On August 22, the Federal Deposit Insurance Corporation (FDIC) sued fifteen former officers and directors of the failed Silverton Bank for:
- Corporate Waste (Georgia law) (Directors only)
- Negligence (Georgia law)
- Gross Negligence (Georgia law and Federal Deposit Insurance Corporation Act, 12 USC § 1821(k))
- Breach of Fiduciary Duty of Care (Georgia law)
Silverton Bank was chartered in 1986 as a Georgia “bankers’ bank,” and converted to a national bank in 2007. Silverton failed in May 2009 and now two years plus later the FDIC as receiver has brought suit for $71 million in federal court in Georgia against the directors and two officers (the Chief Lending Officer and the Chief Credit Officer) [and their insurance carriers]).
The FDIC-R’s complaint begins:
This case presents a text book example of officers and directors of a financial institution being asleep at the wheel and robotically voting for approval of transactions without exercising any business judgment in doing so.
Because this was a bankers' bank populated with directors who headed other banks, the complaint alleges that their specialized knowledge and expertise required them to do more, think harder, and more intelligently. Instead the board and management were “reckless and completely failed in discharging [their] duties.”
Silverton had expanded from funding for start-up banks and capital infusions into hospitality lending, then residential and commercial real estate acquisition and development loans. When the Office of the Comptroller of the Currency (OCC) approved conversion to a national bank charter in 2007, it issued Matters Requiring Attention (MRAs) to the bank, including a requirement for a “comprehensive plan to develop strong credit risk management processes” focusing especially on Commercial Real Estate (CRE) lending in view of Silverton’s high level of such loans. Silverton had sought the national bank charter as part of its plan to expand nationwide, and the OCC called attention to the risks of the current “adverse real estate market” in the context of this expansion.
Silverton’s plan from the mid-2000s onward was to become the nation’s largest bankers' bank, and Silverton grew from $1.7 billion in assets in 2005 to $3 billion by 2008.
The complaint alleges that out of territory LPOs were “push[ed]” through employee incentives into high-risk CRE and acquisition, development, and construction (ADC) loans. In the first quarter of 2009 total assets increased 32% to a level of $4.2 billion. Brokered deposits grew to $1.4 billion. CRE loans reached 1,279% of the bank’s capital (the 300% limit in OCC 2006-46 Bulletin was “waived”).
It is also alleged that the board and management “ignored” the declining economy. In 2008 the OCC sent the board a letter asking them to “reevaluate strategic planning,” and the OCC report of June 2008 downgraded the bank to a Camels 4, criticizing management and board oversight of the lending area and their planning, assessment and management of portfolio concentrations. Over half of the loans reviewed by the OCC had underwriting and credit administration problems. The OCC’s February 2009 exam report downgraded Silverton to a Camels 5.
The FDIC-R asserts that the bank “consistently made loans without complying with the loan policies and without proper underwriting or credit administration.” Loans were made to borrowers “with no real ability to secure the loan, with insufficient equity in the project, and/or insufficient liquidity.”
Alleged Corporate Waste: It did not help when in 2006 and 2007 Silverton bought a Falcon 20 jet and a King Air (from a director) (losing $4,850,000 on the deals), airplane hangars (loss of $3,000,000), and a “large and lavish new office building" (the Medici) (loss of $2,470,000). The Bank employed eight private pilots and the Bank held a lavish directors’ meeting each year at Sea Island (cost - $4,000,000 from 2002-2009).
The complaint gives details of 15 loans approved by the defendants “in blatant violation of the duties owed by them to the bank.” The litany of policy violations and negligence is what you would expect: ignoring negative information, inadequate financial documentation, lack of audited financials, poor underwriting, failure to take deteriorating market conditions into account, improper supervision, and conflict of interest.
In the claim for relief, the FDIC-R asserts that the defendant directors owed a duty under Georgia law not to waste the corporation’s assets. Second, under Georgia law the directors and officers are liable for damages caused by their negligence:
- fail[ure] to investigate material factsf
- fail[ure] to use business judgment
- closing [their] eyes to the danger
- decision[s] were not good faith business decisions made in an informed and deliberate manner
Third, the directors are liable for gross negligence under Section 1821(k) of the Financial Institutions Reform, Recovery and Enforcement Act, which incorporates the state law of gross negligence. Under Georgia law this means “failure to exercise even a slight degree of care or lack of the diligence that even careless men are accustomed to exercise.” The defendants here were “reckless” and their decisions were not “good faith business decisions made in an informed and deliberate manner.”
Finally, the FDIC-R’s complaint alleges breach of the Fiduciary Duties of Care and Loyalty under Georgia law against the officers and defendants.
As to the insurance carriers, the complaint seeks a declaratory judgment that the Regulatory and Insured vs. Insured Exclusions do not apply. As to the former, the binder referred to the exclusion, the policy as issued did not, and on the date of seizure the carrier attempted to remedy the error. As to the latter, the carrier is asserting that the Insured vs. Insured exclusion applies; while the FDIC-R contends that it only has application to “collusive lawsuits between insureds.”
Directors and officers should exercise care, including:
- Carefully examine their D&O coverages and exclusions, and monitor coverage on an ongoing basis.
- Insist that no loan be made without rigorous adherence to the institution’s well-crafted loan policies and procedures.
- Consider operating with a director loan committee; if that is necessary, document with an officer certification that each approved loan conforms to the institution’s loan policies and procedures.
- Avoid any expenditures that would be considered extravagant.