BCLP Banking Blog

Bank Bryan Cave

D&O liability

Main Content

FDIC Sues Former Senior Lender of New Century Bank (Chicago, IL).

In a departure from its typical litigation practice, the FDIC has sued not only the directors and officers who voted for failed loans, but also the senior loan officer who originated those same loans. The claims arise from the failure of New Century Bank, which was placed into receivership in April 2010. The FDIC filed its complaint against the former D&Os on March 26, 2013, just a few weeks prior to the expiration of the three-year limitations period. For a copy of the FDIC’s complaint, click here.

The FDIC seeks to recover damages in excess of $33 million in connection with fourteen bad credits. According to the FDIC’s complaint, each of the fourteen loans was approved in violation of the Bank’s loan policy. Common violations of the loan policy included: (i) failure to establish adequate debt repayment programs; (ii) extension of credit in excess of permitted LTV ratio limits; (iii) failure to adhere to required debt-to-income ratios; (iv) approval of debt service coverage ratios below minimum requirements; and (v) reliance on outdated, unverified and inadequate financial information from borrowers and guarantors.

Several of the Bank’s failed credits were particularly problematic because they were for development projects in Las Vegas, which was far outside the Bank’s normal trade area. Not only could the Bank not monitor these projects as effectively as those in its normal market area, the loan policy itself prohibited the extension of credit outside the Bank’s market footprint.

The most unique aspect of this case is the FDIC’s decision to pursue separate claims against the Bank’s former SVP of Commercial Lending. Nowhere in its lawsuit does the FDIC allege that the lender voted to approve any of the failed credits. Rather, the FDIC asserts negligence and gross negligence claims against the lender arising from his origination, recommendation and administration of the bad loans.

It is not unusual for the FDIC to include senior lenders among its target D&O defendants. However, in almost every case to this point, those senior lenders had voted to approve the failed loans in question. That is not the case here. It will be interesting to see whether this case marks the beginning of a new FDIC theory of recovery against loan officers with no authority to approve loans.

Read More

Fall 2012 Update on Regulatory and Legal Changes Affecting Community Banks

Bank regulators have been as busy as usual in 2012, but some of the more interesting regulatory and legal changes have come from non-bank regulators and the courts. And, the JOBS Act changes described below actually lifts the regulatory burden on banks a bit, a rare respite in an otherwise challenging regulatory environment.

The JOBS Act eases bank capital activities and M&A.  The Jumpstart Our Business Startups Act affects community banks in 4 key ways:

  • “Going public” is easier. Banks that have less than $1 billion in gross revenue can qualify as an “emerging growth” company and take advantage of relaxed rules that allow them to “test the waters” and obtain a confidential prior review of an IPO filing by the SEC, provide reduced executive compensation disclosures and file without a SOX 404 attestation by the bank’s auditors.
  • The “crowdfunding” rule (expected in early 2013) will provide banks significant flexibility in raising $1 million per year from their community without IPO-type expenses and without adding new investors to their shareholder count.
  • Private offerings are easier. Rules affecting private offerings are being relaxed so that a bank will be able to use public solicitation and advertising to attract investors as long as the bank takes reasonable steps to ensure that those investors are accredited.
  • Going or staying private is easier because the shareholder count triggering “going public” was raised from 500 to 2,000. And, shareholders from a bank’s “crowdfunding” offerings and from employee compensation plans are now excluded from the shareholder count. These helpful changes to shareholder count rules mean that some banks can bring in new investors or even acquire another bank without triggering the obligation to “go public,” a significant cost and compliance barrier. Also, banks with a shareholder count under 1,200 can “go private” following a 90-day waiting period.
Read More
The attorneys of Bryan Cave Leighton Paisner make this site available to you only for the educational purposes of imparting general information and a general understanding of the law. This site does not offer specific legal advice. Your use of this site does not create an attorney-client relationship between you and Bryan Cave LLP or any of its attorneys. Do not use this site as a substitute for specific legal advice from a licensed attorney. Much of the information on this site is based upon preliminary discussions in the absence of definitive advice or policy statements and therefore may change as soon as more definitive advice is available. Please review our full disclaimer.