Appeals Courts May Soon Tackle Key Issue in Failed-Bank Suits

WASHINGTON — Although the Federal Deposit Insurance Corp.'s failed-bank suits have not yet gone to trial, a key issue in many of them may soon be taken up by appeals courts, which could have a large impact on the agency's lawsuits.

A common defense for officers and directors in FDIC cases is the "business-judgment rule," which shields business decisions that seemed prudent but later had harmful results.

But the scope of various business-judgment rules — which are established by state laws — are still being debated, and parties in at least two cases are looking to appeals courts for possible help in setting the ground rules.

"It's not surprising at all that they want to go to the appeals court immediately to get a ruling on the extent of protection that the business-judgment rule provides, because it's central to determining the viability of many claims," said Christopher Bruner, a law professor at Washington and Lee University in Lexington, Va. "The bottom line is that this is a very unsettled question, by and large."

In California, lawyers for former IndyMac Bank chief executive Michael Perry are waiting for the Ninth Circuit Court of Appeals to decide if it will hear their case for overturning a lower-court ruling. The lower-court judge had said the FDIC's claim against Perry could proceed — ruling that California's business-judgment rule only protects board members but not executives — but agreed to suspend the case as Perry sought an appeal.

In a separate case, the FDIC wants a reversal of a Georgia court's ruling that the agency cannot bring simple negligence claims against the former leaders of Integrity Bank. The judge in that case said the state's business-judgment rule protects the defendants, but the FDIC has asked the judge either to reconsider or, alternatively, allow the agency to appeal the decision to the Eleventh Circuit Court of Appeals.

While the treatment of business judgment rules tends to vary somewhat by state, Bruner said, an appeals court can "have a role in helping us understand what the business judgment rule protects in that given state."

Yet this legal maneuvering is all transpiring even before any of the FDIC's nearly 30 failed-bank lawsuits stemming from the crisis have reached the trial phase. (The agency has settled in some of the cases.)

Some observers noted that in certain circumstances the outcome of whether a former manager can use the business-judgment rule has limited impact. That is because the FDIC can also allege "gross negligence", meaning someone was outright reckless in running the bank. That more serious claim is tougher to prove, but not limited by business-judgment rules. (The judge in the Integrity case said the FDIC can still pursue "gross negligence" claims against the bank's managers.)

"All of these cases are at the beginning points. Some claims are made no matter what," said Theodore Sawicki, a partner at Alston & Bird in Atlanta, which has defended several failed-bank clients in FDIC cases. "The FDIC makes claims for gross negligence as well as negligence in virtually all the cases. So a case is going to go forward on the merits most likely."

But Henry Turner, the managing member of Turner Law Offices LLC in Decatur, Ga., said any further judicial decisions in the Integrity case regarding the business-judgment rule would have broad effects in Georgia, which since the mortgage debacle has had more failures than any other state. Six other FDIC lawsuits over the failure of Georgia institutions are pending.

The FDIC is "trying to head this off at the pass," Turner said. "Georgia is the epicenter for bank failures. … So the FDIC very predictably when they got that adverse [Integrity Bank] ruling — they're not just going to cave in and say, 'O.k., we'll accept this,' particularly when they have a number of other cases right down the hall from them here in the northern district of Georgia."

But Sawicki said the federal appeals court may shy from cases involving questions about state-specific rules.

"These are all questions of state law. I would expect that the Eleventh Circuit would be loath to take one of these because they'd be asking to decide state law," he said. "Alternatively, what they would do is certify the question to the Georgia Supreme Court."