The demise of Bank of Indiana served as an ugly footnote to the aftermath of the financial crisis. The sale of most of its assets to First Farmers Bank & Trust Co. of Converse in 2013 left holders of stock and debt securities in the bank’s parent with some $23 million in losses.
For years, allegations flew fast and furious over who was to blame for propelling the fast-growing Indianapolis bank into financial peril. Insiders and shareholders lobbed allegations of conflicts of interest and breaches of fiduciary duty.
But now the legal fallout might finally be wrapping up. Late last month, Judge William Lawrence dismissed all five counts in a federal lawsuit that four investors brought two years ago against a litany of insiders, including former Chairman Frank Neese and former Chief Operating Officer Albert Jackson III.
The judge made his ruling without assessing the nitty-gritty of the allegations. Instead, he concluded that the plaintiffs lacked the legal right to bring their racketeering claims. Any such claims would have had to be brought by Indiana Bank Corp., the bank’s bankrupt parent, which opted against bringing a case.
Further, Lawrence said that allowing a handful of investors to recover from the lawsuit would “materially prejudice the interests of IBC’s other creditors and interfere with the fair distribution of any recovery among all interested persons.”
The dismissal of the racketeering claims left three state law claims alleging breach of fiduciary duty, fraud and gross negligence. Lawrence could have heard those allegations, but because they involve solely state law he dismissed them and gave the plaintiffs the right to refile in state court.
It’s not clear whether plaintiffs will pursue that option. Their attorney, Mark Hassler of Hunt Hassler Lorenz & Kondras LLP in Terre Haute, was out of the country on vacation and could not be reached for comment.
At least for now, the dismissal sidelines an array of juicy allegations, including that:
• Neese breached his fiduciary duties and committed fraud when Indiana Bank Corp. bought $1 million in bonds from local homebuilder The Estridge Cos. in January 2007, just before the housing market collapsed, leaving the investment worthless. Neese owns Indiana Securities, which was the underwriter on the $5 million offering and thus earned fees on the transaction—a role that created a conflict of interest, the suit alleges.
• The bank in 2007 hired TLI, which was owned by Neese’s children, to be the bank’s IT provider. The bank was TLI’s only customer, and its services were “woefully inadequate,” which forced Bank of Indiana to terminate the contract and switch to a new vendor “at substantial costs” in 2010, according to the suit.
• Neese orchestrated the lease of a former home he owned at 1705 N. Meridian St. to serve as the bank’s headquarters. Rent was above market rates, the suit alleges, and the space, which included several bedrooms, a sun room and kitchen, was poorly configured for banking offices.
• On at least four occasions, the bank exceeded its legal lending limits, which made certain insiders personally liable for losses on the loans. The suit alleges they “embarked on a pattern of conduct to avoid their personal liability.”
Neese did not respond to a request for comment.
The bank had grown rapidly since 2006, when a group of mostly Indiana investors bought the tiny First National Bank of Dana in Vermillion County, rechristened it Bank of Indiana, and broadened its focus to include central Indiana.
While bank investors lost a bundle, by reaching the sale agreement with First Farmers Bank, they avoided the indignity of a takeover by federal banking regulators—a fate that befell three Hoosier banks after the financial crisis.
The biggest failure was Irwin Union Bank in Columbus, which was seized in 2009. The Federal Reserve’s Office of Inspector General estimated in 2010 that its demise would result in losses to the FDIC’s insurance fund of $552 million.
Evansville-based Integra Bank Corp., which failed in 2011, cost the FDIC insurance fund an estimated $206 million, according to a 2012 Office of Inspector General report. SCB Bank of Shelbyville failed in 2012, costing the FDIC fund an estimated $34 million.
The FDIC last year sued former officers of Integra, charging breach of fiduciary duty and negligence, but dropped the case in June. The FDIC has a case pending against four former officers of Irwin Union, which is set for trial in January.•