FDIC Should Stop Interfering with Bank Directors’ Rights to Defend Themselves
AABD has requested FDIC Chairman Bair to permit bank directors to copy or have access to bank documents they need to defend themselves against suits by the FDIC as receiver of their institutions. The FDIC recently asserted in a lawsuit against a law firm that had been retained by the board of directors of a bank that ultimately failed that the directors had no right to such documents and demanded that the firm return all fees paid by the bank to assist the board members in preparing for a possible suit against them.
On January 25, 2011, Michael Krimminger, FDIC’s General Counsel, responded.
LETTER TO THE HONORABLE SHEILA C. BAIR, FDIC
December 22, 2010
The Honorable Sheila C. Bair
Federal Deposit Insurance Corporation
550 17th Street, N.W.
Washington, DC 20429-9990
Dear Chairman Bair:
We are writing in regard to the FDIC’s recently expressed policy that bank directors have no right to possess bank documents relevant to their defense of a potential suit by the FDIC as receiver. The FDIC has aggressively sought to enforce this previously undisclosed policy by filing a lawsuit against lawyers representing bank directors in the defense of proceedings by the FDIC aimed at recovering losses from their clients. This policy is shortsighted and counterproductive. It will deter qualified persons from accepting positions as bank directors and will motivate currently serving directors to resign. The American Association of Bank Directors is receiving calls from all over the U.S. from bank directors expressing concerns about this issue. Your agency should immediately clarify that the FDIC supports the right of bank directors to the bank records they need to defend themselves against suits by the FDIC and others.
Founded in 1989, the non-profit American Association of Bank Directors (“AABD”) is the only trade group in the United States solely devoted to bank directors and their information, education, and advocacy needs. AABD recently established the Bank Director Liability Resource Center, which acts as a clearinghouse for developments in bank director liability, including lawsuits by FDIC against directors of failed banks and savings institutions. The Institute for Bank Director Education was established in 1993 as the educational arm of AABD. Its purpose is to act as a clearinghouse for education programs designed for bank and savings institution directors that support the nationally recognized Director Certification Program.
FDIC Lawsuits Create the Need for Board Members to Have Access to the Records of Failed Banks.
When a bank fails, the FDIC, as receiver, takes possession of all bank records. Unless directors have maintained, off bank premises, records of the decisions they made prior to the bank’s failure—such as Board and committee minutes, records of loans or policies and procedures approved by the board, examination reports, and outside expert reports such as audit reports and outside loan reports—they are effectively prevented from defending the actions they took as directors. As you are aware, bank directors have a fiduciary obligation and are held to a high standard of care relating to their obligation to make informed and prudent decision relating to the conduct of the bank’s affairs. The review of information relating to the bank’s conduct of its affairs is critical to the discharge of this function. The FDIC is aware of this critical need and should encourage directors to be fully informed during their tenure. To require that all such documents be returned post seizure without even an attempt to protect legitimate interests through a protective order makes transparent that the only interest the FDIC is pursuing in litigating for the return of such records is to cripple the ability of the bank director to document the exercise of their fiduciary duties in any lawsuit brought by the FDIC as receiver.
This is especially true when the FDIC challenges decisions made years prior to the bank’s closing about which memories surely have faded. In the early 1990s, some complaints filed by the Resolution Trust Corporation (“RTC”), which served a similar function for failed S&Ls, alleged that directors breached their fiduciary duties by approving loans more than ten years prior to the date of the complaint. AABD’s seminal study on the RTC’s 1992 lawsuits (RTC Suits against Savings Institution Directors and Officers: Are they in the Public Interest?issued in 1995, (“RTC Suit Study”)) reported that the RTC routinely barred directors from accessing key bank records during the investigative phase of the case, and only acceded to document requests after the court ordered it to do so following the filing of a lawsuit. But this precluded directors from access to bank records that might have allowed them to convince the RTC not to file a suit in the first place. In contrast, through its subpoena power, the RTC had free access to any bank records in the possession of the directors as well as to their personal financial records and was able to depose directors without showing them the records needed to refresh their memories.
This one-sided process was made worse by the use of tolling agreements which prolonged the statutes of limitations for suits against directors of failed institutions. The RTC represented that if a director did not agree to toll the statute of limitations, it would file suit. When a director did agree, the RTC retained the right to file suit for an extended period, allowing the RTC time to strengthen its case, while the director—who remained without access to the bank files—was placed at an even greater disadvantage as his memory continued to fade.
AABD also has received reports from defense counsel of examples of both the RTC and the FDIC losing or misplacing key bank documents.
There is no question that the same delay tactics and possibilities for lost documents persist with regard to any forthcoming FDIC suits against failed and failing bank boards of directors. Bank directors have the absolute right to access bank records during their tenure on a bank’s board, and that right should not be impeded when the decisions those directors made are called into question after the fact. Without access to the documents supporting the decisions made, directors may be unable to defend themselves against an FDIC lawsuit. Indeed, it appears that the express purpose of the FDIC’s position is to ensure that directors are unable to defend themselves in suits in which the FDIC may seek to hold them personally liable for their actions as directors.
The FDIC’s Suit against Bryan Cave.
The FDIC’s suit against the law firm Bryan Cave makes transparent the FDIC’s desire to prevent former directors of failed institutions from obtaining effective legal representation. On November 9, 2010, the FDIC sued Bryan Cave, a law firm representing directors of Hillcrest Bank prior to its October 22, 2010 closure. The FDIC demanded that Bryan Cave return (i) the bank documents in its possession, which likely related to a forthcoming FDIC lawsuit against the directors, and (ii) legal fees paid to Bryan Cave by the bank prior to its closing.
Bryan Cave recommended that copies of bank documents bearing on the directors’ duties and responsibilities be held separately by board counsel, presumably because the FDIC, in the past, purportedly had been unwilling to allow directors of failed banks to review such documents, despite the fact that the FDIC would have benefitted from obtaining meaningful feedback regarding the strengths and potential weaknesses of its potential suits from the very targets of those potential suits.
Allowing directors access to documents relevant to transactions that might have occurred many years ago would allow the FDIC to obtain critical information regarding whether to proceed with a potentially ill-advised suit. Indeed, the FDIC should want directors to have access to these documents so that pre-suit depositions are actually fruitful and informative, providing the FDIC all ofthe relevant information it needs to reach an informed judgment.
Accordingly, AABD requests that the FDIC announce publicly that:
Once the FDIC issues a demand letter to a director of a failed bank, it will advise the director that he or she is entitled to obtain copies of or review bank files from the FDIC under any appropriate confidentiality restrictions.
Bank directors may at any time obtain, possess and retain copies of any bank records under appropriate confidentiality restrictions and may retain such bank records following the closing of their bank, subject to such confidentiality restrictions.
Bank directors are entitled to be represented by counsel and their banks are subject to general corporate statutes and their articles of incorporation and bylaws as to the circwnstances and the procedures under which the bank might pay for their legal defense.
The FDIC has an opportunity to correct the injustices of the past, and to give directors of failed banks a fair shake.
December 27, 2010
The American Association of Bank Directors (“AABD”) has strongly urged Sheila C. Bair, Chairman of the Federal Deposit Insurance Corporation (FDIC), to clarify immediately that the FDIC supports the right of bank directors to copies of bank records they need in order to defend themselves against suits by the FDIC and others.
The FDIC recently expressed a new policy that bank directors have no right to possess copies of bank documents relevant to their defense of a potential suit by the FDIC as receiver. The FDIC has aggressively sought to enforce this previously undisclosed policy by filing a lawsuit against attorneys representing bank directors in the defense of proceedings by the FDIC aimed at recovering losses from their clients.
“This policy is shortsighted and counterproductive,” said David Baris, Executive Director of AABD. “It will deter qualified persons from accepting positions as bank directors and will motivate currently serving directors to resign.”
In a letter dated December 22, 2010, Baris requested Chairman Bair to (1) advise directors of failed banks who are the subject of a demand letter from the FDIC that they are entitled to obtain copies of or review bank files from the FDIC under appropriate confidentiality restrictions; (2) publicly state that bank directors may at any time obtain, possess, and retain copies of any bank records and may maintain such records following the closing of their bank, subject to appropriate confidentiality restrictions; and (3) publicly state that bank directors are entitled to be represented by counsel and that their banks are subject to generally corporate statutes as to circumstances and procedures under which the bank might pay for their legal defense.
During the savings and loan crisis of 20 years ago, both the Resolution Trust Corporation (RTC) and FDIC routinely barred bank directors from having access to copies of bank records that would allow them to refresh their memories of actions taken as directors, sometimes ten years or more prior the bank’s failure. As Baris explained, “The RTC and FDIC often would depose directors before a lawsuit was filed without providing the directors with an opportunity to review the record. We can’t let that travesty happen again.”
The FDIC has also taken the position that banks may not pay for the defense of their bank directors against potential lawsuits by FDIC as receiver. “This position singles out bank directors from directors of all other corporations, who, under state corporate statutes and the corporations’ articles of incorporation and bylaws, may, be entitled to have their legal fees paid for by their corporations,” Baris said. “Bank directors don’t like the FDIC’s stance, and the industry runs the risk of losing some good bank directors.”
Founded in 1989, the non-profit American Association of Bank Directors is the only trade group in the United States solely devoted to bank directors and their information, education, and advocacy needs.