A recent Supreme Court decision making it harder to successfully sue directors and officers for negligence contains a major loophole.
Lawyers who analyzed the January decision said the justices left open the possibility that the Office of the Comptroller of the Currency and the Office of Thrift Supervision could adopt rules subjecting top bank officials to simple negligence suits.
For a finding of simple negligence, plaintiffs need to prove merely that directors and officers erred in a decision, while a finding of gross negligence requires proof the officials made a decision they knew would cause the institution to lose money.
Simple negligence stood at the center of a decade-long fight between the banking industry and the Federal Deposit Insurance Corp., which had claimed the right to bring simple negligence suits against officers and directors of failed institutions.
That fight was supposed to have ended last month when the Supreme Court ruled in the so-called Atherton case.
Under the decision, the FDIC may bring any gross-negligence suit it wants. For the agency to charge officers or directors with simple negligence, however, the bank must be in a state that expressly allows such suits. A 1994 study found that only four states allow simple negligence suits.
Industry lawyers initially hailed the ruling, saying it protects directors and officers from expensive litigation. Government lawyers, however, said the Comptroller's Office or thrift supervisors could use their regulatory power to circumvent the decision.
Neither agency is planning any rule changes, but government lawyers, who asked to remain anonymous, said pressure could mount to adopt a simple negligence standard if financial institutions once again start failing in great numbers.
Banking industry lawyers agreed that the government may have found a way around the Atherton ruling.
"You can make an argument that given the broad powers that OCC and OTS have that it would be within the proper scope of their authority," said Ronald Stevens, a partner at the Washington law firm of Kirkpatrick & Lockhart who represented a director in the Atherton case. "This is a question that has yet to be answered."
"This is a close call," said Ronald R. Glancz, a partner at the Venable law firm in Washington. "The agencies have broad rulemaking authority. I don't know how it would come out."
Bankers may never have to find out. Mr. Stevens said he does not expect either agency to adopt simple-negligence rules.
"They would be providing a major incentive for institutions to convert from federal charters to state charters," Mr. Stevens said. "That is one reason why they have not issued such a regulation up to this point."
Bankers also would challenge the legality of such a rule, he said.
"They clearly can adopt standards for their administrative proceedings," he said. "But to say they can promulgate standards for civil litigation where they are not a party is a much more difficult question."
The simple negligence issue will wind up on Capitol Hill if regulators try to adopt the standard by regulation, Mr. Glancz said.
"I'd hope they wouldn't go down that path," he said. "It would certainly lead to Congress revisiting this issue."