ABA Banking Journal - May/June 2015 - (Page 18)
LEGAL BRIEFS
Does the Business
Judgment Rule Apply
to Bank Directors?
BY DAWN CAUSEY, GENERAL COUNSEL, AMERICAN BANKERS ASSOCIATION
NOT ACCORDING TO the FDIC. The FDIC continues to sue directors to recover
for business judgments gone wrong. These actions ignore the long history of
courts respecting boards of directors exercising their judgments in what they
thought were the best interests of the bank.
The business judgment rule is a
basic pillar of U.S. corporate law
that prevents courts from secondguessing the decisions of directors
who have acted in good faith with
due care and within the directors'
authority. Challengers to judgments
made in accordance with the rule
must demonstrate bad faith or gross
negligence. It is intentionally a high
burden of proof and one that the FDIC
has repeatedly tried to lower.
In 1997, the FDIC tried to convince
the U.S. Supreme Court that directors
were subject to a federal common
law negligence standard of liability
that was a much lower burden for
the agency. However, in Atherton v.
FDIC, the Court rejected the FDIC's
argument unanimously and directed
the agency to apply the state business
judgment rule standards.
Now the FDIC has made a run
at those state standards. ABA
questioned the FDIC's tactics
in its brief filed on behalf of
the industry and all of the state
bankers associations in a case
involving a failed North Carolina
bank where the FDIC attempted to
hold directors personally liable for
ordinary negligence in their business
18
ABA BANKING JOURNAL | MAY/JUNE 2015
judgments. ABA argued such an
approach would negate decades of
established case law, undermine the
sound policy rational supporting the
rule, and diminish the rule's economic
and social benefits.
The case, FDIC v. Willetts (renamed
FDIC v. Rippy on appeal), involved
a series of loans that went sour.
The district court chastised the
FDIC for requiring directors to have
more effective crystal balls than
the regulators themselves. Citing
public statements by high-ranking
administrative officials about the
foreseeability of the economic
downturn, the district court rejected
the FDIC's attempts to use 20/20
hindsight and make the directors
guarantors of their lending decisions.
Fear of liability for regulatory hindsight
is a real issue for bank boards. As
noted in ABA's survey attached to
the brief, 20 percent of the banks
responding lost a director or officer
due to concerns about personal
liability and 40 percent reported that
positions had been rejected over that
concern. Among individual survey
respondents, 97 percent reported
that they were somewhat or very
concerned about their potential
personal liability for their business
decisions and 87 percent reported
that a reduction in the legal protection
against personal liability would affect
their willingness to serve on boards or
in the bank.
ABA and the state bankers
associations were not alone in their
opposition to the FDIC action, The U.S.
Chamber of Commerce filed a brief
that urged the Appellate Court to not
only apply the higher standard, but
also to make it easier for directors and
officers to win cases against the FDIC.
As stated in their brief, "directors and
officers in failed bank litigation have
only one real chance to dispose of a
case before trial: summary judgment. If
Defendants do not prevail on summary
judgment, they face a Hobson's
choice of settling (often at significant
personal expense) or litigating (with
ruinous amounts of potential liability
in the balance). Not surprisingly, the
great majority of cases, even cases
with marginal or wholly insubstantial
claims, settle."
For all these reasons, ABA urged the
Court to reject the FDIC's efforts to
tailor the business judgment rule to the
FDIC's interest. "The FDIC's position
has no support in controlling case law
or sound public policy." Bank directors
deserve the benefit of the business
judgment rule. Let's hope the Fourth
Circuit Court of Appeals follows that
sound policy.
Table of Contents for the Digital Edition of ABA Banking Journal - May/June 2015
CHAIRMAN’S VIEW
UPFRONT
ECONOMIC OUTLOOK
LEGAL BRIEFS
PICTURE THIS
CELEBRATING A TRADITION OF INNOVATION
SOUND RISK CULTURE
AN INTERVIEW WITH FDIC’s MARTIN GRUENBERG
NEW RESPA/TILA MORTGAGE DISCLOSURES
BANK DOMAIN ROLLOUT
INVESTOR PERSPECTIVE
MARKETING/RETAIL
PAYMENTS
ADVOCACY
ABA COMPLIANCE CENTER INBOX
CYBERSECURITY
MORTGAGES
OPERATIONS
BOARD MATTERS
FROM THE STATES
BANKER RECOMMENDED READING
INNOVATIONS IN SOCIAL RESPONSIBILITY
INDEX OF ADVERTISERS
ABA Banking Journal - May/June 2015
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