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How Extensive Will the FDIC's Claims Against Failed Banks' Outside Professionals Be?
If the lawsuit filed on February 7, 2011 in the Northern District of Georgia is any indication, the FDIC’s efforts to pursue liability claims will not only include suits against the directors and officers of failed banks, but will also include in at least some instances the failed institutions’ outside law firms. The FDIC’s actions so far raise the question of how extensive the FDIC’s pursuit of these kinds of claims ultimately may prove to be.

As reflected in J. Scott Trubey’s February 8, 2010 Atlanta Journal Constitution article (here), the FDIC’s recent suit was filed against a Henry County, Georgia law firm, Smith Welch & Brittain, and J. Mark Brittain, in connection with the firm’s legal services on behalf of Neighborhood, Community Bank, a Newnan, Georgia bank that failed on June 26, 2009.

In its complaint, a copy of which can be found here, the FDIC as receiver for the failed bank seeks to recover damages "in excess of $6 million" plus legal fees, based on the defendants’ alleged legal malpractice in connection with the law firm’s handling of certain loans the bank made to a local real estate developer between 2005 and 2007. The complaint alleges that the bank hired the firm to process the documents for the bank’s loans to the developer, who allegedly was also a client of the law firm. The suit alleges the developer of obtaining loans based on inflated property values. The individual defendant allegedly facilitated this, among other things, by creating two sets of settlement statements.

The lawsuit filed Monday is the third liability suit filed in Georgia against a failed bank’s outside law firm. As reflected in press reports (here, scroll down), on October 19, 2010, the FDIC filed two separate lawsuits in the Northern District of Georgia against outside law firms for the failed Integrity Bank of Alpharetta, Georgia. (In January, the FDIC filed a separate suit against former directors and officers of Integrity Bank, as reflected here.) The defendants in one of these two lawsuits also include a title insurance company.

The FDIC has made no secret of the fact that it may pursue claims against the failed banks’ gatekeepers – not just banks’ former directors and officers, but also, according to the FDIC’s website, the banks’ "attorneys, accountants, appraisers, brokers, or others." The website also states that as of February 7, 2011, the FDIC has "authorized seven fidelity bond, attorney malpractice, and appraiser malpractice lawsuits." which presumably includes the suits described above. (As detailed here, the FDIC has to date filed four lawsuits against the directors and officers of failed banks as part of the current wave of bank failures.)

The FDIC’s pursuit of claims against lawyers and other outside professionals is entirely consistent with the actions the agency took during the FDIC crisis. According to NERA Economic Consulting’s August 2010 report about failed bank litigation, in connection with the 2,744 institutions that failed as part of the S&L crisis, the FDIC (or the Resolution Trust Corporation) filed a total of 205 legal malpractice claims and 139 accounting malpractice claims (about 7.5% and 5% of failed banks, respectively).

The outcome of the FDIC’s professional liability claims during the S&L crisis, more than anything else, explain the FDIC’s present actions to pursue these claims in connection with the current round of bank failures. According to the NERA report, as a result of the FDIC’s S&L crisis legal malpractice claims, the FDIC recovered $500 million, and as a result of its accounting malpractice claims, the FDIC recovered $1.1 billion. (By way of contrast, the FDIC’s S&L crisis related claims against the former directors and officers of failed banks resulted in recoveries of $1.3 billion). Given this track record, it is hardly surprising that the FDIC is pursing claims of the type described above now.

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