Bair FDIC Director Suits

8/8/2019 Bair FDIC Director Suits

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AMERICANASSOCIATION

OF BANKDIRECTORS

National Capital OfficeSuite 7001250 24th Street, NWWashington, DC 20037Telephone: (202) 463-4888Facsimile: (202) 349-8080www.aabd.org

December 22,2010

The Honorable Sheila C. BairChairmanFederal Deposit Insurance Corporation550 17 th Street, N.W.Washington, DC 20429-9990Dear Chairman Bair:

We are writing in regard to the FDIC's recently expressed policy that bank directors haveno right to possess bank documents relevant to their defense of a potential suit by the FDIC asreceiver. The FDIC has aggressively sought to enforce this previously undisclosed policy byfiling a lawsuit against lawyers representing bank directors in the defense of proceedings by theFDIC aimed at recovering losses from their clients. This policy is shortsighted andcounterproductive. It will deter qualified persons from accepting positions as bank directors andwill motivate currently serving directors to resign. The American Association of Bank Directorsis 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 thebank 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") isthe 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 LiabilityResource Center, which acts as a clearinghouse for developments in bank director liability,including lawsuits by FDIC against directors of failed banks and savings institutions. TheInstitute for Bank Director Education was established in 1993 as the educational arm ofAABD.Its purpose is to act as a clearinghouse for education programs designed for bank and savingsinstitution directors that support the nationally recognized Director Certification Program.

FDIC Lawsuits Create the Need for Board Members to Have Access to the Records of FailedBanks.

When a bank fails, the FDIC, as receiver, takes possession of all bank records. Unlessdirectors have maintained, off bank premises, records of the decisions they made prior to thebank's failure - such as Board and committee minutes, records of loans or policies andprocedures approved by the board, examination reports, and outside expert reports such as auditreports and outside loan reports - they are effectively prevented from defending the actions theytook as directors. As you are aware bank directors have a fiduciary obligation and are held to a


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The Honorable Sheila C. BairPage TwoDecember 22, 2010

high standard of care relating to their obligation to make informed and prudent decision relatingto the conduct of the bank's affairs. The review of information relating to the bank's conduct ofits affairs is critical to the discharge of this function. The FIDC is aware of this critical need andshould encourage directors to be fully informed during their tenure. To require that all suchdocuments be returned post seizure without even an attempt to protect legitimate intereststhrough a protective order makes transparent that the only interest the FDIC is pursuing inlitigating for the return of such records is to cripple the ability of the bank director to documentthe exercise oftheir 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'sclosing about which memories surely have faded. In the early 1990s, some complaints filed bythe 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 yearsprior to the date of the complaint. AABD's seminal study on the RTC's 1992 lawsuits (RTCSuits against Savings Institution Directors and Officers - Are they in the Public Interest? issuedin 1995, ("RTC Suit Study")) reported that the RTC routinely barred directors from accessingkey bank records during the investigative phase of the case, and only acceded to documentrequests after the court ordered it to do so following the filing of a lawsuit. But this precludeddirectors from access to bank records that might have allowed them to convince the RTC not tofile a suit in the first place .. In contrast, through its subpoena power, the RTC had free access toany bank records in the possession of the directors as well as to their personal financial recordsand was able to depose directors without showing them the records needed to refresh theirmemones.

This one-sided process was made worse by the use of tolling agreements whichprolonged the statutes of limitations for suits against directors of failed institutions. The RTCrepresented 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, allowingthe RTC time to strengthen its case, while the director - who remained without access to thebank 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 andthe FDIC losing or misplacing key bank documents.There is no question that the same delay tactics and possibilities for lost documentspersist with regard to any forthcoming FDIC suits against failed and failing bank boards ofdirectors. Bank directors have the absolute right to access bank records during their tenure on abank's board, and that right should not be impeded when the decisions those directors made arecalled into question after the fact. Without access to the documents supporting the decisionsmade, directors may be unable to defend themselves against an FDIC lawsuit. Indeed, it appears


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The Honorable Sheila C. BairPage ThreeDecember 22, 2010

that the express purpose of the FDIC's position is to ensure that directors are unable to defendthemselves in suits in which the FDIC may seek to hold them personally liable for their actionsas directors.The FDIC's Suit against Bryan Cave.

The FDIC's suit against the law firm Bryan Cave makes transparent the FDIC's desire toprevent former directors of failed institutions from obtaining effective legal representation. OnNovember 9, 2010, the FDIC sued Bryan Cave, a law firm representing directors of HillcrestBank prior to its October 22, 2010 closure. The FDIC demanded that Bryan Cave return (i) thebank documents in its possession, which likely related to a forthcoming FDIC lawsuit against thedirectors, 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' dutiesand responsibilities be held separately by board counsel, presumably because the FDIC, in thepast, purportedly had been unwilling to allow directors of failed banks to review suchdocuments, despite the fact that the FDIC would have benefitted from obtaining meaningfulfeedback regarding the strengths and potential weaknesses of its potential suits from the verytargets of those potential suits.Allowing directors access to documents relevant to transactions that might have occurredmany years ago would allow the FDIC to obtain critical information regarding whether toproceed with a potentially ill-advised suit. Indeed, the FDIC should want directors to haveaccess to these documents so that pre-suit depositions are actually fruitful and informative,providing the FDIC all of the relevant information it needs to reach an informed judgment.Accordingly, AABD requests that the FDIC announce publicly that:1. Once the FDIC issues a demand letter to a director of a failed bank, it will advisethe director that he or she is entitled to obtain copies of or review bank files fromthe FDIC under any appropriate confidentiality restrictions.2. Bank directors may at any time obtain, possess and retain copies of any bankrecords under appropriate confidentiality restrictions and may retain such bankrecords following the closing of their bank, subject to such confidentialityrestrictions.


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The Honorable Sheila C. BairPage FourDecember 22, 2010

3. Bank directors are entitled to be represented by counsel and their banks aresubject to general corporate statutes and their articles of incorporation and byla sas to the circwnstances and the procedures under which the bank might pay fortheir legal defense.The FDIC has an opportunity to correct the injustices of the past, and to give directors offailed banks a fair shake.

Sincerely,

David BarisExecutive Director

Documents

Bair FDIC Director Suits