Banking Law

Last May, reports were circulating from "unnamed sources" within the FDIC that lawsuits against former officers and directors of failed banks by the FDIC were mere weeks away. I suppose "weeks away" meant 40 to 50 weeks away, and we simply misunderstood. In June, FinCri Advisor reported that claims letters were being issued by the FDIC to officers and directors of failed banks to preserve the FDIC's rights under claims made D&O policies. Yesterday, the FinCri Advisor newsletter contained a story that civil demand letters have been issued by the FDIC, along with (or proceeding by) subpoenas seeking documentation and other evidence to use in evaluating and pursuing cases of "gross negligence" against officers and directors of failed banks, or, at least, against those officers and directors who are either covered by a policy that doesn't have a regulatory exclusion or otherwise have assets in amounts sufficient to justify pursuing claims against them. Sooner or later, those lawsuits are actually going to be filed.

For former directors and officers of failed banks, it hasn't looked this grim since the early 1990s.

With 140 bank failures last year -and 552 more banks on the FDIC problem list- "this is the very tip of the iceberg of the director liability issue," notes Memphis banking attorney Jeffrey Gerrish, who once headed the FDIC's failed bank litigation program. "I expect there will be a lot more activity soon."

[...]

"FDIC is trying to recover money for itself.  There has to be culpability and financial resources. I would predict about half these failures would see some director litigation."

That will mean a lot of potential defendants. Lawyers who've been through this drill before are gearing up to steer clients through treacherous territory, where FDIC hounds are in full attack mode, smelling blood and baying with gusto as they pursue their prey through a civil litigation system that has made this country what it is today: the most over-lawyered place on the planet.

One of those lawyers is a former law partner, and current consulting partner, of mine, Tom Bieging, who is quoted in the article as opining that the coming litigation "will rival the litigation that occurred in the 80s and 90s as a result of the many thrift failures." That's an unpleasant prospect for bank directors and officers. It's also a powerful blast on a dog whistle certain to prick up the ears of junkyard civil litigators near and far.

Tom does have some excellent practical tips for directors and officers of banks who may be caught up in this onrushing litigation deluge to prepare for it (in addition to stocking up on a case of Jack Daniels, a gross of Thai sticks, and an AR-15 modified to go "full auto"). His six bullet points alone make the article worth a read, although there's much more in there from a variety of sources to educate officers and directors while simultaneously causing them to wonder why it was that banking ever seemed like such a good career choice in the first place.