Leaders of failed banks could face lawsuits

Officials with Silverton Bank and Georgian Bank, the first and third largest banks to fail in state history, respectively, recently received demand letters from the Federal Deposit Insurance Corp., the people with direct knowledge told the AJC.

Thirty-nine banks have failed in Georgia since August 2008, more than in any other state.

The regulator is pursuing civil actions to help recoup its Deposit Insurance Fund, the safety net that protects consumers. The fund -- paid for by banks, not depositors -- is in the red by $20 billion.

The fund has been strained from backstopping failed lenders. Ninety-six banks have failed nationwide this year, and 2010 is on pace to surpass last year’s total of 140 banks.

During the last wave of bank failures, the Savings & Loan crisis of the late 1980s and early 1990s, the FDIC recouped $2.5 billion from professional liability lawsuits. About half of that came from claims against bank insurance policies.

According to a report in American Banker, the FDIC has sent hundreds of the notices to top officials of failed banks nationwide.

The notices do not necessarily mean a case will be filed, but they could pave the way for insurance claims, as well as individual lawsuits against directors and officers who might have had a role in a bank failure.

“The FDIC wants to send a message to the industry,” said Tony Plath, banking professor at the University of North Carolina-Charlotte. “You will see far more of these over next few years.”

FDIC officials would not comment on specific bank failures, but acknowledged the agency is asserting its right to make claims against banks’ corporate coverage, commonly known as D&O insurance.

“Complaints or lawsuits are only filed when we can demonstrate individual breaches of duty by those named,” said David Barr, an FDIC spokesman. “There will be far fewer lawsuits filed than demand letters.”

A D&O policy protects directors and officers from liability. When a bank fails, the FDIC, as receiver of the shattered company, retains the right to make an insurance claim. It can also separately sue bank officials in federal court for gross negligence.

The demand letters serve as a placeholder for future actions. Most policies expire within a year. The statute of limitations for lawsuits is three years.

Based on the amount of coverage and certain policy exemptions — some policies exclude claims by regulators — the FDIC might not levy a claim at all.

But it is more likely the regulator will pursue claims against banks with healthy insurance policies, as well as file lawsuits against individuals in instances of gross negligence. That is, if they have assets remaining to pursue.

“They’re going to make sure it’s worth their while to go after it,” said Tom Powell, who heads the banking practice at Troutman Sanders.

The demand letters typically list alleged wrongdoing by the named defendants and demand payment for a specific amount. If the FDIC pursues the case beyond the insurance policy, directors and officers may face litigation or settle out of court.

“There are many strong defenses that can and will be mounted,” Powell said. “But nonetheless, this is how it starts, and it’s too difficult to predict how it will end.”

On July 2, the FDIC launched a $300 million lawsuit versus a division of IndyMac Bank, alleging four executives granted loans to developers who were unlikely to repay.

The government is also starting to ramp up criminal investigations. In Georgia, a former Omni National Bank executive pleaded guilty to bank fraud charges.

Two former Integrity Bank executives also pleaded guilty in connection to a case involving fraudulent loans made to a developer.