The FDIC’s pursuit of litigation against directors and officers of banks that have failed as part of the current round of bank failures has been moving forward, albeit at a deliberate pace. The agency’s litigation efforts advanced a couple of steps in recent days, as the agency filed an additional lawsuit and publicly announced that even more are coming.
The FDIC filed its latest lawsuit on May 5, 2011 in the Northern District of Illinois. The lawsuit was filed against certain former directors and offices of Wheatland Bank of Napierville, Illinois, of which the FDIC took control on April 23, 2010 (about which refer here). The actual lawsuit in which the FDIC filed its complaint had begun as a shareholders’ derivative lawsuit in Cook County (Illinois) Circuit Court. The FDIC had removed the lawsuit to federal court (refer here) and on May 5, 2011, the federal court granted the FDIC’s motion to intervene as a party plaintiff and to filed its amended complaint.
In its complaint (a copy of which can be found here), the FDIC seeks to recover at least $22 million that the bank allegedly sustained in connection with commercial real estate loans (CRE). The complaint asserts claims for gross negligence, negligence, breach of the fiduciary duty of care, breach of the fiduciary duty of loyalty, and failure to supervise. The 6 individual defendants include four directors (two of whom who were also officers of the bank and two of whom were nonofficer directors who served on the loan committee), as well as the bank’s chief lending officer and its chief financial officer.
The complaint alleges that:
Defendants recklessly implemented an unsustainable business model pursuing rapid asset growth concentrated in high-risk CRE loans without having adequate loan underwriting and credit administration practices to manage the risk. To make matters worse, the Bank routinely violated whatever loan policies it had in place and approved loans that had little chance of repayment. The Bank also made loans to favored shareholders and borrowers on terms that were preferential and abusive and then, after default, failed to pursue the borrowers and guarantors on these loans. Regulatory warnings about the Bank’s reckless lending practices were repeatedly ignored by Defendants. The out-of-control lending continued until the Bank was closed after only three years of operation.
With the filing of the Wheatland Bank complaint, the FDIC has now filed a total of seven lawsuits against former directors and officers of banks that have failed as part of the current round of bank failures. My running list of the FDIC’s lawsuits can be accessed here.
Interestingly, three of the seven have been filed against banks that had operated in Illinois. At one level, this not a surprise as Illinois has been of the leading states in terms of the number of failed banks. But there have been more in Georgia (which has only one lawsuit), and the over 360 bank failures since January 1, 2008 have involved banks in many different states. It isn’t clear if there is a reason why the litigation seems to be advancing in Illinois, as opposed to anywhere else.
While the FDIC has now filed a total of seven lawsuits against the former directors and officers of failed banks, it seems clear that there are more to come. On May 11, 2011, the FDIC updated its professional liability lawsuit page on its website to reflect that the FDIC has authorized suits against 208 individuals for D&O liability with damage claims of at least $3.86 billion. (The latest update increased the number to 208 from last month’s figure of 187.) Since the seven lawsuits the agency has filed includes only 52 individual lawsuits, there clear implication is that there are many more lawsuits yet to come against the remaining 156 defendants.
The FDIC’s website also discloses that the FDIC also has authorized 13 fidelity bond, attorney malpractice, and appraiser malpractice lawsuits. In addition, 135 residential malpractice and mortgage fraud lawsuits are pending, consisting of lawsuits filed and inherited.
The number of directors and officers against whom the FDIC has authorized litigation has increased every month since the FDIC first began publishing the data in September 2010. The aggregate figure has increased much more quickly than the total number of individuals against whom lawsuits have actually been filed. The clear implication is that the FDIC is being very deliberate in preparing its claims. The suggestion is that the lawsuits will continue to come in slowly – and that the process of filing the lawsuits may go on for quite a while yet.