95 Civ. 9529 JSM)
August 8, 2002
Kathleen M. Balderston, Thelen Reid Priest LLP, New York, NY, for Plaintiff
Claudio D'Chiutiis, Old Brookville, New York; Arnold J. Ross, New York, NY; Eliot Robinson, New York, NY; Martin Simon, P.M.B. 84-279, Laredo, Texas; Jamie Brickell, Pryor, Cashman, Sherman Flynn, New York, NY; Marc Rowin, Lynch Rowin LLP, New York, NY; Arthur M. Handler, Handler Goodman LLP, New York, NY; and Bryan W. Kishner, Kishner Lewitas, New York, NY, for Defendants.
AMENDED OPINION AND ORDER
The Federal Deposit Insurance Corporation ("FDIC"), as receiver of First New York Bank for Business ("the Bank"), brought this action against former directors of the Bank for breach of fiduciary duty, negligence, and gross negligence. The complaint alleges that the directors caused the bank to make preferential insider loans in violation of the Bank's internal lending policy and federal and state laws and regulations. Plaintiff FDIC now moves for partial summary judgment (1) against certain defendants on the issue of whether the business judgment rule is available to those defendants as an Affirmative Defense against its claims, and (2) as to liability against Defendant Boyarsky on the negligence, gross negligence, and breach of fiduciary duty claims. Defendants Boyarsky, D'Chiutiis, Lax, Robinson, and Zalmanov also move for summary judgment on the FDIC's claims against them.
Joel Boyarsky, Norman Dansker, Roger GIMBEL, Martin Simon, Claudio D'Chiutiis, George Lax, Eliot Robinson, and Israel Zalmanov.
The Bank opened in 1975 as The First Women's Bank, a New York State chartered stock form and federally insured savings bank. The name was changed to First New York Bank for Business in 1989. The defendants were members of the Board of Directors of the Bank at some time during the period in question.
Alhough the parties discuss the history of the bank and the tenure of individual defendants in detail, for the purposes of this opinion it is sufficient to observe that from the period between 1987 and November 1992, the Board of Directors of the Bank approved of and issued loans to various Bank insiders and their affiliates. The Complaint alleges that "by December 1990, outstanding loans to Bank insiders and their affiliates totaled approximately $98.5 million or 161% of the institution's capital." (Consolidated Compl. ¶ 44). As time passed, the financial condition of the Bank began to deteriorate and on November 13, 1992, the Bank was closed by the Superintendent of Banks of the State of New York. The FDIC, a corporation and instrumentality of the United States of America, existing under 12 U.S.C. § 1811 et. seq., was appointed as receiver of the Bank and as such is responsible for recouping funds lost due to the failure of this federally insured financial institution. In discharging this duty, the FDIC brought this action, alleging that nine insider loans and lines of credit were improperly extended to certain directors and resulted in a preferential concentration of credit in two directors in violation of federal and state laws.
I. The Business Judgement Rule
The FDIC alleges that "the directors violated their fiduciary duties, were negligent and grossly negligent in approving these loans, as the loans were poorly underwritten, involved more than the normal risk of payment, were made on terms preferential to those offered to non-directors, resulted in unsafe preferential concentrations of credit for the Bank, and violated the Bank's internal lending policy, all in violation of federal and state law." (FDIC's Mem. at 2-3). In response, certain defendants have asserted, inter alia, Affirmative Defenses based on the business judgment rule, which the contend shields them from liability if the underlying business decisions were made in good faith. The issue presented on this motion is whether bank directors are entitled to avail themselves of the New York business judgment rule as a defense to claims relating to the extension of credit.
See supra note 1.
Under New York law, the business judgment rule "bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes." Auerbach v. Bennett, 47 N.Y.2d 619 (1979). New York Business Corporation Law § 717, which sets out the standard of conduct for directors of commercial corporations, has been recognized as the statutory codification of the rule. See Lindner Fund, Inc. v. Waldbaum, Inc., 604 N.Y.S.2d 32, 33 (N.Y. 1993).
York Business Corporation Law § 717(a) states:
A director shall perform his duties as a director, including his duties as a member of any committee of the board upon which he may serve, in good faith and with that degree of care which an ordinarily prudent person in a like position would use under similar circumstances. (emphasis added)
While this rule is applicable to decisions of corporate directors, it has not generally been found to apply to bank directors. In Resolution Trust Corp. v. Gregor, 872 F. Supp. 1140 (E.D.N.Y. 1994), for example, Judge Ross noted that bank directors were traditionally held to a higher standard of diligence because of the quasi-public role of financial institutions in safekeeping the public's funds. See id. (citing Broderick v. Marcus, 272 N.Y.S. 455 (N.Y.S.Ct. 1943) and Litwin v. Allen, 25 N.Y.S.2d 667 (N.Y.S.Ct. 1940)). Following Gregor, Judge Gleeson similarly refused to apply the business judgment rule to bank directors who had allegedly made improvident loans. See FDIC v. Ornstein, 73 F. Supp.2d 277 (E.D.N.Y. 1999).
Defendants raise numerous arguments in support of applying the business judgment rule to bank directors. In 1964, after the Broderick and Litwin decisions upon which Gregor relies, amendments were made to the section of the New York Banking Law that codified the standard of care owed by bank directors. See N.Y. Banking L. § 7105(1). Defendants argue that given the similarities between N.Y. Bus. Corp. L. § 717(a) and N.Y. Banking L. § 7105(1), and in light of the legislative history surrounding the amendments, N.Y. Banking L., § 7105(1) should be read as extending the business judgment rule to bank directors. Accordingly, these defendants assert, in Minzer v. Keegan, CV-97-4077, 1997 U.S. Dist. LEXIS 16445 (E.D.N.Y. September 22, 1997), Judge Sifton applied the business judgment rule to decisions made by savings and loan directors with respect to a bank merger.
New York Banking Law § 7015(1) states:
Directors and officers shall discharge the duties of their respective positions in good faith and with that degree of diligence, care and skill which ordinarily prudent men would exercise under similar circumstances in like positions. (emphasis added)
Under the particular facts of this case, the Court sees no reason to depart from the rationale followed in Gregor and Ornstein. First, Minzer dealt with a merger — a practice that is quite common in the corporate world. The situation is different when dealing with banking activities that do not have an identical corporate counterpart. Here, while boards of financial institutions can make loans to directors, corporate boards cannot make such loans without shareholder approval. See N.Y. Bus. Corp. L. § 714.
Second, while N.Y. Bus. Corp. L. § 717(a) and N.Y. Banking L. § 7015(1) are similar in that they both speak of "good faith," the legislature did add the extra language requiring "diligence" and "skill" to § 7015(1). The legislature is assumed to know what the law is, and if the legislature intended to completely harmonize the standards to which bank directors and corporate directors are held, it presumably would have used exactly the same language. Although numerous commentators suggest that contemporary bank directors should be held to the same standard of care as contemporary corporate directors, see e.g. William L. Cary Melvin A. Eisenberg, Cases and Materials on Corporations 576 (7th ed. 1995 Supp. 1997), it is not the role of this Court to rewrite the law. Accordingly, the business judgment rule is not available as an Affirmative Defense under these particular circumstances.
II. Defendant Joel Boyarsky
The FDIC also seeks summary judgment as to liability against Defendant Joel Boyarsky, a member of the Board of Directors from February 1989 to October 1990. The FDIC argues that in failing to attend 13 of 17 board meetings, Boyarsky abdicated his responsibility as a director to approve or decline loans and violated the duty of care he owes as a director. Boyarsky responds by noting that he cannot be held liable absent a showing that his acts or omissions caused the losses. In addition, Boyarsky has filed a motion for summary judgment, seeking dismissal of all claims against him. Boyarsky claims that with one exception, he was not a member of the Board when the loans were approved (although he was present for the loan renewals) and thus can not be liable with respect to those loans. Furthermore, Boyarsky argues that the claims should be dismissed because the damages alleged were caused by the FDIC's failure to properly liquidate the Bank's assets.
"It is well settled that a director will not be liable for losses to the corporation absent a showing that his act or omission proximately caused the subsequent losses." FDIC v. Berman, 2 F.3d 1424, 1434 (7th Cir. 1993) (citing Michelson v. Penney, 135 F.2d 409, 419 (2d Cir. 1943) (A. Hand, J.)). Whether Boyarsky's failure to attend the meetings caused the losses and whether the outcome would have been different had Boyarsky actually attended the meetings are questions of causation that rest on disputed facts. The FDIC relies on Berman for the proposition that the conduct need not be the sole cause of the harm but only a substantial factor, and suggests that Boyarsky's failure to attend the meetings was at least a substantial factor in the losses. Berman, however, was decided after the trial was complete and after all factual conclusions were reached. See id.
Boyarsky's motion for summary judgment is also denied. Whether the FDIC properly liquidated bank assets turns on material facts that are in dispute. Furthermore, although bank directors may be liable for losses resulting from grossly negligent renewals of the loans, See FDIC v. Majalis, 15 F.2d 1314, 1325 (5th Cir. 1994); Harris v. Rogers, 179 N.Y.S. 799 (4th Dep't 1919); Harris v. Waters, 183 N.Y.S. 721 (N.Y.Sup.Ct. 1920), the question of whether the renewals caused losses rests on disputed facts.
III. Indemnification of Defendant Eliot Robinson
Defendant Eliot Robinson claims that the Complaint against him should be dismissed because the bank indemnified him in its Certificate of Incorporation, in his employment agreement, and in a separate indemnification agreement.
The documents upon which Defendant Robinson relies are expressly and impliedly subject to New York law. The law of New York authorizes indemnification of bank directors with some exceptions. While a corporation may indemnify a director in an action by or in the right of the bank to procure a judgment in its favor,
This action is "by or in the right of the bank" because as a receiver of the bank, the FDIC has and may exercise all rights, titles, powers, and privileges of the insured depository institution, and of any stockholder. . . ." 12 U.S.C. § 1821(d)(2)(A)(i). See also N.Y. Banking L. § 634.
no indemnification shall be made in respect of . . . any claim, issue or matter as to which such person shall have been adjudged to be liable to the corporation, unless and only to the extent that the court in which the action was brought . . . determines upon application that, in view of all the circumstances of the case, the person is fairly and reasonably entitled to indemnity for such portion of the settlement amount and expenses as the court deems proper.
This is the same exception used in the indemnification agreement relied upon by Robinson. (See Robinson Reply Ex. 13) Thus, under New York law and by contract, Robinson would not be entitled to indemnification unless the Court, in view of all the circumstances of the case, deems it proper. As it would not be prudent for the Court to make such a "totality of the circumstances determination at the partial summary judgment phase, Defendant Robinson is not entitled at this time to have the Complaint against him dismissed on indemnification grounds.
IV. Defendants' Motions for Summary Judgment
Defendants D'Chiuttis, Lax, and Zalmanov also move for summary judgment, seeking dismissal of the FDIC's claims against them. The motions are denied.
To the extent that these motions rest on these defendants' affidavits stating that they acted reasonably in approving the disputed extensions of credit or renewals of existing loans, the FDIC has offered evidence to the contrary and these factual disputes must be resolved at trial. To the extent that these directors claim that they were not members of the Board at the time the loans were made, the FDIC is not seeking to hold them liable for the approval of the loan. However, these directors may be held liable for their role in approving the renewal of loans and additional extensions of credit. On the other hand, it may be that the directors will be able to establish that a particular renewal of a loan did not cause the bank any damage because the loan was uncollectible at the time of renewal, but that fact must be proved at trial.
For the foregoing reasons, the FDIC's motion for partial summary judgment against certain defendants is granted and the Court strikes the Affirmative Defense that these defendants are entitled to the protection of the business judgment rule. The FDIC's motion for summary judgment as to liability against Defendant Boyarsky is denied, as are defendants' individual motions for summary judgment against the FDIC.