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Judge wants Congress to reconsider FDIC’s rights when taking over a bank

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In a case that hinges on the distinction between direct and derivative claims, the 7th Circuit Court of Appeals decided that a failed bank can pursue two claims against former managers.

Irwin Financial Corp. subsidiaries Irwin Union Bank & Trust and Irwin Union Bank, FSB were closed in 2009 and taken over by the Federal Deposit Insurance Corp. The banks’ asset portfolios were dominated by mortgage loans, whose values plummeted in 2007 and 2008.

Elliott Levin, as Irwin Financial’s trustee in bankruptcy, sued three of the company’s directors and officers in an attempt to recover money. The FDIC intervened because whatever Levin collects, the FDIC will not be able to collect from the managers. The FDIC argues that most of Irwin Financial’s claims now belong to it under 12 U.S.C. Section 1821(d)(2)(A)(i).

Counts 1, 2, 4 and 5 of Irwin Financial’s complaint allege the managers violated their fiduciary duties to Irwin Financial by not implementing additional controls that would have protected the company from the managers’ errors in their roles as directors of the bank. The managers allowed the banks to specialize in the types of mortgages hard-hit in 2007 and 2008.

Count 3 alleges the managers allowed Irwin to pay dividends in amounts that left it short of capital when the housing bubble burst; and count 7 claims two of the managers breached their duties of care and loyalty when they “capitulated” to the FDIC and caused Irwin to contribute millions of dollars to new capital in the banks.

Judge Sarah Evans Barker in Indianapolis dismissed all of the claims after concluding all of the claims belong to the FDIC. The FDIC on appeal conceded that counts 3 and 7 belong to the bank, a result the 7th Circuit also found.

Indiana treats a stockholder’s claim as derivative if the corporation itself is the loser and the investor is worse off because the value of the firm’s stock declines, which is a good description of the theory behind counts 1, 2, 4 and 5, the 7th Circuit held.

The FDIC, not Irwin, owns any claim against the manager that depends on the choices made as director or employees of the banks, the judges held. And count 3 was prematurely dismissed, because the court did not dismiss it on the merits. The parties need to explore how Indiana’s version of the Business Judgment Rule applies to the managers’ activities with respect to information and distributions, wrote Judge Frank Easterbrook.

Count 7 also alleges a claim that the FDIC could not pursue as the banks’ successor. The judges remanded for further proceedings on counts 3 and 7.

Judge David Hamilton joined the majority opinion and believes this case “raises some broader policy questions that deserve consideration by the FDIC and Congress, including why the direct/derivative distinction should still matter, either under the current version of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, see 12 U.S.C. §1821(d)(2)(A), or perhaps other statutory amendments that Congress may want to consider.”

“Any student of the Great Depression who remembers the ‘runs’ on banks can appreciate those roles. But this case at its core presents a troubling effort. The holding company structure and the direct/derivative dichotomy are being used in ways that could allow those who ran the banks into the ground to take for themselves some of the modest sums available to reimburse the FDIC for a portion of the socialized losses they inflicted. If that result is not contrary to federal law, it should be.”

The case is Elliott D. Levin, as trustee in bankruptcy for Irwin Financial Corp. v. William I. Miller, et al., 12-3474.
 

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  1. Indianapolis employers harassment among minorities AFRICAN Americans needs to be discussed the metro Indianapolis area is horrible when it comes to harassing African American employees especially in the local healthcare facilities. Racially profiling in the workplace is an major issue. Please make it better because I'm many civil rights leaders would come here and justify that Indiana is a state the WORKS only applies to Caucasian Americans especially in Hamilton county. Indiana targets African Americans in the workplace so when governor pence is trying to convince people to vote for him this would be awesome publicity for the Presidency Elections.

  2. Wishing Mary Willis only God's best, and superhuman strength, as she attempts to right a ship that too often strays far off course. May she never suffer this personal affect, as some do who attempt to change a broken system: https://www.youtube.com/watch?v=QojajMsd2nE

  3. Indiana's seatbelt law is not punishable as a crime. It is an infraction. Apparently some of our Circuit judges have deemed settled law inapplicable if it fails to fit their litmus test of political correctness. Extrapolating to redefine terms of behavior in a violation of immigration law to the entire body of criminal law leaves a smorgasbord of opportunity for judicial mischief.

  4. I wonder if $10 diversions for failure to wear seat belts are considered moral turpitude in federal immigration law like they are under Indiana law? Anyone know?

  5. What a fine article, thank you! I can testify firsthand and by detailed legal reports (at end of this note) as to the dire consequences of rejecting this truth from the fine article above: "The inclusion and expansion of this right [to jury] in Indiana’s Constitution is a clear reflection of our state’s intention to emphasize the importance of every Hoosier’s right to make their case in front of a jury of their peers." Over $20? Every Hoosier? Well then how about when your very vocation is on the line? How about instead of a jury of peers, one faces a bevy of political appointees, mini-czars, who care less about due process of the law than the real czars did? Instead of trial by jury, trial by ideological ordeal run by Orwellian agents? Well that is built into more than a few administrative law committees of the Ind S.Ct., and it is now being weaponized, as is revealed in articles posted at this ezine, to root out post moderns heresies like refusal to stand and pledge allegiance to all things politically correct. My career was burned at the stake for not so saluting, but I think I was just one of the early logs. Due, at least in part, to the removal of the jury from bar admission and bar discipline cases, many more fires will soon be lit. Perhaps one awaits you, dear heretic? Oh, at that Ind. article 12 plank about a remedy at law for every damage done ... ah, well, the founders evidently meant only for those damages done not by the government itself, rabid statists that they were. (Yes, that was sarcasm.) My written reports available here: Denied petition for cert (this time around): http://tinyurl.com/zdmawmw Denied petition for cert (from the 2009 denial and five year banishment): http://tinyurl.com/zcypybh Related, not written by me: Amicus brief: http://tinyurl.com/hvh7qgp

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