In Part 1, we introduced you to the history of Cooperative Bank and the background of Federal Deposit Insurance Corporation v. Rippy, 799 F.3d 301 (4th Cir. 2015), also known as FDIC v. Willetts.
The bank officers and managers prevailed at the trial court level on all claims
Rippy was clearly not a case where the bank managers were accused of giving themselves loans on sweetheart terms; the FDIC produced no evidence of fraud or old-fashioned self-dealing.In light of no evidence of bad faith conduct, Judge Boyle determined that on the record before him, the managers had employed a rational – if wrong – process in approving these 86 lot loans and 9 commercial loans which varied from the normal underwriting guidelines and had acted with a rational business purpose (even if, in retrospect, that business purpose was imprudent and flawed).
In a prior examination of the bank, the FDIC had reviewed the policies and procedures in place and gave the bank a satisfactory CAMELs score of “2” in 2006 (1 is the highest CAMEL score, and 5 is the lowest CAMEL score).Judge Boyle construed this prior stamp of regulatory approval as demonstrating, as a matter of law, that the procedures were clearly not “irrational” and could serve a valid business purpose.
Judge Boyle was also critical of the FDIC’s view of history and imposition of clairvoyance on the bank’s managers.
Although there were clearly risks involved in Cooperative's approach, the mere existence of risks cannot be said, in hindsight, to constitute irrationality. Further, corporations are expected to take risks and their directors and officers are entitled to protection from the business judgment rule when those risks turn out poorly. Where, as here, defendants do not display a conscious indifference to risks and where there is no evidence to suggest that they did not have an honest belief that their decisions were made in the company's best interests, then the business judgment rule applies even if those judgments ultimately turned out to be poor.
Similarly, the FDIC’s claim for gross negligence failed as a matter of law because there was no evidence that the managers had ignored the well-being of the bank or engaged in any willful or wanton conduct.
Judge Boyle closed his opinion in a sharp passage which did not mince words and clearly establishes his view:
It appears that the only factor between defendants being sued for millions of dollars [compared to] receiving millions of dollars in assistance from the government is that Cooperative was not considered to be "too big to fail." Taking the position that a big bank's directors and officers should be forgiven for failure due to its size and an unpredictable economic catastrophe while aggressively pursuing monetary compensation from a small bank's directors and officers is unfortunate if not outright unjust.
The FDIC appealed.
Judgment in favor of the directors is affirmed.
On appeal to the Fourth Circuit, a panel of judges agreed that all directors and officers were entitled to summary judgment in their favor on the claims for gross negligence and bad faith.The panel also agreed that all the bank’s directors were entitled to summary judgment on allclaims against them.However, the panel reversed Judge Boyle and remanded the case for trial as to whether the bank’s officers exercised bad faith in approving the 86 lot loans and certain commercial loans which ultimately failed.
Beginning with director liability, the Court noted that Cooperative’s articles of incorporation include the statutorily-permitted exculpatory clause.N.C.G.S. 55-2-02(b)(3) (corporate articles may include a“provision limiting or eliminating the personal liability of any director arising out of an action whether by or in the right of the corporation or otherwise for monetary damages for breach of any duty as a director.No such provision shall be effective with respect to (i) acts or omissions that the director at the time of such breach knew or believed were clearly in conflict with the best interests of the corporation. . .”).Note, however, that the statute does not permit limitations on the duty of loyalty and the duty of good faith.Thus, the directors were in the clear unless the FDIC could show a breach of the duty of loyalty or the duty of good faith.
In the absence of any allegations that the directors breached their duty of loyalty, the FDIC argued that there was a breach of the duty of good faith.There was also no evidence of self-dealing, fraud, or bad faith conduct on the part of the directors.The FDIC argued that making decisions without adequate information rose to the level of bad faith, however these arguments were rejected.As the Court stated, “[t]he exculpatory clause protects directors from monetary liability unless the directors “knew or believed [that their acts or omissions] were clearly in conflict” with the Bank's best interests.”Merely because the result was harmful or “decisions could have been better made do[es] not rise to the level of bad faith. . .”Accordingly, summary judgment in favor of the directors on the claims of ordinary negligence and breach of fiduciary duty was affirmed.
Judgment in favor of the officers is reversed.
Turning to officer liability, the officers were not covered by the same exculpatory provisions in Cooperative’s articles of incorporation which shielded the directors (indeed, N.C.G.S. 55-2-02(b)(3) does not extend to officers).Thus, the officer’s liability was analyzed strictly through the business judgment rule.To overcome the presumptions of the business judgment rule, the FDIC had to show that the officers “(1) did not avail themselves of all material and reasonably available information (i.e., they did not act on an informed basis); (2) acted in bad faith, with a conflict of interest, or disloyalty; or (3) did not honestly believe that they were acting in the best interest of Cooperative.”
The FDIC mainly attacked whether the officers were acting on an informed basis.The FDIC’s expert witness in banking practices noted that the officers did not act in accordance with generally acceptably and prudent banking practices.They approved loans over the telephone, sometimes without first reviewing documentation.Sometimes they approved loans without reviewing any documentation, and sometimes did not receive the documentation until after loans were funded.Cooperative had also failed to address some warnings and deficiencies which regulators had noted in a 2006 bank examination (related to credit administration and audit processes).
This article originally appeared in the Professional Liability Underwriting Society's Journal. In Part 3, we will explain why the result is in harmony with existing North Carolina and Delaware corporate law.
Willetts, 48 F.Supp.3d at 850-51.
Id. at 851
Id. at 851-52.
Rippy, 799 F.3d at 311.
Id. at 312.
 Note that defendant Fredrick Willetts, III was both CEO and Chairman of the Board of Directors.He was both an officer and a director.The exculpation statute provides no protection to Mr. Willetts for violations of the duty of care committed as an officer.
Rippy, 799 F.3d at 313.