Even as the number of bank failures now appears to be
winding down, the FDIC's failed bank litigation filings seem to just be ramping
up. With now 21 lawsuits filed as part of the current wave of bank failures, it
may be possible to try to make some generalizations about the lawsuits so far.
In a February 1, 2012 post on BankDirector.com entitled "Characteristics
of FDIC Lawsuits against Directors & Officers of Failed Financial
Cornerstone Research takes a look at the FDIC's failed bank lawsuits to
date and finds, among other things, that the suits so far have involved
larger institutions within the same geographic concentrations as the bank
failures themselves. As discussed below, Cornerstone Research's various
findings may have important implications for the lawsuit filings that are yet
The Cornerstone Research study reports that the FDIC has
filed lawsuits so far in connection with only about 4.7% of financial
institutions failures since January 1, 2007. Two suits were filed in 2010, 16
in 2011, and three so far in 2012. The study also reports that on average the
FDIC has waited about 2.2 years after the date of an institution's failure to
file a lawsuit.
The lawsuits so far have "tended to target larger failed
institutions," with the 20 institutions so far involved in the 21 lawsuits to
date having had median total assets of $882 million, compared with median total
assets of $241 million for all failed financial institutions. The 20
institutions have had a median estimated cost to the FDIC of $179 million,
compared with the medial estimated costs of $60 million for all failed banks.
The geographic mix of lawsuits has paralleled the
location of failed institutions, with the largest concentrations of both bank
failures and lawsuits in Georgia, Illinois and California. The one exception,
the report notes, is Florida, which has been the location of 14 percent of all
failures since 2007, but where no FDIC failed bank lawsuits have been filed
The 21 lawsuits so far have involved 178 former directors
and officers. In six of the cases, only inside directors and officers have been
named as defendants, but in the remaining 15 cases, outside directors were also
named as defendants. Three of the suits have also named D&O insurers as
defendants (about which refer, for example, here);
and at least one suit has included the failed bank's outside law firm as a
defendant (refer here).
Three cases have involved the spouses of former directors and officers (refer,
for example, here).
The aggregate damages sought in the 21 complaints are
$1.98 billion. The average and median damages sought is $104 million and $40
million, respectively. Losses on commercial real estate loans and on
acquisition, development and construction loans are the most common bases of
alleged damages. As the report notes about the sources of alleged damages,
"despite the widespread problems in residential lending and residential real
estate markets, fewer lawsuits focused on those types of lending."
The report notes that three of the FDIC's cases have
settled so far: the WaMu case (about which refer here);
the First National Bank of Nevada case (about which refer here);
and the Corn Belt Bank & Trust Company case (the settlement details of
which have not yet been publicly disclosed).
Obviously there is a long way to go in the current bank
failure litigation wave. The 4.7% percent of bank failures that have involved
litigation so far compares to the rate during
the S&L crisis, when the FDIC filed lawsuits against directors and
officers of the failed institutions in about 24% of all bank failures. Indeed,
though the FDIC has filed only 21 lawsuits so far, involving 20 institutions
and 178 former directors and officers and aggregate claimed damages of
$1.98 billion, , the FDIC's website
states that as of January 18, 2012, the FDIC has authorized lawsuits in
connection with 44 failed institutions against 391 institutions, claiming
damages of at least $7.7 billion.
Perhaps even more significantly, the FDIC has increased
these authorization numbers each month for the past several months - and the
number of failed institutions has also continued to increase, as well. In other
words, just the suits authorized so far implies quite a number of lawsuits yet
to come, and likelihood of increased numbers of future authorization suggests
an even greater number of suits ahead. The FDIC may or may not wind up filings
suits in connection with 24% of the failed institutions this time around as it
did during the S&L crisis, but we still could be in for a substantial
amount of future litigation.
The substantial gap between the $7.7 billion of claimed
damages in the cases the FDIC has authorized to date, and the aggregate of
$1.98 billion of claimed damages in the cases the FDIC has filed so far,
suggests that the suits that have been authorized but not yet filed involve
larger failed institutions.
The Cornerstone Research report's analysis supports this
suggestion that there may be a backlog of as yet unfiled cases involving larger
institutions, and not just because the report's findings in general suggest
that the FDIC has at least so far largely concentrated its litigation
activities on larger institutions. As the report notes, though the FDIC has
targeted two of the largest failed institutions (WaMu and IndyMac), "many of
the other large or costly failures ...have not yet been the target of FDIC
lawsuits." In light of the fact that many of the most costly failures occurred
in 2008 and 2009 and given statute of limitations restrictions, "these would
seem to be the most likely candidates for FDIC lawsuits in the near future. "
Taking this analysis and looking back at the costliest
2009 bank failures to assess the possible targets, some possible litigation
examples might include Colonial Bank (August 2009 failure, $25 billion asset
bank, $2.8 billion to the insurance fund); Guaranty Bank (August 2009 failure,
$13 billion asset bank, $3 billion loss to the insurance fund); and Bank United
(May 2009 failure, $12.8 billion asset bank, $4.9 billion loss to the insurance
fund). Of course, whether or not there may be litigation involving these
institutions remains to be seen, as would the merits of any litigation that
The report's note that there has as yet been no
litigation involving a failed bank located in Florida is an interesting
insight. Given that over 60 institutions have failed in Florida since 2007, it
seems likely that there future lawsuit filings might involve failed Florida
One concluding note in the Cornerstone Research report
that is worth emphasizing is that a number of potential lawsuits have been
resolved without litigation through mediation or negotiation, often involving
the failed bank's D&O carriers. There are no publicly available statistics
on these out of court resolutions and their overall impact is hard to assess.
Though the impact is not quantifiable, these types of resolutions may be an
important part of the FDIC's post-failure salvage operations.
In any event, it does seem probable that the current wave
of bank failure litigation not only has a long way to run but will also
continue to grow in the near term. We can only hope that Cornerstone Research
will continue to update and publish their analysis as the process unfolds.
Many thanks to a loyal reader for sending me a link to
the Cornerstone Research report.
Carlyle Group Drops Bid to Require Investors
to Arbitrate Claims: In a prior post (here),
I commented on the unusual effort of the Carlyle Group in connection with its
upcoming IPO to require investors to arbitrate rather than to litigate claims.
As Victor Li discusses in a February 3, 2012 Am Law Litigation Daily
Carlyle Group has announced that in response to pressure from the SEC and
others, the company has dropped its efforts in required arbitration. As Li
notes, Carlyle Group's efforts had been sharply criticized by several U.S.
senators and numerous others, and also ran contrary to long-standing SEC
prohibitions against approval of arbitration provisions.
Notwithstanding Carlyle Group's withdrawal of its
arbitration proposal, the issue may yet come to a head in the weeks ahead, in
light of the efforts of investors at Gannett and Pfizer to have included in
their companies' 2012 proxy ballots shareholder proposals to required investor
claims to be litigated. The question of the propriety of a corporate provision
requiring the arbitration of shareholder claims may yet be aired at the SEC.
The Week Ahead: This
week I will be attending the PLUS D&O Symposium at the Marriott Marquis
Hotel in New York City. On Wednesday, February 8, 2012, I will be moderating a
panel entitled "Financial Institutions Underwriting: Is it Safe to Come Out
Yet?" Joining me on the panel are my good friends Jennifer Fahey of AON; Tim
Braun of AXIS; Steven Goldman of ACE: and Dan Gamble of Alterra.
I know many of the readers of this blog will also be
attending the Symposium. I hope readers will feel free to greet me,
particularly those whom I have not previously met.
I know that many attending this larger conference,
particularly first time attendees, can find the crowded sessions and events a
little intimidating. Some may even find that despite - or ironically because of
- the crowds, it is hard to meet people. I can't provide any sure fire way to
overcome these challenges and to succeed in making many new professional
contacts. But one loyal reader did send me a link to an article that may be
useful to at least some conference attendees trying to work their way into the
The January 25, 2012 article is from the Harvard
Business Review blog, and it is entitled "The Introvert's Guide to
Networking," which can be found here.
There are a number of useful items in this short article, but the best piece is
the author's observation that she "stopped being afraid to be the one to reach
out." This observation is particularly useful in connection with the PLUS
My observations after many years in this industry are,
first, that there are many people around who have trouble dealing the large
crowds at industry events, so you are not alone, and, second, most people are
as interested in meeting you as you are in meeting them, and so the best
approach is just to go up to someone you don't know and introduce
yourself. Also, don't be afraid to ask others to introduce you to people
you would like to meet. The great thing is that we have a very friendly,
sociable industry and most people are happy to be introduced.
I look forward to seeing everyone in New York.
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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