Risk & Compliance

FDIC Sues Former Directors of Chicago Bank

The regulator accuses the former directors of Chicago's New City Bank with "gross negligence and breaches of fiduciary duty."
Katie Kuehner-HebertMarch 19, 2015
FDIC Sues Former Directors of Chicago Bank

The Federal Deposit Insurance Corp. is suing the former directors of failed $71 million-asset New City Bank in Chicago for “gross negligence and breaches of fiduciary duty” that resulted in $6.6 million in losses for the FDIC.

A Chicago Tribune story said the agency filed a lawsuit in the U.S. District Court in the Northern District of Illinois against the 14 former directors of the bank, which the FDIC closed in 2012. The suit accuses the directors of making high-risk loans that violated the bank’s own policy.

Most of the loans were secured by commercial real estate, including a $1.25 million loan for the construction of six residential condominiums and retail space. New City’s directors approved the loan despite lacking sufficient financial information about the borrower, the FDIC lawsuit claims.

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“New City was established in 2003, and its original operating plan was to serve the needs of small and midsize businesses in downtown Chicago,” according to the FDIC lawsuit. “Soon after opening, however, the bank’s target lending area expanded, and its commercial real estate loan” portfolio grew rapidly.

“Defendants ignored the proper credit-risk management and underwriting practices necessary to ensure that the growth of the bank’s” commercial real estate loan portfolio was safe.”

One of the defendants’ lawyers, John George of Katten & Temple, told the Chicago Tribune that the former directors were “distinguished professionals experienced in commercial real estate lending.” New City Bank’s board once included the late former Illinois Supreme Court Justice Mary Ann McMorrow.

“Nearly three years after taking over the bank and all the records of its extensive loan portfolio, the FDIC now second-guesses the directors’ approval of a handful of real estate loans made in 2006-2008,” the defendants’ lawyers wrote in a statement emailed to the Tribune.

“The FDIC thus ignores not only the true causes of New City’s loan losses — namely the Great Recession and its disproportionate impact on the South Side community served by New City — but also the repeated high marks the bank received from state and federal banking regulators, including the FDIC itself.”

The FDIC suffered losses on the closure of New City because it could not find a buyer for the troubled bank.