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FDIC Sues Former Directors of Benchmark Bank (Aurora, Illinois)

November 9, 2012

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On October 2nd, the FDIC filed its 33rd lawsuit against former directors or officers of failed banking institutions since the beginning of the current economic recession.  This suit is against the former directors of Benchmark Bank (“Benchmark” or the “Bank”) of Aurora, Illinois, which was placed into FDIC receivership on December 4, 2009.  For a copy of the FDIC’s complaint, click here.

A central theme of the FDIC’s complaint is that the director defendants, all of whom served on the Director’s Loan Committee, embarked on a strategy of aggressive growth through the approval of high-risk acquisition, development and construction (“ADC”) and commercial real estate (“CRE”) loans.  The director defendants approved the high-risk loans, the FDIC alleges, “without analysis of their economic viability or a complete evaluation of the creditworthiness of borrowers and guarantors”.   Even after the real estate market declined, the FDIC contends, the director defendants exacerbated the Bank’s problems by making new loans and renewing existing troubled loans, rather than curtailing ADC/CRE lending and preserving capital to absorb losses from existing loans went bad.

The most unique of the FDIC’s case theory centers on the role of Benchmark’s former chairman, Richard Samuelson, who was not only a director, CEO, and long-time acting president of the Bank, but also the principal originator of the Bank’s ADC and CRE loans.  As CEO and acting president of the Bank, Mr. Samuelson was ultimately responsible for the underwriting and credit administration of loans.  Yet those functions were never segregated from the loan origination function, leaving the Bank with a significant internal control deficiency.  Moreover, since Mr. Samuelson originated most of the ADC and CRE loans, it created a dynamic in which credit analysts were very reluctant to report underwriting deficiencies on his loans.  To make matters worse, the FDIC contends, Mr. Samuelson earned generous incentive awards from his loan originations, providing him with additional motivation to ensure that loans were approved.  In view of these facts, the FDIC alleges, the director defendants knew or should have known that the ADC and CRE loans required a higher degree of scrutiny and monitoring.  The FDIC contends that the director defendants breached their duties with respect to 11 specific ADC and CRE loans, resulting in losses of over $13.3 million.

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Federal Courts in Georgia and Florida Dismiss Ordinary Negligence Claims

September 13, 2012

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We have previously summarized an important district court ruling dismissing the FDIC’s ordinary negligence claims against former directors and officers of Integrity Bank of Alpharetta, Georgia.  The FDIC asked the U.S. District Court for the Northern District of Georgia to reconsider its decision in that case, but the court recently denied that request and reaffirmed its rationale that Georgia’s version of the Business Judgment Rule bars claims for ordinary negligence against corporate directors and officers.  A copy of the court’s recent order in the Integrity Bank case is available here.  Although the district court declined to reconsider its prior dismissal of the ordinary negligence claims, it acknowledged that there was “substantial ground for difference of opinion” on that issue, and it granted the FDIC’s request to certify an order of interlocutory appeal to the Eleventh Circuit Court of Appeals.  Everyone in the D&O defense community, and especially those here in Georgia, is anxiously awaiting to learn if the Eleventh Circuit will accept interlocutory appeal of the case.

In the meanwhile, district courts in two other cases have weighed in on whether the Business Judgment Rule bars claims for ordinary negligence.  The first of these also comes from the Northern District of Georgia, and specifically from the FDIC’s lawsuit against certain former directors and officers of Haven Trust Bank.  (We have previously summarized the Haven Trust complaint.)  Utilizing the same rationale set forth in the Integrity Bank rulings, the court here ruled that the FDIC’s claims for ordinary negligence are not viable by virtue of the Business Judgment Rule.  Furthermore, the court ruled, to the extent that the FDIC’s claims for breach of fiduciary duty are based on the same alleged acts of ordinary negligence, those claims are foreclosed by the Business Judgment Rule as well.  The ruling was not a complete victory for the D&O defendants, however, as the court declined to dismiss the FDIC’s claims for gross negligence under FIRREA.  Specifically, the court held that the FDIC had alleged, in a collective fashion, sufficient facts on which a jury might reasonably conclude that the defendants had been grossly negligent.  Despite that holding, the court took the unusual step, “in the interest of caution,” of ordering the FDIC to replead the gross negligence claim with specific allegations as to each defendant’s involvement or responsibility for the alleged wrongful acts.  A copy of the court’s ruling can be viewed here.

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FDIC Sues Former Directors and Officers of Community Bank of Arizona

July 25, 2012

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On July 13, 2012, the FDIC filed its 31st professional liability lawsuit since the advent of the current economic downturn.  This suit was filed against seven former directors and officers of Community Bank of Arizona (“CBOA” or the “Bank”), all of whom served on the Bank’s Board Loan Committee.  CBOA had four branches in metropolitan Phoenix before it was closed and placed into receivership on August 14, 2009.  For a copy of the FDIC’s complaint, click here.

As it has in prior D&O lawsuits, the FDIC generally alleges here that the defendants: (i) took unreasonable risks with the Bank’s asset portfolio; (ii) violated the Bank’s own loan policies and procedures when approving the acquisition of loans; (iii) ignored warnings regarding risky real-estate and constructions loans, and (iv) knowingly permitted poor underwriting in contravention of the Bank’s policies and reasonable industry standards.

The FDIC’s sharpest criticisms of the defendants relate to CBOA’s acquisition of loan participations without conducting any of its own underwriting.  Most of these loans were acquired from CBOA’s larger “sister bank,” Community Bank of Nevada (“CBON”).  The CBON loans were principally made to real estate developers in Nevada, and seventy-five percent (75%) of the participations that CBOA purchased from CBON ultimately became problem loans.  According to the FDIC’s complaint, the defendants “rubber stamped” the purchase of the loan participations, all without having CBOA: (i) conduct independent financial analysis of the loans; (ii) obtain updated appraisals of the collateral; (iii) obtaining or analyzing financial statements of the guarantors; or (iv) conducting independent site inspections as required by the CBOA loan policy.

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FDIC Sues Former Bank Officer for Fraud

July 18, 2012

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On May 23, 2012, the FDIC filed an action against the former directors and select former officers of Innovative Bank (“Innovative” or the “Bank”).  Innovative was based in Oakland, California, and it had four other branches in the state when it was closed by the FDIC in April 2010.  For a copy of the FDIC’s lawsuit, click here.

The FDIC’s complaint in this case contains the same hallmark claims for negligence, gross negligence and fiduciary breach that we have come to expect from its D&O suits.  But this case is unique in that the FDIC also asserts a direct claim for fraud.

The alleged fraud was rooted in the Bank’s high-volume SBA lending program.  According to the complaint, the senior vice president in charge of SBA lending, Jimmy Kim, had free rein to originate, recommend and approve SBA loans, all with virtually no supervision by senior management or the board of directors.  The SBA loans generated huge commissions for Mr. Kim, and he reportedly received monthly commissions in excess of $100,000.  In order to continue the flow of high commissions, the FDIC alleges, Mr. Kim colluded with borrowers and loan brokers to cause the Bank to extend millions of dollars of loans that absent fraud would not have qualified for the SBA lending program.

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​FDIC Sues Former D&Os of First Bank of Beverly Hills

June 25, 2012

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The latest drama from Beverly Hills is not a revival of Beverly Hills 90210 or a sequel to Beverly Hills Cop, but rather a 42-page complaint filed against the former directors and officers of First Bank of Beverly Hills (“FBBH” or the “Bank”).  FBBH was closed and put into receivership on April 24, 2009.  The FDIC’s lawsuit was filed on April 20, 2012, just days before the expiration of the three-year limitations period.  For a copy of the FDIC’s complaint, click here.

According to the complaint, the director and officer defendants pursued an “unsustainable business model” focused on rapid asset growth through the extension of high-risk CRE and ADC loans.  At the same time, the FDIC alleges, the defendants were weakening the Bank’s capital position by approving large quarterly dividend payments (based on “false profits” from problematic loans) to the Bank’s parent corporation, in which many of the defendants were shareholders.

A common refrain throughout the FDIC’s suit is the defendants’ alleged “willful disregard” of the Bank’s own Loan Policy.  For example, the defendants approved two loans that were in violation of the Loan Policy’s prohibition against loans for construction projects with “difficult topography.”  One loan was for a project that ultimately failed because it sat directly atop the San Andreas Fault.  And the second loan was for a project that failed because the vast majority of the land was ultimately deemed undevelopable due to the Endangered Species Act.

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FDIC Sues Former D&Os of Cape Fear Bank

April 30, 2012

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On April 4, 2012, the FDIC filed an action against the former directors and officers of Cape Fear Bank, Wilmington, NC (“Cape Fear” or the “Bank”).  The lawsuit was filed shortly before the expiration of the 3-year statute of limitations which commenced when the Bank was closed and placed into FDIC receivership on April 10, 2009.  For a copy of the FDIC’s complaint, click here.

The FDIC’s complaint identifies two central causes of Cape Fear’s failure.  First, the FDIC alleges that the D&O defendants pursued a flawed strategy of opening branch operations without consideration for the cost of new branch operations and without any plan to monitor those operations.  Second, the FDIC alleges that the defendants were enticed by the real estate “bubble,” and that they aggressively pursued rapid growth through high-risk and speculative real estate lending.  The defendants approved loans even where the Bank lacked sufficient capital, causing the Bank to become overly dependent on brokered deposits, which in turn severely impaired earnings.  Worse yet, the defendants failed to employ basic prudent lending practices and controls.  Specifically, the FDIC alleged that the defendants routinely approved loans that: (i) violated the Bank’s own loan policy and applicable lending regulations; (ii) lacked proper financial analysis or verification of the borrower’s creditworthiness; (iii) lacked a proper appraisal of the collateral; and (iv) increased CRE and ADC concentrations that had previously been criticized by regulators.   To make matters even worse, the FDIC alleges, the defendants attempted to mask the Bank’s mounting capital problems by approving additional bad credits and making new advances on non-performing loans, often replenishing interest reserves that allowed borrowers to pay interest with borrowed funds.  The complaint identifies 23 specific failed CRE and ADC loans that resulted in approximately $11.2 million of losses, which is the amount the FDIC seeks in damages.

One of the unique aspects to this case is the allegation that Cape Fear’s president and CEO “dominated” the board of directors and the Bank’s lending function.  This unique case theory does not offer any insulation to the other directors and officers, however, as the FDIC contends that they failed to exercise their independent judgment and duties.

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FDIC Sues Former Directors of Florida Community Bank (Immokalee, FL)

April 5, 2012

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Sixty-three banks have failed in Florida from April 2008 through March 2012.  But until recently, the FDIC had not filed any lawsuits against former D&Os of those failed Florida banks.  That all changed on March 13, 2012, when the FDIC filed a complaint against the former directors of Florida Community Bank (“FCB”) of Immokalee, Florida.  For a copy of the FDIC’s complaint, click here.

FCB was placed into FDIC receivership on January 29, 2010.  The losses to the Federal Deposit Insurance Fund arising from FCB’s failure are estimated to be $349.1 million.

According to the FDIC’s complaint, FCB strayed from its long-time agriculture-based strategy, and it embarked on a risky growth strategy by focusing on CRE and ADC loans outside of its local market.  FCB took on “extreme” concentrations in CRE and ADC loans that were several times the concentrations of the average bank in its peer group.  The FDIC contends that FCB’s board approved high-risk loans that were in violation of the bank’s own loan policy and that were based on grossly deficient underwriting and questionable appraisals.  The board continued to approve high-risk loans, the FDIC alleges, even after it had actual knowledge that the real estate market was failing.  The FDIC is seeking damages in excess of $62 million arising from eight bad credits — seven  ADC and CRE loans and one personal loan (for nearly $6 million) that the FDIC contends was approved by the bank’s president in violation of his lending authority.

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FDIC Sues Former Directors and Officers of Broadway Bank (Chicago, IL)

March 23, 2012

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On March 7, 2012, the FDIC filed an action against the former directors and two former officers of Broadway Bank (“Broadway”) of Chicago, Illinois.  For a copy of the FDIC’s complaint, click here.  Broadway was placed into receivership on April 23, 2010.  The FDIC estimates that the losses to the Federal Deposit Insurance Fund due to Broadway’s failure will approach $400 million.

The lawsuit alleges that the D&O defendants embarked on “reckless” strategy of rapidly growing the bank’s assets by approving high-risk ADC and CRE loans without regard for appropriate underwriting and credit administration practices, the bank’s own loan policies, and federal lending regulations.  The risks to the bank was exacerbated, the FDIC alleges, because many of the loans were for projects located outside of Illinois, and Broadway did not have sufficient staff to monitor those projects.

The FDIC is particularly galled by the D&O defendants’ approval of two “grossly imprudent” loans immediately following a meeting at which federal and state regulators warned the board about the risks of CRE lending.  Those loans resulted in losses to the bank of approximately $12 million.

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FDIC Weighs in on Director and Officer Removal of Bank Documents

Following the failure of over 400 financial institutions since the beginning of 2008, the FDIC has clarified its expectations with respect to collection and retention of bank documents by directors and officers of troubled or failing financial institutions for the purpose of explaining or defending their conduct. The FDIC’s Financial Institution Letter (FIL) released today sets forth the FDIC’s position that “[d]irectors and officers of troubled or failing financial institutions who remove originals or copies of financial institution records under such circumstances breach their fiduciary duty to the institution.” Presumably the FDIC would also object to a director or officer of a healthy bank copying and removing bank documents if the FDIC concludes that it is being done for improper purposes, although the FIL does not specifically address that issue.

Even though the guidance comes late in the game, we believe it is helpful for the FDIC to articulate its position on this matter to provide clarity to industry participants. We are disappointed, however, that the FDIC chose to issue this broad guidance through a financial institution letter (which cites no statutory authority or judicial decisions in support of its position) rather than through a formal rulemaking process whereby affected parties could offer comments.

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FDIC Sues Former Officers of Silver State Bank

February 17, 2012

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On February 9, 2012, the FDIC sued four former officers of Silver State Bank (Henderson, NV). Silver State operated 12 branch offices in and around Las Vegas and 4 branch offices in metro Phoenix. In addition, it had 12 loan production offices in several western states and in Florida. Silver State was closed and placed into FDIC receivership in September 2008. For a copy of the FDIC’s complaint, click here.

The defendants in this action are Silver State’s former CEO, the former EVP of Real Estate Lending and two former loan officers. According to the FDIC’s complaint, in early 2006, the CEO steered the bank on an aggressive growth strategy focused on high risk Acquisition, Development and Construction (”ADC”) loans. The CEO and the EVP of Real Estate Lending aggressively pursued lending opportunities in the Bank’s two principal markets – Las Vegas and Phoenix – despite numerous indications that those markets were in steep decline. The FDIC liberally cited several articles published by the EVP that predicted that the real estate market would suffer a painful crash. Despite his own predictions, and his own acknowledgements once the market started to seriously decline, the EVP allegedly sugar-coated his reports on market conditions to the Bank’s board, and he continued to recommend speculative ADC loans to the Senior Loan Committee. The FDIC in part attributed the defendants’ “reckless” behavior to the Bank’s compensation structure, which richly incentivized loan officers to make loans without regard to quality or risk.

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