Judge says FDIC can proceed in suit against two Chicago law firms

A federal judge has shut down an attempt by two Chicago law firms to dismiss an action brought against them by federal banking regulators, who have alleged the law firms are improperly holding a combined $250,000 paid by officers at a failing suburban bank from bank revenues in the waning moments before the institution was taken over by the government.

On March 19, U.S. District Judge Thomas M. Durkin rejected a motion from co-defendant firms The Coleman Law Firm and Kevin Flynn & Associates to dismiss the suit brought by the Federal Deposit Insurance Corporation, which seeks to recover the payments made to the firms by the outgoing officers at the failed Orland Park-based George Washington Savings Bank.

The decision arises as part of proceedings brought almost three years ago by the FDIC, acting as receiver for the failed bank in south Chicago suburb.

In that action, the FDIC has alleged, as it became apparent the bank would fail and come under regulators’ control, the directors and officers of the bank agreed to pay retainers to the Coleman Firm and the Flynn firm of $150,000 and $100,000, respectively, using bank revenue under agreements executed under the name of the bank.

State and federal regulators seized George Washington Savings Bank in 2010, and in 2013, the FDIC brought the action against the bank’s former directors and officers, and the lawyers paid by the bank to represent them.

The case is similar to one brought against the Coleman Firm by the FDIC last year, in which the FDIC alleged the president of the failing Bank of Lincolnwood, at the urging of the law firm, also paid the Coleman Firm a $25,000 retainer using bank funds to represent him in the final moments before the bank was seized. In that action, the FDIC alleged the law firm told the bank president he should make the payment because the retainer was a payment the firm believed the FDIC “could not recover.”

In mid-2014, the FDIC settled with the former directors and officers on separate litigation for a little over $2 million. However, those settlement agreements explicitly stated the deals did not release the law firms to whom the prepayments had been made.

In January, the law firms asked Durkin to dismiss the FDIC action against them, asserting the regulators could no longer proceed against them “in equity and good conscience” because if the FDIC wished to obtain the money, the former directors and officers of the bank needed to be added to the lawsuit, because, under the agreements, the directors and officers were required to repay the bank if it was found they could not legally be indemnified. However, as the FDIC had settled with those directors and officers, the law firms argued they could no longer be joined as defendants in the case.

The judge, however, sided with the FDIC in finding that argument lacking.

To begin, Durkin said, the FDIC is not attempting to enforce any piece of any agreement between the law firms and the bank. The regulators are attempting to void those agreements entirely and compel the law firms to repay money the FDIC believes was improperly paid.

The judge also rejected the law firms’ attempt to label the former directors and officers as “required parties” for the purposes of the FDIC litigation.

The judge said the lawyers were still entitled to sue the directors and officers, if they wished, for unpaid legal bills.

But he said any litigation among those parties would do little to impact proceedings on the FDIC’s claim against the law firms.

“The defendants have vigorously defended their rights to retain those payments, meaning that the (directors’ and officers’) interests in this lawsuit (if any) are adequately protected,” Durkin wrote. “Conversely, if the court dismisses the lawsuit, the FDIC will be unable to recover possibly improper payments to the detriment of the bank’s creditors.

“The court could not, ‘in equity and good conscience,’ dismiss this case under those circumstances,” he wrote.