Turns out that while some of us were wondering when the
lawsuits arising out of the current bank wave would really start to
accumulate, the FDIC itself was busy filing lawsuits -- they just didn't tell
anybody about it, at least not until now. Specifically, the FDIC filed three
more lawsuits in August than had previously come to light. At a minimum, these
lawsuits suggest the FDIC has been more active in pursuing its litigation
strategy than may have been perceived. The suits also suggest that the FDIC's
declarations about its planned litigation strategy are very much in earnest.
The three newly publicized lawsuits, each of which were
filed by the FDIC in its capacity as receiver of a failed bank, are as follows:
First, on August 8, 2011, the FDIC filed a lawsuit in the
Eastern District of Michigan against a single former loan officer at Michigan
Heritage Bank, of Farmington Hills, Michigan, which failed on April 24, 2009
(about which refer here).
A copy of the complaint in this lawsuit can be found here. The
complaint alleges that the individual, whom the complaint alleges had been CEO
of a different Michigan bank that failed in 2002, caused the bank to incur
losses in excess of $8.2 million. The complaint, which asserts claims of
negligence, gross negligence and breach of fiduciary duty, alleges among other
things that the lending officer "failed to conduct due diligence and analysis
prior to originating and recommending approval of 11 commercial loans that
resulted in losses" and "failed to adequately inform [the Bank's] board of
directors and senior management of deficiencies with respect to those loans."
Second, on August 9, 2011, ,the FDIC filed a lawsuit in
the District of Kansas against six former officers and directors of the
Columbian Bank and Trust Company, of Topeka, Kansas, which failed on August 22,
2009 (about which refer here). The
FDIC's complaint in this lawsuit can be found here. The FDIC
seeks to recover losses of at least $52 million the bank allegedly suffered
because the defendants allegedly "negligently, grossly negligently, and in
breach of their fiduciary duties originated and/or approved poorly underwritten
large commercial and commercial real estate loans ... and failed to properly
supervise the Bank's lending function." The FDIC also alleges that the
defendants (one of whom owned or controlled the bank's holding company) "failed
to heed the warnings of bank supervisory authorities."
Third, on August 10, 2011, the FDIC filed a lawsuit in
the Eastern District of North Carolina against nine former directors and
officers of the Cooperative Bank, of Wilmington, North Carolina, which failed
on June 19, 2009 (about which refer here).
The FDIC's complaint in this action can be found here. The
complaint alleges that defendants "failed to manage the inherent risks
associated with their aggressive growth strategy" and "permitted a lax loan
approval process." The complaint further alleges that through out the period
2005 through the bank's failure, state and federal regulators "repeatedly
warned" the bank's management and board "about the risks associated with its
high concentrations in speculative loans and weaknesses in lending functions,"
yet the bank's board "permitted and approved" the bank's continued lending
practices. The FDIC alleges that the defendants' negligence, gross negligence
and reckless conduct "ultimately led to the bank's failure."
There are a number of interesting things about these
three new lawsuits, beyond the fact that they were filed on three successive
days in August. For one thing, all three involved banks that failed more than
two years before the complaints were filed. The timing of the filings relative
to the earlier closures says something about the FDIC's internal timetable for
working up potential lawsuits. Another thing about these lawsuits are that the
involve banks in states that have not been particularly hard hit during the
current bank failure. By and large the bank failures have involved banks in
just a few states, particularly Georgia, Illinois, California and Florida. Hard
to know for sure what it signifies, but it is interesting that none of these
suits involve banks from those hard hit states.
Another interesting thing about these suits is that all
three involve relatively small banks. The Michigan Heritage bank lawsuit
involves a single mid-level lending officer and relatively modest losses on
a relatively small number of loans. The implication seems to be that the FDIC
intends to be very thorough and that there are not going to be cases that are
too small to bother with. This is a salvage operation, pure and simple, and the
FDIC is going to recover everything it can, no matter how small.
In any event, when these three additional lawsuits are
taken into account, the total number of lawsuits that the FDIC has filed
against former directors and officers of failed banks as part of the current
bank failure wave is now up to fourteen, five of which were filed in August,
and half of which were filed since June 30, 2011. The fact that these suits
were filed in August and are just coming to light now suggests the possibility
that there could be other FDIC lawsuits that have been filed but that have not
Whether or not there are other filed but not yet
publicized suits out there, it is clear there are many more lawsuits to come.
On its website,
the FDIC has said that as of September 13, 2011, the agency has approved
lawsuits involving suits in connection with 32 failed institutions against 294
individuals with damage claims of at least $7.2 billion. The FDIC's fourteen
lawsuits to date involve only 103 directors and officers. The implication is
that there are at least 18 more lawsuits yet to be filed - and that is only
taking into account the lawsuits that have been approved as of September 13,
2011. There undoubtedly will be many lawsuits approved in the months ahead,
with additional filings to follow after that.
Given the two year lag time between failure date and
filing date that these three lawsuits described above demonstrate, and given
the fact that the pace of bank failures only really accelerated during late
2009 and early 2010, it seems likely that the failed bank filings will not only
continue well into at least 2012, but that over the next few months the pace of
failed bank lawsuits could really take off.
Indeed, one of the clear implications of the FDIC's
lawsuit filings during August of this year is that the agency's declared
litigation strategy is for real. The FDIC clearly does intend to pursue the
active litigation strategy it has laid out on its website. And in light of
these latest filings, the FDIC's litigation approach clearly will not be
limited just to the largest banks, but could well involve many smaller failures
To be sure, the FDIC's approach does not necessarily
require an actual lawsuit in every case. Early on in connection with many of
the bank failures, the FDIC has submitted notices of claim to the failed banks'
former directors and officers and to the failed bank's D&O insurance
carriers. In many cases, the FDIC may attempt to try to negotiate a settlement
with the former directors and officers and the D&O carriers, without the
actual filing of a civil action.
Reliable sources advise me that that is in fact exactly
what happened in connection with one large failed bank in Florida. Apparently,
the FDIC was able to negotiate a settlement in connection with the failed bank
without actually filing a lawsuit against the failed bank's former directors
and officers. To the extent the FDIC pursues this approach in other cases and
succeeds in negotiating settlements, there could ultimately be fewer
complaints. In view of the fact that this approach would avert the erosion of
the D&O insurance limits of liability by the payment of defense expenses, this
approach could actually result in improved recoveries.
But though there may be cases where actual lawsuit
filings are averted, the likelier scenario in many cases is that there will be
an FDIC lawsuit. With the revelation of the FDIC's August lawsuit filings, and
the suggestion that the FDIC is now actively pursuing its litigation strategy,
it is clear that the game is on. For months to come, one of the predominant
stories on the directors and officers' liability scene will be the FDIC's
pursuit of growing numbers of failed bank lawsuits against the former directors
and offices of the failed institutions
One final note. The FDIC's website makes it clear that
its litigation strategy is not limited just to suits against former directors
and officers. The site says that the agency has "also has authorized 20
fidelity bond, attorney malpractice, and appraiser malpractice lawsuits. In
addition, 175 residential malpractice and mortgage fraud lawsuits are pending,
consisting of lawsuits filed and inherited."
Active Self-Defense: As
discussed in prior posts (refer for example here),
the individuals dragged into the failed bank lawsuits will rely on a number of
theories in order to try to defend themselves. Former Indy Mac Chairman and CEO
Michael Perry is taking a different approach. He has launched a website called
"Not Too Big to Fail" (here) on which
he is attempting to defend himself against charges the FDIC has asserted
against him and other former IndyMac executives.
As discussed here,
in July 2011, the FDIC filed a lawsuit in the Central District of California
against Perry. The FDIC alleges that Perry acted negligently when he allowed
IndyMac to generate and purchase $10 billion in loans when the secondary mortgage
market was becoming illiquid. When IndyMac was later unable to sell the loans,
the bank transferred them to its own investment portfolio, which then caused
over $600 million in losses. Perry has also been named as a defendant in other
lawsuits arising out of IndyMac's July 2008 failure.
On his website, Perry asserts that "not one of the
lawsuits against me has merit." He says that "I and the management team and
directors of IndyMac Bank made prudent and appropriate business decisions based
on the facts available to us at the time and always with the primary goal being
to keep IndyMac bank safe and sound."
The name of the site is taken from Perry's complaint that
IndyMac did not receive government bailout funds that were made available to
other banks. He asserts that this occurred because IndyMac was "not too big to
Though Perry's website represents a rather impressive
display of self-justification, it seems unlikely that his Internet-based public
relations campaign will accomplish much. I suppose though for someone in
Perry's position there is some satisfaction involved with telling off the
regulators, even if it is unlikely to change the outcome of any of the claims
against him. The one thing that is clear is that Perry is both unrepentant and
Well, Maybe Next Year: For those who missed the allusion in the title of this blog post, the reference was to the lyrics of the song “Send in the Clowns,” from Stephen Sondheim’s Broadway musical A Little Night Music. The lyrics include these lines: “Sorry my dear/ But where are the clowns?/Quick, send in the clowns/Don’t Bother, they’re here.”
Although many have sung this tune, it is
has perhaps become most closely associated with Judy Collins. There are
actually a surprising number of versions on You Tube of Judy Collings
singing this song. Here's an audio only version.
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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