The FDIC recently sued a former director of Carson River Community Bank (Carson City, NV), which failed and went into receivership on February 26, 2010. The defendant, James M. Jacobs, was one of five directors who served on the Bank’s Senior Loan Committee and who approved three ADC loans that ultimately went into default, resulting in more than $3.6 million of losses to the Bank.
So why is the FDIC suing only Mr. Jacobs, and not the other members of the Senior Loan Committee for the allegedly imprudent loans? There are two probable reasons – one rooted in fact, and the other rooted in law. First, according to the FDIC’s complaint, the three subject loans were participated out to two Oklahoma banks owned by Mr. Jacobs’ family and for which Mr. Jacobs served as a director. The other directors on the Senior Loan Committee knew about Mr. Jacobs’ interest in the participating banks. What they did not know, however, was that Mr. Jacobs had secretly arranged for the Oklahoma participating banks to have preferential rights to repayment upon default. As a consequence of those preferential repayment rights, the Oklahoma banks were ultimately paid in full and Carson River Community Bank shouldered the bulk of the loss on the loans. This conduct, the FDIC alleges, constituted a breach of Mr. Jacobs’ fiduciary duty to Carson River Community Bank. Since the other directors on the Senior Loan Committee did not know about the preferential repayment rights, the FDIC was not in a position to assert similar fiduciary breach claims against them.
Second, the FDIC has not sued the other directors because Nevada has a very forgiving standard of liability for corporate directors. Under the Nevada corporate code, a director is not liable unless it is proven that: (a) the director’s act or failure to act constituted a breach of his fiduciary duties; and (b) the breach of those duties involved intentional misconduct, fraud or a knowing violation of law. Nev. Rev. Stat. § 78.137(7). Although it characterized the approval of the subject loans as imprudent, the FDIC must not have had sufficient facts to support an allegation that the other directors had committed “intentional misconduct, fraud, or a knowing violation of the law.”
This case is a true factual outlier, and it does not signal a trend that the FDIC will target single director defendants. We expect the FDIC will continue its now long-established practice of targeting all of the former directors and officers who played a substantial and active role in approving allegedly imprudent loans.