United States District Court, S.D. Indiana, Indianapolis Division
ELLIOTT D. LEVIN as Chapter 7 Trustee for Irwin Financial Corporation, Plaintiff,
WILLIAM I. MILLER, GREGORY F. EHLINGER, THOMAS D. WASHBURN, Defendants.
ORDER GRANTING DEFENDANTS' MOTION FOR SUMMARY
EVANS BARKER, JUDGE.
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.
Factual and Procedural Background
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.
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.
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.
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.
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.
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).
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.
Standard of Review
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).
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.
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.
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
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.
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.
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
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 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:
Governing Regulatory Agencies
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.
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.
Independence of the Board
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.
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.
Focus on Capitalization
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
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.
Memorandum of Understanding ...