Bank directors across Florida are opening their mailboxes to discover the federal government wants them to repay millions of dollars lost when banking regulators closed the banks.
The Federal Deposit Insurance Corp. has sent at least 100 "demand letters" seeking to hold the directors of failed Florida banks personally liable for the FDIC's cost to cover losses.
In one closely watched case, the FDIC went a step further and sued the directors of a failed Immokalee bank for $62 million. The agency accuses the directors of approving several huge, irresponsible loans that sunk the bank.
In most cases, the directors receiving the demand letters are in no danger of paying out of pocket because the banks' insurance policies will cover them. But they are sweating things, nonetheless.
Bank boards generally consist of five to 11 people who set policies and approve unusually large loans. Most receive less than $10,000 a year for their service, said investment banker Russ Hunt.
"It used to be that being on the board of directors was a very prestigious thing," said Ken Thomas, an independent bank analyst from Miami. "Now, not only has it lost its prestige, but it carries the negative connotation with all the bank failures and the financial crisis."
Florida community banks suffered worse than most from the real estate crash because many had relied so heavily on real estate and development loans. The FDIC's failed bank database lists 67 Florida banks that it has shut since 2000, second only to Georgia's 84 banks.
Locally, the FDIC has shut at least five banks in Hillsborough and Pinellas counties: Bank of Florida-Tampa Bay, First Commercial Bank of Tampa Bay, Progress Bank of Florida, Southshore Community Bank and Old Harbor Bank.
The FDIC's insurance fund covers any shortfall in depositors' money, tapping into fees that it charges all insured banks in good times and bad. What isn't widely known is that the federal agency may try to get its money back from the failed banks' directors.
"It's not like being on the board of a nonprofit, where you can lend a helpful word or two and help them raise money," said Doug Winton, who leads Republic Bank's operations in Florida and who has not been targeted by the FDIC.
The agency sometimes sues a failed bank's board of directors if it thinks there's money to pursue and if it thinks it can build a case they've been negligent, said David Barr, an FDIC spokesman. In fact, it has filed 32 lawsuits against bank boards across the country seeking repayment.
Only one was a Florida bank, the failed Florida Community Bank of Immokalee, but Florida banking attorneys say they expect more lawsuits.
In most cases, the FDIC doesn't go to the extreme of filing a lawsuit. Instead, it sends a demand letter to a failed bank's board members, which lets them know that the FDIC will make a claim against the insurance policy and advises them to seek a lawyer. Theoretically, it could go after the bank directors' money directly if they don't have insurance.
The letters are confidential, so it's not clear how many bank directors from the Tampa region have gotten them.
But banking industry lawyers Charlie Stutts of Holland & Knight and Sean Johnson of Shutts & Bowen each said they represent 50 to 60 directors of Florida banks who've gotten them. The letters may blame the bank directors for approving irresponsible loans and ask for repayment of the FDIC's money.
Sometimes the FDIC follows by suing the directors, sometimes it settles with them in out-of-court mediation and sometimes it drops the case. Whatever happens, it's an anxious period for bank directors.
"These are not nice letters that say, 'Hey, we hate to ask you to reimburse us,' " Stutts said. "These are accusatory letters."
Johnson said some bank directors can't understand why they're on the hook.
A common response, he said, is: "Wait a minute, we are in a tremendous recessionary economy and we have a number of these loans that have gone bad as a result of the recession, and now we are being held responsible for an economy that has gone south?"
For now, bank directors and their lawyers are closely watching a few court cases to see how willing judges are to hold bank directors accountable.
Stutts, the Holland & Knight lawyer, said Florida law generally protects directors of corporations unless they consciously disregard the rules. The idea is to prevent people from second-guessing board members on a whim, so judges have been throwing out cases of "simple negligence."
However, judges are letting cases with more egregious "gross negligence" to move forward, Stutts said. In these cases, "you almost have to act without the slightest of care," he said.
In the Immokalee bank case, the FDIC alleges that Florida Community Bank's directors approved seven risky development loans that contributed to its collapse. For example, they approved a $17.6 million loan to a development firm on an interest-only basis and despite the fact the developer had, "only vague plans for the property," the lawsuit says.
The lawyer representing the Immokalee bank's directors said a federal judge already has dismissed part of the FDIC's allegations.
"These gentlemen were proud to serve as directors of Florida Community Bank," attorney Mary Gill said by email. "As directors, they faithfully served the best interests of the bank at all times."
Winton, the Republic Bank market president, said his bank isn't in trouble with regulators. But he can sympathize with the bank directors who didn't realize they can be held personally liable for a bank's failure. If he weren't a bank president, he'd do his homework before joining a bank's board.
"It's good for the bank," he said. "It's probably less good for the individuals who serve."