Academic journal article ABA Banking Journal

FDIC Addresses Three D&O Lawsuit Issues

Academic journal article ABA Banking Journal

FDIC Addresses Three D&O Lawsuit Issues

Article excerpt

FDIC's professional liability lawsuits are the subject of much criticism lately. In particular, some observers accuse us of suing too many former officers and directors of failed banks.

They claim that we sue, as scapegoats, former directors who merely got caught up in a bank crisis caused by forces beyond their control. One critic recently charged that we rely on hindsight to sue on loans that went sour merely because of general economic conditions but that were sound at the time they were made.

The consequence of FDIC's claims, our critics contend, is that able men and women are discouraged from assuming bank directorships--just when the industry needs their talents the most.

The record should be set straight. Many of these charges are based more on misinformation than fact. Repeated often enough, this misinformation may well have the effect that FDIC's critics warn against--good people will be scared off unnecessarily from becoming bank directors or, in the case of professionals such as attorneys, from taking on bank clients.

There should be no doubt that FDIC will hold people accountable for their role in bank failures, and will pursue those whom we believe were lax, irresponsible, or dishonest. But in deciding when to sue, we make careful judgments in an effort to apply the law fairly and to ensure that we'll recover more than we'll spend.

What we hope to do here is to dispel three popular myths about our suits: (1) that we sue everyone; (2) that we sue all "deep pockets"; and (3) that our lawsuits for bad loans are based on "20-20 hindsight."

Myth No. 1:

"FDIC Sues Everyone"

One statistic alone should refute this. Since 1985, FDIC has sued at least one former director or officer of about 20% of the failed banks. This indicates, among other things, the distinctions we draw regarding an individual officer's or director's involvement in specific transactions and bank policies.

Consider these figures in the context of other statistics. At mid-year 1992, FDIC had case files on 673 failed institutions--538 banks and 135 failed thrifts that had been insured by the defunct Federal Savings and Loan Insurance Corp. Most potential claims in these files are still in the investigation stage, and many will be "closed out" without filing a lawsuit.

However, from these 673 case files, FDIC had 295 pending professional liability lawsuits. These suits included 185 claims against former directors and officers (claims against multiple officers or directors from the same organization are counted as one claim in this figure); 45 against attorneys; 18 against accountants; 30 against fidelity bond carriers and against appraisers and commodities and securities brokers; and the rest from a selection of other miscellaneous categories of cases.

Since 1985, FDIC has recovered over $1.2 billion in claims against directors, officers, and outside professionals. This figure includes recoveries from banks and old FSLIC thrifts (those failing before 1989), which FDIC inherited. Although clearly a significant sum, it is only a small fraction of the total losses suffered from bank and thrift failures during the 1980s.

Interestingly, the U.S. General Accounting Office, in recent Senate subcommittee testimony, stated that FDIC's performance in investigating and litigating D&O claims "could be better" that we should be filing more lawsuits. Perhaps the criticism coming at us from both sides--that we are too aggressive or not aggressive enough-- indicates that we are striking a pretty good balance in deciding when, and when not, to sue.

Myth No. 2: "FDIC Sues All Deep Pockets"

This charge is more accurately described as a half-truth than a myth. After concluding an investigation, FDIC sues directors and officers only if two tests are met: (1) the claim is sound on the merits (both factual and legal) and (2) the claim is likely to prove cost-effective. …

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