Directors May Be Liable for Defunct Bank’s Ruin

(CN) - The directors of a defunct Florida bank may be liable for costing the bank $40 million and driving it into ruin, a federal judge ruled.

The Panama City, Fla.-based Peoples First Community Bank failed in December 2009, and was closed by the Office of Thrift Supervision.

After the Federal Deposit Insurance Corporation took over as receiver, it sued eight former directors for negligence under Florida law and gross negligence under the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA). The FDIC alleged in the federal complaint that the former directors had approved 11 risky loans in violation of bank and regulatory policies, and had engaged in other improper lending practices and underwriting, causing more than $40 million in damages.

The directors, who include now-Panama City Mayor Greg Brudnicki, asked the court to dismiss the ordinary negligence claims under state law, arguing that directors are exempt from personal liability for their votes and decisions unless they engage in "conscious disregard for the best interest of the corporation, or willful misconduct."

U.S. District Judge Richard Smoak agreed, but ruled that Raymond Powell, who had also served as the bank's president and CEO, was not entitled to the same protection.

State law only insulates directors from personal liability, to encourage the service of qualified persons on governing boards of corporations, and the exemption does not apply to officers or employees, according to the May 15 ruling.

Smoak upheld the gross negligence claims against all directors, finding that the FDIC had pleaded them with sufficient particularity.

The FDIC's complaint described in detail one of the transactions, a $12.2 million loan for the development of 239 homes in Polk County, Fla., and claimed it was illustrative of the other allegedly-deficient loans, according to the ruling.

But the defendants argued the FDIC should be required to provide more details about each transaction, and about the alleged misconduct of each former director.

"However, I find that Exhibit A to the complaint, which is the chart listing the eleven loans, their amounts and approval dates, which board members approved them, and their alleged deficiencies, is not only sufficient, but actually a very efficient way to present the allegations against each defendant without requiring dozens of paragraphs of repetitive legalese," Smoak wrote.

And since the identities of the borrowers and guarantors are protected from public disclosure, they will be made available to the defendants during discovery, the ruling states.

The former directors failed to persuade Smoak that the losses caused by their alleged gross negligence should be pleaded separately from those caused by the collapse of the Florida real estate market.

But the judge instructed the FDIC to file an amended complaint by May 29, showing how the directors' conduct is related to the bank's losses.

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