Bank Requests Court To Reconsider Contested FCA Deal

February 20, 2018 by Paul J. Sievers, Esq.

First Tennessee Bank NA has requested the Sixth Circuit to reverse a district court’s ruling that it gave its insurers inadequate notice for them to provide $75 million to cover a portion of the bank’s 2015 $212.5 million False Claims Act (FCA) settlement.

The bank stated that U.S. District Judge Sheryl H. Lipman erred in the ruling. They contend that an April 2014 email from the Department of Justice (DOJ) constituted a demand to settle claims that Tennessee Bank had knowingly initiated and underwritten substandard mortgages, and that its primary insurer, Houston Casualty Co., along with seven other co-insurers, had been provided insufficient notice of the demand. The bank claims that although the April 2014 communication covers topics such as a revised damages estimation, potential settlement, and invitations to the bank to trade information and submit an offer, the email does not contain any forceful decree seeking monetary gain. According to the bank, the DOJ did not demand a response or even suggest that any adverse action would be taken if the bank did not respond.

The related investigation originated in 2012 when the DOJ started examining whether First Tennessee Bank’s loan activity associated with Federal Housing Authority supported mortgage loans were noncompliant with the FCA. During a May 2013 meeting between representatives from First Tennessee, the DOJ, the Department of Housing and Urban Development and Georgia state prosecutors, the DOJ investigators disclosed preliminary conclusions showing the bank had, in fact, violated the FCA.

In April 2014, a DOJ official tendered an offer, documented in an email, for First Tennessee to enter into a $610 million settlement agreement regarding the allegations. In May 2014, the bank issued a notice to its insurers announcing that it was collaborating with an ongoing investigation into its underwriting activities for FHA-supported loans but failed to mention the new DOJ settlement offer.

In June 2015, the bank chose to settle the DOJ’s claims for $212.5 million. Before the final settlement, First Tennessee filed suit in Tennessee federal court against the insurance companies, requesting a ruling forcing them to contribute their maximum $75 million coverage limits to help fund the settlement.

The insurance companies collectively argued that they not be obligated to fund the settlement because they had not received timely or adequate notice during the policy period. The bank responded that it had provided sufficient notice of the DOJ probe claim to its insurers.

Judge Lipman sided with the insurers that the DOJ official’s April 2014 email represented a claim for which the bank should have provided notice to its insurers. The judge ruled that the bank’s notice of claim did not contain adequate information to enlighten the insurers of the importance of the claim, pointing out that the message made no mention of the pending $610 settlement offer.

In appealing the decision, First Tennessee argued that Judge Lipman errantly dismissed communications made by DOJ officials in April 2014, and denied making a demand and saying they were merely conducting an investigation. Instead, the bank claimed the government was seeking to extend a previously existing tolling agreement to June 2014. The bank contended that because there was no demand made and no confirmation that the government would pursue a claim, that the notice it gave to its insurers of the communications was adequate and compliant with the policy requirements.

First Tennessee further argued that the insurers waived their notice defense after they failed to object, investigate, or request additional information until they were provided notice of a government settlement demand in December 2014.