On April 4, 2012, the FDIC filed an action against the former directors and officers of Cape Fear Bank, Wilmington, NC (“Cape Fear” or the “Bank”).  The lawsuit was filed shortly before the expiration of the 3-year statute of limitations which commenced when the Bank was closed and placed into FDIC receivership on April 10, 2009.  For a copy of the FDIC’s complaint, click here.

The FDIC’s complaint identifies two central causes of Cape Fear’s failure.  First, the FDIC alleges that the D&O defendants pursued a flawed strategy of opening branch operations without consideration for the cost of new branch operations and without any plan to monitor those operations.  Second, the FDIC alleges that the defendants were enticed by the real estate “bubble,” and that they aggressively pursued rapid growth through high-risk and speculative real estate lending.  The defendants approved loans even where the Bank lacked sufficient capital, causing the Bank to become overly dependent on brokered deposits, which in turn severely impaired earnings.  Worse yet, the defendants failed to employ basic prudent lending practices and controls.  Specifically, the FDIC alleged that the defendants routinely approved loans that: (i) violated the Bank’s own loan policy and applicable lending regulations; (ii) lacked proper financial analysis or verification of the borrower’s creditworthiness; (iii) lacked a proper appraisal of the collateral; and (iv) increased CRE and ADC concentrations that had previously been criticized by regulators.   To make matters even worse, the FDIC alleges, the defendants attempted to mask the Bank’s mounting capital problems by approving additional bad credits and making new advances on non-performing loans, often replenishing interest reserves that allowed borrowers to pay interest with borrowed funds.  The complaint identifies 23 specific failed CRE and ADC loans that resulted in approximately $11.2 million of losses, which is the amount the FDIC seeks in damages.

One of the unique aspects to this case is the allegation that Cape Fear’s president and CEO “dominated” the board of directors and the Bank’s lending function.  This unique case theory does not offer any insulation to the other directors and officers, however, as the FDIC contends that they failed to exercise their independent judgment and duties.