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Zucker v. Rodriguez

United States Court of Appeals, First Circuit

March 27, 2019

CLIFFORD A. ZUCKER, in his capacity as plan administrator of R&G Financial Corp., Plaintiff, Appellant,


          Alfred S. Lurey, with whom Stephen E. Hudson, Todd C. Meyers, Kilpatrick Townsend & Stockton, LLP, Carlos A. Rodríguez-Vidal, and Goldman Antonetti & Córdova, L.L.C., were on brief for appellant.

          Joseph Brooks, Counsel, Federal Deposit Insurance Corporation, with whom Colleen J. Boles, Assistant General Counsel, and Kathryn R. Norcross, Senior Counsel, were on brief for appellee Federal Deposit Insurance Corporation.

          Andrew W. Robertson, Zwerling, Schachter & Zwerling, LLP, Roberto A. Cámara-Fuertes, and Ferraiuoli LLC on brief for appellees Joseph R. Sandoval, Jaqueline Marie Cates-Elledge, and Conjugal Partnership Sandoval-Elledge.

          Andrés Rivero, Alan H. Rolnick, M. Paula Aguila, Bryan L. Paschal, and Rivero Mestre LLP, on brief for appellees Rolando Rodriguez, Andres I. Perez, Vicente Gregorio, Melba Acosta-Febo, and Victor J. Galan.

          Before Lynch, Stahl, and Kayatta, Circuit Judges.

          LYNCH, Circuit Judge.

         In 2010, R&G Financial Corporation, a holding company, entered Chapter 11 bankruptcy after its primary subsidiary, R-G Premier Bank of Puerto Rico (the Bank), failed. Weeks prior, Puerto Rican regulators had closed the Bank and named the Federal Deposit Insurance Corporation (FDIC) as the Bank's receiver. The Bank's failure was one of the largest in Puerto Rico's history, costing the FDIC's Deposit Insurance Fund at least $1.2 billion.

         Two years after the Bank's failure, Clifford Zucker, the plan administrator (the Administrator) for the Chapter 11 estate of R&G Financial (the Holding Company), filed this suit against six of the Holding Company's former directors and officers (the Directors) and their insurer, XL Specialty Insurance Company.[1]The Administrator's complaint alleged that negligence and breach of fiduciary duties owed to the Holding Company caused the Bank's failure and the Holding Company's resultant loss of its investment in the Bank. The FDIC intervened to defend its interests as the Bank's receiver, arguing that the claims asserted belonged to it and not to the Administrator. We affirm the district court's dismissal of the complaint, albeit on different reasoning. See Zucker v. Rodriguez, No. 12-CV-1408, 2017 WL 2345683, at *1 (D.P.R. May 30, 2017).[2]

         The FDIC and the Directors argue that the Administrator's complaint must be dismissed because the claims he has asserted for the Holding Company are the FDIC's under 12 U.S.C. § 1821(d)(2)(A), a provision of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). That provision provides that as receiver of a bank, the FDIC "shall . . . succeed to . . . all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder . . . of such institution with respect to the institution and the assets of the institution." We agree that, under § 1821(d)(2)(A), the FDIC succeeded to the Administrator's claims, and affirm on that ground.


         The following facts are taken from the complaint, except where otherwise noted. Cooper v. Charter Commc'ns Entm'ts I, LLC, 760 F.3d 103, 105 (1st Cir. 2014).

         A. The Bank and the Holding Company

         The Bank was established in 1983 as a federal savings bank and became a subsidiary of the Holding Company in 1994.[3] Like other savings and loan, or thrift, institutions, the Bank's primary lending activity was home mortgages. See Executive Summary, OIG Report; see also United States v. Winstar Corp., 518 U.S. 839, 844-45 (1996) (plurality opinion) (describing the thrift industry). In the 2000s, the Holding Company, with its subsidiaries, was Puerto Rico's second-largest residential mortgage loan originator and servicer. As the Holding Company's primary subsidiary, the Bank did most of this lending.[4] Indeed, from 2009 until the Bank's failure, the Bank's assets made up over ninety percent of the Holding Company's assets. See OIG Report at 3 n.2.

         The Holding Company and the Bank had separate boards, but the same individuals served on both boards. See id. at 3. The entities also shared a CEO.[5] Victor Galán, a defendant here, was the Holding Company's President and Chief Executive Officer (CEO) until 2006. He remained Chairman of both boards until December 2008, and he controlled at least fifty-eight percent of the Holding Company's stock during the relevant period. Rolando Rodríguez, also a defendant, took over as President and CEO of the Holding Company in 2007. Galán and Rodríguez also served as CEOs of the Bank while leading the Holding Company. See Complaint at 5, Galán-Alvarez, No. 12-CV-1029.

         Also among the director defendants are Joseph Sandoval, Vincente Gregorio, Andres Pérez, and Melba Acosta-Febo, each of whom served at some relevant time as Executive Vice President and Chief Financial Officer (CFO) of the Holding Company. The record does not say what roles, if any, these defendants held at the Bank.

         B. Mid-2000s Accounting Fraud Scheme

         While Galán and Sandoval were at the helm, the Holding Company and the Bank engaged in an accounting fraud scheme with two other major lending institutions in Puerto Rico -- First BanCorp and Doral Financial Corporation (Doral) -- and their subsidiary banks. The accounting scheme, which ran from 2002 until 2005, involved a series of transactions in which the Holding Company or the Bank transferred interest in non-conforming mortgage loans to First BanCorp, Doral, or to their subsidiary banks. The participants then improperly recorded these transactions on their books as true sales; with proper accounting, the transactions would have been categorized as secured lending transactions. Categorizing the transactions as true sales allowed the participants to account for the sales as gains. Ultimately, because of the scheme, each bank holding company reported greater assets than it actually had and appeared healthier than it actually was on capital- and risk-related measures.

         In 2005, investors questioned assumptions disclosed in Doral's 2004 Form 10-K used to calculate the "gains" from its transactions with the Holding Company and the Bank. In April of that year, the Holding Company publicly acknowledged that because of the accounting scheme, it would need to restate its consolidated financial statements for 2003 and 2004. The consolidated statements presented aggregated financial information for the Holding Company and its subsidiaries, including the Bank. The errors in the consolidated financial statements were sizable, in dollar terms: for example, for 2004, the Holding Company misstated its net income as $160.2 million when it had actually suffered a loss of $15.9 million.

         C. The Bank's Failure

         The Administrator's complaint alleged that negligence and breach of fiduciary duties by the Directors in the aftermath of this accounting scheme led to years-long delays in the correction of the consolidated financial statements for 2002 through 2004 and in the preparation and issuance of new consolidated financial statements for 2005 through 2008.[6] These delays, the complaint said, led to the failure of the Bank and to resulting losses to the Holding Company.

         Between 2005 and 2010, the Holding Company and its subsidiaries, including the Bank, desperately needed to replenish the capital eroded during the accounting fraud and subsequent class action litigation.[7] These capital shortages were exacerbated by the 2008 collapse of the housing market in Puerto Rico and elsewhere. In 2006 and 2007, in an apparent effort to raise capital, the Holding Company had sold off several other non-bank subsidiaries. However, it retained ownership of its wholly owned mortgage lending business, R&G Mortgage Corporation, and the Bank.[8]Further capital-raising efforts faltered because, without up-to-date consolidated financial statements, it was impossible, the Administrator's complaint alleged, for the Holding Company and its subsidiaries to access capital markets or private capital sufficient to remain solvent.

         The Bank failed on April 30, 2010 when Puerto Rican regulators closed it and named the FDIC as its receiver. By that time, the Holding Company had made R&G Mortgage a subsidiary of the Bank. The Holding Company had transferred all of its stock interests in R&G Mortgage to the Bank to satisfy debt owed by R&G Mortgage to the Bank. When the Bank closed, its liabilities exceeded its assets by at least $1.2 billion. See OIG Report at 1. This $1.2 billion difference is the estimated loss to the FDIC's Deposit Insurance Fund because of the Bank's failure. Id.

         Having lost its only significant operating subsidiary, the Holding Company filed for Chapter 11 bankruptcy in May 2010.

         D. Procedural Histories of the Administrator's Action and the FDIC's Action

         The Administrator initiated this proceeding in the Holding Company's Chapter 11 case in May 2012. The complaint's Counts I through IV alleged that the Directors acted negligently and breached their fiduciary duties to the Holding Company by failing to implement and maintain effective internal controls over financial reporting. Counts V and VI alleged that the Directors breached a fiduciary duty of care owed to the Holding Company by failing to provide complete and accurate financial reports to the Holding Company's board. (Recall that the financial statements of the Holding Company and the Bank were consolidated.) Count XI of the complaint was brought against XL Specialty Insurance Company and alleged that the claims asserted fell within the coverage provided to the Directors by XL. Finally, Counts VII through X of the complaint were ultimately withdrawn and are discussed below.

         The sole injury alleged in the complaint was the Holding Company's loss of its interest in the Bank when the Bank failed. "The loss of [the Bank] caused severe injury to [the Holding Company]," the complaint stated, "in an amount to be proven at trial but not less than $278 million."

         Once the reference to the bankruptcy court was withdrawn and the case was in federal district court, the FDIC moved to intervene to protect its interests as receiver of the Bank. Its motion informed the district court of an action filed by the FDIC alleging that gross negligence by officers and directors of the Bank in the supervision of the Bank's lending ...

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