Business Judgment Rule In California Continues On Its Tortured Path

Kevin LaCRoix recently ran a post that discussed, among other things, the continuing uncertainty in California concerning the applicability of the Business Judgment Rule to officers of a bank (as opposed to the directors, to whom the rule clearly applies). We've discussed this issue previously (most recently, here and here). It's of major concern to bank officers, because the FDIC has been aggressive in its attempts to eviscerate what many corporate officers considered a good faith protection from the FDIC's Monday morning quarterbacking of decisions that seemed to be reasonable when made, but turned out poorly for the bank.

As Kevin notes, California courts that have ruled on the issue have issued contrary decisions, with some holding that California law does provide officers, as well as directors, with the protection afforded by the Business Judgment Rule, and other courts holding that the rule applies only to directors in California.

Kevin's latest post discusses a June 7, 2012 ruling by a federal district court judge in California that found that while officers were not entitled to the protections of the Business Judgment Rule that is incorporated into California statutory law, they may be able to raise the defense of the Business Judgment Rule as an affirmative common law defense.

In the decisions, which can be found here, Eastern District of California Judge Lawrence O’Neill held that the defendant officers cannot rely on the statutorily codified business judgment rule under California Corporations Code Section 309, because the statute by its terms refers only to officers not directors.

However, with respect to the defendant officers’ efforts to rely on the common law business judgment rule, Judge O’Neill also denied the defendants’ motion to dismiss -- but not on the basis that they could not rely on the business judgment rule; rather, he said only that “the business judgment rule is an affirmative defense which involves factual issues to preclude its application to dismiss the complaint’s claims.”

 While Judge O’Neill did find that the defendants’ entitlement to rely on the common law business judgment rule is a factual issue, what he did not say is that the defendants were not entitled to rely on it as a matter of law. Which can be interpreted to suggest at least by negative inference that there is a common law business judgment rule separate and apart from the statutory provision, and defendants can rely on the common law rule, if they can establish as a factual matter that the qualify for the rule’s protection.

Well, in this case, a "negative inference" is better than no inference at all. On the other hand, as attorney Ronald Stevens, cited in one of my previous posts, asserts, there's no logical reason not to extend the rule to officers and the failure to do so "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."

This sounds like it's a problem that might take a legislative fix. What are the chances of getting that done in California in the foreseeable future?