AABD’s Amicus in FDIC Lawsuit Against Directors of a Failed Bank will Defend Bank Directors’ Protection Under the Business Judgment Rule
In support of bank directors facing a lawsuit filed by the FDIC, AABD (together with ICBA) will be submitting in February 2015 an amicus brief in to the U.S. Court of Appeals for the Fourth Circuit in FDIC v. Rippey, et al. The most important issue in the case is whether, as the FDIC argues, directors (and officers) may be held liable in damages for what a jury determines in hindsight was simple — or ordinary — negligence in the approval of particular loans. That is, approvals made in good faith which the board members believed were in the best interests of their bank but which involved, in hindsight, faulty decision making or procedures. AABD will counter that under the business judgment rule, only a jury finding of gross negligence may give rise to damages. In FDIC v. Rippey, the trial court agreed that gross negligence is the appropriate standard in North Carolina. The trial court also found that directors cannot be liable when the evidence shows that the FDIC itself graded management and loan quality “satisfactory” in Reports of Examinations.
This issue is vitally important to AABD’s membership. In response to the significant increase since the Great Recession in the number of investigations and related lawsuits by the FDIC against bank directors, AABD has established a Bank Director Liability Resource Center to serve as a clearinghouse for developments in these areas. In addition, AABD has published a book describing the standard of liability in each U.S. jurisdiction (AABD, Bank Director Standards of Care and Protections: A Fifty-State Survey (David Baris ed., 2013)) and a book detailing lawsuits filed by FDIC against directors of failed banks (FDIC DIRECTOR SUITS: LESSONS LEARNED (David Baris and Jared Kelly, 2012)). A 2015 update to this report will be published in the near future.
The FDIC’s attempt to make simple-negligence determinations in hindsight the basis of financial liability represents an undeserved risk to independent directors of community banks and other banks that is counterproductive to the safety and soundness of the banking system. Directors of community banks usually are paid small fees and are in most instances not professional bankers. Nevertheless, they can be exposed to ruinous liability when a bank fails because of a national crisis not of their making.
Most of the banks that failed during or in the aftermath of the Great Recession were community banks and, as a result, most of the FDIC’s lawsuits have been filed against community bank directors. Those directors, unlike directors of larger institutions, often still approve individual loans at the board or board-committee level – not because they are required by law or regulation to approve them but because they believe that additional reviews of loans recommended by management provide an extra level of protection for their institutions. And it is those approvals now being challenged, based on many months of hindsight review by numerous highly trained FDIC examiners and attorneys of every piece of paper about the loans, whereas overburdened directors are required by business necessity to process loan applications expeditiously while attending to hundreds of other legal requirements.
In June of 2014, AABD filed another amicus brief in the case of FDIC v Loudermilk involving the directors of a failed Georgia-based bank. The brief detailed the reasons why an ordinary negligence claim against bank directors is contrary to the public interest in having a strong banking system. As in FDIC v Rippey and in many other complaints that it has filed against bank directors, the FDIC argued that the Business Judgment Rule did not protect bank directors from claims of ordinary negligence.