12 March 2010
The Illinois Appellate Court has held that former depositors in Superior Bank FSB, who lost money on deposits exceeding the $100,000 FDIC-insured limit when Superior failed, could not bring claims against Superior’s officers and directors, or against auditor Ernst & Young LLP. The appellate court held that the depositors’ cause of action was derivative and “properly belong[ed] to the FDIC in its corporate capacity as receiver [for Superior].” Courtney v. Pritzker, 2010 WL 625031 (Ill. App. 1st Dist. 2010). Despite many federal circuit courts having reached this conclusion, the Courtney opinion is one of the first state court decisions on the issue.
Plaintiffs in Courtney initially brought suit in federal court alleging that Superior, its officers and directors, and its auditor had provided plaintiffs false financial statements and erroneous advice to induce deposits in excess of the FDIC-insured $100,000 amount. Specifically, plaintiffs alleged violations of the Illinois Consumer Fraud and Deceptive Business Practices Act (Consumer Fraud Act), the Illinois Public Accounting Act (Accounting Act), and the federal Racketeer Influenced and Corrupt Organizations Act (RICO). The federal court held that the depositors could not bring the RICO claims but declined to exercise supplemental jurisdiction over plaintiffs’ state-law claims. Courtney v. Halleran, 485 F.3d 942 (7th Cir. 2007).
Plaintiffs refiled their state law claims and the Illinois state court dismissed them. On February 22, 2010, the Illinois Appellate Court affirmed, stating the general rule: “depositors, as a class, lack standing to pursue claims against bank officers and directors accused of causing a bank to fail, because the cause of action belongs to the bank or its receiver.” The plaintiffs argued that their case did not fall within the general rule because representations had been made directly to them by bank employees and in the audited financial statements of the bank. The Illinois Appellate Court rejected this argument, concluding that “the essence of plaintiffs’ complaint is that they lost the uninsured portions of their deposits because the defendants looted the bank’s assets and drove the bank into insolvency, all while misleading plaintiffs and other investors into believing the bank was financially stable.” Because plaintiffs failed to allege an injury distinct from that suffered by the other depositors or by Superior, the claim belonged to the FDIC as receiver for the failed Superior and not to the plaintiff depositors.
The Courtney decision is one of the first state court decisions holding that uninsured depositors lack standing to sue officers, directors and auditors of a failed bank because their claims are derivative. This holding could have particular significance in Illinois. Since 2008, no fewer than 24 Illinois banks have failed (second to only Georgia (32) and tied with California). See FDIC Failed Bank List, http://www.fdic.gov/bank/individual/failed/banklist.html. If the rate of Illinois bank failures is any indication, suits by under-insured depositors seeking to recover from auditors, directors, or officers could well have become more commonplace prior to the Courtney decision. Such cases may well be brought in other states where there is no such decision.
Mayer Brown represented Ernst & Young LLP in this matter. For more information about the Courtney decision, or any other matter raised in this Client Alert, please contact
at +1 312 701 7326 or
at +1 312 701 7964.
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