FDIC Responds to AABD Brief in FDIC Suit Against Directors of Failed Bank
As reported here on February 9th, the AABD filed a brief jointly earlier this year with ICBA and The Clearing House with the U.S. Court of Appeals for the Fourth Circuit in FDIC v. Rippy, et al., a suit filed by the FDIC against directors of a failed North Carolina bank.
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 countered that under the business judgment rule, only a jury finding of gross negligence may give rise to damages. 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. The FDIC’s attempt to make simple-negligence determinations in hindsight the basis of personal 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.
Despite AABD’s brief, the FDIC filed a reply brief dated March 3rd. In the brief, the FDIC continued its contention that the business judgment rule does NOT insulate directors from liability for ordinary negligence in North Carolina and many other states. A copy of the FDIC’s reply brief may be found here. The case has been set for oral arguments before the court in Richmond for May 13th.