October 10, 2011
Authored by: Bard Brockman
On August 8, 2011, the FDIC filed a lawsuit against Timothy J. Cuttle, the former Senior Loan Officer of Michigan Heritage Bank, which was placed into receivership in April 2009. A copy of the FDIC’s complaint is available here. Although the FDIC has included loan officers among the defendants in some of its prior D&O lawsuits, this is the first time in the current litigation cycle that the FDIC has targeted its claims against a single loan officer.
The FDIC’s focus on the Senior Loan Officer is likely largely attributable to the Bank’s detailed written Lending Policy, which assigned strict and specific responsibilities to the Bank’s loan officers. According to the FDIC’s complaint, the Senior Loan Officer violated the Lending Policy, as well as prudent lending practices, in connection with eleven (11) commercial loans, which resulted in losses in excess of $8.2 million. The complaint asserts state law claims for negligence and breach of fiduciary duty, and a gross negligence claim under FIRREA, for the following types of misconduct:
- causing the Bank to approve and fund loans based on inadequate collateral;
- causing the Bank to approve and fund loans based on inadequate, incomplete, in accurate or unrealistic appraisals;
- failing to adequately inspect real estate taken as collateral;
- causing the Bank to approve and fund loans without requiring adequate sources of repayment;
- causing the Bank to approve and fund loans without adequately analyzing debt service coverage ratios and the borrowers’ abilities to perform on the loans;
- failing to ensure that loans closed according to the terms approved; and
- causing the Bank to approve and fund CRE loans in which the project equity contribution from the borrower was not evaluated or was inadequate.
Although the FDIC targets the Senior Loan Officer, the lawsuit makes clear that the loans at issue were approved by a Senior Loan Committee, and in a few instances, by the Bank’s board of directors. So why has the FDIC seemingly departed from its prior practice and not sued the Senior Loan Committee or the directors in this case?
The complaint offers clues to two possible explanations.
First, for many of the loans at issue, the FDIC alleges that the Senior Loan Officer withheld key information from the Senior Loan Committee and the board, and that the Bank would not have approved the loans had that information been disclosed.
Second, and perhaps more importantly, the complaint reveals that the Bank eventually demoted the officer and removed him from the Senior Loan Committee in May 2007 – two years before the Bank’s failure. He eventually left the Bank’s employ. That affirmative disciplinary action may have spared the Senior Loan Committee and the board of directors from being named as co-defendants in the lawsuit.