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Banks, the FDIC, and insurers are set to fight over whether the vague terms of director & officer liability insurance put insurers on the hook for FDIC claims against failed bank execs.
November 18 -
The FDIC has filed a lawsuit against former directors and executives at the failed Mutual Bank, claiming, among other things, that $250,000 was spent on a lavish wedding that management detailed as a bank function.
October 31 -
The FDIC charged executives of the failed Silverton Bank with squandering millions on planes, posh digs, and island retreats.
August 23
The Federal Deposit Insurance Corp. isn't the only party looking to recoup losses by collecting from directors and officers of failed banks. Other banks want their money back, too.
During the last decade, community banks often funded their balance sheets by taking out loans at the holding company level, then funneling the funds to the bank as equity. But with more than 400 bank failures since 2008, there have been several cases of lenders having to write off loans they made to other banks.
For instance, Sterling Bank in Spokane, Wash., wants the $6 million it loaned to Bank of Clark County back, plus another $1.14 million for increased regulatory fees stemming from the loss. Sterling, a unit of the $9.1 billion-asset Sterling Financial Corp. in Spokane, Wash., filed a lawsuit against the bank's directors and officers in Superior Court for the State of Washington in May 2009.
This summer, the FDIC intervened in the case, saying it wants $19 million from the same directors and officers. The FDIC's involvement moved the case to the U.S. District Court for the Eastern District of Washington. Now, the regulator and the lender are trying to recover what they can.
"It seems like a bit of a food fight between the FDIC and Sterling Bank. They are both claiming the same rights," says Chip MacDonald, a partner at Jones Day in Atlanta. "I would probably give the fight to the FDIC."
Sterling declined to comment. The FDIC does not comment on ongoing litigation. Lawyers for the directors and officers of Bank of Clark County, which was based in Vancouver, Wash., did not return calls for comment.
The FDIC and Sterling make the same assertions, claiming that Bank of Clark County's leaders breached their fiduciary responsibility and were negligent. Sterling's original complaint also accused the leaders of fraud.
MacDonald says Bank of Clark County had an interesting demise, since it happened so fast. Sterling didn't have much opportunity to pursue repayment when the bank began to default on the loan.
"The bank seemed to have just fallen off a cliff," says MacDonald, who publishes reports on every failed bank. "Sterling is aggrieved. They didn't have a chance to take appropriate action."
Several banking lawyers say the FDIC's claims and legal fees will likely leave Sterling empty handed, though they were intrigued by Sterling's approach. In its suit, the FDIC claims that, as receiver of a failed bank, it alone has the power to pursue claims against directors and officers. It also says that it only learned about the Sterling lawsuit last February, almost two years after the suit was filed.
Had Sterling succeeded in its claim before the FDIC discovered the suit, would it have to forfeit the funds? It's unclear, lawyers said.
"If it was a shareholder versus another shareholder, it really is the first to the pot of gold," said Steven Miller, a partner at Graham & Dunn. "As receiver, the FDIC does have priority over the bank's assets in a way that other claimants do not. Truthfully, I don't think Sterling would have been able to proceed without the FDIC getting involved."
Bank stock loans are made to the holding company, but the collateral is almost always the stock of the bank. Camden Fine, president of the Independent Community Bankers of America and a former bankers' bank president, said he typically required personal guarantees when making bank stock loans.
Sterling is suing as both a creditor and a shareholder because the company was in default on the loan and therefore it controlled the shares of the bank. Banking attorneys said that jumps several legal steps, such as foreclosure and taking ownership of the shares, but is still a novel concept.
Other lawyers say the case points to an important downfall to the FDIC's thorough, but slow approach to pursuing claims against directors: some other claimant might stake their claim while the FDIC is still gathering information.
The FDIC has three years to seek such claims. Of the banks that have failed since 2008, the FDIC Board has authorized suits against 37. Last month, the FDIC filed a lawsuit against the directors and officers of Westsound Bank in Bremerton, Wash., which failed in May 2009.
"What we know is that the FDIC has been authorized to investigate lots and lots of banks and they are doing a lot of investigations," says Miller, who represents some directors and officers of failed banks.
Robert Coleman of Coleman Law Firm who also represents directors and officers, says that while the FDIC is taking its time with lawsuits, Sterling's helped speed up the process. "Sterling forced the issue," he says. "The FDIC is always going to take the necessary steps to preserve its rights."
