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The FDIC has aggressively asserted in bank director suits that the standard of care is simple negligence even in jurisdictions where many legal practitioners have assumed the standard was gross negligence.

This matters.

You may think this will never happen to you. You are careful and always put the interests of the bank first. But over 1,000 bank directors and officers found themselves named as defendants in expensive, time-consuming FDIC receivership litigation after the Great Recession, mostly because of their role as members of a loan committee.

Don’t let the FDIC second-guess your business decisions. Take the time now to revisit your state statutes to see how your conduct will be judged. If the statute does not clearly establish a gross negligence standard for both directors and officers, then it should be amended to remove any doubt.

AABD has launched an initiative – the AABD Initiative to Reform State Standards of Care – to spearhead changes to state statutes to ensure that gross negligence is the applicable standard of care for bank directors.

What is “simple negligence”? Generally that term is defined as one where the director did not act consistent with how an ordinarily prudent person would act under similar facts and circumstances.

What is “gross” negligence? A number of courts define it as “wanton conduct done with conscious or reckless disregard…” for the consequences of your actions. It is a more difficult standard for the FDIC to meet in a lawsuit.

Federal banking law requires the standard in suits against directors of failed banks to be gross negligence unless the state law requires that standard to be simple negligence. Federal law requires that the definition of gross negligence be determined by the state.

The FDIC prefers to define gross negligence as a smidgen more than simple negligence, and so often argues in suits against bank directors. State statutes should do two things. First, they should clarify that gross negligence is the standard of care. Second, they should clearly define what is meant by gross negligence so that it is not left to a court of law to decide its meaning without clear direction from the state legislature.

For reference, see Bank Director Standards of Care and Protections: A Fifty-State Survey, David Baris, Ed., a publication of the American Association of Bank Directors

AABD also recommends that states adopt the Business Judgment Rule as applied in Delaware.

The State of Delaware is a leading domicile for U.S. and international corporations. More than 1,000,000 business entities have made Delaware their legal home. More than 50% of all publicly-traded companies in the United States including 64% of the Fortune 500 have chosen Delaware as their legal home.

The Business Judgment Rule (“BJR”) has been summarized as a presumption that in making a decision, directors were well informed, acted in good faith, and honestly believed that the decision was in the best interests of the corporation.

Delaware courts frequently dismiss an action without necessity of a trial based on a review of the procedural steps that a board has taken consistent with the presumption. But, without a robust BJR, it is extremely difficult to avoid a trial. Bank director defendants in FDIC suits have found that the costs of defending themselves through trial are prohibitive and consequently are forced into undesirable settlements, regardless of the facts.

You, your board, your bank and your state bank trade association should review your state laws now and decide whether clarification of your state statutes is warranted so that they would bar suits unless the conduct was wanton and done with conscious or reckless disregard.

In future Alerts, AABD will specify states where statutory reform is needed.

In a separate Alert, AABD will provide AABD members an opportunity to participate in a Task Force that will lead the AABD Initiative to reform state director standards of care.