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FDIC Sues Former Directors and Officers of Haven Trust Bank

July 18, 2011

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The FDIC filed its ninth lawsuit against directors or officers of failed financial institutions since the onset of the current economic downturn.  On July 14th, the FDIC filed a civil complaint against the directors and three senior officers of Haven Trust Bank (Duluth, Ga.), which was placed into receivership in December 2008.  The FDIC estimates the failure of Haven Trust Bank will cost the Federal Deposit Insurance Fund approximately $248 million. We have posted a copy of the complaint.

Some of the core allegations in the FDIC’s complaint are very familiar by now.  The FDIC alleges that the Haven Trust defendants implemented an unsustainable business model focused on rapid asset growth heavily concentrated in high-risk commercial real estate (“CRE”) loans.  It further contends that the defendants failed to maintain adequate internal controls, loan underwriting policies, and sufficient credit administration procedures necessary to oversee and manage the operations of the bank.  The FDIC alleges that the defendants continued to pursue an aggressive CRE lending strategy throughout most of 2008, after regulators had cautioned them about the bank’s poor asset quality and rapidly deteriorating capital ratios.

The unique allegations in the complaint center on the influence the FDIC contends was exercised by two of the directors, R.C. Patel and Mike Patel, who collectively owned a controlling interest in the bank.  Specifically, the FDIC contends that the bank made numerous imprudent insider loans (exceeding $7 million) to the Patels or their relatives, all for the Patels’ personal benefit.  The FDIC also alleges that despite the bank’s rapidly declining capital-to-asset ratios, the defendant directors authorized dividend payments to the bank holding company in the months prior to the receivership.

The FDIC’s complaint asserts state law claims for negligence and breach of fiduciary duty, and an additional claim for gross negligence under FIRREA.  The total amount of the damages sought is estimated to exceed $40 million.

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FDIC Sues Former Directors and Officers of Wheatland Bank

May 19, 2011

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The FDIC filed its seventh D&O lawsuit since the beginning of the current economic downturn.  The complaint was filed against the former directors and officers of Wheatland Bank of Naperville, Illinois. See a copy of the FDIC’s complaint.

The FDIC’s theory about the ultimate failure of Wheatland Bank has a ring of familiarity to it by now.  It contends that the bank pursued rapid asset growth concentrated on high-risk commercial real estate (CRE) loans, without implementing adequate loan underwriting and credit administration practices to manage the risk.  The FDIC also alleges that the bank routinely violated its loan policies, approved loans that had little chance of repayment, and repeatedly ignored regulators’ warnings about its risk lending practices.

The complaint asserts two primary case theories.  First, it alleges that the members of the bank’s Loan Committee (which included two non-director officers) approved high-risk insider loans to “favored shareholders or borrowers” without adequate analysis or collateral, and failed to pursue the borrowers or guarantors after those loans went into default.  The FDIC asserts alternative claims against the Loan Committee defendants for gross negligence (under FIRREA), negligence, breach of fiduciary, and breach of loyalty for the more than $22 million of losses caused by eight loan defaults.

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FDIC Sues Former Directors and Officers of Corn Belt Bank & Trust

March 22, 2011

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The FDIC filed its fifth lawsuit against former officers of directors of a failed banking institution on March 1, 2011.  The defendants are four members of the Loan Committee for Corn Belt Bank & Trust (Pittsfield, Illinois).  Three of the defendants were directors (one of whom as bank president), and the fourth defendant was Corn Belt’s Senior VP of Lending.  See a copy of the FDIC’s complaint.

The FDIC seeks to recover damages for five failed loans to borrowers in the truck leasing business.  According to the FDIC’s complaint, Corn Belt’s internal loan review specifically warned the defendants about the following weaknesses in the loans: (i) they provided 100% financing to a start-up company; (ii) the borrower was outside the bank’s geographical footprint; (iii) the loans would be secured by semi-tractors and other rolling stock; and (iv) the guarantees covered only a small portion of the debt.  The FDIC also alleges that the defendants knew or should have known that: (i) the loan terms did not require the borrower to make an equity contribution; (ii) the borrower had inadequate cash flow; (iii) the debt service coverage ratios were insufficient; (iv) the credit request relied only on forward-looking financial statements; and (v) the loans allowed the borrower to make draws in excess of the amount required to purchase semi-tractors.

Among the noteworthy allegations in the FDIC’s complaint is that the president and chief lending officer closed a $1.8 million loan, despite the fact that it had not been approved by the Loan Committee.  The FDIC is equally critical of the Loan Committee on this extension of credit.  Once the Loan Committee learned that the loan had been closed, the FDIC alleges, it did not object or question the officers who had extended the unauthorized credit.

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FDIC Files Fourth Lawsuit Against Former Bank Directors and Officers

January 21, 2011

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On January 14, 2010, the FDIC filed its fourth lawsuit against former directors and officers of a failed financial institution.  The defendants in this action are the former directors and the former VP of Real Estate Construction for 1st Centennial Bank (Redlands, Cal.), which was put into receivership on January 23, 2009.

The FDIC’s complaint asserts state law claims for negligence, breach of fiduciary duty, and breach of the directors’ duty to supervise.  It also asserts a claim under FIRREA for gross negligence.  The complaint focuses on 16 specific loan losses, and it seeks damages in the minimum amount of $26.8 million flowing from those bad loans.

The crux of the FDIC’s lawsuit is that the 1st Centennial defendants “recklessly implemented an unsustainable business model pursuing rapid asset growth concentrated in high-risk loans in commercial real estate without having adequate credit administration and loan underwriting policies and practices to manage the risk.”  Even after the local real estate market had softened significantly, the FDIC alleged, the defendants did not take steps to curtail the bank’s lending , carefully monitor the existing loan portfolio, or seek to minimize loan losses.  By the end of 2008, the percentage of Acquisition, Development and Construction loans to total capital had increased to 1,264%, more than ten times the regulatory guidance.

Another central theme of the FDIC’s lawsuit is that the bank’s CEO, Chief Credit Officer and VP of Real Estate Construction were all unqualified to carry out their duties and responsibilities to the bank.  This does not necessarily present the other director defendants with a defense, however, as the FDIC has specifically alleged the board did not adequately supervise the bank’s management.

On January 14th, the FDIC filed its fourth lawsuit against former directors and officers of a failed financial institution.  The defendants in this action are the former directors and the former VP of Real Estate Construction for 1st Centennial Bank (Redlands, Cal.), which was put into receivership on January 23, 2009.

The FDIC’s lawsuit asserts state law claims for negligence, breach of fiduciary duty, and breach of the directors’ duty to supervise.  It also asserts a claim under FIRREA for gross negligence.  The complaint focuses on 16 specific loan losses, and it seeks damages in the minimum amount of $26.8 million flowing from those bad loans.  For a copy of the complaint, click here.

The crux of the FDIC’s lawsuit is that the 1st Centennial defendants “recklessly implemented an unsustainable business model pursuing rapid asset growth concentrated in high-risk loans in commercial real estate without having adequate credit administration and loan underwriting policies and practices to manage the risk.”  Even after the local real estate market had softened significantly, the FDIC alleged, the defendants did not take steps to curtail the bank’s lending , carefully monitor the existing loan portfolio, or seek to minimize loan losses.  By the end of 2008, the percentage of Acquisition, Development and Construction (“ADC”) loans to total capital had increased to 1,264%, more than ten times the regulatory limit.

Another central theme of the FDIC’s lawsuit is that the bank’s CEO, Chief Credit Officer and VP of Real Estate Construction were all unqualified to carry out their duties and responsibilities to the bank.  This does not necessarily present the other director defendants with a defense, however, as the FDIC has specifically alleged the board did not adequately supervise the bank’s management.

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FDIC Files Lawsuit Against Directors and Officers of Failed Integrity Bank

January 21, 2011

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The FDIC filed its third lawsuit against selected former directors and officers of a failed financial institution on January 14, 2010.  The defendants in the lawsuit are certain former directors and officers of Integrity Bank (Alpharetta, Ga.), which the FDIC placed into receivership on August 29, 2008.  The complaint, which was filed in the U.S. District Court for the Northern District of Georgia, asserts claims for negligence, gross negligence and breach of fiduciary duty.

The central theme of the complaint is that the defendants served on the bank’s Director Loan Committee, and in that capacity they pursued an “unsustainable growth strategy designed to exploit the then-expanding ‘bubble’ in the residential and commercial real estate market.”  Directors who did not serve on that committee were not sued. The FDIC alleged a variety of misdeeds by the defendants, including the following:

  • the adoption of a loan policy that set a lending limit in excess of the statutory legal lending limit;
  • the abdication of the credit and lending functions to a Senior Lender who was compensated based on the volume of loan originations, without regard to the quality of the credit; and
  • an over-concentration in speculative ADC loans that ultimately represented nearly 80% of the bank’s total loan portfolio

However, the more than $70 million in damages alleged focus on twenty-one (21) specific ADC loans approved by, or subject to the oversight of, the Director Loan Committee.

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FDIC Files Lawsuit Against Directors and Officers of Failed Illinois Bank

November 3, 2010

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The FDIC filed a lawsuit against directors and officers of Heritage Community Bank (Glenwood, Ill.), which was taken into FDIC receivership in early February 2009.  The FDIC lawsuit was filed in federal court in Chicago on November 1, 2010, and it is the FDIC’s second suit against directors or officers of failed institutions since the advent of the current real estate recession. For a copy of the complaint, click here.

The FDIC’s case theory revolves around the bank’s commercial real estate (“CRE”) lending program.  The lawsuit alleges that the directors and officers failed to protect the bank from the “substantial inherent risks of large-scale CRE lending,” by:

  • routinely financing CRE projects without any meaningful analysis or adequate appraisals;
  • repeatedly making loans with excessive loan-to-value ratios; and
  • failing to properly evaluate the creditworthiness of CRE borrowers and guarantors.

One unique factual allegation in the lawsuit is that the bank routinely drew down interest reserves from specific loans and recorded it as income.  That practice, the FDIC alleged, generated phony profits, which the bank used to justify “substantial dividends” to the holding company and “generous incentive compensation” to its senior management.

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