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Goliath vs. David:
Defending the FDIC’s
Aggressive Claims Against
Counsel to Failed Banks
© 2014 Goldberg Segalla LLP
Overview: Federal Deposit Insurance
Corporation (FDIC)
• Preserves and promotes public confidence in the U.S.
financial system by insuring deposits in banks and thrift
institutions for at least $250,000
• An independent agency of the federal government,
created in 1933 in response to the thousands of bank
failures that occurred in the 1920s and early 1930s
• Since the start of FDIC insurance on January 1, 1934, no
depositor has lost a single cent of insured funds as a
result of a failure.
© 2014 Goldberg Segalla LLP
FDIC Overview (cont.)
• Mission: “... to maintain stability and public
confidence in the nation's financial system by:
– insuring deposits;
– examining and supervising financial
institutions for safety and soundness and
consumer protection; and
– managing receiverships.
© 2014 Goldberg Segalla LLP
Bank and Thrift Failures
2007: 3
2008: 25
2009: 140
2010: 157
2011: 92
2012: 51
465 Institutions Failed during 2008-2012
© 2014 Goldberg Segalla LLP
FDIC as Receiver for Failed Banks
• Steps into shoes of failed institutions
– FDIC succeeds to all rights, titles, powers, privileges
and assets of the failed institution. 12 U.S.C. §
1821(d)(2)(A)(i)
– Controls all operations and disposition of assets
– Enforces and collects outstanding obligations
• Has the duty to pursue viable claims of the failed banks
against those who may have caused the losses.
© 2014 Goldberg Segalla LLP
• FDIC may sue professionals who played a role in the
failure of the institution in order to maximize recoveries,
including:
– Officers and Directors
– Attorneys
– Accountants, appraisers, brokers
• Also, direct claims against insurance carriers such as
fidelity bond carriers and title insurance companies.
© 2014 Goldberg Segalla LLP
FDIC Professional Liability Unit
• Purposes of Professional Liability Program:
– Maintain public trust, ensure accountability
– Promote good corporate governance and discipline
– Maximize asset recovery for Receiverships
• FDIC investigates the causes of every failure
• Pursues meritorious and cost-effective claims against
those responsible for failures
– Board approval required before bringing claims
– Ongoing case review by FDIC management
© 2014 Goldberg Segalla LLP
Professional Liability Claims (PLCs)
• For the 465 institutions that failed during 2008
through 2012, the FDIC investigated 5,641
potential PLCs.
• As of 9/30/13, the FDIC completed 430 PLCs
against individuals associated with 90
institutions (19% of 465).
© 2014 Goldberg Segalla LLP
PLCs Pertaining to the 465 Failed Institutions (2008-2012)
Claim Type
Closed Out by
FDIC and Not
Pursued
Pending a
Decision by
FDIC to Close
or Pursue
Pending
Results from
Litigation or
Negotiation
Completed
(Judgment,
Settlement, or
Dismissed)
D&O Liability
186
(38.5%)
135
(28.0%)
102
(21.1%)
60
(12.4%)
Fidelity Bond
376
(76.6%)
79
(16.1%)
19
(3.9%)
17
(3.5%)
381
(80.9%)
411
(87.6%)
404
(86.7%)
437
(93.6%)
438
(93.8%)
438
(94.2%)
422
(46.4%)
392
(84.3%)
82
(17.4%)
40
(8.5%)
50
(10.7%)
29
(6.2%)
29
(6.2%)
27
(5.8%)
42
(4.6%)
24
(5.2%)
5
(1.1%)
10
(2.1%)
4
(0.9%)
1
(0.2%)
0
(0.0%)
0
(0.0%)
117
(12.9%)
47
(10.1%)
3
(0.6%)
8
(1.7%)
8
(1.7%)
0
(0.0%)
0
(0.0%)
0
(0.0%)
329
(36.2%)
2
(0.4%)
451
(92.6%)
33
(6.8%)
0
(0.0%)
3
(0.6%)
4,336
(76.9%)
570
(10.1%)
305
(5.4%)
430*
(7.6%)
Accountants’ Liability
Attorney Malpractice
Appraiser Malpractice
Insurance
Commodity Broker
Issuer
Residential Mortgage
Malpractice and Fraud
Securities and
Residential Mortgage
Backed Securities
Other Miscellaneous
Claims
Total
5,641 PLCs
© 2014 Goldberg Segalla LLP
PLC Recoveries/Expenses
FDIC PLC Recoveries and Expenses: 2008-2013 Dollars in
Millions
Year
Recoveries
Expenses*
Recoveries to
Expenses
2008
2009
$31.3
$47.1
$9.7
$52.9
3.23 to 1
0.89 to 1
2010
$79.4
$160.8
0.49 to 1
2011
$231.9
$139.5
1.66 to 1
2012
2013
$337.3
$674.2
$110.1
$144.6
3.06 to 1
4.66 to 1
$1,401.2
$617.6
Total
2.27 to 1
Source: FDIC’s PLU.
* Expenses include all costs associated with investigating, closing,
and pursuing PLCs.
© 2014 Goldberg Segalla LLP
FDIC Professional Liability Unit – PreSuit
• Before seeking recoveries, FDIC conducts a thorough
investigation into the causes of the losses.
• Most investigations are completed within 18 months
from the time the institution is closed.
• Prior to filing the claim, PLU staff will attempt to settle
with the responsible parties.
• If a settlement cannot be reached, a complaint will be
filed, typically in federal court.
© 2014 Goldberg Segalla LLP
Statute of Limitations
• The Financial Institutions Reform, Recovery, and
Enforcement Act of 1989 (FIRREA) re-starts the
limitations period to permit the FDIC to bring claims
viable at failure
– Torts: 3 years from failure
– Contracts: 6 years from failure
– State law applies if it provides a longer period
© 2014 Goldberg Segalla LLP
Nature of Claims
• Mistakes to the financial detriment of the Bank
– Closings
• Failure to secure lien or priority of lien
• Failure to close as instructed
– Straw borrowers/HUD-1s/Fees
• Incorrect advice to Bank
• Conflict of interest
• Fraud or intentional misconduct
© 2014 Goldberg Segalla LLP
Nature of Claims (cont.)
• Aiding and abetting directors and officers in the
violation of bank policies and federal regulations
• Failure to advise the bank client about violations
of regulations and statutes, usually concerning
loans, or failing to sufficiently oversee a
particular transaction
© 2014 Goldberg Segalla LLP
Legal Causes of Action
• Legal malpractice
– can be based on:
• Negligence
• Breach of fiduciary duty
• Breach of contract
• Aiding and abetting
– violations of regulations or breaches of fiduciary
duties
© 2014 Goldberg Segalla LLP
Causes of Action (cont.)
• Fraud
– Rare
– Claims may provide attorney’s legal
malpractice carrier with a defense based
upon dishonestly exclusion
© 2014 Goldberg Segalla LLP
Causes of Action (cont.)
• FDIC may bring claims against an entire law firm
on theories of vicarious liability or failure to
monitor the lawyer’s compliance with
professional standards.
© 2014 Goldberg Segalla LLP
Case Example: FDIC v. Mahajan
(N.D. Ill. 10/25/11)
• FDIC, as receiver for Mutual Bank, sued 10 members of the
Board of Directors of bank and 2 former officers of the bank,
plus the Bank's lawyer and his law firm
• Bank failed after $115 million loss, allegedly due to risky
construction and commercial real estate loans and improper
expenditure of corporate assets for personal use
• Claims against attorney and law firm:
– (1) malpractice
– (2) breach of fiduciary duty, and
– (3) aiding and abetting
© 2014 Goldberg Segalla LLP
FDIC v. Mahajan (cont.)
• Attorney and law firm:
–
–
–
–
represented the bank in loan transactions;
served as the Board’s general counsel;
counseled the bank regarding regulatory compliance; and
actively participated in discussions with regulators with
awareness of the Board’s conduct and the risk it posed to the
bank.
• Case still pending
• 2014 U.S. Dist. LEXIS 92805 (7/9/14): bank secretary, who
refused to answer any questions at her deposition other than
her name, address, and educational background, properly
invoked the 5th Amendment (FDIC’s motion to compel
denied).
© 2014 Goldberg Segalla LLP
Additional Cases
• FDIC v. Andersen, Tate & Carr, PC, Case No. 1:10-CV3383 (N.D. Ga. 10/19/10)
– Law firm allegedly failed to get a release on 272 acres from
prior lienholder (Colonial Bank) before wiring $10 million payoff
• FDIC v. Jampol, Schleicher, Jacobs & Papadakis, LLP,
Case No. 1:10-CV-3383 (N.D. Ga. 10/19/10)
– Bank lawyers allegedly failed to properly prepare a security
deed in the name of the owner of the property
© 2014 Goldberg Segalla LLP
Claims against Closing Attorneys
• December 2012: over 30 lawsuits filed by FDIC against
outside bank professionals, including attorneys.
• Examples:
– FDIC v. Sarcona, No. 12-cv-05965 (E.D.N.Y. 12/4/12) (closing
attorneys allegedly failed to advise the bank of material
information concerning a closing and properly collect/disburse
closing funds)
– FDIC v. Guerrero, No. 1:12-cv24257 (S.D. Fla. 12/3/12) (among
other things, attorney allegedly permitted borrower not to pay
the full amount of required down payment and
misrepresented the true sale price)
© 2014 Goldberg Segalla LLP
Defenses
• U.S. Supreme Court:
“any defense good against the original party is good
against the receiver.” O'Melveny & Myers v. FDIC,
512 U.S. 79 (1994).
• Statute of limitations
• Lack of causation
• Comparative fault
• Failure to mitigate
– Before the bank closes
– FDIC’s actions
© 2014 Goldberg Segalla LLP
Questions?
Thank you
© 2014 Goldberg Segalla LLP