The January 2012 failures of Tennessee Commerce Bank and BankEast, the first bank failures in the state in a decade, demonstrate that banks in Tennessee are not immune to the conditions that have caused the failure of over 420 banks in the United States since 2008. These failures act as a strong reminder for directors of banks, and particularly those serving troubled institutions, of actions they can take to limit their personal liability if their bank fails.
The directors of banks, like their counterparts in any corporation, can best defend against most claims by diligently fulfilling their obligations to the corporation and its shareholders. Much has been written of a director's fiduciary obligations – the duties of care and loyalty – and further discussion of these duties is beyond the scope of this article. However, by being actively engaged as a board member (reviewing materials distributed, regularly attending board meetings); actively participating in board discussions; and making informed decisions, a director can limit his or her liability from potential claims.
It is also important that board minutes accurately memorialize the board meetings (see the Banking and Financial Services Update, Vol. 11, Winter 2011 ). As Mike Krimminger (the FDIC's General Counsel) has said, if it is not in the minutes, the FDIC does not consider it as having happened. Accurate board minutes are a director's proof that he or she has fulfilled his or her duties to the bank. Process is key, but to evidence adequate process, you must have an adequate corporate record.
As a bank becomes troubled and slips closer to receivership, there are numerous steps that a bank director can take to best position himself or herself for a successful defense against FDIC litigation. As a bank's condition deteriorates, it is important that the bank's directors know what is in the bank's D&O insurance policy to fully understand what is and is not covered by the policy, including:
- Definition of "loss"
- Key exclusions (i.e., whether there is a regulatory exclusion)
- Reporting requirements
- Amount of coverage provided under the policy.
Directors also need to understand "Side A" and "Side B" coverage and ask whether the policy contains independent director liability coverage. Additionally, each director must decide whether to engage individual counsel. While single counsel for the board of directors as a whole is cost effective and often appropriate, there may be occasions where there are conflicting interests among directors causing individual counsel to be appropriate.
Directors of faltering banks should also take other actions to properly situate themselves in case the FDIC makes demands on them. Directors should retain copies of key documents that they have utilized in performing their duties. Following the failure of a bank, it can be difficult to obtain all of the documentation a director or his or her counsel may want during the preparation of a defense strategy. This can be made much easier if the director is able to provide much of this information from retained copies, noting that it remains the duty of the director to keep this information confidential, and recognizing that all original copies of information must remain at the bank. The FDIC generally has a three-year statute of limitations following the failure of a bank to bring tort claims against directors, officers, and others that it perceives were liable for the failure of the institution. Because of this extended time period before claims are actually brought, it may help a director of a failed bank to construct a written record of meetings and significant decisions as a point of reference.
While the failure of a bank is an unpleasant experience for any member of the bank's board, properly performing one's job on the board, and preparing for the failure can help limit ongoing potential liability following FDIC receivership. Further, engaging counsel early in the process can allow the director and counsel to work together to review the D&O liability insurance contract as well as identify early on any potential claims against the director.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.