July 14, 2011 Articles

A Test for Determining Whether a Claim Is Derivative or Direct

Just as bankruptcy follows bank failure, often litigation follows in the form of derivative or direct claims against officers and directors of the failed bank and its holding company.

By Deborah D. Williamson

“A failed bank, a bankrupt holding company, and a single D&O policy––it is a recipe for litigation between those starving fiduciaries scrounging through the remnants of assets for scraps of creditor recovery.” Official Comm. of Unsecured Creditors of BankUnited Fin. Corp. v. FDIC (In re BankUnited Fin. Corp.), 442 B.R. 49 (Bankr. S.D. Fla. 2011).

Over the past few years, a wave of bank failures has triggered subsequent bankruptcy filings by bank holding companies. Just as bankruptcy follows bank failure, often litigation follows as well in the form of derivative or direct claims against officers and directors of the failed bank and its holding company. Typically, the ownership of and delineation between such claims is easily determined; however, a complication arises when the failed bank and its holding company share common directors and officers. Such were the facts in BankUnited, in which Bankruptcy Judge Laurel M. Isicoff from the Southern District of Florida addressed this issue and formulated a test to determine whether claims are direct or derivative when asserted against shared officers and directors of a failed bank and its holding company.

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