When federal district court judge Otis T. Wright, II, ruled last year that bank officers in California did not have the benefit of the Business Judgment Rule, I thought that was a bad omen for the defendants in the case, former officers of IndyMac. Last week, the axe dropped on those defendants, when the jury in the case found that the defendants were both negligent and had breached their fiduciary duties, and awarded the FDIC $168.8 million. I don't know about you, but an adverse judgment of that size would throw a wet blanket over my Christmas spirit.
Kevin LaCroix analyzed the decision and speculated that even if the officers had had the benefit of the Business Judgment Rule, they may have lost the case anyway, because the jury found that they had breached their fiduciary duty of due care. I don't think that's necessarily true, but at this point, we won'r know. The case is sure to be appealed, on among other grounds the allegation that the judge erred in his ruling on the applicability of the BJR to officers, as well as the application of California, not Delaware, law to decide the question (as we discussed in January). There's a split in authority at the federal district court level in California that needs to be clarified. Whether these defendants will now settle (if that's possible), or whether this case will be appealed, remains to be seen.
The defense attorneys I've chatted with on a preliminary basis think that since this is the first jury decision on a case arising out of the current crop of FDIC lawsuits, it is likely to encourage the FDIC to bargain hard, at least facially, on the issue of whether or not the economic collapse of 2008 was reasonably foreseeable by reasonably prudent officers and directors of failed banks. Obviously, defendants in these cases have strongly asserted that it was not. On the other hand, the defendants in this case worked for one of the poster children of the debacle, IndyMac. Juries are composed of your "peers" and in case anyone hasn't noticed this fact, your "peers" are pissed at banks generally, and failed banks in particular. OK, primarily at Wall Street banks that were bailed out, but failed banks come in a close second, especially high profile failures like this one. I don't know whether that same degree of anger would also play out among members of a jury who are also members of a community where the former officers and/or directors involved are respected participants and who aren't subject to the allegation that they were pumping up profits to milk bonuses from the bank at any cost, which was the FDIC's story line in the IndyMac case. Nevertheless, the defense "It was the economy, stupid" didn't get rave reviews on opening night.
As Kevin notes, this story is far from over.
The just completed trial apparently represents only the first trial phase of this matter. There apparently will be a separate trial phase that will address the FDIC’s allegations as to scores of other loans as well as allegations with respect to the bank’s loan portfolio as a whole. The FDIC apparently is seeking total damages of more than $350 million. In addition, the FDIC’s separate case against Perry, the bank’s former CEO, will continue to go forward as well.
Given the magnitude of the jury’s verdict, there undoubtedly will be post-trial motions and, after the conclusion of all remaining trial phases, appeals as well.
Moreover, as Kevin also discusses, collecting the judgment may be a tough nut to crack. Thus far, there does not appear to be an insurance fund available that hasn't been drained by defense costs. This is another issue that may be subject to permutations by appellate court decisions.