EDUCATION CENTER

Professional Liability Lawsuits

As receiver for a failed financial institution, the FDIC may sue professionals who played a role in the failure of the institution in order to maximize recoveries. These individuals can include officers and directors, attorneys, accountants, appraisers, brokers, or others. Professional liability claims also include direct claims against insurance carriers such as fidelity bond carriers and title insurance companies.

The FDIC follows the policies adopted by the FDIC Board in 1992, Statement Concerning the Responsibilities of Bank Directors and Officers, which can be found at http://www.fdic.gov/regulations/laws/rules/5000-3300.html#fdic5000statementct, and require Board approval before actions are brought against directors and officers.

Professional liability suits are only pursued if they are both meritorious and cost-effective. Before seeking recoveries from professionals, the 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, staff will attempt to settle with the responsible parties. If a settlement cannot be reached, however, a complaint will be filed, typically in federal court.

As receiver, the FDIC has three years for tort claims and six years for breach-of-contract claims to file suit from the time a bank is closed. If state law permits a longer time, the state statute of limitations is followed.

Professionals may be sued for either gross or simple negligence. The Supreme Court has ruled that the FDIC may pursue simple negligence claims against directors and officers if state law permits (Atherton v. FDIC). Federal law preempts state law that insulates directors and officers from gross negligence or worse conduct. Bank directors are allowed to exercise business judgment without incurring legal liability.

Not all bank failures result in Director and Officer (D&O) lawsuits. The FDIC brought claims against directors and officers in 24 percent of the bank failures between 1985 and 1992.

From 1986 through 2012, the FDIC and former Resolution Trust Corporation (1989-1995) collected $6.8 billion from professional liability claims. Over that same time, they spent $1.9 billion to fund all professional liability claims and investigations. Early in the process of professional liability claims, expenses will often exceed recoveries due to the costs incurred in handling new investigations. Professional liability program recoveries lag expenses by several years until settlements occur and judgments are awarded.

From January 1, 2009, through April 10, 2014, the FDIC has authorized suits in connection with 136 failed institutions against 1,102 individuals for D&O liability. This includes 94 filed D&O lawsuits (21 of which have fully settled and 1 of which resulted in a favorable jury verdict) naming 724 former directors and officers. The FDIC also has authorized 58 other lawsuits for RMBS, LIBOR suppression, fidelity bond, insurance, accounting malpractice, appraiser malpractice, and attorney malpractice claims. In addition, 69 residential mortgage malpractice and fraud lawsuits are pending, consisting of lawsuits filed and inherited.

While FDIC is fully prepared to litigate its claims against professionals of failed institutions to judgment, at any time during the process the parties may settle. To view settlements with former directors and officers of failed institutions, please visit: Professional Liability Settlements Agreements.

For additional background on Professional Liability Suits, please see Chapter 11 of "Managing the Crisis: The FDIC and RTC Experience" http://www.fdic.gov/bank/historical/managing/history1-11.pdf.

 

 

 

 
 
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