Federal Court Dismisses IndyMac Subsidiary’s Coverage Action, Finding No Standing to Seek Coverage

By Elizabeth Musser, Esq.
The Central District of California dismisses a coverage action brought by a subsidiary of failed bank IndyMac against IndyMacaEUR(TM)s D&O insurance carriers, because the IndyMac subsidiary lacks Article III standing. IndyMac MBS, Inc. v. ACE American Insurance Company, Case Nos. 2:11-cv-2950 and 2:11-cv-2998 (Aug. 25, 2011 C.D. Cal.).
IndyMac MBS, Inc. (aEURoeIndyMac MBSaEUR?) was a subsidiary of IndyMac Bank, F.S.B., which was in turn a subsidiary of IndyMac Bancorp (aEURoeBancorpaEUR?). IndyMac Bank failed on July 11, 2008, and Bancorp filed for Chapter 7 bankruptcy on July 31, 2008. IndyMac MBS is now in receivership with the Federal Deposit Insurance Corporation (FDIC).
In the wake of IndyMac BankaEUR(TM)s failure, at least 12 actions were filed against IndyMac MBS or other IndyMac entities, BancorpaEUR(TM)s directors and officers, and BancorpaEUR(TM)s bankruptcy trustee alleging aEURoevarious improprieties, mostly centering around mortgage backed securitiesaEUR? (the aEURoeUnderlying ActionsaEUR?). Three of the Underlying Actions name IndyMac MBS as a defendant.
On Feb. 23, 2011, IndyMac MBS filed a declaratory relief action in Los Angeles County Superior Court, seeking a determination as to the availability of coverage under insurance policies issued to Bancorp directors and officers. One of the defendants removed to the federal court, and the action was automatically referred to the bankruptcy court, as related to BancorpaEUR(TM)s Chapter 7 filing. The district court granted two different groups of insurersaEUR(TM) motions to withdraw the reference, so the case initially filed by IndyMac MBS in state court ended up as two different, related coverage actions pending in district court before the Hon. R. Gary Klausner.
The insurer defendants provide $160 million of insurance coverage to Bancorp under 16 separate insurance policies. Eight of the policies are effective 2007-2008 (aEURoeFirst ToweraEUR?) and eight of the policies are effective 2008-2009 (aEURoeSecond ToweraEUR?). Each tower consists of eight layers of coverage, each layer providing $10 million in policy limits. The bottom four layers in both towers provide coverage for losses resulting from the individual acts of directors and officers (side A coverage), losses resulting from BancorpaEUR(TM)s indemnification of directors and officers (side B coverage), and losses sustained by Bancorp and its subsidiaries for securities law violations (side C coverage). The policies provide coverage for directors and officers before providing coverage to Bancorp and its subsidiaries, including IndyMac MBS. The top four layers provide only side A coverage.
In its declaratory relief action, IndyMac MBS sought a determination of rights and liabilities for coverage of the Underlying Actions under all these insurance policies, and specifically asked the court to determine whether each action was covered under the First Tower or Second Tower, and the amount potentially available in the Underlying Actions.
The carriers providing coverage under sides A, B and C (the aEURoeABC carriersaEUR?) and the carriers providing coverage only under side A (the aEURoeside A carriersaEUR?) filed motions to dismiss for lack of subject matter jurisdiction under Rule 12(b)(1). The side A carriers also based their motion on failure to state a claim under Rule 12(b)(6).
The court specifically noted that IndyMac MBS must satisfy the constitutional aEURoecase or controversyaEUR? requirement imposed by Article III, so that the alleged injury is aEURoedefinite and concreteaEUR? and aEURoeimmediate and not too speculative.aEUR?
The court found that as to the ABC carriers, there is no Article III standing, because the applicable policies prioritize coverage, so that directors and officers receive any available coverage before IndyMac MBS. Accordingly, IndyMac MBSaEUR(TM)s claim for coverage is too remote to satisfy Article IIIaEUR(TM)s immediacy requirement, because for coverage to be available, any coverage available to directors and officers would need to be paid first. Judgments against the directors and officers (which are the subject of at least several Underlying Actions not nvolving IndyMac MBS) would need to be paid first. In addition, the insurers provide coverage in layers greater than a $2.5 million deductible, which must be exhausted before any insurance proceeds are available. Here, IndyMac MBS provided no allegation that the deductible has been paid or that the primary layers of coverage are exhausted, potentially triggering the excess layers.
Accordingly, any potential for coverage is too speculative.
As to the side A carriers, the court found that because the side A carriers provide coverage only for directors and officers, IndyMac MBS has no stake in the allocation of insurance proceeds under these policies, and lacks any legal interest in the insurance proceeds available under these policies.
The District Court dismissed IndyMac MBSaEUR(TM)s action in its entirety on Sept. 7, 2011.
Tressler Comments
More than 300 banks have failed since the beginning of the current financial crisis in 2008. IndyMac was one of the largest failed banks, with $32 billion in assets, second only to Washington Mutual. Predictably, IndyMacaEUR(TM)s failure has given rise to a variety of lawsuits, and we can expect more lawsuits to be filed in connection with IndyMac and other failed banks. For example, the action discussed above is only one of several coverage-related actions that have been filed in the wake of IndyMac BankaEUR(TM)s failure.
The bankruptcy trustee for Bancorp also had a case pending before Judge Klausner in the Central District of California, which he voluntarily dismissed in the wake of the courtaEUR(TM)s ruling in the IndyMac MBS action, and re-filed in California state court. Siegel v. Underwriters, Los Angeles County Superior Court, Case No. BC469091. Presumably, the trustee is hoping that the lack of any Article III standing requirement in California state court will allow its action to proceed. The side A carriers filed a declaratory relief action against Bancorp directors and officers in a case pending before Judge Klausner, to which the ABC carriers have been added by counterclaim. XL Specialty Inc. Co. v. Perry, Case No. 2:11-cv-2078-RGK-JCG (C.D. Cal.). It appears likely that this action will provide the forum for coverage-related decisions regarding the Bancorp D&O policies to proceed.

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