If the lawsuit filed on Monday is any indication, the
long-anticipated FDIC litigation against failed banks may have arrived. On
November 1, 2010, the FDIC filed a lawsuit in the Northern District of Illinois
against eleven former directors and officers of Heritage Community Bank, a
lending institution in Glenwood, Illinois that failed in February 2009. A copy of the FDIC's complaint can
be found here.
banks have failed since January 1, 2008, there has been widespread speculation that the FDIC might pursue claims
against the former directors and officers of the failed institutions. Until
now, the FDIC has filed just one lawsuit against former executives of a failed
bank, involving former officers of IndyMac bank (about which refer here). More recently, there had been reports that the FDIC's board had authorized numerous
lawsuits to proceed - and now the lawsuits apparently have begun.
The Heritage Community Bank lawsuit, filed by the FDIC in
its capacity as the bank's receiver, seeks to "recover losses of at least
$20 million" that the FDIC alleges the bank suffered because the
defendants "failed to properly manage and supervise Heritage and its
commercial real estate lending program." The complaint alleges claims of
negligence, gross negligence and breach of fiduciary duty.
Essentially, the complaint alleges that the defendants
made imprudent or improper commercial loans while "making millions of
dollars of dividend payments to Heritage's holding company and paying generous
incentive awards to senior management." The complaint also alleges that by
December 2006, the defendants knew the bank was in trouble, but instead of
curtailing lending, the defendants "tried to mask the Bank's mounting
problems" by lending troubled borrowers more to pay down earlier loans.
The defendants in the case include not only the bank's
CEO, CFO and various lending officers, but also five outside directors.
The defendants are alleged to have extended or approved
commercial real estate without appropriate expertise, processes or supervision,
allowing loans in excess of prudent loan to value rations. The bank allegedly
also lacked appropriate loan monitoring processes. The bank allegedly failed to
post appropriate loan loss reserves, and even inappropriately recognized income
as subsequent loans were used to pay off interest on prior loans.
The inappropriately recognized income allowed the
allegedly improper holding company dividends and incentive compensation
payments. (The allegedly improper incentive compensation payments in 2007 totaled
$825,000.) The FDIC alleges that the total amounts of the improper dividends
and inventive compensation payments were over $11 million.
Counsel for the defendants issued a press
release on the defendants' behalf that stated among other things:
The FDIC has now filed a lawsuit against the Bank's
former officers and directors for failing to foresee the recent unprecedented
collapse in real estate values. The FDIC's action is both regrettable and
wrong. With the advantage of 20-20 hindsight, the FDIC blames the former
officers and directors of a small community bank for not anticipating the same
market forces that also caught central bankers, national banks, economists,
major Wall Street firms, and the regulators themselves by surprise.
From my perspective, this case seems like an unexpected
place for the FDIC to have started. The allegedly improper compensation seems
relatively modest and there are otherwise no allegations of self-dealing or
other egregious conduct. Similarly, there are no allegations that the bank
operated in violation of any regulatory orders or consents.
Even taking the FDIC's complaint on its own terms, it
looks as if this bank (like so many others) got caught up in the real estate
bubble and then failed to recognize the collapse until it was too late. In the
aftermath, it seems easy to say the bank should have been more prudent than it
was. The bank has a lot of company in that regard, starting with the Federal Reserve
and going from there.
I will say this (in quotation of a comment from one of my
readers) this complaint is a hell of a lot more compact than the 300-page
behemoth the FDIC filed in the Indy Mac case.
It is perhaps not much of a surprise that this suit
involves an Illinois failed bank. There have been 38 bank failures in Illinois
since January 1, 2008, the third highest number of any state, behind only
Georgia (46) and Floriday (43).
Earlier news reports had suggested that the FDIC had
authorized lawsuits against as many as 50 former directors and officers of
failed banks, but news reports concerning the new Heritage Community Bank lawsuit
report that the FDIC has now authorized lawsuits against "more than
70" former directors and officers. Reliable sources tell me that the FDIC
has also filed a lawsuit against the former directors and officers of a
specific failed bank in a Western state although I have been unable to
independently verify that.
But in any event, it appears the FDIC failed bank D&O
litigation has now begun. It seems probable that may more lawsuits will follow.
Special thanks to John M. George, Jr.
of the Katten & Temple law firm for providing copies of the complaint and
of the defense counsel press release. George's firm is of counsel in connection
with the defense of one of hte indidivudal defendants.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.