The pace of bank closures has slowed to a trickle. There
have only been three bank failures so far in 2013 (including one this past
Friday evening, involving the Covenant
Bank of Chicago, Illinois). But while bank failures have dwindled, the
number of failed bank lawsuit filings has surged. On February 15, 2013, the
FDIC updated
its website to reflect a cluster of new failed bank lawsuit filings as well
as an increased number of lawsuit authorizations. With the latest lawsuit
authorizations, the FDIC is now approaching an authorized level of lawsuit
filings comparable to the lawsuit filing level during the S&L Crisis.
With the three bank closures this year, there have now
been a total of 471 bank failures since January 1, 2007. The FDIC's latest
litigation update shows that during the current wave of bank failures the
agency has now filed 51 lawsuits against the former directors and officers of
50 failed banks, meaning that the FDIC has already filed lawsuits in connection
with just under 11% of all bank failures. But, as reflected in the updated
information on the FDIC's website, the agency has also authorized more
lawsuits. The number of authorized lawsuits has continued to increase each
month, as well.
As of February 15, 2013, the FDIC has authorized suits in
connection with 102 failed institutions against 836 individuals for D&O
liability. This includes the 51 filed lawsuits naming 396 former directors and
officers at 50 institutions. In other words, there could be as many as 52
as-yet-to-be-filed lawsuits based just on the authorizations to date. Some of
these authorized lawsuits may not ultimately be filed, as pre-litigation
negotiations sometimes results in settlements that avert the need for a lawsuit
to be filed. But were the FDIC to file lawsuit in connection with as many as
102 failed institutions, that would mean that the FDIC would have initiated
lawsuits in connection with nearly 22% of all bank failures, a percentage that
would approach the 24% rate during the S&L crisis. To the extent the agency
authorizes even more lawsuits in coming months, the litigation rate could meet
or even exceed the S&L crisis litigation rate.
The updated information on the FDIC's website includes
information relating to four additional filed bank lawsuits that I had not
previously tracked. With the addition of these four latest suits, the FDIC has
now filed a total of seven failed bank lawsuits so far in 2013, after having
filed 26 during 2012. I briefly discuss each of the four latest lawsuits below.
One interesting note about these four new suits is that none of them involve
failed Georgia banks. As I have previously noted on this blog (most recently here,
see second item), the failed bank lawsuits had been disproportionately
concentrated in Georgia. These latest filings, none of which involve Georgia
banks, might suggest that this imbalance may start to level out.
Here is brief description of the four latest failed bank
lawsuit filings.
First, on January 18, 2013, the FDIC in its capacity as
receiver for the failed Columbia River Bank of The Dalles, Oregon filed an
action in the District of Oregon against seven former officer and three former
directors of the bank. The bank failed on
January 22, 2010, so the FDIC filed the suit just ahead of the third year
anniversary of the bank's closure. The FDIC's complaint (a copy of which can be
found here)
asserts claims against the former directors and officers for gross negligence,
negligence and breach of fiduciary duties. The complaint alleges that the
defendants "took unreasonable risks with the Bank's loan portfolio, allowed
irresponsible and unsustainable rapid asset growth concentrated in high-risk and
speculative" loans, "disregarded regulator warnings," and violated the Bank's
loan policies and procedures. The defendants allegedly caused damages to the
bank of no less than $39 million.
Interestingly, though the Columbia River Bank was not
closed until January 2010, all but one of the specific loans cited in the
complaint were originated in 2006 and 2007 (the one exception was originated in
early 2008). As time goes by, the loan originations cited in the FDIC's
complaint start to seem more and more like ancient history.
Second, on January 29, 2013, the FDIC filed an action in
the Middle District of Florida in its capacity as receiver for the failed Orion
Bank of Naples, Florida. The FDIC's complaint can be found here. The
FDIC's complaint seeks to recover damages of in excess of $58 million. The
lineup of defendants is interesting, as the four individuals named as
defendants are all former directors; none of the bank's former officers are
named as defendants.
The complaint, which asserts claims for gross negligence
and breach of fiduciary duties, alleges that the bank "collapsed under the
weight of the unsustainable growth strategy that the Defendants permitted Chief
Executive Officer Jerry Williams to pursue." Williams, the former CEO, is not
named as a defendant in the case. The complaint alleges that as Williams
pursued his "reckless growth strategy" he was "unrestrained" by the defendants
who engaged in a "pattern of unconsidered acquiescence." The Defendants are
alleged to have approved loans "without meaningful deliberation or discussion."
The complaint alleges that the director defendants even continued to "ignore"
their duties even after the bank had entered an August 25, 2008 written
agreement with the federal banking authorities that was specifically concerned
with the directors' oversight responsibilities.
The Orion Bank failed on
November 13, 2009, which suggests that the parties may have entered some
sort of a tolling agreement. The naming of only four former directors as
defendants, and the absence of any officer defendants, is not explained in the
complaint. One possibility is that as a result of negotiations while the
tolling agreement was in place resulted in settlements on behalf of the former
officers (this, I should add is sheer speculation on my part).
Third, on January 31, 2013, the FDIC in its capacity as
receiver of the failed Security Savings Bank of Henderson, Nevada, filed an
action in the District of Nevada against three former director and officers of
the bank. The FDIC's complaint (a copy of which can be found here) seeks
to recover damages in excess of $13.1 million from the three defendants who
allegedly "underwrote, recommended and/or voted to approve at least seven
high-risk commercial real estate and acquisition and development and
construction loans in violation of the Bank's lending policies and clear
principles of safety and soundness."
The bank was closed and the FDIC appointed as receiver on February
27, 2009, which suggests that the parties had entered some sort of tolling
agreement. The three defendants had resigned before the bank failed; two of
them, the former CEO and the former Chief Credit Officer, had resigned in
September 2008, and the third had resigned all the way back in December 2006.
The three individual defendants have long since scattered, with two now living
in Texas and a third living in Virginia. All of the specific loans mentioned in
the FDIC's complaint were originated in 2005 and 2006, which really does seem
like ancient history.
Fourth, on February 13, 2013, the FDIC, in its capacity
as receiver of the failed LaJolla Bank of LaJolla, California filed an action
in the Southern District of California against two former officers of the bank
and against the bank's former board Chairman. The complaint (here)
asserts claims for negligence, gross negligence and breach of fiduciary duty
and seeks to recover damages in excess of $57 million. The complaint alleges
that the defendants violated the bank's loan policy and "safe and sound lending
practices" by "recommending or approving speculative commercial real estate
loans despite known adverse economic conditions," as well as recommending or
approving loans to borrowers who were not creditworthy, or without requiring
sufficient underwriting and without sufficient information.
Regulators closed the
LaJolla Bank on February 19, 2010, so the FDIC filed its complaint just
prior to the third anniversary of the bank's closure. The specific loans
referenced in the complaint were originated between March 2007 and March 2009.
Reading these four complaints in quick succession was an
interesting experience. Though there are noteworthy variations between the
complaints (for example, with the Orion Bank complaint, which names only
director defendants), there is also a certain sameness to the complaints, as
well - so much so that some of the allegations and even phraseology seem to be
lifted verbatim from other complaints. It is, after all, a familiar story. The
banks grew quickly during a period of rapid economic expansion and then were
slow to recognize the seriousness of the downturn. In the aftermath, it appears
that many of the loans extended during the go-go days had not always been made
with full procedural compliance. It does beg the question whether the losses
were the result of the failure to follow procedures or of the suddenness and
severity of the downturn.
Another unmistakable impression from reading these
complaints in quick succession is that as time goes by, the events on which the
FDIC is going to be trying to base its current and any future lawsuits are
receding further and further into the past. As noted above with respect to the
Security Saving Bank complaint, the defendants are scattering. As time goes by,
the FDIC's burden is going to become increasingly archeological.
This Just In From Our Istanbul Bureau --
D&O Liability and Insurance in Turkey: As is the case in
many countries, the use of D&O insurance is still relatively new in Turkey.
However, as discussed in an interesting January 29, 2013 article by Naşe
Taşdemir Önder and Pelin Baysal
of the Mehmet Gün & Partners
law firm entitled "Turkey: Directors' and Officers' Liability Insurance in
View of the New Turkey Commercial Code" (here),
new standards on corporate governance incorporated into the new Turkish Commercial
Code are "expected" to "lead to increase in demand for D&O policies."
According to the authors, the new Code introduces new
requirements for "universal accounting and auditing standards and rules for
increased transparency" which the authors expect will support the "operability"
of "liability provisions." According to the authors, the Code introduces a
"heavier level of duty of care" for directors and officers. Among other things,
the new Code provisions introduce certain specific types of liability
provisions, including in particular liability for misrepresentations in
documents and declaration and misrepresentations on capital subscription. The
Code introduces many other new provisions, including new provisions allowing
for claims by shareholders for losses incurred by the company.
With respect to insurance, the new Code specifies that
third party liability insurance will be consider "occurrence based" unless
otherwise indicated in the policy. The new Code also prohibits coverage for
losses arising as a result of willful acts. The author's very thorough
examination of the new Code's insurance-related provisions detail the many
other specific insurance issues that the new Code addresses.
For anyone interested in the D&O liability and
D&O insurance issues in Turkey, the authors' memo is a valuable resource.
And Now, From Our Singapore Bureau:
Regular readers of this blog may recall my
post about my April 2012 visit to Singapore, which I found to be an
interesting and impressive place. But Singapore's transformation into a
gleaming metropolis is relatively recent. As shown in this
photo montage from Business Insider, Singapore had to become what it
is today and relatively recently it was a very different place. I found these
photographs, and the history they embody, to be fascinating.
And Finally: Kalefa
Sanneh's excellent and interesting article in the February 11 & 18
issue of The New Yorker entitled "Spirit Guide" (here), about
whisky distiller Bruichladdich,
contains the following sentence, written with reference to the whisky sampling
techniques of the whisky maker's master distiller, Jim McEwan: "It's a
simple process, but consumers hoping to reproduce McEwan's results at home will
find, no doubt, that some variant of the uncertainty principle applies: the
more research you conduct, the less reliable your data become." I tip my hat to
the article's author; the sentence has its own humor, in that conducting whisky
research undoubtedly involves certain limits owing to the properties of the
subject matter. But it is the sly side reference to Heisenberg's uncertainty principle
that I admire.
Though I could never hope to write with such
sophisticated humor, I can certainly admire the writing, including also the
following sentence from the same article: "The first part of the
distillate, known as the foreshot, contains methanol, which can be toxic in
large quantities - although the same could be said of whisky." (Side note: In
Scotland, there's no "e" in whisky.)
Read
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix
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