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Does the business judgment rule shield bank directors from FDIC enforcement?

John Lande Iowa Banking Law Dickinson Law Firm Des Moines, Iowa

Posted on 08/29/2012 at 05:58 PM by John Lande

In 2008, at the very beginning of the financial crises, one of the first banks to fail was Haven Trust Bank of Duluth, Georgia. The bank had engaged in a number of risky commercial loans, improper loans to insiders, and imprudent dividend distributions. After the FDIC closed the bank, it brought an action against the bank’s directors for negligence, breach of fiduciary duty, and gross negligence. The bank’s directors responded by seeking to dismiss the FDIC’s claim for negligence. The directors argued that Georgia’s business judgment rule shielded the directors from liability for ordinary negligence. The directors also sought to dismiss the claim for breach of fiduciary duty on the grounds that Georgia’s business judgment rule shield directors from liability absent any claims of bad faith, fraud, or abuse of discretion. Under Georgia law, like Iowa, directors are not liable for acts taken in good faith compliance with their corporate duties. Directors are required to discharge their director duties with the care of an ordinary and prudent person in a like position. This rule affords directors a presumption that they acted in good faith, and shields the directors from liability unless they act in bad faith, commit fraud, or abuse their discretion. The purpose behind this rule is to provide directors with the ability to take on some business risk in an effort to increase earnings while not having to face potential liability if their gamble fails. Under Georgia law, like Iowa law, these same rules apply equally to bank directors as any other corporate director. Based on this rule, the United States District Court for the Northern District of Georgia concluded on August 14, 2012, that the FDIC could not hold bank directors liable for ordinary negligence or breach of fiduciary duty in the absence of evidence of fraud, bad faith, or abuse of discretion. The district court allowed the FDIC’s claim for gross negligence against the directors to continue on the grounds that the business judgment rule does not shield directors from their acts of gross negligence. Gross negligence requires more proof of wrongdoing than ordinary negligence. The FDIC must show willful neglect on the part of the directors, or that the bank directors “acted with a lack of diligence that even careless men are accustomed to exercise[ing].” The case is currently pending before the district court as Federal Deposit Insurance Corporation v. Edward Briscoe, et al.  The parties have agreed to attempt to resolve the case through mediation on September 18, 2012. This is an important case because it could determine whether bank directors are treated differently than directors of other corporate entities. The FDIC likely does not want to see this ruling expanded beyond the facts of this particular case. If this case is appealed, and the FDIC loses, then the FDIC will have a much harder time holding bank directors liable in the event of a bank failure. If the parties agree to settle this case in September, then there will likely be no further development. Regardless, the district court’s opinion should give bank directors some comfort that the FDIC may not be able hold them liable quite so easily.

Categories: Banking Law, John Lande

 

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