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September 14, 2015
  FDIC v. Rippy - Fourth Circuit
Headline: Bank Officers Can Be Held Personally Liable for Bad Loans Despite Business Judgment Rule Protections

Areas of Law: Business Law, Torts

Issue Presented: Whether the business judgment rule and North Carolina statutory law prevent bank directors and officers from being held personally liable for bank losses under theories of gross negligence, negligence, and breach of fiduciary duty.

Brief Summary: In a case that attracted a lot of attention from banking associations across the nation, the United States Court of Appeals for the Fourth Circuit upheld the District Court's grant of summary judgment for the directors of Cooperative Bank on all counts. The Court's opinion was based on the business judgment rule as read in conjunction with an exculpatory clause in the bank's articles of incorporation. The court reversed the District Court's grant of summary judgment for the officers of Cooperative Bank on the claims of ordinary negligence and breach of fiduciary duty finding that the officers did not act within generally accepted banking practices when they approved many of the bank's loans.

Extended Summary: Cooperative Bank, based in North Carolina, closed in 2008. The bank ran into trouble when the board of directors voted to increase the bank's assets from $443 million to $1 billion in three years. This was carried out through increased commercial real estate lending.

For two years, the bank received fair grades on its FDIC reviews. The FDIC did provide the bank with feedback that it should improve its credit administration and underwriting practices. The issues were not addressed and two years later the bank was found to be extremely deficient during its annual review. This resulted in a Cease and Desist Order from the FDIC in 2008. Shortly, thereafter the bank closed when it was unable to comply with the order.

The FDIC sustained $216.1 million in losses when the bank closed. It sought to recoup this money from the bank's directors and officers. The FDIC brought claims of gross negligence, negligence, and breach of fiduciary duty against the directors and officers in federal district court. The directors and officers sought an order of summary judgment citing the business judgment rule. Any evaluation of personal liability for a bank's directors and officers under federal and North Carolina law is assessed after the business judgment rule is applied. The business judgment rule states that the initial presumption is the directors and officers acted with due care and good faith when making business decisions. A court will not overturn a business decision made by directors and officers unless this presumption is rebutted. The District Court granted summary judgment in favor of both sets of defendants and the FDIC appealed.

In Atherton v. FDIC, 519 U.S. 213 (1997), the Supreme Court held that a state may set its own standard by which a director or officer of a financial institution may be held personally liable in a civil action, as long as that standard meets the gross negligence floor required by federal statute. 12 U.S.C. §1821(k). Under North Carolina law a director or officer of a bank must act 1) in good faith, 2) with the care of an ordinarily prudent person, or 3) in a manner he reasonably believes to be in the bank's best interest. North Carolina state law further provides that officers and directors may be held personally liable for negligence. However, North Carolina law allows directors to escape liability from ordinary negligence if the corporation's articles of incorporation include an exculpatory provision barring such liability.

Cooperative Bank's articles of incorporation provided an exculpatory clause for the directors which shielded them from liability for negligence and breach of fiduciary duty as long as there was no evidence of fraud or self-dealing. The court found that in light of the provision, the award of summary judgment for the directors on these counts was correct.

The exculpatory provision did not, however, extend to the officers. Because the officers were not exempted from liability under the articles of incorporation, the court then considered whether sufficient evidence had been presented to rebut the business judgment presumption as to the officers' conduct. The court found the FDIC presented adequate evidence the officers knew the loan writing system was unsatisfactory. The court also found the FDIC rebutted the business judgment presumption when it presented evidence the officers were approving loans over the phone and the officers had not received or reviewed the required loan documents prior to approving the loans. Although officers said they relied on reports from the bank's loan administrators, the court found there was a genuine issue of material fact as to whether it was reasonable to rely on these reports given the feedback provided to the officers during the FDIC's reviews which pointed out the issues with the bank's loan writing policies. The court reversed the District Court's grant of summary judgment for negligence and breach of fiduciary duty claims against the officers.

To read the full opinion, click here.

Panel: Judges Gregory, Harris, and Hamilton

Argument Date: 05/13/2015

Date of Issued Opinion: 08/18/2015

Docket Number: Case No. 14-2078

Decided: Affirmed in part and reversed in part by published opinion

Case Alert Author: Kathleen DeNobile, Univ. of Maryland Carey School of Law

Counsel: James Scott Watson, FEDERAL DEPOSIT INSURANCE CORPORATION, Arlington, Virginia, for Appellant. Thomas E. Gilbertsen, VENABLE LLP, Washington, D.C., for Appellees. ON BRIEF: Mary L. Wolff, Douglas A. Black, WOLFF ARDIS, P.C., Memphis, Tennessee; Colleen J. Boles, Assistant General Counsel, Kathryn R. Norcross, Senior Counsel, Steven C. Morrison, Counsel, FEDERAL DEPOSIT INSURANCE CORPORATION, Arlington, Virginia, for Appellant. Ronald R. Glancz, Meredith L. Boylan, VENABLE LLP, Washington, D.C.; Camden R. Webb, Kacy L. Hunt, WILLIAMS MULLEN P.C., Raleigh, North Carolina, for Appellees. Katherine M.R. Bosken, Raleigh, North Carolina, for Amicus North Carolina Commissioner of Banks. Kate Comerford Todd, Steven P. Lehotsky, U.S. CHAMBER LITIGATION CENTER, INC., Washington, D.C.; John K. Villa, Kannon K. Shanmugam, Ryan Scarborough, Richard Olderman, WILLIAMS & CONNOLLY LLP, Washington, D.C., for Amicus The Chamber of Commerce of the United States of America. Michael A.F. Johnson, Nancy L. Perkins, Elliott C. Mogul, Joanna G. Persio, ARNOLD & PORTER LLP, Washington, D.C., for Amici American Bankers Association, Alabama Bankers Association, Alaska Bankers Association, Arizona Bankers Association, Arkansas Bankers Association, California Bankers Association, Colorado Bankers Association, Connecticut Bankers Association, Delaware Bankers Association, Florida Bankers Association, Georgia Bankers Association, Hawaii Bankers Association, Heartland Community Bankers Association, Idaho Bankers Association, Illinois Bankers Association, Illinois League of Financial Institutions, Indiana Bankers Association, Iowa Bankers Association, Kansas Bankers Association, Kentucky Bankers Association, Louisiana Bankers Association, Maine Bankers Association, Maryland Bankers Association, Massachusetts Bankers Association, Michigan Bankers Association, Minnesota Bankers Association, Mississippi Bankers Association, Missouri Bankers Association, Montana Bankers Association, Nebraska Bankers Association, Nevada Bankers Association, New Hampshire Bankers Association, New Jersey Bankers Association, New Mexico Bankers Association, New York Bankers Association, North Carolina Bankers Association, North Dakota Bankers Association, Ohio Bankers League, Oklahoma Bankers Association, Oregon Bankers Association, Pennsylvania Bankers Association, Puerto Rico Bankers Association, Rhode Island Bankers Association, South Carolina Bankers Association, South Dakota Bankers Association, Tennessee Bankers Association, Texas Bankers Association, Utah Bankers Association, Vermont Bankers Association, Virginia Bankers Association, Washington Bankers Association, Washington Financial League, West Virginia Bankers Association, Wisconsin Bankers Association, and Wyoming Bankers Association. Matthew P. Previn, Joseph J. Reilly, Ali M. Abugheida, BUCKLEY SANDLER LLP, Washington, D.C., for Amici American Association of Bank Directors, Independent Community Bankers of America, and The Clearing House Association, LLC.

Author of Opinion: Judge Gregory

Case Alert Supervisor: Professor Renée Hutchins

Edited: 09/29/2015 at 12:44 PM by Renee Hutchins

    Posted By: Renee Hutchins @ 09/14/2015 12:52 PM     4th Circuit  

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