California Federal District Court Permits FDIC Suit Against Former Bank Officers to Proceed

FDIC Directors & Officers

On October 5, the U.S. District Court for the Central District of California dismissed several affirmative defenses invoked by a group of former bank officers sued by the FDIC as receiver for a failed bank, including their claim of protection from personal liability for business decisions. FDIC v. Van Dellen, No. 10-4915, 2012 WL 4815159 (C.D. Cal. Oct. 5, 2012). The FDIC sued the former officers, alleging that, in pursuit of bonuses for high loan origination volumes, the officers approved homebuilder loans to unqualified borrowers. As part of their defense, the officers claimed that the court should apply the law of the state of Delaware where the bank was incorporated, and not California law where the bank had its principle place of business. The officers sought to invoke Delaware law protecting officers from personal liability for business decisions. The court disagreed and held that (i) California law applies under any choice of law test and (ii) California’s business judgment rule, both as codified and its common law element, immunizes directors from personal liability but not officers. With regard to the officers’ defense that the FDIC claims were time barred as allegations of professional negligence, the court held that the gravamen of the complaint actually is breach of fiduciary duty, which has a longer statute of limitations. The court also reiterated a previous ruling that the officers could not invoke any defenses that would rely on imputing the bank’s pre-receivership conduct to the FDIC as receiver. The court did agree with the officers that any recoveries made by the FDIC in another case should be considered when assessing damages in this case, and that claims regarding certain loans approved by the bank’s federal regulator should be reviewed by a jury.