Bank wins Ponzi scheme settlement coverage appeal

An Ohio bank can claim insurance coverage from an American International Group Inc. unit for a settlement it paid to end litigation related to a Ponzi scheme it was caught up in in the early 2000s, a federal appeals court ruled.

In overturning a lower court decision in favor of the unit, the U.S. 6th Circuit Court of Appeals in Cincinnati ruled last week in Huntington National Bank v. AIG Specialty Insurance Co. et al. that Ohio law did not bar the Columbus-based bank’s $15 million claim on its bankers professional liability policy.

The claim stemmed from a Ponzi scheme perpetrated by Barton Watson through two fraudulent companies, Cyberco Holdings and Teleservices Group Inc. Huntington served as Cyberco’s bank from 2002 to 2004 and extended the company multiple loans, the ruling states.

Mr. Watson set up a web of loans with Teleservices and financing companies purportedly to pay for computer equipment and deposited the money in Cyberco’s account with Huntington, court papers say.

Huntington became suspicious of Mr. Watson’s banking activity in 2003 and learned from the FBI that he had previously served time for fraud-related crimes. From May 2004 to October 2004, Cyberco gradually repaid its entire loan. Later the FBI raided Cyberco’s offices, and Mr. Watson committed suicide shortly afterwards, court papers say.

Creditors of Cyberco and Teleservices discovered the companies were bankrupt, and trustees of the companies claimed Huntington put its desire to be repaid ahead of concerns over Mr. Watson’s fraud.

After lengthy bankruptcy proceedings, in 2018 Huntington settled with the trustees for $32 million without admitting liability. At various points during the bankruptcy proceedings, Huntington sought $15 million in coverage under its policy with AIG and the insurer denied the claim.

Huntington sued AIG, and a lower court ruled in the insurer’s favor, stating the claim was uninsurable under Ohio law and also barred under a policy exclusion for “unrepaid, unrecoverable, or outstanding credit.”

Reviewing the case, the appeals court stated that only two categories of claims are uninsurable under Ohio law: claims for punitive damages and intentional torts.