With one lone exception, the FDIC has not yet itself pursued litigation against the directors and officers of a failed financial institution. However, the FDIC has already made it clear that it intends to assert its rights under FIRREA as the receiver of failed banks to take control of shareholders’ derivative lawsuits.


More recently, and perhaps more aggressively, the FDIC is now attempting to intervene in two direct shareholder actions where failed institutions’ aggrieved investors are asserting their own claims, rather than derivatively asserting those of the failed institution. These more recent moves may represent efforts not just to assert but to extend the FDIC’s litigation preclusion rights. The FDIC’s actions are interesting in and of themselves, but also for what the FDIC has claimed in asserting its rights.


The FDIC’s most recent move in this direction is its October 4, 2010 motion to intervene in the Haven Trust Bancorp securities class action litigation pending in the Northern District of Georgia. A copy of the FDIC’s memorandum in support of its motion to intervene can be found here. Haven Trust Bancorp was the parent corporation for Haven Trust Bank, a Duluth, Georgia failed bank of which the FDIC took control on December 12, 2008.


The FDIC has previously moved to intervene in the negligent misrepresentation lawsuit that individual investors had filed in Fulton County (Georgia) State Court against certain former directors and officers of Georgian Bancorp. A copy of the FDIC’s September 23, 2010 motion to intervene, and accompanying motion to remove the case to federal court upon grant of the intervention, can be found here. Georgian Bancorp was the corporate parent of Georgian Bank, of which the FDIC took control on September 25, 2010. My prior post about the Georgian Bancorp case can be found here.


Both of these lawsuits are direct, not derivative, actions. In each case the plaintiffs seek to recover damages in the form of their own lost investment interests. In asserting that it nevertheless has the right to intervene, the FDIC raises a number of interesting arguments.


First, in both cases, the FDIC asserts that both cases are basically just derivative lawsuits in disguise. Thus, for example, in the Haven Trust case, the FDIC asserts that "although Plaintiffs have attempted to frame their allegations of wrongdoing and damages in terms of securities fraud and misrepresentations …Plaintiffs’ alleged losses clearly emanate from the fact that the Bank, as sole asset of the Holding Company, became worthless upon the appointment of the FDIC as receiver for the Bank." In the Georgian case, the FDIC asserts that the plaintiffs’ claim is "in substance a derivative claim." The FDIC asserts, the shareholders’ claims are, in effect, "double derivative" claims.


Second, the FDIC asserts that as receiver of the respective banks, under 12 U.S.C. Section 1821 it has succeeded to "all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder … of such institution with respect to the institution and the assets of the institution." In reliance on this provision, the FDIC asserts as an initial matter that it has priority rights to assert the claims presented in the respective plaintiffs’ complaints, because they are essentially derivative complaints.


The FDIC’s further argument in reliance on this statutory provision is with reference to the respective institutions’ D&O insurance policies. Thus, for example, the FDIC asserts in the Georgian case that among the assets with respect to which it assumed priority upon being appointed receiver was Georgian’s D&O insurance policy, which "provides limited and finite monies for claims covered by the Policy and may be the only source of recovery against the Defendants in this or any subsequent lawsuit."


The FDIC points out further that the D&O policy is a "wasting asset" that would be reduced by defending the plaintiffs’ claims. The FDIC has the right to intervene, it therefore asserts, because "its ability to recover in a subsequent lawsuit will be affected by any judgment in this action or protracted litigation."


The FDIC is even more explicit about the possibility of its pursuing claims in its intervention motion in the Haven Trust case. There the FDIC explicitly stated that its investigation includes examination of the "acts and/or omissions of the Bank’s former officers and directors in connection with their management of the Bank’s affairs." The FDIC states that after completing its investigation it will determine "whether claims should be brought against any individual or entity," noting that "several of the defendants in this case, as former officers and/or directors of the Bank, are potential targets."


There are a number of concerns with the grounds on which the FDIC is moving to intervene. First, the FDIC completely disregards the investors’ own legal right to assert their own claims for their own alleged financial injuries. Second, and perhaps more to the point, the investors are asserting their claims as shareholders of the parent holding companies of the failed banks, not of the failed banks themselves. The FDIC’s priority rights extend to its rights as receiver of the failed bank. Whether the FDIC can assert rights on behalf of the parent holding company of the failed bank is a potentially contentious proposition.


Section 1821 (d)(2)(A)(i), on which the FDIC relies to assert its priority rights, refers to the rights, titles, etc., of the "insured depositary institution, and of any shareholder …of such institution." However, the plaintiffs’ in this shareholder suits are not asserting rights as shareholders of the institution, but of the parent holding company. The FDIC may or may not be able to persuade a court to make the leap from its rights as receiver of the failed bank to the rights of the shareholders of the bank’s parent company, but the argument seems to strain the language of the provision.


Finally, the FDIC may indeed be interested in preserving the D&O policies, but there is nothing about Section 1821 that gives the FDIC priority to the proceeds of the policy, in preference to other prospective claimants. The insurance proceeds are not a cash fund like an investment account: rather, the proceeds are available only for payment of certain kinds of loss arising from claims. The policy itself may be an asset of the estate, but the proceeds are available only pursuant to the terms and conditions of the policy, only for payment of claims, and the rights of the insureds and the claimants to the proceeds of the policy are determined by the policy’s own terms.


Whatever else may be said about the FDIC’s actions in moving to intervene in these case, they do show both that the FDIC is actively considering pursuing its own lawsuits, and that it is will to move aggressively to preserve its own recovery prospects in the event it subsequently decides to pursue lawsuits. The pretty clear message is that the FDIC does intend to pursue lawsuits, too.


As if the prospect of competing lawsuits from both investors and regulators were not daunting enough for directors and officers of failed institutions (and their insurers), a lawsuit recently filed in South Carolina suggests yet another type of prospective claimant that may be asserting claims against failed banks’ directors and officers.


On September 29, 2010, the trustee for the estate of Beach First National Bankshares filed a lawsuit in the Bankruptcy Court for the District of South Carolina against certain directors and officers of the bankrupt company. A copy of the complaint can be found here. The company’s wholly owned subsidiary, First National Bank of Myrtle Beach, was closed on April 9, 2010 The Trustee’s complaint asserts claims for breach of fiduciary duty and negligence.


While the Trustee may have seized the initiative in this case, there would seem to be the possibility that the FDIC might yet seek to intervene in the Trustee’s case just as it did in the cases described above. Disappointed shareholders might also seek to assert their own claims for harm to their own investment interests, particularly since the First National holding company is a publicly traded company.


The possibility of claims asserted by these various prospective and active claimants underscores how one of the consequences of a bank failure may be a scramble for the proceeds of the insurance policy. The FDIC may well contend that under FIRREA it has certain priorities but other claimants are also highly motivated to circumvent the FDIC’s asserted rights.


Of course in the end the FDIC may establish its priority. But in the meantime, the scramble for the D&O insurance could become quite a circus. And in the center ring could be the directors and officers of the failed institutions – and their insurers – against whom the competing claimants will assert their claims. The likelihood for further D&O litigation involving failed banks’ directors and officers seems high.


One final thought about the FDIC’s interventions in the two case discussed above — there have been a fair number of shareholder class actions brought by investors in failed financial institutions. It will be interesting to see how far the FDIC goes with thie intervention tactic and whether it will seek to intervene in other cases involving larger financial institutions. Perhaps its initiatives in the two Georgia lawsuits are test cases that will determine whether it will seek to intervene elsewhere.


Many thanks to a loyal reader for providing copies of the various pleadings to which I linked above.


A copy of an October 3, 2010 Myrtle Beach Sun News article about the Beach First Trustee’s lawsuit can be found here. (Full disclosure, I was interviewed in connection with the article.)