CLIFFORD A. ZUCKER, in his capacity as plan administrator of R&G Financial Corp., Plaintiff, Appellant,
v.
ROLANDO RODRIGUEZ; MARIA VINA; CONJUGAL PARTNERSHIP RODRIGUEZ-VINA; NELIDA FUNDORA; ANDRES I. PEREZ; JOSEPH R. SANDOVAL; JACQUELINE MARIE CATES-ELLEDGE; CONJUGAL PARTNERSHIP SANDOVAL-CATES; VICENTE GREGORIO; CARMEN A. MARTINEZ; CONJUGAL PARTNERSHIP GREGORIO-MARTINEZ; MELBA ACOSTA; XL SPECIALTY INSURANCE COMPANY; VICTOR J. GALAN; CONJUGAL PARTNERSHIP GALAN-FUNDORA; FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver of R-G Premier Bank of Puerto Rico, Defendants, Appellees.
APPEAL
FROM THE UNITED STATES DISTRICT COURT FOR THE DISTRICT OF
PUERTO RICO [Hon. Pedro A. Delgado-Hernández, U.S.
District Judge]
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.
I.
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 ...