Years after Irwin Union’s failure, a lawsuit yields settlement

Three Hoosier banks collapsed after the financial crisis—Irwin Union in Columbus, SCB in Shelbyville, and Integra in Evansville. But by far the biggest calamity was Irwin—a storied institution that traced its roots to the Civil War era and helped fund the launch of two Columbus behemoths, Cummins and Arvin Industries.

Seven years after regulators marched in on a Friday afternoon and shut Irwin down, the nightmare lives on for the bank’s former top executives, who continue to fight a lawsuit filed in 2011 by Elliott Levin, the bankruptcy trustee overseeing the liquidation of its parent company, Irwin Financial Corp.

But a settlement has finally been reached in another lawsuit—this one brought by the Federal Deposit Insurance Corp. in 2013 accusing former Irwin officers Bradley Kime, Duncan Burdette, Michael Waters and Kim Roerig of reckless lending practices. The suit alleged the four “closed their eyes to known risks” in approving 19 loans that caused at least $42 million in losses.

Terms of the deal, finalized last month, have not yet been made public. But court records show it came after mediation sessions aimed at settling both lawsuits in which the FDIC demanded that Irwin’s insurers pay up to the limits of their coverage—a figure other documents reveal was at least $10 million and may be far more.

Indianapolis attorney Jim Knauer, who represents Brad Kime, said in a statement: "Brad is glad it's over—he never admitted any liability and there was never any such finding. The insurers decided to settle the claim and Brad made no contribution to the settlement."

Knauer also represents the three defendants in the Levin case—former CEO William Miller, former Chief Financial Officer Gregory Ehlinger and former Executive Vice President Thomas Washburn. He said settling one case but not the other suggests there is coverage left to tap.

Policy-limit demands under officers-and-directors coverage are not unusual in high-stakes litigation, since they put insurers in an awkward spot. If insurers say “no,” they could expose themselves to additional liability stemming from allegations that they put their own interests ahead of their clients’.

“Policy limits demands can be a powerful tool for plaintiffs’ counsel and can cause headaches for claims handlers,” according to an issue paper by the San Francisco-based law firm Gordon & Rees, which is not involved in the Irwin litigation. “Depending on the circumstances, an insurer that misses an opportunity for a reasonable settlement of a claim against its insured may be liable for the full amount of a later judgment, regardless of the policy limits.”

With no settlement reached in the Levin case, the parties are pressing toward trial, which is scheduled for May 2017.

The original suit charged Irwin’s top brass with seven counts—four involving breach of fiduciary duty—and sought more than $500 million in damages. The complaint charged top executives recklessly expanded in the early 2000s, diving into commercial lending as far away as California and doling out residential loans for as much as 125 percent of a home’s value—reckless behavior that led to an “ultimately fatal concentration … of real estate loans.”

But the case soon lost steam. Judge Sarah Evans Barker in 2012 dismissed it, asserting that only the FDIC had standing to bring the suit and had opted against doing so.

Levin appealed but won only a partial victory, with the appellate court reinstating two counts—neither related to breach of fiduciary duty. One alleged the executives frittered away capital through dividends and stock buybacks; the other charged they drained capital by capitulating to the demands of regulators who demanded they funnel millions of dollars into the bank even after it was clear it was going to fail.

Whatever the ultimate resolution in the two cases, they are unlikely to dent the massive losses Irwin’s failure caused.

The Federal Reserve’s Office of Inspector General estimated in 2010 that the bank’s demise would result in losses to the FDIC’s insurance fund of $552 million.

On top of that, the federal Pension Benefit Guaranty Corp. had to step in to cover nearly all of a $20.5 million shortfall in the pension plan covering more than 1,000 former workers and retirees of Irwin Financial.

Investors in Irwin Financial also took it on the chin. Shareholders of the company—which had a market cap of nearly $600 million before the financial crisis—were wiped out after it filed for bankruptcy liquidation in 2009, listing assets of $13 million and liabilities of $230 million. The bulk of that money is owed to holders of debt securities issued by Irwin to help fuel its growth.•