WASHINGTON A key deadline in many states for the Federal Deposit Insurance Corp. to sue failed-bank directors and officers has come and gone, and yet the lawsuits keep coming.
Most observers believe FDIC suits peaked in 2013 when a total of 40 were filed since 2010 saw the height of failures and the agency usually has three years from a bank closure to take action. Yet six lawsuits were already filed in just the first six weeks of 2014, including five in January, which are double the filings in the fourth quarter of 2013. (The FDIC has filed a total of 90 cases since 2010.)
The sustained pace appears due to several factors. Though failures started to decline after 2010, suits stemming from 2011 failures and beyond are still anticipated. The FDIC also may deviate from the three-year timeframe when either a state allows a longer statute of limitations or the agency has special agreements in place with former officers and directors to extend the deadline.
"January was a banner month in terms of the number of filings. We haven't seen that many filings in quite some time. Some of those are older closings, which was surprising," said Jonathan Cohen, the head of litigation at Joseph & Cohen in San Francisco. "We're going to continue to see cases brought. Whether or not they circle back and grab some of these older banks is still an unknown."
Two of the suits filed this year came more than three years after the banks involved had failed. Both institutions Tamalpais Bank and First Regional Bank were seized in 2010 in California, where certain claims can be brought more than three years after a closure.
"There are lots of ways the FDIC can manage to take a potentially long time before filing an action," Cohen said.
In addition to states allowing longer statutes of limitations, another factor are so-called "tolling agreements," which the agency enters into with directors and officers to allow more time for settlement talks to avoid court action.
A recent Kansas decision challenged the validity of such agreements, but observers said existing pacts may mean the FDIC has not fully determined whether to sue in some cases related to older failures. A comprehensive report on FDIC lawsuit trends released in February by Cornerstone Research said 14 of the lawsuits filed last year came more than three years after a failure, and "presumably" could have been pushed back because of tolling agreements.
"If you compare the number of bank closings in 2011 to those in 2010, the result is that there are fewer banks that are potentially subject to D&O claims. However, some of the lawsuits that would otherwise have been filed in 2013 were delayed pre-litigation by tolling agreements to allow for settlement discussions," said Mary Gill, a partner at Alston & Bird LLP who represents bank officers and directors in FDIC suits. "As a result, there may be suits relating to 2010 bank closings that have yet to be filed, if a settlement is not reached."
Still, both current and former officials at the FDIC say the pace of filings is expected to slow eventually, even though the legal battles over failures could be fought for quite some time. Besides claims settled in or out of court, only one suit has actually produced a jury trial outcome.
"We have hit the peak or are hitting it right now. The numbers will start coming down," said Richard J. Osterman Jr., the FDIC's acting general counsel. He added that there was a similar pattern following the savings and loan crisis in the eighties and nineties when lawsuits peaked around three years after the height of closures.
Osterman said the agency has been cautious about entering in new tolling agreements following a July decision from the U.S. District Court in Kansas. The ruling dismissed National Credit Union Administration claims against Barclays Capital for credit union losses in mortgage-backed securities, arguing that a statute of limitations had lapsed despite a tolling agreement.
"That is a district court decision that we don't agree with and it is on appeal. But the fact that that decision is out there means that we have to look at the risks of entering in to tolling agreements," Osterman said. "So we would not be as likely to do so in light of that decision."
Michael Krimminger, who was formerly the FDIC's top lawyer before entering private practice, said the deadlines for the agency to file suit are necessary to support the legal strength of claims. He noted that the filings of new cases "should begin to tail off consistent with the fairly steep decline in the number of failures that occurred."
"There are reasons for a statute of limitations and other constraints on when people file lawsuits," Krimminger said. "The evidence becomes stale, and people's memories fade even with the best intentions. It becomes a more difficult case for the FDIC to win and a more difficult case for former directors and officers to defend.
"I had pushed as general counsel for investigations to move quickly because insurance money will be dissipated, and a case is always harder to win with a longer lapse between the facts occurring and the time you bring the case."
Yet Osterman said the process cannot be rushed.
"We wanted to move carefully and methodically in reviewing the circumstances surrounding the failure of the institutions," he said. "This ensures that actions are brought only where merited, not just because an institution has been closed."
According to the Cornerstone study, of the 140 banks seized in 2009, the FDIC filed a lawsuit or settled claims out of court in cases related to 46% of the failures. That rate fell to 34% for cases resulting from failures in 2010, when 157 banks failed, the study said. Meanwhile, the 40 lawsuits in 2013 were 54% more than those filed in 2012, according to the paper.
Some observers pointed out that, even though failures peaked in 2010, the still-elevated failure numbers later in the cycle means the agency has a pile of potential claims through which to work. Ninety-two banks failed in 2011.
"The pace all along has been uneven so it's hard to tell," said Kevin LaCroix, an executive vice president at RT ProExec, and author of the D&O Diary blog. "There have been times prior to now when there were lulls as long as three months. From the outside it's hard to discern. Because banks continued to close throughout 2013, I think we have to assume there is a pretty good possibility that they will continue to have lawsuit filings for some time to come."
Yet some former managers of banks that were closed earlier in the failure wave may be breathing a sigh of relief.
"I have nervous clients waiting and the best news for them is when the three years passes and we don't hear anything," said Rosemary Stewart, a partner at Hollingsworth LLP.