On August 22, 2011, when the FDIC filed a lawsuit
related to the collapse of Silverton Bank, which is Georgia's largest failed
bank, the named defendants included not only bank officers that the regulators
allege are responsible for the bank's failure, but also the bank's former
outside directors and even the bank's D&O insurers. A copy of the
FDIC's complaint, which was filed in the Northern District of Georgia, can be
Scott Trubey's August 22, 2011 Atlanta Journal Constitution article
about the lawsuit can be found here.
In addition, and as discussed further below, on August
23, 2011, the FDIC separate filed an action in the District of Arizona against
certain directors and officers of the failed First National Bank of Nevada.
When Silverton failed on May
1, 2009, it had assets of over $4 billion. Prior to its collapse, Silverton
had done business as a "banker's bank" and had been chartered to do serve the
needs of community financial institutions, by providing correspondent and
clearinghouse services. The bank eventually expanded into residential and
commercial real estate acquisition and development loans, which it accomplished
through "participations" in which the Bank shared funding and risk with other
The FDIC's complaint alleged that its case represents "a
text book example of officer and directors of a financial institution being
asleep at the wheel and robotically voting for approval of transactions without
exercising any business judgment in doing go." The complaint, which seeks
recovery of damages of $71 million, asserts claims against the individual
defendants for negligence, gross negligence, breaches of fiduciary duty and
The individual defendants named in the lawsuit include
not only the bank's former President and CEO and two other former bank
officers, but also 14 additional former outside board members. In naming the
outside directors, the FDIC stressed that what makes this case "so unique and
troubling" is that the bank's board was not composed of "ordinary businessmen"
but, rather, in view of the bank's business as a banker's bank, of individuals
who were all CEOs or presidents of other community banks. These outside board
members "by virtue of their elevated positions within their own banks, were
more skillful and possessed superior attributes in relation to fulfilling their
duties" than "others who may serve in this capacity.
The complaint alleges that the individual defendants
allowed the bank to pursue a strategy of rapid expansion, particularly with
respect to commercial real estate lending, just as the economy started to head
south, and allowed the bank to continue to pursue this strategy even after the
signs of economic problems began to mount. The complaint alleges that the
bank's "aggressive banking plan" was accompanied by weaknesses in loan
underwriting, credit administration and a complete disregard of a declining
economy, which "led to the failure of the Bank."
The complaint also alleged that the individual defendants
"directed the Bank on a course of expansive and extravagant spending on
unnecessary items for the Bank after the economy began to decline." The
individual defendants are alleged to have "authorized the purchase of two new
aircrafts, a new airplane hanger to house three large and expensive airplanes,
and a large and lavish new office building."
In addition to naming the former officials of the failed
bank as defendants, the complaint somewhat unconventionally also names as
defendants the bank's two D&O insurers.
At the time the bank failed, it carried a total of $10
million of D&O insurance, arranged in two layers consisting of a primary
layer of $5 million and an additional $5 million layer excess of the primary.
The complaint relates that when the binder for the relevant primary policy was
issued on March 3, 2009 (that is, less than two months before the bank failed),
the binder listed ten endorsements, including an endorsement containing the
so-called regulatory exclusion (for background about the regulatory exclusion,
However, when the primary carrier issued the policy on April 1, 2009, only
seven of the ten endorsements that had been listed on the binder were included
on the D&O policy. Among the endorsements that were listed on the binder
that were not included on the issued policy was the endorsement with the
On the afternoon of May 1, 2009 (that is, the day
Silverton was closed), a representative of the primary carrier sent an email
message that he "had noticed that the Regulatory Endorsement was on the Binder
but left off the policy in error," and attached to the email an endorsement
with the Regulatory Endorsement dated May 1, 2009 but with an effective date of
March 9, 2009. The complaint characterizes this as a "last minute attempt
to unilaterally change the terms of the Policy." The complaint further alleges
that policy issuance terminated the binder.
The FDIC's complaint seeks a judicial declaration that
the regulatory exclusion is not a part of the primary or excess policy, and
that the Insured vs. Insured exclusion, on which the carriers also purport to
rely to deny coverage, does not preclude coverage for the claim. (Refer here
for a discussion of the issues surrounding the applicability of the Insured vs.
Insured exclusion in connection with a claim involving the FDIC as receiver.)
The FDIC's lawsuit against the former Silverton directors
and officers is not the first lawsuit filed as part of the current round of
bank failures in which the FDIC has included outside directors as defendants.
For example, the lawsuit the FDIC recently filed in connection with the
collapse of Haven Trust included the failed bank's former outside directors as
defendants, as discussed here.
The FDIC seems to have particularly targeted the outside directors of
this failed bank, owing to the unusual circumstance that former directors were
all themselves also senior executives of other banking institutions. The FDIC
clearly intends to try to bootstrap this fact in order to argue that these
specific directors should be held to a higher standard of care. (My recent post
on issues surrounding questions of bank director liability can be found here.)
Upon reflection of the unique circumstances by which
these directors came to be on the Silverton board, it occurs to me that the
FDIC may have certain additional motivations in pursuing claims against the
former outside directors of the bank. The parrticular circumstance I have
in mind is the fact that each of these outside directors of Silverton was also
an officer of another banking institution. To the extent these individuals were
serving on the Silverton board at the direction of the sponsoring institution,
these individuals potentially could have coverge for claims in connection with
their Silverton board service under the outside director liability provisions
of their sponsoring bank's D&O insurance policies. I am
expressing no views on whether or to what extent such coverage actually would
be available, nor could I without further information about their
sponsoring banks' D&O insurance policies and about the circustances by
which they came to be on the Silverton board. My purpose in noting the
observations here is simply to suggest this possible additional motivation that
the FDIC might have in pursuing claims against these particular outside
directors. In any event, the outside director liability coverage, if any, under
the sponsoring company's D&O insurance may be limited to outside
director service on nonprofit boards.
The FDIC's inclusion of the D&O insurers as parties
defendant in the liability lawsuit is unorthodox to say the least. One the one
hand, as the complaint recites, the D&O insurers have denied liability for
the FDIC's claim, which might set the predicate for a more conventional (and
separate) declaratory judgment action against the carrier. From reading the
complaint, it seems that the primary carrier's belated attempt to correct the
omission of the regulatory exclusion from primary policy may explain the FDIC's
more aggressive approach here.
Whatever else may be said about the FDIC's inclusion of
the insurers as defendants in this lawsuit, the alleged facts provide a
veritable parable about the importance of making sure that the issued policy
matches the terms of the binder. It will be interested to see how the Court
addresses what allegedly appears to be a policy issuance error, as the
insurance arrangement to which the parties had agreed unquestionably was
intended at the time of contract formation to include a regulatory exclusion.
For that matter, it will be interested to see whether the Court permits
the coverage action to remain joined with the underlying liability action, and
whether or not the Court will permit the two related actions to go forward at
the same time.
FDIC Also Files Lawsuit Against Former
Officials of First National Bank of Arizona: In
addition to its new lawsuit against the Silverton officials, the FDIC also
filed a separate lawsuit in August 23, 2011 in the District of Arizona
against two former directors and officers of First National Bank
of Arizona, which had been one of the sister banks of First National
Bank of Nevada until they merged shortly before FNB Nevada
failed. FNB Nevada was among the first banks to fail as
part of the current round of bank falures when it failed on
July 25, 2008. A copy of the FDIC's complaint in the case can be found here.
The complaint alleges breach of fiduciary duty,
negligence and gross negligence against the former officers, asserting that
they cause the bank to sustain "losses from the unsustainable business
model they promoted for FNB Arizona's loan portfolio -- a model that depended
on real estate values rising indefinitely and low defaule rate." The
complaint alleges that "when the real estate market collapsed and default
rates skyrocketed, FNB Arizona was left holding millions of dollars of bad loans
it could not sell." The FDIC alleges that as a result of the
defendants' conduct, the FDIC has sustained losses in excess of $193 million.
The Current FDIC Failed Bank Lawsuit Count: These
complaints represent the tenth and eleventh that the FDIC has filed
against former directors and officers of a failed bank as part of the current
round of bank failures. The Silverton lawsuit represents the third so
far in Georgia. There undoubtedly will be more lawsuits to come, as the FDIC has indicated
on its website that as of August 4, 2011, it has authorized suits in
connection with 30 failed institutions against 266 individuals for D&O
liability with damage claims of at least $6.8 billion. With the Silverton
Bank and FNB Nevada lawsuits, the FDIC has now filed suits in
connection with eleven failed institutions against 77 individuals. Even
just taking account of the lawsuits that have already been authorized,
there are many more suits to come, and undoubtedly even more lawsuits will be
But with the back to back arrival of these two lawsuits
in the space of two days, both involving banks the failed early on the the bank
failure wave, there is a sense that the long lagtime associated with the FDIC's
lawsuit filings may be over. For what it is worth, both of these new complaints
both involve the same lawfirm on behalf of the FDIC, the Mullin Hoard
& Brown law firm of Amarillo, Texas.
It is probably worth noting that the FDIC's lawsuit is
not the first to be filed against the former directors and officers of
Silverton. As reflected here,
the bank's defunct parent company earlier this year filed suit against the
bank's former CEO and its former accountant and accounting firm, seeking about
$65 million in damages.
Special thanks to the several readers who sent me copies
of the Silverton complaint and related links. Special thanks also to the loyal
reader who sent me a copy of the FNB Nevada lawsuit as well.
Number of Problem Banks Declines:
According to the FDIC's latest Quarterly Banking Profile, released on August
23, 2011 (refer here),
the number of problem institutions during the second quarter of 2011 declined
to 865, from 888 at the end of the first quarter of 2011. This reduction
represents the first quarterly decline in the number of problem institutions in
19 quarters. (The FDIC identifies banks as problem institutions as those
that are graded a 4 or a 5 on a 1-to-5 scale as a result of "financial,
operational, or managerial weaknesses that threat their continued financial
viability." The FDIC does not release the names of the individual problem
While the quarterly decline in the number of problem
institutions is good news, the latest quarterly figure still represents a significant
number and percentage of all banks. The 865 problem institutions represents
about 11.5% of the 7513 of all reporting institutions. This is slightly lower
than the 11.7% of all banks that were rated as problem institutions at the end
of the first quarter.
With the continued weakness in the sector, the number of
failed and troubled banks will continue to remain a concern for some time to
The FDIC's August 23, 2011 press release regarding the
latest Quarterly Banking Profile can be found here.
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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