Directors and officers of failed banks should think twice before agreeing to settle claims brought by the Federal Deposit Insurance Corp. in its capacity as receiver. Those who do settle are increasingly being confronted with a lifetime ban from the banking industry.

The FDIC's administrative actions to ban bank leaders from the industry are often a surprise to bankers who thought they were finished with the FDIC after settling with the FDIC's receivership arm. Furthermore, they must face these removal actions — and possible subsequent civil penalties — without insurance coverage to assist them with hefty legal fees to contest this action. Any attorneys' fees coverage under the director and officer policies of the financial institutions that failed is extinguished when they sign the settlement agreement.

The FDIC has the power to order "the removal of an institution-affiliated party (director, officer, employee, controlling stockholder, independent contractor, etc.) from office" under the Federal Deposit Insurance Act. Removal and prohibition orders are usually brought by regulators against individuals who have committed "violations of law or regulations, unsafe or unsound banking practices, and/or breach of fiduciary duty."

An individual issued a removal and prohibition order "is banned from participating in the conduct of the affairs of any insured depository institution." The FDIC's receivership arm will not include any release language in its settlement of the director and officer case relating to administrative actions, thus leaving the settling bankers to wonder what might come next.

The lifetime ban prohibits officers and directors from doing anything related to banking — working at a bank, taking ownership in a bank or being a consultant. Essentially, other than being a bank customer, an individual who is subject to this action has ended his or her career in the industry. Although this fate may be more agreeable to bankers nearing retirement and those who want to leave the industry, others who are younger and want to remain in the field most often do not think this is what they agreed to under the terms of their FDIC settlement.

The FDIC has processed 462 removal and prohibition orders since January 2010. These actions are occurring because many of the FDIC receivership cases have now been settled and the FDIC's enforcement arm has taken action against certain of the settling individuals. During the receivership case, the FDIC often makes no mention of the bankers' behavior as fraudulent, since fraud is excluded from coverage in D&O policies and the insurance carrier would likely use that fraud claim as a basis to deny coverage of the FDIC's claims.

For the same reason, enforcement actions seeking to ban bankers from the industry are not occurring until the receivership phase is complete. Taking such an action while the FDIC's receiver arm has not completed its case would prompt a declaratory action by the D&O carrier seeking to deny coverage.

In addition, the FDIC wants to ensure that the receivership arm recovers as much money as possible. That would not happen if the insurance policy were depleted by administrative actions. This is a coordinated effort on the FDIC's part. 

Given the possibility of a lifetime ban, bankers facing an FDIC receivership action may want to prudently examine whether they want to settle. It may be worthwhile for bankers to retain legal counsel familiar with both the FDIC's receivership claims and the FDIC's enforcement procedures in order to defend against the pending claims while at the same time preparing to handle any further administrative action. One way for bankers to potentially avoid a removal action is to be vindicated in a prior civil action by a jury. Settling the civil action does not allow for this result.

More than nine out of 10 disciplinary actions are settled by bankers who choose not to fight. However, most of the bankers are likely unaware of the possibility of a second act, causing them to give up and not contest the removal action.

Bankers would do well to prepare to face all possible claims, instead of just the one problem they are currently addressing. The rest of their careers could be at stake.

Mark D. Belongia is a partner with Duane Morris LLP in Chicago. He practices in the areas of business and commercial litigation.

This article is prepared and published for informational purposes only and should not be construed as legal advice. The views expressed in this article are those of the author and do not necessarily reflect the views of the author's law firm or its individual partners.