Kevin LaCroix discussed the most recent lawsuit filed (last week) by the FDIC against former officers and directors of a failed bank, in this case Wheatland Bank of Napierville, Illinois. This was the seventh lawsuit filed thus far by the FDIC against former officers and directors of a failed financial institution. Although Wheatland Bank failed last August and the FDIC customarily takes at least eighteen months to investigate claims against former officers and directors prior to commencing litigation, in this case it appears that a great deal of the FDIC's leg work may have been done for it by the former shareholders of the bank, who filed a lawsuit against the defendants prior to the bank's failure. The FDIC removed the case to federal court and was granted leave to intervene as a party plaintiff and file an amended complaint. The allegations made by the FDIC in its amended complaint are in many respects typical (as we discussed last month in connection with a similar lawsuit): rapid growth; over-concentration on high-risk commercial real estate loans without adequate underwriting and credit administration practices to manage the risk; loans made in violation of the bank's loan policies; loans made to borrowers who had little prospect of repaying the loans (without, I assume, rapid appreciation in the value of the collateral, which would have to be sold in order to repay the loan). In this case, there are also allegations of favorable loans having been made to insiders and a lack of enforcement of repayment of those loans. As in other lawsuits filed to date, the FDIC claims that the defendant officers and directors ignored repeated warnings from banking regulators to clean up their act. In addition, the bank fits the FDIC's all-too-typical model of a bank gone wrong: a de novo bank that blew out of the starting gate, rushed headlong into CRE lending, and died rounding the first turn a mere three years after being born. Unlike many similar lawsuits, however, the FDIC claims that all four outside directors who did not sit on the bank's loan committee (as well as the four directors who did sit on that committee) were negligent and grossly negligent for failing properly to supervise the bank's lending program. That is an ill omen for any outside board member who thinks he or she might have a closet within which to hide from the vengeful glare of the FDIC. When it comes to pursuing directors of failed banks, no director should feel safe. For those interested in keeping track of this area (and, being involved in the representation of directors and officers of community banks who are facing an uncertain future, I'm one of those), Kevin's keeping a running list of FDIC lawsuits (accessed through this post). His list is a kind of Implode-O-Meter of FDIC litigation. As Kevin observes, there are more lawsuits to come. On May 11, 2011, the FDIC updated its professional liability lawsuit page on its website to reflect that the FDIC has authorized suits against 208 individuals for D&O liability with damage claims of at least $3.86 billion. (The latest update increased the number to 208 from last month's figure of 187.) Since the seven lawsuits the agency has filed includes only 52 individual lawsuits, there clear implication is that there are many more lawsuits yet to come against the remaining 156 defendants. The FDIC's website also discloses that the FDIC also has authorized 13 fidelity bond, attorney malpractice, and appraiser malpractice lawsuits. In addition, 135 residential malpractice and mortgage fraud lawsuits are pending, consisting of lawsuits filed and inherited. The number of directors and officers against whom the FDIC has authorized litigation has increased every month since the FDIC first began publishing the data in September 2010. The aggregate figure has increased much more quickly than the total number of individuals against whom lawsuits have actually been filed. The clear implication is that the FDIC is being very deliberate in preparing its claims. The suggestion is that the lawsuits will continue to come in slowly – and that the process of filing the lawsuits may go on for quite a while yet. I've recently heard of some boards of directors whose members have stood on the tracks like a herd of cud-chewing bovines, staring dully into the distance while the onrushing train of failure speeds relentlessly towards them. As a general proposition, the officers and directors of a distressed community bank, and especially the outside directors, need to seek advice of competent counsel (and someone other than the bank's existing counsel) sooner rather than later, for a whole host of reasons, not the least of which is that following the failure of the bank, getting access to the necessary records of the bank will be much more difficult, inasmuch as the party in possession of those records will be the FDIC. In addition, assuming that applicable state law, and, under certain circumstances, FDIC regulations, permit it, the directors (particularly the outside directors) may be able to make an indemnification claim against the bank to cover the costs of independent counsel and related expenses. Moreover, someone with expertise ought to check the D&O policy and fidelity bond to see if the directors (or the bank, in the case of the fidelity bond) have coverage and, if so, if claims or other notices to carriers should be made prior to failure. The foregoing is only scratching the surface of the many reasons why directors should not be overcome with inertia when it comes to understanding where they are exposed with respect to their fiduciary duties and how best to don a little asbestos clothing to protect themselves from the coming flamethrower of the FDIC. As a wise mentor once advised this lawyer many, many moons ago, during a similar period of upheaval in the banking business, "It's never too early to panic."
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