Federal Deposit Insurance Corp. v. BancInsure, Inc.

FILED
NOT FOR PUBLICATION
JAN 10 2017
UNITED STATES COURT OF APPEALS MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS

FOR THE NINTH CIRCUIT

FEDERAL DEPOSIT INSURANCE No. 14-56132
CORPORATION, as Receiver for Security
Pacific Bank, D.C. No. 2:12-cv-09882-DMG-
MRW
Plaintiff–Appellee,

v. MEMORANDUM*

BANCINSURE, INC., an Oklahoma
Corporation,

Defendant–Appellant.

Appeal from the United States District Court
for the Central District of California
Dolly M. Gee, District Judge, Presiding

Argued and Submitted June 8, 2016
Pasadena, California

Before: RAWLINSON and BEA, Circuit Judges, and EATON,** Judge.

*
This disposition is not appropriate for publication and is not precedent
except as provided by Ninth Circuit Rule 36-3.
**
Richard K. Eaton, Judge for the U.S. Court of International Trade, sitting
by designation.

1
 The Federal Deposit Insurance Corporation (“FDIC”), acting as receiver of

the failed Security Pacific Bank (“Security Pacific”), seeks a declaratory judgment

regarding whether a directors-and-officers-liability-insurance policy (“D&O

Policy”) issued by BancInsure, Inc. (“BancInsure”) to Security Pacific1 covers

losses arising from the negligence, gross negligence, and breach of fiduciary duty

allegedly committed by certain of Security Pacific’s former directors and officers.

The district court concluded that the D&O Policy covers the FDIC’s claims and

thus granted summary judgment in favor of the FDIC. We have jurisdiction under

28 U.S.C. § 1291, and we reverse.

1. The D&O Policy excludes from coverage losses arising from legal actions

brought “by, or on behalf of, or at the behest of” Security Pacific, a person insured

under the D&O Policy, or “any successor, trustee, assignee or receiver” of Security

Pacific (“insured-versus-insured exclusion”). The FDIC, as the duly constituted

receiver of Security Pacific, seeks payment of losses it claims were caused to

Security Pacific by its former directors and officers. On its face, the insured-

versus-insured exclusion appears unambiguously to bar the FDIC’s claims, and the

FDIC does not suggest otherwise. Instead, the FDIC points to other provisions of

1
The D&O Policy covered directors and officers of Security Pacific, its
holding company, and other subsidiaries of the holding company through the date
of Security Pacific’s closure. We do not distinguish among the entities.

2
the D&O Policy that, in its view, evidence an intent to cover the FDIC’s

claims—or at least create an ambiguity in the terms of the D&O Policy that should

be construed in favor of coverage. See E.M.M.I. Inc. v. Zurich Am. Ins. Co., 84

P.3d 385, 389 (Cal. 2004).2

2. The FDIC contends that it is not a “receiver” within the meaning of the

insured-versus-insured exclusion because, by statute, it has a “unique role”

representing “multiple interests”:3 As receiver, the FDIC “succeed[s] to . . . all

rights, titles, powers, and privileges of the insured depository institution, and of

any stockholder, member, accountholder, depositor, officer, or director.” 12 U.S.C.

§ 1821(d)(2)(A)(i). Because it is vested with the powers of a shareholder, the FDIC

2
The parties agree that California law governs the interpretation of the D&O
Policy.
3
The FDIC argues that its “unique role . . . distinguishes it from a typical
‘successor’ or ‘receiver.’” However, the FDIC does not clarify what powers it has
that other receivers do not normally or cannot have, or vice versa. Rather, it cites
several cases in which courts held that the FDIC was not included within the scope
of an insurance policy’s insured-versus-insured exclusion because the FDIC does
not merely “step into the shoes” of a failed bank. See, e.g., Progressive Cas. Ins.
Co. v. FDIC, 926 F. Supp. 2d 1337, 1340 (N.D. Ga. 2013). But in none of those
cases did the insured-versus-insured exclusion expressly include the term
“successor” or “receiver.” The Tenth Circuit recently found the insured-versus-
insured exclusion in a nearly identical BancInsure insurance policy unambiguously
to bar claims by the FDIC as receiver, in part because the insured-versus-insured
exclusion expressly barred claims by a “receiver.” See BancInsure, Inc. v. FDIC,
796 F.3d 1226, 1235–36 (10th Cir. 2015), cert. denied sub nom. McCaffree v.
BancInsure, No. 15-982 (June 13, 2016).

3
points to an exception to the insured-versus-insured exclusion for losses arising

from “a shareholder’s derivative action brought on behalf of [Security Pacific] by

one or more shareholders who are not [insureds under the D&O Policy] and make a

Claim4 without the cooperation or solicitation of” Security Pacific or any person

insured under the D&O Policy (“shareholder-derivative-suit exception”). The

FDIC argues that the shareholder-derivative-suit exception evidences an intent to

cover its claims, because (1) the claims are similar to those brought in shareholder

derivative suits; (2) the FDIC succeeded to the interests of Security Pacific’s

shareholders; and (3) after it was appointed receiver, only the FDIC could bring an

action against Security Pacific’s former directors and officers for their alleged

negligence, gross negligence, and breach of fiduciary duty, see Pareto v. FDIC,

139 F.3d 696, 699–701 (9th Cir. 1998). The district court agreed with the FDIC,

but we do not.

Causes of action against a corporation’s directors and officers for their

malfeasance belong to the corporation—not to the shareholders—and the board of

directors is primarily responsible for enforcing the corporation’s rights. See

4
The term “Claim” in the D&O Policy “shall mean any judicial or
administrative proceeding that is filed against an Insured Person in any state or
federal court or administrative agency, in which such Insured Person could be
subjected to a binding adjudication of liability for damages or other civil relief.”

4
Grosset v. Wenaas, 175 P.3d 1184, 1189 (Cal. 2008). Security Pacific’s board of

directors could have authorized a direct suit against its former directors and

officers for their alleged negligence, gross negligence and breach of fiduciary

duty—but, had it done so, the D&O Policy’s insured-versus-insured exclusion

would have barred coverage of the claims.5 The FDIC, as receiver, succeeded to

the right of Security Pacific’s board of directors to bring such a direct suit. See 12

U.S.C. § 1821(d)(2)(A)–(C).6 But the insured-versus-insured exclusion—the text

of which expressly includes the terms “successor” and “receiver,” cf. supra note

3—would continue to bar coverage of claims brought by the FDIC against Security

Pacific’s former directors and officers as receiver of Security Pacific and as the

successor to its board of directors.

5
The “insured-versus-insured exclusion” “arose in D & O policies as a
reaction to several lawsuits in the mid-1980s in which insured corporations sued
their own directors to recoup operational losses caused by improvident or
unauthorized actions. Such lawsuits created problems of moral hazard, collusion,
and unintended expansion of coverage. The reasonable expectations of the parties
were that they were protecting against claims by outsiders, not intracompany
claims.” Biltmore Assocs., LLC v. Twin City Fire Ins. Co., 572 F.3d 663, 668 (9th
Cir. 2009) (footnote omitted).
6
As part of an agreement with BancInsure and certain of Security Pacific’s
former directors and officers, the FDIC voluntarily “waive[d] any claim against the
[directors and officers] in excess of the [D&O] Policy Limits and further agree[d]
to look only to the [D&O] Policy and the Policy Limits with respect to the FDIC’s
Claims.”

5
 A shareholder derivative suit is a secondary means of enforcing a

corporation’s rights and redressing its injuries, and a shareholder may bring a

derivative suit only “when the board of directors fails or refuses to do so.” Grosset,

175 P.3d at 1189. Reading the D&O Policy as a whole and in context, see

E.M.M.I., 84 P.3d at 389, the shareholder-derivative-suit exception extends the

D&O Policy’s coverage to losses from shareholder derivative suits, but not to suits

brought by a successor or receiver. The D&O Policy’s insured-versus-insured

exclusion would exclude from coverage losses from a direct suit by the FDIC

against Security Pacific’s former directors and officers. See supra. The

shareholder-derivative-suit exception does not change that result or render the

insured-versus-insured exclusion ambiguous with respect to the FDIC as receiver

merely because the FDIC also succeeded to the right of Security Pacific’s

shareholders to bring a derivative action—which right (1) is secondary to the

FDIC’s right to bring the same claims directly as Security Pacific’s receiver and

(2) may be exercised only if the FDIC does not exercise its primary right to bring

6
the claims directly.7 Cf. Reserve Ins. Co. v. Pisciotta, 640 P.2d 764, 767–68 (Cal.

1982) (“Courts will not adopt a strained or absurd interpretation in order to create

an ambiguity where none exists.”).

We must also remember that the D&O Policy concerns an FDIC-insured,

California-chartered bank. California law allows the Commissioner of Business

Oversight to appoint the FDIC as receiver of a failed FDIC-insured state-chartered

bank, see Cal. Fin. Code § 620,8 and federal law permits the FDIC to accept such

an appointment, see 12 U.S.C. § 1821(c). “Today, state regulatory authorities

virtually always request the appointment of the FDIC when a receiver is

appointed.” FDIC, Managing the Crisis 215 (1998). Indeed, press releases show

that the FDIC has been appointed receiver of every California-chartered bank that

7
Moreover, the shareholder-derivative-suit exception extends coverage
under the D&O Policy only to derivative suits brought “without the cooperation or
solicitation” of Security Pacific. A shareholder derivative suit may be brought only
if the corporation, through its board of directors, declines to pursue the claims at
issue directly. See Grosset, 175 P.3d at 1189. Were the FDIC, as successor to the
interests of Security Pacific’s shareholders, to attempt to bring a derivative suit
against Security Pacific’s former directors and officers, it, as receiver of Security
Pacific and successor to Security Pacific’s board of directors, would necessarily
have to “cooperat[e]” in the derivative suit by refusing to bring the same claims
directly. In that circumstance, there would be no coverage for the manufactured
shareholder derivative suit under the D&O Policy.
8
Similar provisions were previously codified at Cal. Fin. Code
§§ 3220–3225 (until December 31, 2010) and Cal. Fin. Code §§ 310–310.3 (until
January 31, 2011).

7
has failed since 2001. See Cal. Dep’t of Bus. Oversight, Press Releases,

http://www.dbo.ca.gov/Press/press_releases/ (last visited Aug. 10, 2016).

Interpreting the shareholder-derivative-suit exception to provide coverage to the

FDIC’s claims may very well read the term “receiver” out of the insured-versus-

insured exclusion. We think the term “receiver” is clear and unambiguous and

includes the FDIC in its role as receiver of Security Pacific. As such, the FDIC’s

claims fall within the scope of the D&O Policy’s insured-versus-insured exclusion.

3. The standard policy form separately excluded coverage for losses arising

from “any action or proceeding brought by or on behalf of any federal or state

regulatory or supervisory agency or deposit insurance organization” (“regulatory

exclusion”). However, the D&O Policy, through an endorsement (“regulatory

endorsement”), deleted the regulatory exclusion in full and established a coverage

sublimit for the formerly excluded claims. The FDIC argues that its claims would

most naturally be excluded by the regulatory exclusion, and the deletion of that

exclusion should be construed to favor coverage of its claims.

We agree that the regulatory exclusion, as against the insured-versus-insured

exclusion, would more clearly exclude the FDIC’s claims and that, “[i]n the

interpretation of insurance contracts, a specific provision relating to a particular

subject will govern in respect to that subject, as against a general provision, even

8
though the latter, standing alone, would be broad enough to include the subject to

which the more specific provision relates.” Kavruck v. Blue Cross of Cal., 134 Cal.

Rptr. 2d 152, 157 (Ct. App. 2003). However, deleting the specific provision does

not necessarily alter the scope of the general provision. Cf. Berry v. Am. Express

Publ’g, Inc., 54 Cal. Rptr. 3d 91, 96 (Ct. App. 2007). The standard policy form

contained two exclusions: (1) the insured-versus-insured exclusion; and (2) the

regulatory exclusion. Each, standing alone, would have excluded the FDIC’s

claims. The regulatory endorsement deleted the regulatory exclusion but did not

“vary, waive, or extend any of the [other] terms” of the D&O Policy,9 and thus did

not alter the scope of the insured-versus-insured exclusion. As a result, the FDIC’s

claims remain barred by the insured-versus-insured exclusion. See Hervey v.

Mercury Cas. Co., 110 Cal. Rptr. 3d 890, 897–98 (Ct. App. 2010).10

9
The standard policy form “and any written endorsements attached [to the
standard policy form] constitute the entire agreement between the parties.”
10
Nor is the regulatory endorsement superfluous. Shortly before it failed,
Security Pacific gave BancInsure notice of two types of potential claims by the
FDIC: (1) “enforcement actions against the individual officers and directors”; and
(2) “as receiver for the Bank, . . . a civil action against the individual directors and
officers seeking to recovery monetary damages as a result of their alleged
conduct.” The regulatory endorsement may have reinstated coverage for
enforcement actions, which are not barred by the insured-versus-insured exclusion.

9
 4. The FDIC also argues that extrinsic evidence shows that the D&O

Policy’s insured-versus-insured exclusion is at least ambiguous with respect to

claims by the FDIC as receiver. However, extrinsic evidence may not be used to

contradict the express terms of an insurance policy, see, e.g., id. at 895, and we

therefore do not consider it.

5. Because we conclude that the D&O Policy does not cover the FDIC’s

claims, we do not address BancInsure’s alternative argument that Security Pacific

had failed to give timely notice of the FDIC’s claims or the circumstances that

gave rise to the claims.

* * *

Having found that the D&O Policy unambiguously excludes from coverage

the FDIC’s claims against Security Pacific’s former directors and officers, we

reverse the decision of the district court and remand with instructions to enter

judgment in favor of BancInsure.

REVERSED and REMANDED with instructions.

10
 FILED
Page 1 of 4
JAN 10 2017
MOLLY C. DWYER, CLERK
U.S. COURT OF APPEALS
FDIC v. BancInsure, Case No. 14-56132
RAWLINSON, Circuit Judge, dissenting:

I respectfully dissent. I agree with the district court judge that the

“Regulatory Endorsement” superseded the regulatory coverage exclusion, thereby

providing coverage for the claims made by the Federal Deposit Insurance

Corporation (FDIC).

As relevant here, the applicable insurance policy contained an exclusion for

any

[c]laim by, or on behalf of, or at the behest of, any other Insured Person,
the Company, or any successor, trustee, assignee, or receiver of the
Company except for . . . a shareholder’s derivative action brought on
behalf of the Company by one or more shareholders who are not Insured
Persons and make a Claim without the cooperation or solicitation of any
Insured Person or the Company.

However, the exclusion section of the policy was also amended by deleting the

exclusion

based in or upon any action or proceeding brought by or on behalf of any
federal or state regulatory or supervisory agency or deposit insurance
organization (“Agency”).

This exclusion shall include, but not be limited to, any type of legal
action which any such Agency may bring as receiver, conservator,
trustee, liquidator or in any capacity, whether such action or proceeding
is brought in the name of such Agency or by or on behalf of such
 Page 2 of 4
Agency in the name of any other entity or solely in the name of any third
party . . .

Under California law, a policy provision is ambiguous if it may reasonably be

subject to at least two interpretations. See MacKinnon v. Truck Ins. Exchange, 31 Cal.

4th 635, 648 (2003), as modified. Insurance coverage is interpreted broadly, and

exclusions are interpreted narrowly. See id. “[T]he burden rests upon the insurer to

phrase exceptions and exclusions in clear and unmistakable language,” without

ambiguity. Id. (citation omitted).

Applying these precepts, a conclusion of ambiguity is apparent. Considering

the “insured versus insured” exclusion discussed by the majority in the context of the

amendment to the exclusion that specifically addresses actions brought by receivers,

at least two interpretations come to mind. The first is the interpretation advanced by

the majority— that the FDIC, as a successor entity to the defunct financial institution,

is similarly barred by the “insured versus insured” exclusion. However, the majority

ignores the equally plausible interpretation that the amendment to the exclusions

specifically preserved claims brought by a receiver, more precisely those brought by

a “regulatory . . . deposit insurance organization.” The latter interpretation is entirely

consistent with California caselaw holding that an endorsement expressly deleting an

exclusion “supports an objectively reasonable expectation” of coverage. American
 Page 3 of 4
Alternative Ins. Corp. v. Super. Ct., 135 Cal. App. 4th 1239, 1247 (2006). At a

minimum, this interpretation, supported by California authority, creates an ambiguity

that is resolved in favor of the insured and coverage. See St. Paul Mercury Ins. Co.

v. Hahn, No. SACV 13-0424 AG (RNBx), 2014 WL 5369400 (C.D. Calif., Oct. 8,

2004) at *3-4 (“[T]he Insured v. Insured Exclusion is ambiguous when applied to the

FDIC [and] California law mandates that any ambiguity or uncertainty in an insurance

policy is to be resolved against the insurer.”) (citations and internal quotation marks

omitted). Coverage is particularly mandated when one keeps in mind that California

courts construe coverage broadly, exclusions narrowly, and place the burden on

insurers to “phrase . . . exclusions in clear and unmistakable language.” Mackinnon,

31 Cal. 4th at 648.

I am not persuaded by the decision of the Tenth Circuit cited by the majority

for one simple reason—in BancInsure, Inc. v. FDIC, 796 F.3d 1226 (10th Cir. 2015)

cert. denied sub nom McCaffree v. BancInsure, 136 S. Ct. 2462 (June 13, 2016), the

court applied Kansas law rather than California law. See id. at 1233. There is no

indication in the Tenth Circuit’s decision that Kansas courts have adopted the

California approach treating an endorsement deleting an exclusion as adequate to

“support an objectively reasonable expectation of coverage.” American Alt., 135 Cal.

App. 4th at 1247; see also St. Paul Mercury, 2014 WL 5369400 at *3-4 (finding an
 Page 4 of 4
ambiguity in the application of the “Insured v. Insured” exclusion to the FDIC). The

district court got it right. The FDIC was entitled to insurance coverage for its claim.

I respectfully dissent.