When the FDIC Comes Calling

Bank failures could mean legal malpractice suits for lawyers and law firms
March 10, 2011
Daily Report

Georgia leads the nation in bank failures with 55 so far, and the number keeps rising. In 2010, there were 157 bank failures nationally. This is bad news for banks and the lawyers who represented them.

In just the last few months, the FDIC has filed legal malpractice suits against some of the most respected law firms in Georgia. Demands have been made against many more with tolling agreements and settlements with others. This is just the beginning of what will likely be a steady stream of claims against Georgia lawyers as the FDIC attempts to recover the deep pockets of lawyers and their legal malpractice insurers.

Under federal law, the FDIC acquires all of the claims of a failed bank including against outside professionals, including lawyers. As part of its investigation in every instance of a bank failure, the FDIC has formed a Professional Liability Operation. In addition, the FDIC has retained national counsel to assist in connection with the assertion and prosecution claims against lawyers, including legal malpractice claims.

The FDIC has many advantages over typical legal malpractice plaintiffs. Most notably, it has a deep pocket to fund litigation. Equally important, it enjoys many protections unavailable to most plaintiffs including defenses and accountability for negligence, failure to mitigate and post-takeover conduct.

Contrary to popular belief, FDIC recovery actions are not limited to botched real estate transactions. While real estate transactions certainly are a prime target, the FDIC has also pursued claims arising out of representations in litigation, acquisitions and operations. More recently, the FDIC has become much more aggressive about pursuing litigation to gain access to documents and information within the possession of lawyers.

There are two relevant time limits that are important. First, Georgia has a four-year statute of limitations applicable to legal malpractice claims. Second, the FDIC typically completes its investigations within 18 months of a takeover.

Lawyers and law firms who have represented a failed bank should take affirmative proactive steps to protect themselves.

Here are several important things to do once a law firm learns that a client bank has failed and the FDIC has taken over:

1. Notify your legal malpractice insurer of a "circumstance that might give rise to a claim." This is different than giving notice of a legal malpractice claim. Under most malpractice policies, this notice triggers the coverage and protects the law firm the event that the FDIC decides months, or years, later to pursue a legal malpractice claim.

2. Establish a "control group" or "potential claim" partner to provide advice and monitor the situation. This should not be lawyer who has worked on matters for the failed bank. Some of the worst admissions (sometimes unfounded) come from unprivileged internal communications from lawyers trying to figure out what happened and who is responsible.

3. Secure and segregate all files for the failed bank. Increasingly, the FDIC has filed litigation against law firms seeking discovery of files. One of the complicating issues surrounding files involves what is appropriately considered to be part the file. To address this issue, the most effective strategy is to "lock down" the file as the date of the takeover so that there is no dispute about the file's content on that date.

4. Close all existing files (with a termination letter, if one does not already exist) and open a new client/matter for any ongoing matters. The lawyer's and firm's client has changed. The failed bank as an existing client ended with the takeover. The FDIC is a new client.  These are important distinctions for a lot of reasons. For conflict-of-interest purposes, the failed bank is now a former client and the FDIC is a current client. More importantly, lawyers and law firms should avoid any suggestion that the statute of limitations has not started because the representation is ongoing.

5. If any disputes arise, hire outside counsel for the law firm experienced in matters involving "lawyers' law" even if the malpractice insurer has retained counsel. The interests of the law firm and the legal malpractice insurer differ greatly. For the legal malpractice insurer, it really is about money. For the lawyer and law firm, much more is at stake. Lawyers and firms need someone who is looking out for their interests only.

So, how much should law firms that have represented failed banks worry? In the failed savings and loan association situation from a few years ago, one in four takeovers resulted in claims against professionals. To date, the FDIC has included in lawsuits and claims against law firms and individual lawyers; claims for legal malpractice, breach of fiduciary duty and punitive damages; and claims for attorneys fees.

The risks are high and Georgia lawyers should treat them accordingly.

The authors' firm, McKenna Long & Aldridge, is suing the Federal Deposit Insurance Corp. in U.S. District Court for the Northern District of Georgia, claiming that the agency is unlawfully demanding that the law firm turn over records pertaining to executives of failed banks. The authors are not involved in the case.

Reprinted with permission from the March 10, 2011 issue of the Daily ReportĀ© 2011 ALM Media Properties, LLC.  Further duplication without permission is prohibited.  All rights reserved.  

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