The FDIC as receiver of the failed Haven Trust Bank may
not intervene in a securities lawsuit brought by the aggrieved investors of the
Bank's holding company, according to Northern District of Georgia Judge Charles A. Pannell,
Jr.'s December 29, 2010 order in the case. Judge Pannell's ruling, a copy
of which can be found here,
could have important implications for other failed bank investor cases in which
the FDIC has or may seek to intervene.
Banking regulators closed Haven Trust, located in Duluth,
December 12, 2008. As detailed here, on December 31,
2009, investors who purchased shares in the bank's holding company filed suit
in the Northern District of Georgia alleging that the company's former
officials had misled investors in connection with the share offering, in
violation of federal and state securities laws. The individual defendants had
served as directors both of the holding company and of the operating bank.
On October 4, 2010, the FDIC as the failed bank's
receiver moved to intervene in the investor action. As detailed at greater
the FDIC alleged that the investor action was essentially just a
"derivative lawsuit in disguise," and, under FIRREA,
as receiver, the FDIC succeeded to all of the bank's rights, including its
rights to control actions brought on the company's behalf.
The FDIC also asserted that it had an
"interest" in the case sufficient to support intervention because of
its interests in preserving the D&O insurance policy for potential
recoveries in connection with future claims the FDIC as receiver might assert
against the former directors and officers of the bank.
The December 29 Ruling
In his December 29 ruling, Judge Pannell rejected both of
the bases on which the FDIC had sought to intervene.
First, Judge Pannell rejected the FDIC's argument that
the investors' claims were essentially just derivative claims over which the
FDIC had priority rights under FIREEA. Judge Pannell said
These claims are not derivative claims against the Bank
but are instead direct claims against the defendants .... While the FDIC controls
derivative claims against the Bank's former officers, it does not control
claims against the holding company's officers .... In this case, the plaintiffs
assert their claims not as stockholders of the failed Bank, but instead as
shareholders of the holding company.
Second Judge Pannell rejected the FDIC's argument that it
was entitled to intervene because of its prospective interest in the Company's
D&O insurance policy. Judge Pannell found that the FDIC does not have a
"legally protectable interest" because the FDIC "has no rights
with respect to this insurance policy except as a potential claimant against
certain of the policy's insured parties," and the FDIC's "potential
future rights" are "insufficient to establish that the FDIC has an
interest in this case that justifies intervention as of right."
Finally, Judge Pannell denied the FDIC's request for
"permissive intervention" because the FDIC's intervention "would
needlessly delay the current proceedings while the FDIC investigates to
determine whether it has any legitimate claims against the defendants."
As NERA Economic Consulting noted in its August 2010
study of failed bank litigation (here),
private investor securities suits were "not a notable feature of the
S&L crisis," because few of the institutions that failed during that
era had conducted securities offerings. By contrast, private litigation against
directors and officers of failed banks during the current wave have been
"widespread." As a result, the FDIC is in a position of competing
with investor claimants for dwindling D&O insurance policy proceeds, as the
Haven Trust case demonstrates.
As I discussed in my
prior post about the FDIC's bid to intervene in the Haven Trust case, the
claimants who may be competing with the FDIC for the D&O insurance policy
proceeds include not only aggrieved investors, but in instances where the bank
holding company is in bankruptcy, may also include the bankruptcy trustee.
In both of these kinds of cases, the claims against the
individual defendants will be direct claims aimed against them in their
capacities as directors and officers of the holding company. At least according
to the logic of Judge Pannell's decisions in the Haven Trust case, the FDIC's
rights as receiver may not be sufficient to allow the FDIC to control or
otherwise take priority over these direct claims targeted at the holding
The essential problem at the heart of all of these kinds
of disputes is that the parties left aggrieved in the wake of a bank failure
are set against one another in a scramble for the D&O insurance (or
whatever might be left of it after defense expenses have eroded the limits).
Meanwhile, the former directors and officers are put squarely in the crossfire,
with heightened exposure to multiple conflicting claims. Whatever else might be
the merits of Judge Pannell's holding, the practical effect of his ruling is to
exacerbate all of these forces.
From the FDIC's perspective, Judge Pannell's ruling, if
followed by other courts, could put the FDIC in a quite a dilemma. On the one
hand, the FDIC has been proceeding quite deliberately as part of its process of
investigating bank failures and deciding whether to bring claims. (Indeed, even
though 322 banks have failed since January 1, 2008, the FDIC has filed only two
lawsuits against former directors and officers of failed banks).
On the other hand, however, if by proceeding deliberately
the FDIC is to be disadvantaged in the scramble for D&O insurance policy
proceeds, and if the FDIC is unable to intervene in and stay investor and
trustee actions against former bank officials, it may find itself compelled to
move more quickly to file suit, simply to try to preserve a part of the
dwindling policy proceeds before the other claimants get there.
Whether or not the FDIC will now accelerate its
investigative and litigious processes remains to be seen. But at a minimum,
Judge Pannell's ruling suggests that the FDIC does not have priority rights
over the direct claims of bank holding company investors, which is a principle
that could prove important in the numerous other failed bank-related
Special thanks to the several loyal readers who sent me a
copy of Judge Pannell's ruling.
Read other items of interest from the world of
directors & officers liability, with occasional commentary, at the D&O Diary, a blog by