The FDIC as receiver of the failed Haven Trust Bank may not intervene in a securities lawsuit brought by the aggrieved investors of the Bank’s holding company, according to Northern District of Georgia Judge Charles A. Pannell, Jr.’s December 29, 2010 order in the case. Judge Pannell’s ruling, a copy of which can be found here, could have important implications for other failed bank investor cases in which the FDIC has or may seek to intervene.



Banking regulators closed Haven Trust, located in Duluth, Ga., on December 12, 2008. As detailed here, on December 31, 2009, investors who purchased shares in the bank’s holding company filed suit in the Northern District of Georgia alleging that the company’s former officials had misled investors in connection with the share offering, in violation of federal and state securities laws. The individual defendants had served as directors both of the holding company and of the operating bank.


On October 4, 2010, the FDIC as the failed bank’s receiver moved to intervene in the investor action. As detailed at greater length here, the FDIC alleged that the investor action was essentially just a "derivative lawsuit in disguise," and, under FIRREA, as receiver, the FDIC succeeded to all of the bank’s rights, including its rights to control actions brought on the company’s behalf.


The FDIC also asserted that it had an "interest" in the case sufficient to support intervention because of its interests in preserving the D&O insurance policy for potential recoveries in connection with future claims the FDIC as receiver might assert against the former directors and officers of the bank.


The December 29 Ruling

In his December 29 ruling, Judge Pannell rejected both of the bases on which the FDIC had sought to intervene.


First, Judge Pannell rejected the FDIC’s argument that the investors’ claims were essentially just derivative claims over which the FDIC had priority rights under FIREEA. Judge Pannell said


These claims are not derivative claims against the Bank but are instead direct claims against the defendants …. While the FDIC controls derivative claims against the Bank’s former officers, it does not control claims against the holding company’s officers …. In this case, the plaintiffs assert their claims not as stockholders of the failed Bank, but instead as shareholders of the holding company.


Second Judge Pannell rejected the FDIC’s argument that it was entitled to intervene because of its prospective interest in the Company’s D&O insurance policy. Judge Pannell found that the FDIC does not have a "legally protectable interest" because the FDIC "has no rights with respect to this insurance policy except as a potential claimant against certain of the policy’s insured parties," and the FDIC’s "potential future rights" are "insufficient to establish that the FDIC has an interest in this case that justifies intervention as of right."


Finally, Judge Pannell denied the FDIC’s request for "permissive intervention" because the FDIC’s intervention "would needlessly delay the current proceedings while the FDIC investigates to determine whether it has any legitimate claims against the defendants."



As NERA Economic Consulting noted in its August 2010 study of failed bank litigation (here), private investor securities suits were "not a notable feature of the S&L crisis," because few of the institutions that failed during that era had conducted securities offerings. By contrast, private litigation against directors and officers of failed banks during the current wave have been "widespread." As a result, the FDIC is in a position of competing with investor claimants for dwindling D&O insurance policy proceeds, as the Haven Trust case demonstrates.


As I discussed in my prior post about the FDIC’s bid to intervene in the Haven Trust case, the claimants who may be competing with the FDIC for the D&O insurance policy proceeds include not only aggrieved investors, but in instances where the bank holding company is in bankruptcy, may also include the bankruptcy trustee.


In both of these kinds of cases, the claims against the individual defendants will be direct claims aimed against them in their capacities as directors and officers of the holding company. At least according to the logic of Judge Pannell’s decisions in the Haven Trust case, the FDIC’s rights as receiver may not be sufficient to allow the FDIC to control or otherwise take priority over these direct claims targeted at the holding company level.


The essential problem at the heart of all of these kinds of disputes is that the parties left aggrieved in the wake of a bank failure are set against one another in a scramble for the D&O insurance (or whatever might be left of it after defense expenses have eroded the limits). Meanwhile, the former directors and officers are put squarely in the crossfire, with heightened exposure to multiple conflicting claims. Whatever else might be the merits of Judge Pannell’s holding, the practical effect of his ruling is to exacerbate all of these forces.


From the FDIC’s perspective, Judge Pannell’s ruling, if followed by other courts, could put the FDIC in a quite a dilemma. On the one hand, the FDIC has been proceeding quite deliberately as part of its process of investigating bank failures and deciding whether to bring claims. (Indeed, even though 322 banks have failed since January 1, 2008, the FDIC has filed only two lawsuits against former directors and officers of failed banks).


On the other hand, however, if by proceeding deliberately the FDIC is to be disadvantaged in the scramble for D&O insurance policy proceeds, and if the FDIC is unable to intervene in and stay investor and trustee actions against former bank officials, it may find itself compelled to move more quickly to file suit, simply to try to preserve a part of the dwindling policy proceeds before the other claimants get there.


Whether or not the FDIC will now accelerate its investigative and litigious processes remains to be seen. But at a minimum, Judge Pannell’s ruling suggests that the FDIC does not have priority rights over the direct claims of bank holding company investors, which is a principle that could prove important in the numerous other failed bank-related proceedings.


Special thanks to the several loyal readers who sent me a copy of Judge Pannell’s ruling.


Editorial Note: In my January 3, 2011 post, I mentioned that I would be publishing a list of the top ten D&O stories of 2010 today (January 4, 2011). However, because of the several time sensitive developments (including the above), I will postpone the publication of the top ten list until later in the week. Sorry for any confusion.