Bank Directors in North Carolina and Elsewhere Breathe a Sigh of Relief
On September 10, 2014, a Federal District Court in North Carolina dismissed the suit by the FDIC to recover losses related to the failure of state-chartered Cooperative Bank from its board of directors. The FDIC brought three claims for relief against Cooperative’s board: negligence; gross negligence and breach of fiduciary duties.
The Court found that the business judgment rule applies in North Carolina and shields bank board members from liability on ordinary negligence and breach of fiduciary duties claims. Stating that the business judgment rule provides that corporate directors are presumed to act with due care and in good faith in the best interest of the corporation, the Court found that the rule imposes essentially a gross negligence standard.
In applying the business judgment rule in this case, the Court found no evidence that the directors were engaged in self-dealing, fraud or any other conduct that might constitute bad faith. As an important part of its analysis, the Court also found that the board employed a ‘rational process’ in its decision-making and acted with a rational business purpose.
In fact, the court cited prior regulatory CAMELS ratings of “2” for management, asset quality and market risk sensitivity as proof that the board had followed a rational process in its decision-making. That is, inasmuch as the examiners (banking experts) gave the bank satisfactory ratings after examining the details of management’s decisions on loan applications and other business matters, directors (who are not experts equivalent to examiners) should appropriately presume that their overall supervision of management and bank operations was acceptable to the regulators.
It is important to note in this regard that the Court endorsed the methodology of reviewing the bank’s overall decision-making process to assess the board’s rational process, rather than looking at each individual decision (i.e., loan granting, asset disposition, etc., involving 86 loans cited by the FDIC).
Additionally in this case, the Court went on to find that the actions of the board can be attributed to a rational business purpose, even though there clearly were risks. The Court recognized that the mere existence of risks in the loan portfolio cannot be said to indicate irrationality on the board’s part. The Court said that the board did not display a conscious indifference to risk and there was no evidence to suggest that it did not have an honest belief that its decisions were in the Cooperative Bank’s best interests.
Finally, the Court went on to refute as “absurd” the FDIC’s claims that the bank’s board and management were more prescient than the nation’s top bank regulators and economists in foreseeing the Crisis of 2008, and that they should be held accountable for disregarding the risks that they deemed foreseeable. The Court stated that it was unfair that big banks considered ‘too big to fail’ were giving government assistance after their failures, while smaller ones were aggressively pursued by the government for reimbursement of losses.
On October 2, 2014, the FDIC filed an appeal of its loss in this case to the U.S. Fourth Circuit of Appeals. AABD will keep its members advised of the outcome of this appeal. Please feel free to contact either David Baris or Rich Whiting of AABD for further information.