On July 2, 2010, in what is as far as I am aware the first
suit by the FDIC against former directors and officers of a failed bank as part
of the current wave of bank failures, the FDIC as receiver of IndyMac filed a lawsuit in the Central District of California against
four former officers of IndyMac's Homebuilder Division (HBD).
Very special thanks to Peter Christensen of the Appraiser Law blog for providing links to the
The FDIC took control
of IndyMac on July 11, 2008. At the time, the outstanding balance on HBD's
portfolio of homebuilder loans was nearly $900 million. The FDIC alleges in its
complaint that IndyMac's losses "are estimated to exceed $500
The lawsuit is filed against Scott Van Dellen, HBD's former
President and CEO, who is alleged to have approved all of the loans that are
the subject of the FDIC's suit; Richard Koon, who was HBD's Chief Lending
Officer until mid-2006 and who is alleged to have approved at least 40 of the
loans at issue; Kenneth Shellem, who served as HBD's Chief Compliance Officer
until late 2006, and who is alleged to have approved at least 57 of the loans
at issue; ;and William Rothman, who served as HBD's Chief Lending Officer from
mid-2006 and who is alleged to have approved at least 34 of the loans at issue.
The lawsuit seeks to recover damages from the four
individual defendants for "negligence and breach of fiduciary
duties." The lawsuit alleges "two significant departures from safe
and sound banking practices."
First, the complaint alleges that HBD's management
"repeatedly disregarded HBD's credit policies and approved loans to
borrowers who were not creditworthy and/or for projects that provided
insufficient collateral." The complaint further alleges that HBD's
compensation plans encouraged HBD's management to "push for growth in loan
production volume with little regard for credit quality."
Second, HBD's management is alleged to have "continued
to follow a strategy for growth at the tail-end of the longest appreciating
real estate market in over four decades," despite management's alleged
"awareness that a significant downturn in the market was imminent and
despite warnings from IndyMac's upper management about the likelihood of a
market decline." HBD's management allegedly "unwisely continued
operations in homebuilder lending in deteriorating markets even after becoming
aware of the market decline.
The FDIC's complaint, which sprawls to some 309 pages,
details a litany of allegedly negligent lending practices, including approving
loans where repayment sources were not likely to be sufficient; where the loans
violated applicable laws and the Bank's own internal policies; where the loans
were made to borrowers who "were or should have been known to be not
creditworthy and/or in financial distress; based on inadequate or inaccurate
financial information; without taking proper and reasonable steps to insure
that the loan proceeds would be used in accordance with the loan application.
The complaint is very detailed and reflects painstaking
preparation. A lot of time and effort went into the preparation of this
complaint, which may in and of itself explain why the FDIC has not up until
this point filed other complaints against directors and officers of failed
banks. If the FDIC is taking similar measures in connection with other claims
that it might be considering, it is little wonder that there have been no
claims up until this point. Complaints containing this level of specificity and
painstaking detail will take a significant amount of time to prepare.
There are some particular reason why IndyMac attracted one
of the first claims. First, the FDIC took control of IndyMac relatively early
in the current round of bank failures - it has been almost exactly two years
since IndyMac closed, meaning the FDIC has had a greater amount of time to
review the circumstances that led up to IndyMac's failure and consider
potential claims. When the FDIC took control of IndyMac, it was only the fifth
bank failure that year, meaning that IndyMac was among the earliest of the
current bank failures.
But perhaps even more important that its timing was the
sheer size of IndyMac's failure. At the time of its closure, IndyMac had assets
of about $32 billion, making its closure the second largest bank failure during
the current wave of bank failures (exceeded only by the closure of Washington
Mutual, which had assets of $307 billion).
More to the point, IndyMac's failure triggered losses to the
FDIC's insurance fund of $8 billion, by far the largest amount of any bank
failure during the current round. The magnitude of these losses suggests
possible motivations for the FDIC to give priority to claims relating to
While the recently filed IndyMac claim may be the first
claim the FDIC has filed against former directors and officers of a failed bank
as part of the current bank failure wave, it is surely not the last. (Indeed,
it may not even be the last filed against former IndyMac officials.) Statistics
reported by the Alston & Bird firm suggest that during
the last wave of bank failures in the S&L crisis, the FDIC filed claims in
connection with about 24% of all bank failures.
The fact that the FDIC appears poised to pursue many
additional claims against bank officials represents a threat both to the
individuals themselves and to the bank's D&O liability insurers. The extent
to which the FDIC's efforts result in significant recoveries will depend on a
wide variety of factors, the most important of which is the extent to which the
FDIC can successfully allege individual liability. But beyond that, the FDIC's
ability to actually recover money will depend on identifying and accessing
The extent to which the FDIC will succeed in recovering
substantial amounts of D&O insurance will depend on a host of factors,
including in particular the terms and conditions of the applicable policies.
Claims made and notice of claims issues will be highly relevant, as will
potential policy exclusions, such as, for example, the regulatory exclusion, which insurers added to many
policies in recent years. These insurance coverage questions suggest the
likelihood that in addition to a round of claims against former officials of
failed banks, we are also likely to see a parallel round of insurance coverage
In addition to the FDIC's recent action, there has also been
extensive litigation involving IndyMac's shareholders, as detailed here.
Most recently, on March 29, 2010, Central District of California Judge George
Wu certified an interlocutory appeal to the Ninth Circuit of his denial
of the defendants' motion to dismiss the plaintiffs' sixth amended complaint.
Bank Failure Wave Continues: Meanwhile, while the
FDIC cranks up its litigation efforts, it is continuing to take control of
additional banking institutions. This past Friday evening, July 9, 2010, the
FDIC took control of four additional banks, bringing the 2010 total number
of failed banks to 90.
Through June 30, 2010, the FDIC had closed 86 banks, which
put the FDIC on pace to close 172 banks this year, compared to 140 in 2009 and
only 25 in 2008. Indeed, by way of comparison, as of June 30, 2009, the FDIC
had closed only 40 banks, as the pace of bank failures quickened substantially
in the second half of 2009 and continued into 2010.
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.