August 10, 2020

Volume X, Number 223

August 10, 2020

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Nevada’s Business Judgment Rule: FDIC – 4; Management – 0

In recent weeks, the U.S. District Court has issued four separate rulings in cases brought by the Federal Deposit Insurance Corporation (FDIC) against former bank managers for breach of fiduciary duty.  Here is a brief recap of these decisions:

In FDIC v. Delaney, 2014 U.S. Dist. LEXIS 90147 (July 2, 2014), the FDIC asserted claims against two former directors of Sun West Bank for gross negligence under the Financial Institutions Reform, Recovery, and Enforcement Act (FIRREA) (12 U.S.C. § 1821(k)) and breach of fiduciary duty under Nevada law.  In moving to dismiss, the directors argued that both claims failed in the face of Nevada’s business judgment rule.  With respect to the FIRREA claim, however, Judge James C. Mahan found that to the extent that the rule would insulate the directors, it is preempted.  With respect to the state law claim, Judge Mahan found that the rule does not preclude liability – it merely creates a presumption that directors act on an informed basis and in the best interest of the corporation.  Reviewing the FDIC’s allegations, he found them sufficient to rebut the presumption, but noted that the defendants might prevail under the business judgment rule at the summary judgment or trial stages.

FDIC v. Jones, 2014 U.S. Dist. LEXIS 131738 (Sept. 19, 2014) involved the FDIC’s suit against three former officers and directors of the failed Security Savings Bank for more than $13.1 million in bad loans.  The defendants moved to dismiss based on, among other things, the business judgment rule.  Judge Jennifer A. Dorsey also found that the business judgment rule establishes presumption and the FDIC had pled sufficient facts to rebut it.  In a footnote, however, she noted that neither party addressed whether the FDIC had pled the claim with the specificity required by Rule 9(b) of the Federal Rules of Civil Procedure.  See Nevada State Bank v. Jamison Family P’ship,  801 P.2d 1377, 1382 (Nev. 1990) (“A breach of fiduciary duty is fraud . . .”)  Notwithstanding this oversight, she found that a review of the complaint revealed that the FDIC “properly pled the ‘who, what, when, where, and how’ required by Rule 9(b) . . .“. 

In FDIC v. Johnson, 2014 U.S. Dist. LEXIS 148302 (Oct. 17, 2014), Judge Kent J. Dawson considered a motion for summary judgment, rather than a motion to dismiss.  Again, the FDIC charged both gross negligence and breach of fiduciary duty.  The defendant claimed the protection of the business judgment rule.  Judge Dawson found that there was a “definite possibility” that FDIC could overcome the business judgment rule by showing gross negligence.

I discussed the fourth case, FDIC v. Jacobs, 2014 U.S. Dist. LEXIS 157449 (Nov. 5, 2014) in this post last week.  This case, like Johnson, involved a ruling on a motion for summary judgment.  As with all of the preceding cases, the defendant was unsuccessful.

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About this Author

Keith Paul Bishop, Corporate Transactions Lawyer, finance securities attorney, Allen Matkins Law Firm
Partner

Keith Paul Bishop is a partner in Allen Matkins' Corporate and Securities practice group, and works out of the Orange County office. He represents clients in a wide range of corporate transactions, including public and private securities offerings of debt and equity, mergers and acquisitions, proxy contests and tender offers, corporate governance matters and federal and state securities laws (including the Sarbanes-Oxley Act of 2002 and the Dodd-Frank Act), investment adviser, financial services regulation, and California administrative law. He regularly advises clients...

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