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FDIC Files Lawsuit Against Directors and Officers of Failed Integrity Bank

The FDIC filed its third lawsuit against selected former directors and officers of a failed financial institution on January 14, 2010.  The defendants in the lawsuit are certain former directors and officers of Integrity Bank (Alpharetta, Ga.), which the FDIC placed into receivership on August 29, 2008.  The complaint, which was filed in the U.S. District Court for the Northern District of Georgia, asserts claims for negligence, gross negligence and breach of fiduciary duty.

The central theme of the complaint is that the defendants served on the bank’s Director Loan Committee, and in that capacity they pursued an “unsustainable growth strategy designed to exploit the then-expanding ‘bubble’ in the residential and commercial real estate market.”  Directors who did not serve on that committee were not sued. The FDIC alleged a variety of misdeeds by the defendants, including the following:

  • the adoption of a loan policy that set a lending limit in excess of the statutory legal lending limit;
  • the abdication of the credit and lending functions to a Senior Lender who was compensated based on the volume of loan originations, without regard to the quality of the credit; and
  • an over-concentration in speculative ADC loans that ultimately represented nearly 80% of the bank’s total loan portfolio

However, the more than $70 million in damages alleged focus on twenty-one (21) specific ADC loans approved by, or subject to the oversight of, the Director Loan Committee.

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Court Dismisses Failed Bank Investor Class Action; Signals Obstacles for Plaintiffs in Similar Cases

In a decision which could have significance in other cases in which investors in failed banks seek to recover their losses, on January 14, 2011, the United States District Court for the Northern District of Georgia dismissed an investor class action against the directors of the holding company which owned Haven Trust Bank, a Duluth Georgia based bank which was closed by the Georgia Department of Banking on December 12, 2008. Patel v. Patel, et al., U.S.D.C., ND of Ga., Civil Action No. 1:09-cv-3684-CAP (Order, 1/14/11). In dismissing the case at the pleadings stage, the Court identified several difficult obstacles that plaintiffs in such cases will have to overcome in order to proceed with a claim, including the difficulty of establishing that their losses were caused by something other than the catastrophic turmoil felt by the banking industry as a whole, which has resulted in hundreds of bank failures to date, with more to come.

Haven Trust Bancorp, Inc. was organized as a holding company for Haven Trust Bank and had no business operations other than the bank, which was its wholly owned subsidiary. The named defendants in the case were the directors of the holding company, and also served as the directors of the bank itself. The bank had grown very rapidly, from $29 million in assets in its first full year of operation in 2000 to approximately $575 million by 2008. Like many community banks operating in this time period, Haven’s rapid growth was based in large part on the use of non-core funding, including brokered deposits, which were then used for acquisition, development, and construction (ADC) loans and other types of commercial real estate (CRE) lending.

The defendants solicited investors through the use of private placement memoranda (PPMs). When, on December 12, 2008, the bank was closed and the FDIC was appointed as Receiver, Haven Trust stock became worthless. Subsequently, the plaintiff’s brought this lawsuit alleging that the 2006 and 2008 PPMs hid the true financial condition and business operations of the bank, and specifically failed to disclose the bank’s risky lending practices, self-dealing transactions, violations of laws and regulations, and other failures to correct improprieties. The defendants moved to dismiss the complaint for failure to state a legally cognizable claim.

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FDIC Files Lawsuit Against Directors and Officers of Failed Illinois Bank

The FDIC filed a lawsuit against directors and officers of Heritage Community Bank (Glenwood, Ill.), which was taken into FDIC receivership in early February 2009.  The FDIC lawsuit was filed in federal court in Chicago on November 1, 2010, and it is the FDIC’s second suit against directors or officers of failed institutions since the advent of the current real estate recession. For a copy of the complaint, click here.

The FDIC’s case theory revolves around the bank’s commercial real estate (“CRE”) lending program.  The lawsuit alleges that the directors and officers failed to protect the bank from the “substantial inherent risks of large-scale CRE lending,” by:

  • routinely financing CRE projects without any meaningful analysis or adequate appraisals;
  • repeatedly making loans with excessive loan-to-value ratios; and
  • failing to properly evaluate the creditworthiness of CRE borrowers and guarantors.

One unique factual allegation in the lawsuit is that the bank routinely drew down interest reserves from specific loans and recorded it as income.  That practice, the FDIC alleged, generated phony profits, which the bank used to justify “substantial dividends” to the holding company and “generous incentive compensation” to its senior management.

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