ILNews

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

Back to TopCommentsE-mailPrintBookmark and Share

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.
 

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by
2015 Distinguished Barrister &
Up and Coming Lawyer Reception

Tuesday, May 5, 2015 • 4:30 - 7:00 pm
Learn More


ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. A traditional parade of attorneys? Really Evansville? Y'all need to get out more. When is the traditional parade of notaries? Nurses? Sanitation workers? Pole dancers? I gotta wonder, do throngs of admiring citizens gather to laud these marching servants of the constitution? "Show us your billing records!!!" Hoping some video gets posted. Ours is not a narcissistic profession by any chance, is it? Nah .....

  2. My previous comment not an aside at court. I agree with smith. Good call. Just thought posting here a bit on the if it bleeds it leads side. Most attorneys need to think of last lines of story above.

  3. Hello everyone I'm Gina and I'm here for the exact same thing you are. I have the wonderful joy of waking up every morning to my heart being pulled out and sheer terror of what DCS is going to Throw at me and my family today.Let me start from the !bebeginning.My daughter lost all rights to her 3beautiful children due to Severe mental issues she no longer lives in our state and has cut all ties.DCS led her to belive that once she done signed over her right the babies would be with their family. We have faught screamed begged and anything else we could possibly due I hired a lawyer five grand down the drain.You know all I want is my babies home.I've done everything they have even asked me to do.Now their saying I can't see my grandchildren cause I'M on a prescription for paipain.I have a very rare blood disease it causes cellulitis a form of blood poisoning to stay dormant in my tissues and nervous system it also causes a ,blood clotting disorder.even with the two blood thinners I'm on I still Continue to develop them them also.DCS knows about my illness and still they refuse to let me see my grandchildren. I Love and miss them so much Please can anyone help Us my grandchildren and I they should be worrying about what toy there going to play with but instead there worrying about if there ever coming home again.THANK YOU DCS FOR ALL YOU'VE DONE. ( And if anyone at all has any ideals or knows who can help. Please contact (765)960~5096.only serious callers

  4. He must be a Rethuglican, for if from the other side of the aisle such acts would be merely personal and thus not something that attaches to his professional life. AND ... gotta love this ... oh, and on top of talking dirty on the phone, he also, as an aside, guess we should mention, might be important, not sure, but .... "In addition to these allegations, Keaton was accused of failing to file an appeal after he collected advance payment from a client seeking to challenge a ruling that the client repay benefits because of unreported income." rimshot

  5. I am not a fan of some of the 8.4 discipline we have seen for private conduct-- but this was so egregious and abusive and had so many points of bad conduct relates to the law and the lawyer's status as a lawyer that it is clearly a proper and just disbarment. A truly despicable account of bad acts showing unfit character to practice law. I applaud the outcome.

ADVERTISEMENT