In his latest post on the status of FDIC lawsuits against former officers and directors of failed banks, Kevin LaCroix makes a couple of observations. One is the fact that in the latest two lawsuits, filed during the last two weeks of May, the FDIC doesn't bother pleading ordinary negligence, instead pleading only gross negligence. As a commenter to that post points out, that may be because the FDIC is allowed to recover on the theory of ordinary negligence only where applicable state law so provides, but is always allowed, by federal law, to recover if it can prove gross negligence. In other words, gross negligence is the floor of the standard of conduct for officers and directors of federally-insured financial institutions, even if greater protection for the officers and directors is afforded by state law.
In many previous cases, the FDIC has routinely pleaded both ordinary and gross negligence, regardless of state law. LaCroix speculates that the FDIC may have decided not to waste time and money on attorneys fees slugging it out on the standard of negligence. I think that makes sense, since it has lost on that issue in some states. Pleading only gross negligence (although, theoretically, a higher hurdle to jump) should, in most cases where the complaint or petition is properly composed, survive a motion to dismiss, at least in the early stages of the litigation. By the time the FDIC has softened up the defendants and their professional liability carrier with many, many months of expensive discovery and motion hand-fighting, the chances of extracting a settlement have increased.
Kevin's other observation has to do with the location of the real estate securing the "loss loans" on which the FDIC is basing its damages.
The other thing about these cases is that they both are based primarily on loans made in the deteriorating Las Vegas real estate market five or more years ago. The collapse of the Las Vegas real estate market, as well as the collapse of other regional real estate markets that had surged during the boom years last decade, contributed to the closure of many banks. Although the agency’s filing of these lawsuits apparently met the strict requirements of the statute of limitations, there does seem to be a sense in which the agency’s lawsuits increasingly involve stale allegations. As time goes by, questions about loans made into the real estate bubble a long time seem increasingly pointless. The events from that time are starting to seem like ancient history.
To the extent that his problem with the FDIC allegations is that when the loans were made many years ago, during flush times, no one could have reasonably foreseen the crash, nor, certainly, its depth, breadth, and length, I agree with him. Otherwise, I think the loans seem "stale," in large part, because the FDIC has spent the last few years since these two banks failed, trying to squeeze a settlement out of reluctant defendants and, more likely, reluctant insurers who are tired of writing checks. You've got a three-year statute of limitations (which can be extended with a tolling agreement), and the FDIC doesn't want to sue until it has to sue. Therefore, I don't see "staleness" as an issue, at least not one that is objectionable solely on the basis of the age of the loss loans.
The wheels of "justice" grind slowly, but exceedingly fine. In addition, so do the wheels of FDIC litigation.
Kevin's analysis is that there are 49 lawsuits yet-to-be-filed in the FDIC's pipeline. It will be interesting to see if the FDIC continues to stick with gross negligence claims, except in those few states whose legal standard allows it.