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FDIC Intervenes in Coverage Dispute to Assert Claims Against Former D&Os of Westernbank

February 16, 2012

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In a unusual procedural maneuver, the FDIC has intervened in a pending insurance coverage dispute to assert claims against the former directors and officers of Westernbank of Mayaguez, Puerto Rico.  Westernbank was closed on April 30, 2010.  At the time of its failure, Westernbank was the second largest bank in Puerto Rico.  The FDIC alleges that Westernbank’s failure will result in a loss to the Deposit Insurance Fund of approximately $4.25 billion.

The case was originally a coverage dispute filed by some of the former directors of Westernbank against their D&O carrier Chartis.  The FDIC intervened in the case and asserted claims against a much broader set of defendants, including all of the former bank directors, several former bank officers, and three additional D&O carriers.  The claims against Chartis and the other D&O carriers were brought pursuant to a Puerto Rico statute that grants a right of direct action against the insurers.  For a copy of the FDIC’s Amended and Restated Complaint, click here.

In support of its gross negligence claim against the former directors and officers, the FDIC alleges that the defendants approved and/or administered numerous CRE, construction and asset-based commercial loans in violation of bank policies, federal safety and soundness regulations, and prudent banking practices.  The FDIC seeks to recover $176 million in damages attributable to losses suffered on 21 specific bad credits.

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FDIC Sues Former Directors and Officers of R-G Premier Bank

January 26, 2012

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On January 18, 2012, the FDIC filed a complaint against former directors and officers of R-G Premier Bank of Puerto Rico, which was closed and put into receivership on April 30, 2010.  A copy of the FDIC’s complaint is available here.

The roots of R-G Premier’s failure, the FDIC contends, can be traced to the 2001 strategic decision to increase its commercial real estate lending.  According to the complaint, the board of directors appointed a new Chief Lending Officer, Victor Irizarry, and it structured the Bank to give Irizarry “free rein” to make commercial real estate loans.  Among the board’s alleged failings was its decision to give Irizarry supervisory control of the Bank’s credit risk management department.  This reporting structure, the FDIC alleges, effectively squelched the credit risk personnel from voicing any concerns about the underwriting of loans or creditworthiness of borrowers.  Internal audits and banking regulators both warned that the credit risk management function should be segregated from the loan department, but the board ignored those warnings.

The FDIC further alleges that the board itself essentially turned a “blind eye” to the Bank’s lending function.  Specifically, the FDIC alleges that the board failed to institute effective loan reviews, which in turn “undermined its own ability to monitor the health and quality of its rapidly expanding commercial loan portfolio.”  The board’s failure to institute appropriate procedures and controls, combined with its resistance to recommended reform, resulted in the Bank’s extension of over $350 million in loans that a “prudent banker should have known would probably never be repaid.”

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FDIC Sues Former Directors and Officers of Westsound Bank

January 24, 2012

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In mid-November 2011, the FDIC filed a complaint against eleven former directors and officers of Westsound Bank (Bremerton, WA), which was closed in May 2009.  The lawsuit is the FDIC’s seventeenth action against former D&Os of failed banking institutions since the advent of the Great Recession. A copy of the FDIC’s complaint is available here.

The FDIC’s core allegations resemble those asserted in its prior D&O lawsuits.  Specifically, it alleges that the Westsound board embarked on a “reckless” business strategy focused on high-risk ADC and CRE lending.  The FDIC further contends that the board and the Directors Loan Committee (“DLC”): (i) failed to properly manage and supervise the bank’s lending function; (ii) approved loans in violation of and without regard to the bank’s loan policy; (iii) ignored regulators’ warnings about excessive loan concentrations and lax oversight of the lending function; and (iv) approved additional loans and loan renewals and advances to mask non-performing credits.

The FDIC seeks to recover damages in excess of $15 million on claims for gross negligence (under FIRREA), and state law claims for negligence and breach of fiduciary duty.  Its alleged damages are tied to 35 specific credits, including seven ADC/CRE loans, and seven other loans to insiders allegedly made without board approval in violation of Reg. O.

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FDIC Sues Former Directors, Officers and Outside Counsel of Mutual Bank

November 11, 2011

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The FDIC sued the former directors and two former officers of Mutual Bank (Homewood, Illinois), along with Mutual Bank’s outside law firm, on October 25, 2011.  Mutual Bank was placed into FDIC receivership in July 2009, and its failure currently is estimated to cost the Deposit Insurance Fund $775 million.  A copy of the FDIC’s complaint is available here.

One of the unique aspects of this lawsuit is the FDIC’s allegations of corporate waste.  For example, the FDIC alleges that the directors approved a $250,000 payment for sponsorship of a “bank function.”  The bank function was actually the wedding of one of the directors, who was also the chairman’s and principal shareholder’s son.  In another example, the FDIC alleges that the directors allowed $495,000 of Bank funds to be used to make payments to another director for his wife’s defense of a Medicare fraud case.  In yet another example, the FDIC alleges that the directors permitted roughly $300,000 of Bank funds to be used to fund travel to an unnecessary directors’ meeting in Monte Carlo.  In total, the FDIC is seeking to recover at least $1.09 million from the directors who approved the wasteful transactions.

The FDIC is also suing the directors for their approval of $10.5 million of illegal dividend payments in 2007 and 2008, at a time when the Bank was hemorrhaging and under severe regulatory criticism.  The dividends were paid to the bank holding company, which in turn paid them to the shareholders, with 95% of the dividends being paid to the controlling family, which had four members on the Bank board.

The bulk of the FDIC’s complaint is devoted to its claims against the directors and senior officer defendants for approval of twelve loans that resulted in losses of over $115 million for the Bank.  As a backdrop for those claims, the FDIC describes a litany of the Bank’s operational deficiencies and failures, including: (i) a “dangerous” concentration in CRE and ADC loans; (ii) a failure to maintain a proper credit administration staff; (iii) an inappropriate reliance on outside mortgage brokers to structure and facilitate large loans; (iv) a failure to establish procedures to ensure compliance with the Bank’s loan policy and prudent lending practices; (v) an inability to generate timely and accurate financial reports; (vi) a routine disregard of the Bank’s loan policy; and (vii) an arrogant disregard of bank regulators and their criticisms.

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FDIC Sues Former Directors and Officers of Alpha Bank & Trust

October 12, 2011

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On October 7, 2011, the FDIC filed a complaint against the former directors and senior officers of Alpha Bank & Trust (Alpharetta, Ga.), which was put into receivership on October 24, 2008. A copy of the FDIC’s complaint is available here. Alpha Bank & Trust (“Alpha” or the “Bank”) opened in May 2006 and operated for only thirty (30) months. Nevertheless, the FDIC estimates that the failure of Alpha will cause the Deposit Insurance Fund to lose $214.5 million.

According to the complaint, Alpha embarked on an aggressive growth strategy that focused on making risky loans in the acquisition, development and construction (“ADC”) and commercial real estate (“CRE”) sectors. The complaint also alleges that the Bank incentivized loans officers to generate loans, regardless of credit quality or loan performance, and that the Bank either disregarded or rejected warnings from regulators and third-party loan review consultants.

The complaint seeks to recover $23.92 million in damages directly tied to losses suffered on thirteen separate bad credits. The defendants were all members of the Director’s Loan Committee, and according to the complaint, they each voted to approve one or more of the subject loans. Their alleged failures and omissions included the following:

  • failure to follow the Bank’s existing loan policies;
  • failure to inform themselves and each other about the true nature and condition of the Bank’s loan portfolio;
  • failure to adopt and enforce prudent underwriting procedures and appropriate loan-to-value ratios;
  • approving loans to borrowers who were or who should have been known to be not creditworthy;
  • approving loans to be made on an unsecured or under-secured basis;
  • approving loans made on the basis of inadequate or non-existent appraisals;
  • causing or permitting loans to be made without properly and promptly perfecting security interests in the loan collateral; and
  • failure to exercise their duties to manage and supervise the affairs of the Bank in a safe, sound and prudent manner.

The complaint asserts a state law claim for negligence and a claim for gross negligence under FIRREA. Interestingly, the FDIC does not assert a separate state law claim for breach of fiduciary duty, even though it has consistently pled that claim in nearly every other D&O lawsuit to date.

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FDIC Sues Former Directors and Officers of Cooperative Bank

October 12, 2011

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On August 10, 2011, the FDIC sued nine former directors and officers of Cooperative Bank (Wilmington, NC), which was placed into receivership in June 2009. A copy of the FDIC’s complaint is available here.

In its complaint, the FDIC alleges that the board and senior management of Cooperative Bank instituted a strategy in 2001 to grow from the Bank’s assets from $443 million to $1 billion by the end of 2005. The Bank did not meet that goal, but the board and senior management reaffirmed the goal to become a $1 billion bank, and pursued an aggressive growth plan in furtherance of that goal. That aggressive growth plan, the FDIC alleges, caused the Bank to become over-concentrated in acquisition, development and construction (“ADC”) loans. Furthermore, the FDIC contends, the defendants “failed to manage the inherent risks associated” with the aggressive growth strategy. Specifically, the director defendants permitted a lax loan approval process that did not include a formal loan committee to review an analyze loans; instead, the Bank relied on various levels of loan approval authority, which were routinely violated. State and federal regulators repeatedly warned Cooperative’s management about the risks associated with its high concentration in speculative loans and weaknesses in its lending function, but the FDIC states those warnings were ignored.

The FDIC’s complaint seeks approximately $34.5 million of damages on negligence and breach of fiduciary duty theories. The alleged damages flow from two types of loan losses.

The first set of losses resulted from Cooperative’s “Lot Loan Program,” in which the Bank provided credit to borrowers to buy vacant lots for the purported purpose of eventually building vacation homes in developments along the North Carolina coast. In reality, the FDIC alleges, Cooperative provided lot loans to out-of-state, speculative buyers (many of whom intended to “flip” the lots) on artificially-inflated appraisals.

The Lot Loan program was particularly ill-advised, the FDIC contends, because the Bank’s senior management acknowledged from the start that the lot loans would not be profitable for the Bank. The senior managers viewed the Lot Loan Program as a “loss leader,” which would put the Bank in a better position to provide construction financing when the buyers were ready to build.

In the course of setting up the Lot Loan Program, the Bank’s senior management represented to the Bank’s ALCO Committee that the lot loans would be limited to a 90% loan-to-value ratio, and that payments would not be interest-only (which had been a concern of the regulators). Even at 90% LTV, the lot loans violated the Bank’s own Loan Policy, which allowed only a 65% LTV limit for raw land and a 75% LTV limit for land development. To make matters worse, the lot loans were no-equity loans, with interest-only payments, and the majority of the lot loans were “stated income” (no-document) loans.

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FDIC Sues Directors of Columbian Bank and Trust

October 11, 2011

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In the second of three D&O lawsuits filed on successive days in August, the FDIC sued six former directors of Columbian Bank and Trust (Topeka, KS), which was placed into receivership in August 2008.  A copy of the FDIC’s complaint is available here.

The FDIC’s complaint alleges that Columbian embarked on an aggressive commercial and CRE lending program in 2003 to drive up the Bank’s revenues.  In furtherance of this lending program, the FDIC contends, Columbian incentivized its loan officers to generate loans, at the expense of credit quality.  The FDIC further alleges that this “uncontrolled” lending campaign, combined with the defendants’ several other failures — most notably, the failure to heed regulators’ warnings and to follow the Bank’s own loan policies – caused the 40-year-old Columbian Bank to collapse in just five years.

The complaint focuses on losses resulting from loans to twelve sets of borrowers.  The FDIC is seeking to hold the former directors for the total amount of those loan losses, which is over $52 million.

Aside from the FDIC’s contention that the loans at issue violated the Bank’s loan policy and were the product of a negligent underwriting and approval process, the loans bear few common characteristics.  In one example, the FDIC alleges that Columbian made a series of loans ($18 million in total) to a newly-formed LLC to purchase and rehab a commercial office building in Kansas City that had no signed leases or tenants.  Columbian apparently never prepared a DSC or cash flow analysis on the project; nor did it obtain financial statements on the borrower or its guarantors.  The project failed, and the Bank ultimately suffered losses of nearly $8 million.

The FDIC’s complaint presents two case theories: (1) that the defendants were negligent and/or breached their fiduciary duty with respect to approval of the failed loans; and (2) that the defendants were negligent and/or breached their fiduciary duty in connection with their failure to properly supervise the Bank’s officers and employees.  These two case theories are presented in the context of claims for gross negligence (under FIRREA), negligence under state law, and breach of fiduciary duty under state law.

Perhaps the most interesting aspect of the FDIC’s complaint is the allegation that the six defendants, along with “other culpable former directors,” constituted a majority of the Bank’s board.  This clearly suggests that the FDIC has elected not to sue all of the former Columbian directors, despite its assertion that they are “culpable” for the Bank’s failure.

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FDIC Files Lawsuit Against Former Senior Loan Officer

October 10, 2011

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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?

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FDIC Sues Directors and Officers of Silverton Bank

September 14, 2011

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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.

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FDIC Sues Former IndyMac CEO for Over $600 Million

August 1, 2011

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On July 6, 2011, the FDIC filed a civil complaint against Michael Perry, the former chief executive officer of IndyMac Bank, F.S.B. (“IndyMac”).   A copy of the complaint is available here.  The lawsuit is the FDIC’s eighth lawsuit against directors or officers of failed banks in the current economic downturn, and it comes a little more than one year after its first D&O lawsuit (against four senior officers of IndyMac’s home builders division).

In its complaint against Mr. Perry, the FDIC chronicles IndyMac’s meteoric rise as an independent mortgage lender.   For instance, between 2000 and 2006, IndyMac increased its mortgage loan production from approximately $10 billion to almost $92 billion, most of which was sold in the secondary market.  According to the complaint, IndyMac’s principal mortgage product was a high-risk “Alt-A” loan, which was typically marketed to borrowers with less than full documentation, lower credit scores and higher loan-to-value ratios.

The crux of the FDIC’s complaint is that Mr. Perry neglected to comply with his duties as CEO, and that he presided over IndyMac’s aggressive generation of residential loans at a time when he knew the secondary market was volatile and uncertain.  When IndyMac could not profitably sell those loans in the secondary market, it transferred the loans to its internal “Hold for Investment” portfolio.  The mortgage loans generated in the six-month period between April and October 2007 alone resulted in more than $600 million of liquidated losses for the bank.  The FDIC believes that IndyMac suffered additional losses for loans generated in 2008, but it has not determined the amount of those losses just yet.

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