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14-2078
__________
IN THE UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
__________________________
FEDERAL DEPOSIT INSURANCE CORPORATION, AS
RECEIVER FOR COOPERATIVE BANK,
Plaintiff-Appellant,
v.
RICHARD ALLEN RIPPY; JAMES D. HUNDLEY; FRANCES PETER
FENSEL, JR.; HORACE THOMPSON KING, III; FREDERICK WILLETS, III;
DICKSON B. BRIDGER; PAUL G. BURTON; OTTIS RICHARD WRIGHT,
JR.; OTTO C. BUDDY BURRELL, JR.,
Defendants-Appellees.
_____________________________
On Appeal From The United States District Court For The Eastern District Of
North Carolina in Case No. 7:11-cv-00165-BO
BRIEF FOR AMICUS CURIAE THE CHAMBER OF COMMERCE
OF THE UNITED STATES OF AMERICA URGING AFFIRMANCE.
______________________________
KATE COMERFORD TODD
STEVEN P. LEHOTSKY
U.S. CHAMBER LITIGATION
CENTER, INC.
1615 H Street, N.W.
Washington, D.C. 20062
(202) 463-5337

Date: February 6, 2015

JOHN K. VILLA
KANNON K. SHANMUGAM
RYAN SCARBOROUGH
RICHARD OLDERMAN
WILLIAMS & CONNOLLY LLP
725 Twelfth Street, N.W.
Washington, D.C. 20005
(202) 434-5117
jvilla@[Link]

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CORPORATE DISCLOSURE STATEMENT

Pursuant to Rule 26.1 of the Federal Rules of Appellate Procedure, and Local
Rule 26.1, the Chamber of Commerce of the United States, amicus curiae in this appeal,
makes the following disclosures:
The Chamber is a non-profit, tax-exempt organization incorporated in the
District of Columbia.
The Chamber has no parent corporation.
No publicly held corporation owns 10% or more of the Chambers stock.
No publicly held corporation or other publicly held entity has a direct financial
interest in the outcome of this litigation.
This case does not arise out of a bankruptcy proceeding.

Signed: /s/ Richard A. Olderman

Date: February 6, 2015

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TABLE OF CONTENTS
Page

CORPORATE DISCLOSURE STATEMENT.................................................................. 2

TABLE OF AUTHORITIES ................................................................................................. ii
INTEREST OF THE AMICUS CURIAE .......................................................................... 1
SUMMARY OF ARGUMENT .............................................................................................. 2
ARGUMENT ............................................................................................................................ 5
I.

II.

THE BUSINESS JUDGMENT RULE PROTECTS DECISIONS MADE

USING A RATIONAL PROCESS AND PERFORMED IN GOOD FAITH.5
A.

The Business Judgment Rule in North Carolina........................................... 5

B.

Adoption of the FDICs Approach Would Frustrate the Protections of

the Business Judgment Rule for Bank Officers and Directors. .................. 9

BUSINESS JUDGMENT RULE ISSUES SHOULD BE RESOLVED ON

SUMMARY JUDGMENT, WITHOUT THE COSTS OF TRIAL.................. 14

CONCLUSION ...................................................................................................................... 21
CERTIFICATE OF COMPLIANCE WITH RULE 32(A)(7)(b) .................................. 22

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TABLE OF AUTHORITIES
FEDERAL CASES
Ashcroft v. Iqbal, 556 U.S. 662 (2009) ..................................................................................... 10
Atherton v. FDIC, 519 U.S. 213 (1997) .................................................................................... 6
Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) .............................................................. 10
Blue Chip Stamps v. Manor Drug Stores, 421 U.S. 723 (1975) ................................................ 13
Court Appointed Receiver of Lancer Offshore, Inc. v. Citco Grp. Ltd., No. 056008-Civ., 2008 WL 926509 (S.D. Fla. Mar. 31, 2008) ................................................ 10
FDIC v. Baldini, 983 F. Supp. 2d 772 (S.D. [Link]. 2013) .................................................. 10
FDIC v. Blackwell, No. 1:11-cv-03423-PWS, 2012 WL 3230490 (N.D. Ga.
Aug. 3, 2012) ...................................................................................................................... 11
FDIC v. Castetter, 184 F.3d 1040 (9th Cir. 1999) ................................................................. 12
FDIC v. Perry, No. CV 11-5561-ODW, 2012 WL 589569 (C.D. Cal. Feb.
21, 2012) ................................................................................................................................ 6
FDIC v. Willetts, 882 F. Supp. 2d 859 (E.D.N.C. 2012)..................................................... 11
Joy v. North, 692 F.2d 880 (2d Cir. 1982) .............................................................................. 17
Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th
Cir. 1985)............................................................................................................................... 2
Starr Intl Co. Inc. v. Fed. Reserve Bank of N.Y., 742 F.3d 37 (2d Cir. 2014) ......................... 3
Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148 (2008) ........................ 13
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308 ..................................................... 13
STATE CASES
Brehm v. Eisner, 746 A.2d 244 (Del. 2000) .............................................................................. 8
Ehrenhaus v. Baker, No. 08 CVS 22632, 2008 WL 5124899 (N.C. Super.
Dec. 5, 2008) ........................................................................................................................ 7

ii

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FDIC v. Loudermilk, 761 S.E.2d 332 (Ga. 2014).................................................................... 8

Gagliardi v. TriFoods Intl, Inc., 683 A.2d 1049 (Del. Ch. 1996) .......................................... 18
Godbold v. Branch Bank, 11 Ala. 191, 1847 WL 159 (Ala. 1847) .......................................... 5
In re Caremark Intl Inc. Deriv. Litig., 698 A.2d 959 (Del. Ch. 1996) .................................... 7
In re MFW Sholders Litig., 67 A.3d 496 (Del. Ch. 2013), affd, 88 A.3d 635
(Del. 2014) ............................................................................................................................ 9
In re Walt Disney Co. Derivative Litig., 907A.2d 693, 746 (Del. Ch. 2005),
affd, 906 A.2d 27 (Del. 2006) ...................................................................................... 8, 18
Kahn v. M& F Worldwide Corp., 88 A.3d 635 (Del. 2014) ..................................................... 8
Maurer v. Maurer, No. 13 CVS 4421, 2013 WL 4647703 (N.C. Super. Ct.
Aug. 23, 2013) ...................................................................................................................... 7
Percy v. Millaudon, 8 Mart. (n.s.) 68, 1829 WL 1592 (La. 1829) ............................................ 5
State v. Custard, No. 06-CVS-4622, 2010 WL 1035809 (N.C. Super. Ct.
Mar. 19, 2010) ..................................................................................................................6, 7
Stewart v. BF Boathouse Holdco, LLC, No. 8119-VCP, 2013 WL 5210220
(Del. Ch. Aug. 30, 2013) ..................................................................................................... 7
Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168 (Del. Ch.
2006), affd, 931 A.2d 438 (Del. 2007) ................................................................. 9, 14, 18
Wachovia Capital Partners, LLC v. Frank Harvey Inv. Family Ltd. Pship, No.
05 CVS 20568, 2007 WL 2570838 (N.C. Super. Ct. Mar. 5, 2007).............................. 8
Yancey v. Lea, 550 S.E.2d 155 (N.C. 2001) ............................................................................. 6
FEDERAL STATUTES
28 U.S.C. 1292(b) ................................................................................................................. 11
Financial Institutions Reform, Recovery, and Enforcement Act of 1989,
12 U.S.C. 1821(k) .............................................................................................................2, 5
Private Securities Litigation Reform Act, 15 U.S.C. 78u-4 ............................................ 13

iii

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OTHER AUTHORITIES
ABA Comm. on Corporate Laws, Changes in the Model Business
Corporation Act Pertaining to the Standards of Conduct for Officer;
Inspection Rights and NoticesFinal Adoption, 54 Bus. Law 1229
(1999) ..................................................................................................................................... 7
American Law Institute, Principles of Corporate Governance (1994) ............................. 7
Cornerstone Research, Characteristics of FDIC Lawsuits against Directors and
Officers of Failed Financial Institutions (2014)............................................................... 10, 11
Daniel R. Fischel & Michael Bradley, The Role of Liability Rules and the
Derivative Suit incorporate Law: A Theoretical and Empirical Analysis, 71
Cornell L. Rev. 261 (1986) ............................................................................................... 18
FDIC Community Banking Study
[Link] (last
visited Feb. 5, 2015) .......................................................................................................... 19
FDIC Failures & Assistance Transactions, available at
[Link] ........................................ 4
FDIC Oversight: Examining and Evaluating the Role of the Regulator During the
Financial Crisis and Today, Before the H. Subcomm. on Financial Institutions
and Consumer Credit of the H. Comm. on Financial Services, 112th Cong.
46, (2011) (Statement of Sheila C. Bair, Chairman, FDIC) ......................................... 15
FDIC, Professional Liability Lawsuits,
[Link] (last visited Feb.
4, 2015) ......................................................................................................................... 10, 12
Fletcher, Cyclopedia of the Law of Corporations 1037(West 2014) ......................................... 16
H.R. Rep. No. 104-369, (1995) (Conf. Rep.), reprinted in 1995
U.S.C.C.A.N. 730 ............................................................................................................... 13
Melvin A. Eisenberg, The Duty of Care of Corporate Directors and Officers, 51
U. Pitt. L. Rev. 945 (1990) ................................................................................................ 14
Russell M. Robinson, II, Robinson on North Carolina Corporation Law
14.06 n.9 (7th ed. 2002) ............................................................................................. 3, 4, 6
S. Rep. No. 104-98 (1995), reprinted in 1995 U.S.C.C.A.N. 679 ........................................ 13
iv

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Alan Greenspan, The Financial Crisis and the Role of Regulators (Oct. 23,
2008) ...................................................................................................................................... 4
Alan Greenspan, Never Saw It Coming: Why the Financial Crisis Took
Economists By Surprise, Foreign Affairs, (Nov/Dec 2013).......................................... 15
Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine, 57
Vand. L. Rev. 83 (2004) .................................................................................................... 17
William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the
Standard of Review of Director Due Care With Delaware Public Policy: A
Critique of Van Gorkom and its Progeny as a Standard of Review Problem, 96
Nw. U. L. Rev. 449 (2002) ............................................................................................... 18

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INTEREST OF THE AMICUS CURIAE

The Chamber of Commerce of the United States of America (Chamber) is
the worlds largest business federation. It represents 300,000 direct members and
indirectly represents the interests of more than three million companies and
professional organizations of every size, in every industry sector, and from every
region of the country. An important function of the Chamber is to represent the
interests of its members in matters before Congress, the Executive Branch, and the
courts. To that end, the Chamber regularly files amicus curiae briefs in cases that raise
issues of concern to the nations business community.
The issue presented in this appeal is of great importance to the Chamber and
its members because it affects how courts will apply the business judgment rule, a
bulwark of protection for corporate officers and directors against hindsight-based
assertions of personal liability brought by shareholders and other stakeholders.
All parties have consented to the filing of this brief.1

Pursuant to Rule 29(c)(5), counsel for the amicus curiae states that no counsel for a
party authored this brief in whole or in part, and no person other than the amicus
curiae, its members, or its counsel made a monetary contribution to its preparation or
submission.

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SUMMARY OF ARGUMENT
As generally formulated and applied in corporate litigation, the wellestablished business judgment rule means that courts should defer toshould not
interfere withdecisions of corporate directors upon matters entrusted to their
business judgment except upon a finding of bad faith or gross abuse of their business
discretion. Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043, 1047
(4th Cir. 1985) (citation omitted). The rule focuses on the reasonableness of the
process used to reach a decision, not the decisions ultimate outcome; and it reflects
the understanding that business executives, rather than judges, are in the best position
to determine what transactions best serve their companys interests.
The FDIC, as receiver for failed financial institutions, has the authority to hold
bank directors and officers personally liable for bank losses caused by their gross
negligence in making loans, unless state law provides a lesser standard of care. See 12
U.S.C. 1821(k). In advancing such claims, the FDICs practice has been to cherry
pick a handful of loans that officers and directors approved, and that with hindsight
turned out to be non-performing. Although a given director or officer might approve
hundreds of loans in a years time, the FDIC second-guesses only a few of these loans
(generally those with seven or eight-figure losses). The FDIC then sues the
individuals personally, seeking damages so high that the in terrorem effect of substantial
damages, coupled with the burdens and risks of trial, causes most cases to settle even
where the allegations of wrongdoing are marginal or groundless.
2

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But routine-lending decisions, made in good faith according to an established

process, should not lead to second-guessing by banking agencies and should not put
officers and directors in jeopardy of ruinous personal judgments. North Carolina
cases establish that directors are required to exercise only reasonable care and business
judgment; they are not guarantors that they will make no mistakes in the management
of the corporation and are not personally responsible for mere errors of judgment.
Russell M. Robinson, II, Robinson on North Carolina Corporation Law 14.06 n.9 (7th ed.
2002). Accordingly, to provide meaningful protection at a stage where the business
judgment rule should matter most, courts generally should grant summary judgment
unless plaintiffs can overcome the presumption that the judgments of corporate
professionals were reached in good faith based on a rational process.
The protections of the business judgment rule become all the more important
in cases like this, where the loan decisions in question were made on the brink of an
unforeseen economic disruption that the Second Circuit has described as the direst
financial crisis in modern times. Starr Intl Co. Inc. v. Fed. Reserve Bank of N.Y., 742
F.3d 37, 42 (2d Cir. 2014). The 2008 financial crisis unleashed a contagion effect that
caused historic declines in credit and real estate markets that, in turn, resulted in the
default of loans that would have performed in any ordinary economic cycle. From
2000 through 2007, there were 32 bank failures in the United Statesall but three of

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which occurred before 20052with total losses estimated at under $1 billion. From
2008 through the present, the number of bank failures skyrocketed to over 500, more
than 15 times the rate seen in the preceding seven-year period.3 Total losses were
estimated to exceed $85 billion.4 It was, in the words of Alan Greenspan, former
Chairman of the Federal Reserve, a once in a century credit tsunami.5
Without meaningful business judgment protections against liability for
decisions that only with the benefit of hindsight now seem dubious, individuals will be
less willing to risk potentially ruinous financial liability by serving as officers and
directors. As a result, financial institutions, as well as other corporations, will find it
harder to attract and retain the most-qualified individuals to serve as officers and
directors. Further, those who agree to serve might become unduly risk averse, which
has its own set of societal costs measured by lost economic opportunities. One of the
important purposes of the business judgment rule is to allow[] directors to be risk
takers without being made subject to the hindsight of judicial second guessing.
Robinson, II, supra, 14.06, at 1416 through 1417. Assaults on the business
judgment rules protections necessarily temper entrepreneurial risk-taking by officers
2

FDIC Failures & Assistance Transactions, available at

[Link]
3

See id.

See id.

Statement of Alan Greenspan, The Financial Crisis and the Role of Regulators, Hearing
Before the House Committee on Oversight and Government Reform (Oct. 23, 2008).

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and directors. In the banking context, less risk-taking translates into denials of credit
to local borrowers who wish to start, fund, or run businesses that create jobs in our
communities. For corporations of every kind, to succeed in an intensely competitive
business environment management must be willing to take reasonable risks that
enable them to pursue new markets, create new products, and execute new strategies.
Subjecting corporate decision makers to liability for decisions made in good faith
according to a rational decision making process, deters them from taking steps
necessary to advance business operations and shareholder wealth.
It is easy to second-guess decisions in hindsight. Directors and officers who
make decisions in good-faith, according to a rational process should not have to go to
trial to vindicate their judgments.
ARGUMENT
I.

THE BUSINESS JUDGMENT RULE PROTECTS DECISIONS

MADE USING A RATIONAL PROCESS AND PERFORMED IN
GOOD FAITH.
A.

The Business Judgment Rule in North Carolina

Directors and officers of failed institutions who are alleged to have acted
negligently or in breach of their fiduciary duties may in most jurisdictions invoke the
defense of the business judgment rule, a presumption that their decisions were made
in good faith.6 The rule had its origins in the common law, in bank director cases.7
6

Federal law imposes a heightened liability standard on the FDIC as receiver of a

banks assets. The Financial Institutions Reform, Recovery, and Enforcement Act of

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In North Carolina, the rule creates, first, an initial evidentiary presumption

that in making a decision the directors acted with due care (i.e. on an informed basis)
and in good faith in the honest belief that their action was in the best interest of the
corporation, and second, absent rebuttal of the initial presumption, a powerful
substantive presumption that a decision by a loyal and informed board will not be
overturned by a court unless it cannot be attributed to any rational business purpose.
Robinson, II, Robinson on North Carolina Corporation Law, 14.06, at 1416 through 14
17.8

1989 (FIRREA), 12 U.S.C. 1821(k), established gross negligence as a national

minimum standard for officer and director liability. However, the Supreme Court has
held that the phrase gross negligence does not immunize directors and officers
from liability for less culpable conductsuch as ordinary negligence. Rather, it
provides only a floor. States are free to enact more stringent requirements. Atherton
v. FDIC, 519 U.S. 213, 22728 (1997). In North Carolina, the business judgment rule
may be overcome only by a showing of gross negligence. See State v. Custard, No. 06CVS-4622, 2010 WL 1035809, at *20-21 (N.C. Super. Ct. Mar. 19, 2010). Gross
negligence requires willful and wanton conduct. Yancey v. Lea, 550 S.E.2d 155, 157
58 (N.C. 2001).
7

See Percy v. Millaudon, 8 Mart. (n.s.) 68, 1829 WL 1592 (La. 1829) (bank director not
liable if he exercised ordinary care); Godbold v. Branch Bank, 11 Ala. 191, 199, 1847 WL
159, at *6 (Ala. 1847) (holding bank director liable for any error in decision-making
would be manifestly wrong and observing that [t]he inevitable tendency of such a
rule, would be hostile to the end proposed by it, as no man of ordinary prudence
would accept a trust surrounded by such perils.).
8

North Carolina applies the rule to officers and directors. See Robinson, II, supra,
14.96 (Absent proof of bad faith, conflict of interest, or disloyalty, the business
decisions of officers and directors will not be second-guessed if they are the product
of a rational process . . . . (citations and internal quotation marks omitted)). In some
States, the rule only applies to directors. See, e.g., FDIC v. Perry, No. CV 11-5561-

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When applying the rule, courts in North Carolina (and many other States, led
by well-established Delaware jurisprudence),9 consider the reasonableness of the
process used to reach a decision, not the decisions ultimate outcome. See Maurer v.
Maurer, No. 13 CVS 4421, 2013 WL 4647703, at *6 (N.C. Super. Ct. Aug. 23, 2013)
(the business judgment rule is process oriented rather than a simple exercise of an
after the fact objective evaluation) (citation omitted); State v. Custard, 2010 WL
1035809, at *21 (no liability for a decision that the fact-finder believes to be wrong,
stupid, or egregious so long as the . . . [decision-making process] . . . was either
rational or [was] employed . . . in good faith) (emphasis omitted) (quoting In re
Caremark Intl Inc. Deriv. Litig., 698 A.2d 959, 967 (Del. Ch. 1996)); Stewart v. BF
ODW, 2012 WL 589569 (C.D. Cal. Feb. 21, 2012). In other States, the application of
the rule to officers is unclear. Both the American Law Institute and the ABA
Committee on Corporate Laws endorse applying the Business Judgment Rule to
officers and directors. See ABA Comm. on Corporate Laws, Changes in the Model
Business Corporation Act Pertaining to the Standards of Conduct for Officer;
Inspection Rights and NoticesFinal Adoption, 54 Bus. Law 1229, 1231 (1999)
([T]he business judgment rule will normally apply to decisions within an officers
discretionary authority.); American Law Institute, Principles of Corporate
Governance: Analysis and Recommendations 4.01 cmt. a (1994) (Sound public
policy points in the direction of holding officers to the same duty of care and business
judgment standards as directors.).
9

North Carolina courts have frequently looked to the well-developed case law of
corporate governance in Delaware for guidance. State v. Custard, 2010 WL 1035809,
at *18 (N.C. Super. Ct. Mar. 19, 2010); see also Ehrenhaus v. Baker, No. 08 CVS 22632,
2008 WL 5124899, at *9, n.19 (N.C. Super. Dec. 5, 2008) (North Carolina courts
frequently look to Delaware for guidance on questions of corporate governance
because of the special expertise and body of case law developed in the Delaware
Chancery Court and the Delaware Supreme Court.).

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Boathouse Holdco, LLC, No. 8119-VCP, 2013 WL 5210220, at *10 (Del. Ch. Aug. 30,
2013) (Due care in the decision-making process is process due care only) (emphasis
and internal quotation marks omitted); FDIC v. Loudermilk, 761 S.E.2d 332, 338 (Ga.
2014) (business judgment rule generally precludes claims against officers and
directors for their business decisions that sound in ordinary negligence, except to the
extent that those decisions are shown to have been made without deliberation,
without the requisite diligence to ascertain and assess the facts and circumstances
upon which the decisions are based, or in bad faith). See also Kahn v. M& F Worldwide
Corp., 88 A.3d 635, 654 (Del. 2014) (rule does not apply only where it can be credibly
argued that no rational person would have made the decision); Brehm v. Eisner, 746
A.2d 244, 264 & n.66 (Del. 2000) (Irrationality is the outer limit of the business
judgment rule) (footnote omitted).
The rule reflects the understanding that business executives, rather than
judges, are in the best position to determine what transactions best serve their
companys interests. Wachovia Capital Partners, LLC v. Frank Harvey Inv. Family Ltd.
Pship, No. 05 CVS 20568, 2007 WL 2570838, at *4 (N.C. Super. Ct. Mar. 5, 2007)
(The business judgment rule recognizes that business decisions are best left in the
hands of informed and experienced boards of directors and managers. Courts,
although expert at interpreting and applying the law, are ill equipped to engage in
post hoc substantive review of business decisions.) (quoting In re Walt Disney Co.
Derivative Litig., 907A.2d 693, 746 (Del. Ch. 2005), affd, 906 A.2d 27 (Del. 2006)). See
8

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also In re MFW Sholders Litig., 67 A.3d 496, 526 (Del. Ch. 2013) ([I]t has long been
thought beneficial to investors for courts, which are not experts in business, to defer
to the disinterested decisions of directors, who are expert, and stockholders, whose
money is at stake.), affd, 88 A.3d 635 (Del. 2014).
The rule also encourages reasonable risk-taking by reassuring officers and
directors that they are not guarantors of business outcomes. See, e.g., Trenwick Am.
Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 205 (Del. Ch. 2006) (The rule
provid[es] directors with sufficient insulation so that they can seek to create wealth
through the good faith pursuit of business strategies that involve a risk of failure),
affd, 931 A.2d 438 (Del. 2007) (Table). These protections are critical to recruiting and
retaining qualified individuals, whether in the context of regulated financial
institutions, or more broadly in offices and boardrooms across corporate America.
B.

Adoption of the FDICs Approach Would Frustrate the Protections

of the Business Judgment Rule for Bank Officers and Directors.

The salutary purposes of the rule are frequently thwarted by the FDIC in bank
director and officer litigation. Such litigation, which invariably focuses on relatively
few loans, viewed with hindsight, and relies on boilerplate allegations of wrongdoing
that are recycled from complaint to complaint, seeks millions of dollars of damages
from defendants in their personal capacities. Over a five-year period (20092014)
since the 2008 financial crisis staggered the global economy, the FDIC has authorized
more than 100 lawsuits against nearly 800 directors and officers of failed financial

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institutions. See FDIC, Professional Liability Lawsuits,

[Link] (last visited Feb. 4, 2015). For all
director and officer lawsuits filed by the agency through 2013, the average damages
claim was $49 million, and the median claim was $22 million. See Cornerstone
Research, Characteristics of FDIC Lawsuits against Directors and Officers of Failed Financial
Institutions (2014) at 11. In this particular lawsuit, the FDIC seeks to recover more
than $34 million overall without counting pre-judgment interest. It premises liability
on the decision of individual directors and officers who voted to approve each
particular loan. The agency seeks judgment against Rippy for $20 million; against
Willetts for $33.274 million; against Burton for $9.4 million; against Hundley for $4.48
million; against King for $12.38 million; against Wright for $11.01 million; against
Fensel for $21.436 million; against Bridger for $14.45 million; and against Burrell for
$18.64 million.
Notwithstanding the Supreme Courts rulings in Bell Atlantic Corp. v. Twombly,
550 U.S. 544 (2007), and Ashcroft v. Iqbal, 556 U.S. 662 (2009), many courts faced with
failed bank litigation have held that the business judgment rule is too fact-intensive to
be disposed of on a motion to dismiss. See, e.g., FDIC v. Baldini, 983 F. Supp. 2d 772,
783 (S.D. [Link]. 2013) (citing overwhelming authority that the rule is highly fact
dependent and, therefore, inappropriate for consideration on a motion to dismiss);
Court Appointed Receiver of Lancer Offshore, Inc. v. Citco Grp. Ltd., No. 05-6008-Civ., 2008
WL 926509, at *5 (S.D. Fla. Mar. 31, 2008) ([T]he Court considers it unwise to
10

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evaluate conduct and determine whether or not it is protected by the business

judgment rule at the motion to dismiss stage.). But see FDIC v. Blackwell, No. 1:11cv-03423-PWS, 2012 WL 3230490 (N.D. Ga. Aug. 3, 2012) (granting motion to
dismiss claims of ordinary negligence and breach of fiduciary duty where the
entitlement to the protections of the rule were clear under the Georgia statute).
Moreover, few courts are willing to certify business judgment rule issues for
interlocutory appeal under 28 U.S.C. 1292(b).10
Accordingly, absent unusual circumstances, directors and officers in failed bank
litigation have only one real chance to dispose of a case before trial: summary
judgment. If Defendants do not prevail on summary judgment, they face a Hobsons
choice of settling (often at significant personal expense)11 or litigating (with ruinous
amounts of potential liability in the balance). Not surprisingly, the great majority of

10

In this case, for example, following the denial of the motion to dismiss, the District
Court denied Defendants motion to certify what Defendants characterized as a
controlling question of law. See FDIC v. Willetts, 882 F. Supp. 2d 859, 867-68
(E.D.N.C. 2012).

11

When cases settle, officers and directors frequently must make out-of-pocket
payments. According to Cornerstone Research, of 82 settlement agreements
involving officers and directors (regardless whether a lawsuit was actually filed), as
many as 38 agreements, or 46 percent, required out-of-pocket payments by directors
and officers. Directors and officers agreed to pay at least $34 million out of pocket in
these cases. Cornerstone Research, Characteristics of FDIC Lawsuits against Directors and
Officers of Failed Financial Institutions at 15 (2014). Although directors do receive fees for
their work, there is an enormous discrepancy between the amount they are paid and
the potential liability they face from FDIC lawsuits.

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cases, even cases with marginal or wholly insubstantial claims, settle. Of the hundredplus D&O lawsuits filed by the FDIC since the 2008 financial crisis, thirty-four had
been resolved by the end of 2014: thirty-three settlements and only one trial
(involving a verdict in favor of the FDIC involving the failure of IndyMac Bank, one
of the countrys largest savings and loan associations prior to its failure on July 11,
2008). See FDIC, Professional Liability Lawsuits,
[Link] failed/pls/ (last visited Feb. 4, 2015). Even
when cases go to trial, vindicating business judgments can be an extremely long and
costly process fraught with uncertainty.12
In this regard, failed bank litigation is similar to class action securities fraud
lawsuits, where both Congress and the Supreme Court criticized (and acted to

12

In FDIC v. Castetter, 184 F.3d 1040 (9th Cir. 1999), for example, the FDIC alleged
that former bank directors were negligent and liable for losses in the banks loan
portfolio. The case went to trial. Following a jury verdict in favor of the FDIC, the
trial court granted the defendants motion for judgment as a matter of law or, in the
alternative, a new trial. The Ninth Circuit reversed the order granting judgment as a
matter of law, but affirmed the grant of a new trial. On remand, the trial court ruled
in defendants favor on summary judgment, and the FDIC again appealed. The Ninth
Circuit then determined that the California business judgment rule insulated the
directors from liability. Holding that the directors had relied on the advice of experts
regarding the banks financial condition, the Ninth Circuit criticized the FDIC for
largely ad hominem attacks on the directors capabilities, their decisions, and their
inability to reverse negative earnings trends. Id. at 104546 (internal quotation marks
omitted). The court observed that the FDIC was primarily attacking the directors
decisions themselves and that the business judgment rule should protect wellmeaning directors who are misinformed, misguided, and honestly mistaken. Id. at
1046.

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eliminate) blackmail settlements induced by a small probability of an immense

judgment. In the Private Securities Litigation Reform Act, 15 U.S.C. 78u-4, et seq.
(PSLRA), Congress created several procedural barriers to securities fraud actions,
including a heightened pleading requirement, to prevent in terrorem settlements.13
Moreover, in a series of securities decisions, both before and after the PSLRA, the
Supreme Court recognized and condemned the practice of suing for the value of
settlement. See Stoneridge Inv. Partners, LLC v. Scientific-Atlanta, Inc., 552 U.S. 148, 163
(2008) (rejecting the expansion of securities fraud causes of action where it would
allow plaintiffs with weak claims to extort settlements from innocent companies);
Tellabs, Inc. v. Makor Issues & Rights, Ltd., 551 U.S. 308, 313(2007); Blue Chip Stamps v.
Manor Drug Stores, 421 U.S. 723, 741 (1975). The magnitude of damages coupled with
the costs of litigation in bank director and officer suits continues to drive settlement,
causing defendants to forfeit the protections of the business judgment rule before
they have any meaningful opportunity to avail themselves of its shield.

13

See S. Rep. No. 104-98, at 6 (1995), reprinted in 1995 U.S.C.C.A.N. 679, 685 (The
dynamics of private securities litigation create powerful incentives to settle . . . . Many
such actions are brought on the basis of their settlement value. The settlement value
to defendants turns more on the expected costs of defense than the merits of the
underlying claim[s].). See also H.R. Rep. No. 104-369, at 37 (1995) (Conf. Rep.),
reprinted in 1995 U.S.C.C.A.N. 730, 736 (The cost of discovery often forces innocent
parties to settle frivolous securities class actions.).

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II.

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BUSINESS JUDGMENT RULE ISSUES SHOULD BE RESOLVED

ON SUMMARY JUDGMENT, WITHOUT THE COSTS OF TRIAL.
To provide meaningful protection to these individuals within the intended

scope of the business judgment rule, courts should dismiss, or grant summary
judgment, on ordinary negligence and breach of fiduciary duty claims where the
business judgments of corporate professionals were based on a rational process
performed in good faith. That is particularly the case where, as here, regulators
contemporaneously examined that process and found it to be satisfactory.14 Courts
should reject the FDICs invitation to second-guess the substance of the actual loan
decisions at issue, or the fact that the bank failed. As then-Vice Chancellor Strine of
the Delaware Court of Chancery observed in Trenwick America Litigation Trust v. Ernst
& Young, 906 A.2d 168, 193 (Del. Ch. 2006): [B]usiness failure is an ever-present
risk. The business judgment rule exists precisely to ensure that directors and
managers acting in good faith may pursue risky strategies that seem to promise great
profit. If the mere fact that a strategy turned out poorly is in itself sufficient to create
an inference that the directors who approved it breached their fiduciary duties, the

14

One commentator has observed that [t]he business-judgment rule applicable to

directors and officers goes much further than the honest-error-of-judgment rule of
general tort law. . . . Under the business judgment rule, there is no liability even
though a decision is unreasonable. Melvin A. Eisenberg, The Duty of Care of Corporate
Directors and Officers, 51 U. Pitt. L. Rev. 945, 963 (1990).

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business judgment rule will have been denuded of much of its utility. 906 A.2d at
193.
Applying the business judgment rule to dismiss a complaint before trial is
particularly important where, as here, the underlying decisions were made on the cusp
of an historic economic catastrophe, the full extent of which was impossible to
predict.15 In testimony given to the House of Representatives in 2011, Sheila C. Bair,
Chairperson of the FDIC, observed that the financial crisis that hit in the fall of
2008 was the worst financial crisis since the 1930s, and that few at the time
foresaw the extent of the emerging threat to our financial stability. FDIC Oversight:
Examining and Evaluating the Role of the Regulator During the Financial Crisis and Today,
Before the H. Subcomm. on Financial Institutions and Consumer Credit of the H. Comm. on
Financial Services, 112th Cong. 46, 48, (2011) (Statement of Sheila C. Bair, Chairman,
FDIC). Alan Greenspan conceded that virtually every economist and policymaker of
note [was] . . . blind to the coming calamity and experts, including me, fail[ed] to see
it approaching[.] See Alan Greenspan, Never Saw It Coming: Why the Financial
Crisis Took Economists By Surprise, Foreign Affairs, (Nov/Dec 2013) at 2. The
closest historical precedent was the Great Depression.
Banks lend based on presumptions about the local, regional, and national
15

The FDICs Complaint in this case charged Defendants with negligence, gross
negligence, and breaches of fiduciary duty with respect to 86 loans made between
January 5, 2007 and April 10, 2008.

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economies, including the presumption that the economy will cycle up and down but
will stay within an historical range. They expect that some small percentage of loans
will not pay off, no matter how reasonable the underlying business judgment, and
thus they establish an Allowance for Loan and Lease Losses to account for that fact.
The 2008 financial crisis, however, proved those presumptions wrong. Both the
economy and real estate prices plunged much faster and far deeper than the industry
or its regulators predicted, resulting in a far higher percentage of what would have
been performing loans in any ordinary economic cycle defaulting.
In this case, the trial court recognized this economic reality and properly
invoked the protections of the business judgment rule to dispose of the case at the
summary judgment stage. The court resisted the temptation to second-guess the
decisions: Although the decisions of defendants to engage in various forms of
lending and to make the particular loans challenged in the complaint, and the wisdom
of such decisions raise interesting discussion points in hindsight, the business
judgment rule precludes this court from delving into whether or not the decisions
were good and limits the courts involvement to a determination of whether the
decisions were made in good faith or were founded on a rational business purpose.
Joint Appendix (JA) 0077.
But the position advanced by the FDIC on appeal is shortsighted and, if
adopted, could make our banking system less resilient. If directors and officers must
go to trial to vindicate business judgments reached in good faith through a rational
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decision making process deemed to be satisfactory by examiners at the time, the most
qualified individuals will be discouraged from serving as directors or officers. See 3A
Fletcher, Cyclopedia of the Law of Corporations 1037(West 2014) ([B]usiness is inherently
risky and the quality of a business decision cannot always be judged by the immediate
results; therefore personal liability for a decision that produces bad results would
make it difficult to secure the services of able and experienced corporate directors.).
That is why it is critically important for trial courts to apply the business judgment
rule at a pre-trial stage in a way that insulates directors and officers from hindsightbased criticisms after a risk materializes. As one commentator observed, [T]here is a
substantial risk that suing shareholders and reviewing judges will be unable to
distinguish between competent and negligent management because bad outcomes
often will be regarded, ex post, as having been foreseeable and, therefore, preventable
ex ante. If liability results from bad outcomes, without regard to the ex-ante quality of
the decision or the decision-making process, however, managers will be discouraged
from taking risks. See Stephen M. Bainbridge, The Business Judgment Rule as Abstention
Doctrine, 57 Vand. L. Rev. 83, 11415 (2004) (footnote omitted).
Eroding the protections of the business judgment rule not only discourages
participation by qualified individuals, it also discourages risk-taking, which is the lifeblood of a corporation. As the Second Circuit has observed, because potential profit
often corresponds to the potential risk, it is very much in the interest of shareholders
that the law not create incentives for overly cautious corporate decisions. Joy v.
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North, 692 F.2d 880, 886 (2d Cir. 1982). Hindsight review of business decisions
destroys [t]he entire advantage of the risk-taking, innovative, wealth-creating engine
that is the . . . corporation . . . with disastrous results for shareholders and society
alike. In re Walt Disney Co. Derivative Litig., 907 A.2d 693, 698 (Del. Ch. 2005); see also
William T. Allen, Jack B. Jacobs & Leo E. Strine, Jr., Realigning the Standard of Review of
Director Due Care With Delaware Public Policy: A Critique of Van Gorkom and its Progeny as a
Standard of Review Problem, 96 Nw. U. L. Rev. 449, 455 (2002) (Because the expected
value of a risky business decision may be greater than that of a less risky decision,
directors may be acting in the best interest of the shareholders when they choose the
riskier alternative.); id. at 450 (By intruding on the protected space that the business
judgment rule accords such decisions, courts create disincentives for businesses to
engage in the risk-taking that is fundamental to a capitalist economy.).16
16

See also Trenwick Am. Litig. Trust v. Ernst & Young, L.L.P., 906 A.2d 168, 205 (Del.
Ch. 2006) (observing that the business judgment rule provid[es] directors with
sufficient insulation so that they can seek to create wealth through the good faith
pursuit of business strategies that involve a risk of failure), affd, 931 A.2d 438 (Del.
2007) (Table); Gagliardi v. TriFoods Intl, Inc., 683 A.2d 1049, 1052 (Del. Ch. 1996)
([The business judgment rule] protects shareholder investment interests against the
uneconomic consequences that the presence of [judicial] second-guessing risk would
have on director action and shareholder wealth in a number of ways.) (emphasis
omitted). Cf. Daniel R. Fischel & Michael Bradley, The Role of Liability Rules and the
Derivative Suit incorporate Law: A Theoretical and Empirical Analysis, 71 Cornell L. Rev.
261, 285 (1986) ( Public corporations are structured to transfer most business risk to
security holders who have access to capital markets and thus have a comparative
advantage in bearing risk. The threat of litigation if a particular decision turns out
poorly, however, has the effect of transferring the risk from security holders to
managers who are far less efficient risk bearers.).

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The defendants in this case were local residents who served as officers and
directors of a community bank. When such individuals act too conservatively, and
decline to take reasonable risks or extend credit to creditworthy borrowers, the
shareholders and customers they serve suffer as well. Less risk-taking leads to denials
of credit to local residents who wish to start, fund or expand businesses that create
jobs for other local residents, which in turn leads to reduced profits. This is
particularly true of community banks such as Cooperative. As the FDIC has
recognized, community banks focus on providing traditional banking services in
their local communities. They obtain most of their core deposits locally and make
many of their loans to local businesses. See FDIC Community Banking Study
[Link] (last visited Feb. 5,
2015). As the FDICs own study makes clear:
This relationship approach to lending is particularly important to
small businesses that rely on community banks for loans and
other services. Small businesses, particularly small start-up
companies, may be unable to satisfy the requirements of the more
structured approach to underwriting that larger banks use. The
relationship lending approach used by community banks is often
the only avenue small businesses have to obtain loans and access
other financial services.
Id.17

17

The FDIC Report additionally notes that [c]ommunity banks can develop close
relationships with customers because they tend to be smaller in size and only conduct
business locally. FDIC Community Bank Study, at 1-1. And that community banks
may weigh the competing interests of shareholders, customers, employees and the

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When directors and officers can be second-guessed without meaningful

protection, the natural reaction is to restrict borrowing to only the most creditworthy
individuals. This has an enormous social and economic cost to the communities the
banks serve. That strategy would have caused conservative banks to lose market
share and share value, endure regulatory criticism, and run the risk of being acquired
by more aggressive and thus more profitable banks. The same cautionary rule applies,
of course, to all corporations. Where the business judgment rule is not properly
applied by the courts, directors and officers become risk-adverse and the corporation,
its shareholders, and the economy suffers.

local community differently from a larger institution with stronger ties to the capital
markets. Id.

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CONCLUSION
For the foregoing reasons, the Court should affirm the grant of summary
judgment in favor of the individual defendants.
Respectfully Submitted,
KATE COMERFORD TODD
STEVEN P. LEHOTSKY
U.S. CHAMBER LITIGATION
CENTER, INC.
1615 H Street, N.W.
Washington, D.C. 20062
(202) 463-5337

JOHN K. VILLA
KANNON K. SHANMUGAM
RYAN SCARBOROUGH
RICHARD OLDERMAN
WILLIAMS & CONNOLLY LLP
725 Twelfth Street, N.W.
Washington, D.C. 20005
(202) 434-5117
jvilla@[Link]

Date: February 6, 2015

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CERTIFICATE OF COMPLIANCE WITH RULE 32(A)(7)(b)

This brief complies with the type-volume limitation of Federal Rule of
Appellate Procedure 32(a) because it contains 5,405 words, excluding the parts of the
brief exempted by Federal Rule of Appellate Procedure 32(a)(7)(B)(iii).
This brief complies with the typeface requirements of Federal Rule of
Appellate Procedure 32(a)(5) and the type-style requirements of Federal Rule of
Appellate Procedure 32(a)(6) because it has been prepared in a proportionally spaced
typeface using Microsoft Word 2007 in 14-point Garamond.

/s/ Richard A. Olderman

Date: February 6, 2015

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CERTIFICATE OF SERVICE
I hereby certify that on this 6th day of February 2015, the foregoing Brief of
the Amicus Curiae Chamber of Commerce of the United States of America was
electronically filed through the Courts CM/ECF system. Notice of this filing will be
sent by email to all parties by operation of the Courts electronic filing system.
I additionally caused eight true and correct printed copies of the brief to be
filed with the Clerk of the Court by Fed Ex delivery directed to the following address:
Hon. Patricia S. Connor
Clerk, U.S. Court of Appeals
for the Fourth Circuit
1100 East Main Street, Suite 501
Richmond, Virginia 23219-3517
/s/ Richard A. Olderman

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