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FDIC Starts Posting Settlement Agreements

The FDIC has begun posting copies of its settlement agreements on its website.  It recently came under fire after the L.A. Times printed an article criticizing the FDIC for not being more transparent on the issue of whether its litigation efforts are bearing fruit.  The FDIC responded to that criticism by posting the settlement agreements on its website.  This website will likely be updated from time to time with new settlement agreements.

Not all of the settlement agreements posted on the FDIC’s site are from D&O cases.  At least a few of them are from claims against brokers, lawyers or accountants for the failed banks.  At this time, we don’t see any particular trends or patterns based on the settlement agreements on claims against former D&Os.

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FDIC Targets Single Former Director in Lawsuit

The FDIC recently sued a former director of Carson River Community Bank (Carson City, NV), which failed and went into receivership on February 26, 2010. The defendant, James M. Jacobs, was one of five directors who served on the Bank’s Senior Loan Committee and who approved three ADC loans that ultimately went into default, resulting in more than $3.6 million of losses to the Bank.

So why is the FDIC suing only Mr. Jacobs, and not the other members of the Senior Loan Committee for the allegedly imprudent loans? There are two probable reasons – one rooted in fact, and the other rooted in law. First, according to the FDIC’s complaint, the three subject loans were participated out to two Oklahoma banks owned by Mr. Jacobs’ family and for which Mr. Jacobs served as a director. The other directors on the Senior Loan Committee knew about Mr. Jacobs’ interest in the participating banks. What they did not know, however, was that Mr. Jacobs had secretly arranged for the Oklahoma participating banks to have preferential rights to repayment upon default. As a consequence of those preferential repayment rights, the Oklahoma banks were ultimately paid in full and Carson River Community Bank shouldered the bulk of the loss on the loans. This conduct, the FDIC alleges, constituted a breach of Mr. Jacobs’ fiduciary duty to Carson River Community Bank. Since the other directors on the Senior Loan Committee did not know about the preferential repayment rights, the FDIC was not in a position to assert similar fiduciary breach claims against them.

Second, the FDIC has not sued the other directors because Nevada has a very forgiving standard of liability for corporate directors. Under the Nevada corporate code, a director is not liable unless it is proven that: (a) the director’s act or failure to act constituted a breach of his fiduciary duties; and (b) the breach of those duties involved intentional misconduct, fraud or a knowing violation of law. Nev. Rev. Stat. § 78.137(7). Although it characterized the approval of the subject loans as imprudent, the FDIC must not have had sufficient facts to support an allegation that the other directors had committed “intentional misconduct, fraud, or a knowing violation of the law.”

This case is a true factual outlier, and it does not signal a trend that the FDIC will target single director defendants. We expect the FDIC will continue its now long-established practice of targeting all of the former directors and officers who played a substantial and active role in approving allegedly imprudent loans.

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FDIC Sues Former Chairman and Senior Officers of La Jolla Bank

Last week the FDIC filed its 51st lawsuit against former directors and officers of failed banking institutions since July 2010. This most recent suit is against the former chairman, former CEO and former Chief Credit Officer of La Jolla Bank, which failed and went into FDIC receivership on February 19, 2010. A copy of the lawsuit is available here.

Many of the central themes in the FDIC’s complaint are consistent with its other recent D&O lawsuits – the Bank pursued an aggressive growth strategy fueled by heavy concentrations in commercial real estate lending, with insufficient underwriting and loan policy compliance, and without regard to deteriorating market conditions. What makes this case different is the FDIC’s theory that the Bank’s CEO and COO gave preferential loan treatment to certain Friends of the Bank (“FOB”). The senior officers, both of whom were compensated in large part based on loan production, allegedly granted oral approval of FOB loans, pressured lower-level bank personnel to recommend FOB loans with little or no underwriting, and concealed FOB loans that had gone into troubled status. Seven such FOB loans went into default, and the FDIC is seeking damages in excess of $57 million in connection with those loans.

Perhaps the most significant aspect of this case is that the FDIC is not seeking to hold most of the directors liable for the Bank’s losses. That decision is likely rooted in both the facts of the case and California’s version of the Business Judgment Rule. The factual allegations in the complaint suggest that the Chairman had actual knowledge of the Bank’s lax underwriting and loan policy compliance, and that the other directors may not have known about those deficiencies until much later. Ordinarily, the FDIC might still seek to hold the other directors liable for ordinary negligence. However, as several district courts have already ruled, California’s version of the Business Judgment Rule shields directors from claims for ordinary negligence. The FDIC therefore was limited to claims for gross negligence under FIRREA. It has asserted a gross negligence claim against the Chairman, but it apparently determined that the facts of the case do not support such a claim against the other directors.

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FDIC Sues Former Fla. Bank Directors for Gross Negligence

For the first time since the advent of the Great Recession, the FDIC has filed an action against former bank directors based only on theories of gross negligence. The lawsuit was filed against the former directors of Orion Bank (“Orion” or the “Bank”) of Naples, FL, which failed and went into receivership in November 2009. A copy of the FDIC’s complaint is available here.

The FDIC’s central case theory focuses on the defendant directors’ completely lack of oversight over Orion’s President and CEO, Jerry Williams. According to the complaint, Mr. Williams became such a dominant decision-maker that the defendant directors generally approved any and all of his proposals with little, if any, scrutiny. Their alleged abdication of responsibility bled over into role as members of the Board Loan Committee, and they “blithely rubberstamped” any loan that Mr. Williams proposed without any meaningful review or deliberation. The FDIC contends that the director defendants continued to “rubberstamp” Mr. Williams’ proposed loans even after banking regulators had specifically criticized their lack of oversight and had warned them to be personally and directly involved in reviewing, analyzing and independently evaluating loans presented for approval.

Apart from its allegations that the defendant directors failed to properly oversee management, the FDIC also alleges that the defendants routinely disregarded proper loan underwriting standards, the Bank’s own loan policy, repeated warnings from regulators, and the rapidly declining real estate market. Worse yet, the defendant directors continued to approve ADC lending at an accelerated rate between 2005 and 2007 despite obvious signs that the real estate market was in steep decline. In total, the FDIC seeks to recover more than $53 million in connection with several bad loans approved by the defendants.

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FDIC Sues Former Directors and Officers for “Reckless Gamble” on Subprime Lending

Earlier this month, the FDIC filed its 42nd D&O lawsuit since the advent of the Great Recession. This suit was filed against the former directors and two former executive officers of Charter Bank of Santa Fe, N.M. (“Charter” or the “Bank”), which was closed and placed into FDIC receivership in January 2010.  A copy of the FDIC’s complaint is available here. This case represents a departure from the FDIC’s typical claims about alleged over concentrations in ADC and CRE lending. It instead focuses on Charter’s intentional strategy to enter into the subprime lending market in late 2006.

According to the FDIC’s complaint, the defendants authorized the formation of a subprime lending group in late 2006, with plans to target subprime borrowers, primarily in Florida, California and Texas. The Bank ultimately committed 72% of the its core capital to opening and operating its subprime lending unit. By pursuing this strategic path, the FDIC alleges, the defendants ignored regulatory warnings about the significant liquidity risk of originating subprime loans for sale, as well as obvious early warning signs that the secondary market for subprime residential mortgages had already started to tighten significantly.

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FDIC Files Third D&O Lawsuit in Florida

The pace of FDIC suits continued to pick up steam in the fourth quarter, with the FDIC filing its third lawsuit suit in Florida, this time against the former directors of Peoples First Community Bank (Panama City, FL). Peoples First Community Bank (“Peoples First” or the “Bank”) was closed and put into receivership on December 18, 2009. The FDIC’s lawsuit was filed on December 17, 2012 – one day prior to the expiration of the three-year limitations period. For a copy of the FDIC’s complaint, click here.

The FDIC’s complaint against the former Peoples First directors is strikingly similar, both in tone and substance, to its last several D&O complaints. As we previously reported, the FDIC now must overcome a ruling by the Middle District of Florida that Florida’s statutory version of the Business Judgment Rule bars claims against former directors for ordinary negligence. It appears that, as a matter of legal strategy, the FDIC is attempting to “plead around” the Business Judgment Rule by alleging that the director defendants approved each of the bad credits at issue after: (i) they were specifically warned by regulators about deficiencies in the Bank’s loan underwriting procedures; (ii) they knew or should have known about the Bank’s overexposure in CRE loans and the “inevitable cyclical decline in real estate values.” In this case, the FDIC highlights eleven CRE transactions that ultimately resulted in over $77.1 million in losses to the Bank.

This complaint was filed in the Northern District of Florida, which has not yet ruled on the applicability of Florida’s statutory Business Judgment Rule to ordinary negligence claims. Nevertheless, we fully expect that the director defendants here will seek to dismiss some or all of the claims early in the case. We will be monitoring this case, along with the two other pending Florida cases, to see which of the FDIC’s claims are allowed to move beyond the initial pleadings stage.

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Around the Web

Around the Web

December 30, 2012

Authored by: Robert Klingler

A collection of new banking resources from around the internet:

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Around the Web

Around the Web

December 16, 2012

Authored by: Robert Klingler

A collection of new banking resources from around the internet:

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FDIC Sues Former Officers and Directors of Two Failed Georgia Banks in October 2012

As has been noted on this blog before, the State of Georgia has the dubious distinction of leading the nation in the number of failed financial institutions. In the month of October 2012, the number of lawsuits against former officers and directors of those failed institutions increased by two (2).

In the first lawsuit, filed on October 17, 2012, the FDIC brought suit in its capacity as Receiver for American United Bank of Lawrenceville, Georgia against two former officers and 6 former directors of the bank. (A copy of the complaint can be found here.)  In that suit, the FDIC alleged both ordinary negligence and gross negligence in connection with the management of the lending function of the bank. The FDIC alleged that the failure of American United caused a loss to the Federal Deposit Insurance Fund in the amount of $45.2 million, and, through alleged damages in the lawsuit, seeks to recover an amount in excess of $7.3 million.

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FDIC Files Second D&O Lawsuit in Florida

Despite having more than its fair share of failed banks, Florida has not been a hotbed of D&O litigation. On November 9th, the FDIC filed only its second lawsuit against former directors of a failed banking institution. The defendants here are former directors of Century Bank, FSB (Sarasota, FL), which was placed into receivership in mid-November 2009.  A copy of the FDIC’s complaint is available here.

 The FDIC’s complaint is consistent with most of its prior D&O lawsuits, with typical allegations of negligent overconcentration in ADC and CRE, as well as various failures to follow the Bank’s loan policy or to exercise safe and sound banking practices. What makes this complaint a little different is that it focuses on ten specific loan transactions which were approved after it was apparent that the Bank was in “dire financial condition” and not meeting regulatory capital requirements. 

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