A federal court has denied the motion of former IndyMac
CEO Matthew Perry to dismiss the action that the FDIC, as the failed bank's
receiver, had filed against him. In a December 13, 2011 order (here),
Central District of California Judge Otis D. Wright II
held that under California law the business judgment rule does not protect
officers' corporate decisions and accordingly he rejected Perry's argument that
the FDIC's complaint must be dismissed for failure to plead around the business
As discussed here,
in July 2011, the FDIC as receiver for the failed IndyMac bank sued Perry
alleging that as the bank's CEO he had breached his duties to IndyMac and acted
negligently in allowing IndyMac to continue to generate and acquire more than
$10 billion in risky residential loans for sale into the secondary market. As
the secondary market became unstable, the bank was forced to take the loans
into its own investment portfolio, where the generated substantial losses,
allegedly in excess of $600 million. IndyMac failed on July 11, 2008 and the
FDIC was appointed as the bank's receiver.
Perry moved to dismiss the FDIC's complaint, arguing that
the FDIC failed to allege facts sufficient to overcome the business judgment
rule. Perry argued that the business judgment rule applies and insulates him
from personal liability for his actions prior to IndyMac's demise.
In opposing Perry's motion, the FDIC argued that under
California law the business judgment rule does not apply to officers. Judge
Wright agreed. He 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." Because the FDIC's
allegations against Perry in his capacity as an office, Judge Wright denied his
motion to dismiss.
Historically, courts in applying the business judgment
rule have not always carefully examined whether or not the rule's protection
should apply to officers as well as to directors. Over time, some
have argued rather vigorously that the rule should not apply to officers.
argued that officers should be entitled to rely on the business judgment
rule. Certainly it would seem that in those jurisdictions where officers and
directors are held to have the same duties then they should be entitled to the
In any event, the question of whether or not an officer
is entitled to the same protection under the business judgment rule as a
director is a question of state law on which state law will control. Judge
Wright's decision is clearly reflection of his analysis under California state
law. But though it is limited on that basis, 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.
Setting aside the question of whether or not officers are
entitled to the protection of the business judgment rule is the question of
whether or not questions involving the applicability of the protections should
be addressed at the motion to dismiss stage. There is the further procedural
question of whether the plaintiffs must be expected to plead around the defense
in order for their case to go forward, or whether the protections are in their
nature more in the form of an affirmative defense to be invoked and
substantiated by the defendant as the case goes forward. Judge Wright's
analysis does not examine these issues in detail but they present and added
level of inquiry beyond the issues Judge Wright does address.
In any event, special thanks to a loyal reader for
providing me with a copy of Judge Wright's decision.
More About the FDIC's Settlement with WaMu
Executives: As was widely
reported yesterday, the FDIC has settled the action it brought as receiver
for the failed Washington Mutual bank against three former WaMu executives and
their wives. The early reports did not specify the amount of the
settlement, but a December 14, 2011 Wall Street Journal article (here)
fills in some of the missing details.
The total amount of the settlement is $64 million,
consisting of about $400,000 from the settling parties themselves, and the
balance of the cash amount to be paid by insurance. The executives are also to
forego a total of $24 million in retirement benefits and bonus claims.
The Journal article also makes a tantalizingly
brief mention of a prior $125 million settlement that the FDIC previously
reached "to release claims against other former outside directors and
officers." As I noted here,
there had been some suggestion in the press when the FDIC first filed its
action against the three executives that the agency had separately settled or
reached an agreement with the failed bank's outside directors, but the brief
mention in the Journal article is the first affirmative substantiation I have
seen since that time referencing this separate settlement. Any
readers that can shed light on this separate settlement are encouraged to pass
along whatever information they can.
other items of interest from the world of directors & officers liability,
with occasional commentary, at the D&O Diary, a blog by Kevin LaCroix.
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