In the first trial of a case brought by the FDIC against former bank officers during this financial crisis, a California jury concluded that three former officers of a division of IndyMac Bank, F.S.B. (“IndyMac”) are liable under California law for negligence and breach of fiduciary duty to the FDIC. FDIC v. Van Dellen, Case No. 2:10-cv-04915- DSF-SH (C.D. Cal.) (“Van Dellen”). On December 7, 2012, the jury in Van Dellen awarded the FDIC damages of $168.8 million following sixteen days of trial. There are important distinctions, however, between the Van Dellen case and FDIC actions brought in other jurisdictions against former bank officers and directors. In the majority of these cases, the FDIC will be required to demonstrate that the former bank officers and directors committed gross negligence, which is far more difficult to prove than simple negligence or breach of fiduciary duty.

IndyMac was among the earliest and largest of the bank failures when it was closed on July 11, 2008. The Van Dellen complaint, which was filed in June 2010, was the first action brought by the FDIC against former bank officers, none of whom were directors, during this financial crisis. The FDIC filed a separate action in July 2011 against IndyMac’s former CEO, Michael Perry, which remains pending. FDIC v. Perry, Case No. 2:11-cv-5561 (C.D. Cal.).

The trial in Van Dellen involved the President and CEO of the IndyMac Home Builder Division, and its Chief Lending Officer and the Chief Credit Officer. The complaint focused upon twenty-three loans, which the FDIC contended were approved without adequate information and in violation of bank policies. With respect to each of these twenty-three loans, the jury concluded that one or more of the former officers were negligent and breached their fiduciary duties in approving the loan.

Under the federal statute that governs claims by the FDIC, the FDIC must demonstrate that the officer or director conduct was grossly negligent, unless the applicable state law allows liability to be imposed based upon a stricter standard. Financial Institutions Reform, Recovery, and Enforcement Act of 1989 (“FIRREA”), 12 U.S.C. § 1821(k). In many states, officers and directors are not subject to liability for negligence, either by statute or application of the business judgment rule, which generally protects officers and directors from personal liability for ordinary negligence. Thus, for example, FDIC claims for ordinary negligence brought against former bank officers and directors in Georgia have been dismissed. FDIC v. Skow, Case No. 1:11-cv- 0111 (N.D. Ga. Feb. 27, 2012), reconsideration denied (N.D. Ga. Aug. 14, 2012); FDIC v. Blackwell, Case No. 1:11-cv-03423 (N.D. Ga. Aug. 3, 2012); FDIC v. Briscoe, Case No. 1:11-cv-02303 (N.D. Ga. Aug. 14, 2012); FDIC v. Whitley, Case No. 2:12-cv-00170 (N.D. Ga. Dec. 10, 2012). The Eleventh Circuit recently accepted an appeal in FDIC v. Skow, in which the FDIC seeks review of this issue under Georgia law. FDIC v. Skow, Case No. 1:11-cv-00111 (N.D. Ga. Nov. 19, 2012).

The FDIC claims in Van Dellen were based upon California law, which affords directors, but arguably not officers, the protection of the business judgment rule from claims of ordinary negligence. Prior to trial, the Van Dellen court held that the officers could not rely upon the business judgment rule under California law. This ruling was consistent with the earlier ruling in the action against IndyMac’s CEO, FDIC v. Perry. In contrast, a 1999 decision from the Ninth Circuit Court of Appeals, which remains as binding precedent, held that under California law bank directors are protected by the business judgment rule from claims of ordinary negligence. FDIC v. Castetter, 184 F. 3d 1040 (9th Cir. 1999).

Accordingly, the Van Dellen verdict cannot be viewed as a predictor of potential results in other cases, particularly those in which officers and directors are afforded the protection of the business judgment rule and the FDIC is required to demonstrate gross negligence.