Just days after the US Court of Appeals for the Fifth Circuit issued an ordered granting an emergency motion for a stay pending the preliminary injunction against the Corporate Transparency Act (the CTA), the Fifth Circuit has vacated the motion and reinstated the CTA reporting obligations. 

The CTA was enacted as a federal law that aimed to combat money laundering, fraud, and other illegal activities by requiring certain businesses to submit detailed information about their owners (beneficial owners) to the government, thereby increasing transparency in corporate ownership structures. 

Earlier this month, a district court in Texas ruled that the CTA was likely unconstitutional. It issued a nationwide injunction which halted CTA’s enforcement as well as the enforcement of the CTA’s January 1, 2025, reporting deadline for certain non-exempt reporting companies formed before January 1, 2024. The district court characterized the CTA as a “flanking, quasi-Orwellian statute,” and granted the injunction, finding, among other factors, that the individuals were likely to succeed on the merits of their claims and that the individuals were likely to suffer irreparable harm in the absence of preliminary injunctive relief. 

With the Fifth Circuit’s stay now dismissed, we expect the Department of the Treasury’s Financial Crimes Enforcement Network (FinCEN) to update its website to reflect these developments and to advise that reporting companies are not required, but may, report beneficial ownership while the injunction is in effect.

A Bank Holding Company (the “Company”) sought coverage from its Bankers Professional Liability carrier for defense and indemnity expenses in connection with underlying lawsuits related to an alleged Ponzi scheme. The underlying lawsuits alleged that the Company and several related entities had improperly used investment pools, funded by other investors, to run a Ponzi scheme for their benefit.

The carrier denied coverage citing the policy’s Lending Exclusion (the “Exclusion”) which precluded coverage "for Loss in connection with Claims based on or arising out of: Wrongful Acts by Subsidiaries; liability of other assumed under contract; and certain loans, leases or extensions of credit.

The Company argued that this claim fell within the Loan Servicing exception to the Exclusion. Specifically, the Company argued that the underlying claims sought to hold the Company "liable for its conduct in servicing the loans and lines of credit that were extended to the [investment pools] and the [other individuals] and that such conduct fell within the Loan Servicing exception" to the Exclusion.

The court disagreed and relied on the evidence which showed that the underlying actions sought to hold the Company liable based on it/its predecessor’s decisions to extend or renew those loans and lines of credit to the individuals, as well as the bank’s failure to recognize or address the individuals’ misuse of investor funds over the course of the alleged Ponzi scheme.

The Company’s attempt to construe Loan Servicing so broadly as to include all subsequent activity after it/its predecessors extended loans or lines of credit was unreasonable and did not suffice to show a genuine dispute of material fact as to whether the Lending Exclusion would apply. Since the court found that the Lending Exclusion applied, the carrier did not have to provide a defense.   

A New Hampshire Federal Court, applying California Law, in a coverage dispute stemming from a violation of the California Franchise Investment Law (“CFIL”). At issue in the coverage dispute was whether the policy’s provision disclaiming coverage for misrepresentations on the Insurance application barred coverage for Insured’s dispute with its franchisee. 

The policy provided: 

The Insureds further agree that in the event of any material misstatement, misrepresentation or omission in the Application, there shall be no coverage under this Policy for any Insured who had actual or imputed knowledge as of the inception date of the Policy Period of the facts that were misstated, misrepresented or omitted in the Application (whether or not such Insured was aware that such facts were misstated, misrepresented, or omitted in the Application). For purposes of determining the applicability of this Paragraph, any knowledge possessed by the Chief Executive Officer, the Chief Financial Officer, or the General Counsel of the Named Insured shall be imputed to the Company, but with the exception of the foregoing, any knowledge possessed by an Insured shall not be imputed to any other Insured.

The franchise dispute stemmed from a buy-back agreement that had been pending for several months prior to the inception of the D&O policy. Before the policy’s inception, the Insured sent a notice of default under the Franchise Agreement due to Franchisee’s failure to complete training. Also, the disagreements persisted for the following months. The insured failed to disclose these circumstances on the insurance application. However, formal litigation against the insured by the franchisee did not commence until after the policy was placed into effect.  

The court analyzed the insurance carrier’s arguments relative to the prior notice exclusion, the professional services exclusion, the intentional acts exclusion, and the breach of contract exclusion in the policy. The breach of contract exclusion issue turned on the “based upon or attributable” preamble to the contract exclusion, which the court held was narrow enough to not be applicable to the dispute. The court further held that the carve-back to the exclusion for liability in the absence of the contract would apply, as the liability to the insured was statutory rather than contractual.  

The professional services exclusion was also found inapplicable, as the claim was based on fraud and misrepresentations in the insured’s initial disclosures, which pre-dated the franchise agreement, and not to the insured’s “failure to provide training and resources to its Franchisees.”  The court further held that the policy’s intentional acts and contract exclusions did not bar coverage, as the insured’s actions were not deemed willful or intentional.  

The court determined that the application provision incorporated into the policy potentially applied, precluding coverage for claims an insured knew or should have anticipated before obtaining insurance. The court determined that, on the above facts, a reasonable jury could decide that Insured knew a lawsuit could ensue. 

A New York federal court ruling highlights the importance of purchasing D&O insurance. Specifically, the court ruled that defense costs and potential liabilities arising from False Claims Act (“FCA”) litigation is covered under D&O policies. 

In the underlying action, a group of healthcare centers (the “Company”) sought coverage under its D&O policy for defense costs related to a qui tam action alleging that the Company defrauded the federal and New York state governments when submitting claims for reimbursement. In the lower court, the carrier argued that the Government Funding Defense Expense Coverage provision (the “Provision”) excluded “the return of funds which were received from any federal, state, or local government agency” from the policy’s definition of “Loss.” Thus, according to the carrier, coverage for “any Claim arising out of the return, or request to return, such funds” was precluded. The lower court disagreed with the carrier and held that the ordinary meaning of “return”—to put original owner of property back in its prior position—did not apply to the underlying qui tam action because: (1) FCA damages were compensatory and punitive in nature; and (2) those who brought the action never actually possessed the money.  Thus, the lower court confirmed that coverage for defense costs incurred in the FCA qui tam action was not limited by the Provision but covered under the policy. 

The carrier filed a notice of appeal to the Second Circuit. While awaiting a decision from the Second Circuit, the lower court’s decision aligns with other circuits that have held that FCA damages are compensatory in nature, and therefore not excluded under D&O policies. Since many carriers may argue the FCA-related exposures are uninsurable, this decision proves otherwise. Alliant will continue to monitor this decision. In the meantime, Healthcare providers should work with their brokers to ensure they have the best coverage to protect themselves against the risk of expensive government investigations and FCA litigation.