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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. The practitioners and judges who hail E-filing as the Saviour of the West need to contain their respective excitements. E-filing is federal court requires the practitioner to cram his motion practice into pigeonholes created by IT people. Compound motions or those seeking alternative relief are effectively barred, unless the practitioner wants to receive a tart note from some functionary admonishing about the "problem". E-filing is just another method by which courts and judges transfer their burden to practitioners, who are the really the only powerless components of the system. Of COURSE it is easier for the court to require all of its imput to conform to certain formats, but this imposition does NOT improve the quality of the practice of law and does NOT improve the ability of the practitioner to advocate for his client or to fashion pleadings that exactly conform to his client's best interests. And we should be very wary of the disingenuous pablum about the costs. The courts will find a way to stick it to the practitioner. Lake County is a VERY good example of this rapaciousness. Any one who does not believe this is invited to review the various special fees that system imposes upon practitioners- as practitioners- and upon each case ON TOP of the court costs normal in every case manually filed. Jurisprudence according to Aldous Huxley.

  2. Any attorneys who practice in federal court should be able to say the same as I can ... efiling is great. I have been doing it in fed court since it started way back. Pacer has its drawbacks, but the ability to hit an e-docket and pull up anything and everything onscreen is a huge plus for a litigator, eps the sole practitioner, who lacks a filing clerk and the paralegal support of large firms. Were I an Indiana attorney I would welcome this great step forward.

  3. Can we get full disclosure on lobbyist's payments to legislatures such as Mr Buck? AS long as there are idiots that are disrespectful of neighbors and intent on shooting fireworks every night, some kind of regulations are needed.

  4. I am the mother of the child in this case. My silence on the matter was due to the fact that I filed, both in Illinois and Indiana, child support cases. I even filed supporting documentation with the Indiana family law court. Not sure whether this information was provided to the court of appeals or not. Wish the case was done before moving to Indiana, because no matter what, there is NO WAY the state of Illinois would have allowed an appeal on a child support case!

  5. "No one is safe when the Legislature is in session."

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