OPINION AND ORDER
This case stands in a long line of claims brought by the Federal Deposit Insurance Corporation (“FDIC”) against directors and officers of banks throughout the United States. To date, the FDIC has filed thirty-three such suits in its capacity as a receiver. In sum, the FDIC became Westernbank’s receiver on April 30, 2010. W Holding Company (“W Holding”) owned all outstanding shares of Westernbank’s corporate stock when the FDIC assumed
The D & O’s purchased liability insurance from Chartis Insurance Company of Puerto Rico (“Chartis”). When the FDIC took over as receiver, the D & O’s sought coverage under their Chartis policy, and Chartis denied the D & Os’ requests. W Holding and the D & O’s brought suit to enforce the agreement. (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 fiduciary duties, fraudulent conveyances, and adverse domination, as well as against Chartis and other insurers who provided excess policies to the D & O’s for enforcement of such policies.
I. Background
The FDIC intervened in a suit brought in the Puerto Rico Commonwealth Court by W Holding and the D & O’s against Chartis for declarations of coverage under liability policies, pursuant to the Puerto Rico Direct Action Statute. (Id., ¶¶ 10, 28.) The FDIC, as Westernbank’s receiver, seeks recovery of $176.02 million in damages from former Westernbank D & O’s and their conjugal partnerships
The FDIC’s complaint alleges several acts of purported gross negligence, such as Westernbank’s violations of loan-to-value ratio limits, lack of required borrower equity, inadequate real estate appraisals, insufficient analyses of collateral or inadequate collateral, and insufficient borrower repayment information and repayment sources. (Id., ¶ 5.) The FDIC also asserts that the D & O’s increased, extended, and renewed expired and deteriorating loans to enable continued funding of interest reserves, thereby delaying losses and defaults and increasing the losses on the loans. (Id.)
The FDIC discusses in detail several loans that allegedly led to the $176.02 million in losses issued to Museum Towers, LP (“Museum Towers”), Yasscar Development Corporation (“Yasscar Development”), Yasscar Caguas Development Corporation (“Yasscar Caguas”), Sabana Del Palmar, Inc. (“Sabana”), Plaza CCD Development Corporation (“Plaza CCD”), Inyx, Inc. (“Inyx”), and Intercoffee, Inc. (“Inter-coffee”). The complaint details why and how the loan approvals violated various internal policies, which D & 0 approved the loan and at what stage the D & 0 granted approval or administered the financing, and the accountable percentage of the aggregate $176.02 million loss. (Id., ¶¶ 77-80.)
The FDIC asserts seven claims in its complaint: (1) gross negligence; (2) breach of fiduciary duty against Tamboer; (3) adverse domination; (4)-(6) fraudulent transfers against Stipes, Tamboer, and Dominguez, and; (7) direct action claims against the insurance carriers. (Docket No. 182, ¶¶ 83-100.) Presently before the court are seven motions to dismiss the FDIC’s complaint filed by the D & O’s and their conjugal partnerships. (Docket Nos. 196, 198, 199, 200, 202, 205, & 291.) For the reasons stated herein, after reviewing the parties’ memoranda of law, submissions, and attachments thereto, the court DENIES all motions to dismiss.
II. Motion to Dismiss Standard
“The general rules of pleading require a short and plain statement of the claim showing that the pleader is entitled to relief.” Gargano v. Liberty Intern. Underwriters, Inc.,
Under Rule 12(b)(6), a defendant may move to dismiss an action against him for failure to state a claim upon which relief can be granted. See Fed.R.Civ.P. 12(b)(6). To survive a Rule 12(b)(6) motion, a complaint must contain sufficient factual matter “to state a claim to relief that is plausible on its face.” Twombly,
III. Discussion
1. Counts 1-3: Gross Negligence, Fiduciary Duty, Delayed Discovery & Adverse Domination
The D & Os’ motions to dismiss the FDIC’s claims for negligence are DENIED. (Docket Nos. 196, 198, 199, 200, 202, 205, & 291.) The FDIC must demonstrate the D & O’s were grossly negligent, as directors and officers are shielded from ordinary negligence claims under Puerto Rico’s Business Judgment Rule.
A. The FDIC’s Complaint Sufficiently Alleges Gross Negligence
The Financial Institutions Reform, Recovery, and Enforcement Act (“FIRREA”) imposes personal liability on directors or officers of insured depository institutions for gross negligence. Section 1821(k) of FIRREA provides that the definition of gross negligence should be grounded in state law. Puerto Rico models its corporate statutes after Delaware corporate law. See Wyilie v. Stipes,
Parallel FDIC actions against various directors and officers guide the court in its analysis. Although FIRREA dictates that state-based gross negligence doctrine governs claims against directors and officers, and the facts of each case differ, these cases nonetheless assist the court. See e.g,. FDIC v. Briscoe, No. 11-CV-2S03 (N.D.Ga. Aug. 14, 2012); FDIC v. Willetts,
In Briscoe, the FDIC alleged violations of law and regulations; failure to establish, enforce, and follow loan policies; inadequate investigation; failure to heed regulatory warnings; loans to non-creditworthy borrowers; inadequate financial information; inadequate loan documentation; unsecured and undersecured loans; inadequate or non-existent appraisals; failure to perfect and maintain collateral; diversion of loan proceeds; improper loan repayment programs; improper loan extensions and renewables; inadequate collection procedures; improper selection and supervision of officers; improper investment and liquidity policy compliance; improper maintenance of capital-to-asset ratio; insider loans; and failure to properly exercise management and supervision duties. See slip op. at 12-13. The court found that the complaint alleged sufficient facts for gross negligence and requested the FDIC to replead sufficient facts as to each specific D & O in the group. Id. at 16, 19.
In Spangler, the FDIC alleged that “Loan Committee Defendants failed to follow the bank’s written lending policies and ensure prudent underwriting in approving the ‘Loss Loans.’ The Loan Committee allegedly approved loans without current and complete financial information on the borrower and guarantor and without obtaining a full guarantee on the loans.” See slip op. at 4-5. The FDIC also alleged failure to assess repayment abilities of borrowers and creditworthiness before allowing generous interest reserves, as well as funding loans that were not financially feasible, failure to address repeated regulatory warnings about the state of the bank, and breach of commitments to regulators that the bank would limit total loans. Id. at 5, 10. The court recognized Illinois’s gross negligence standard as “very great negligence,” rejecting a “recklessness definition.” Id. at 8.
In denying the motion to dismiss, the court noted, “[I]t is not clear that Defendants’ action can be chalked up to ‘a recession.’ While it is too early in the case to know whether the evidence will show that Defendants too were victims of the recession, the amended complaint does not attempt to hold the Loan Committee Defendants accountable for failing to foresee future economic developments.” Id. at 11. The Spangler court considered vagueness claims, noting that the defendants claimed the allegations were “nothing but vague assertions that officers and directors did not conform to a loan policy or get a personal guarantee.” Id. at 12. The court found this argument unconvincing, ruling that the FDIC met the gross negligence standard.
In Saphir, Judge Pallmeyer found sufficient pleadings for gross negligence for alleged failure to adequately implement and supervise loan programs, voting to approve the allegedly toxic loans, failing to
In Show, the court found sufficient allegations of gross negligence where the FDIC asserted that the directors and officers “deliberately pursued a speculative, high-growth lending strategy, the risks of which were compounded by their failure to implement sound lending practices or to exercise appropriate oversight over loan officers and the lending function,” and failed to heed regulator warnings. See slip op. at 12-13.
Lastly, in Willetts, the court denied the defendants’ 12(b)(6) motion where the FDIC alleged that “directors were repeatedly warned about regulator violations and were advised that loans were being made in violation of the loan policy but took no action.” See
In the instant case, the FDIC alleges “funding of loans in the face of repeated borrower defaults, ineligible collateral, cash diversions, and violations of fundamental loan terms and covenants in order to continue to collect interest and derive short term profits,” “failure to obtain appraisals ... in violation of bank policy ...,” “failure to require compliance with loan to value ratio limits as required by bank policy,” “failure to disclose personal interests in a loan or borrower, and self dealing [sic],” and failure to “heed and act upon escalating examiner and auditor warnings of deficiencies in commercial lending and administration.” (See Docket No. 233 at 2-3) (citing Docket No. 182 at ¶¶ 4, 56, 57, 80(D), 84; 5, 58, 77, 80(A), (B), (F), (G), and (H); 5, 58, 77, 80(A), (F), (G), and (H); 5, 77, 80(C)-(E); 7, 80(F), 82; 8, 60-63, 68, 69, & 84, respectively); see also Docket No. 182, ¶¶ 66-67, 79, 80(d) (sufficiently alleging breach of banking procedure against Ruiz). The similarities between the allegations against the Westernbank D & O’s and those in Illinois, North Carolina, and Georgia are overwhelmingly evident. The FDIC’s allegations exceed the requirements set forth in Iqbal and Twombly.
A critical distinction between the Delaware and Illinois-Georgia-North Carolina standards for gross negligence lies in Delaware’s strict definition and merits mention. Where some states find gross negligence does not quite encompass recklessness, Delaware embraces it. Reckless indifference outside the bounds of reason and a devil-may-care attitude certainly necessitate proffers of egregiousness beyond those required in other jurisdictions recognizing gross negligence. Nonetheless, the FDIC alleges facts questioning “whether a board has acted in a deliberate and knowledgeable way in identifying and exploring alternatives” analogous to those encountered by our sister courts in denying their respective motions to dismiss. See Citron v. Fairchild Camera & Instrument Corp.,
Lastly, the D & O’s in both this and several other FDIC-D & 0 cases argue that vagueness in the complaint precludes individual directors and officers from understanding with certainty for which actions the FDIC holds them accountable. Indeed, the Briscoe court required the FDIC to amend its complaint to specify which allegedly negligent actions were attributed to which director or officer. See slip op. at 19. Here, however, the FDIC explicitly chronicles which director or officer approved which purportedly grossly negligent loan, when the approval occurred, whether the loan constituted an initial loan, additional credit, extension of construction loan, or post-approval administration and funding. (See Docket No. 182, ¶ 79.) The FDIC subsequently discusses in extensive detail the various pitfalls in the D & Os’ approval of the loans. (Id. at ¶ 80.) The FDIC’s memorandum opposing the various motions to dismiss delves further into specific allegations of wrongdoing and need not be recited here. (See Docket No. 233 at 9-16.) Several of the D & O’s have also filed individual motions to dismiss. Although these motions adopt by incorporation the D & O’s motion discussed above, they raise separate concerns that the court considers below and ultimately DENIES.
i. Insurers on behalf of D & O’s & Conjugal Partnerships [196]
The claims set forth in this motion to dismiss are addressed in count 7.
ii. Stipes, Frontera, Del Rio, Vidal, Ruiz, & Dominguez [198]
This motion alleges issue preclusion pursuant to this court’s decision in Wyilie v. Stipes,
This allegation lacks merit. Wylie brought a shareholder derivative suit against certain D & O’s of W Holding for alleged Sarbanes-Oxley violations, breach of fiduciary duties, waste of corporate assets, unjust enrichment, and violations of the Puerto Rico General Corporations Law of 1995.
iii. Barletta, Schmidt, Sotomayor, Diaz, & Cruz [199] and McDowell [205]
The conjugal partners of the D & O’s assert that claims against them should be dismissed because they are not liable under FIRREA or Puerto Rico law. To reiterate, FIRREA adopts state law standards. Therefore, the court need only assess whether the claims against the conjugal partnerships plausibly entitle the FDIC to relief according to Puerto Rico law.
This motion to dismiss first asserts the spouses cannot be subjected to personal liability. (Docket No. 199 at 2.) The FDIC clarifies it “does not assert any individual liability of the spouses beyond their interests in the conjugal partnerships.” (See Docket No. 233 at 25) (citing Docket No. 182, ¶ 28.) Therefore, the only questions remaining concern the conjugal partnerships’ liability. The movants claim the partnerships’ liability for acts of one spouse is subsidiary under Puerto Rico law and the court should exclude them from the present action until adverse judgment against the D & O’s. Each spouse, as an individual, is not responsible for all the obligations of the conjugal partnership. However, when a spouse’s negligent conduct generates economic benefits for the partnership, the partnership is liable for the resulting damages. See Lugo Montalvo v. González Manon,
iv. Fuentes [200], Biaggi [202], and Aldebol [291]
The court addresses these issues in Part A and Part B of this Section.
B. Statutes of Limitation and Adverse Domination
Preliminarily, the court observes that the FDIC timely files this suit under FIR-REA. The FDIC’s statute of limitations for any action in tort is the longer of the three-year period beginning on the date the claim accrues; or the period applicable under State law. See 12 U.S.C. § 1821(d)(14)(A)(ii). The FDIC assumed receivership of Westernbank on April 30, 2010. Therefore, no question exists as to whether the FDIC timely files this suit under its federal limitations period.
i. Statute of Limitations
The D & O’s assert that a one-year statute of limitations bars negligence claims of the allegedly negligent loans and that codification of the Business Judgment Rule limitations period should not apply
ii. Adverse Domination & Delayed Discovery
Adverse domination is “an equitable doctrine which operates to toll the statute of limitations for a corporation’s claims against its officers or directors when the persons in charge of the corporation cannot be expected to pursue claims adverse to their own interests.” In re Payroll Express Corp.,
The Supreme Court has squarely rejected developing federal common law to govern the standard of care used to measure the legal propriety of the conduct of directors, holding instead that state common law principles govern liability in tort. See Atherton v. FDIC,
The D & O’s also argue that adverse domination should only apply to claims sounding in fraud; however, the Bird court weighed negligence claims in implementing adverse domination. Distinguishing negligence from fraud here would defeat the core purpose of the doctrine. Regardless of the D & Os’ intent, if putative plaintiffs are not situated to become aware of egregious lending practices and the corporation neglects to sue the directors and officers, a harm arises necessitating tolling. To toll the statute on the ground of adverse domination, “at least once the facts giving rise to ... liability are known, plaintiff must effectively negate the possibility that an informed stockholder or director could have induced the corporation to sue.” Int’l Inv. Trust v. Cornfeld,
Adverse domination and lack of disclosure toll the limitations period for any grossly negligent actor, whether or not employed by Westernbank when it published the Form 10-K or when the FDIC assumed receivership. Thus, Fuentes and Biaggi are not exempt. Excluding D & O’s under this rationale would reward grossly negligent actors who simply foresee potential litigation and resign. Following discovery, the D & O’s may proffer evidence revealing practices discoverable prior to the Form 10-K filing on March 16, 2009 not obfuscated by adverse domination, so as to start running the three-year clock at an earlier date.
2. Counts 1-6: Fraudulent Conveyance — Stipes, Tamboer, and Dominguez
The court DENIES motions to dismiss regarding fraudulent conveyances attributed to Stipes and Dominguez.
The D & O’s contest whether the FDIC appropriately categorizes Stipes and Dominguez as debtors or institution-affiliated parties, calling to question the FDIC’s interpretation of 12 U.S.C. § 1821(d)(17). Stipes and Dominguez comprise institution-affiliated parties because they were directors and officers of the institution during the purportedly negligent actions for which the FDIC seeks damages. The D & O’s argue that because they were not affiliated at the time of conveyance, the statute does not apply to them. However, the court finds RTC v. Grief persuasive.
The question thus becomes one of concurrence — whether the FDIC may simultaneously allege fraudulent conveyance without a judgment against the D & O’s. The court finds such action permissible under the federal scheme, but questions of ripeness arise for allegations under state law. Sucesion Almazan v. Lopez holds that a petitioner must be “really and truly a lawful creditor of defendants.”
Secondly, the FDIC must allege an intent to hinder, defraud, or delay. The First Circuit recognizes that courts often find fraudulent conveyances through circumstantial evidence. See e.g., Max Sugarman Funeral Home, Inc. v. A.D.B. Investors,
3. Count 7: Insurers’ Motions to Dismiss
Chartis, ACE, XL Speciality, and Liberty (collectively “Insurers”) move to dismiss the FDIC’s claims against them for enforcement of the D & Os’ liability insurance policies, and Chartis moves to dismiss the D & O’s claims against it for enforcement of the D & Os’ liability insurance policies. (Docket No. 197.) The court DENIES both motions.
The Insurers claim the Insured vs. In
Where a regulatory agency asserts claims against insured directors and officers on behalf of both the insured organization and third-party interests, the applicability of the Exclusion is ambiguous. Fed. Ins. Co. v. Hawaiian Elec. Indus. Inc., No. 94-00125,
However, the Insurers maintain the appropriate course of action requires applying the Exclusion to FDIC claims. See Hyde v. Fidelity & Deposit Co.,
With these differences in mind, the court turns to the purpose of the Exclusion, the complaint, and the specific terms in the policy for guidance. The obvious intent behind the Exclusion is to protect insurance companies from collusive suits among insured parties. See Michael D. Sousa, Making Sense of the Bramble-Filled Thicket: the “Insured v. Insured” Exclusion in the Bankruptcy Context, 23 Bank. Dev. J. 365, 391 (2007) (citing Fid. & Dep. Co. of Md. v. Zandstra,
The policy, however, encompasses claims “brought by, on behalf of or in the right of, an Organization 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 “Organization” 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 Branning 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, privileges, 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 DENIED.
IV. Conclusion
For the abovementioned reasons, the court DENIES all motions to dismiss [196, 198,199, 200, 202, 205, 291],
SO ORDERED.
Notes
. The D & O’s comprise Frank C. StipesGarcia, Juan Carlos Frontera-Garcia, Hector L. Del Rio-Torres, William M. Vidal-Carvajal, Cesar A. Ruiz-Rodriguez, and Pedro R. Dominguez-Zayas. The complaint lays out their respective roles within Westernbank during the timeframe of the alleged grossly negligent behavior. Certain D & O’s served on Westernbank’s Senior Lending Committee ("SLC”) and Senior Credit Committee ("SCC”). The FDIC asserts claims against the following former D & O’s, as well: Jose Biaggi-Landron, Ricardo Cortina-Cruz, Miguel A. Vazquez-Seijo, Julia Fuentes del Collado, Mario A. Ramirez-Matos, and Cornelius Tamboer. The conjugal partnerships joined also include Marlene Cruz-Caballero, Lilliam Diaz-Cabassa, Gladys Barletta-Segarra, Hannalore Schmidt-Michels, Sonia Sotomayor-Vicenty, the partner of Jose Biaggi-Landron (referred to as Jane Doe in the complaint), Elizabeth Aldebol de Cortina, Sharon McDowell-Nixon, and Olga Morales-Perez. (See id. ¶¶ 22-52.)
. P.R. Law Ann. 14 § 3563 states,
The directors and officers shall be bound to dedicate to the affairs of the corporation and to the exercise of their duties the attention and care which in a similar position and under analogous circumstances a responsible and competent director or officer would execute in applying his/her business judgment in good faith or his/her best judgment in the case of nonprofit corporations. Only gross negligence in the exercise of the duties and obligations mentioned above shall result in personal liability (emphasis added).
The statute does not distinguish between directors and officers in imposing a gross negligence threshold for liability. Therefore, the court assesses directors and officers equally.
. Actions against directors or stockholders of corporations must be brought within three years after the discovery by the aggrieved party of the facts upon which the penalty or forfeiture attached or the liability was created. See P.R. Laws Ann. 32 § 261.
. The D & Os’ do not address Tamboer's alleged fraudulent conveyance; thus, neither shall the court.
. The Exclusion in Section 4(i) of the ChartisD & O Policy reads, "The Insurer 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.” (Docket No. 197-4 at 9.)