The Federal Deposit Insurance Corporation filed a Complaint seeking $17 million from 17 former directors and officers of the Atlanta-based Silverton Bank.  FDIC v. Bryan, et al., was filed on August 21, 2011, in federal courts for the Northern District of Georgia. 

In an effort reminiscent of the 1980’s, the FDIC is again directing personal liability claims against the officers and directors of failed financial institutions.  In the Bryan case, in a Complaint 102 pages long, five separate Counts are being pursued against the director defendants.  The operative causes of action generally relate to allegations of corporate waste under Georgia law, negligence under Georgia and federal law (12 U.S.C. §1821(k)), and breaches of fiduciary duty under Georgia law.

Bryan is significant in revealing one current thrust of the FDIC’s approach to director liability. The FDIC’s Complaint is built around specific loan transactions in which the directors allegedly exercised loan approval type functions.  For example, respecting one past loan transaction it is alleged the directors violated Silverton’s loan-to-value ratio policy without adequate justification, at least based upon the regulator’s review of the Bank’s underwriting records.  Another example of misconduct cited in the Complaint was a loan approved by the directors based upon a perception of the guarantor’s credit worthiness, as opposed to a business analysis of the project itself.  In that instance the FDIC alleges the directors had failed to examine background records relating to the guarantor, which were referenced within the loan’s due diligence report and which may have revealed the guarantor’s unsuitability.

The FDIC, when it acts as receiver for a failed institution, may review in detail (and having the advantage of hindsight) the institution’s past loan decisions.  Although directors are often not professional bankers by training, all directors no matter their background owe recognized duties of care and loyalty in fulfilling their responsibilities.  This may perhaps present special issues for the directors of community banks, particularly if they become involved with loan approval or restructuring decisions.  Community bank directors are often invited to serve because of their association with important businesses in the community and the perception they possess valuable experience and business sensitivity.  While this is often true, that perception of expertise may result in a heightened level of legal scrutiny whenever the FDIC perceives the directors were involved with loan approval activities

The Bryan lawsuit sends notice, or perhaps a reminder notice, that bank directors may face personal liability by voting to approve loans or serving on a director loan committee.  Organizations representing bank directors, including the American Association of Board of Directors, have flagged this as a serious and troubling liability trend.  Recommendations are even being advanced that board members should specifically avoid involvement in the loan approval or modification process, unless the loans are those specifically requiring their involvement by law and regulation, like Regulation O and insider loans. 

Finally, in the Bryan lawsuit, Silverton’s insurance providers were named as additional co-defendants.  The FDIC seeks declaratory judgment relief under the insurance policies.  The Court is asked to rule on coverage questions relating to the defendant directors, the Regulatory Exclusion clause found within the policies, and whether the Insured versus Insured Exclusion precludes coverage for the FDIC’s asserted claim.