The nation’s bank failures could soon lead to a wave of legal action against some officers and directors of some failed lenders. And Georgia, with its nation-leading tally of seized banks, could be ground zero.

Among the cratered financial companies bracing for potential lawsuits or civil claims is Georgian Bank, shut down last September 25, 2009, at an estimated loss of $892 million, the third-largest lender in the state to fail in the current cycle.

In a September 28, 2009, letter to Chubb Group of Insurance Companies, attorneys for Georgian notified the insurance carrier of potential claims that could be made against officers and directors by the Federal Deposit Insurance Corp. and shareholders.

When a bank fails, the FDIC becomes the primary shareholder of the organization and retains the right to sue directors and officers for “gross negligence” that may have contributed to the failure, under directors and officers liability insurance, known informally as “D&O” insurance.

The insurance protects officers and directors from personal liability and is often one of the few remaining assets when a bank is seized. Claims can range in size from hundreds of thousands of dollars into the millions, depending on the size of the policy and the number of bank representatives involved in the claim.

Georgian's letter is known as a “notice of circumstances” and is standard practice immediately before or after a failure. It is necessary to trigger coverage by a bank’s directors and officers insurance before it expires.

The notice is not an admission of guilt, and it states that its inclusion of a description of circumstances that may give rise to a claim “is not intended and shall not be taken as any agreement or admission with respect to the regulators’ criticisms.”

But the letter does illuminate alleged practices that bank regulators apparently took umbrage with prior to the failure. And it also shows the steps banks are taking to protect themselves in the wake of a collapse.

Attorneys for Georgian Bank say the FDIC has not made any claims against directors or officers, nor have any lawsuits been filed, and lawyers say the agency is not planning on any legal action in the future.

Sources in the banking industry say the FDIC has sent “demands for civil damages” to directors and officers at some Georgia banks. The so-called “demand letters” are not made public but are a possible precursor to legal action or claims against a liability insurance policy.

“The FDIC has a job to do in connection with every bank failure and part of that is to explore claims against insiders who might have played a part in a bank’s failure,” said Mark Kanaly, banking attorney with Alston & Bird LLP.

The seven-page letter is largely a recitation by Georgian’s lawyers of an FDIC cease-and-desist order that was made public against the bank on the day it failed.

Regulators cited Georgian for operating with a board that failed to provide proper oversight, management whose policies and practices were detrimental to the bank and the safety of deposits, inadequate capital reserves given its asset quality, volume of souring loans, inadequate allowance for loan and lease losses, lax lending practices, inadequate funds management, and other alleged shortcomings.

But the letter goes into further detail about potential claims that the FDIC—and shareholders—might make if a case can be made for alleged negligence and wrongdoing. And it goes on to detail regulators’ assertions of “unsafe and unsound banking practices and wrongful acts,” among them, an overindulgence in commercial and residential real estate acquisition and development loans, violations of legal lending limits to several Atlanta developers, lending out of territory and appraisal deficiencies that included the use of a former CEO’s son’s firm for a “large portion” of the bank’s appraisals.

John Douglas, an attorney with Davis Polk & Wardwell LLP in New York, who represents Georgian’s board, reiterated that the Georgian letter should not be considered an admission of guilt, but is rather a standard practice to notify an insurer of possible claims following a failure.

Such letters have likely been filed with insurers by all 30 banks that have failed in Georgia since August 2008, according to industry experts.

Michael Cochran, an attorney with McKenna Long & Aldridge LLP in Atlanta who represents former Georgian Bank CEO Gordon Teel, declined to comment about the matter or make his client available for an interview.