WASHINGTON - The Supreme Court has been asked to hear a case that would set the standard for government lawsuits against bank directors and officers.
The case being appealed pits six former directors of City Federal Savings Bank against the Resolution Trust Corp. On June 26, the U.S. Court of Appeals for the Third Circuit upheld civil money damages that RTC had levied against the directors of the Bedminster, N.J., thrift, which failed in 1989.
The decision allowed the RTC to bring lawsuits against directors and officers using a simple negligence standard in Pennsylvania, New Jersey, Delaware, and the Virgin Islands.
Meanwhile, the RTC as well as the Federal Deposit Insurance Corp. have lost similar cases in four other federal appeals courts. Those courts have ruled in separate cases that the government must show directors made business decisions that they should have known were wrong. This standard, called gross negligence, is harder to prove.
This contradiction among the five circuit courts could prompt the Supreme Court to accept the case, lawyers said Monday.
"This is a matter of vital importance not just to directors involved in our case but to the industry as a whole," said Douglas Kraus, a lawyer representing the Cityfed directors with Skadden, Arps, Slate, Meagher & Flom. "It raises considerable doubt as to what the proper standard of care is for a bank or savings and loan director."
Mr. Kraus as well as other lawyers said the Cityfed case must be reversed by the Supreme Court or potential directors and officers will not work for financial institutions.
"In this climate of uncertainty," Mr. Kraus said, "the best businessmen will demur and decide the best course is not to serve on boards of directors."
Richard M. Whiting, general counsel for the Bankers Roundtable, agreed.
"Imposition of a stricter standard would serve as a disincentive to directors to serve and as an incentive for nuisance suits by plaintiffs," he said.
"We counsider that counterproductive," said Mike Crotty, a litigator for the American Bankers Association. "It is in the government's interest as well as our own to encourage rather than discourage good people from serving as directors."
In the case appealed to the Supreme Court on Dec. 12, the RTC charged that the directors failed to oversee 10 large construction loans made between 1984 and 1989. Those loans went sour, leaving the thrift with a $12.7 million loss. The government said the directors hired an incompetent appraiser, never produced a written loan policy, and approved loans after they had closed.
The justices should decide early this spring if they will take the case. Oral arguments could occur in the fall.
