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Construction Law Today

FDIC vs. Construction Lenders Jury Verdict: IndyMac Bankers Liable for $169 Million

Posted in California, Construction Finance and Insolvency, FDIC & Bank Failures, States

Jurors awarded this $169M verdict (PDF) against three former IndyMac Bank executives for originating dubious construction and development loans. It happened last Friday in Los Angeles at the US District Court for the Central District of California.

$169M Verdict Against Former Indyac Bank Executives

In their original complaint (PDF), the FDIC alleged:

  • That the former bank executives were too permissive in underwriting and originating a host of development and construction loans
  • Their permissiveness was negligent
  • And their permissiveness breached the fiduciary duty of care each executive owed to the bank before it failed

The jurors agreed with the FDIC on the 21 loans that went to trial. The result: a verdict for the FDIC on every count—and, in one combination or another, against each former executive respectively—totaling about $169M in damages.

Conclusions and Observations

  • Many say cases like this don’t go to trial. This one did. After this it’ll be interesting to see whether going to verdict in this case affects litigants’ willingness to settle similar cases. And if it does, how, and for how long
  • Remarkably—for a “professional liability” case with the complexities they usually entail—this case went from the FDIC filing their original complaint in July 2010 through a jury trial and to a verdict in under two and a half years. That suggests at least some, and maybe all, of the lawyers in the case, and presiding Judge Dale Fischer, are worthy of acclaim for moving things along
  • The bank executives and their lawyers are sure to bring a barrage of post-trial motions. And regardless of how Judge Fischer decides, this case is likely to keep our interest as appeals go to the 9th Circuit. And thanks to the 9th Circuit’s video page, if you’re really into this sort of thing, you can watch the oral argument from wherever you are
  • Many of your reader questions ask why this—a blog about construction law—has so much content about bank failures and the FDIC. Friday’s verdict helps answer a lot of those questions. Construction projects and contacts—at least the private ones—depend on construction loans. There’s few construction projects without construction loans. And as we’ve talked about in earlier posts, when the bank behind the construction loan fails, it’s big trouble for the project and each project participant. Friday’s verdict also reminds us that it’s big trouble for the bankers who made those loans too. One can’t help but think that $169M worth of trouble for banks and former bankers on past loans is going to affect how future construction lenders—most of whom will be banks—will underwrite, set prices for, and terms of, future construction loans. That’s going to be critical to the construction industry and project participants (be they designers, contractors, owners, material, or equipment, suppliers). And that’s one of the big reasons why here we devote so much content to bank failures and the FDIC

Looking for More?

Kevin LaCroix over at the D&O Diary provides superlative and comprehensive coverage and analysis of Friday’s verdict, particularly from the D&O insurance coverage angle. Head on over there and read Kevin’s piece, then add a D&O Diary subscription to your RSS feeds.