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Home / Opinion Digests / Banks And Banking / Banks & Banking – Tort/Negligence – FIRREA – Corporate – Officer & Director Liability – Gross Negligence – Business Judgment Rule

Banks & Banking – Tort/Negligence – FIRREA – Corporate – Officer & Director Liability – Gross Negligence – Business Judgment Rule

Federal Deposit Insurance Corp. v. Willetts (Lawyers Weekly No. 12-02-0456, 10 pp.) (Terrence W. Boyle, J.) 7:11-cv-165; E.D.N.C.

Holding: Plaintiff alleges that the defendant-officers and directors of Cooperative Bank permitted a lax loan approval process, that state and federal regulators repeatedly warned defendants about risks associated with a high concentration in speculative loans, and that defendants continued to focus on real estate lending after 2007 when they should have known that the real estate market was slowing. Plaintiff has sufficiently alleged gross negligence; furthermore, it is too early in this action to determine whether the business judgment rule will protect defendants from claims of ordinary negligence.

Defendants’ motion to dismiss is denied.

Although directors of a corporation are not liable to third parties for ordinary negligence, N.C. courts distinguish between claims of ordinary negligence by third parties and claims of ordinary negligence by the corporation itself against its directors.

The N.C. Supreme Court has said that directors and officers of a corporation are liable for either willful or negligent failure to perform their duties. North Carolina Corp. Comm. v. Harnett County Trust Co., 192 N.C. 246 (1926). The court also said that, “if there is a loss of the corporation’s assets, caused and brought about by the negligent failure of its officers to perform their duties, the corporation, or its receiver … can maintain an action therefor.”

Under the business judgment rule, absent proof of bad faith, conflict of interest or disloyalty, the business decisions of officers and directors will not be second-guessed if they are the product of a rational process and the officers and directors have availed themselves of all material and reasonably available information and honestly believed they were acting in the best interest of the corporation. Because the business judgment rule presupposes the exercise of reasonable care, N.C. law may recognize director liability for simple negligence, to the extent that such negligence falls outside the protection of the business judgment rule. Plaintiff has alleged that defendants were made aware of certain risks associated with their actions and that they continued to act in conflict with the bank’s best interests.

Because sufficient facts of ordinary negligence have been pled, and only with further factual development will the court be in a position to determine whether the business judgment rule would apply, dismissal of plaintiff’s ordinary negligence claim is inappropriate at this time.

At this early stage of the proceedings, the court has insufficient evidence before it to determine whether the defendant-outside directors reasonably relied on information provided to them or whether they had actual knowledge that would have made such reliance unwarranted. Plaintiff has sufficiently alleged ordinary negligence on the part of the outside directors, and it remains to be seen whether the outside directors have a defense under G.S. § 55-830(b).

Even though G.S. § 55-2-02(b)(3) permits articles of incorporation to limit or eliminate the personal liability of a director, no such provision will be effective with respect to acts or omissions that the director at the time of the breach knew or believed were clearly in conflict with the best interests of the corporation. Plaintiff has sufficiently pled that defendants acted in conflict with the best interest of the bank; therefore, dismissal of these claims pursuant to the exculpatory clause without further examination of whether or not these Defendants knew or believed their actions were in conflict with the banks’ best interests would be premature.

12 U.S.C. § 1821(k) says the definition of gross negligence should be grounded in state law. Under N.C. law, “willful and wanton conduct” amounts to more than gross negligence. Therefore, plaintiff need not show that defendants acted intentionally or that their conduct rose to the level of deliberate or conscious action.

Motion denied.

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