Trade group exec protests measure to Riegle.

David H. Baris, executive director of the American Association of Bank Directors, wrote to Senate Banking Committee Chairman Donald W. Riegle, D-Mich., last month to protest a Senate measure that would give agencies more time to sue officers and directors of banks and thrifts. Excerpts follow:

The provision, in Title II of the Senate version, would allow the FDIC and the RTC to sue directors of failed banks and savings institutions, "regardless of whether the claim may have been barred under any otherwise applicable statute of limiations at the date of such appointment, unless such claim was barred more than five years before the date of such appointment."

The Senate approved this language by voice vote as a floor amendment introduced by Sen. [Howard M.] Metzenbaum [D-Ohio], without any hearings or debate.

The legislation represents a radical departure from traditional legislative practice and constitutional norms.

Assuming that the state statute of limitations is three years, the government could sue an outside director for a loan approved eight years before the institution was closed. The government has at least three additional years to file suit, or 11 years from the date of the loan.

Some state statutes are much longer (e.g., Louisiana, 10 years), and some state statues do not begin to run until the loss or injury occurs or is known. In those states, the government will be able to sue on the basis of board actions taken 15 to 20 years ago or even longer.

Reversals of Cases Possible

With its retroactive effect, the legislation could reverse cases already decided by the courts, and would revive claims that have expired. As such, we believe the provision is constitutionally infirm and could be successfully challenged if enacted.

The provision also offends the principles of federalism by overriding the judgments of the 50 state legislatures as to the reasonable period in which to sue a person under state law.

Statutes of limitation are designed to protect defendants and courts from the difficulties of establishing the truth after many years have passed during which memories fade, persons die, and records do not survive.

This problem is exacerbated by the fact that many of the cases filed by the FDIC and the RTC against former directors of failed banks and savings institutions have been based primarily on a handful of loans approved by the board of directors or management many years prior to the suit.

Approval of loans is a routine, daily activity in a financial institution. Smaller institutions commonly approve hundreds of loans every year, and larger institutions approve thousands of loans yearly. Memories of the details on such loans fade quickly.

Sen. Metzenbaum, the main proponent of this legislation, suggests that these lawsuits are being filed against those who have "ripped off" the American taxpayer and cites an example of a former president of a failed savings institution whose institution allegedly purchased airplanes and expensive automobiles for his personal use.

Basis for Lawsuits

But, as reflected in AABD's study of RTC suits filed in 1992 against directors of failed savings institutions, the overwhelming number of lawsuits filed by the RTC has nothing to do with self-dealing, conflicts of interest, or fraud; rather, the suits are based on challenges to the directors' exercise of business judgment in approving ... a handful of loans years ago, in which the directors had no pecuniary interest.

This is not the first visit by the FDIC and the RTC to Capitol Hill to obtain assistance from the U.S. Congress to salvage its D&O suits, and it will not be their last. We believe that the D&O suit program may be in trouble.

According to Vic Simon of Bank Bailout Litigation News, of the cases going to trial, the RTC has won 14 and lost 29 professional liability cases and, through the end of 1993, the RTC has collected $98 million on D&O claims, but has spent at least $185 million, which does not include costs of using inhouse personnel and Department of Justice attorneys.

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