Asset Protection for Bank Directors: Most Have Little Appreciation for the Risks They Face

In Michigan, as well as other states, all corporate directors face risks. As fiduciaries of their corporations they have numerous obligations and assume a myriad of duties they are required to carry out. However, due to the regulatory environment under which they operate, bank directors have significantly greater exposure than directors of non-financial institutions. But there is one thing all directors have in common, personal liability for breach of their duties. Accordingly, bank directors should consult an asset protection planning attorney and complete and implement a plan for asset protection, along with confirming the adequacy of their director’s and officer’s liability insurance coverage, before agreeing to serve on the board.

A bank director (i) is responsible to ensure the bank is operating according to the guidelines of state and federal banking regulators, (ii) must remain informed by monitoring and taking an active role to ensure adequate management and bank operations, and (iii) must stay informed about bank activities. How many bank directors fully understand the safety and soundness regulations and guidelines to which their institution is subject is questionable. How knowledgeable are they about internal controls and information systems, internal auditing, compensation, fees and benefits among other things?

The potential for liability often arises from a claim that a director, current or former, failed to fulfill his duty to ensure that the bank was being operated in a sound and safe manner. Even if bank directors adhere to a strict best practices approach to carrying out their duties we know sometimes things go horribly wrong ….. even if totally unintentional. It is for this reason that persons being requested to serve on a bank board should always consider implementing a reasonable plan for asset protection. In this way, should a director become a target for alleged wrongdoing or breach of fiduciary duty, the director will have segregated some portion of his wealth from the reach of his potential creditors.

The recalcitrant director always falls back on the claimed safety net of his D&O insurance policy. But beware! A recent trend finds these policies often containing a “regulatory exclusion” that precludes coverage for actions brought by the FDIC, state regulators and other regulatory agencies. A further concern is if the FDIC steps in as a receiver. The insurance carrier may deny coverage in such cases.

The FDIC can initiate a lawsuit against a former or current director for an array of activities but the ones most frequently seen involve allegations that the director failed to establish proper loan underwriting policies, approved loans that were improperly underwritten or failed to heed warnings from regulators or professional advisors.

“For current and former bank directors, the risk of personal liability for losses incurred by a failed bank is very real.” [Footnote 1] Steps need to be taken to minimize that liability and asset protection planning should be first on the list.

Footnote 1 – The author relied extensively on the excellent article of Michael Kus and Marsha J. Greco appearing in the Fall 2010 Michigan Business Law Journal, Troubled Banks Mean Trouble for Bank Directors, Volume 30, Issue 3.