By Stephen Baker, Katherine Villanueva, Nolan Tully and Robert Mancuso

Who:    Plaintiffs:  Fifth Third Bancorp and Fifth Third Bank

Defendants:  Ace Insurance Company, Axis Insurance Company, Certain Underwriters at Lloyd’s, Continental Insurance Company, Federal Insurance Company, Fidelity and Deposit Insurance Company, and St. Paul Mercury Insurance Company

What:  In this lawsuit, Fifth Third Bancorp and Fifth Third Bank (collectively, the “Bank”) seek indemnification and reimbursement under three financial institution bonds for losses exceeding $100 million, the collective limit of liability under the bonds, allegedly sustained by the Bank as a result of the dishonest and fraudulent acts of the Bank’s former employee, Matthew Ross.  By failing to indemnify and reimburse the Bank for these alleged losses, the Bank contends that the insurers that subscribe to the bonds (collectively, the “Insurers”) breached the terms of the bonds.

The allegations regarding the dishonest and fraudulent acts of Ross are based upon the interactions between and activity of Ross and Ed Netherland of InsCap Management LLC (“InsCap”).  According to the complaint, Ross caused the Bank to fund fraudulent loan facilities for the benefit of Netherland and InsCap and to fund a credit facility designated as “LIPF II,” which was created to provide life insurance premium financing for InsCap’s “Ultra” insurance program.  As an aside, we note that there have been multiple lawsuits filed against Netherland and InsCap resulting from the “Ultra” insurance program. 

Ross purportedly advised the Bank that these loans would be protected by market valuations of the life insurance policies procured through the Ultra program that would be prepared by Life Asset Group.  Ross also purportedly advised that LaSalle Bank, the servicing agent for the Ultra program, was to serve as a fiduciary and would be liable for any “unacceptable findings.”  The complaint further alleges that Ross concealed from the Bank the close affiliation between InsCap and Life Asset Group’s owner, Gary Brecka. 

The Bank contends that Ross colluded with InsCap (including Netherland, Harish Rghavan, and Ira Brody) to defraud the Bank, inter alia, by:  (1) creating fraudulent documentation used to secure premium financing loans funded by the Bank; (2) permitting the payment of fraudulent credit fees and other payments from the Bank to InsCap; (3) creating fraudulent financial reporting statements regarding the purported collateral for the Bank’s loans; (4) funding advances for life insurance policies that were never purchased; and (5) concealing the continuous fraud occurring in connection with the LIPF II credit facility.  In connection with committing these purported dishonest and fraudulent acts, Ross allegedly received substantial financial benefits.

The Bank allegedly suffered losses in excess of $100 million and submitted a proof of loss to the Insurers in October 2011 seeking reimbursement and indemnification under the bonds for these losses, which the Bank contends resulted from the dishonest and fraudulent conduct of Ross.  However, the Insurers have allegedly maintained that the Bank has failed to demonstrate that Ross committed dishonest or fraudulent acts within the meaning of the bonds and, therefore, the bonds do not respond to the Bank’s purported losses.  The Bank subsequently commenced this action. 

When:  November 10, 2014

Where: United States District Court, Southern District of Ohio

Source: Secondary Market Alert