The fallout from the ongoing banking crisis continues to emerge, with the arrival in recent days of still more bank failures and of even more FDIC lawsuits involving failed banks. Unfortunately, the hopes that that all of the bank failures might be safely behind us, or, as I recently suggested on this blog, the hopes that we might be in a “lull” in the failing of failed bank lawsuits, have been dashed. As developments this past week show, banks continue to fail and the FDIC is continuing to actively pursue litigation against the directors and officers of failed banks – and even against the failed bank’s outside professionals.


With respect to the bank failures, the FDIC announced on its website this past Friday night the closure of three more banks, two in Florida and one in Kentucky. The two Florida banks are the Chipola Community Bank of Marianna, Florida and the Heritage Bank of Northern Florida of Orange Park, Florida. The Kentucky bank is the First Federal Bank of Lexington, Kentucky. Prior to the closure of these three banks on Friday, there had only been a total of five bank closures so far during all of 2013, and only two since February 1, 2013. It really did seem as if the bank failure wave might finally have played itself out and that the banking crisis of the past few years had safely moved into the moping up phase. These three latest bank failures suggest that the banking failure wave may yet have further to go and that we could continue to see still more bank closures as the year unfolds.


With respect to the failed bank lawsuits, just this past Tuesday I had noted that pace of the FDIC’s new lawsuit filings seemed to have slowed. In the preceding month, the FDIC had filed just one new lawsuit and the agency had filed only four new lawsuits since February 1, 2013. However, I did also note that late April 2010 had been a particularly busy period for bank failures and that during late April 2013 nearly two dozen banks would be reaching the third anniversary of their closure date. (The FDIC typically files its failed bank lawsuits close to the third anniversary owing to statute of limitations considerations.)


As I anticipated might happen given the number of bank closures in April 2010, this past week the FDIC filed at least two new failed bank lawsuits in connection with two banks whose third year anniversary date fell just after the date on which the FDIC filed its complaints.


First, on April 15, 2013, the FDIC filed a lawsuit in its capacity as a receiver for the failed City Bank of Lynwood, Washington filed a complaint against the bank’s founder and former CEO and against a loan officer in the bank’s real estate department. City Bank failed on April 16, 2010, so the FDIC filed its complaint the day before the third anniversary of the bank’s closure. In its complaint, a copy of which can be found here, the FDIC asserted claims against the two defendants for negligence, gross negligence and for breaches of fiduciary duties for “approving, in violation of the City Bank Loan Policy and prudent, safe and sound lending practices, at least 26 loans between May 2005 ad October 2008.” The FDIC’s complaint seeks damages of “not less than $41 million.” An April 16, 2013 Seattle Times article about the lawsuit can be found here.


Second, and also on April 15, 2013, the FDIC in its capacity as receiver of the failed Riverside National Bank of Ft. Pierce, Florida, filed a complaint in the Southern District of Florida against eight former directors and officers of the failed bank. Riverside National Bank also failed on April 16, 2010, so again the FDIC took it right down to the wire, filing its complaint the day before the three year statute of limitations period expired. In its complaint, a copy of which can be found here, the FDIC seeks to recover “in excess of $8 million” in damages caused by the defendants’ alleged breaches of duties, gross negligence and negligence “based on defendants’ permitting an excessive number of poorly underwritten loans to be made that were secured solely or largely by the stock of [affiliates of the bank’s holding company].” Owing to the familiarity with the circumstances involving these affiliates, the defendants “had personal knowledge of the dangers inherent in such stock loans.” An April 17, 2013 South Florida Business Journal article about the lawsuit can be found here.


So after filing only two lawsuits between March 1, 2013 and April 12, 2013, the FDIC filed two new lawsuits in a single day on April 15, 2013. As I noted in my recent post, there were 22 bank failures during the period between April 16, 2010 and April 30, 2010. I speculated that this large group of bank failures in a compressed period in late April 2010 might produce a flurry of new lawsuit filings during the last two weeks of April 2013; the arrival of these two latest lawsuit bears out this supposition and suggests that we may see further suits in the next few days as the third anniversary of these various April 2010 bank closures approaches. In any event, the arrival of these two new suits puts to rest any suggestion of a “lull” in the filing of new failed bank lawsuits.


In addition to these two latest lawsuits against former directors and officers of failed banks, the FDIC has also recently filed a lawsuit against the outside law firm of a failed bank. On March 15, 2013, the FDIC, in its capacity as receiver for the failed Orion Bank of Naples Florida, filed a lawsuit in the Middle District of Florida against the Nason Yeager Gerson White & Lioce law firm, and against two partners of the firm, Alan I. Armour II and Ryan P. Aiello. Orion Bank failed in November 2009. In its complaint, a copy of which can be found here, the FDIC alleges that the defendants “inexcusably failed to recognize a slew of glaring red flags.”


The complaint alleges that the bank had retained the firm in connection with certain loans to entities controlled by a local businessman, Francesco Mileto, a borrower who already owed the bank $43 million. The complaint alleges that by June 29, 2009, the date the new loans closed, the defendants “should have known that these loans were in fact the center of a conspiracy among the Bank’s officers to manipulate the Bank’s accounting, deceive the Bank’s Board of Directors … and illegally finance the purchase of stock in the Bank’s own holding company.” The “obvious red flags” did not dissuade the defendants from disbursing $26.5 million in violation of the terms and conditions of the loans and in violation of the law. The defendants’ allegedly “turned a blind eye to the Bank’s officers’ brazen disregard for the internal and legal constraints on their lending.” As a result, the bank allegedly sustained losses in excess of $31 million. The complaint asserts claims of legal malpractice, professional negligence and breach of fiduciary duty.


According to a April 17, 2013 South Florida Business Journal article about the lawsuit, here, Mileto and Orion Bank’s former CEO have both previously been sentenced to prison for inflating the bank’s capital levels through a scheme to purchase bank stock using  the proceeds of loans from the bank. 


The arrival of this lawsuit against the failed bank’s outside law firm is interesting. In many ways, the FDIC’s litigation approach during the current bank failure wave has been quite similar to the approach that the FDIC and the other banking regulatory agencies followed during the S&L Crisis. The one way the FDIC’s approach this time seemed to differ is that the last time around, the banking regulators had aggressively pursued the outside professionals that had advised the failed banks and the failed banks’ boards of directors. From my perspective, the FDIC has not been as aggressive in pursuing the FDIC’s outside professionals.


To be sure, there have been some noteworthy cases where the FDIC has filed claims against failed banks’ outside professionals. For example, as discussed here, in November 2012, the FDIC filed an action against PwC and Crowe Horvath, the former accountants for the failed Colonial Bank of Montgomery, Alabama. In addition, as discussed here, in the October 2011 lawsuit that the FDIC filed its capacity as receiver of the failed Mutual Bank of Harvey, Illinois, the FDIC’s complaint named as defendants not only certain former directors and officers of the bank, but also the bank’s outside General Counsel, who was also a director of the bank, and the General Counsel’s law firm.


But even though as these cases show there have been instances where the agency has pursued claims against failed banks’ former accountants or former lawyers, the FDIC has not as actively pursued claims against outside professionals as it did during the S&L crisis. The FDIC states on the professional liability lawsuit page on its website that, other than lawsuits involving the former directors and officers of failed banks, the agency has authorized an additional 51 lawsuits for “fidelity bond, insurance, attorney malpractice, appraiser malpractice, accounting malpractice, and RMBS claims.” The website does not specify from among these 51 additional authorized lawsuits how many relate specifically to attorney or accountant malpractice. The FDIC’s recent filing against the former outside law firm for the failed Orion Bank, as well as the prior two cases cited above, does show that at least in certain instances the FDIC does intend to pursue claims against failed banks’ outside attorneys and accountants.


In any event, with the FDIC’s filing of the latest two failed bank D&O lawsuits described above, the FDIC has now filed a total of 56 lawsuits against the former directors and officers of failed banks during the current bank failure wave, including 12 so far during 2013. The professional liability lawsuit page on the FDIC’s website states that as of April 12, 2013, the agency has authorized lawsuits against former directors and officers of in connection with 109 failed institutions, inclusive of the now 56 lawsuits involving 55 failed institutions that have already been filed. The gap between the number of suits authorized and the number filed suggests the possibility of as many as 53 additional lawsuits are yet to come. In addition, each month for the past several months, the FDIC has increased the number of lawsuits it has authorized, so the number of potential lawsuits in the pipeline likely is even greater than the current gap between the numbers of authorized and filed lawsuits suggests. In other words, it seems likely that we will continue to see the arrival of additional failed bank lawsuits in the weeks and months to come.


One final note. As I previously noted, in response to media pressure, the FDIC recently has added a new page to its website on which the agency has linked to settlement agreements that the agency has reached in connection with claims and lawsuits that agency has failed or asserted as part of the current bank failure wave. There is a lot of information in the settlement agreements to which the agency has linked on the page. As Joe Montelone notes in an interesting April 19, 2013 post on his blog, The D&O and E&O Monitor, the agency’s publication of these agreements on its website raises a number of interesting issues and presents some potential challenges for defendants and D&O insurers in other claims and lawsuits.


A Note to Readers: This past Wednesday, I added a new post about the $500 million settlement agreement that the parties reached in the Countrywide mortgage backed securities litigation. I composed and published the post while sitting in the boarding area at the Cleveland airport, waiting to board a delayed flight to Chicago (I spent quite a bit of time this past week sitting in airports waiting for various delayed flights). In my haste to publish the post before boarding the flight, I put the post up on my site with a typo in the blog post title – I referred to “Countrywide” as “Countywide.” I am grateful to a number of readers who caught the typo and who sent me notes about it. However, I have not corrected the error, for a very simple reason. If I were to make the change, the software running my blog would think I had added a new blog post, and would send out emails to all of my readers as if I had added a new post.


We all get too many emails. I don’t want to add to the burden by having a bunch of potentially confusing emails going out to all of my readers. Because I don’t want to burden everyone with a completely unnecessary email, I am just going to have to live with the typo. So – my apologies for the error, it is just one of the side effects of the way in which this blog is created, developed and maintained. I hope that readers can look at the typo and recognize that I am living with the embarrassment of the error rather than contributing to email pollution. My thanks to everyone who sent me notes about the typo. I always appreciate it when people help me out by spotting possible errors. In this instance, the error will have to stand uncorrected.