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Levin v. Miller

United States District Court, S.D. Indiana, Indianapolis Division

March 31, 2017

ELLIOTT D. LEVIN as Chapter 7 Trustee for Irwin Financial Corporation, Plaintiff,



         This cause is before the Court on Defendants' Motion for Summary Judgment [Docket No. 177], filed on May 17, 2016, pursuant to Federal Rule of Civil Procedure 56. Plaintiff Elliott D. Levin, as Chapter 7 Trustee (“the Trustee”) for Irwin Financial Corporation (“Irwin”), brought this suit against three of Irwin's former directors and officers, Defendants William I. Miller, Gregory F. Ehlinger, and Thomas D. Washburn (collectively, “the Managers”), alleging that Defendants breached their fiduciary duties to Irwin in various ways. For the reasons detailed below, we GRANT Defendants' Motion for Summary Judgment.

         General Factual and Procedural Background

         During the time period relevant to this litigation, Irwin was a public company that functioned as a holding company for two banks: Irwin Union Bank and Trust Company (“Union Bank & Trust”) and Irwin Union Bank, FSB (“Union Bank, FSB”) (collectively, “the Banks”). Beginning in the early 2000s, the Banks became heavily involved in the residential mortgage and commercial real estate markets. To advance this business, Union Bank & Trust had subsidiaries including Irwin Home Equity Corporation (“Irwin Home”), which engaged in nationwide consumer lending, and Irwin Mortgage Corporation (“Irwin Mortgage”), which engaged in nationwide mortgage banking activities.

         On September 18, 2009, in the aftermath of the real estate collapse in 2007, bank regulators closed Union Bank & Trust and Union Bank, FSB after they lost substantial sums as a result of bad loans and investments. The Federal Deposit Insurance Corporation (“FDIC”) was appointed receiver over the Banks. That same day, Irwin filed a voluntary petition for bankruptcy and Plaintiff Elliot Levin was appointed Chapter 7 trustee for the Irwin Estate to oversee its liquidation.

         At all times relevant to this litigation, Irwin was governed by a ten-member board of directors (“the Board”). Irwin's bylaws also provided that one officer would be chosen from among the directors to act as Chairman of the Board and Chief Executive Officer. Defendant Miller began serving as a director of Irwin in 1985 and was appointed as Chairman of the Board and Chief Executive Officer in 1990. Defendant Ehlinger served as Irwin's Chief Financial Officer throughout the relevant time period. Defendant Washburn served as Irwin's Executive Vice President from early 2000 until January 2008.

         The Trustee filed this action on September 16, 2011, alleging in seven counts that as former senior officers of Irwin, Defendants breached their fiduciary duties to the corporation. On September 27, 2012, we dismissed the Trustee's complaint on standing grounds, holding that the Trustee lacked standing to bring any of the claims alleged because they all belonged exclusively to the FDIC. The Trustee appealed our decision, and, on August 14, 2014, the Seventh Circuit affirmed the dismissal of five of the seven claims, but ruled that the Trustee had standing to bring the remaining two claims. The case was therefore remanded for consideration of the remaining two claims on their merits.

         In Count I (originally Count III), the Trustee alleges that Defendants violated their fiduciary duty of care to Irwin by failing to have in place a proper risk monitoring and assessment system and internal controls to ensure that financial information and projections provided to the Board would be accurate and reliable. The Trustee claims that, as a result of Defendants' failure, the Board acted on the basis of inaccurate and unreliable financial information, which led it to improvidently approve dividends, stock repurchases, and other distributions in 2006 and 2007, when it should have instead preserved capital.

         With regard to Count II (originally Count VII), the Trustee claims that Defendants Miller and Ehlinger breached their duties of care and loyalty to Irwin by “capitulating to bank regulators” in 2009 and causing Irwin to contribute millions of dollars in capital to two of its subsidiary banks when Defendants knew or should have known that such an act was futile and would not benefit Irwin, given the low likelihood that the Banks would survive. As the Seventh Circuit observed, the claim is essentially that Defendants “threw good money after bad.” Irwin v. Levin, 763 F.3d 667, 671 (7th Cir. 2014).

         Defendants moved for summary judgment on both of these claims on May 17, 2016. That motion is now fully briefed and ripe for ruling. We have detailed the facts relevant to each count more fully below as necessary.

         Legal Analysis

         I. Standard of Review

         Summary judgment is appropriate when the record shows that there is no genuine issue as to any material fact and that the moving party is entitled to a judgment as a matter of law. Fed.R.Civ.P. 56(c); Celotex Corp. v. Catrett, 477 U.S. 317, 322 (1986). Disputes concerning material facts are genuine where the evidence is such that a reasonable jury could return a verdict for the non-moving party. Anderson v. Liberty Lobby, Inc., 477 U.S. 242, 248 (1986). In deciding whether genuine issues of material fact exist, the court construes all facts in a light most favorable to the non-moving party and draws all reasonable inferences in favor of the non-moving party. See id. at 255. However, neither the mere existence of some alleged factual dispute between the parties, id. at 247, nor the existence of some metaphysical doubt as to the material facts, Matsushita Elec. Indus. Co. v. Zenith Radio Corp., 475 U.S. 574, 586 (1986), will defeat a motion for summary judgment. Michas v. Health Cost Controls of Illinois, Inc., 209 F.3d 687, 692 (7th Cir. 2000).

         The moving party bears the initial responsibility of informing the district court of the basis for its motion, and identifying those portions of [the record] which it believes demonstrate the absence of a genuine issue of material fact. Celotex, 477 U.S. At 323. The party seeking summary judgment on a claim on which the non-moving party bears the burden of proof at trial may discharge its burden by showing an absence of evidence to support the non-moving party's case. Id. at 325.

         Summary judgment is not a substitute for a trial on the merits, nor is it a vehicle for resolving factual disputes. Waldridge v. Am. Hoechst Corp., 24 F.3d 918, 920 (7th Cir. 1994). Thus, after drawing all reasonable inferences from the facts in favor of the non-movant, if genuine doubts remain and a reasonable fact finder could find for the party opposing the motion, summary judgment is inappropriate. See Shields Enter., Inc. v. First Chicago Corp., 975 F.2d 1290, 1294 (7th Cir. 1992); Wolf v. City of Fitchburg, 870 F.2d 1327, 1330 (7th Cir. 1989). But if it is clear that a plaintiff will be unable to satisfy the legal requirements necessary to establish her case, summary judgment is not only appropriate, but it is mandated. See Celotex, 477 U.S. at 322; Ziliak v. AstraZeneca LP, 324 F.3d 518, 520 (7th Cir. 2003). Further, a failure to prove one essential element necessarily renders all other facts immaterial. Celotex, 477 U.S. at 323.

         II. Count I

         In Count I, the Trustee alleges that Defendants violated their fiduciary duties to Irwin by presenting inaccurate financial information and unreliable financial projections to the Board, which led the Board to approve dividends, stock repurchases, and other distributions in 2006 and 2007, when Irwin should have instead preserved capital. Defendants argue that summary judgment should be entered in their favor on Count I for three reasons: (1) the statute of limitations bars claims to recover all of the distributions except for the payments approved in the fourth quarter of 2007; (2) the distributions to the shareholders do not constitute a loss that is recoverable under Indiana law by any corporate constituency represented by the Trustee; and (3) even if such a theory of recovery existed under Indiana law, Defendants' actions are protected by Indiana's business judgment rule as well as the indemnification standard set forth under Irwin's bylaws. Because we find, for the reasons detailed below, that Indiana law does not support the Trustee's theory of recovery in the circumstances presented here, we need not address Defendants' alternative arguments in support of summary judgment.[1]

         A bankruptcy trustee serves the interests of two constituencies of an insolvent corporation - its creditors and its shareholders. See Commodity Futures Trading Comm'n v. Weintraub, 471 U.S. 343, 355 (1985) (“[T]he fiduciary duty of the trustee runs to shareholders as well as to creditors.”). On the facts before us, however, the Trustee cannot recover the 2006 and 2007 distributions on behalf of either Irwin's shareholders or its creditors under Indiana law. Defendants are therefore entitled to summary judgment on Count I.

         With regard to shareholder interests, the Seventh Circuit previously recognized that one “potential problem” with Count I is “whether Indiana law permits recovery on a theory that a holding company distributed ‘too much' to its investors.” Levin v. Miller, 763 F.3d 667, 671 (7th Cir. 2014). We find no support under Indiana law for recovery on such a theory. As Defendants argue, the Trustee cannot recover shareholder distributions for the benefit of the very shareholders who received those distributions, as such a result would equate to a double recovery on behalf of the shareholders. The Trustee does not argue otherwise.

         Nor can the Trustee recover on behalf of Irwin's creditors under Indiana law. In support of Count I, the Trustee originally argued both here and on appeal that “when a corporation is encountering financial difficulties … the supervening duty of corporate fiduciaries is to the corporation - a duty to maximize the value of the corporation for the benefit of all stakeholders.” Dkt. 118 at 9; see also 7th Circuit Case 12-374, Dkt. 15-1 at 44-45 (“[I]f the capital in question had not been dissipated as alleged in Count [I], [Irwin] would have been correspondingly less insolvent when the Banks failed, and the funds in question would have been available to be applied to Irwin's debts.”). It is true that in certain jurisdictions “a director owes a fiduciary duty to creditors if the corporation is insolvent and no longer a going concern.” Geiger & Peters, Inc. v. Berghoff, 854 N.E.2d 842, 850 (Ind.Ct.App. 2006). However, Indiana has rejected this “trust fund” or “zone of insolvency” theory that “insolvent … corporations … hold their property in trust for their creditors.” Id.; see also Abrams v. McGuireWoods LLP, 518 B.R. 491, 502 (N.D. Ind. Bankr. 2014) (recognizing that “Indiana … has completely rejected the trust fund theory.”).

         In response to this clear precedent, the Trustee has shifted his position to now assert that his claims are not derived from Irwin's shareholders or creditors, but rather are based “on the recognition that the primary object of a corporate fiduciary's duties is the corporation itself.” Dkt. 197 at 21-22. While it is true that the Trustee may “stand in the shoes” of the corporation and act on behalf of the estate, this does not change the fact that the interests served by the Trustee are those of the only residual beneficiaries of any increase in value of the corporation, to wit, the shareholders and creditors. For the reasons stated previously, payment to the stockholders here would result in a double recovery and Indiana law does not recognize a duty on the part of corporate fiduciaries to creditors post-insolvency. Accordingly, neither constituency served by the Trustee can recover the subject distributions, given the facts before us, and Defendants are therefore entitled to summary judgment on Count I.[2]

         III. Count II

         In Count II, the Trustee asserts that Defendants Miller and Ehlinger breached their duties of care and loyalty to Irwin by capitulating to the pressure of bank regulators and causing Irwin to make capital contributions to the Banks in 2009 without considering whether such contributions were in Irwin's best interest, given the Banks' precarious financial situation. The contributions at issue occurred in January 2009 ($14 million) and June 2009 ($3.5 million), and include an “eschew[ed] opportunity in June 2009 upon receipt of a tax refund to replenish [Irwin's] cash by $30 million by adjusting intercompany accounts.” Comp. ¶ 73. The facts relevant to our disposition of Count II are as follows:

         A. Relevant Facts

         1. Governing Regulatory Agencies

         At all relevant times, Irwin was registered as a bank holding company with the Board of Governors of the Federal Reserve System (“Board of Governors”) under the Bank Holding Company Act of 1956 (“BHC Act”) and was subject to the Federal Reserve's supervision. Acknowledging this supervisory relationship, in 2006, Irwin publicly disclosed that “[t]he Federal Reserve expects us to act as a source of financial strength to our banking subsidiaries and to commit resources to support them. In implementing this policy, the Federal Reserve could require us to provide financial support when we otherwise would not consider ourselves able to do so.” 2006 10-K at 8.

         Union Bank & Trust was a state-chartered member of the Federal Reserve System and, along with its subsidiaries, was subject to the Federal Reserve's and the Indiana Department of Financial Institution's (“DFI”) supervision. As the primary federal regulator of Union Bank & Trust, the Federal Reserve had broad authority under the Federal Reserve Act to oversee the banking activities of Union Bank & Trust and its subsidiaries. The Federal Reserve also had broad authority pursuant to the BHC Act over the activities of Irwin's non-banking subsidiaries. Union Bank, FSB was a federally chartered savings bank and was governed by and subject to regulation, examination, and supervision by the Office of Thrift Supervision. Additionally, the Banks were supervised and examined by the FDIC because their deposits were insured under provisions of the Federal Deposit Insurance Act.

         2. Independence of the Board

         According to Defendants, since at least 2004, the Board had a supermajority (more than 75%) of “independent” directors under the standards required by the New York Stock Exchange, Irwin's Corporate Governance Principles, and its securities provisions. The Trustee contends, however, that at all relevant times, Mr. Miller controlled almost 40% of Irwin's voting stock.

         It was the Board's practice to hold an executive session after each Board meeting without Mr. Miller or any other member of management present. At those meetings, the Board would identify and discuss various concerns and recommendations that would later be presented to Mr. Miller.

         3. Focus on Capitalization

         The time period relevant to Count II begins in early 2008 and extends through July of 2009. In early 2008, the real estate market throughout the United States had already begun to collapse and the Banks, which specialized in the types of mortgages hardest hit by the real estate crisis, were experiencing financial struggles. On February 28, 2008, a special meeting of the Board was held at which a representative from the Federal Reserve Bank of Chicago (“the Reserve Bank”) joined by telephone to discuss “regulatory concerns about Bank liquidity and the parent company's expected role as a source of strength for the Bank” in providing capital and liquidity. Defs.' Exh. I-1 at 3. Following this meeting, the Board recognized the need to “maintain[] adequate capital” and to “provide protection to [Union Bank & Trust's] depositors.” Id. at 7; Defs.' Exh. R ¶¶ 12-13; Defs.' Exh. S ¶¶ 10-11.

         A few months later, in April 2008, the Board authorized management to engage an investment banker, Stifel Nicolaus, to pursue several capital-generating options, including raising private capital. Around that same time, the Board sought to hire legal counsel in order to ensure it was taking appropriate action to oversee Irwin. The Board engaged the New York firm of Sullivan & Cromwell to advise “on all issues related to recapitalization and Board duties.” Defs.' Exh. H at 4. The lead attorney from Sullivan & Cromwell who advised the Board on these issues was Rodgin Cohen. Mr. Cohen was hired to provide counsel to the Board, and the Board expected Irwin's management to follow the advice of Mr. Cohen and his colleagues. After engaging Mr. Cohen, the Board conducted meetings each Friday, most of which Mr. Cohen was in attendance. His colleague, Ms. Whitney Chatterjee, also often attended these meetings.

         4. Memorandum of Understanding ...

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