Orion Bank Directors Must Face FDIC Lawsuit

(CN) - Four former directors of a Florida bank that failed in 2009, costing the FDIC $880 million, cannot dismiss charges of gross negligence, a federal judge ruled.

In January 2013, the FDIC sued four former directors of the Naples, Fla.-based Orion Ban: James Aultman, Earl Holland, Alan Pratt and Brian Schmitt. The complaint alleged that extremely risky investment strategies cost the commission $880 million when the bank failed.

Commissioners claimed, for example, that the bank directors approved a $45 million loan for one man, Francesco Mileto, without ever attempting to verify his claims to enormous personal wealth.

Even when the directors became aware that the bank was failing, they took no action to improve the bank's position, according to the complaint.

U.S. District Judge Sheri Polster Chappell refused to dismiss the complaint last week, finding that the business judgment rule, which presumes that directors act in good faith, is a question of fact best left for a jury.

"In this case, the complaint specifically alleges numerous acts and omissions of defendants that, if true, support plaintiff's contention that they were 'likely to result in injury' to the bank and that exhibited 'conscious disregard' for the bank's best interest," the judge said.

In addition, the court is not required to consider alternative explanations for the defendants' actions, such as the economic conditions at the time of the bank's failure, at the motion-to-dismiss stage.

"Defendants argue that plaintiff's claim ignores the economic conditions in the country that caused several other banks to fail around the same time that Orion failed," Chappell wrote. "Although economic conditions may be considered in the totality of the circumstances, defendants essentially argue that the economic recession, not defendants' conduct, was the proximate cause of the bank's failure. Proximate cause is a fact-sensitive determination inappropriate for consideration on a motion to dismiss. Thus, the purported ignorance of the economic recession in the complaint will not support dismissal at this stage of the proceedings."

In a separate complaint, the FDIC is pursuing claims that Orion's attorneys "inexcusably failed to recognize a slew of glaring red flags" when reviewing the Mileto loans.

Judge Chappell stayed discovery in that case on July 3 after finding that it "would waste the resources of the litigants" since the attorneys have filed a motion to transfer, or in the alternative motion to dismiss."

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