The Federal Deposit Insurance Corporation ("FDIC") rated Cooperative Bank a "2". (That was before the FDIC became the Receiver for Cooperative Bank.) Below a 2 was not such a good rating. A rating of 2 was not a rating of 1, but it in FDIC-speak it was still a passing grade.
In one North Carolina Federal Court, a 2 from the FDIC is also immunity from bad faith for the former executives of a defunct bank like Cooperative.
The FDIC sued former executives of Cooperative Bank for making bad loans, including one particularly -- well, dodgy is not too strong a description of it -- standout loan scheme whereby they gave developers two years of no payments, no interest, no nothing. The developers who got these loans could buy a piece of land and then sell it for more than the amount of the loan. In two years, they made a lot of money those developers.
And Cooperative Bank became extinct.
Then the FDIC sued the former executives, raising the issue while the lawsuit was alive that the executives made promises that they would do better once their audits revealed their risky practices. (It is unfortunately common that Federal regulators give their captors, the corporations they are supposed to regulate, a pass even while their auditors and examiners issue reports that the auditors and examiners are appalled by the conduct of the corporation's officials.) They apparently did not perform much better despite the bank examiner's warnings, these Cooperative Bank executives, because Cooperative Bank went bust and the FDIC sued these former executives for bad faith, among other things.
Then a Federal Judge ruled that when the FDIC gives out a 2, it cannot sue bank executives for bad faith, even the ones who did not keep their promises. As one commentator reported:
The F.D.I.C. complaint made accusations that certainly sounded as if there were some bad faith. It said officers of the bank regularly ignored the bank's own lending rules and ignored repeated warnings from state and federal bank examiners. It said the board made no effort to force the bank officers to abide by the bank's own rules, let alone comply with the examiner's recommendations.
So what facts indicated there was no bad faith? That is hard to tell. The judge sealed many documents, including the F.D.I.C.'s arguments against the summary judgment.
Floyd Norris, "High & Low Finance / Failed Bank's Broken Vows Mean Little" p. B1, col. 1 (New York Times Nat'l ed., "Business Day" Section, Friday, September 19, 2014). Here is the Order, signed September 10, 2014: Download September 10 2014 Order granting D SJ M FDIC v Willetts III (E.D.N.C. 7.11.165).
In addition to the insightful New York Times column by Mr. Floyd Norris, linked above, this decision is also fully briefed by Kevin LaCroix, on his D&O Diary on September 16, 2014, "Failed NC Bank Execs Granted Summary Judgment on All FDIC Claims".
The part of this decision that I want to address does not concern the bad faith issues of the bank executives' conduct, however, but the bad faith issues presented by the Court's conduct in sealing parts of the record, including parts that would have revealed the evidence if any that would have supported the bad faith claims against those executives. Reportedly, the Court even sealed "the F.D.I.C.'s arguments against the summary judgment." Floyd Norris, "Failed Banks Broken Vows Mean Little," supra.
To be continued .....
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