Monday, February 9, 2015

ABA Survey Shows FDIC Claims in Business Judgment Case Would Affect Board Recruitment

The FDIC is appealing a federal judge’s ruling rejecting the agency’s legal case against the directors and officers of a failed North Carolina community bank. Relying on North Carolina’s business judgment rule — which protects directors and officers from personal liability for decisions made in good faith and according to a rational process — the trial judge in FDIC v. Willetts dismissed the agency’s claims against the defendants.

The FDIC challenged the business judgment rule, arguing that the current standard for allowing personal liability claims, “gross negligence,” should be replaced with an “ordinary negligence” standard. ABA and the state groups argued that both federal and North Carolina legal precedents protect the business judgment rule, with numerous courts finding the rule necessary for attracting and retaining qualified directors and officers. They also pointed out that the FDIC's approach would increase unproductive litigation and, for bank customers, limit credit availability.

ABA submitted the results of a survey showing that bank directors and officers are deeply concerned about how changes to the business judgment rule could affect their service and their banks’ ability to extend credit.

The survey showed that nearly two-thirds of directors and officers are “very concerned” about the potential for personal liability in their business decisions — with an additional third “somewhat concerned.” Eighty-four percent said that that changes to personal liability would make them less willing to serve as a director or officer in the future.

For banks, these concerns have affected director and officer recruitment more than retention. One in five said they have had difficulty retaining directors over these concerns, while 40% said a candidate had declined a director or officer role at their bank for these reasons.

Three quarters of directors and officers projected that if the business judgment rule is changed, loan administration and evaluation costs will go up as boards devote much greater scrutiny to credit decisions. The result: less credit for underserved markets, according to 76%, and less credit for borrowers with no credit history, according to 80%.

View the survey results.
Read the brief.

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