In a move that could end seven years of bitter litigation, the U.S. Supreme Court agreed Monday to decide whether the government can sue officials of failed institutions under an easier-to- prove form of negligence.
Banking industry lawyers hailed the court's decision to hear arguments in Atherton v. Resolution Trust Corp., saying the legal wrangling had raged far too long on this issue.
"This will cut down on the need for litigating the same issue over, and over, and over again in courts around the country," said Michael Crotty, deputy general counsel for litigation at the American Bankers Association. "We will finally get a definitive answer to the question of whether you can sue for simple negligence."
The Federal Deposit Insurance Corp. and the now closed RTC have sued hundreds of directors and officers since 1989, charging that their mistakes had caused banks and thrifts to fail. The agencies have sought to recover hundreds of millions of dollars for the bank and thrift insurance funds.
The agencies assert that a clause in the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 permits them to charge simple negligence, holding bank officials liable if they made faulty business decisions.
Four federal appeal courts, however, have rejected the agencies' legal theory. They have ruled instead that the government must prove former officials guilty of gross negligence. This is a tougher standard, requiring the government to show officials made decisions they should have known were wrong.
The banking industry had considered the issue resolved, until the U.S. Court of Appeals for the Third Circuit ruled June 26 that the agencies do have the right to sue under federal common law, the legal underpinning for simple negligence claims.
Ronald Glancz, a partner in the Washington law firm of Venable, Baetjer, Howard & Civiletti, said the Supreme Court's decision could affect nearly 200 pending cases.
Mr. Glancz, who represents a defendant in the case before the Supreme Court, said the threat of simple negligence charges has made it difficult for some banks to find outside directors. Local business leaders fear being sued for simply making the wrong choice, he said.
He is confident of victory, Mr. Glancz said. "The court didn't take this case to affirm," he said. "They took it to reverse."
C. Dawn Causey, general counsel to America's Community Bankers, said the FDIC has been trying to settle this case, fearing defeat in the Supreme Court would permanently bar it from bringing further simple negligence suits.
"This is an important case, and we are very confident that our interpretation of the statute will prevail," said FDIC spokesman Robert M. Garsson.
The dispute before the Supreme Court stems from the 1989 failure of City Federal Savings Bank, Bedminster, N.J. The RTC sued the thrift's former officers and directors, saying they had been negligent in approving $100 million of bad loans. Oral arguments are expected to be heard in October.
