FDIC Failed Bank Director And Officer Claims - Recent Court Decisions Better Define The Landscape

Since the current cycle of bank failures began in 2008, the FDIC has authorized suits for director and officer ("D&O") liability against 427 individuals in connection with 49 failed banks. Through February 9, 2012, the FDIC has filed 22 lawsuits against former officers and directors of failed banks, most of which were instituted within the past year. Recently, United States District Courts in Atlanta and Chicago have issued important opinions governing the manner in which these lawsuits should be handled. In FDIC v. Steven Skow, et al., a case which arose from the failure of Integrity Bank, Alpharetta, Georgia ("Integrity"), on August 29, 2008.1 and FDIC v. John M. Saphir, et al., a case arising out of the failure of Heritage Community Bank, Glenwood, Illinois ("Heritage"), on February 27, 2009,2 the courts define the legal grounds on which the FDIC's bank failure claims against D&Os may be litigated, especially in the early motion stage. The Integrity and Heritage cases are based on a familiar set of FDIC allegations and claims in failed bank D&O lawsuits: the alleged pursuit by directors and officers of failed banks of an unsustainable growth strategy concentrated on lending for allegedly high-risk and speculative real estate ventures, which resulted in substantial losses when the real estate market collapsed and the bank failed. In these and other lawsuits, the FDIC has asserted claims for (i) breach of fiduciary duty, (ii) ordinary negligence under state law, and (iii) gross negligence under the federal Financial Institutions Reform Recovery and Enforcement Act of 1989 ("FIRREA"). The director and officer defendants in these recent cases filed dispositive Rule 12 motions seeking dismissal of all claims. In Integrity, the FDIC also moved to strike a number of the defendants' affirmative defenses. In both Integrity and Heritage, the courts allowed some of the FDIC's claims to survive dismissal at the pleadings stage, while other claims and certain affirmative defenses did not.

Claims Based on Ordinary Negligence Should Not Survive the Business Judgment Rule

The defendants in Integrity and Heritage argued that the business judgment rule barred claims for ordinary negligence. The Integrity Court addressed the substance of this argument. Under Georgia corporate law, as noted by the Integrity Bank defendants and the court, the business judgment rule "affords an officer the presumption that he or she acted in good faith, and absolves the officer of personal liability unless it is established that he or she engaged in fraud, bad faith or an abuse of discretion."3 Thus, "allegations amounting to mere negligence, carelessness or 'lackadaisical performance' are insufficient as a matter of law."4 Finding this principle determinative, the court held that claims against directors and officers for ordinary negligence, as well as claims for breach of fiduciary duty based on ordinary negligence, are precluded by...