Basic Claim Step Advice For Hurricane Earl Policyholders

Thu, 02 Sep 2010 16:52:02 GMT

Tina Nicholson is based in our Houston office. She wrote a very basic article "Steps For Handling an Insurance Claim" for the Hotel World Network. With Hurricane Earl winds beating the mid-Atlantic coast, her tips may be helpful for many policyholders:

Contact your insurance company immediately to notify it of the claim. The first contact will likely be a telephone call, but follow that up in writing. In some states, you are only entitled to certain legal rights if you notify the insurance company of the claim in writing.
Read your insurance policy carefully to determine exactly what your policy does and does not cover. For example, if your policy covers water damage but not mold damage, then you will need to emphasize to the insurance adjuster that your carpet is wet, rather than saying it "smells moldy.”
Document the damage with lots of photographs. Photograph every room and each item that is damaged. After the property is cleaned up and repaired, the insurance company may dispute the extent of the damage and you will need proof.
Hire reputable contractors for the repairs. Avoid “restoration” companies, particularly if they tell you they will only charge you what the insurance company pays. That situation can result in the restoration company getting the bulk of your insurance check and leaving you with a lot of out-of-pocket expenses.
Keep track of the amount of time your employees spend on clean-up or repairs. The insurance company may reimburse you for the cost of its time.
Provide the insurance company with all of the documentation it requests. If you fail to cooperate with the insurance company, you could jeopardize your insurance claim.
Document all contacts with the insurance company, including names, telephone numbers and conversations. It is common for a policyholder to receive conflicting information from the insurance company. The adjuster who says the company will pay for your loss may be overruled at the home office.
If your claim is not paid quickly and fairly, contact an attorney experienced in property insurance claims to determine your rights. Many states require the insurance company to pay your attorney fees if you have to take legal action to obtain full payment on your insurance claim.

Policyholders who are in the path of high wind events should require their insurers to closely inspect for the subtle damages caused by hurricanes. Many catastrophe adjusters do not have the time, experience, training, time or motivation to find these types of damage. The more thorough the examination of the structure following a loss, the better the chance of finding damage which often is overlooked until it causes other portions of the building to break down far sooner than the designed life expectancy.

Nichholson's tip to keep track of everything said and done by the adjusters and representatives of the insurance company can be crucial. Often, multiple adjusters will be assigned to a loss. Agreements and discussions are often forgotten or lost. Our strong suggestion is for the policyholder to carefully note every interaction with the insurance company by time and date.

Take many videos and photographs of obvious damage to your property and neighboring properties. Documenting the "war zone" scenario often found following a storm prevents any argument later by the insurer that the storm was not as bad as the policyholder suggests. Insurers that want to minimize damage payments often have few photographs of very badly damaged structures or devastated areas. Those same insurers will take many photographs of areas with little damage.

This observation is not meant for most of the adjusters who are trying to do a great job in getting benefits to policyholders, but you don't know what breed of adjuster you will be assigned. Safe is better than sorry.

More Bad News for James Hardie and Its Asbestos Compensation Fund

Thu, 02 Sep 2010 14:26:33 GMT

Managing legacy liabilities is never easy. For some, it can be a nightmare. Thus, James Hardie and its asbestos compensation fund took yet another hit yesterday through the loss of a tax appeal. The loss is described here in mass media in Australia. The mass media is focused on the fund's long term survival prospects in light of the adverse ruling and the continuing slumps in the building sector that buys product from James Hardie entities.

The company issued a statement yesterday (go here to investor relations page), but did not include a link to the opinion. According to the statement. the loss will result in a charge of about $ 330 million (US) unless there is a successful further appeal. The company also says it will not violate loan covenants by taking the charge.

Doubling Down: Protecting the Director or Officer Against the Unknown and Unforeseen

srosenberg@mc-ep.com (Stephen D. Rosenberg) — Thu, 02 Sep 2010 14:16:17 GMT

Here’s a little story that rung an old bell for me, and provides an object lesson on a point I have made in the past in various forums concerning the protections against liability that need to be sought by officers and directors. The story concerns a decision out of the Tenth Circuit finding that a company did not have to indemnify one of its former corporate officers in total for legal fees related to the officer’s defense of a securities fraud case, despite a written agreement that appeared to impose such an obligation. I have not studied this case enough to hazard a guess as to whether the former officer, or the company indemnifying the officer, might have had access to coverage of those defense costs under a directors and officers policy. However, the case illustrates a principle I have often mentioned with regard to issues concerning service as a director or officer of a company - there is no way to know for certain long in advance of any particular claims being made whether the company will stand by an apparent obligation in its by-laws or other documents to indemnify an officer, nor can one be absolutely certain in the abstract whether the officer will have coverage against any such future claims under a directors and officers policy. There are too many variables to be certain, as the story reflects and evidences. As a result, as I discussed in detail here some time ago, it is important for directors and officers to protect themselves by doubling down on their protections, and requiring both broad indemnification protections in the company’s documentation and that the company acquire directors and officers coverage that is as broad as possible. That way, if and when a claim is made, if one of the two (the company or the directors and officers insurer) balks at paying for the defense of the officer or director, a second avenue of potential payment still exists. Certainly, as appears to have been the case in the little exemplar story discussed in this post, there may be claims in which neither will have to pay for all of the costs of defending the officer or director against a claim, but at least this two pronged approach gives the officer a reasonable shot at having someone pay those fees for him or her.

What Difference Does it Make that Paulson "Instructed" Lewis Not to Disclose the Fed Backstop of the BofA/Merrill Deal?

Thu, 02 Sep 2010 09:15:35 GMT

One of the most interesting aspects of the complicated sequence of events surrounding the Bank of America/Merrill Lynch merger is the suggestion that Treasury Secretary Henry Paulson instructed BofA’s CEO Ken Lewis not to disclose to BofA shareholders that the government, in order to keep BofA from backing out of the deal, was backstopping BofA to the tune of billions of dollars of additional TARP funds and asset guarantees.

As I recently pointed out in my discussion of the opinion, Southern District of New York Judge Kevin Castel, in his August 27, 2010 dismissal motion ruling in the BofA/Merrill securities suit, found that the plaintiffs had not sufficiently alleged scienter in connection with BofA’s alleged failure to disclose this federal backstop.

In support of this conclusion, Castel said the defendants were "acting at the instruction of the Treasury Secretary during a moment of acute economic and political uncertainty. There are no allegations of personal gain derived from the federal funds, or a violation of a statute or regulation in a ‘highly unreasonable’ manner."

Castel doesn’t say that BofA didn’t have a duty to disclose the existence of the federal backstop. But if BofA had a duty to disclose the information, what difference does it make under the federal securities laws that Paulson told Lewis not to disclose it? As CNN Money journalist Colin Barr noted on September 1, 2010 in his Street Sweep blog post entitled "Judge Embraces ‘Paulson Made Me’ Defense" (here), Castel’s ruling has "left some observers scratching their heads."

Is Castel suggesting that there is some kind of governmental instruction or national emergency exception to the disclosure requirements under the federal securities laws? On what basis? Whose instruction is sufficient? What level of exigency is sufficient and who decides?

I was glad to see Barr’s post focusing on this aspect of Judge Castel’s ruling. I think these issues are both interesting and important, but for whatever reason, this part of Castel’s opinion has largely gone without public comment.

I did explore these issues in my prior post about Judge Castel’s opinion. Because I think these issues are worthy of attention and further consideration, and at risk of appearing a little too self-referential, I am reproducing here my prior comments about this aspect of Judge Castel’s ruling, in order to try to highlight these issues and to try to encourage further discussion of these questions. Here are my thoughts on this issue:

The BofA/Merrill Lynch merger was one of highest profile events during the peak of the global financial crisis in late 2008 and early 2009. The disclosures in early 2009 about Merrill’s losses and about the bonus payments were highly controversial. As a result, Judge Castle’s opinion in the consolidated shareholder litigation undoubtedly will provoke extensive scrutiny and commentary. There are indeed a number of parts of the opinion that are worthy of discussion, but the part this is the most interesting to me is his conclusion regarding the inadequacy of the scienter allegations in connection with the alleged failure to disclose the federal bailout that Lewis negotiated with Paulson.

As alleged in the complaint, this massive federal package was negotiated after the shareholder vote but before the deal closed. Its existence was apparently critical to the BofA board’s vote to go forward with the deal rather than to invoke the MAC clause. Moreover, it was understood that Paulson’s verbal agreement would have to be disclosed if it were reduced to writing – and accordingly, it was not reduced to writing so it wouldn’t have to be disclosed.

In concluding that these actions, which seem to have been taken precisely so that something everyone recognized as important would not have to be disclosed prior to the merger closing, do not give rise to a strong inference of scienter, Judge Castel relied on two considerations: (1) Paulson "instructed" Lewis not to disclose the federal package; and (2) Lewis had nothing to gain personally from withholding disclosure.

Though these factors undoubtedly are relevant, it strikes me that these points do not necessarily answer the question whether or not Lewis consciously misled BofA shareholders of acted with reckless indifference to the truth.

It could be argued that the allegations strongly suggest that Lewis did not want the BofA shareholders to know that the only reason the BofA board was willing to go forward with the deal was the existence of massive federal support. A plausible inference is that he, like Paulson, feared the chaos that would have emerged if these facts were revealed before the deal closed. It is also plausible to infer that Lewis and others didn’t want to anger Paulson and risk losing the proffered federal support.

These might all have seemed like good and sufficient reasons to withhold the information, but whether or not the reasons might have seemed good and sufficient does not answer the question whether Lewis and others acted with awareness of or conscious disregard whether BofA shareholders would be misled.

The fact that Paulson "instructed" Lewis to withhold disclosure does not answer the question whether or not Lewis was aware BofA shareholders would be mislead; to the contrary, it might actually suggest a concern that BofA’s shareholders couldn’t be trusted with the truth. (Indeed, Paulson’s instruction arguably does nothing more than make him complicit in the alleged deception, which in Paulson’s case, encompassed not just BofA shareholders but also U.S. taxpayers.)

Why is Paulson’s "instruction" relevant at all to the question whether or not the securities laws were violated? Is Castel suggesting that there is some sort of immunity from securities liability if the actions were at the request of a government official? It seems to me that the supposed relevance of Paulson’s instruction is surprisingly unexamined in Castel’s opinion, and the entire discussion of the issue is disconnected from the question whether or not Lewis knew that the shareholders would be misled.

Judge Castel’s emphasis on Lewis’s lack of personal benefit, while not irrelevant, is also beside the point. Lewis’s lack of personal benefit certainly doesn’t answer the question whether Lewis and others were deliberately taking steps to avoid disclosing material information because they were afraid of what would happen if they did.

In the final analysis, I think Judge Castel’s ruling can perhaps only be understood by his observation that these events took place "during a moment of acute economic and political uncertainty." While this fact has nothing to do with whether or not Lewis was consciously withholding information from BofA shareholders, it does suggest Castel is simply unwilling to permit liability for actions taken at the direction of senior public officials at a time of national exigency. It is almost as if he is saying, with shrugging shoulders, "What else was BofA going to do?" I certainly understand this way of looking at these circumstances. The problem is that it doesn’t necessarily address the questions required by the securities laws.

Judge Castel does not actually say he is inferring either an official instruction or national emergency exception to the requirements of the securities laws. But by emphasizing those aspects of the situation, he seems to be suggesting that these exceptions exist and apply.

To be sure, Judge Castel did observe that the scienter allegations regarding the nondisclosure of the federal package, which he characterized as "thin," might have been sufficient if they were accompanied by adequate allegations of motive or recklessness. It could be argued that his ruling is simply a reflection of insufficient factual pleading, which may be the case. Nevertheless, his analysis raises many questions that in my view are insufficiently examined, whether or not the scienter allegations themselves were or were not sufficient.

Given the high profile nature of this case, I suspect there will be much discussion of Judge Castle’s opinion in the weeks and months ahead. Legal proceedings arising out of these circumstances do seem to attract controversy – as, with for example, Judge Rakoff’s high profile rejection of the SEC’s settlement of its enforcement action against BofA arising from these circumstances.

Back to School: Add one more company to the list of for-profit education companies that have recently been sued in securities class action lawsuits. As I discussed in a recent post, within the space of just a few days in August, plaintiffs’ lawyers filed a cluster of lawsuits against for-profit education companies. On August 31, 2010, plaintiffs’ lawyers added one more company to the list when they sued Corinthian Colleges and certain of its directors and offices, based on allegations similar to those raise against the other for-profit education companies. A copy of the plaintiffs’ lawyers’ press release can be found here.

Old School: I wonder if this for-profit education company’s schools cover their chairs with Soft Corinthian Leather. For those who miss the reference, and in respectful memory of Ricardo Montalban, here is the original Chrysler Cordoba advertisement to which I was referring :

Sinkholes Remain in the News While Eyes are on Hurricane Earl

Thu, 02 Sep 2010 00:06:40 GMT

Since 2004, the majority of our law firm's large insurance battles have focused on hurricane loss insurance disputes. It is not surprising that we are getting phone calls from people asking whether our firm will open offices somewhere between North Carolina and Boston as Hurricane Earl is projected to hit that area. I was surprised by a recent newspaper article that indicated our firm "specializes" in sinkhole losses.

The Ocala Star Banner ran a story last week, "Insurers Say Sinkholes Impact Marion Market." The introduction in the first paragraph of the following exerpt is an exaggeration of our practice:

William “Chip” Merlin, president of Tampa-based Merlin Law Group, which specializes in sinkhole claims, said population growth and development is more to blame for rising sinkhole claims.

“Number one is population growth,” Merlin said. “We're seeing more structures in rural areas that are prone to sinkhole activity. Number two, we're seeing more in farm areas because of irrigation. With more development we're not going to see a decrease, we will continue to see an increase.

Another factor, Merlin said, is how difficult it is to deal with insurance companies when it comes to sinkhole claims. “Yes, we are seeing more claims,” Merlin said. “It's much more difficult to collect payment so more people are going to attorneys.”

The Merlin Law Group does not specialize in sinkhole claims. We represent policyholders with insurance disputes. A small portion of those claims involve sinkhole claims. Since most of our practice involves disputes with property insurance at issue, we represent many policyholders with sinkhole claims. Indeed, as I wrote this, two attorneys in our firm are in the third day of trial regarding a sinkhole loss that the insurance company has denied.

Floridians have a much more difficult burden to prove and collect for their sinkhole damaged properties than in the past. Several changes to the statutory laws limiting how, what and when the insurance companies pay their customers for sinkhole losses have passed the Florida legislature. The insurance industry wants even more burdens and restrictions for policyholders, even limiting representation. To justify this, they have lobbied the Florida Office of Insurance Regulation to find "data" to limit policyholder choices and opportunities when faced with a sinkhole claim.

I am writing this while embroiled in a two day mediation for a large Texas school district involving a Hurricane Ike loss. Some may consider a school district with dedicated legal counsel, architects and building construction employees to be a sophisticated client. The truth is that if these policyholders are having trouble collecting and are having to retain professionals such as us, policyholders with sinkhole damage need professional help even more, given the current complex state of the law.

In the interim, Hurricane Earl has a windspeed map that must be concerning to those living on the Eastern seaboard.

If Earl wobbles just a little to the west, you don't have to be a NASA rocket scientist to figure out somebody is going to be welcomed as a new member of the slabbed storm surge association.

An Emerging Consensus on Arbitrating Complex Commercial Disputes?

srosenberg@mc-ep.com (Stephen D. Rosenberg) — Wed, 01 Sep 2010 19:00:11 GMT

Well, I have written extensively on my skepticism about commercial arbitration as a tool for solving commercial disputes, and my belief that the courtroom is a better forum for most complex cases. It would take a lot of links to cover my past discussion of the pros and cons of this type of dispute resolution, and my reasons for thinking it a far weaker forum for a dispute between corporate entities than the courthouse. If you click on the category “Arbitration of Coverage Disputes” or the category “Arbitration” over on the left side, however, you will quickly find my past discussions of this topic. If you don’t want to do that, however, you could read this article here, which nicely sums up the same calculus that underlies my earlier posts on the efficacy, and sometimes lack thereof, of commercial arbitration.

Associations Should Mark October 24, 2010 On The Calendar

Wed, 01 Sep 2010 17:30:21 GMT

In a recent post on Property Insurance Coverage Law Blog, Jeremy Tyler discussed general issues with the statute of limitations for filing lawsuits. As Jeremy correctly pointed out, the statute of limitations is a legal deadline for filing a lawsuit. If a lawsuit is not filed before the statute of limitations has expired, the lawsuit may be barred, despite the merits of the action. Complying with the statute of limitations is extremely important, and any association that suffered damages from Hurricane Wilma should pay close attention to the status of its claim and immediately make decisions on how to best proceed.

In Florida, an action for breach of contract has a five year statute of limitations. Thus, the insured has five years to commence an action for breach of contract or the suit may be barred. While there certainly are exceptions to this rule, the main question that arises in the context of an insurance dispute is when the five year statute begins to run.

Insurance companies generally argue that the five year statute begins to run from the date of loss, i.e. the date the storm caused damage to the property. In some states like North Carolina and Wisconsin, this position is correct. In Florida, however, courts have generally held that the statute of limitations for breach of an insurance contract runs from the date that the insurer breached the contract. Therefore, the proper beginning of the five year timeframe should be the date the insurer breached the contract by failing to pay the amounts owed.

While the timeframe for filing a claim for breach of an insurance contract may seem clear in Florida, there are a number of other factors that need to be considered. Because most associations and board members are not familiar with insurance law, they may not realize when the breach actually occurs. Similarly, there can be issues raised with supplemental and re-opened claims that may cause the statute of limitation to run sooner than the policyholder thinks.

Hurricane Wilma was one of the most destructive hurricanes to hit the State of Florida. Many associations in southern portions of the state were significantly damaged. As the five year anniversary of Wilma approaches, associations should mark October 24, 2010 on the calendar. If you feel that you have not been properly paid for your damages, currently have an open claim being investigated, or are involved in an appraisal with the insurance company, I strongly suggest contacting an insurance coverage attorney now to ensure that your rights are protected. Waiting until it is too late may leave even the strongest claims unrecoverable.

An Ideal Time for Hospitals to Reevaluate Strengths & Strategies for Using those Strengths

Wed, 01 Sep 2010 15:36:59 GMT

Our McGuireWoods colleagues, Scott Becker and Bart Walker, recently published an article entitled "Strategies for Hospital Leadership and Identifying Strengths, Allocating Hospital Resources and Focusing on Profitable Niche Leadership" which contains key concepts on strategic planning for hospitals. In light of healthcare reform legislation, trends in reimbursement, growing interest in accountable care organizations and other issues facing the U.S. healthcare industry, now is an ideal time for hospital leaders to reevaluate their strengths and use those strengths to meet their challenges

FDIC: Banks Looking Up, But Number of Problem Banks Still Increasing

Wed, 01 Sep 2010 09:18:47 GMT

According to the FDIC’s Second Quarter 2010 Quarterly Banking Profile, which the agency released on August 31, 2010, aggregate indicators of banking institutions’ financial health are improving, but at the same time the number of "problem institutions" also continues to increase. The FDIC’s August 31, 2010 press release about the Quarterly Banking Profile can be found here.

The positive news is that the industry’s 2Q10 earnings of $21.6 billion are the highest since the third quarter of 2008. Almost two-thirds of the banks reported higher year-over-year quarterly net income. However, 20 percent of institutions did report quarterly net losses (compared to 29 percent 2Q09).

The quarterly report also reflects that provisions for loan losses, while "still high by historic standards," represented the smallest total since the first quarter of 2008. Fewer borrowers are falling behind on their loan payments. With respect to just about every type of loan, troubled loans declined for the first time in more than four years. The only exception was commercial real estate loans, which continued to show increased weakness.

Despite this relatively good news, the number of problem institutions increased in the second quarter, to 829, up about 7% from the 775 problem institutions at the end of 1Q10, up 18% from the 702 problem institutions at the end of 2009, and up almost 100% from the 416 at June 30, 2009. (The FDIC defines a "problem institution" as those it rates as "4" or a "5" on its one-to-five scale of rating banks’ financial and operating criteria. The FDIC does not disclose the names of the problem institutions.)

The number of problem institutions is the highest since March 31, 1993, when there were 928.

To put the latest number of problem institutions into perspective, at the end of the second quarter, there were a total of 7,830 insured institutions. So the 829 problem banks represent about 10.6% of all insured institutions.

Or to put it a different way, one out of every ten banks in the United States is a problem institution. (And that’s after the 283 banks that have failed since January 1, 2008 have been taken out of the equation).

Though the number of problem institutions increased in the quarter, the assets associated with these banks did decrease. The 829 problem institutions at the end of the second quarter represented assets of about $403 billion, down slightly from the $431 billion that represented by the 775 problem institutions at the end of 1Q10.

To put the assets associated with the problem institutions into perspective, the collective assets of all insured institutions totals $13.2 trillion. The $403 billion in assets associated with the problem institutions represents about 3.1% of the industry’s total assets.

One other sign that the banking industry as a whole may not yet be in the clear, notwithstanding the relatively positive industry news overall, is that during the second quarter and for the first time in the 38 years for which data is available, there were no new insured institutions.

Since January 1, 2008, 283 banks have failed, 118 in 2010 alone. But even with the growing numbers of failures (each one of which presumably reduces the number of problem institutions by a count of one), the number of problem institutions continues to grow. The likelihood seems to be that the number of failed banks will continue to grow for some time to come.

Eric Dash’s August 31, 2010 New York Times article about the report can be found here.

Ain't Too Proud to Beg: The D&O Diary has been selected as a nominee candidate for the LexisNexis Top 25 Business Law Blogs of 2010. The ultimate list of the Top 25 blogs will be chosen based on comment submited by members of either of two LexisNexis business law communities, the Corporate & Securities Law Community and the UCC, Commercial Contracts and Business Law Community. If you are a registered member of either of these communities, I would appreciate your comment in support. Members of the Corporate & Securities Law Community can submit comments here, and members of the UCC, Commercial Contracts and Business Law Community can submit comments here. The deadline for comments is October 8, 2010.

Things I Think . . . I Think

Tue, 31 Aug 2010 23:44:27 GMT

We all have our guilty pleasures. One of mine is reading my weekly issue of Sports Illustrated cover to cover. During this time of year, every issue ends with the same column titled “Things I Think I Think” – a column dedicated to “all the latest news, buzz, and inside information”. Like all of you, I have been bombarded with buzz daily about the latest developments in healthcare reform. In an attempt to keep up, I have immersed myself in the law for the last several months, trying to make as much sense of it as I can. After taking in all of this information, and adding in a few of my own thoughts, here (so far) is what I think…I think.

Even though I get email every day on how to be one, and the law allows for the formation of them, I don’t believe that ACOs are ready for primetime just yet. There is a lot of good that may come from them in theory, but the operational challenges of actually designing, implementing, and successfully managing an ACO are daunting at best. The complexities of actually pulling all of the moving parts together may prove too much for the majority of healthcare organizations, leaving much of what the law has set out to do a distant goal for many.
The pilot project that CMS has underway for orthopedics, interventional cardiology, and cardiovascular surgery is already approaching the halfway mark, with preliminary performance data expected in November of 2010. These bundled payment models are likely here to stay, at least in high dollar specialties. There are several facts that lead me to this conclusion. First, these models are designed to jointly incentivize physicians and hospitals in their efforts to deliver high quality care by removing the primary reimbursement barrier facing them today; disparate payment systems that are misaligned. Secondly, the outcomes metrics in these specialties are well developed, and some of them have already been rolled out by CMS for public comment outside of the demonstration project to be used in other portions of the healthcare law. And last, but certainly not least, the enormous amount of financial savings that is likely to be gained by implementing these models will simply be too great for CMS and other payers to ignore.
Physician payment reform may not come in the form of repealing the SGR, but will be greatly shaped by the Value Based Payment Modifier section of the new law. This section (section 3007) is designed to reward physicians who deliver high quality, low cost care with respect to their peers by changing the amount paid per work RVU. The metrics to be used are due out by January 2012, rule making is set for 2013, with full implementation scheduled for January 1, 2015. This may seem a long way out, but the advantage this modifier may have over other methodologies is that it avoids the need to overhaul the payment infrastructure currently in place. Once quality metrics are defined, you will simply be paid more (or less) per work RVU using the same systems that CMS currently has in place.

At the end of the day, I guess what I think I think is that even though we have a long way to go before all of the pieces of the puzzle fall into place for truly meaningful reform, we are soon to see the effects of several of these pieces, signaling the beginning of truly significant change to our system.

Prudential has strategies to reduce Long Term Disability claim payments

gdell@dnslaw.com (Gregory Dell) — Tue, 31 Aug 2010 20:00:00 GMT

The Prudential Insurance Company of America (PRU), one of the world’s largest long term disability insurance companies, recently issued a press release regarding their return to work strategies. In my opinion, when Prudential or any long term disability insurance company discuss “return to work strategy”, this is tantamount to saying how quick can we stop paying a long term disability income claim. It’s no secret that Prudential can make a lot more money if less people are paid long term disability. No employer wants to see their employee miss work due to a disabling condition, but it is is scary when a long term disability company thinks they are qualified to make decisions about when a disabled person can return to work. Unfortunately, many long term disability insurance companies rely on computer programs to tell them how long a person should be out of work based upon a specific medical condition. Prudential and many other long term disability insurance carriers attended a national conference to discuss “effective return to work strategies”.

For more information about the meeting check out dmec.org.

Prudential’s August 26, 2010 Press Release states as follows:

NEWARK, N.J., Aug 26, 2010 (BUSINESS WIRE) — Kimberly Mashburn, vice president of Strategic Partnerships for Prudential’s Group Insurance business, a unit of Prudential discussed the critical role of managers and effective return to work strategies at the annual Disability Management Employer Coalition (DMEC) conference, August 1- 4, 2010 in San Diego, Calif.

Workplace absence can be very expensive. Costs and consequences of absence can include direct costs like disability premiums, benefits paid to disabled employees, continuing employee benefits, and wages to replacement workers. Also, indirect costs like reduced productivity, increased overtime, increased supervisory time, increased stress & pressure, recruitment and training of replacement workers, increased medical costs, and administrative cost all add up. While many disability absences are out of a manager’s control, some may not be.

“Some disability absences are driven by subjective feelings about work, so managers should make sure they are building an environment that breeds commitment,” said Mashburn. During her August 1 workshop, she provided the following actionable steps that managers can take to enhance prompt return to work and boost productivity:

Create a positive work environment that employees want to come back to;
Prepare for planned absences by discussing how to cover the work with the employee going on leave;
Keep personal and professional connections when employees are out of work;
Plan for the return to work using all the options available at your company; and
Monitor the return to work to help ensure additional absence is mitigated.

“New laws, escalating costs, fewer employees, and health and productivity issues are the challenges of the post-recession economy,” said Joe Wozniak, Certified Professional in Disability Management and Chief Financial Officer of DMEC. “This year’s conference allowed attendees to learn best practices and proven solutions that help employers return workers to productive employment from peers and thought leaders like Prudential.”

If you have questions about a long term disability claim please call 800-828-7583 for a free consultation or use our contact page.

K&L Gates Webinar: HUD Interpretive Rule - Are Marketing Agreements Under Siege?

Tue, 31 Aug 2010 17:17:50 GMT

K&L Gates Webinar: HUD Interpretive Rule – Are Marketing Agreements Under Siege?

Date/Time: Tuesday, September 14, 2010 at 2:00 p.m. EDT

Location: Attend via Webinar. Login directions will be distributed via email the day before the event.

RSVP: Click here to register online. Registration closes at 5:00 p.m. EDT on September 10.

As Section 8 of the Real Estate Settlement Procedures Act ("RESPA") provides an exemption for payments made by one person to another person for actual, necessary, and distinct services, mortgage lenders, homebuilders, real estate brokers, title insurance companies, and other settlement service providers have maintained marketing agreements for decades without much guidance from the U.S. Department of Housing and Urban Development ("HUD"). That all changed on June 25, 2010 when HUD issued a RESPA interpretive rule regarding the permissibility of marketing agreements between home warranty companies and real estate brokers and agents. Although the interpretive rule provided RESPA guidance in the limited circumstance of per-transaction home warranty marketing agreements, HUD's interpretation has caused settlement service providers generally to question the RESPA compliance of flat fee marketing and service agreements, as well as the permissible types of marketing services performed under these agreements.

Join us on Tuesday, September 14, 2010 from 2:00 p.m. until 3:15 p.m. Eastern Daylight Time for a webinar to learn more about HUD's interpretive rule and the effects this interpretation could have on your existing marketing agreements. Time for questions and answers will follow the webinar presentation.

Speakers Include:

Phillip L. Schulman, Partner, Washington, D.C.
Holly Spencer Bunting, Associate, Washington, D.C.

Send Nord South!

Tue, 31 Aug 2010 16:13:34 GMT

Where did courts ever come up with the wild idea that medical opinions about a patient from a treating doctor and those from a reviewing doctor, who just looks at reports and test results without seeing the patient, should be given the same weight?

The responsibility of the physician in each case is worlds apart. Physicians know that seeing the patient (skin pallor, demeanor, eye condition, general appearance) is a major part of diagnosing disease or illness. How can such a personal examination by an experienced doctor be replaced by looking at words on paper?

The Social Security Administration has long ago concluded that it cannot, and has adopted the “Treating Physician” rule. This rule gives more credit to the opinion of a physician who actually treats a patient than it does to a doctor who is paid just to render a medical opinion on the patient. To most people, this would seem a sensible rule.

However, the U.S. Supreme Court in Nord v. Black & Decker, 538 U.S. 822 (2003),has refused to allow the “Treating Physician” rule to used by courts in ERISA cases. Why?

Sometimes, when the doctor has known the patient for some time, a change in appearance will offer a major clue to whether or not the patient is really ill. And, most importantly, a treating doctor can be held accountable for malpractice while a doctor examining for an insurance company cannot, because the person being examined is not that doctor’s patient.

But the Supreme Court in Nord suggests that a treating doctor may have a friendship or feel sorry for a patient and therefore shade his or her medical opinion toward the patient. However, this ignores the fact that for years insurance companies have been nurturing stables of doctors who never seem to find any claimant disabled, no matter how compelling that claimant’s injury or illness.

Until lately, courts have seemed to be blind to the practice of insurance companies using the same physicians over and over again based on the doctor’s inability to find disability. Many of these “experts” make all or most of their handsome livelihoods from these insurance company exams. Who would you think would be more liable to fudge examination results, the doctor who might feel sorry for a patient or the doctor who derives a major portion or all of his or her income from insurance exams?

To those who think there are doctors who would honestly follow their findings no matter what, we agree. However, such physicians are unlikely to have a stall in the disability insurance barn for long. We live in a world where to understand how things actually work you have to follow the money. When you follow insurance company money and a lot of it is going out because of one doctor’s opinions, you know there are going to be some changes made.

Which brings us back to the original question: Where did courts ever come up with the idea that medical opinions about a patient from a treating doctor and a reviewing doctor, should be given the same weight? And, why is it taking the courts so long to recognize this idea is so out of balance when everyone else involved in the disability insurance industry knows it is flat out wrong?

The obvious answer is that the insurance companies pay millions each year to PR and advertising people to blow smoke in the eyes of legislators and courts to perpetuate what is good for insurance companies, while claimants have no organized campaign to present inequities to the powers that be.

What’s to be done? Not much. Claimants will just have to chip away at the stodgy body of law which has grown since Congress enacted ERISA in 1974. Appellate courts seem to be starting to get the message of the unfairness of closing their eyes to reality. See MetLife v. Glenn, 128 S. Ct. 2343 (2008) at Page 2352, where the U.S. Supreme Court finally recognized that there is a conflict of interest when an insurance company, which will have to pay a claim, is given deference by courts to decide whether the claim is going to be paid. It doesn’t take a genius to figure that one out, especially in these times when “More, More, More” is the theme song in business.

Glenn should be a beginning. Notwithstanding Nord, more courts should come to the realization that treating doctors have their medical license to lose if they lie about their findings. On the other hand, many insurance company doctors lose their meal ticket if they don’t lie about theirs.

If courts do recognize the difference in responsibility, maybe, just maybe, they will generally afford the evidence of treating doctors an edge over insurance doctors, who never even see the claimant.

Is Mold Covered Under my Texas Homeowners Policy?

Tue, 31 Aug 2010 10:26:10 GMT

Oftentimes after a windstorm, flood, or plumbing leak, mold develops in a home. There are several standard insurance policies issued in Texas, and they all have some language that deals with mold. For example, a standard Texas Dwelling Policy—Form 3 specifically excludes mold damage, but covers an “ensuing loss” caused by water damage. These clauses seemingly contradict one another: how can there be no coverage for mold damage if it is an “ensuing loss” caused by water damage? In 2004, the U.S. District Court for the Eastern District of Texas discussed this issue in Malley v. Allstate Texas Lloyds.

In Malley, the homeowner had a standard Texas Dwelling Policy Form—3, insuring the house he owned in Beaumont, Texas. The house was damaged by plumbing leaks in the foundation during a 1999 freeze. Allstate denied Plaintiff’s subsequent mold claim, asserting that the policy contained an exclusion for mold damage. Plaintiff asserted that there was coverage under the “ensuing loss” provision, because it resulted from a covered event.

The policy stated:

We do not cover loss caused by:
.....
(2) rust, rot, mold or other fungi.
.....
We do cover ensuing loss caused by collapse of building or any part of the building, water damage or breakage of 349*349 glass which is part of the building if the loss would otherwise be covered under this policy.

The District Court noted that the Texas Supreme Court had not the construed “ensuing loss” provision in a policy like the one in this case, so the Court had to make an educated guess as to how the Court would rule. However, the District Court pointed out that Texas state intermediate courts have interpreted “to ensue” as meaning “to follow as a consequence in chronological succession; to result, as an ensuing conclusion or effect.” Citing another Texas case, the Court stated that:

Ensuing loss caused by water damage refers to water damage which is the result, rather than the cause, of settling, cracking, bulging, shrinkage, or expansion of foundations, walls floors, [and] ceiling.

Applying this analysis, the Court concluded that mold damage resulting from earlier water damage, as claimed by the Plaintiff, would not be covered. “The ‘ensuing loss’ caused by water damage would refer to water damage which is the result, not the cause, of mold damage.”

The Court decided that if it were to interpret the “ensuing loss” provision so as to allow mold coverage under the circumstances in this case, it would “very nearly destroy the exclusions.” And an interpretation rendering the exclusionary clause inoperative makes “no sense.”

In short, according to the U.S. District Court for the Eastern District of Texas, if you have a mold exclusion in your insurance policy, an “ensuing loss” provision will not negate that exclusion.

Guest Post: Bill Lerach on Whether Companies Underperform After Settling Securities Suits

Tue, 31 Aug 2010 08:33:04 GMT

In a post last week, I discussed a recent article by three academics in which they considered whether companies involved in securities lawsuits financially underperform after the cases are settled. The prior post provoked an unusual level of reader commentary. Among the comments posted was one from former plaintiffs’ securities class action attorney William Lerach.

Because I know readers enjoy a spirited discussion as much as I do, and because I believe this blog can and should encompass a wide variety of viewpoints, I communicated with Mr. Lerach to see if he would allow me to republish his comment in the form of a guest post on this site. Mr. Lerach agreed and so his comment is reproduced below. In order to appreciate the context for Mr. Lerach’s remarks, I strongly recommend reading the prior post on which he is commenting. Here are his comments:

After reading Kevin's description of this study concerning the post settlement performance of companies sued for securities fraud and his own evaluation of the paper I don't know whether to characterize them both as silly or stupid. They're probably a combination of both. Almost everything about the study and the associated commentary ignores the basic realities of the circumstances that surround the vast majority of securities fraud litigations. Most companies end up being sued for securities fraud––and then end up (with the help of directors’ and officers’ liability insurance) paying a settlement––because they have lied to the marketplace about the quality of the corporation's business or its products or finances. Frequently the revelation of the truth results and not only a sharp drop in the stock price but adverse financial revelations, a drop in revenues and cash flow, violation of bank or lending covenants and management shakeups. So are we surprised that companies with these characteristics suffer "greater risks of financial distress" after they later settle a lawsuit. Of course they face such risks because they were lying about the nature of their business earlier--to cover up flaws in products, performance or the business model itself. Often such companies face a" liar's discount" in the marketplace as a consequence of their prior bad conduct. It's not the lawsuit or the settlement of the lawsuit that injures the company-or impairs it ongoing performance of financial condition-it is the misconduct, the lying and the financial falsification of the executives that got the company sued in the first place that undermines the future performance and financial health of the company. We should not be surprised that companies that have committed securities fraud––whether it's stuffing the channel, lying about their products, or falsifying their financials, "perform worse than their peers". What is it about such companies and their managements that would cause us to believe that they would perform better than their peers? Kevin's conclusion that this flawed study suggests that suits are better directed at the individuals who perpetrated the misconduct i.e. the officers of the company-- and that this would somehow spare the corporate entity the financial distress of the settlement -ignores the reality of the indemnification obligation of the company which in virtually every case causes the company to fund the bulk of any settlement on behalf of the officers directors and then only to the extent it has not been paid for by directors and officers liability insurance, a contributor which would have no material adverse impact on the corporate entity. Underlying the study and Kevin's commentary on it is the notion somehow that suits brought on by half of shareholders merely transfer money from one group of shareholders to another and therefore really don't benefit anyone-- but harm the company. Not only does this ignore the reality that the bulk of the settlement monies in these cases comes from directors and officers insurance but it completely misses the point that the vast majority of settlement proceeds go to former shareholders of the company––those investors who purchased the shares of the company at an inflated price during the fraud period but who in most instances, out of anger , frustration, or even for tax considerations later sell the shares at a loss and have no further interest in the corporate entity. These are former shareholders not current shareholders with the equivalent of a tort claim against the company. I normally am not moved to comment on the academic work done concerning securities lawsuits but the simplistic nature of this study is so obvious that I could not resist pointing out these shortcomings. It may well be that there are many defects with securities fraud class action lawsuits but any financial underperformance of companies that follows their settling such lawsuits against them and their officers and directors is not one of them.

I would like to thank Mr. Lerach for taking the time to communicate his reaction to my prior post and for allowing me to reproduce his thoughts here. As I have already had my say on this topic, and because my business partners prefer that I attend to my day job from time to time, I will not respond here to Mr. Lerach’s comments. However, I expect some readers may have their own reactions to Mr. Lerach’s remarks, and I encourage everyone to consider adding their thoughts to this post using the blog’s comment feature. I have always hoped this site would serve as a platform for the exchange of ideas, and I encourage all readers to use post their thoughts for the benefit of other readers.

In a prior post (here), I reviewed the recent biography of Mr. Lerach, Circle of Greed. My interview with the book’s authors can be found here.

That's Reassuring: I am still trying to work out whether I am silly or stupid. Or perhaps both. In the meantime, I take some consolation from the fact that Lexis Nexis has selected The D&O Diary as one of the Top 50 Insurance blogs, as reflected in the icon embedded in the right hand margin.

In addition, George Mason Law Professor J.W. Verret, writing in the Truth on the Market blog on Monday, included The D&O Diary as one of twelve blogs he lists as his "favorite corporate law blogs." UCLA Law Professor Stephen Bainbridge, commenting on Verret's list on the ProfessorBainbridge.com blog, also included The D&O Diary on his (somewhat longer) list of corporate law blogs he reads regularly. My thanks to both venerable Professors (and fellow bloggers). I should add that my blog list is very much like theirs and that my list also includes both of their blogs.

A Sign of Things to Come in NY...Longer Review Times

ccurrin@currinlawoffice.com (Cailie Currin) — Mon, 30 Aug 2010 19:48:59 GMT

As many of you know who file life and annuity products in NY on a certified basis, there are only two NY Insurance Department employees who currently review these submissions. And soon there will be just one, as Ann Mone, an incredibly dedicated and hard worker, is expected to retire this year. And this year is rapidly moving towards its last quarter. Already there are signs that the inevitable slowdown is coming as she begins to make that transition. Her departure will be felt throughout those companies who do business in NY. It seems unlikely that she will be replaced, so the only possible outcome is a significant increase in review times as Ms. DiNola does her best to keep up with the submissions single-handedly.

On a personal level, I have tremendous respect and admiration for Ms. Mone and I will miss seeing her on visits to the NY Department. On a professional level her departure is a hugely important development as she does so much for all of the attorneys in the Life Bureau now. Even as she uses her accrued time it can be felt. I can only imagine what will happen to turnaround times when she leaves for good!

K&L Gates Webinar: The Politics of Dodd-Frank Rule Making - Comment Letters Are Not Enough

Mon, 30 Aug 2010 14:16:57 GMT

K&L Gates Webinar: The Politics of Dodd-Frank Rule Making – Comment Letters Are Not Enough

Date/Time:
Thursday, September 16, 2010 at 2:00 p.m. EDT

Location:
Attend via Webinar. Login directions will be distributed via email the day before the event.

RSVP:
Click here to register online. Registration closes at 5:00 p.m. EDT on September 14.

K&L Gates is pleased to invite you to our complimentary Webinar on the politics of rule making under the Dodd-Frank Act conducted by members of our Public Policy Practice Group in consultation with our Financial Services Practice Area.

The recently enacted Dodd-Frank Act is the most comprehensive regulatory reform in the financial services industry affecting nearly every part of the financial services industry. The new law is over 2000 pages long with 315 required rule makings, 145 required studies and reports, and dozens of ambiguities and internal contradictions. Many significant issues and thousands of details have been left to the regulators – who must proceed (and are proceeding) immediately and with unusual speed to fill in much of the substance – including issues such as:

To what extent will investment companies or their managers be considered companies "predominately engaged in financial activities" falling within the scope of Financial Stability Oversight Council (FORC) regulations that are to be designed to "identify risks to the financial stability of the U.S.," "promote market discipline" and "respond to emerging threats to the stability of the U.S. financial system"
What investor protection regulations will be considered by the new Investor Advisory Committee to be established within the SEC to advise and consult on investor protection, the effectiveness of disclosure and related issues?
What will be the prohibitions on sponsoring or investing in private funds under the Volcker Rule?
What is a "major swap participant" or a "major security-based swap participant," what constitutes a "substantial position" in swaps that could have systemic implications, and what positions will be deemed to constitute hedging or mitigating of "commercial risk," which will be excluded from computation of a substantial position?
What is a qualified residential mortgage loan under the risk retention rules?
How will the Bureau of Consumer Financial Protection define "unfair"?

But this is not simply a dry, technical process dependent on the filing of substantive comments in response to the notice of proposed rule making. Certainly that will be necessary. But those impacted by the new law just file comments at their peril.

This policy making process will be political from the start, with the regulators responsive to Congressional informal oversight and direction (which could change dramatically with the fall elections). One House Subcommittee Chairman held an oversight hearing with the SEC before the bill was even signed! Moreover, Congressional leaders already have recognized the need for additional legislation to make "technical corrections" and possibly substantive modifications as well. Companies and their trade associations will be seeking to use this process to minimize burdens and to advantage themselves competitively. What will you do? Some companies make things happen – others just say "what happened?" This Webinar will discuss how getting involved early and adopting a comprehensive approach to regulatory implementing activity can provide significant benefits.

To learn more, please join us for a one-hour complimentary Webinar on Thursday, September 16.

We’ll leave time at the end of the Webinar for questions.

For more information please visit the Financial Services Reform Webpage.

Speakers Include:

Bruce J. Heiman, Partner, Washington, D.C.
Daniel F. C. Crowley, Partner, Washington, D.C.
William A. Kirk, Partner, Washington, D.C.
Karishma Shah Page, Associate, Washington, D.C.

Hurricane Losses and the Statute of Limitations

Mon, 30 Aug 2010 12:03:34 GMT

Chip brought up the five year anniversary of Hurricane Katrina in his post last week titled, “The Hurricane Katrina Five Year Anniversary is Noted as New Hurricanes Lurk in the Atlantic Ocean.” The anniversary of Katrina will have special meaning to all who were affected by it, but this five year anniversary also has a practical importance to anyone in Florida that is still attempting to put the pieces back together after Katrina, thanks to Florida’s five year statute of limitations on contract lawsuits. Fla. Stat. § 95.11(2)(b) requires that “[a] legal or equitable action on a contract, obligation, or liability founded on a written instrument…” must be commenced within five years.

A statute of limitations works like a legal deadline by which a lawsuit must be filed. Each state has its own statute, and deadlines vary by the cause of action (e.g. contracts, negligence, and medical malpractice). In actual practice, the statute of limitations must be raised as a defense to have any effect, but if it is raised, it can act as an absolute bar to any recovery the plaintiff may be seeking.

There are some exceptions to the statute of limitations that lawyers can work with to try to get around these hard and fast deadlines, but it is always better to be safe than sorry with these deadlines. One exception is the relation back doctrine. Under Rule 15(c) of the Federal Rules of Civil Procedure, an amendment made to a pleading in a lawsuit will “relate back” to the original date of filing if:

(A) the law that provides the applicable statute of limitations allows relation back;

(B) the amendment asserts a claim or defense that arose out of the conduct, transaction, or occurrence set out — or attempted to be set out — in the original pleading; or

(C) the amendment changes the party or the naming of the party against whom a claim is asserted, if Rule 15(c)(1)(B) is satisfied and if, within the period provided by Rule 4(m) for serving the summons and complaint, the party to be brought in by amendment:

(i) received such notice of the action that it will not be prejudiced in defending on the merits; and

(ii) knew or should have known that the action would have been brought against it, but for a mistake concerning the proper party's identity.

In Tubre v. Western Diversified Cas. Ins. Co., No. 09-2482, 2009 WL 3447255 (E.D. La. Oct. 19, 2009), a Louisiana resident sued his insurance company for bad faith and damages resulting from Hurricane Katrina. The lawsuit was filed within the appropriate statute of limitations, but, unfortunately, the plaintiff named the wrong insurance company as the defendant. The plaintiff rectified the error, but not until after the statute of limitations had run in Louisiana. When the newly named defendant insurance company raised the statute of limitations as a defense, the plaintiff’s attorney asserted the relation back doctrine, claiming that the new lawsuit “arose out of the conduct, transaction, or occurrence” of the original lawsuit against the wrongly named insurance company. The plaintiff’s attorney satisfied part (c)(1)(B) of Rule 15, but could not satisfy parts (c)(1)(C)(i) and (ii),which require a newly named defendant be aware that it could or should have been named in the lawsuit before the statute of limitations ran out. The court held that the amended complaint did not relate back and dismissed the lawsuit against the insurance company.

This is just one example of what was probably a valid claim against an insurance company that was dismissed because it was filed after the statute of limitations passed, even though the delay was based on a simple error. The five-year anniversary of Hurricane Katrina passed last week for those in Florida. Other anniversaries are also coming up soon, such as September 13, for Hurricane Ike claims in Texas, and October 24, for Hurricane Wilma claims in Florida. If you have a potential claim based on one of these storms or know someone who does, please urge them to get competent legal help before it is too late.

Arbitration for Certain Disputes Between Unit Owners and Condominium Associations Is Not Mandatory

Mon, 30 Aug 2010 11:16:25 GMT

I wanted to continue a discussion that Jeremy Tyler initiated last week in his blog post, Mandatory Arbitration for Disputes Between Unit Owners and Condominium Associations. Jeremy introduced a recent case, Gomez v. Lakes of Carriage Hills Condo. Assoc., Inc., --- So. 3d ---, 35 Fla. L. Weekly D1822 (4th DCA August 11, 2010), which concerned the question of whether claims brought by unit owners against the association and various members of its board of directors must first be pursued through non-binding arbitration. Jeremy's post also presented an excellent analysis of certain “disputes” that by Florida Statute §718.1255 must first be submitted to non-binding arbitration before a lawsuit may be filed.

Jeremy discussed the court’s ruling on some of the issues involving the allegations of breach of fiduciary duties and the claims not subject to mandatory non-binding arbitration before the lawsuit. There were two additional claims in the lawsuit on which the trial court entered a judgment in favor of the association/directors. This post will discuss those two additional claims by the unit owners and the fact that those disputes were not subject to non-binding arbitration before the lawsuit.

The lawsuit was filed by a group of unit owners against the association and individual members of the board of directors. The unit owners were concerned with the way the association and board members addressed the damage and repairs in the aftermath of Hurricane Wilma.

First, the unit owners sought to enjoin or stop the association/directors from holding “secret meetings” without notice and involvement of the unit owners. This count of their lawsuit asked for a permanent injunction, which is an extraordinary remedy where a court can order a party to stop engaging in a certain type of activity. A party seeking a permanent injunction in Florida has a very high burden to prove that they are entitled to that extraordinary relief.

The unit owners did not submit any evidence to the court to establish a present, existing violation of the Florida Condominium Act by the current board of directors. The only evidence presented by the unit owners involved action taken and “secret meetings” held by past board members. The appellate court noted that:

[I]t is difficult to discern how the unit owners’ would continue to suffer the ‘irreparable harm’ necessary to obtain injunctive relief in that the association’s board of directors had experienced an almost complete turnover in membership since the [lawsuit was filed.]

The unit owners’ failure to demonstrate a current dispute with the association and board of directors over these “secret meetings” was fatal to that part of the lawsuit. The court could not enjoin or stop “secret meetings” that were not even taking place with the current board of directors. The appellate court affirmed the trial court’s disposition.

Second, the unit owners asserted that the association/directors misallocated Hurricane Wilma insurance proceeds that “belonged” to building five in the twelve building complex. The unit owners in Gomez alleged that building five residents suffered damages as a result of their potential exposure to future claims by the insurance carrier because the claim payment was used to repair buildings other than building five. The association/directors submitted affidavits that building five suffered minimal damage and that the insurance carrier was insolvent and already liquidated. The insurance carrier had not filed any action to recover any insurance payment specifically related to building five.

The unit owners acknowledged in court that their claim in this area of the lawsuit was speculative in nature. The appellate court affirmed the trial court’s ruling in favor of the association/directors on this claim since it was “a theoretical, speculative claim lacking in merit and unsubstantiated by any type of proof.”

It is important to note for purposes of this post that the two counts of the lawsuit, (1) seeking to enjoin the directors’ “secret meetings,” and (2) accusing the board of directors of misallocating Hurricane Wilma insurance proceeds, involved claims that are not subject to pre-suit arbitration. Generally, these types of disputes are likely to be litigated and not referred to arbitration first since they often require extensive discovery, testimony and legal assistance to resolve.

Motions to Dismiss Denied, Granted in Part in BofA/Merrill Merger Securities Suit

Mon, 30 Aug 2010 08:59:29 GMT

In an August 27, 2010 opinion so massive that its table of contents alone is five pages long, Southern District of New York Judge Kevin Castel granted in part and denied in part the motions to dismiss in the consolidated securities and derivative litigation arising from Bank of America’s January 2009 acquisition of Merrill Lynch and related events. Though the opinion dismisses parts of the lawsuit, other substantial pieces, particularly those related to the controversial bonuses paid to Merrill employees at the end of 2008, will be going forward.

Background

In the whirlwind of events in mid-September 2008 that included the collapse of Lehman Brothers and the dramatic government bailout of AIG, BofA agreed to acquire Merrill Lynch. According to the allegations in the subsequent lawsuits, one of the important features of the merger negotiations related to 2008 bonuses scheduled to be paid to Merrill employees in January 2009. The complaint alleges that BofA agreed to a $5.8 billion bonus pool and agreed that the bonus payments could be accelerated so the payout occurred prior to year end 2008 and before the merger transaction closed on January 1, 2009.

The complaint alleges that these bonus arrangements were not disclosed to BofA shareholders in the proxy materials that were sent to shareholders on November 3, 2008. (The arrangements were described in a "Disclosure Schedule" that was not available to shareholders prior to the shareholder vote).

On October 7, 2008, after the merger was announced but prior to the proxy vote, BofA conducted a $9.9 billion secondary offering. In October and November 2008, while shareholder approval of the transaction was pending, Merrill suffered losses of over $15 billion and also took a $2 billion goodwill impairment charge. The Complaint alleges that BofA’s senior officials were aware of these losses as they occurred. The Complaint alleges that the losses were so significant that BofA management discussed terminating the transaction, prior to the December 5, 2008 shareholder vote on the merger, in which BofA shareholders approved the merger.

In discussions after the merger vote about Merrill’s deteriorating condition, BofA senior management considered whether BofA had the right to terminate the merger under the merger agreement’s "material adverse change" (MAC) clause. On December 17, 2008, BofA Chariman and CEO Kenneth Lewis called Treasury Secretary Henry Paulson to advise him that BofA was "strongly considering" invoking the MAC clause. At Paulson’s invitation, Lewis flew to Washington for a face-to-face meeting, at which Paulson and Federal Reserve Board Chair Ben Bernanke urged Lewis not to invoke the MAC clause.

In subsequent conversations, Lewis again advised the government officials that BofA intended to invoke the MAC clause. According to the complaint, BofA’s board voted on December 21, 2008 to invoke the MAC clause, but on the following day, the Board voted to approve the merger, apparently in part based on Lewis’s statement that he had received verbal assurances from Paulson that BofA would received a capital infusion and a guarantee against losses from risky assets if the merger concluded. Lewis allegedly told the Board that the company would not enter into a written agreement concerning the federal funds because he could not risk public disclosure of the government loans prior to the transaction’s scheduled January 1, 2010 closing. Instead, the government bailout package would be disclosed at the time of the company’s earnings release later in January.

On January 16, 2010, BofA disclosed the fourth quarter losses of both BofA and Merrill and also revealed the federal funding package, which included $20 billion in capital and protection against further losses on $118 billion in assets. In following days, news about Merrill’s bonus arrangement broke.

In response to this news, BofA’s share price declined, and shareholder litigation ensued. The plaintiffs alleged that the defendants misstated and concealed matters related to the Merrill bonuses, the losses that accrued in the Fourth Quarter of 2008 after the merger was announced, and the pressure to consummate the deal from government officials. After the securities and derivative lawsuits were consolidated, the defendants moved to dismiss.

The August 27 Order

Judge Castel’s massive August 27 memorandum opinion and order covers a lot of ground, much of which cannot be easily summarized. For simplicity’s sake, I have summarized here only his rulings pertaining to the major categories of factual allegations.

Merrill Lynch Bonus Payments: First, Judge Castel held that the plaintiffs had sufficiently alleged actionable misstatement with respect to the parties’ "undisclosed written agreement authorizing the payment of bonuses to Merrill," because the proxy "portrayed bonus payments to Merrill employees as a contingent event, when, in reality, the parties had reached agreement as to the timing and range of bonuses." Accordingly, the proxy materials "omitted information necessary to render the statements truthful" and the omission "was material."

Judge Castel also held that the plaintiffs had sufficiently alleged scienter in connection with the Merrill Lynch bonus allegations, at least other than with respect to two specific BofA officials (Price and Crotty) who were not sufficiently alleged to have been involved in the negotiations or disclosures.

Judge Castel found that "the Securities Complaint explicitly alleges awareness of the bonus arrangement on the part of Lewis and [Merrill CEO John] Thain, which was memorialized in the secret Disclosure Schedule." Both of these men, Judge Castle said, "were closely involved in the details of the bonus negotiations, the resolution of which was concealed from BofA shareholders." These allegations, Judge Castle said, "raise an inference of recklessness that is ‘at least as compelling as any opposing inference of nonfraudulent intent.’"

With respect to the BofA directors, Judge Castel concluded that the allegations of scienter were insufficient, but the allegations were sufficient to allege negligence, and therefore, while not stating a claim under Section 10(b), were sufficient to state a claim under Section 14(a). Judge Castel observed with respect to the BofA directors that if they "were aware that the Joint Proxy was materially deficient (as is alleged) or if they should have been aware of deficiencies but took not steps to remedy or inquire about them (as is also alleged), the negligence standard of Section 14(a) would be satisfied." The allegations against Price and Crotty were insufficient event to establish negligence.

Fourth Quarter Losses: Judge Castel also concluded that the plaintiffs had sufficiently alleged actionable misstatements with respect to the alleged failure to disclose the fourth quarter losses. However, while concluding that the complaints adequately allege that the magnitude of the losses was material, the Complaint does not "sufficiently allege how the failure the failure to disclose the losses was ‘highly unreasonable’ and "represented an extreme departure" from the standards of ordinary care."

Judge Castel added that the securities complaint fails "to adequately and plausibly explain why a defendant would be motivated to accurately disclose a ‘turbulent’ and ‘tumultuous’ economic forecast for the quarter yet recklessly or intentionally conceal the dire reality as the quarter unfolded." Accordingly he concluded that the securities complaint "fails to allege scienter as to defendants’ failure to disclose the fourth quarter losses."

However, while Judge Castel concluded that the securities complaint "does not satisfy the threshold for alleging fraud" it does "adequately set forth a theory grounded in negligence." Accordingly he denied the defendants’ motion to dismiss securities plaintiffs’ Section 14(a) claims, as well the derivative plaintiffs’ claims, based on the failure to disclosure the fourth quarter losses.

Undisclosed Federal Bailout Arrangements: Judge Castel found that the plaintiffs had sufficiently alleged an actionable misstatement or omission with respect to the bailout understanding that Lewis reached with Paulson. He found that "detailed, non-conclusory allegations plausibly allege that BofA received concrete assurances from officials …that BofA would receive a massive capital infusion in exchange for proceeding with the Merrill acquisition" but that this agreement was "intentionally not memorialized to avoid public disclosure." Judge Castel concluded that these allegations "adequately alleged the particulars of fraud."

However, Judge Castel found that the allegations about the nondisclosure of the federal agreement fail to satisfy the requirements for pleading scienter. He noted that "the scienter allegations are thin" and that the complaint only explicitly asserts scienter as to Lewis.

Judge Castel noted that the complaint alleges a consciousness on Lewis’s part of avoiding liability because he sought a letter from Bernanke providing immunity from civil claims. Judge Castle observed that the securities complaint does not allege that Lewis or any other defendant "stood to gain from non-disclosure" and to not allege "a quid pro quo type arrangement" or that failing to disclose the federal funding brought a benefit to any defendant.

Judge Castel noted further that "the decision not to disclose federal support originated in an instruction by Paulson." There is, Judge Castel noted, "no allegation that Lewis or any other defendant hatched a scheme to avoid public disclosure of the federal capital support." Rather than "self-interested motivations," Lewis "acted as ‘instructed’ by Paulson." Judge Castel added that "while Paulson’s instruction would not necessarily preclude a finding of scienter if other allegations established motive or recklessness, it anchors the defendants’ concealment to Paulson’s directions."

The defendants, Judge Castel noted, "were acting at the instruction of the Treasury Secretary during a moment of acute economic and political uncertainty. There are no allegations of personal gain derived from the federal funds, or a violation of a statute or regulation in a ‘highly unreasonable’ manner."

The October 2008 Offering: Judge Castel denied the defendants’ motion to dismiss the securities plaintiffs’ ’33 Act claims, except to the extent the allegations related to non-actionable puffery.

Other Holdings: Judge Castel dismissed both the securities plaintiffs’ and the derivative plaintiffs’ allegations relating to the defendants’ disclosures regarding the defendants’ failure to invoke the MAC and the alleged failure to disclose the defendants’ consideration of possible invoking the MAC. Judge Castel also dismissed the plaintiffs’ claims relating to statements about the adequacy of BofA’s due diligence. Judge Castel also rejected the plaintiffs’ claims relating to a number of post-merger statements.

Demand Excused: Judge Castel concluded that the demand was excused on the derivative plaintiffs’ Section 14(a) claims because the directors "faced a ‘substantial likelihood’ of personal liability on the Section 14(a) claim at the time the suit was commenced," which would have "prevented them from exercising their disinterested and impartial judgment to a demand request." However, Judge Castel concluded that demand was not excused as to the derivative plaintiffs’ breach of fiduciary duty claims against the BofA board for approving the merger.

Discussion

It could be argued that the allegations strongly suggest that Lewis did not want the BofA shareholders to know that the only way the BofA board was willing to go forward with the deal was the existence of massive federal support. A plausible inference is that he, like Paulson, feared the chaos that would have emerged if these facts were revealed before the deal closed. It is also plausible to infer that Lewis and others didn’t want to anger Paulson and risk losing the proffered federal support.

I have in any event added Judge Castel’s opinion to my running tally of subprime and credit crisis-related dismissal motion rulings, which can be accessed here.?

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