FDIC's Latest Failed Bank Litigation Update Reflects Increasing Lawsuit Filings

FDIC's Latest Failed Bank Litigation Update Reflects Increasing Lawsuit Filings

 According to the latest update on the FDIC's website, the pace of the agency's filing of failed bank lawsuits picked up considerably in the last month. According to the agency's website (here), which the agency updated on May 22, 2013 the agency has now filed a total of 63 lawsuits against the directors of failed banks, an increase of nine new lawsuits since the agency's last update in April. With the latest lawsuits, the agency has now filed a total 19 new lawsuits so far this year, compared to 26 during all of 2012.

The agency's quickened pace of lawsuit filings since its last website presents quite a contrast to the period preceding the agency's last website update. As I noted at the time of the April update, the agency had filed only one new lawsuit since its prior update and had filed only four new lawsuit overall since February 1, 2013. I had noted in posts since the FDIC's last website update that the agency had been filing a number of lawsuits. However, the agency's website update contains a number of new lawsuits I had not previously noted.

First, on April 26, 2013, the FDIC filed an action in the District of Puerto Rico in its capacity as receiver for the failed Eurobank of San Juan, Puerto Rico, against nine of the bank's former directors. A copy of the FDIC's complaint can be found here. Regulators closed the bank on April 30, 2013, so the FDIC filed the action just before the third anniversary of the bank's failure. The action seeks to recover over $55 million in losses the bank incurred on twelve commercial real estate loans approved between March 6, 2006 and December 22, 2008. The complaint alleges that the nine director defendants "failed to properly oversee Eurobank's lending practices and approved 12 high-risk loans with glaring underwriting deficiencies that violated prudent lending standards as well as the Bank's own credit risk management policy."

Interestingly, it its lawsuit against the former Eurobank directors, the FDIC also named as defendants the spouses of several of the directors: the conjugal partnerships of several of the directors; and the bank's D&O insurers, with respect to which the agency seeks a judicial declaration that the carriers' policies cover the losses the agency seeks to recover. These additional defendants are named as defendants pursuant to Puerto Rican law. The insurers are named as defendants in reliance of Puerto Rico's direct action statute. (The FDIC's prior failed bank lawsuits in Puerto Rico also named spousal and insurer co-defendants, in reliance on the provisions of Puerto Rican law, as discussed here.)

Second, the FDIC filed an action on April 29, 2013 in the Eastern District of Missouri in its capacity as receiver of the failed Champion Bank of Creve Coeur, Missouri, against ten former directors and officers of the bank for negligence, gross negligence and breach of fiduciary duty, for approving "sever high-risk out-of-territory commercial real estate loan participations and two business lines of credit resulting in damages of at least $15.56 million." A copy of the FDIC's complaint can be found here. The bank failed on April 30, 2010, so the FDIC filed its suit just before the third anniversary of the bank's failure.

Third, on May 13, 2013, the FDIC filed an action in the Southern District of Indiana in its capacity as receiver of the failed Irwin Bank and Trust Company and Irwin Union Bank against four former officers of the banks. Regulators closed the banks on September 18, 2009, which suggests that the parties may have previously entered into a tolling agreement. As reflected in the FDIC's complaint (here), the FDIC asserts claims against the defendants for negligence, gross negligence and for breach of fiduciary duty, for approving nineteen "poorly underwritten" loans between May 27, 2005 and April 12, 2009. The agency seeks recovery of damages of "no less than $42 million."

Finally, on May 20, 2013, the FDIC filed an action in the Northern District of Iowa against eight former directors and officers of the failed Vantus bank of Sioux City, Iowa, which failed September 4, 2009. Again, the fact that the complaint has been filed so far beyond the third anniversary of the bank's closure suggests that the parties may have entered a tolling agreement. The FDIC's complaint (here), asserts claims against the directors and officers for negligence, gross negligence and for breach of fiduciary duty. The FDIC bases its claims against the defendants for allegedly causing the bank to use $65 million (120% of the bank's core capital) to purchase "high risk collateralized debt obligations back by trust preferred securities without due diligence and in disregard and ignorance of regulatory guidance about the risks and limits on purchases of such securities."

All signs are that the number of failed bank lawsuits will continue to accumulate in the months ahead. Indeed, as has been the case for some months now, once again the FDIC has adjusted its website as part of its monthly update to reflect the increased numbers of authorized lawsuits. In the latest update, the FDIC has indicated that as of May 21, 2013, the agency has authorized suits in connection with 114 failed institutions against 921 individuals for D&O liability. These figures are inclusive of the 63 filed D&O lawsuits naming 488 former directors and officers, so the implication is that there is a backlog of as many as 51 approved but yet unfiled lawsuits in the pipeline.

At least by reference to bank closure dates, the assumption would seem to be that we should be near the high water mark for failed bank lawsuits, owing to the fact that the peak numbers of bank failures occurred in the last two quarters of 2009 and the first two quarters of 2010. The suggestion would seem to be that the number of failed bank lawsuit might start to begin to taper off as 2013 progresses. However, the presence on the latest filed lawsuits of several banks that were well past their third anniversaries suggests that there could be factors that prolong the filing curve into the future.

With lawsuits authorized in connection with 114 failed institutions, the agency has now authorized lawsuits in connection with just about 24% of all failed banks. In other words, the percentage of failed institutions for which lawsuits have been authorized is approaching the 24% of failed institutions that were involved in failed bank litigation during the S&L crisis.

Though the bank failure rate has clearly slowed during 2013, some banks nevertheless are continuing to fail. As reflected on the FDIC failed bank list (here), three banks have been closed so far in May 2013, bringing the 2013 YTD number of failed banks to 13.

Read 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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