case in june of two thousand and eight percent propitious time for the banking industry as it turns out underwriters agreed to insure the directors of a troubled bank for all the wrongful acts of the bank going forward but recognizing the risks of insuring a troubled bank they included exclusion and what they make clear in clear and unambiguous language is that they would not be responsible for ensuring against wrongful acts either that occurred prior to the inception date or that were enter were actually if you look at the oreo by twenty fold as a result of the wrongful c deal d conduct well was that just because the they lending division longs were so much larger in amount then the other longs for example i'm going three plagued parts of the record it says of the more than six hundred oreo properties upon which they allege inaccurate is that every single one of the oreo expenditures that are alleges oriya wrongful acts came out of the steel deprogram that were wrongful acts so there were five hundred three oreo properties know expenditures were made on the i don't know if that's accurate if you look at that document one fifty three one hundred tutor eighty five it makes clear that it's a disputed that the or wrong for lack expenditures were all made pursuant to the last mitigation strategy that they undertook as a result of the wrongful lending policies so these wrongful acts were connected to the wrongful acts but they applied them to properties that weren't in the oriole portfolio because of the lending division misconduct of the is undisputed the overwhelming majority eighty six percent were came out of the of the expenditures came out of the lending program what would you say that say you have a loss mitigation strategy but the loss mitigation strategy was just not was not limited to those ninety seven property so they made an overall strategy so the strategy might have had an effect but the actual if you did a side by side of the property they only ninety seven them only about one fifth of them were actually came out of the or the oreo performing crack well we're looking at the wrongful acts that they allege in the in this in this claim and those wrongful oreo acts did arise out of the sea deal does lending practices and so we didn't all of them i think and paragraphs eighty two through eighty five they concede that they're all the product of this loss mitigation strategy that occurred as a result of these c d o the wrongful acts the bank officers were very explicit and their testimony and then the f d i c actually stipulated that it was undisputed that this that this program they discovered the problems with the c deal the lending program prior to inception and they actually started this strategy with the oreo properties where they spent money to try and dig out of the hole in two thousand and seven and they didn't apply and  they didn't apply that strategy to any other properties except the lending division properties the lending division probert days where the overwhelming bulk of all properties on which oreo expenditures were made alleged that is you wrongfully made these oreo expenditures in the policy period are all related to the c deal dealing in practices in the prior policy period i don't understand why would they would make the claim only against the not have a defense to is my point i don't understand if they had if they had property that being they have to ask eventually if there was property that there had him prudent college orio expenditures on that weren't connected with the lending division yeah i don't understand why they would carve a pow those properties in a claim which are the properties that have absolutely you have no argument on they can't be in a related wrongful acts if they are completely divorced from the lending division screw ups well it's clear that they divided their wrongful acts into two groups in order to get the progressive policy period and the underwriters policy period and so that distinction is artificial certainly if you look at for instance the zucker case that the second set of acts arose out of the first set of acts and in this circumstance the oreo there's a close a dent in the with the oreo expenditures that are alleged in the second might do in the us it may be  misinterpreted paragraph eighty five one fifty three one and paragraph twenty one fifty one i will check that but for present purposes let me ask you this purely hypothetical and place don't fi warrant only you keep saying arise policy adoption is not enough or made in fact that they've adopted the policy because of the lending division that and cut it speaking only for m x if they had let's put it this way ten million dollars is what we're talking about if they had ten million and one dollars worth of imprudent expenditure of own non lending division oreo properties you would not have a defense under the in a related wrongful conduct cost right if they were completely unrelated yes your honor would say they came from for instance the commercial bank lending division or something to some other or they they arose from a different set of circumstances that were not wrongful in some way are the properties and enter the portfolio before the lending division we a property because these loans went bad they took them over and they took them over at an end at at an approved value and then their real reality was if they sold them at an unimproved right they would have a huge hole and they could and there was a glut and so these practices these these wrongful practices resulted in this a good lot of property that they then started spending money and in order to patch the hole that was going to become very apparent in the balance sheet if they tried to sell the properties and that the f d i c said you were wrong to make those loans and you're wrong to make those expenditures to try and improve the loans to trying to improve your position yeah and those are related according to the to the undisputed ask you let me ask you this question both sides agree in this case that new york law controls and when you look at the second circuit doma tor new york versus continental casualty count pany it looks to most the analysis to the second shark it followed in that case really mirrors what judge batten did in this case how did you do how do you distinguish what the stock and shark it said in that case versus what judge battened did in their sketch of what i would say the second that in the dormitory association case that was an interesting situation there were two separate sets of claims there were two claims one was that the architecture firm had delayed completion and those that resulted in a loss of rental income the second one the second p was that the that the design was flawed in that it caused ice and snow to fall into the sidewalk well there was no allegation that the delay in completion is what caused the ice and snow to fall on the sidewalk to me that they they appear so distinct in this circumstance that that i don't see how you would say that they're and are related wrongful acts the problem that i see what i see that the judge did here the trial court did here  that was wrong as rather than following the language in the policy he actually he actually came up with kind of two different tests one was where the wrongful act and his words and actually and twined ok in the language of the exclusion is very clear the language of an ex or billy entwined is not clear at all but in any of the tests that he did and the other test was are they not unduly unrelated are they not oreo expenditures it actually was undertaken as a result of the cd loan program that dug a big hole in the balance sheet and been notes to certain of the officers at the time and that the comprise expenditures that resulted from this c d o they are very in a related the bank officers were very clear about that and that's why it's undisputed when you look at the you look at the stipulations  well that is that what that is one of the suggestions that they have to guess who makes and i would just say this we don't have to it's not the underwriters job to determine what was wrong full it's to determine if what was alleged to be wrongful was in a related and so if they if they were wrongful they wouldn't they're only suing on the things that they say were wrongful presumably and so if we go back at what point in time which oreo expenditures if it turned out that only fourteen percent of the properties needed oreo expenditures would they have sued the bank where they have sued these directors we don't know that's an imponderable actually because it would have maybe been manageable in the bank might have survived and it might be here today but the question is are the wrongful acts that were actually alleged these were expenditures are they interrelated with the previous wrongful acts of the lending programs that led to the overhang does that is that helpful at all well yes or no but i understand your argument that it seems to me that the bank did not and implement the plan until december of two thousand and seven that lending had ended a few months before that autumn of two thousand and seven and then the ad believe that was a concession that the expenditures made to rehabilitate the properties did not come on flats until the kana five rating came out six months after that so to me it would limit the universe necessarily and i think it does  e it does play into the question of enter relatedness well i would say this of course the policy incepted june ninth two thousand which was seven months after the policy that the the loss mitigation strategy began obviously you know the issues became much more pronounced after september of two thousand and eight as we as the court is well aware of it are they wrongful beforehand will the f t c didn't sue him saying that they're wrongful could they would they have is this are the allegations in this case tailored towards coverage rather than tailored towards conduct by the bank officers of course are going to say now that it was not wrongful then but we've seen other cases where the f d i c is is quite aggressive in terms of saying that acts are wrongful for various reasons the camel five rating from the perspective the officers they said that was they were not bound by it ok but the wrongful acts that are see they say that at the time they oreo expenditures were made their wrongful act if they had been wrongful acts they wouldn't have they wouldn't have brought the claims so it's so they're not presumably suing based on acts that weren't wrongful there so in wrongful acts and the question is are they enter related i would say that the reason the court adopted this kind of different languages different test which was not a test that this circuit has recognized was because it said that the language is written would result in illusory coverage now the court didn't go into it in sufficient detail to really establish that the court seems to have assumed or to presume that it would have think your honor pointed out would have not would have been covered under the policy and i give you some examples obviously and zachary had situations where misrepresentations were made about lending practices the lending practices were were faulty those resulted in a transfer of forty five million dollars to a subsidiary and that transfer to the subsidiary was deemed to have been arisen out of the prior act so under that under this policy there are two prongs in the first one is a prior act prong which also has the arising from language and i actually believe that this judge had he had sucker in hand when he made his decision would have ruled differently of course it would have briefed it the zucker case would have ruled differently and would have other two thousand and eight is a provided a that and it's and it's and in so in years provided a wealth of different kinds of cases against bank officers and directors alleging all sorts of improper acts which would have nothing to do  wrongful and this is the only practice iran full and what the testimony from the bank officers are in that and and the timing would suggest that this is that they're telling the truth is that the expenditures were made as a result of the sea deal the lending practices that they the adoption of the plan i think it's fair to say if the plan had never been executed if they'd never made any oreo expenditures that are alleged wrongful by the n t s b they would've they they would have sued just merely on the adoption of a strategy which maybe a week later was abandoned or that they said well actually we need to come clean and all right on it and it worked exactly over well i would say that the problem is i thought i don't you know if it was in two thousand and eight maybe you know who knows where that would have worked but the problem is they had vastly overstated assets and they attempted to support that vast overstatement with their oreo practices it here i would say that the that the dormitory case is different because those are such distinct wrongful acts one is a loss of parental income due to late completion one is snow falling off of a roof to design that the analysis here should cue more closely to the actual language of the exclusion and that and with it if it does than in the future and there will be other bank problems they'll be able to directors will be able to fire a chemist line we'll give you five minutes and we're going to and eight to mr brooks so he will have twenty three minutes if you n good morning your honour's and may it please the court i am joseph brooks from the f b i sees appellate litigation unit could you first comment on the question i ask about how many of those six hundred oreo properties that you claim the expenditure of money after dates ember two thousand and seven what you wrongful or imprudent how many of those were c d l properties and how many our best information is that the number eighty six percent this probably correct we do not make an argument on this appeal based on whether or not the expenditures were made on properties that either were or were not part of the c d o the wrongful acts our arguments assume that they were but judge abrams hit the key point the key point is this listening to counsel for the other side to argue one would give the impression that the f b i see objected to all expenditures on an oreo post adoption of the oreo expenditure plan we absolutely do not and has counsel indicated there is a stipulation in the record that they made that we rely on that none of the expenditures under the oreo plan prior to the inception of this policy were wrongful acts as a matter of fact none of the expenditures the oriole expenditures under the or expenditure plan during the first three to five months of the policy were wrongful acts as judge abrams actually accurately pointed out our position is that the expenditure of money to rehab oreo properties over a long term basis only became wrongful on the day that the camel's five rating came down which was september of two thousand and ten or two thousand and eight and all we're seeking here is not the eighty four million dollars of the ninety million dollars that was spent on the oriel properties we're only seeking to recover the twelve million dollars and of course the policy limits ten million dollars that were expended at a point in time when the directors and officers knew that a long term investment strategy was throwing money away because the failure of the bank was imminent that is the oriole wrongful act and more than ten ten million dollars or more of those expended tears were on c d o linked oreo properties we assume that they were your honor yes we don't dispute that well i mean it's in your favor if it was so  our brief and ignored in the reply brief the ninth circuit had a similar situation there was a claim brought that they were in over two hundred wrong from loans that led to an incredible amount of losses and those loans were made pursu policy an aggressive lending policy that had been adopted by the bank and the allegation was made that that policy could cause the losses under the loans and the ninth circuit said no that's not the case the subsequent to the policy independent business determinations to make those loans were the cause similarly here the c d l the wrongful acts that created the the people of oreo expenditures were being made there were no wrongful acts it was only after the camel's five rating accompanied by a warning that the fare of the bank was imminent came down and then the directors and officers made an independent business decision to continue spending money on a long term investment it was only then that we had or your wrongful acts but that doesn't mean there's not a common nexus between the only position is that the causal connection was cut off and that analysis by the way is entirely consistent with judge to be honest point which is if you look at what the trial judge did here he didn't disregard the policy language he didn't go off and find a new standard he performed precisely the kind of analysis that the second circuit performed in dormitory authority that the southern district of new york performed in glass coffee and indeed that every single court that addressed and in a related acts or related acts provision that's cited and discussed in underwriters brief performed they lay the claims or the wrongful acts side by side they look at what's common and what's on common and our position is not that any one factor makes it related or any related our position is that consistently those courts have found where there are three factors that are different where the wrongdoers are different where the wrongful conduct is different and where the time period in which i do the wrongful conduct or its manifestation occurs is different when all three of those are different cold well it if i were running the opinion in this case you want to make sure i have a question fantasize for a moment yeah well when we would hold a common nexus means a direct causal connection  in which you have the same or similar wrongdoing occurring during the same time period and involving the same wrongful actors now that are that sounds less in are related it's the same type of wrongful conduct for example what the cases have done a lot of these cases are securities law cases and you have the same type of misrepresentations that are made to different people it's not the same identical conduct it's the same type of conduct as opposed to what we have here your honor on the one hand we have a group of directors and officers in a lending division that are engaged in unsound lending practices and then two years later we have a different group of officers and directors who were given the pointed out to properly analyze this case and this is consistent with the unique a decision as well it makes no difference when the oreo defendants decide to spend or not spend money in order to deal investing long term in this property given that we now know from government authorities that the failure of this bank is eminent and from the standpoint and under the lipton case in new york the critical thing here is what the policyholder what di here believe on the day that they purchased this policy and read it that the precise conduct here would be covered in other words what they believe that if after that policy went into effect they had made imprudent negligent and gross negligent decisions to expend the bank's money when they believe that they would be covered in some instances but perhaps not in others depending upon what they spent the bank's money on certainly not they would certainly expect that directors and officers coverage would cover them for this independent business decision as the unique of a court hell of have to make these expenditures under the most imprudent circumstances but let me ask you this what does the record show about the negotiation with this part of the contract and you can put scare quotes around negotiation if you want to just tell me what the evidence shows about what your broker asked foreign didn't get you and verse in the brief as to this part of the policy yes part of standard no dispute there was no negotiation zero negotiation the entire language is industry standard language and you want to take my word for that because it keeps popping up in all these you don't get to the exception here because the exclusion itself says that excluded are claims that are brought by or be half of by or on behalf of an assured right and then before the says and except where such claim except where such a claim then it gets to the exceptions what is such claim such claim of course is a claim brought by or on behalf of the assured and under this court's decision in st paul mercury insurance and numerous other decisions whether or not the f d i c unique among receivers brings a claim by or on behalf of a failed bank is at best ambiguous because under policies and so there was no negotiation there was simply standard form language it is a policy exclusion and even assuming for the sake of argument that a new york court would apply some version of contra pro anthem here it certainly wouldn't be a broad version it certainly wouldn't apply to an exclusion because as the new york courts have said the rule then an exclusion must be clear and unmistakable is a heightened application of contra profer wrentham contra profer meant them applies in a big and large way to exclusions so they certainly wouldn't apply it to an exclusion suit language with an exclusion that wasn't negotiated by the so called sophisticated insured and which instead had nothing to do with this case absolutely nothing and here's why as mr lane pointed out the zucker case dealt with the issue of whether or not a claim during the policy period arises from a preponderance the period wrongful act and as mr lane pointed out the exclusion here the retroactive exclusion here has to promise the first prong deals with what i just said does a policy period claim arise out preprocessor wrongful act that prong is not a part of this case and the reason why it's not a part of this case is because not only was that argument waived because nowhere in the opening brief and nowhere in the reply brief do underwriters ever contest the trial court judge's ruling that the first prong wasn't satisfied here but more importantly if you go do the brief the opening brief in this case retroactive exclusion which applies to wrongful acts that occurred prior to underwriter's policy period applied to the oriole wrongful act unquote in other words not only did they not raise the argument in either their opening b repudiated having made the argument in their opening brief so sucker is entirely and applicable to this case and unless the court has a further questions i don't have anything further this time we don't think it was worth then to affirm the district court in all respects thank you mr lang five minutes yes your honor couple of notes on the issue of zucker obviously i view it differently than counsel fred did i say because i believe that zucker really leads the way to a reversal in this case and here's why yes the there was a prior act exclusion involved in soccer i the first prong would have applied the second prong flies a force your e because there has to be a common nexus with the prior acts if the subsequent acts arising out of the prior wrongful  so the nexus is satisfied irrespective of whether you applied the first prong whether the first even if whether you even noticed the first prong what i'm saying is in zucker the court looked and what happened in zucker there was no allegation that the same people making the improper loans were the same pay people who decided to transfer the forty five million dollars that restrictive reading that the f a i c wants when you ask them what does the nexus mean i mean obviously they would like to have the parties have negotiated a much more narrow and a different language for this exclusion that isn't what happened it was common nexus and if these are factually legally causally related what happened the other thing is if you'll notice the f t c contends that not only should it be the same people the same action basically the adin fickel acts read out that it's in a related subsequent act but they say it has to be during the same time period will how can that be possible if the interrelated wrongful   lucian applies during our policy carry this as it excludes wrongful acts that are interrelated with a prior time period so the time limitation obviously is not readable so  the language that he dictated to the court is not the language is in the policy it's not the language that that is dictated by law it's not the language that should apply now i want to talk a little bit about the sophisticated insured exception because i think that's what the court was getting at it is not that you look at each particular provision and determine whether it was specifically negotiated here's the deal if i enter into a transaction with i b m and i maybe i'm showing my age  or to make or to negotiate that means they accept it ok that means they join with me and that agreement and we both sign our names and the essence of the sophisticate insured exception is not where the negotiated a provision is whether you had the bargaining power to have a seat at the table and to give your opinion and you may give your opinion you may say as anyone who's engaged in a large negotiation in a large transactions or had to litigate them after the fact he insured the bank comes to you and says we don't want that let's change that language and you say absolutely they're brokered and you say absolutely not yet take it or leave it that's negotiation  language you're stuck with the ambiguity is there can strewed against you well now if they say let's do this language just instead you say what about this and you modify the language i don't know anybody who said th contra canon doesn't apply if you thought we appreciate you come to see us here's your hat here's your coat we're going to stick with that language your honor if you look at the cummins case that they don't actually get into whether may have been just delighted just to get a policy well that may be new york law and i'll look into it but it's strange law if it is you know i don't know any jurisdiction in our circuit that upset and certainly i've never seen us say that and that's kind i mean come on i would say the more accurate analogy would be a homeowner insurance policy where on the consumer and i can't realistically change the form of my own water insurance that would be a different situation as opposed to a situation where i am a company and i can come into your best case on the contract can and doesn't apply if the big sophisticated insured well i would also say the southern district of new york's two thousand and fourteen case catalan also when the insured is quote sophisticated comma instrumental in crafting various parts of the green mint comma end of quote under various parts it doesn't have to be the specific provision at issue in the litigation there is no question that there were there were and it's in the stipulation facts that there were that there were drafts that works changed and that they had to say they had a broker that represented them but did he did dealing with the london market and then the parties negotiate off the brokers language the broker represents the insured but it wasn't the language the broker was offering originally drafted by law and didn't they have some parts well the broker may ok he pointed out that there are lots of different cases that have similar language and the broker may propose a form because that form may he knows maybe  she may be acceptable to the ensure or to the insured and it's the subject of negotiation we're talking about hundreds of years of history obviously between the brokers and the insurers but the broker represents the insured the broker doesn't represent understand that but if the insurers says here are six different versions of that line which i'm sorry that component of the policy six different versions pick one negotiation you're on i would disagree if i tell i b m i insist on this and i b m ultimately says i'm going to agree to that language they have bargaining power they've chosen to accept my proposal and that is the agreement your proposal is pick one are hit the door that's the essence of bargaining power is that i can leave when i'm negotiating i can walk out the door go and who gets to walk out lowy no the  contract can i mean the homeowner can walk out the door will there where the second ensure they negotiated with i understand that that doesn't change the fact that it was your language they agreed to and they essence of the absence of bargaining power you would get your argument up thank you and would take that case under submission