The 2008 financial crisis was catastrophic for the U.S. banking industry. Between 2007 and 2014, 510 banks failed. Another 700-plus banks received some type of federal monetary assistance. Unsurprisingly, this led to calls to hold bank directors and officers legally accountable for harm they may have caused.
One federal regulator with the power to hold directors and officers of failed banks financially responsible is the Federal Deposit Insurance Corporation (FDIC). The FDIC acts as a receiver for failed banks. It has authority to sue directors and officers for losses they caused to failed banks and has been aggressive in doing so. Yet even as the FDIC brings director and officer suits, the standard of liability for breach of the duty of care in the banking setting is misunderstood.
Duty of care liability in non-bank corporations is typically governed by state statute and common law. While the law differs somewhat from state to state, the standard of liability often varies depending upon the specific claim. If the shareholders (on behalf of the corporation) allege that the directors and officers made poor substantive decisions, the directors and officers are largely insulated from liability by the business judgment rule. If, however, the shareholders allege that the directors and officers exercised inadequate oversight or were not sufficiently informed when making a decision, the directors and officers are subject to a greater risk of liability.
In contrast, duty of care liability in the banking setting is governed partly by a federal statute—the Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (FIRREA)—that imposes liability for “gross negligence [or] similar conduct . . . that demonstrates a greater disregard of a duty of care.” In 1997, the United States Supreme Court in Atherton v. FDIC held that FIRREA allows the FDIC to sue directors and officers of failed banks under either a federal gross negligence standard or any applicable state law standard that imposes liability for less culpable conduct. Perhaps because FIRREA uses “gross negligence” language, nearly all the commentary on bank director and officer liability focuses on whether the standard for bankers is negligence or gross negligence. Regulatory guidance and academic commentary both fail to acknowledge and incorporate a key insight from corporate law: The standard of liability for breach of the duty of care often varies depending upon the context of the particular claim.
Just as duty of care actions under state corporate law arise in different contexts, so too do duty of care actions in the banking setting. Some arise from the alleged failure of bankers to oversee the bank, while others arise from allegedly poor banker decisions.
Because the standard of liability can vary depending upon the context, it is often a misleading oversimplification to frame the banker liability debate in any particular jurisdiction as a binary choice between negligence and gross negligence. Indeed, the standard of liability can vary by claim within a single state. For example, courts often review claims arising in the oversight context more rigorously than they would review claims that the directors or officers made a poor substantive decision. Similarly, courts may review claims about deficiencies in the decision-making process more rigorously than claims that the decision itself was substantively deficient. Moreover, the standard for any particular claim may require something other than a negligence or gross negligence showing.
We believe that because duty of care liability is more nuanced than negligence versus gross negligence, the application of FIRREA and Atherton to duty of care claims in the banking setting is more complicated than commentators have appreciated.
Finally, because duty of care claims arise in different contexts, and because standards of liability for such claims are defined by state law, FDIC guidelines that ignore context and suggest a nationwide standard of liability are inaccurate. The guidelines are also inconsistent with the FDIC’s practice of aggressively pursuing state law claims. We recommend that the FDIC update its guidelines to help bankers understand this complexity and to allow them to accurately gauge their risk of exposure under the FDIC’s current litigation practices.
Our article integrates the academic literature on the duty of care in the general corporate setting with the literature on the duty of care in the banking setting. It shows that, just as in corporate law, in banking the context of the claim matters. This moves the discussion beyond the simplistic negligence versus gross negligence debate that pervades discussions of bankers’ duty of care.
This post comes to us from Professor Julie Andersen Hill at the University of Alabama School of Law and Professor Douglas Moll at the University of Houston Law Center. It is based on their recent article, “The Duty of Care of Bank Directors and Officers,” available here.