May 19, 2011
Authored by: Bard Brockman
The FDIC filed its seventh D&O lawsuit since the beginning of the current economic downturn. The complaint was filed against the former directors and officers of Wheatland Bank of Naperville, Illinois. See a copy of the FDIC’s complaint.
The FDIC’s theory about the ultimate failure of Wheatland Bank has a ring of familiarity to it by now. It contends that the bank pursued rapid asset growth concentrated on high-risk commercial real estate (CRE) loans, without implementing adequate loan underwriting and credit administration practices to manage the risk. The FDIC also alleges that the bank routinely violated its loan policies, approved loans that had little chance of repayment, and repeatedly ignored regulators’ warnings about its risk lending practices.
The complaint asserts two primary case theories. First, it alleges that the members of the bank’s Loan Committee (which included two non-director officers) approved high-risk insider loans to “favored shareholders or borrowers” without adequate analysis or collateral, and failed to pursue the borrowers or guarantors after those loans went into default. The FDIC asserts alternative claims against the Loan Committee defendants for gross negligence (under FIRREA), negligence, breach of fiduciary, and breach of loyalty for the more than $22 million of losses caused by eight loan defaults.
Second, the FDIC asserts negligence and gross negligence claims against the director defendants for their failure to properly supervise the operations of the bank. Specifically, the FDIC alleges that the director defendants permitted management to violate the bank’s business plan and loans policies; that they failed to select and retain competent management; and that they failed to exercise independent judgment in evaluating the actions and competency of management.
This second set of claims is perhaps the most intriguing. It signals that the FDIC is not concentrating solely on the directors and officers who comprise the loan committee. Instead, the FDIC will seek to hold directors liable for alleged breaches in connection with their ultimate role in supervising the management and operations of the bank.