Lawsuits Against Bank Directors and Officers Trending Down

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By Chris Bruce

Aug. 10 — Lawsuits against bank directors and officers, especially those related to bank failures, are trending downward as the financial crisis recedes into the past.

The Federal Deposit Insurance Corporation, which steps into the shoes of failed institutions when it sues directors and officers, had its most prolific recent year in 2013 by filing 40 so-called D&O lawsuits, but so far in 2016 has filed just one.

That doesn't mean bank officers and directors are in the clear. Senior leadership at banks may face new kinds of liability in the future related to cyber security and risks posed by third-party relationships.

In the near term, though, D&O litigation probably will continue to decline because of statutes of limitation, fewer bank failures, and smaller losses by banks that do fail, Thomas P. Vartanian, a partner with Dechert in Washington told Bloomberg BNA.

Based on historical patterns, 2016 could see only a handful of new cases filed, Vartanian said.

“I think it is pretty much math at this point, assuming that there are not exceptions to the general rules,” he said.

Ronald R. Glancz, a partner with Venable in Washington agreed, saying a continued drop-off in new suits is likely, even after accounting for agreements that give regulators more time to file their claims.

“The number of newly-filed FDIC D&O suits is declining, and I do not expect too many more, even where the parties have signed tolling agreements,” Glancz told Bloomberg BNA Aug. 10.

FDIC Lawsuits Feared

Failed-bank litigation isn't the whole story. Directors and officers face lawsuits by private plaintiffs, and may be subject to court action by other state and federal government bodies.

But lawsuits by the FDIC, which are for many the most feared because of the government's vast resources and the severe penalties that can result, are trailing off in part because of a three-year statute of limitations that generally governs the FDIC's claims.

That makes the past three years especially important. According to Vartanian, the main focus is on institutions that failed in 2013.

Most of those, he said, were smaller community banks. That lessens the risk of lawsuits by itself, he said, because smaller banks generally mean smaller losses, and because board members of smaller banks may have less personal wealth for the FDIC to pursue.

Some Cases Settle

Meanwhile, settlements could trim the number of active suits. According to FDIC data, the agency has settled D&O cases involving eight institutions so far this year.

The most recent came at the end of July, when a federal judge in Illinois dismissed a case after the FDIC reached a $26.5 million settlement with James J. Giancola and other former directors of Midwest Bank and Trust Co., of Elmwood Park, Ill., which closed in 2010 ( Fed. Dep. Ins. Corp. v. Giancola, N.D. Ill., No. 13-cv-03230, case dismissed 7/27/16 ).

The FDIC's 2013 complaint in the U.S. District Court for the Northern District of Illinois, which originally sought more than $128 million in damages, said the defendants “exhibited an extreme departure from the standard of care” by agreeing to loan $100 million to six “uncreditworthy” borrowers and affiliated parties.

According to the settlement agreement, the settling defendants denied liability.

Hold the Cheerleading

Any cheerleading about fewer FDIC lawsuits may be short-lived. Even if failed-bank litigation is winding down, directors and officers face other actions, according to Vartanian.

“On the enforcement side, we’re seeing a renewed focus against directors and officers as the overseers of financial institutions,” he said. “Regulators are being very direct and very candid in holding them accountable in the wake of the financial crisis. It really puts the spotlight on directors in a way that gets their attention.”

Glancz said some enforcement actions also may give regulators longer statutes of limitations. “The agencies can seek prohibition orders and civil money penalties, so directors are still not out of the woods,” Glancz said.

And new risks are ahead, he added, citing those related to cyber security and risks posed by third-party relationships.

“Board oversight and direction continues to be critical with respect to risk management, information technology and cybersecurity,” he said. “Boards need to anticipate regulatory initiatives and get out ahead of them. Banks that engage in significant lending activities through third-parties should anticipate increased supervision, including 12-month examination cycles.”

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