A collection of new banking resources from around the internet:
- Characteristics of FDIC Lawsuits Against Directors and Officers of Failed Financial Institutions – Courtesy of Cornerstone Research.
- FDIC Publishes 3rd Quarter 2012 State Banking Profiles
- FDIC Publishes Winter 2012 Supervisory Insights – Includes articles on Mobile Banking and High-Yield Checking Accounts.
- FDIC Releases Community Banking Study, Supervisory Initiatives – The FDIC released the results of a study of community banking in the United States, as well as a series of supervisory and rulemaking measures relating to community banks, as the outcome of its yearlong Community Banking Initiative.
- OCC Highlights Risks Facing National Banks and Federal Savings Associations – Regulators highlight the risks associated with the potential for banks to take excessive risk in an effort to improve profitability, revenue challenges from a slow economy and financial market volatility, and lingering effects of real estate lending.
- WSJ’s Top 10 Economic Charts of 2012 – Hopefully the fiscal cliff doesn’t make them all irrelevant to a historical review.
- 100 Best Lists of All Time – Courtesy of the New Yorker. Personally, I’m a big fan of #16 – 16. Hasbro’s “2-Letter Scrabble Words List”.
- The S.E.C. vs. the S.E.C. – Hailing from the South, I clearly take the football conference, notwithstanding my profession.
A collection of new banking resources from around the internet:
- Congress Amends ATM Fee Disclosure Requirements – Pending the President’s signature, banks will no longer have to include duplicative signing informing customers of ATM fees going forward.
- Senate Rejects Bill to Extend Transaction Account Guarantee – Based on a Congressional Budget Office report that concluded “that, using recent history, the FDIC and NCUA would underestimate probable losses when setting fees to charge for this additional coverage,” the Senate was unable to overcome a procedural objection to the bill. In the larger context, the bill was killed as part of a senate fight over the filibuster, a battle with credit unions over expansion of business lending, and objection to continued “bailouts,” but looking solely at the official record, the bill failed on the belief of Congress that the FDIC did a lousy job foreseeing the economic crisis.
- FDIC Updates Status of Professional Liability Suits – Despite the FDIC’s inability to foresee the economic crisis, the FDIC continues to pursue litigation against directors and executive officers, having authorized suits against 369 defendants in 2012.
- FDIC Publishes Regulatory Calendar for Community Banks – The online regulatory calendar is intended to help community banks stay up-to-date on changes in federal banking laws, regulations, and supervisory guidance.
- Treasury Announces Results of 5th Round of “Opt-Out” Auctions – Discounts ranged from less than 2% to 35%.
As has been noted on this blog before, the State of Georgia has the dubious distinction of leading the nation in the number of failed financial institutions. In the month of October 2012, the number of lawsuits against former officers and directors of those failed institutions increased by two (2).
In the first lawsuit, filed on October 17, 2012, the FDIC brought suit in its capacity as Receiver for American United Bank of Lawrenceville, Georgia against two former officers and 6 former directors of the bank. (A copy of the complaint can be found here.) In that suit, the FDIC alleged both ordinary negligence and gross negligence in connection with the management of the lending function of the bank. The FDIC alleged that the failure of American United caused a loss to the Federal Deposit Insurance Fund in the amount of $45.2 million, and, through alleged damages in the lawsuit, seeks to recover an amount in excess of $7.3 million.
Despite having more than its fair share of failed banks, Florida has not been a hotbed of D&O litigation. On November 9th, the FDIC filed only its second lawsuit against former directors of a failed banking institution. The defendants here are former directors of Century Bank, FSB (Sarasota, FL), which was placed into receivership in mid-November 2009. A copy of the FDIC’s complaint is available here.
The FDIC’s complaint is consistent with most of its prior D&O lawsuits, with typical allegations of negligent overconcentration in ADC and CRE, as well as various failures to follow the Bank’s loan policy or to exercise safe and sound banking practices. What makes this complaint a little different is that it focuses on ten specific loan transactions which were approved after it was apparent that the Bank was in “dire financial condition” and not meeting regulatory capital requirements. (more…)
In August, the Northern District of Georgia reaffirmed its prior ruling in the Integrity Bank case that Georgia’s version of the Business Judgment Rule shields former directors and officers from FDIC claims for ordinary negligence. Our discussion of that ruling can be found here. In doing so, the district court acknowledged that there was “substantial ground for difference of opinion,” on the issue, and it granted the FDIC’s request to petition the Eleventh Circuit Court of Appeals for an interlocutory appeal.
On November 16th, the Eleventh Circuit granted the FDIC’s petition, paving the way for an interlocutory appeal on the district court’s ruling. The parties will brief their respective arguments in the coming weeks, and it is likely that several interested non-parties will also seek to file amicus (“friend of the court”) briefs. The Eleventh Circuit may elect to hear oral argument on the issue, but it is not required to do so. A decision will likely come down within the next year.
The Eleventh Circuit’s ruling is expected to have a significant impact on the scope of claims that the FDIC may assert against former directors and officers of failed banks in Georgia. If the Court affirms the district court below, then the FDIC will be limited to prosecuting claims for gross negligence, which involves a much higher standard of care. If the Eleventh Circuit reverses, then the FDIC will continue to pursue D&O claims for ordinary negligence based on a lower threshold of negligent conduct. Either way, the Eleventh Circuit’s decision should be a significant turning point for FDIC claims in Georgia.
The FDIC has filed its fifth professional liability lawsuit since early October. Its most recent lawsuit is against the former directors and officers of Community Bank of West Georgia (Villa Rica, Georgia), which went into receivership in June 2009. A copy of the FDIC’s complaint is attached here.
Community Bank of West Georgia (the “Bank” or “Community Bank”) opened in March 2003. The FDIC alleges that the Bank’s original business plan was to grow its assets for a planned sale within five years. Towards this end, the FDIC contends, the Bank focused on increasing its real estate lending, primarily in ADC and CRE loans and purchase of loan participations.
The FDIC’s claims for negligence and gross negligence are rooted in many of the same types of general allegations that have become part of the FDIC’s standard pleading mantra: (i) failure to comply with the Bank’s own policies and procedures, banking regulations, and prudent lending practices; (ii) failure to adequately monitor and supervise the Bank’s lending function; (iii) disregard of regulators’ warnings and failing to address obvious problems; (iv) deficient underwriting, risk management, and credit administration practices that left the Bank “fatally exposed to the inevitable cyclical decrease in real estate values.” In total, the FDIC seeks to recover losses in excess of $16.8 million from 20 specific loans and loan participations.
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.
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.
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.
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.