7th Circuit Court of Appeals
Civil – Banks/Fiduciary Duties
Elliott D. Levin, as trustee in bankruptcy for Irwin Financial Corp. v. William I. Miller, et al.
In a case that hinges on the distinction between direct and derivative claims, the 7th Circuit Court of Appeals decided that a failed bank can pursue two claims against former managers.
Irwin Financial Corp. subsidiaries Irwin Union Bank & Trust and Irwin Union Bank, FSB were closed in 2009 and taken over by the Federal Deposit Insurance Corp. The banks’ asset portfolios were dominated by mortgage loans, whose values plummeted in 2007 and 2008.
Elliott Levin, as Irwin Financial’s trustee in bankruptcy, sued three of the company’s directors and officers in an attempt to recover money. The FDIC intervened because whatever Levin collects, the FDIC will not be able to collect from the managers. The FDIC argues that most of Irwin Financial’s claims now belong to it under 12 U.S.C. Section 1821(d)(2)(A)(i).
Counts 1, 2, 4 and 5 of Irwin Financial’s complaint allege the managers violated their fiduciary duties to Irwin Financial by not implementing additional controls that would have protected the company from the managers’ errors in their roles as directors of the bank. The managers allowed the banks to specialize in the types of mortgages hard-hit in 2007 and 2008.
Count 3 alleges the managers allowed Irwin to pay dividends in amounts that left it short of capital when the housing bubble burst; and count 7 claims two of the managers breached their duties of care and loyalty when they “capitulated” to the FDIC and caused Irwin to contribute millions of dollars to new capital in the banks.
Judge Sarah Evans Barker in Indianapolis dismissed all of the claims after concluding they belong to the FDIC. The FDIC on appeal conceded that counts 3 and 7 belong to the bank, a result the 7th Circuit also found.
Indiana treats a stockholder’s claim as derivative if the corporation itself is the loser and the investor is worse off because the value of the firm’s stock declines, which is a good description of the theory behind counts 1, 2, 4 and 5, the 7th Circuit held.
The FDIC, not Irwin, owns any claim against the manager that depends on the choices made as director or employees of the banks, the judges held. And count 3 was prematurely dismissed, because the court did not dismiss it on the merits. The parties need to explore how Indiana’s version of the Business Judgment Rule applies to the managers’ activities with respect to information and distributions, wrote Judge Frank Easterbrook.
Count 7 also alleges a claim that the FDIC could not pursue as the banks’ successor. The judges remanded for further proceedings on counts 3 and 7.
Judge David Hamilton joined the majority opinion and believes this case “raises some broader policy questions that deserve consideration by the FDIC and Congress, including why the direct/derivative distinction should still matter, either under the current version of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, see 12 U.S.C. §1821(d)(2)(A), or perhaps other statutory amendments that Congress may want to consider.”
“Any student of the Great Depression who remembers the ‘runs’ on banks can appreciate those roles. But this case at its core presents a troubling effort. The holding company structure and the direct/derivative dichotomy are being used in ways that could allow those who ran the banks into the ground to take for themselves some of the modest sums available to reimburse the FDIC for a portion of the socialized losses they inflicted. If that result is not contrary to federal law, it should be.”
Indiana Court of Appeals
Civil Plenary – Insurance/Environmental Contamination
Indiana Insurance Company v. Patricia Kopetsky, and KB Home Indiana Inc.
The Indiana Court of Appeals granted rehearing to a case involving a dispute over coverage for environmental contamination and found that the “known claim” exclusion applies, not the known loss doctrine.
Patricia Kopetsky and Indiana Insurance Co. sought clarification from the appeals court regarding the possible finding that George Kopetsky knew of contamination in a housing development prior to obtaining CGL coverage from Indiana Insurance.
In June, the judges ordered a trial on the issue of whether the known loss doctrine would bar coverage by Indiana Insurance. George Kopetsky sold land to KB Home Indiana for a housing development. It’s alleged that he knew as early as May 2002 that some of the lots were contaminated. He obtained coverage from Indiana Insurance in April 2002 that was in effect for a four-year period.
The judges addressed the legal effect of Indiana Insurance’s knowledge of the contamination. Patricia Kopetsky argued that under the common law known loss doctrine, even if a jury found George Kopetsky knew of the contamination before taking out the policy, coverage would only be barred during the first of the four coverage years. The insurer, citing the known claim exclusionary language from the policies, argued that there is no coverage for the final three years, regardless of what the jury finds regarding George Kopetsky’s knowledge. It also argued that a finding he knew of the loss before obtaining coverage would bar coverage in the first year as well.
“We agree with Indiana Insurance because we conclude that, consistent with the Indiana Supreme Court’s approach in Sheehan Construction Co., Inc. v. Continental Casualty Co., 935 N.E.2d 160 (2010), the Policies’ ‘known claim’ exclusionary language controls,” Judge Cale Bradford wrote.
That case requires the court to start with the policy language and determine if the loss would be covered under the general coverage clause and if any exclusions apply that would preclude coverage, without regard to whether the loss constituted an “economic loss.”
George Kopetsky knew of the contamination no later than May 2002, so coverage is barred for the second through fourth years, regardless of the jury’s finding of any prior knowledge. Any finding of knowledge of contamination prior to the first year of coverage only applies to the first year, Bradford wrote.
The original decision is affirmed in all other respects.
Civil Plenary – Attorney Fees/Wrongful Death Statute
SCI Propane, LLC; South Central Indiana Rural Electric Membership Corporation; et al. v. Courtney Frederick, as Personal Representative of the Estate of Stephen Frederick, deceased
The Indiana Court of Appeals found that an estate of a man with dependents can recover attorney fees under the General Wrongful Death Statute, but the trial court erred in how it calculated the amount the law firm will receive.
SCI Propane and other defendants appealed the award of “reasonable” attorney fees to Courtney Frederick, as personal representative of the estate of Stephen Frederick. Her husband was killed when a gas propane tank exploded on the property of William and Betty Kindle. They had recently changed the gas-control valve for their water heater, and neither SCI, nor Midland-Impact LLP, which was hired by SCI to fill the Kindles’ propane tank, re-tested the system after the Kindles’ repair.
The explosion and fire injured six other family members and led to a liability lawsuit filed by the victims. A jury awarded the plaintiffs $27 million in damages, which was reduced based on the finding William Kindle was 35 percent at fault.
Frederick’s estate received more $3.7 million after the parties settled on the issue of damages, and the settlement did not include attorney fees. Those fees are at the heart of the appeal.
The defendants argue that the GWDS does not allow for the estate to recover attorney fees, as the statute does not explicitly say that attorney fees are recoverable when a decedent is survived by a spouse, dependent children or dependent next of kin. The defendants also argue that the trial court erred when it granted the estate nearly $2.33 million to pay attorney fees to Faegre Baker Daniels LLP. The trial court held under the GWDS, the fee recovery should be based on a reasonableness standard, but the defendants claimed the estate was entitled to recover only under the terms of its contingency fee contract with FBD.
The Court of Appeals decided that attorney fees are recoverable under the first part of the GWDS because those fees are the “type” of damages contemplated by the statute; such a conclusion comports with the court’s principles of statutory construction; and the Legislature has “acquiesced” to the recoverability of attorney fees.
But the amount the estate can recover should have been limited to the amount it was required to pay FBD under its contingency fee agreement, Judge Rudolph Pyle III wrote. The award of attorney fees under the statute is compensatory in nature, and an aggrieved party should not be put in a better position than had the tort not occurred.
The trial court’s award of damages places the estate in a much better position than it would have been through its contingent fee agreement. The estate owes FBD 33 and 1/3 percent of its recovery from the settlement, which equals a little more than $1.244 million. But the estate was awarded more than $2.3 in attorney fees.
The case is remanded for the trial court to enter a revised award of attorney fees that is consistent with the attorney fee damages the estate incurred under its contingency fee agreement.
Domestic Relation – Divorce/Marital Estate
Amy L. Falatovics v. Imre L. Falatovics
The Indiana Court of Appeals has ordered a trial court to take another look at the marital pot of a northern Indiana couple, finding the lower court should have included the husband’s ownership interest in two parcels of land he owns as a joint tenant with his brother.
Imre Falatovics has interest in the two parcels of land with his brother, subject to a life estate in his mother. These two parcels were excluded from the marital estate, which his wife, Amy Falatovics, claims is an error because he has a present pecuniary interest in the properties.
Imre Falatovics has a remainder interest in the land subject to a life estate which represents a pecuniary interest capable of valuation. It does not matter whether he owns the land as a joint tenant with rights of survivorship or as a tenant in common, the appeals court held.
“Wife argues that the difference is immaterial in this context because as a joint tenant, Husband has a fixed, vested interest in the parcels, which he can convey for value,” Judge Terry Crone wrote. “We agree with Wife. Husband’s remainder interest in Parcels 1 and 2, which he holds as a joint tenant, has a present pecuniary interest. His interest in the parcels is an asset capable of valuation. Accordingly, we conclude that the trial court erred in excluding Husband’s interest in Parcels 1 and 2 from the marital pot and reverse that portion of the decree.”
Amy Falatovics wants her husband’s interest divided equally between them, but the Court of Appeals remanded for further proceedings because the decision to divide the marital pot equally by the trial court was not based upon the proper valuation of the marital estate.
Miscellaneous – Expungement
Michael Kevin Mallory v. State of Indiana
The statute in effect when a man petitioned to have his Class D felony conviction records expunged said the trial court “shall order” the expungement if all statutory requirements have been met. As a result, the trial court erred in denying Michael Kevin Mallory’s petition based on testimony of his victims.
In 2000, Mallory pleaded guilty to two counts of Class D felony theft and successfully completed the obligations of his sentence in 2003. In November 2013, he sought to expunge his conviction records. He met all the statutory requirements in place at the time, so the trial court should have expunged his records based on the “shall order” language in I.C. 35-38-9-3.
But at the expungement hearing, his victims testified that they wanted the trial court to deny his petition. The judge found I.C. 35-38-9-3 to be in conflict with I.C. 35-38-9-9(d), which at the time, allowed a victim to submit an oral or written statement in support or in opposition of the petition at the time of the hearing. The statute also said, “The court shall consider the victim’s statement before making its determination,” language that has been removed by an amendment in the 2014 legislative session.
“It is well settled that the use of the word ‘shall’ is construed as ‘mandatory language creating a statutory right to a particular outcome after certain conditions are met,’” Judge Cale Bradford wrote. “Therefore, we agree with Mallory that Indiana Code section 35-38-9-3(e) unambiguously requires expungement if all statutory requirements are met.”
The judges remanded with instructions to grant Mallory’s petition.
Juvenile – Father’s Rights/CHINS
In the Matter of: S.A. (Minor Child), Child in Need of Services and M.H. (Father) v. The Indiana Department of Child Services
The Indiana Court of Appeals reversed the adjudication of a toddler as a child in need of services after finding the Department of Child Services did not establish that the child’s father is unlikely to meet the child’s needs absent court intervention based on his lack of parenting experience and previous diagnosis of having post-traumatic stress disorder.
Father M.H. was on active duty in the military most of S.A.’s life and had only seen the child twice before CHINS proceedings were initiated. His paternity was not established until these proceedings began. M.H. never paid child support nor provided anything for S.A.’s care while on active duty.
S.A. was removed from his mother’s care due to her drug use and adjudicated as a CHINS. S.A. lived with his maternal grandmother and stepfather at the time of the adjudication and remained in their care.
After his paternity was established, M.H. began spending time with his son and wanted to receive custody of the boy. He visited the child at the grandmother’s house, and while he was a little slow changing diapers and clothes on the child, he interacted well with him.
At a fact-finding hearing regarding S.A.’s CHINS status, the trial court criticized M.H. for not establishing paternity sooner and also referenced M.H.’s previous revelation to DCS that he had been diagnosed and treated for PTSD while on active duty. DCS and the court-appointed special advocate wanted the CHINS adjudication to continue, citing concerns about the boy’s unfamiliarity with his father and M.H.’s lack of prior parenting experience.
The trial judge continued with the adjudication, ordering M.H. to participate in services and submit documentation for his PTSD treatment or undergo a psychological evaluation.
The judges sua sponte addressed the CHINS proceeding and found father’s due process rights had been violated because by adjudicating the child as a CHINS prior to father’s fact-finding hearing, the father was deprived of a meaningful opportunity to be heard.
But they did not rely on that finding to reverse the adjudication. Instead, the judges cited insufficient evidence.
“DCS does not satisfy its burden of proof by simply highlighting Father’s shortcomings as a parent; rather, DCS must establish that Father is unlikely to meet the Child’s needs absent coercive court intervention. Neither the trial court’s findings nor the other evidence in the record supports such a conclusion. If it were sufficient for the purposes of CHINS adjudications that a parent has no prior parenting experience or training, then all new parents would necessarily be subject to DCS intervention,” Judge Patricia Riley wrote.
Father had resolved the allegations in the CHINS petition by the time of the fact-finding hearing. Also, his PTSD diagnosis was relied on by DCS as a post hoc justification, as it was not raised in the petition as a basis for DCS involvement.
“We find Father’s voluntary admission of his PTSD history to DCS and the CASA to be indicative of the fact that court intervention would not be necessary to compel Father into treatment,” she wrote.
Domestic Relation – Attorney Fees/Subpoena
Lisa B. Gonzalez v. R. Stanton Evans
The Indiana Court of Appeals decided that under Indiana Trial Rule 34(C)(3), refusing to comply with a discovery request solely because the parties can’t agree on an appropriate amount to pay does not constitute reasonable resistance to a discovery request.
Lisa Gonzalez subpoenaed R. Stanton Evans for information about her ex-husband’s business interests. Evans is a business partner in 31 of those endeavors, and Gonzalez believed that her ex-husband undervalued the marital estate in their divorce and fraudulently induced her to accept the property settlement agreement.
Evans believed the subpoena was too broad. Months passed, and although Evans had already compiled the nearly 1,000 pages of documents, Evans demanded $1,500 in attorney fees and $500 for his time before turning over the documents. Gonzalez paid the $500 but refused to pay attorney fees, instead filing a motion to compel. Evans claimed any grant of the motion should be conditioned upon her prepayment of damages incurred by Evans in his “reasonable resistance.” Evans never sought to quash or limit the subpoena in court and never sought a protective order.
The court eventually ordered Gonzalez to pay Evans $8,289.33 in attorney fees and did not award her any attorney fees for Evans initial noncooperation.
The gist of the case is Evans’ claims that he was entitled to insist that Gonzalez pay attorney fees to him in an amount he requested before he had to comply with the subpoena, based on T.R. 34(C)(3). The rule says damages shall include reasonable attorney fees incurred in “reasonable resistance.” He claimed he reasonably resisted the subpoena because she refused to pay any security against any damages he might sustain, so he is entitled to the attorney fees.
Citing IBM v. ACS Human Servs. LLC, 999, N.E.2d 880, 885 (Ind. Ct. App. 2013), the only other Indiana case directly addressing this trial rule, the judges concluded the amount of attorney fees awarded to Evans exceeded the bounds of what is contemplated by the rule.
“The key here in our view is that Gonzalez proximately caused only a small percentage of the attorney fees that Evans incurred,” Judge Michael Barnes wrote. Evans is entitled to attorney fees, but not the amount originally ordered. The judges ordered the trial court to determine how much in fees Evans incurred in relation to his compliance with the subpoena and document review.
The judges also held that the rule does not permit a non-party to unilaterally withhold documents requested by a subpoena on the condition that the requesting party first pays attorney fees in an amount demanded by the non-party.
“Even if Trial Rule 34(C)(3) permits a subpoenaed party to ask for prepayment of security from the subpoenaing party, we do not believe that a disagreement between the parties as to the appropriate amount of such security permits the subpoenaed party to withhold the documents indefinitely and to run up more attorney fees in the process,” he wrote. They also affirmed the denial of attorney fees to Gonzalez because they found she waived her claim by failing to present some evidence or argument regarding her attorney fees.•