January 25, 2012
Authored by: Jake Bielema
On December 29, 2011, the FDIC filed suit against seven former directors of the Bank of Asheville in the Western District of North Carolina seeking to recover over $6.8 million in losses suffered by the bank prior to receivership. All of the directors named as defendants were members of the bank’s Loan Committee, the committee responsible “for the amplification, implementation and administration of the loan policy” and “management of the lending function”. The Complaint cites 30 specific commercial real estate and business loans approved by the defendants between June 26, 2007 and December 24, 2009 as causing loss to the bank and those loans form the subject matter of the Complaint. A copy of the FDIC’s complaint is available here.
In the Complaint, the FDIC as Receiver essentially cites the Bank’s rapid growth strategy concentrated in what it characterizes as “higher risk, speculative commercial real estate loans”. The Complaint alleges that the defendants had virtually no previous banking or commercial real estate lending experience, failed to implement even the most basic prudent lending controls, and neglected to adequately supervise inexperienced and under qualified lending personnel. The complaint further alleges that the defendants failed to heed warnings by State and Federal regulators as well as outside auditors of the increasing risk associated with the bank’s highly concentrated commercial real estate loan portfolio. The complaint alleges that once those risks began to manifest themselves, the defendants “took actions that masked the bank’s mounting problems” by approving additional loss loans and renewing and making additional advances on other non-performing loans, as well as replenishing interest reserves which allowed borrowers to pay interest with more borrowed funds.
The Asheville suit brings to 18 the total number of lawsuits the FDIC has now filed against directors and/or officers of failed banks. What is most notable about the complaint is the absence of any particularly compelling allegation of wrongdoing, such as self dealing or personal enrichment, and the relatively small amount of the losses sought. The Asheville suit appears to be the clearest example yet of a suit that is based almost solely upon allegations of negligence relating to rapid growth and over concentration in commercial real estate, a fact pattern that was prevalent at hundreds of community banks during the real estate boom years. The Asheville suit may signify that the FDIC is becoming more aggressive in deciding which bank failures merit lawsuits, or it may signal that the FDIC believed it needed to file a lawsuit in order to get the attention of a D&O carrier. Based on the number of lawsuits that the FDIC has authorized, it is clear that there will be many more lawsuits to come against former directors and officers of failed banks.