Kevin LaCroix's always excellent blog "The D&O Diary" today discussed yesterday's decision by Federal District Court Judge Otis T. Wright, II, that held that in California, the business judgment rule does not extend to corporate officers. The judge denied a motion by the former CEO of IndyMac to dismiss a complaint filed against him by the FDIC as receiver for IndyMac, that alleged simple negligence by the former CEO. As summarized by LaCroix:
[The judge] concluded that the relevant legal authority does not support a conclusion that common law business judgment rule encompassing the general judicial policy of deference to business decisions should apply to officers. He also found that California’s statutory business judgment rule does not extend its protection to corporate officers. After reviewing the statute, applicable legislative history and relevant case law, he concluded that when the California legislature codified the business judgment rule, “it purposely excluded its application to corporate officers.”
As LaCroix also notes that while the decision is based on the court's analysis of California law, "his conclusion nevertheless highlights the interesting question whether as a matter of public policy the decisions and actions of corporate officers should enjoy the same protection under the business judgment rule as directors."
K&L Gates attorney Ronald Stevens, a veteran of the last banking meltdown of the late 1980s, feels strongly that the FDIC's tactic of arguing that a simple negligence standard of liability should apply to former officers of IndyMac (as opposed to FIRREA's default standard of gross negligence) and that the protections of the business judgment rule should not extend to them, is not wise. In the second part of an excellent two-part series on FDIC lawsuits against former officers and directors of failed financial institutions (the first part of which can be found here), Stevens argues that this position is not only "extreme," but if sustained, "would produce a result that in the long term might well reduce the pool of qualified individuals willing to serve as bank directors and officers."
If judge Wright's opinion is upheld on appeal, the effect may very well be to discourage such individuals from serving, at least in California and other states that take a similar stance.