A short time later, certain board members instituted a plan to renovate and hold the OREO properties rather than to sell them "as is" at the time of foreclosure.

Omni's regulators approved the plan in 2008, when Omni had a "CAMELS" rating of 2, which signified that Omni was "fundamentally sound." (The CAMELS rating system, used to assess the soundness of a bank or financial institution, uses a scale of one through five, with one being the highest and five being the lowest rating.)

On September 15, 2008, Omni's regulators issued a report and changed Omni's Bank's CAMELS rating to 5, indicating that Omni was failing or would fail imminently. The board members who had instituted a plan to renovate and hold the OREO properties, however, continued to invest approximately $12.6 million into OREO properties from that date through Omni's closure in March 2009.

The Federal Deposit Insurance Corporation ("FDIC") brought an action against Certain Underwriters at Lloyd's of London ("Underwriters") to recover from the directors and officers insurance policy it had issued to Omni for, among other things, certain alleged OREO-related wrongful acts.

Underwriters asserted that it did not owe the $10 million policy limit because two exclusions precluded coverage: the retroactive exclusion for prior or "interrelated wrongful acts," and the insured versus insured exclusion.

The U.S. District Court for the Northern District of Georgia denied Underwriters' motion for summary judgment and granted the FDIC's cross-motion for summary judgment. The district court concluded that neither exclusion applied and required Underwriters to provide the policy coverage.

Underwriters appealed to the Eleventh Circuit, relying in large measure on the Eleventh Circuit's May 15, 2017 decision in Zucker v. U.S. Specialty Insurance Company, 856 F.3d 1343 (11th Cir. 2017).

The Eleventh Circuit's Decision

The circuit court affirmed.

In its decision, the circuit court explained that, in Zucker, it had examined an insurance policy's exclusion for "prior acts" under the auspices of Florida law. (New York law governed the dispute between Underwriters and the FDIC.)

Zucker involved BankUnited Financial Corporation, the parent company of a wholly-owned subsidiary bank that admittedly engaged in risky lending practices preceding the 2008 housing market crash that rendered it insolvent. Shortly thereafter, the parent obtained a new directors and officers policy with U.S. Specialty Insurance Company with a prior acts exclusion. It stated that U.S. Specialty would "not be liable to make any payment of Loss in connection with a Claim arising out of, based upon or attributable to any Wrongful Act committed or allegedly committed, in whole or in part, prior to [November 10, 2008]."

In 2009, during the U.S. Specialty policy period, the parent transferred approximately $46 million to the subsidiary bank to stabilize it. Despite this influx of money, regulators closed the subsidiary bank in May 2009 and appointed the FDIC as the receiver. Immediately thereafter, the parent filed for bankruptcy under Chapter 11. Creditors sued the parent's board, alleging the $46 million transfer was fraudulent, and the board sought but was denied coverage under the insurance policy's prior acts exclusion.

The Eleventh Circuit held the prior acts exclusion applied to the fraudulent transfer claim because "the Parent Bank's insolvency 'arose out of' wrongful acts that occurred before November 10, 2008" and "share[s] 'a connection with' wrongful acts covered by the" exclusion. The circuit court declared that "an essential element of [plaintiff's] claim – the Parent Bank's insolvency – has a connection to some prior wrongful acts of the Parent Bank's officers and directors that occurred before the policy's effective date."

The circuit court then rejected Underwriters' argument that it was entitled to the same result as in Zucker on the basis that the alleged OREO-related wrongful acts necessarily arose from the alleged CDLD-related wrongful acts and were inextricably connected and, therefore, "interrelated wrongful acts."

The Eleventh Circuit explained that the wrongful acts at issue in Zucker – the fraudulent transfer from the parent company to the subsidiary bank – were wrongful because the parent company was insolvent at the time they occurred. "The parent company's insolvency was the result of wrongful acts that occurred before the policy period," the circuit court said, adding that "what ultimately made those transfers wrongful were wrongful acts that occurred before the policy's effective date." It said that was "not the case here."

The circuit court stated that unlike the fraudulent transfer claim in Zucker, the claim for coverage for the alleged OREO-related wrongful acts was "not inextricably linked" to Omni's unsound lending practices in the CDLD. Rather, the Eleventh Circuit continued, the claimed wrongful acts were "for the particular expenditures to rehabilitate OREO properties that occurred after – and only after – [Omni] received the downgrade to the CAMELS 5 rating in September 2008." The board authorized these expenditures between September 15, 2008 and March 2009, which was within the policy period, the circuit court noted. It added that the decision to continue these expenditures, even when not necessary, occurred after the board knew of Omni's impending failure and constituted an "independent business decision from the initial lending practices in the CDLD division."

Thus, the Eleventh Circuit concluded, the continuing investments into the OREO properties were not "interrelated wrongful acts" under the policy but rather were independent wrongful acts that occurred during the policy period. As such, Underwriters had to afford the coverage due under Omni's policy.

The case is Certain Underwriters at Lloyd's of London v. Federal Deposit Ins. Corp., No. 16-16702 (11th Cir. Jan. 23, 2018). Attorneys involved include: For CERTAIN UNDERWRITERS AT LLOYD'S OF LONDON, Plaintiff – Appellant: Daniel McNeel Lane, Jr., Manuel Mungia, Matthew Edwin Pepping, Norton Rose Fulbright US LLP, SAN ANTONIO, TX; Joshua P. Gunnemann, Tony G. Powers, Rogers & Hardin, LLP, ATLANTA, GA. For FEDERAL DEPOSIT INSURANCE CORPORATION, as receiver for Omni National Bank, Defendant – Appellee: Joseph Brooks, Federal Deposit Insurance Corporation, Appellate Litigation – Legal Division, ARLINGTON, VA; James A. Brown, Erin L. Delatte, Carey L. Menasco, Liskow & Lewis, NEW ORLEANS, LA; Jeanne Simkins Hollis, Jacquelyn Dessaure Smith, Simkins Hollis Law Group, ATLANTA, GA; Andrew Reidy, Joseph Mark Saka, Lowenstein Sandler, LLP, WASHINGTON, DC; Catherine J. Serafin, Blank Rome, LLP, WASHINGTON, DC; S. Paul Smith, Smith & Katz, PC, ATLANTA, GA. For CONSTANCE E. PERRINE, BENJAMIN J. COHEN, Defendant – Appellees: Joseph C. Chancey, Drew Eckl & Farnham, LLP, ATLANTA, GA; Benjamin J. Cohen, Price-CO Law Group, LLC, TUCKER, GA. For SERVICE: Christopher Adams, Jeffrey D. Horst, Krevolin & Horst, LLC, ATLANTA, GA; David L. Balser, Tracy Klingler, Zachary Andrew McEntyre, King & Spalding, LLP, ATLANTA, GA; Gary D. Beelen, Meredith Riggs Guerrero, Drew Eckl & Farnham, LLP, ATLANTA, GA; Thomas B. Bosch, Ezra H. Cohen, Alison A. Grounds, Natalie D. Sacha, Troutman Sanders, LLP, ATLANTA, GA; Elizabeth Gingold Clark, Robert R. Long, Alston & Bird, LLP, Alston & Bird, LLP, ATLANTA, GA; Matthew J. Dendinger, Lewis K. Loss, Loss Judge & Ward, LLP, WASHINGTON, DC; Jules N. Greenblatt, ATLANTA, GA; George August Koenig, Koenig Law Group, P.C., ATLANTA, GA; Shannon C. Livengood, MARIETTA, GA; J. Matthew Maguire, Jr., Parks Chesin & Walbert, PC, ATLANTA, GA; David Joel Marmins, Law Office of Daniel M. Formby, BLUFFTON, SC; Frank G. Podesta, Bomar Law Firm, LLC, ATLANTA, GA; Richard A. Rice, The Rice Law Firm, LLC, ATLANTA, GA; Scott B. Riddle, Kuruvilla Law Firm, PC, ATLANTA, GA.