WASHINGTON - Directors and officers at federally chartered institutions scored a huge legal victory last week.
A federal appeals court said the Resolution Trust Corp. must prove directors and officers at failed national thrifts were grossly negligent.
The RTC argued that its burden of proof should be "simple negligence," which is much easier to prove. But the U.S. Court of Appeals for the Seventh Circuit in Chicago said Nov. 9 that the RTC must prove "gross negligence" to convict 13 former directors and officers of Concordia Federal Savings and Loan Association, which failed in 1990.
Bailout Act Cited
The court said the 1989 thrift bailout law established a national gross negligence standard for all cases against directors and officers at nationally chartered institutions. The court did not rule on whether this national standard preempts state laws.
"The plain language" of the Financial Institutions Reform, Recovery, and Enforcement Act, the court said, "establishes a gross negligence standard of liability for officers and directors of failed financial institutions."
"This will put some rationality and decency back into this whole area," said Ronald Glancz, a partner at Venable, Baetjer, Howard & Civiletti law firm here. "If you are a director at a federal institutions there is a national standard, and it is gross negligence."
Both the RTC and the Federal Deposit Insurance Corp. have tried to persuade courts across the country that there is no national standard.
Common Law Overruled
The agencies have argued that simple negligence is the standard under federal common law, or the law that grows from court decisions when Congress has not spoken. But the court overruled common law.
This is the first case at the circuit court level to involve a federally chartered institution. The two other cases in two other circuits have pitted the government against state chartered institutions. Directors lost both of those cases, and request that the Supreme Court consider an appeal have been denied.