Title: Director Liability: Understanding the Risks
Abstract: Has the government protected the industry to the point of crippling it? The potential liability of being a bank director has built gradually over the last 20 years, with the most significant increases occurring since 1989. disturbing, counterproductive paradox has resulted. Regulators and legislators have put numerous laws and regulations into effect to strengthen the banking system and its deposit insurance fund. Yet many bankers now worry that the very same laws and regulations may well be discouraging competent and qualified individuals from serving in the industry--just when the industry needs the services of top talent. What are these risks? comprehensive review of all laws and regulations--ranging from environmental statutes to pension law, as well as state corporate and banking laws--affecting director liability is beyond the scope of a magazine article. The purpose here is to illustrate the most significant changes in federal banking laws and how such changes have increased bank directors' potential liability. (Bank officers also share many of the same risks.) Traditional standards. General corporate law subjects all corporate directors to two standards of conduct. The first is the of care: directors must act in good faith and exercise their duties in a reasonable and prudent manner. Some courts have held that banks' deposit-taking function dictates that bank directors comply with a greater standard of care. If directors have met fully the duty of care, then they can expect that the business judgment will shield them. This rule protects directors from losses resulting from informed decisions made in good faith, and in the honest belief that the action taken was in the corporation's best interests. The second duty is the of loyalty: directors must put the corporation's interests above their own. Thus, directors must avoid self-dealing or any interests that would be harmful to the corporation. Negligence standards. In addition, the conduct of all directors is generally reviewed under a negligence standard established by common The question of director liability often turns on whether negligence is defined as or gross. Simple negligence is generally defined as the absence of ordinary care. However, there is no generally accepted definition of gross negligence. State laws differ on its meaning. Under common law, director liability has been viewed under a simple negligence standard. This standard prevails to the present, except where it has been preempted by state or federal Over 40 states have enacted statutes that limit or eliminate the liability of corporate directors for certain claims. These statutes do not, however, eliminate liability for intentional misconduct or knowing violations of laws. The 1989 Financial Institutions Reform, Recovery, and Enforcement Act contains a provision relating to the standard of care that establishes liability standards for officers and directors in lawsuits brought by FDIC in failed bank situations. Specifically, 12 U.S.C. 1821 (k), as amended by FIRREA Sect. 212, reads: A director or officer of an insured depository institution may be held personally liable for monetary damages in any civil action...for gross negligence, including any similar conduct that demonstrates a greater disregard of a duty of care (than gross negligence) including intentional tortious conduct, as such terms are defined and determined under the applicable State law. Federal district courts have not agreed on interpretation of the statute. One federal appeals court is currently considering the appropriate standard of care owed by directors under the statute. Thus, bank directors may be placed in a more vulnerable position than other corporate directors. Until Congress clarifies the intent of Sect. 212, or until there is more settled judicial interpretation of the section, directors should exercise an even higher standard of care than management in other industries, in order to avoid liability. …
Publication Year: 1992
Publication Date: 1992-06-01
Language: en
Type: article
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