WASHINGTON -- A Connecticut federal judge has struck yet another blow to the efforts of bank regulators to bring suits against directors of failed institutions under an easier-to-prove form of negligence.

U.S. District Judge T.F. Gilroy Daly dismissed charges late last month against the directors of the failed Charter Federal Savings and Loan Association of Stamford, Conn.

Judge Daly ruled that the Resolution Trust Corp. lacked the authority to charge the directors with simple negligence, a legal standard requiring the government to prove that a person failed to exercise the same care a reasonable person would use in the same situation.

The judge let stand an added charge of gross negligence, a claim placing a higher burden of proof on the government. To prove gross negligence, failure to use even slight care must be shown.

This is the first time a judge in the second circuit, which also includes New York and Vermont, has ruled on the issue, lawyers familiar with this case said. Judges in the fifth and seventh circuits, which include Texas and Illinois respectively, have dismissed similar charges against bank directors.

Margaret E. Haering, an attorney at Hurwitz & Sagarin in Milford, Conn. who represented the directors, said the judge's decision clearly shows that the RTC is on a losing course. "It was one of the clearest explanations that FIRREA [Financial Institutions Reform, Recovery, and Enforcement Act! does not give regulators the right to impose simple negligence," Ms. Haering said.

Judge Daly wrote that the thrift-bailout law clearly states that regulators must follow a stricter, federal negligence standard and not any state's applicable simple-negligence standard. He also wrote that the legislative history of the '89 law fails to support the RTC's argument that Congress intended regulators to have the power to file simple-negligence claims, which are much easier to win.

The RTC's lawyer, David Schneider of New Haven's Tyler, Cooper & Alcorn, said he expects the judge to give his client special permission to appeal the issue to the second circuit now, rather than once the case is concluded. "Hopefully we will get the second circuit to say the seventh circuit was wrong," Mr. Schneider said.

The suit stems from the June 1990 collapse of Charter Federal, a six-year-old institution that lost more than $5.7 million. The RTC claims that the bank's directors authorized unsafe and illegal loans despite warnings from regulators.

Ronald R. Glancz, a lawyer at Washington's Venable, Baetjer, Howard & Civiletti, said Judge Daly's decision combined with the other circuits' decisions normally mean this legal issue would be dead. He said courts don't appreciate losing parties who keep bringing similar cases in different circuits. "But, with the RTC as a litigant, they will just keep litigating this," he said.

Subscribe Now

Access to authoritative analysis and perspective and our data-driven report series.

14-Day Free Trial

No credit card required. Complete access to articles, breaking news and industry data.