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  • Manatt Partner Discusses Simple Negligence Ruling

    “Georgia Court Dismisses FDIC’s Simple Negligence Charge”
    Bank Safety & Soundness Advisor 

    March 5, 2012 – Manatt’s Harold P. Reichwald, co-chair of the Financial Services & Banking Practice, discussed with Bank Safety & Soundness Advisor how a Georgia court decision on a simple negligence claim may affect future litigation between former bank officers and the Federal Deposit Insurance Corporation (FDIC).

    Bank Safety & Soundness Advisor reports that, for the first time in recent litigation, a district court judge in George ruled that the state’s business judgment rule protects directors from claims for simple negligence, thus dismissing a claim that the FDIC has included in almost every suit it brought against former bank directors and officers around the country. The FDIC will now need to demonstrate gross negligence, a much harder burden of proof.

    The judge also ruled that former directors and officers can argue the FDIC, as receiver, failed to mitigate damages to the bank. If officers and directors can insist that the FDIC contributed to their bank’s total losses, it could reduce the amount of money the FDIC can get in damages.

    “Even with claims for gross negligence and breach of fiduciary duty going forward, the FDIC has to show that the conduct of the defendants caused the losses claimed by the FDIC,” said Reichwald. “If the FDIC’s conduct as receiver contributed to the ultimate loss claimed, then perhaps the defendants have the basis for reducing the FDIC’s claim.”

    “Also, the ruling seems to suggest that there could be an opportunity for defendants to argue that FDIC conduct prior to a bank take-over contributed to the loss, for example, by not giving the bank sufficient time to raise additional capital or rejecting offers from third parties to purchase the bank pre-closure,” Reichwald added. “The FDIC has been successful in the past in arguing that claimed pre-closure FDIC conduct cannot be used to defend against post-closure enforcement actions. Maybe that is changing. We have to await the court’s further rulings.”