Failed Banks Lawsuits

The Federal Deposit Insurance Corporation (“FDIC”) is starting to bring lawsuits against officers and directors of bank failures.  There have been professional liability investigations in an effort to recoup over $2 billion in losses.

On November 1, 2010, the FDIC, as receiver of Heritage Community Bank in Glenwood, Illinois (“Heritage”), filed a case in federal district court in Illinois to recover losses of around $20 million.  Heritage had about $230 million in assets.  It was closed by Illinois banking regulators in February 2009. The complaint alleged that 11 Heritage’s former directors or officers were negligent and breached fiduciary duty by, failing to manage Heritage’s commercial real estate lending program. The 11 defendants include former Heritage board of directors and officers.

The Heritage defendants allegedly failed to protect Heritage from the lending risks, including deficient loan underwriting and monitoring, with Heritage financing projects without any analysis of economic viability, inadequate appraisals, excessive loan-to-value ratios, and improper evaluation on the creditworthiness of borrowers and guarantors to ensure they could repay loans. The FDIC alleged the director defendants breached fiduciary duties by approving dividends and incentive awards to senior management when they should have increased loan loss reserves and capital.

Another case, FDIC v. Cassetter, 184 F.3d 1040 (9th Cir. 1999), in federal court in California, the FDIC sued the directors of a national bank to recover losses by the failed bank based on negligence.

On July 2, 2010, the FDIC filed its lawsuit in its capacity as receiver of IndyMac Bank F.S.B (“IndyMac”), in federal district court in California seeking damages for alleged negligence and breach of fiduciary duties against 4 officers, including IndyMac’s Homebuilder Division former Chief Executive Officer, Chief Compliance Officer, and Chief Lending Officer.

Among the causes the complaint alleged, HBD’s defendants negligently approved loans where sources of repayment of the loan were not sufficient to retire the debt, in violation of applicable laws and regulations or IndyMac’s internal policies, with inadequate financial information on the creditworthiness of the borrower or guarantors, with inadequate appraisals.

Money for government bailouts of financial institutions, who took on too much risk, has been shouldered by consumers who have not seen any meaningful relief from the bailouts. Are failed banks finally getting what they deserve with FDIC lawsuits?  Banks at large have not cooperated when it comes to lending money or giving consumers a break with mortgages after receiving billions of dollars.  People in debt have been turning to the Bankruptcy Code as a bailout when not given a break by their creditors.

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