FDIC suits against directors and officers of failed financial institutions are on the rise

Most of the cases allege negligence and breach of fiduciary duty

Between January 2008 and March 2012, the Federal Deposit Insurance Corp. (FDIC) took over a staggering 427 banks. In the preceding five-year period, the agency shuttered only 10. The rate of bank failures dramatically peaked in 2010, and has been dropping off in each subsequent year. But the financial sector isn’t resting easy during this slow recovery. According to a new report issued by Cornerstone Research, 2013 has seen a precipitous increase in FDIC litigation against the directors and officers of failed financial institutions, even as new bank closures slow down and mortgage lending recovers. At press time, the agency had filed 19 suits in 2013 and was on pace to file 39 such lawsuits by year’s end, the greatest number in a single year since the financial crisis began.

Beyond a mere increase in the number of financial institutions targeted for litigation, there also has been a marked change in the FDIC’s approach to such cases. Emboldened by the $169 million verdict in the FDIC’s favor in litigation against three former officers of failed California bank IndyMac in December 2012, the agency is taking an aggressive position, going after the personal assets of directors and officers, and filing more lawsuits rather than settling claims.

According to the Cornerstone study, 417 former directors and officers have been named as defendants in FDIC suits since the financial crisis began. The most common executive targets of such suits were chief executive officers (named in 88 percent of cases), chief credit officers (named in 34 percent of cases) and chief loan officers (named in 18 percent of cases). The banks’ directors were defendants in 75 percent of cases.

The current onslaught of lawsuits corresponds with the 2010 peak in bank failures. Regulators work with the failed institutions to try to settle claims prior to filing suit. But there is typically a three-year statute of limitations on such claims. The FDIC has authorized litigation against the former leaders of approximately 100 failed banks, among 476 total failures since 2007. The deadline to file many of those suits is now approaching.

Adele Nicholas

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