ABA Banking Journal
No Result
View All Result
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive
SUBSCRIBE
ABA Banking Journal
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive
No Result
View All Result
No Result
View All Result
ADVERTISEMENT
Home Legal

Does the Business Judgment Rule Apply to Bank Directors?

April 29, 2015
Reading Time: 3 mins read

By Dawn Causey

Not according to the FDIC. The FDIC continues to sue directors to recover for business judgments gone wrong. These actions ignore the long history of courts respecting boards of directors exercising their judgments in what they thought were the best interests of the bank.

The business judgment rule is a basic pillar of U.S. corporate law that prevents courts from second-guessing the decisions of directors who have acted in good faith with due care and within the directors’ authority. Challengers to judgments made in accordance with the rule must demonstrate bad faith or gross negligence. It is intentionally a high burden of proof and one that the FDIC has repeatedly tried to lower.

In 1997, the FDIC tried to convince the U.S. Supreme Court that directors were subject to a federal common law negligence standard of liability that was a much lower burden for the agency. However, in Atherton v. FDIC, the Court rejected the FDIC’s argument unanimously and directed the agency to apply the state business judgment rule standards.

Now the FDIC has made a run at those state standards. ABA questioned the FDIC’s tactics in its brief filed on behalf of the industry and all of the state bankers associations in a case involving a failed North Carolina bank where the FDIC attempted to hold directors personally liable for ordinary negligence in their business judgments. ABA argued such an approach would negate decades of established case law, undermine the sound policy rational supporting the rule, and diminish the rule’s economic and social benefits.

The case, FDIC v. Willetts (renamed FDIC v. Rippy on appeal), involved a series of loans that went sour. The district court chastised the FDIC for requiring directors to have more effective crystal balls than the regulators themselves. Citing public statements by high-ranking administrative officials about the foreseeability of the economic downturn, the district court rejected the FDIC’s attempts to use 20/20 hindsight and make the directors guarantors of their lending decisions.

Fear of liability for regulatory hindsight is a real issue for bank boards. As noted in ABA’s survey attached to the brief, 20 percent of the banks responding lost a director or officer due to concerns about personal liability and 40 percent reported that positions had been rejected over that concern. Among individual survey respondents, 97 percent reported that they were somewhat or very concerned about their potential personal liability for their business decisions and 87 percent reported that a reduction in the legal protection against personal liability would affect their willingness to serve on boards or in the bank.

ABA and the state bankers associations were not alone in their opposition to the FDIC action. The U.S. Chamber of Commerce filed a brief that urged the Appellate Court to not only apply the higher standard, but also to make it easier for directors and officers to win cases against the FDIC. As stated in their brief, “directors and officers in failed bank litigation have only one real chance to dispose of a case before trial: summary judgment. If Defendants do not prevail on summary judgment, they face a Hobson’s choice of settling (often at significant personal expense) or litigating (with ruinous amounts of potential liability in the balance). Not surprisingly, the great majority of cases, even cases with marginal or wholly insubstantial claims, settle.”

For all these reasons, ABA urged the Court to reject the FDIC’s efforts to tailor the business judgment rule to the FDIC’s interest. “The FDIC’s position has no support in controlling case law or sound public policy.” Bank directors deserve the benefit of the business judgment rule. Let’s hope the Fourth Circuit Court of Appeals follows that sound policy.

ADVERTISEMENT
Tags: Directors
ShareTweetPin

Related Posts

CFPB launches ‘tip line’ to report on bureau employees

ABA, associations urge CFPB to rescind changes to adjudication process

Legal
June 13, 2025

ABA joined three associations in voicing support for a CFPB proposal to rescind a set of changes to the bureau’s rules that, among other things, gave its director authority to resolve adjudication hearings overseen by the agency.

Acting OCC head discusses regulatory tailoring, bank merger reviews

OCC’s Hood affirms support for federal preemption

Legal
June 9, 2025

Acting Comptroller of the Currency Rodney Hood strongly affirmed the OCC’s continued support for federal preemption of state laws for national banks and federal thrifts, defending preemption as both lawful and pro-competitive.

SEC updates data breach standards for investment companies, advisers

CFPB asks court to vacate Section 1033 data sharing rule

Compliance and Risk
June 2, 2025

The CFPB has asked a federal court to vacate its rule on financial data sharing, citing the rule’s “numerous legal infirmities.”

Illinois lawmakers vote to delay implementation date for state interchange fee law

Illinois lawmakers vote to delay implementation date for state interchange fee law

Legal
June 1, 2025

The Illinois General Assembly approved legislation extending by a year the effective date of a first-of-its-kind state law restricting interchange fees.

Helping Home Buyers Navigate a Hot Housing Market

Reconsideration of value: A critical component of appraisal review

Compliance and Risk
May 28, 2025

Ensuring appraisals and other types of property valuations are accurate is not just about fair lending.

CFPB issues decision on TILA preemption of state laws

Fed, plaintiffs seek pause in stress test lawsuit

Legal
May 26, 2025

The Federal Reserve and a coalition of bank and business associations have requested that a federal court pause litigation challenging the Fed’s stress testing framework.

NEWSBYTES

Banking agencies seek public comment on strategies to combat payments fraud

June 16, 2025

ABA urges CFPB to preserve streamlined mortgage relief option

June 16, 2025

Illinois pushes back implementation date for state interchange fee law

June 16, 2025

SPONSORED CONTENT

AI Compliance and Regulation: What Financial Institutions Need to Know

Unlocking Deposit Growth: How Financial Institutions Can Activate Data for Precision Cross-Sell

June 1, 2025
Choosing the Right Account Opening Platform: 10 Key Considerations for Long-Term Success

Choosing the Right Account Opening Platform: 10 Key Considerations for Long-Term Success

April 25, 2025
Outsourcing: Getting to Go/No-Go

Outsourcing: Getting to Go/No-Go

April 5, 2025
Six Payments Trends Driving the Future of Transactions

Six Payments Trends Driving the Future of Transactions

March 15, 2025

PODCASTS

Podcast: Old National’s Jim Ryan on the things that really matter

June 12, 2025

Podcast: What bankers need to know about ‘First Amendment audits’

June 5, 2025

Podcast: Accelerating banking for quick-service restaurants

May 8, 2025
ADVERTISEMENT

American Bankers Association
1333 New Hampshire Ave NW
Washington, DC 20036
1-800-BANKERS (800-226-5377)
www.aba.com
About ABA
Privacy Policy
Contact ABA

ABA Banking Journal
About ABA Banking Journal
Media Kit
Advertising
Subscribe

© 2025 American Bankers Association. All rights reserved.

No Result
View All Result
  • Topics
    • Ag Banking
    • Commercial Lending
    • Community Banking
    • Compliance and Risk
    • Cybersecurity
    • Economy
    • Human Resources
    • Insurance
    • Legal
    • Mortgage
    • Mutual Funds
    • Payments
    • Policy
    • Retail and Marketing
    • Tax and Accounting
    • Technology
    • Wealth Management
  • Newsbytes
  • Podcasts
  • Magazine
    • Subscribe
    • Advertise
    • Magazine Archive
    • Newsletter Archive
    • Podcast Archive
    • Sponsored Content Archive

© 2025 American Bankers Association. All rights reserved.