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Though the current bank failure wave has been rolling for
several years now and though there have been over 425 bank
closures during that period, the much anticipated FDIC failed bank
litigation has been slower to gain momentum - that is, perhaps, at least until
now. Through the end of 2011, the FDIC had filed 18 lawsuits against former
directors and officers of failed banks. But now with the latest FDIC lawsuits,
described below, the FDIC has already filed seven so far in 2012, three of
which just in the last nine business days. There is a definite sense that the
pace of litigation activity is picking up.
The latest FDIC failed bank lawsuit was filed in the
Northern District of Illinois and relates to the failed Broadway Bank of
Chicago, Illinois. Broadway Bank failed on April 23, 2010. The FDIC's compliant,
which can be found here,
alleges that at the time of failure that bank had assets of 1.06 billion and
that the bank's failure cost the insurance fund $391.4 million. According to news
reports, the failed bank is the former family bank of a former Illinois
The FDIC's lawsuit, filed in its capacity as the failed
bank's receiver, seeks to recover over $104 million in losses the bank
allegedly suffered on commercial real estate loans. The complaint names nine
individuals as defendants, seven director defendants and two officer
defendants. The complaint asserts claims against the nine defendants for gross
negligence; breach of the fiduciary duty of care; and negligence.
The complaint alleges that the defendants "recklessly implemented
a strategy of rapidly growing Broadway's assets by approving high-risk loans
without regard for appropriate underwriting and credit administration
practices, the Bank's written loan policies, federal regulations and warnings
from the Bank's regulators." With regard to the regulators' warnings, the
complaint alleges that the Director Defendants approved "two of the worst Loss
Loans" on June 24, 2008 after a meeting earlier the same day with the Bank's
regulators in which the regulators "specifically warned the Director Defendants
about the risks that these types of loans posed to the Bank." That same day
regulators had discussed with the Director Defendants the need to "enter a
Memorandum of Understanding" that would "impose restrictions on the Bank to
stop this type of high risk lending."
One of the director defendants, James McMahon, who served
on the bank's board from 2003 to December 22, 2008 issues a press
release about the FDIC's complaint, in which McMahon notes that the bank
had been founded "by an immigrant who left Greece in 1962 to find a better life
in America," and had become a "vital force in the financial life of the
community." The bank had been "unable to withstand the greatest market decline
since the Great Depression and, along with over 400 other community banks" had
been "forced to close their doors." With respect to the lawsuit, McMahon
states "with the advantage of 20-20 hindsight, the FDIC now blames Broadway's
former officers and directors for not anticipating the same unprecedented
market forces that also surprised central bankers, national banks, economists,
major Wall Street firms and the regulators themselves." McMahon concludes by
noting that the allegations in the complaint are "utterly without merit and I
expect to be fully vindicated by the Court."
With this lawsuit, the FDIC has now filed 25 lawsuits
against the former directors and officers as part of the current wave of bank
failures. The Broadway bank lawsuit is the fifth that the FDIC has filed so far
in Illinois, the most of any state except Georgia, where the FDIC has filed six
suits. There clearly are more cases in the pipeline, as the FDIC has stated on
its website that, as of February 14, 2012, the agency has authorized suits in
connection with 49 failed institutions against 427 individuals for D&O
liability with damage claims of at least $7.8 billion.
Thus the 25 lawsuits filed so far represent only about
half of the lawsuits that had been authorized as of the middle of February, and
the 205 individuals named in those 25 lawsuits represent less than half of the
individuals against whom lawsuits have been authorized. The number of
authorizations undoubtedly will continue to climb in the months ahead, as will
the number of lawsuits.
With this latest suit, the FDIC has now filed three new
lawsuits in just the last nine business days. These three cases include the
February 24, 2012 lawsuit filed in the Northern District of Georgia involving
two former officers of the failed Community Bank and Trust of Cornelia,
Georgia (about which refer here,
scroll down) as well as the March 2, 2012 lawsuit filed in the Northern
District of Georgia against 12 former directors and officer of the failed
Freedom Bank of Commerce, Georgia (about which refer here,
scroll down). There is a definite sense that the pace of the FDIC's litigation
activity has picked up. Though this latest lawsuit was filed well in advance of
the three-year statute of limitations, the two prior suits were much closer to
the cut-off, and with the three-year deadline date looming for the failed bank
class of 2009 - the largest year for failed banks - it seems likely there will
be increasing numbers of suits ahead.
Very special thanks to John M. George, Jr. of the Katten & Temple law firm for
sending me a copy of the Broadway bank complaint and for sending me James
McMahon's press release. The Katten & Temple law firm represents Mr.
Corruption Investigation Follow-On Civil
Suits Reach Canada: The occurrence of follow-on civil actions
being filed in the wake of corruption and bribery investigations is a
phenomenon I have noted
frequently on this blog. It now appears this type of follow on civil suit
has now reached Canada.
As discussed here,
the share price of SNC-Lavalin Group recently declined sharply after the
company announced an internal investigation of the accounting for certain
payments in connection with a company project in Libya . As reflected in their
March 1, 2012 press release (here),
plaintiffs' lawyers have now initiated a securities class action lawsuit in
Quebec Superior Court against the Company and certain of its directors and
The plaintiffs' complaint, which can be found here,
alleges that the company violated its continuing disclosure obligation by
misrepresenting the company's internal controls and accounting. Among other
things the complaint alleges that an anonymous letter the company's senior
management alleged that for years shell companies had been used to funnel money
from SNC-Lavalin to members of the Libya's Gadhafi family.
The phenomenon of follow on civil litigation has been a
factor in the U.S. for years. As anticorruption efforts spread elsewhere, the
likelihood is not only that more companies will face scrutiny from government
officials, but they may also face civil litigation as well. At a minimum this
case shows how Canada's litigation environment is continuing to evolve, and its
litigation landscape is becoming both more extensive and more complex.
Special thanks for a loyal reader for alerting me to this
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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