Court Issues Mixed Decision in North Carolina Business Judgment Case

A federal appeals court today issued a mixed decision in the closely watched case of FDIC v. Rippy, which arose from the 2009 failure of a North Carolina community bank. The FDIC sued the bank’s directors and officers, alleging that the bank failed due to their negligence, both simple and gross, and breaches of fiduciary duties. A local federal court granted summary judgment to the directors and officers, and the FDIC appealed.

At issue in the case — also known as FDIC v. Willetts — is the business judgment rule, which protects directors and officers from personal liability for decisions made in good faith and according to a rational process. ABA and the state bankers associations filed a brief supporting the Rippy defendants that emphasized the necessity of robust protections for good-faith business decisions by bank directors and officers.

The appeals court agreed with the local court that the FDIC failed to prove gross negligence on the part of directors and officers and bad faith on the part of the directors. However, the court found the FDIC did meet its burden under summary judgment and that a trial was necessary to determine whether the bank’s officers exercised bad faith in approving loans that soured.

In Rippy, the court found, the officers did not enjoy the protections of the business judgment rule because they took actions that would be harmful to the bank without adequate information. For example, the ruling cited evidence that the officers approved loans over the phone without receiving documents until later — sometimes after the loans had already been funded.

If not settled, the case will now return to the lower court for a full trial on the issue of the FDIC’s claims of ordinary negligence and breach of fiduciary duty against the bank’s officers. “I am glad to see the court reject the FDIC’s attempts to unfairly impose personal liability on bank directors for ordinary business decisions made in good faith,” said ABA President and CEO Frank Keating. For more information, contact ABA’s Tom Pinder.