By Amanda Whorton

On August 18, 2015, the Fourth Circuit issued a published opinion in the civil case FDIC v. Rippy. The court held that there were genuine issues of material fact as to Cooperative Bank’s officers’ liability for ordinary negligence and breach of fiduciary duty, but upheld summary judgment for the directors as to the ordinary negligence and breach of fiduciary duty claims. The court further upheld summary judgment on the gross negligence claim for both directors and officers.

The Annual Examinations of Cooperative Bank

Cooperative Bank (“Cooperative”) opened in Wilmington, North Carolina in 1898 and operated as a community bank and thrift until they converted to a state-charted savings bank regulated by the Federal Deposit Insurance Corporation (“FDIC”) in 1992. In 2002, Cooperative became a state commercial banking institution. Because of this status, the FDIC and North Carolina Commission of Banks (“NCCB”) gave Cooperative annual reviews as its regulators.

In 2006, the FDIC conducted an annual report of Cooperative. The majority of observations in the report were positive. However, the report identified problems with credit administration and underwriting, audit practices, risk management, and liquidity. Officials at Cooperative agreed to address these problems.

In 2007, the NCCB conducted their annual review. They found that Cooperative’s management was slow to address the problems found in the 2006 FDIC Report. Again, Cooperative’s management agreed to confront the issues.

Later that same year, Credit Risk Management (“CRM”) conducted an external loan review and gave Cooperative passing grades. However, they additionally suggested that Cooperative update their credit file documentation.

In 2008, CRM again conducted an external loan review. This year however, they gave Cooperative failing grades and reported that Cooperative had problems with loan documentation, loan monitoring, and using old financial information.

After this incident, the FDIC and NCCB conducted a joint review. They found that Cooperative’s management had ignored or failed to adequately address any of their previous concerns. It was then that FDIC issued a Cease and Desist Order. After Cooperative failed to comply, the NCCB closed Cooperative and named FDIC as the receiver.

Because of Cooperative’s failure, FDIC suffered losses and later brought this suit against the directors and officers of Cooperative, stating that the directors and officers were ordinarily negligent, grossly negligent, and breached their fiduciary duties in approving loans.

The District Court Granted Defendants’ Motion for Summary Judgment

At the district court, the defendants filed motions for summary judgment on all claims FDIC filed against them and FDIC filed a cross-motion for partial summary judgment on the defendants’ affirmative defenses of failure to mitigate and superseding or intervening cause.

The district court granted summary judgment for the defendants and denied FDIC’s cross-motion as moot. The district court held that FDIC failed to show evidence that the defendants engaged in “self-dealing or fraud” or acted in bad faith. Thus, the court argued, that their actions were protected by the business judgment rule from claims of ordinary negligence and breach of fiduciary duty. There was also no evidence that Cooperative’s officers and directors engaged in “wanton conduct” or “consciously disregarded” the corporation; the court held that the defendants were not grossly negligent either.

Directors’ Liability for Ordinary Negligence and Breach of Fiduciary Duty

Under North Carolina law, a director or officer can be liable for ordinary negligence. North Carolina law also allows corporations to shield directors from liability by including an exculpatory clause in their articles of incorporation. The business judgment rule further constrains liability for officers and directors for ordinary negligence.

Cooperative’s articles of incorporation included an exculpatory provision that shielded its directors. The provision protected directors from liability for ordinary negligence and breach of fiduciary duties.

Because FDIC only argued that defendants took harmful actions without obtaining adequate information, and did not produce sufficient evidence that the directors engaged in self-dealing, fraud, or acted in bad faith, the exculpatory provision in Cooperative’s articles protected the directors in this case.

The Fourth Circuit therefore affirmed the district court’s award of summary judgment to the directors on FDIC’s ordinary negligence and breach of fiduciary duty claims.

Officers’ Liability for Ordinary Negligence and Breach of Fiduciary Duty

Because Cooperative’s exculpatory provision only covered directors, the Fourth Circuit analyzed the officers’ liability under the business judgment rule. The business judgment rule creates a presumption that the officers acted with due care. This presumption can be rebutted with evidence that the officers (1) did not act on an informed basis, (2) acted in bad faith or with a conflict of interest, or (3) did not believe they were acting in the best interest of the bank.

The Fourth Circuit found that FDIC presented adequate evidence to survive summary judgment and rebut the presumption of the business judgment rule. They presented an expert who stated that the officers did not act in accordance with generally accepted banking practices, which shows that the officers may not have acted on an informed basis. Therefore, the Fourth Circuit vacated the district court’s grant of summary judgment in regards to the officers on the issues of ordinary negligence and breach of fiduciary duty.

Gross Negligence

To survive a motion for summary judgment, FDIC had to show that there was a genuine issue of material fact as to whether the defendants’ actions constituted “wanton conduct done with conscious or reckless disregard.” The Fourth Circuit found that FDIC did not present sufficient evidence and thus affirmed the district court’s award of summary judgment to the defendants on FDIC’s claim of gross negligence.

Fourth Circuit’s Holding

The Fourth Circuit vacated the district court’s award of summary judgment in regards to Cooperative’s officers on FDIC’s claims of ordinary negligence and breach of fiduciary duty and remanded those claims for further proceedings. The court also reversed and remanded the district court’s order denying as moot the FDIC’s cross-motion for summary judgment. On FDIC’s remaining claims, the Fourth Circuit affirmed the district court’s judgment.

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