The Supreme Court heard arguments Monday in a case that will decide the fate of 236 director and officer liability suits, many stemming from the thrift crisis of the 1980s.
At issue is the legal standard the government must meet when it sues top officials of failed institutions. If the court rules in favor of the Federal Deposit Insurance Corp. and against the director-plaintiff, then directors could become harder to recruit and retain, warned Bankers Roundtable general counsel Richard M. Whiting.
Assistant Solicitor General Richard P. Bress contended Monday that the government has a federal common-law right to sue for simple negligence, which means the directors erred in running the business.
But a lawyer for former City Federal Savings Bank director John W. Atherton Jr. told the justices that the 1989 thrift bailout law gives the FDIC only two options: sue under the law of the state where the institution operated; or claim gross negligence, which means directors should have known what they were doing was wrong.
"Our position is there was never a federal common-law claim (for simple negligence) and there should not be now," said Ronald W. Stevens, a partner at the Washington law firm Kirkpatrick & Lockhart, who represents Mr. Atherton in Atherton v. FDIC.
Mr. Whiting of the Bankers Roundtable, who observed the arguments Monday, said, "The standard of care that the FDIC is seeking to apply would expose directors to higher liability. They would have to reassess their decisions to serve on these boards."
Federal common law, the result of judicial interpretation, fills gaps that lawmakers leave in statutes they enact. The Supreme Court has recently curtailed the use of federal common law and several federal appeals courts have rejected its use in director and officer cases.
The Supreme Court justices criticized both parties during Monday's arguments. But they appeared to seriously question the government's contention that it may bring common-law claims.
"It seems to me that there is a lot more certainty to the law if we apply state law," Justice Antonin Scalia said. "It would take us 100 years to create a federal common law for corporations."
Industry lawyers predicted victory. "It went fairly well for our side," said Michael F. Crotty, deputy general counsel for litigation at the American Bankers Association. "They seemed skeptical of most everything everyone was saying, but even moreso of the FDIC's position."
"I think Mr. Atherton will win," said Ronald R. Glancz, a partner at the Washington firm of Venable, Baetjer, Howard & Civiletti. "The court will hold that the thrift bailout law provides only a gross negligence standard for federal institutions."
But FDIC spokesman Robert M. Garsson said the agency was "very encouraged ... We thought it was very clear that they were interested in our arguments and that they understood the argument we were making."
Mr. Bress, the assistant solicitor general, tried to show that Congress never intended the 1989 law to make it harder to sue directors and officers. Rather, it wanted to override state laws that protected directors and officers from most lawsuits.
"Congress just wanted to make sure that whatever else applied, the FDIC would at least have a claim for gross negligence," Mr. Bress said.
Atherton v. FDIC stems from the December 1989 failure of City Federal Savings Bank, Bedminster, N.J. The FDIC had charged its directors with approving loans they should have known were destined to fail. All the directors except Mr. Atherton settled.
Also at the Supreme Court on Monday, the justices appeared to side with the Justice Department's contention that it may prosecute anyone who lies on a loan application.
Speaking on U.S. v. Wells, Deputy Solicitor General Michael R. Dreeben said the government does not have to show that a borrower's lie was "material" to the bank's credit decision. Rather it must prove that the borrower intended for the lie to influence the bank.
James R. Wyrsch, the lawyer representing Jerry E. Wells, said Congress intended to require the government to prove that the lie affected the bank's decision.
That didn't go over well with several justices. "The text (of the law) simply doesn't include it," Justice Sandra Day O'Connor said.
The case centers on a 1987 loan by O'Bannon Bank in Missouri to Mr. Wells and Kenneth R. Steele, who operated a copier leasing business. The government charged the two did not disclose all of the company's liabilities.