Typically, the FDIC updates the professional liability lawsuits page about once a month, but on June 7, 2013, only about two weeks after its last update, the FDIC again updated the page to include new lawsuit information. According to the information in the latest update, the FDIC has now filed a total of 65 lawsuits against the directors and officers of failed banks as part of the current bank failure wave, including a total of 21 new lawsuits during 2013.
In the FDIC’s most recent update, the agency including information about its two most recently filed lawsuits. The FDIC filed the first of these two lawsuits on May 24, 2013 in the District of Nevada, in the agency’s capacity as receiver for the failed Sun West Bank of Las Vegas, Nevada. The bank failed on May 28, 2010, meaning that the agency filed its lawsuit just before the third anniversary of the bank’s closure. As reflected in the agency’s complaint (here), the FDIC as receiver for the failed bank has named nine of the bank’s former officers and directors as defendants, asserting claims against them for gross negligence and for breaches of fiduciary duties. The agency alleges that each of the defendants approved “certain high risk loans in violation of the Bank’s existing loan policies and prudent lending practices.” The agency seeks to recover “damages in excess of $8 million” that it claims the defendants’ misconduct caused.
Interestingly, the individual defendants not only served as bank directors and officers, but they also each had substantial ownership interests in the Bank’s holding company. Collectively, the individual defendants allegedly owned or controlled 59.3 percent of the holding company’s stock.
The FDIC filed the second of its two latest lawsuits on May 31, 2013. The agency filed the action in the District of Nebraska against eight former directors and officers of the failed TierOne Bank of Lincoln, Nebraska. The bank failed on June 4, 2010 in what was, according to press reports, the largest bank failure ever in Nebraska. The agency filed its lawsuit just before the third anniversary of the bank’s failure. The FDIC’s complaint, which can be found here, asserts claims against the defendants for gross negligence and for breach of fiduciary duty for approving “eight poorly underwritten acquisition, development and construction loans from April 21, 2006 through September 17, 2008.” The complaint alleges that the defendants’ ignored the bank’s own loan policies and prudent banking practices in approving “risky” loans in Las Vegas.
There are a couple of interesting things about these two lawsuits. The first is that both of the complaints assert claims only for gross negligence and for breaches of fiduciary duties. Many of the other D&O lawsuits the FDIC has filed have not only asserted these claims but also asserted claims for negligence as well. Much of the early skirmishing in the lawsuits involving negligence allegations involves motions filed by the individual defendants in those cases asserting that mere claims of negligence are not sufficient to hold them liable. In these two latest cases, by contrast, the FDIC has sidestepped this issue entirely, seeking recovery only for claims of gross negligence and for breach of fiduciary duty.
The other thing about these cases is that they both are based primarily on loans made in the deteriorating Las Vegas real estate market five or more years ago. The collapse of the Las Vegas real estate market, as well as the collapse of other regional real estate markets that had surged during the boom years last decade, contributed to the closure of many banks. Although the agency’s filing of these lawsuits apparently met the strict requirements of the statute of limitations, there does seem to be a sense in which the agency’s lawsuits increasingly involve stale allegations. As time goes by, questions about loans made into the real estate bubble a long time seem increasingly pointless. The events from that time are starting to seem like ancient history.
Though the FDIC updated its professional liability lawsuits page to add these two latest lawsuits, the agency did not update the information about the number of authorized lawsuits. The number of authorized lawsuits remains unchanged from the May update; the agency has authorized suits in connection with 114 failed institutions against 921 individuals for D&O liability. With the addition of the two latest lawsuits, the agency has 65 filed D&O lawsuits naming 505 former directors and officers as defendants. The implication is that there are as many 49 yet-to-be-filed lawsuits in the pipeline.
Even though the current bank failure wave is now well into its sixth year, banks continue to fail. As reflected on the agency’s failed bank list, the agency closed two more banks last week, the 1st Commerce Bank of North Las Vegas, Nevada (which the agency closed in an unusual Thursday night closure on June 6, 2013) and Mountain National Bank of Sevierville, Tennessee, which the agency close in a more conventional Friday night closure on June 7, 2013. These two latest closures bring the total number of bank failures so far this year to 16 (compared to 51 in all of 2012), and the total since January 1, 2007 to 484.
Unfortunately, despite the gradual economic recovery, bank failures may continue. As noted here, in the FDIC’s most recent Quarterly Banking Profile, the agency reported that it still continues to rate 8.7% of the depositary institutions as “problem institutions,” and though both the number and percentage of problem institutions has declined, the number of problem institutions remains stubbornly high.