The pace of bank closures has slowed to a trickle. There have only been three bank failures so far in 2013 (including one this past Friday evening, involving the Covenant Bank of Chicago, Illinois). But while bank failures have dwindled, the number of failed bank lawsuit filings has surged. On February 15, 2013, the FDIC updated its website to reflect a cluster of new failed bank lawsuit filings as well as an increased number of lawsuit authorizations. With the latest lawsuit authorizations, the FDIC is now approaching an authorized level of lawsuit filings comparable to the lawsuit filing level during the S&L Crisis.
With the three bank closures this year, there have now been a total of 471 bank failures since January 1, 2007. The FDIC’s latest litigation update shows that during the current wave of bank failures the agency has now filed 51 lawsuits against the former directors and officers of 50 failed banks, meaning that the FDIC has already filed lawsuits in connection with just under 11% of all bank failures. But, as reflected in the updated information on the FDIC’s website, the agency has also authorized more lawsuits. The number of authorized lawsuits has continued to increase each month, as well.
As of February 15, 2013, the FDIC has authorized suits in connection with 102 failed institutions against 836 individuals for D&O liability. This includes the 51 filed lawsuits naming 396 former directors and officers at 50 institutions. In other words, there could be as many as 52 as-yet-to-be-filed lawsuits based just on the authorizations to date. Some of these authorized lawsuits may not ultimately be filed, as pre-litigation negotiations sometimes results in settlements that avert the need for a lawsuit to be filed. But were the FDIC to file lawsuit in connection with as many as 102 failed institutions, that would mean that the FDIC would have initiated lawsuits in connection with nearly 22% of all bank failures, a percentage that would approach the 24% rate during the S&L crisis. To the extent the agency authorizes even more lawsuits in coming months, the litigation rate could meet or even exceed the S&L crisis litigation rate.
The updated information on the FDIC’s website includes information relating to four additional filed bank lawsuits that I had not previously tracked. With the addition of these four latest suits, the FDIC has now filed a total of seven failed bank lawsuits so far in 2013, after having filed 26 during 2012. I briefly discuss each of the four latest lawsuits below. One interesting note about these four new suits is that none of them involve failed Georgia banks. As I have previously noted on this blog (most recently here, see second item), the failed bank lawsuits had been disproportionately concentrated in Georgia. These latest filings, none of which involve Georgia banks, might suggest that this imbalance may start to level out.
Here is brief description of the four latest failed bank lawsuit filings.
First, on January 18, 2013, the FDIC in its capacity as receiver for the failed Columbia River Bank of The Dalles, Oregon filed an action in the District of Oregon against seven former officer and three former directors of the bank. The bank failed on January 22, 2010, so the FDIC filed the suit just ahead of the third year anniversary of the bank’s closure. The FDIC’s complaint (a copy of which can be found here) asserts claims against the former directors and officers for gross negligence, negligence and breach of fiduciary duties. The complaint alleges that the defendants “took unreasonable risks with the Bank’s loan portfolio, allowed irresponsible and unsustainable rapid asset growth concentrated in high-risk and speculative” loans, “disregarded regulator warnings,” and violated the Bank’s loan policies and procedures. The defendants allegedly caused damages to the bank of no less than $39 million.
Interestingly, though the Columbia River Bank was not closed until January 2010, all but one of the specific loans cited in the complaint were originated in 2006 and 2007 (the one exception was originated in early 2008). As time goes by, the loan originations cited in the FDIC’s complaint start to seem more and more like ancient history.
Second, on January 29, 2013, the FDIC filed an action in the Middle District of Florida in its capacity as receiver for the failed Orion Bank of Naples, Florida. The FDIC’s complaint can be found here. The FDIC’s complaint seeks to recover damages of in excess of $58 million. The lineup of defendants is interesting, as the four individuals named as defendants are all former directors; none of the bank’s former officers are named as defendants.
The complaint, which asserts claims for gross negligence and breach of fiduciary duties, alleges that the bank “collapsed under the weight of the unsustainable growth strategy that the Defendants permitted Chief Executive Officer Jerry Williams to pursue.” Williams, the former CEO, is not named as a defendant in the case. The complaint alleges that as Williams pursued his “reckless growth strategy” he was “unrestrained” by the defendants who engaged in a “pattern of unconsidered acquiescence.” The Defendants are alleged to have approved loans “without meaningful deliberation or discussion.” The complaint alleges that the director defendants even continued to “ignore” their duties even after the bank had entered an August 25, 2008 written agreement with the federal banking authorities that was specifically concerned with the directors’ oversight responsibilities.
The Orion Bank failed on November 13, 2009, which suggests that the parties may have entered some sort of a tolling agreement. The naming of only four former directors as defendants, and the absence of any officer defendants, is not explained in the complaint. One possibility is that as a result of negotiations while the tolling agreement was in place resulted in settlements on behalf of the former officers (this, I should add is sheer speculation on my part).
Third, on January 31, 2013, the FDIC in its capacity as receiver of the failed Security Savings Bank of Henderson, Nevada, filed an action in the District of Nevada against three former director and officers of the bank. The FDIC’s complaint (a copy of which can be found here) seeks to recover damages in excess of $13.1 million from the three defendants who allegedly “underwrote, recommended and/or voted to approve at least seven high-risk commercial real estate and acquisition and development and construction loans in violation of the Bank’s lending policies and clear principles of safety and soundness.”
The bank was closed and the FDIC appointed as receiver on February 27, 2009, which suggests that the parties had entered some sort of tolling agreement. The three defendants had resigned before the bank failed; two of them, the former CEO and the former Chief Credit Officer, had resigned in September 2008, and the third had resigned all the way back in December 2006. The three individual defendants have long since scattered, with two now living in Texas and a third living in Virginia. All of the specific loans mentioned in the FDIC’s complaint were originated in 2005 and 2006, which really does seem like ancient history.
Fourth, on February 13, 2013, the FDIC, in its capacity as receiver of the failed LaJolla Bank of LaJolla, California filed an action in the Southern District of California against two former officers of the bank and against the bank’s former board Chairman. The complaint (here) asserts claims for negligence, gross negligence and breach of fiduciary duty and seeks to recover damages in excess of $57 million. The complaint alleges that the defendants violated the bank’s loan policy and “safe and sound lending practices” by “recommending or approving speculative commercial real estate loans despite known adverse economic conditions,” as well as recommending or approving loans to borrowers who were not creditworthy, or without requiring sufficient underwriting and without sufficient information.
Regulators closed the LaJolla Bank on February 19, 2010, so the FDIC filed its complaint just prior to the third anniversary of the bank’s closure. The specific loans referenced in the complaint were originated between March 2007 and March 2009.
Reading these four complaints in quick succession was an interesting experience. Though there are noteworthy variations between the complaints (for example, with the Orion Bank complaint, which names only director defendants), there is also a certain sameness to the complaints, as well – so much so that some of the allegations and even phraseology seem to be lifted verbatim from other complaints. It is, after all, a familiar story. The banks grew quickly during a period of rapid economic expansion and then were slow to recognize the seriousness of the downturn. In the aftermath, it appears that many of the loans extended during the go-go days had not always been made with full procedural compliance. It does beg the question whether the losses were the result of the failure to follow procedures or of the suddenness and severity of the downturn.
Another unmistakable impression from reading these complaints in quick succession is that as time goes by, the events on which the FDIC is going to be trying to base its current and any future lawsuits are receding further and further into the past. As noted above with respect to the Security Saving Bank complaint, the defendants are scattering. As time goes by, the FDIC’s burden is going to become increasingly archeological.
This Just In From Our Istanbul Bureau — D&O Liability and Insurance in Turkey: As is the case in many countries, the use of D&O insurance is still relatively new in Turkey. However, as discussed in an interesting January 29, 2013 article by Naşe Taşdemir Önder and Pelin Baysal of the Mehmet Gün & Partners law firm entitled “Turkey: Directors’ and Officers’ Liability Insurance in View of the New Turkey Commercial Code” (here), new standards on corporate governance incorporated into the new Turkish Commercial Code are “expected” to “lead to increase in demand for D&O policies.”
According to the authors, the new Code introduces new requirements for “universal accounting and auditing standards and rules for increased transparency” which the authors expect will support the “operability” of “liability provisions.” According to the authors, the Code introduces a “heavier level of duty of care” for directors and officers. Among other things, the new Code provisions introduce certain specific types of liability provisions, including in particular liability for misrepresentations in documents and declaration and misrepresentations on capital subscription. The Code introduces many other new provisions, including new provisions allowing for claims by shareholders for losses incurred by the company.
With respect to insurance, the new Code specifies that third party liability insurance will be consider “occurrence based” unless otherwise indicated in the policy. The new Code also prohibits coverage for losses arising as a result of willful acts. The author’s very thorough examination of the new Code’s insurance-related provisions detail the many other specific insurance issues that the new Code addresses.
For anyone interested in the D&O liability and D&O insurance issues in Turkey, the authors’ memo is a valuable resource.
And Now, From Our Singapore Bureau: Regular readers of this blog may recall my post about my April 2012 visit to Singapore, which I found to be an interesting and impressive place. But Singapore’s transformation into a gleaming metropolis is relatively recent. As shown in this photo montage from Business Insider, Singapore had to become what it is today and relatively recently it was a very different place. I found these photographs, and the history they embody, to be fascinating.
And Finally: Kalefa Sanneh’s excellent and interesting article in the February 11 & 18 issue of The New Yorker entitled “Sprit Guide” (here), about whisky distiller Bruichladdich, contains the following sentence, written with reference to the whisky sampling techniques of the whisky maker’s master distiller, Jim McEwan: “It’s a simple process, but consumers hoping to reproduce McEwan’s results at home will find, no doubt, that some variant of the uncertainty principle applies: the more research you conduct, the less reliable your data become.” I tip my hat to the article’s author; the sentence has its own humor, in that conducting whisky research undoubtedly involves certain limits owing to the properties of the subject matter. But it is the sly side reference to Heisenberg’s uncertainty principle that I admire.
Though I could never hope to write with such sophisticated humor, I can certainly admire the writing, including also the following sentence from the same article: “The first part of the distillate, known as the foreshot, contains methanol, which can be toxic in large quantities – although the same could be said of whisky.” (Side note: In Scotland, there’s no “e” in whisky.)