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FDIC v. Bober - 95 Civ. 9529 (JSM), 2002 U.S. Dist. LEXIS 13231 (S.D.N.Y. July 18, 2002)

Rule:

While the business judgment rule is applicable to decisions of corporate directors, it has not generally been found to apply to bank directors. Bank directors are traditionally held to a higher standard of diligence because of the quasi-public role of financial institutions in safekeeping the public's funds. Courts have refused to apply the business judgment rule to bank directors who had allegedly made improvident loans.

Facts:

Plaintiff Federal Deposit Insurance Corporation ("FDIC"), as receiver of First New York Bank for Business ("the Bank"), brought this action against defendant former directors of the Bank for breach of fiduciary duties, negligence, and gross negligence. The complaint alleged that the directors caused the Bank to make preferential insider loans in violation of the Bank's internal lending policies and federal and state laws and regulations. The FDIC moved for partial summary judgment (1) against certain defendants on the issue of whether the business judgment rule is available to those defendants as an affirmative defense against its claims; and (2) as to liability against individual defendant Boyarsky on the negligence, gross negligence, and breach of fiduciary duty claims. Individual defendants Boyarsky, D'Chiutiis, Lax, Robinson, and Zalmanov also moved for summary judgment on the FDIC's claims against them. They contended that the business judgment rule shielded them from liability if the underlying business decisions were made in good faith. Defendant Boyarsky claimed that he was not a member of the Board when the loans were approved, and thus he cannnot be liable with respect to those loans. Defendant Robinson claimed that the complaint against him should be dismissed because the Bank had indemnified him.

Issue:

In the Federal Deposit Insurance Corporation's action alleging breach of fiduciary duties in approving preferential insider loans, were defendant bank directors entitled to the protection of the business judgment rule to shield them from liability?

Answer:

No

Conclusion:

The United States District Court agreed with the FDIC that the New York business judgment rule was not available as an affirmative defense to these particular circumstances and claims relating to the extension of credit. Under New York law, the business judgment rule bars judicial inquiry into actions of corporate directors taken in good faith and in the exercise of honest judgment in the lawful and legitimate furtherance of corporate purposes. Stating that it is not the Court's role to rewrite the law, the Court held that while the rule is applicable to decisions of corporate directors, it has not generally been found to apply to bank directors. Accordingly, plaintiff FDIC's motion for partial summary judgment against certain defendants was granted. The Court struck the affirmative defenses that the defendants are entitled to the protection of the business judgment rule. Next, the Court denied the FDIC's motion for summary judgment as to liability against defendant Boyarsky, as well as defendants' individual motions for summary judgment against the FDIC. It is well settled that a director will not be liable for losses to the corporation absent a showing that his act or omission proximately caused the subsequent losses. Whether one director's failing to attend 13 of 17 board meetings caused any losses and whether the outcome would have been different had Boyarsky actually attended the meetings were questions of causation that rested on disputed facts. Thus, summary judgment was inappropriate on that issue. Next, the Court denied defendant Robinson's motion for summary judgment dismissal. It would not be prudent for the Court to make a "totality of the circumstances" determination at the partial summary judgment phase as to whether a director was entitled to indemnification. Finally, the Court denied defendants D'Chiuttis, Lax, and Zalmanov's motion for summary judgment dismissal of the FDIC's claims against them. Whether the directors acted reasonably in approving the disputed extensions of credit or renewals of existing loans was a factual dispute that must be resolved at trial. 

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