September 14, 2011
Authored by: Bard Brockman and Robert Klingler
On August 22, 2011, the FDIC filed a complaint in the U.S. District Court for the Northern District of Georgia against the former directors and executive officers of Silverton Bank, N.A. Silverton was declared insolvent and placed into FDIC receivership on May 1, 2009.
Silverton, formerly known as The Banker’s Bank, was not a traditional banking institution. It provided correspondent and clearinghouse services, among other financial services, to community banks only. Silverton was owned by investor banks, and its board was comprised entirely of experienced community bankers.
The FDIC’s account of Silverton’s failure contains many of the same hallmark allegations present in its prior D&O lawsuits:
- overly-aggressive growth goals;
- compensation that incentivized loan production regardless of asset quality;
- expansion of lending into unfamiliar geographic markets;
- heavy focus on risky CRE and ADC lending;
- significant weaknesses in loan underwriting and credit administration;
- ignored warnings from state and federal banking regulators; and
- complete disregard of deteriorating economic conditions.
As it has done in prior lawsuits, the FDIC has identified several failed credit transactions that it contends are examples of negligence, gross and a breach of fiduciary duty by the directors or officers who approved them. In total, the FDIC seeks damages in excess of $61 million for fifteen (15) specific credit transactions.
Although it contains some familiar allegations and case themes, the FDIC’s complaint against the Silverton D&Os is unique, both in substance and tone. For the first time in the current downturn, the FDIC seeks to hold directors liable for instances of what it describes as “corporate waste.” Specifically, the complaint recites several examples of Silverton’s “extravagant spending” while the economy was in decline, including: (i) the purchase of two corporate aircraft for the bank holding company; (ii) the construction of a new airplane hangar for the holding company on leased property; (iii) the construction of a “lavish” new office building, which Silverton occupied 20 months before the expiration of its then-current lease. The FDIC alleges that the directors who authorized these specific expenditures are liable for more than $10 million of “corporate waste.”
The tenor of the FDIC’s allegations against the Silverton D&Os is more strident than in its prior lawsuits. The FDIC is particularly critical of the Silverton board, which was comprised of CEOs or presidents of other community banks. That experience and specialized knowledge, the FDIC contends, imposed a heightened duty on the directors to discharge the duties owed to the bank.
Bryan Cave banking partner Walt Moeling, who represented Silverton in connection with certain regulatory matters, has a different perspective on the immediate cause of Silverton’s failure. The Atlanta Journal-Constitution interviewed Walt about Silverton’s failure. Here is an excerpt from that article:
Ultimately, Moeling said, Silverton failed not because of its lending or spending, but because it is structured differently than most banks.
As a bank for banks, Silverton’s services included clearing checks, offering short-term investments for banks’ cash, financing new bank startups and divvying up and selling parts of loans – known as “participations” – that were too large for any single bank to handle.
To fund its operations, Moeling said, Silverton depended on member banks’ cash deposits in their check-clearing accounts and short-term investments. For each member, those accounts often totaled millions of dollars – well above the FDIC’s deposit guarantee of $250,000.
When rumors of Silverton’s troubles surfaced in early 2009, a modern-day run on the bank occurred. Member banks pulled out their money and turned to the Federal Reserve to clear their checks and hold their cash.
“Once the cracks began to appear, the member banks felt that they couldn’t have uninsured deposits,” Moeling said. Silverton “went from very liquid to out of cash, very, very fast.”
Finally, the FDIC’s complaint is also unique in that it includes a direct claim against the primary and excess D&O insurance carriers. The facts giving rise to that claim are interesting. According to the complaint, Silverton paid the premium for a primary D&O policy with Chubb. Chubb forwarded a Binder that referenced several endorsements, including a Regulatory Exclusion, which would operate to exclude from coverage any claims brought by federal or state regulators. However, when the D&O Policy was issued about one month later, it did not include contain a Regulatory Exclusion endorsement. One month later, on the very afternoon that Silverton was closed and the FDIC was appointed as receiver, Chubb’s underwriting officer forwarded the Regulatory Exclusion, which he claimed had been omitted from the policy in error. When the FDIC later asserted a civil demand under the D&O policy, Chubb denied coverage due to the Regulatory Exclusion. As part of its complaint, the FDIC is asserting a claim for declaratory relief against Chubb and the excess carrier, Westchester, to have the court determine whether the Regulatory Exclusion is part of the D&O policies.