On March 16, 2012, the FDIC, in its capacity as Receiver for the failed Omni National Bank, brought a lawsuit in the Northern District of Georgia against several former officers, some of whom had also served as directors, of the Bank seeking to recover over $24.5 million in losses the bank suffered on over 200 Community Development Lending Division (“CDLD”) loans on low income residential properties. The Complaint also seeks to recover an additional $12.6 million in what it contends were wasteful expenditures on low income Other Real Estate Owned (“OREO”) properties. A copy of the FDIC’s complaint is available here.
Omni National Bank of Atlanta, Georgia was closed by the regulators on March 27, 2009. This lawsuit was brought almost exactly three years later, which is the operative statute of limitations.
Most of the defendants named in the Complaint were former CDLD officers, who are alleged to have approved the loans at issue in the Complaint despite alleged “numerous, repeated and obvious violations of the Bank’s loan policies and procedures, banking regulations and prudent and sound lending practices.” The violations alleged include violations of loan to one borrower limits through the use of straw borrowers, violations of loan to value limits, failure to obtain appraisals prior to funding, lack of required borrower equity or down payment, insufficient borrower credit scores or repayment ability, and other improprieties. The Complaint also includes claims against more senior former executives, including the former CEO and President of the Bank, based on their alleged failure to supervise the CDLD lending function, their alleged previous knowledge of misconduct and other “red flags” of problems in the CDLD lending program, and their alleged authorization of certain OREO expenditures described below.
The Complaint also asserts claims for alleged wasteful OREO expenditures after September 15, 2008. This claim is made against a former vice president, who was responsible for management of OREO. FDIC alleges that, instead of liquidating the additional OREO properties “as is” to conserve remaining capital, this defendant expended over $12.6 million to maintain, rehabilitate, renovate, and/or improve the additional OREO properties. The Complaint alleges that these expenditures further depleted the Bank’s already deficient capital and hastened the Bank’s failure.
As with previous complaints, this Complaint continues to allege claims under both simple negligence and gross negligence theories, despite the holding of a federal court in the Integrity Bank case in Georgia that simple negligence claims are not available against former directors and officers of a failed bank under Georgia law.
On March 7, 2012, the FDIC filed an action against the former directors and two former officers of Broadway Bank (“Broadway”) of Chicago, Illinois. For a copy of the FDIC’s complaint, click here. Broadway was placed into receivership on April 23, 2010. The FDIC estimates that the losses to the Federal Deposit Insurance Fund due to Broadway’s failure will approach $400 million.
The lawsuit alleges that the D&O defendants embarked on “reckless” strategy of rapidly growing the bank’s assets by approving high-risk ADC and CRE loans without regard for appropriate underwriting and credit administration practices, the bank’s own loan policies, and federal lending regulations. The risks to the bank was exacerbated, the FDIC alleges, because many of the loans were for projects located outside of Illinois, and Broadway did not have sufficient staff to monitor those projects.
The FDIC is particularly galled by the D&O defendants’ approval of two “grossly imprudent” loans immediately following a meeting at which federal and state regulators warned the board about the risks of CRE lending. Those loans resulted in losses to the bank of approximately $12 million.
On March 2, 2012, the FDIC, in its capacity as receiver for Freedom Bank of Georgia, brought suit against twelve (12) former directors and officers of the Bank, many of whom served on the bank’s Loan Committee. The complaint alleges that, because of the defendants’ misconduct, the FDIC, as receiver, is entitled to recover at least $11,050,623. Interestingly, Freedom was closed by the Georgia Department of Banking & Finance on March 6, 2009, thus the FDIC’s lawsuit was filed almost exactly three (3) years from the date that the bank went into receivership, which is the applicable statute of limitations. A copy of the FDIC’s complaint is available here.
The FDIC’s damage claim is based on losses from twenty-one (21) commercial real estate and acquisition development and construction loans which were approved by the bank from May 16, 2005 through June 20, 2007. The complaint alleges an undifferentiated laundry list of problems related to these loans, including, but not limited to, a lack of internal control in the loan policy limiting the amount of such loans, the absence of a requirement in the loan policy to conduct the global cash flow analysis of all contingent liabilities for the bank’s borrowers and guarantors, inadequate due diligence market research for loans outside the bank’s geographic area, insufficient analysis of ability to repay, failing to secure adequate collateral, incomplete or inadequate appraisals, and failing to ensure appropriate loan to value ratios.
On February 24, 2012 the FDIC, in its capacity as receiver, filed suit against the former President & CEO as well as the former Sr. Vice President of the Retail Banking Group for Community Bank & Trust of Cornelia, Georgia. In the complaint, the FDIC seeks to recover losses in excess of $11 million that the FDIC alleges the bank suffered as a result of the defendants’ breaches of fiduciary duties, negligence, and gross negligence. For a copy of the FDIC’s complaint, click here.
Community Bank & Trust of Cornelia, Georgia failed on January 29, 2010. The Bank had been in existence since 1900, and had 36 branches across northeast Georgia at the time of its closing. Defendant Charles Miller became the CEO of the Bank in 2006, and during the time that he served as CEO, co-defendant Trent Fricks served as Sr. Vice President of a retail banking group of the Bank.
All of the claims in the FDIC suit relate to the Bank’s Home Funding Loan Program, and to losses allegedly caused by that program between January 6, 2006 and December 2, 2009. The complaint alleges that the Home Funding Loan Program developed through a relationship between defendant Fricks and Robert Warren, who owned several mortgage brokerage entities, collectively referred to as Home Funding Corporation. The complaint alleges that the Bank provided bridge loans to the customers of the Home Funding Corporation entities, who were ostensibly real estate investors, in return for a commitment letter from Home Funding Corporation to the Bank in which it agreed to purchase the loan back from the Bank at maturity. The loans related to purchases of investment single family residences in the Atlanta low end housing market, and were alleged to have been high risk, short term loans. The complaint alleges that defendant Fricks was directly responsible for the program, and personally approved the loans despite material underwriting deficiencies, and numerous violations of the bank’s loan policy, such as failing to obtain complete financial statements, failing to obtain appraisals, and exceeding the bank’s LTV ratio limit. Further, the complaint alleges that the numerous deficiencies and problems with the Home Funding Loan Program and with Fricks’ conduct were brought to the attention of CEO Miller, and he failed to act on any of the problems that were identified, allowing losses to continue to mount.
As many readers are aware, Georgia has led the nation in the number of failed financial institutions in the recent financial crisis. Integrity Bank, of Alpharetta, was one of the first of those banks to fail in Georgia, on August 28, 2008, and drew the first lawsuit filed by the FDIC as receiver against former directors and officers in Georgia. The lawsuit was filed against former members of the Director Loan Committee of the Bank, and asserted claims against the Defendants based on their alleged pursuit of an unsustainable rapid growth strategy, involving high risk lending concentrated in speculative real estate and acquisition, construction and development loans. The suit alleged over $70 million in losses from 21 such loans, between February 4, 2005 and May 2, 2007.
On February 27, 2012, in response to motions to dismiss filed by the defendants, and motions to strike certain affirmative defenses filed by the FDIC as Receiver, Judge Steven C. Jones of the United States District Court for the Northern District of Georgia issued an Order which made some critical rulings regarding the standard of care and the availability of certain defenses in actions brought by the FDIC as receiver in Georgia. A copy of the Order is available here. Given that this is the first such substantive ruling in this context by a court in Georgia, the decision is notable and will likely have a significant impact on future FDIC litigation in Georgia going forward.
Of potentially greatest significance, the Court granted the Defendants motion to dismiss all of the FDIC’s claims based on ordinary, as opposed to gross, negligence. The Court was persuaded that in Georgia, the deviation from the standard of care necessary to state a claim against former bank officers and directors must rise at least to the level of the “gross negligence” floor set by the Financial Institutions Reform, Recovery and Enforcement Act of 1989 (FIRREA) . The Court reached this conclusion after determining that Georgia ‘ s Business Judgment Rule protects directors and officers from claims based on simple, or ordinary, negligence. This sets the bar fairly high for the FDIC to prevail on claims against former directors and officers of failed banks,and should provide some comfort in that regard.
Detracting somewhat from the defendants victory on that aspect of the motion to dismiss, however, Judge Jones also ruled that the relatively unexceptional allegations by the FDIC of uncontrolled rapid growth and over concentration in speculative and risky acquisition, development and construction loans were sufficient to withstand a motion to dismiss, even at the heightened “gross negligence” standard. Thus, while the decision sets the bar high for the FDIC to ultimately prevail on these sorts of claims, it does not necessarily provide much ammunition to argue for dismissal at the motion to dismiss stage.
On February 9, 2012, the FDIC sued four former officers of Silver State Bank (Henderson, NV). Silver State operated 12 branch offices in and around Las Vegas and 4 branch offices in metro Phoenix. In addition, it had 12 loan production offices in several western states and in Florida. Silver State was closed and placed into FDIC receivership in September 2008. For a copy of the FDIC’s complaint, click here.
The defendants in this action are Silver State’s former CEO, the former EVP of Real Estate Lending and two former loan officers. According to the FDIC’s complaint, in early 2006, the CEO steered the bank on an aggressive growth strategy focused on high risk Acquisition, Development and Construction (”ADC”) loans. The CEO and the EVP of Real Estate Lending aggressively pursued lending opportunities in the Bank’s two principal markets – Las Vegas and Phoenix – despite numerous indications that those markets were in steep decline. The FDIC liberally cited several articles published by the EVP that predicted that the real estate market would suffer a painful crash. Despite his own predictions, and his own acknowledgements once the market started to seriously decline, the EVP allegedly sugar-coated his reports on market conditions to the Bank’s board, and he continued to recommend speculative ADC loans to the Senior Loan Committee. The FDIC in part attributed the defendants’ “reckless” behavior to the Bank’s compensation structure, which richly incentivized loan officers to make loans without regard to quality or risk.
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.
In its most recent lawsuit relating to a bank failure, the FDIC, in its capacity as receiver of the failed County Bank of Merced, California has filed a complaint against former officers of the bank. The complaint was filed on January 27, 2012, in the Eastern District of California. Interestingly, County Bank had failed on February 6, 2009, so the FDIC ultimately filed its complaint just short of the expiration of the three (3) year period from the date of receivership within which it can file claims. A copy of the FDIC’s complaint is available here.
The complaint names five (5) former officers of the bank all of whom served on the bank’s Executive Loan Committee. It essentially alleges that the defendants allowed the bank to make what it characterizes as “imprudent” real estate loans, especially loans for the construction and development of residences. The complaint alleges that the bank’s real estate lending policies were not safe and sound banking practices, that the bank disregarded its own credit policies and approved loans to non-credit worthy borrowers. It also alleges that the bank’s management continued to invest in risky commercial real estate lending even after the marker had begun to decline.
The complaint focuses on twelve (12) specific loans, and alleges claims against each of the defendants for negligence and breach of fiduciary duty. The loans were made between December 2005 and June 2008, and FDIC contends they caused the bank losses in excess of $42 million.
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.”
On December 29, 2011, the FDIC filed suit against seven former directors of the Bank of Asheville in the Western District of North Carolina seeking to recover over $6.8 million in losses suffered by the bank prior to receivership. All of the directors named as defendants were members of the bank’s Loan Committee, the committee responsible “for the amplification, implementation and administration of the loan policy” and “management of the lending function”. The Complaint cites 30 specific commercial real estate and business loans approved by the defendants between June 26, 2007 and December 24, 2009 as causing loss to the bank and those loans form the subject matter of the Complaint. A copy of the FDIC’s complaint is available here.
In the Complaint, the FDIC as Receiver essentially cites the Bank’s rapid growth strategy concentrated in what it characterizes as “higher risk, speculative commercial real estate loans”. The Complaint alleges that the defendants had virtually no previous banking or commercial real estate lending experience, failed to implement even the most basic prudent lending controls, and neglected to adequately supervise inexperienced and under qualified lending personnel. The complaint further alleges that the defendants failed to heed warnings by State and Federal regulators as well as outside auditors of the increasing risk associated with the bank’s highly concentrated commercial real estate loan portfolio. The complaint alleges that once those risks began to manifest themselves, the defendants “took actions that masked the bank’s mounting problems” by approving additional loss loans and renewing and making additional advances on other non-performing loans, as well as replenishing interest reserves which allowed borrowers to pay interest with more borrowed funds.