Among the important questions that will need to be answered in connection with the current wave of failed bank litigation is the question of extent to which the non-director officers will be able to defend themselves in reliance on the business judgment rule.

 

 

In the following guest post, Jonathan Joseph (pictured to the left) takes a look at the extent to officers may defend themselves in reliance on the business judgment rule in cases to which California law applies. These questions go to the heart of the

officers’ potential liabilities and the legal standards that will be applied to address those questions.

 

 

Jonathan Joseph is a member of the California State Bar and has focused for over 33 years on regulatory, corporate, securities and transactional matters for banks and bank holding companies and officers and directors of distressed and failed institutions.  He currently serves as the Co-Vice Chair and Secretary of the Financial Institutions Committee of the Business Law Section of the California State Bar (2008 – present). He is the founder and managing partner of Joseph & Cohen, Professional Corporation in San Francisco, CA. Mr. Joseph is also a member of the Washington D.C. Bar and the State Bar of New York. He may be contacted at Jon@josephandcohen.com. A substantially similar version of this article was initially published in Issue No. 1 2012 of the Business Law News of the California State Bar. The original article on which this revised version is based was originally written before the initial decisio in FDIC v Perry was reported (about which decision, refer here).

 

 

Many thanks to Jon for his willingness to publish his article here. I welcome guest posts from responsible commentators on topics relevant to this blog. Any readers who are interested in publishing a guest post on this site are encouraged to contact me directly. Jon’s article follows. Footnotes appear below following the article text.

 

 

 

 

The exact nature of the duties and liabilities of corporate officers who are not directors is a subject that has received little attention from courts and commentators. [1]  Many cases which relate to the duties and liabilities of corporate fiduciaries explore whether negligence and breach of care claims are protected by the business judgment rule and the courts that have spoken have done so mostly in terms of its application to decisions or judgments of corporate directors. [2] While the standard of liability for non-director officers remains relatively unexplored, there is widespread consensus among the courts on the policy justifications for the deferential treatment of directors under the business judgment rule.[3]

 

 

Recently, two Federal banking agencies have brought civil damage actions in California against corporate officers of failed federally-insured depository institutions in which they assert that the widely recognized deference accorded by courts to decisions by directors does not apply to corporate officers. These cases seek damages for the alleged negligence of non-director officers as well as officers who were also directors for huge losses suffered when regulators closed the institutions based largely on pre-closure decisions made in good faith that didn’t turn out well. Three of these cases, which are all triangulating on the same issues, are discussed below. [4] 

 

 

While none of these cases has proceeded to trial, rulings at the motion to dismiss and judgment on the pleadings stage in two of these matters, all within the Central District of California, have emerged with contradictory results — including one ruling in August to the effect that the business judgment rule doesn’t apply to non-director officers. This is troubling to some California practitioners as the great weight of authority by courts and commentators has favored application of the business judgment rule to officers acting in their capacity as officers within the scope of their delegated authority.[5] 

 

 

In most states, including California, Delaware and New York, despite the case law being sparse, there has been little dispute that the business judgment rule or BJR applies equally to corporate officers and directors. Consequently, these pending Central District cases are worthy of focus since any final rulings upholding the position asserted by the Federal banking agencies could have far flung effects. If the BJR is ultimately held not to protect good faith decisions by officers of California based banks, that holding would extend to officers of any California corporation.

 

 

These cases touch upon significant underlying themes being widely debated in American society today (e.g., Occupy Wall Street) as to who should be held responsible for the tremendous costs of bailing out the largest American banks in 2008, why more executives and directors of such institutions haven’t been held accountable and whether corporate executives and directors could have anticipated the acute global financial meltdown in 2008 and thereafter.[6]

 

 

 

The Standard of Conduct and Business Judgment Rule

 

 

The general standard of conduct applicable directors and officers of California corporations in the performance of their functions as they relate to matters in which they are disinterested is a corporate governance principle widely recognized throughout the United States. The standard is well summarized by the American Law Institute’s Principles of Corporate Governance [7]:

 

 

“A director or officer has a duty to the corporation to perform the director’s or officer’s functions in good faith, in a manner that he or she reasonably believes to be in the best interests of the corporation, and with the care that an ordinary prudent person would reasonably be expected to exercise in a like position and under similar circumstances.”

 

 

In California, as elsewhere, when it is applicable, the business judgment rule.[8] precludes judicial second-guessing of decisions made by corporate fiduciaries in good faith or where the decision can be attributed to any rationale business purpose.[9]  The rule is procedural and process oriented. It sets up a presumption that decisions are based on sound business judgment and the “presumption can only be rebutted by a factual showing of fraud, bad-faith or gross-overreaching" [10]  based on a widespread “judicial policy of deference to the business judgment of corporate directors in the exercise of their broad discretion in making corporate decisions." [11] The relevant consideration is whether the process employed was either rational or employed in a good faith effort to advance corporate interests even if a judge or jury considering the matter after the fact, believes a decision to have been “substantively wrong, or degrees of wrong extending through stupid to egregious." [12]

 

 

Two Federal Banking Agencies Seek Damages for Breach of the Duty of Care

 

 

Since the global financial crisis began in 2008, four hundred twelve banks have been closed across the United States through December 15, 2011 including thirty-eight banks in California. [13] As of December 8, 2011, the FDIC has authorized suits in connection with 41 failed institutions against 373 individuals for director and officer liability with damage claims of at least $7.6 billion. [14]  Credit unions also failed during this period, although the actual number of failures is lower. {15]  Federal banking regulators are required to investigate insured depository institution failures and bring lawsuits to recover damages. Enforcement authority under Federal law was strengthened in 1989 after Congress concluded that a large number of saving and loan failures during the 1980’s were due to outright fraud and other egregious conduct. [16]

 

 

Thus, it isn’t surprising that the banking agencies have instituted damage suits in connection with some of the most recent failures and more will undoubtedly be authorized in the coming months. [17] As stated above, both the Federal Deposit Insurance Corporation (“FDIC”), in Van Dellen and Perry, and the National Credit Union Administration (‘NCUA”), in Siravo, have asserted that corporate officers in California are not protected by the business judgment rule. [18] Their basic argument is that section 309 of the Corporations Code applies on its face to directors, not officers and that there is no common law business judgment rule in California case law that applies to limit the liability of officers.

 

 

The Aftermath of the Failure of IndyMac Bank

 

 

Van Dellen and Perry involve two different actions by the FDIC as receiver arising out of the failure of IndyMac Bank, FSB in 2008. On July 11, 2008, IndyMac Bank, Pasadena, CA was closed by the Office of Thrift Supervision and the FDIC was named Conservator. With about $32 billion in assets when it was closed, the failure is the second largest since 2008 and the FDIC has estimated that the loss was $8 billion. Van Dellen was filed in July 2010 against former officers of the homebuilder division of IndyMac Bank alleging breach of fiduciary duty and negligence in approving loans made by the division. 

 

 

The FDIC’s other companion IndyMac case is more recent. It was filed against former Chairman of the Board and CEO Michael Perry in July 2011 seeking $600 million in damages, alleging in a single count that Perry, solely in his capacity as an officer (i.e., CEO), had been negligent. [19]  The complaint in Perry is noteworthy for several reasons including that i) the allegations artfully bypass his actions as a director, ii) the complaint is comprised of a single claim for ordinary negligence, and iii) no outside directors were named. The latter is presumably due to the FDIC’s conclusion that the BJR would immunize the outside directors’ conduct. [20]  Alternatively, it is possible that the outside directors settled or are negotiating to settle the FDIC’s claims against them.

 

 

In addition to anticipating the weakness of claims for ordinary negligence against the bank’s directors when it filed the Perry action solely against Michael Perry, the FDIC may also have concluded that it couldn’t support gross negligence theories against directors (including Perry). In Siravo, the NCUA had originally named the former outside directors of WesCorp and alleged they had been negligent, but lost this argument on a motion to dismiss based on the courts assessment that the BJR was applicable. On August 1, 2011, after earlier allowing the FDIC to amend its complaint several times, Judge George Wu issued his Siravo Order in which he dismissed all claims against the directors on business judgment rule grounds – without leave to amend. [21].

 

 

The Failure of WesCorp Federal Credit Union – NCUA v. Siravo

 

 

Siravo involves losses arising out of the failure of Western Corporate Federal Credit Union (“WesCorp”), which was the largest corporate credit union in the United States when it was placed into conservatorship by the NCUA on March 19, 2009. On October 1, 2010, the NCUA placed WesCorp into involuntary liquidation. WesCorp was originally seized after the NCUA concluded that its liquidity was imperiled by $6.8 billion in anticipated losses stemming from investments in private-label mortgage-backed securities (“MBS”). The NCUA originally brought suit against former officers and directors of WesCorp alleging they breached their duty of due care and were grossly negligent when they approved investments in MBS. Due to Judge Wu’s decision to dismiss the NCUA claims against WesCorp’s outside directors, the only remaining defendants in Siravo, as of the date this article went to print, were five officers.

 

 

The Siravo Order was issued pursuant to a motion to dismiss brought by the officer and director defendants pursuant to Rule 12(b)(6). The standard for such a motion required the court to 1) construe the NCUA’s complaint in the light most favorable to the plaintiff, and 2) accept all well-pleaded factual allegations as true, as well as all reasonable inferences to be drawn from them. [22]  The court was not required to accept as true “legal conclusions merely because they were cast in the form of factual allegations." [23] and the complaint against the defendants will not be upheld if it “tenders ‘naked assertion[s]’ devoid of ‘further factual enhancement.’" [24] Rather, the court concluded that to survive a motion to dismiss, the plaintiff must allege facts that, if accepted as true, are sufficient to “raise a right to relief above the speculative level,” and to “state a claim to relief that is plausible on its face." [25]

 

 

The director defendants in Siravo argued that the facts as pled in the amended complaint made clear that they had operated far above the standard of culpability necessary for a claim to survive application of the business judgment rule. The director defendants further argued that the complaint failed to focus, as required, on the “process” in which they made their decisions, but rather attacked simply the content and results of their decision.

 

 

In considering director defendants’ motion to dismiss, Judge Wu held that the plaintiff would effectively have to plead “fraud, breach of trust, conflict of interest, bad faith, oppression, corruption, complete abdication of responsibility, willful ignorance or gross overreaching” in order to overcome the business judgment rule as applied to the directors. [26]  In the final analysis, Judge Wu concluded that the directors “may have made choices – or not made choices – with which the NCUA disagrees, but that does not mean they failed in their responsibilities so severely that they lose the protection of the business judgment rule." [27]

 

 

The director defendants also argued that the business judgment rule extends to officer defendants such as a WesCorp executive who had been the Chief Investment Officer. The NCUA argued that a 1989 California decision, Gaillard v. Natomas Co. [28]  held that only directors are protected in California by the business judgment rule. In denying the motion to dismiss the officer defendants from the breach of duty claim, the court focused on the plain language of section 309 of the Corporations Code (which is applicable only to directors) and refused to recognize the common law application of the BJR to an officer in California. The Judge noted that some California decisions had included officers within the scope of the BJR’s protection, but found nevertheless that Gaillard v Natomashad considered the issue and concluded that the WesCorp officer defendants did not enjoy the rules protection. The court may have been swayed by an inference that executives had received increased compensation as a result of a shift in WesCorp’s investment emphasis which increased the compensation paid to top executives. [29]

 

 

Judge Fischer Rules that the BJR May Be Raised by Corporate Officers

 

 

Just one month after Judge Wu’s ruling in Siravo, Judge Dale S. Fischer issued the Van Dellen Order which also considered the issue of whether the common law business judgment rule extends to good faith conduct by corporate officers in California. The procedural posture in Van Dellen was slightly different than in Siravo. In Van Dellen the officer defendants had filed an Answer raising affirmative defenses. The FDIC moved for partial judgment on the pleadings pursuant to Federal Rule of Procedure 12(c) as to some of the affirmative defenses including the business judgment rule. However, because a motion for judgment on the pleadings is functionally identical to a motion to dismiss, the applicable standard is essentially the same as for a Rule 12(b)(6) motion. [30]  Judge Fischer rejected the reasoning employed by Judge Wu and reached the opposite conclusion. The Judge distinguished Gaillard v. Natomas and held that as a matter of law the FDIC had failed to demonstrate that the business judgment rule is inapplicable to officers in Californa. [31]

 

 

The Van Dellen officer defendants had argued that the common law component of the BJR applies even if Section 309 does not apply to officers and that Gaillard v. Natomas was a duty of loyalty case inapplicable to whether the BJR is a defense to breach of care claims. Presumably, the Judge was aware of Professor Melvin Eisenberg’s criticism of Gaillardin his 1995 study for the California Law Revision Commission [32]  since her ruling closely tracked the Eisenberg Law Revision Commission Analysis. She held that “California has recognized that ‘[t]he common law business judgment rule has two components’ and ‘[o]nly the first component is embodied in Corporations Code section 309’… most California cases discussing § 309 involve directors and not officers, … the common law component of the business judgment rule may apply to officers even if § 309 does not." [33]

 

 

Motion to Dismiss Ruling in FDIC v. Perry Could Be Tie Breaker

 

 

The Perry case is also being considered in the Central District of California before Judge Otis Wright. Perry has filed a motion to dismiss pursuant to Rule 12(b)(6). The motion was considered on November 7, 2011 following briefing by the FDIC and Perry. Perry’s motion points the court to the Van Dellen Order and notes that the FDIC’s position that section 309 applies to directors only is beside the point since the second, uncodified component of the BJR, applies to directors and to officers. [34]

 

 

Perry also attacked the FDIC’s reliance on GaillardPerry pointed out that Gaillard related to golden parachutes provided to a corporation’s officers and involved self-dealing. Perry argues that Gaillard correctly held that the BJR was inapplicable because the officers therein had a personal interest in golden parachutes, but the second aspect of the court’s holding was incorrect because the officers were not entitled to the protection of the BJR only because they had engaged in self-dealing. [35] Perry does not involve any self-dealing or duty of loyalty allegations.

 

 

The officer defendants in Siravo intend to raise the Van Dellen Order at a hearing in early 2012. It is possible, therefore, that Judge Wu might modify his prior BJR ruling as it relates to officers. In Perry, the courtis expected to rule on Perry’s motion to dismiss in the next few months. While the issue may seem narrow, the implications in California could be far-reaching if the FDIC’s position prevails. The FDIC argues that good reasons exist as to why the BJR should not apply to corporate officers. In contrast to outside directors, they state that because officers receive higher absolute pay levels, they stand to reap substantial rewards for serving and taking risks and for this reason, the FDIC reasons they should face greater risks. [36]  Perry’s reply is that FDIC’s assertion that policy reasons support limiting the BJR protection only to directors is entirely off base. Perry asserts that not a single state has implemented such a policy. [37]

 

 

The BJR represents sound public policy that, as a general rule, should continue to be applied by the courts as a presumption that good faith judgments by officers and directors of California corporations can only be rebutted by a factual showing of fraud, bad faith or gross overreaching. To employ a different rule as advocated by the banking agencies – one that permits judging the content of decisions by corporate fiduciaries with the benefit of hindsight – would, in the long run, be injurious to shareholder interests. [38]  Such a holding would tend to chill the ability of corporate executives, including bankers, to take legitimate and reasonable business risks that could benefit their corporations and shareholders.

 

 

Professor Melvin Eisenberg has noted that the BJR is premised on the idea that business judgments are necessarily made on the basis of incomplete information and in the face of obvious risks, so that typically a range of decisions is reasonable. Fact finders are ill-equipped to distinguish between bad decisions and proper decisions that turn out badly based on 20-20 hindsight. If courts too often erroneously treat decisions that turned out badly as bad decisions, and unfairly hold directors and officers liable for such decisions, corporate decision makers might tend to be unduly risk-averse. The business judgment rule protects directors and officers from such unfair liability and encourages risk taking. [39]

 

 

The Van Dellen Order, dated September 27, 2011, and the Siravo Order, dated August 1, 2011, both considered the business judgment rule as it relates to tort claims against corporate officers under California law and reached conflicting results. The Perry cased involves the same issue. A motion to dismiss the single claim for negligence in Perry was heard on November 7, 2011. No ruling had been delivered as of early December 2011. The ruling, when issued by the Perry court, could be viewed as a tie-breaker. Alternatively, since the issue presents an unsettled question of an important legal principle in California, if the Court in FDIC v. Perry follows the Siravo result (i.e., ruling against Perry), it could pave the way for an appeal by Perry to the Ninth Circuit.

 

 

These decisions and future rulings in other FDIC civil damage actions against bank executive officers that have also been brought by the FDIC recently in California and appeals of District Court decisions could shape California law as it applies to officers of California corporations and federally-insured depository institutions headquartered in California for years. Consequently, California business leaders and corporate practitioners should follow these cases closely. 

 

 

Given the justifications and importance of the business-judgment rule and the uncertainty of its status and formulation in California, particularly as it applies to officers of corporations in the exercise of judgment when making business decisions, it may be desirable to codify the rule legislatively unless the Ninth Circuit or the California Supreme Court act first and find that the business judgment rule applies to officers.

 

 

Postscript

 

 

On December 13, 2011, the District Court in Perry denied Michael Perry’s motion to dismiss, holding that the business judgment rule does not apply to officers under California law. The Court’s order was based on the Judge’s conclusion that no authority exists for the proposition that the common law BJR applies to officers and he further inferred that when the legislature adopted section 309 it must have meant to eliminate the common law business judgment rule. His finding is surprising because the legislative history doesn’t explicitly state the legislature intended to override the common law business judgment rule when it enacted section 309 in 1977.   Consequently, the Court’s reasoning isn’t particularly persuasive.

 

 

In an amended order issued on February 21, 2012, Judge Otis Wright approved Perry’s request for an immediate interlocutory appeal of his order. Judge Wright found that his order involved “a controlling question of law as to which there is substantial ground for differences of opinion” and that the immediate appeal “may materially advance the ultimate termination of the litigation.”

 

 

This author’s view is that the Ninth Circuit should overrule the District Court’s decision in Perry. This can be accomplished by holding that Gaillard v. Natomas was misapplied by the District Court since Gaillard is only applicable to cases involving breach of the duty of loyalty. The Appellate Court should also correct the District Court’s unfounded conclusion regarding the legislative intent underlying section 309 by finding that in 1977 when section 309 was enacted the common law business judgment rule as applied to officers was not eliminated. Consequently, the BJR would continue as a valid defense for officers of California corporations and federally chartered institutions headquartered in the State.   Common sense and public policy call out for such a result.

 

*End*


 

 

Endnotes:

 

[1] Lawrence A. Hamermesh and A. Gilchrist Sparks III, Corporate Officers and the Business Judgment Rule: A Reply to Professor Johnson, 60 Bus. Law. 865, vol. 60, May 2005 (“Hamermesh & Gilchrist Sparks”); Hellman v. Hellman, 860 N.Y.S.2d 817, 19 Misc.3d 695 (2008) (“Hellman v Hellman”).

 

[2] Hamermesh & Gilchrist Sparks at 867; Hellman v Hellman at 719.

 

 

[3] Hamermesh & Gilchrist Sparks at 867; Berg & Berg Enters., LLC v. Boyle, 178 Cal. App. 4th 1020, 1045, 1048 (2009) (The business judgment rule "has two components—one which immunizes directors from personal liability if they act in accordance with its requirements, and another which insulates from court intervention those management decisions which are made by directors in good faith in what the directors believe is the organization’s best interest…”).

 

[4] See FDIC as Receiver for IndyMac Bank, F.S.B. v. Scott Van Dellen, et al., No. 2:10-cv-04915- DSF-SH (C.D. Cal. Jul. 2, 2010 )(“Van Dellen”); See also Van Dellen Memorandum Order by Judge Dale S. Fischer filed Sept. 27, 2011(Doc. No. 75) in Van Dellen (“Van Dellen Order”); National Credit Union Administration as Conservator for Western Corporate Federal Credit Union v. Siravo, et al., No. cv-10-01597 GW (MANx) (C.D. Cal.) (“Siravo”); FDIC as Receiver of IndyMac Bank, F.S.B. v. Perry, No. 11-cv-5561-ODW-MRWx (C.D. Cal. Jul. 6, 2011) (“Perry”).

 

[5]  1 American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 4.01, Comment a (1994); H. Henn and J. Alexander, Laws of Corporations and Other BusinessEnterprises, § 242 (3d ed. 1983); Frances T. v. Village Green Owners Ass’n,42 Cal. 3d 490, 507 n. 14 (1986); Biren v. Equality Emergency Med. Group, 102 Cal.App. 4th 125, 137 (2002)(“Biren”);PMC, Inc. v. Kadisha, 78 Cal. App. 4th 1368, 1386-87 (2000) (“Kadisha”); McMichael v. U.S. Filter Corp., 2001 U.S. Dist. LEXIS 3918, *31-*32 (C.D. Cal Feb. 22, 2001 (applying Delaware law); Hameresh & Gilchrist Sparks("policy rationales underlying the development and application of the business judgment rule to corporate directors similarly justify application of the rule to non-director officers, at least with respect to their exercise of discretionary delegated authority");Stephen M. Bainbridge, The Business Judgment Rule As Abstention Doctrine, 57 VAND. L. Rev. 83 (2004) (same). An earlier study also supported application of the business judgment rule to non-director officers within the scope of their delegated authority. (A. Gilchrist Sparks, III and Lawrence A. Hamermesh, Common Law Duties of Non-Director Corporate Officers, 48 Bus. Law. 215 (1992);Compare Lyman P.Q. Johnson, Corporate Officers and the Business Judgment Rule, 60 Bus. Law. 439 (2005) (arguing that the business judgment rule should not shield corporate officers to the degree that it protects directors).

 

[6]  Both the then Chairwoman of the Federal Deposit Insurance Corporation, Sheila Bair, and Federal Reserve Chairman Ben Bernanke have conceded in sworn testimonythat few could have foreseen the 2008 financial crisis.Ms. Bair testified that “[a]t the time the bubble was building, few saw all therisks and linkages that we can now better identify.” FDIC, Statement of Sheila C.Bair on the Causes and Current State of the Financial Crisis before the FinancialCrisis Inquiry Commission (Jan. 14, 2010), available at http://www.fdic.gov/news/news/ speeches/chairman/spjan1410.html  . Mr. Bernanke similarly testifiedthat “I fully admit that I did not forecast this crisis.” Declassified Testimony ofBen Bernanke before a Closed Session of the Financial Crisis Inquiry Commission (Nov. 17, 2009), at 48-49, available at http://www.scribd.com/doc/48878840/FCIC-Interview-with-Ben-Bernanke-Federal-Reserve.

 

[7] See  American Law Institute, Principles of Corporate Governance: Analysis and Recommendations § 4.01 and cmt. 1 (2005).

 

[8] Cal. Corp. Code § 309(a); Berg & Berg Enters., LLC v. Boyle, 178 Cal. App.4that 1048.

 

 

[9] Berg & Berg Enters., LLC v. Boyle, 178 Cal. App. 4that 1045; see also Marble v. Latchford Glass Co., 205 Cal. App. 2d 171, 178 (1962) in which the court said that it would “not substitute its judgment for the business judgment of the board of directors made in good faith.”

 

[10] Eldridge v. Tymshare, Inc., 186 Cal. App 3d 767, 776 (1986).

 

 

[11] Berg & Berg Enters., LLC, 178 Cal. App. 4th at 1020 (quoting Barnes v. State Farm Mut. Auto. Ins.Co.,16 Cal. App. 4th 365, 378 (1993)).

 

[12] In re Citicorp Inc. Shareholder Derivative Litig.,964 A.2d 106, 127 (Del. Ch. 2009)(“In re Citicorp”).

 

[13] See http://portalseven.com/banks/.

 

[14] See http://www.fdic.gov/bank/individual/failed/pls/index.html, which states, in part: “The FDIC follows the policies adopted by the FDIC Board in 1992, Statement Concerning the Responsibilities of Bank Directors and Officers, which can be found at http://www.fdic.gov/regulations/laws/rules/5000-3300.html#fdic5000statementct, and require Board approval before actions are brought against directors and officers. Professional liability suits are only pursued if they are both meritorious and cost-effective. Before seeking recoveries from professionals, the FDIC conducts a thorough investigation into the causes of the failure. Most investigations are completed within 18 months from the time the institution is closed. Prior to filing the claim, staff will attempt to settle with the responsible parties. If a settlement cannot be reached, however, a complaint will be filed, typically in federal court.”

 

[15] See http://www.snl.com/InteractiveX/article.aspx?CDID=A-12197960-12332&KPLT=2.

 

[16] See Michael P. Battin, Bank Director Liability under Firrea, 63 Fordham L. Rev. 2347 (1995), available at http://ir.lawnet.fordham.edu/flr/vol63/iss6/11.

 

[17] See Jonathan D. Joseph, Claims Against Failed Bank D&O’s Will Spike in 2012, available at http://josephandcohen.com/2011/09/.

 

[18] For a Federally-chartered financial institution the applicable law is the law of the state in which the institution has its main office or principle place of business. For state-chartered banking corporations the applicable law is the law of the state of incorporation. See Atherton v. FDIC, 519 U.S. 213, 224 (1997).

 

[19] Former Chairman and CEO, Michael Perry, has a much different perspective than the FDIC. His personal blog site, Not To Big To Fail, at http://nottoobigtofail.org/ sets forth facts from his perspective about Indy Mac and the FDIC’s lawsuit against him including copies of briefs filed in the case.

 

[20] The FDIC’s allegations attempt to adroitly bifurcate the inextricably interwoven actions of a single person serving as an officer and director. This is no easy task and in many contexts may be almost impossible. In Hellman v Hellman, the court stated"given the typical involvement of both directors and officers, and the typical overlap of roles and communications, it is likely to be fiendishly complex for a court, let alone a jury, to sort out when and where any given defendant is acting . . . in a distinct capacity as a director or officer…". Hellman v. Hellman at 720. 

 

[21] See Siravo Order by Judge George Wu filed August 1, 2011 (Doc. No. 153 incorporating Docs. 110, 115 and 147) in Siravo (“Siravo Order”).

 

[22] See Sprewell v. Golden State Warriors, 266 F.3d 979, 988, (9th Cir.), amended on denial of reh’g, 275 F.3d  1187 (9th Cir. 2001); Pareto v. FDIC, 139 F.3d 696, 699 ( 9th Cir. 1998); See also Fleming v. Pickard, 581 F.3d 922, 925 (9th Cir. 2009).

 

[23]  Warren v. Fox Family Worldwide, Inc., 328 F.3d 1136, 1139 (9th Cir. 2003).

 

[24] Ashcroft v. Iqbal, 129 S.Ct 1937, 1949 (2009) (quoting Bell Atlantic Corp.,v. Twombly, 550 U.S. 544, 556 (2007).

 

[25] Bell Atlantic Corp., v. Twombly, 550 U. S. at 556, 570. Dismissal pursuant to Rule 12(b)(6) is proper only where there is a “lack of a cognizable legal theory or the absence of sufficient facts alleged under a cognizable legal theory. Balistreri v. Pacifica Police Dep’t, 901 f.2d 696, 699 (9th Cir. 1990).

 

[26] Siravo Order (Doc. No. 110 and 115 therein) (citing FDIC v. Castetter, 184 F.3d 1040, 1046 (9th Cir. 1999); Frances T. v. Village Green Owners Ass’n, Id at 509; Bader v. Anderson, 179 Cal.App 4 th 775, 787 (2009); Berg & Berg Enters., LLC at 1045)).

 

 

[27]Siravo Order (Doc. No. 147 therein).

 

 

[28] 208 Cal.App 3d 1250 (1989).

 

 

[29] Siravo Order (Doc. No. 110 at 12). See also Hill v. State Farm Mutual Insurance Co., 166 Cal.App. 4th 1438, 1469, 83 Cal.Rptr.3d 651, 673 (2008) (which was not cited by Judge Wu despite that fact that in dicta it endorsed the better-reasoned view that officers are just as entitled to the protection of the BJR as directors). Even though the court concluded that the business judgment rule was not a basis for dismissing the claim for negligence against the officers, it did conclude that the NCUA had failed to allege in particular what one officer “did or did not do so as to make a claim for breach of fiduciary duties plausible against him under Twombly and Iqbal.” The NCUA was permitted to amend its complaint against the officer for breach of fiduciary duty. See Doc No. 110.

 

 

[30] Van Dellen Order at 2.

 

[31] Van Dellen Order at 3 (“Because most California cases discussing § 309 involve directors and not officers, and because the common law component of the business judgment rule may apply to officers even if § 309 does not, the FDIC has not established that the California business judgment rule is inapplicable as a matter of law.’)

 

[32] See Melvin A. Eisenberg, California Law Revision Commission, Whether the Business-Judgment Rule Should Be Codified 40, 47 – 49(May 1995) (“Eisenberg Law Revision Commission Analysis”) who points out that the common law business judgment rule applies to directors and officers and the holding in Gaillard v. Natomasto the effect that Corporations Code Section 309 “codifies California’s business-judgment rule” is incorrect. Eisenberg states: “Section 309 codifies the standard of careful conduct, with which the business-judgment rule is inconsistent….The better position, however, is that although Section 309 does not codify the business-judgment rule, neither does it overturn the rule.”

 

[33] See Perry Order at 3 citing BirenandKadishaat 1386-1387(“[A]n officer or director who commits a tort because he or she reasonably relied on expert advice or other information cannot be held personally liable for the resulting harm”) and Lee v. Interinsurance Exch., 50 Cal.App. 4th 694, 714 (1996).

 

[34]  See Perry Reply in Support of Motion to Dismiss at 8 (Doc. No. 26, filed October 24, 2011).

 

[35] Id at 10. Perry also points out that the FDIC’s reliance on FDIC v. Castetter, 184 F.3d 1040, 1041 n.1 (9th Cir. 1999) was misplaced since the only appellees in that case were directors and the Ninth Circuit actually held that ordinary negligence claim against former bank officials based on allegedly unsound banking practices was barred by the business judgment rule.

 

[36] See PerryOpposition of Plaintiff Federal Deposit Insurance Corporation to Defendant Michael Perry’s Motion to Dismiss at 17 (Doc. No. 22, filed October 11, 2011).

 

[37] See Perry Motion to Dismiss at 20 (Doc. No. 18, filed Sept. 15, 2011) (“The Delaware Supreme Court has expressly held that “the business judgment rule….protect[s] corporate officers and directors…other jurisdictions similarly apply the business judgment rule both to directors and officers: Arizona, Pennsylvania, Illinois, Texas, Connecticut, New York, Washington, Louisiana, Georgia and Florida, to name just a few.”).

 

[38] In re Citicorpat 127.

 

[39] See Eisenberg Law Revision Commission Analysis at 44 – 45, 49 – 50 (“Given the justifications and importance of the business-judgment rule, and the uncertainty of its status and formulation in California, it would be desirable to codify the rule legislatively. The simplest approach would be to amend California Corporations Code Section 309 by incorporating the formulation of the business-judgment rule in the American Law Institute’s Principles of Corporate Governance Section 4.01(c)”).

 

 

© Jonathan D. Joseph. 2012. All Rights Reserved. A substantially similar version of this article was initially published in Issue No. 1 2012 of the Business Law News of the California State Bar. The original article upon which this revised version is based was originally written before the initial decision in FDIC v Perry was reported.