Banking Law

For the past year or so, Georgia has been a hot bed of failed banks. According to an "unnamed source" within the FDIC, it's about to become the bulls-eye of FDIC target practice that seeks to score big returns to the Federal Deposit Insurance Fund from the D&O insurance carriers who issued policies covering failed banks' boards of directors and officers.

The Federal Deposit Insurance Corporation is expected within weeks to start suing directors and officers of failed Atlanta banks, according to people familiar with looming litigation.



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A source familiar with the FDIC?s local operations said suits will be filed within weeks against board members and executive teams for some of the 11 Atlanta banks that have failed, primarily looking for claims under directors and officers insurance.



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?They?re pulling a page from the S&L playbook and going after the D&O insurance,? the source said, who declined to name any of the banks that will be sued.

Yeah, just let 'em all sweat, eh "unnamed source"?

A FDIC "named source" refused to divulge any specific plans to sue or not to sue. On the other hand, his beating about the bush certainly would lead you to assume that lawsuits are on the way.

FDIC spokesman David Barr said the regulator does not comment on possible future actions.

In the past, however, Barr said, the FDIC has filed suit against directors, officers, appraisers, law firms, accountants, or other groups it believed were grossly negligent and contributed to the failure of the bank.

?We sued quite a few different entities during that time,? he said.

Yes, they did, and I was in the thick of it. It appeared to many of us on the other side of the table from the FDIC (generally working through its sock puppet, the RTC) that the primary criteria used by the FDIC for deciding whether or not to file a lawsuit against directors, officers, accountants, appraisers, attorneys, janitors, pest exterminators, plant care technicians, and parking lot attendants who might, at one time or another after the end of the Civil War but prior to the arrival of Bill Clinton in the White House, been associated in some fashion with a failed savings and loan or bank were (A) is there an insurance policy we can go after and, if so, (B) whether the complaint or petition could survive a motion for sanctions under Rule 11. Often, settlements were hammered out or claims defeated by a clever tactic used by defense counsel: retaining the services of consulting and testifying experts who had actually worked or performed services for a bank or savings and loan and who analyzed the fact pattern against the way the banking business works in the real world, not in the mind of a bureaucrat or (shudder) a trial lawyer who, due to the broad conflict of interest rules of the FDIC, likely never had any practical experience with the banking transactions that were involved in the "gross negligence" claim.

Then again, some bankers, directors, and advisors actually committed misfeasance or, in some cases, malfeasance, and deserved to be sued. The problem is, the last time around, a lot of dolphin were swept up in the tuna nets along with the fish. I hope this time around, the FDIC isn't as trigger-happy. Bryan Cave partner Walt Moeling and Jones Day partner Chip MacDonald think that it won't be and that even if it is, it'll have a tougher time collecting on D&O policies.

Moeling said the FDIC pursues a case only if it believes it has a likelihood of success, and the legal costs would be less than any recovery.

But Moeling said he thinks the FDIC may have a tougher time recouping on D&O insurance claims in this economy.

?It?s hard to get around the fact we?re in an unprecedented economic downturn,? he said. ?The regulators, including the FDIC, were telling everyone to prepare for a 100-year flood, and the 500-year flood is the one we got.?

And the burden of proving gross negligence, attorneys said, is a high bar.

?Just because a bank fails doesn?t mean the executives or directors haven?t performed their duty,? said Chip MacDonald, a Jones Day banking attorney. ?Directors and executives are not supposed to be Superman.?

MacDonald said the most common claims under gross negligence for a failed bank include loans beyond the legal lending limit, insider transactions that are not done as arms-length deals, and criminal violations such as kickbacks or bribes for business.

Then we have Sheila Bair on May 18, 2009's Today show on NBC, who was interviewed by host Matt Lauer. When he asked her whether she ever thought that the economy would be this bad, she answered: ""No. Even I didn't think things would ever be this bad." If a prophet of Bair's stature couldn't foresee the damage (and she was being interviewed because she was a recipient of a "Profiles in Courage Award" due to her prescient warnings of subprime mortgage problems), how can mere mortals like bank directors be expected to foresee the future?

I'll also be curious as to what kind of intelligence comes creeping out of the regulatory woodwork once the FDIC starts going after directors and others associated with failed banks, and once old hands from the wars of the 1980s and 1990s, many of them still alive and kicking, step up to lead the defense. Were FDIC officials warned earlier in this decade by internal analyses of the danger lurking on the horizon? Were the bearers of this bad news and the news itself suppressed? Did anyone lose his or her job at any bank regulatory agency for being a Cassandra? I don't know for certain, but I have my suspicions. If the regulatory agencies, which have access to industry-wide information not available to the institutions they regulate, had advanced knowledge of a potential catastrophe and didn't raise the alarm because they didn't want to derail the mortgage lending and securitization engine that was running the country's economy at high speed off the rails, what effect might that evidence have on allegations by the FDIC that it was the "gross negligence" of bank directors and officers that was the primary cause of an institution's failure?

I'm merely asking the question. No need to get riled.

Obviously, we're in for some interesting discovery in the course of the upcoming litigation, aren't we?