FDIC: Chicago law firm should refund $25K retainer payment it received from failed bank

A Chicago law firm is facing accusations brought by federal banking regulators that it improperly received a $25,000 payment from an executive running a failing bank in the weeks before its assets were shifted to new ownership almost five years ago.

The Federal Deposit Insurance Corporation (FDIC) filed suit June 4 in Chicago's federal court against the Coleman Law Firm over the 2009 incident, asking a federal judge to make the firm to return the money paid to it under a retainer agreement signed by Richard Robbins, then then-president of the former Bank of Lincolnwood.

“Lincolnwood’s $25,000 prepayment to Coleman was plainly improper,” the FDIC asserts in its complaint. “It simply served to create a ‘war chest’ to be used to pay Robbins’ potential future legal expenses, notwithstanding higher priority claims of Lincolnwood’s other creditors.”

The suit comes years after the federal independent agency assumed receivership over the Bank of Lincolnwood, a small state-chartered financial institution with two branches headquartered in Lincolnwood in Chicago’s north suburbs.

The bank failed after 55 years in business amid an avalanche of bad returns, which Crain’s Chicago Business reported at the time centered mainly on commercial loans that went sour amid the onset of the 2008 recession.

According to the complaint, the bank’s net income dropped by 1,556-percent in one year. From the first quarter of 2008 to the first quarter of 2009, the bank’s net income fell from $893,000 to a loss of more than $13 million. Much of the loss, the suit notes, came during the first quarter of 2009, as the bank’s losses widened from $975,000 to $13 million.

The FDIC alleges that “for years preceding Lincolnwood’s failure,” regulators had critiqued the bank’s lending practices, believing it was not sufficiently capitalized for the level of risk the bank was assuming.

Regulators launched “a full-scale examination” of the Bank of Lincolnwood in February 2009, and in March 2009 officially notified the bank of the looming threat of closure.

The bank was closed on June 5, 2009, with its deposits and much of its assets transferred by state and federal regulators at the time to Republic Bank of Chicago.

However, on April 3, 2009, about three weeks before the FDIC issued a cease-and-desist order to the bank, Robbins, the bank’s president and chief operating officer, retained the Coleman Law Firm “in contemplation of Lincolnwood’s insolvency” to take care of costs Robbins “might incur if he were sued or came under investigation,” the complaint states.

The suit alleges the Coleman firm told Robbins he needed to make the payment in advance because the retainer was of a type the firm believed the FDIC “could not recover if it were appointed Lincolnwood’s receiver.”

Saying that type of payment is prohibited by federal law and the money should have been kept by the bank for distribution to its various creditors, the FDIC is asking Chicago's federal court to order the law firm to repay the $25,000 retainer payment, plus interest.

The FDIC, which claims the Bank of Lincolnwood failure cost the FDIC Fund about $83 million, is being represented in the action by attorneys Kathleen R. Pasulka-Brown, Stephen H. Pugh, and Christopher M. Cascino of Pugh, Jones & Johnson P.C. in Chicago.

The Coleman Law Firm, according to its website, was founded in 1984 and concentrates its practice on complex business litigation.