Ruling gives ammo to officers fighting lawsuits by the FDIC.

WASHINGTON -- Regulators lost again in their continuing battle to sue bank officers and directors under a legal theory that makes it easier to prove negligence.

The U.S. Court of Appeals for the 6th Circuit ruled Dec. 15 that regulators must prove that officers and directors made business decisions they should have known were wrong.

The court said the 1989 thrift bailout law requires the government to meet this more stringent standard, known as gross negligence.

The Federal Deposit Insurance Corp. and the Resolution Trust Corp. have sued officers and directors of federally chartered institutions during the past few years, claiming these people caused their institutions to fail. The agencies have tried to recoup millions of dollars for the deposit insurance funds.

The agencies had argued in FDIC v. Bates that they could allege an easier-to-prove claim, known as simple negligence, which only requires the government to show that officers and directors erred.

The decision was the third by a federal appeals court against the FDIC on the issue of gross versus simple negligence.

"It pretty much puts the icing on the cake on this issue," said Ronald Glancz, a partner at Venable, Baetjer, Howard & Civiletti.

Other appellate courts, he said, are unlikely to address the issue, given the three rulings. But other banking lawyers were not convinced the issue is dead.

"One would think at some point the FDIC would recognize what is the binding weight of precedents," said H. Rodgin Cohen, a partner in New York's Sullivan & Cromwell. "But they haven't shown any real inclination to give up on this, and I really do expect they will continue to fight it."

Ed O'Meara, an FDIC attorney, said the agency would pursue existing cases in two other appellate circuits. But he said he recognizes that the agency faces a rough road.

This is the third appellate circuit to reach the same conclusion, he said, referring to the Bates decision, and this obviously makes it harder to bring a claim.

The banking agencies' best chance for victory, Mr. O'Meara said, is likely to be in the 10th Circuit, which already has ruled that regulators can bring simplenegligence claims against statechartered institutions.

Mr. Glancz said the FDIC's efforts run contrary to public policy because the best qualified people may avoid serving on bank boards if they are subject to simple-negligence suits.

"Remember, when we are talking about simple negligence, we are talking about an error in judgment," he said, "and we all make errors in judgment."

The entire dispute may be academic, said Michael Crotty, deputy general counsel for litigation at the American Bankers Association. Jurors do not draw the fine distinctions between different forms of negligence that lawyers do, he said.

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