If the lawsuit filed on February 7, 2011 in the Northern
District of Georgia is any indication, the FDIC's efforts to pursue liability
claims will not only include suits against the directors and officers of failed
banks, but will also include in at least some instances the failed
institutions' outside law firms. The FDIC's actions so far raise the question
of how extensive the FDIC's pursuit of these kinds of claims ultimately may
prove to be.
As reflected in J. Scott Trubey's February 8, 2010 Atlanta
Journal Constitution article (here),
the FDIC's recent suit was filed against a Henry County, Georgia law firm, Smith Welch & Brittain, and J. Mark
Brittain, in connection with the firm's legal services on behalf of
Neighborhood, Community Bank, a Newnan, Georgia bank that failed on June 26,
2009.
In its complaint, a copy of which can be found here, the FDIC as
receiver for the failed bank seeks to recover damages "in excess of $6
million" plus legal fees, based on the defendants' alleged legal
malpractice in connection with the law firm's handling of certain loans the
bank made to a local real estate developer between 2005 and 2007. The complaint
alleges that the bank hired the firm to process the documents for the bank's
loans to the developer, who allegedly was also a client of the law firm. The
suit alleges the developer of obtaining loans based on inflated property
values. The individual defendant allegedly facilitated this, among other
things, by creating two sets of settlement statements.
The lawsuit filed Monday is the third liability suit
filed in Georgia against a failed bank's outside law firm. As reflected in
press reports (here,
scroll down), on October 19, 2010, the FDIC filed two separate lawsuits in the
Northern District of Georgia against outside law firms for the failed Integrity
Bank of Alpharetta, Georgia. (In January, the FDIC filed a separate suit
against former directors and officers of Integrity Bank, as reflected here.)
The defendants in one of these two lawsuits also include a title insurance
company.
The FDIC has made no secret of the fact that it may
pursue claims against the failed banks' gatekeepers - not just banks' former
directors and officers, but also, according to
the FDIC's website, the banks' "attorneys, accountants, appraisers,
brokers, or others." The website also states that as of February 7, 2011,
the FDIC has "authorized seven fidelity bond, attorney malpractice, and
appraiser malpractice lawsuits." which presumably includes the suits
described above. (As detailed here,
the FDIC has to date filed four lawsuits against the directors and officers of
failed banks as part of the current wave of bank failures.)
The FDIC's pursuit of claims against lawyers and other
outside professionals is entirely consistent with the actions the agency took
during the FDIC crisis. According to NERA Economic Consulting's August 2010 report about failed bank
litigation, in connection with the 2,744 institutions that failed as part
of the S&L crisis, the FDIC (or the Resolution Trust Corporation) filed a
total of 205 legal malpractice claims and 139 accounting malpractice claims
(about 7.5% and 5% of failed banks, respectively).
The outcome of the FDIC's professional liability claims
during the S&L crisis, more than anything else, explain the FDIC's present
actions to pursue these claims in connection with the current round of bank
failures. According to the NERA report, as a result of the FDIC's S&L crisis
legal malpractice claims, the FDIC recovered $500 million, and as a result of
its accounting malpractice claims, the FDIC recovered $1.1 billion. (By way of
contrast, the FDIC's S&L crisis related claims against the former directors
and officers of failed banks resulted in recoveries of $1.3 billion). Given
this track record, it is hardly surprising that the FDIC is pursing claims of
the type described above now.
One question that all of this information raises is
whether the FDIC will as part of the current round of bank failures pursue
claims against the failed institutions' accountants, as the FDIC did during the
S&L crisis. The FDIC's website does not specify whether or not the agency's
board has so far authorized any claims against accountants or accounting firms.
Thought the FDIC has not yet pursued (or indeed,
apparently, authorized) claims against the accounting firms of failed banks, it
may only be a matter of time until these claims emerge, at least according to a
February 8, 2011 Legal Intelligencer article entitled "FDIC
Professional Liability Group Set to Pursue Audit Firms" (here).
The article lays out the legal theories on which the FDIC is likely to proceed
in its claims against outside accounting firms, and also reviews the firms'
likely defenses.
Though there have only been a few legal malpractice
claims to date and as yet no accounting malpractice claims, this process has
really only just gotten started. The FDIC's website describes an 18 month
process that precedes the authorization for the filing of these types of
claims. Indeed, the lawsuits discussed above were filed nearly two years after
the failure of the related institution.. Given that the current bank failure
wave really started to gain momentum in the second half of 2009, it seems
likely that as this year progresses - and on into 2012 - we could be seeing a
steadily growing number of these types of gatekeeper claims.
The fact that the first attorney malpractice claims were
filed in Georgia may simply be a reflection of the fact that as part of the
current found of bank failures, more banks have failed in Georgia than in any
other state. Of the 336 banks that failed between January 1, 2008 and February
4, 2011, 51 have been located in Georgia (including four of the fourteen banks
that have failed in 2011).
Read the article in its entirety at the D&O Diary, a blog by
Kevin LaCroix
For more information about LexisNexis products
and solutions connect with us through our corporate site.