingly, the court finds that the FDIC's course of conduct does not run afoul of this provision and adopts the rationale espoused in Bran- ning and Am. Cas. Co. of Reading v. FSLIC that the Exclusion does not preclude the FDIC from seeking redress from the Insurers.

The FDIC establishes in its complaint that it “succeeds to the rights, claims, titles, powers, privi- leges, and assets of Westernbank and its stockholders, members, account holders, depositors, officers, or directors ...” (Docket No. 182 at ¶ 21.) The Exclusion and relevant terms in the policy therefore preclude suit on behalf of the members, officers, and directors. The Exclusion also ostensibly prevents the FDIC from bringing suit on behalf of Westernbank's shareholders, who consist only of W Holding, a plaintiff to this case. Entertaining such a claim would contradict the purpose of the Exclusion by cloaking collusion in an FDIC action. Nonetheless, the FDIC mollifies these concerns by suing on behalf of depositors, account holders, and a depleted insurance fund. The FDIC's role as a regulator sufficiently distinguishes it from those whom the parties intended to prevent from bringing claims under the Exclusion. Therefore, the Insurers' motion to dismiss FDIC's claims is DE- NIED.

IV. Conclusion *12 For the abovementioned reasons, the court DENIES all motions to dismiss [196, 198, 199, 200, 202, 205, 291].

SO ORDERED.