March 22, 2011
Authored by: Bard Brockman
The FDIC filed its fifth lawsuit against former officers of directors of a failed banking institution on March 1, 2011. The defendants are four members of the Loan Committee for Corn Belt Bank & Trust (Pittsfield, Illinois). Three of the defendants were directors (one of whom as bank president), and the fourth defendant was Corn Belt’s Senior VP of Lending. See a copy of the FDIC’s complaint.
The FDIC seeks to recover damages for five failed loans to borrowers in the truck leasing business. According to the FDIC’s complaint, Corn Belt’s internal loan review specifically warned the defendants about the following weaknesses in the loans: (i) they provided 100% financing to a start-up company; (ii) the borrower was outside the bank’s geographical footprint; (iii) the loans would be secured by semi-tractors and other rolling stock; and (iv) the guarantees covered only a small portion of the debt. The FDIC also alleges that the defendants knew or should have known that: (i) the loan terms did not require the borrower to make an equity contribution; (ii) the borrower had inadequate cash flow; (iii) the debt service coverage ratios were insufficient; (iv) the credit request relied only on forward-looking financial statements; and (v) the loans allowed the borrower to make draws in excess of the amount required to purchase semi-tractors.
Among the noteworthy allegations in the FDIC’s complaint is that the president and chief lending officer closed a $1.8 million loan, despite the fact that it had not been approved by the Loan Committee. The FDIC is equally critical of the Loan Committee on this extension of credit. Once the Loan Committee learned that the loan had been closed, the FDIC alleges, it did not object or question the officers who had extended the unauthorized credit.
The FDIC asserted claims against all defendants for negligence (under Illinois law) and gross negligence (under FIRREA) for approving the failed loans, which the FDIC contends resulted in loan losses to Corn Belt of approximately $10.4 million. The FDIC asserted similar claims against the former president and chief lending officer for making the unauthorized loan, and for failing to properly administer loans and protect the bank’s security interest in collateral.
This is the FDIC’s first lawsuit that focuses on commercial lending practices outside of the real estate arena, and it serves to put the banking community on notice that the FDIC is not singularly focused on failed real estate loans.