Assumptions in bankruptcy case leave 7th Circuit ‘colored skeptical’

Katie Stancombe for www.theindianalawyer.com

Assumptive arguments made by a bankruptcy trustee suing former bank directors were rejected by the 7^th Circuit Court of Appeals, which said his assertions colored the court skeptical.

Federal regulators seized and shut down the Columbus-based Irwin Union Bank & Trust Co., which was a holding company for two banks, after it filed for bankruptcy in September 2009 amid the Great Recession. Two years later, Irwin’s bankruptcy trustee Elliott Levin sued three bank officers for breach of fiduciary duty.

Levin claimed the officers should have known the banks were going to fail and should have investigated alternatives to transferring a last-shot $76 million tax refund to potentially claim as an asset in bankruptcy, despite the board of directors’ clear directive to transfer the refund to the subsidiary banks. If the officers had presented this information to the board, Levin said the board would have declared bankruptcy before transferring the refund to the banks, thereby maximizing the holding company’s value for creditors.

The U.S. District Court for the Southern District of Indiana initially dismissed the case, but onremand from the 7^th Circuit granted summary judgment in favor of former Irwin CEO William Miller, former Chief Financial Officer Gregory Ehlinger and former Executive Vice President Thomas Washburn.  The 7^th Circuit affirmed the grant of summary judgment on Friday.

“Corporate officers have a duty to furnish the Board of Directors with material information, but that duty is subject to the Board’s contrary directives,” Judge Diane Sykes wrote for the court. “…The officers had no authority to second-guess the Board’s judgment with their own independent investigation.”

Levin had argued the officers breached their duty to provide information to the board. In a series of assumptions, he faulted them for failing to inform the board that an earlier bankruptcy could have maximized Irwin’s value.

“Even on its own terms, Levin’s complicated theory is dubious,” Sykes wrote. “The argument’s intricate chain of inferences rests on a series of speculative and increasingly questionable links— especially the assertion that, contrary to both regulatory guidance and Irwin’s years-long understanding (memorialized in a written agreement), the Board would have tried to claim the tax refund as its own asset in bankruptcy. Color us skeptical.”

The 7th Circuit found Levin’s theories fundamentally flawed, noting that as agents of the board, the officers had a duty to execute the board’s strategy and directives. It added that the board made its decision based on “advice of regulatory agencies and deeply experienced outside counsel.”

Finally, Levin argued it would only be logical for the board to be interested in receiving information about Irwin’s potential value in bankruptcy. If so, the board may have changed course had it known that an earlier bankruptcy could maximize value.

But the 7^th Circuit also rejected that argument in Elliott Levin v. William Miller, et al, 17-1775.

“Taking account of the regulatory directives and expert legal advice, the Board exercised its judgment and chose to devote its resources to saving the banks,” Sykes concluded. “As agents, the officers had no right to spend company resources pursuing a different strategy.”