Fourth Circuit Allows FDIC’s Negligence Claims Under Business Judgment Rule

Case: FDIC v. Rippy

Issue: Whether the Federal Deposit Insurance Corp. as Receiver (FDIC-R) is barred from suing the former bank directors and officers (D&Os) of Cooperative Bank for ordinary and gross negligence under the business judgment rule.

Case Summary: The Fourth Circuit reversed a district court order favoring the former officers from Cooperative Bank by holding the FDIC-R can sue bank directors and officers for ordinary negligence under North Carolina law, but affirmed that the FDIC-R did not meet its burden in proving that the former directors committed gross negligence.

The FDIC-R brought the suit on behalf of North Carolina-based Cooperative Bank alleging that the former D&Os were negligent and breached their fiduciary duties when they approved risky mortgage loans that resulted in $33 million in losses for the bank.

The district court granted the former D&O’s motion for summary judgment, holding that under the business judgment rule, the D&Os are shielded from liability of negligence and breach of fiduciary duty because they had a rational business purpose and acted in good faith when they approved the disputed loans. In dismissing the FDIC-R’s gross negligence claims, the district court determined that the FDIC-R failed to demonstrate that the D&Os consciously exercised bad faith in approving the loans.

The Fourth Circuit issued a mixed decision on the FDIC-R’s appeal of the district court’s summary judgment ruling. The Court first reversed the district court by holding under North Carolina law, the FDIC-R can sue bank directors and officers for ordinary negligence. The Court then addressed the FDIC-R’s claims against the D&Os.

On the issue of gross negligence, the Court affirmed that the FDIC-R failed to meet its burden in proving gross negligence against the D&Os given the inherent contradiction of prior examinations rating the bank a CAMELS “2” in all categories, while at the same time noting deficiencies in underwriting and other areas.

On the issue of fiduciary duty, the Court ruled that the former directors were protected by an exculpatory clause in Cooperative Bank’s articles of incorporation that shielded them from monetary liability for ordinary negligence. The Court reasoned that absent allegations or evidence that the directors engaged in self-dealing or fraud or otherwise acted in bad faith, there was no breach of the duty of good faith.

However, unlike the directors, the court ruled that the former officers were not protected by the exculpatory clause. Based on this decision, the Court concluded that the FDIC-R presented sufficient evidence that the officers did not act on an “informed basis” as required by North Carolina’s business judgment rule. The Court vacated the district court’s award of summary judgment to the bank’s officers and remanded the FDIC-R’s claims of ordinary negligence and breach of fiduciary duty for further proceedings.

The 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.

Bottom Line: If the parties do not reach a settlement, the case will return to the lower court for a trial on the issue of the FDIC-R’s claims of ordinary negligence and breach of fiduciary duty against the bank’s officers.

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About Thomas Pinder

Thomas Pinder
Thomas Pinder is senior vice president and senior counsel for litigation in the office of ABA's general counsel.