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Decided: August 18, 2015

The Fourth Circuit affirmed in part, reversed in part, vacated in part, and remanded.

This case was an appeal from summary judgement in which plaintiff, the Federal Deposit Insurance Corporation as Receiver for Cooperative Bank (“FDIC-R”) brought an action against officers and directors of Cooperative Bank (“Bank”), alleging negligence, gross negligence, and breach of financial duties that resulted in the Bank’s failure. The claims arose out of events surrounding FDIC’s annual reviews of the Bank from 2006 to 2008, wherein the Bank scored poorly each year, leading to a Cease and Desist order in 2009, and when the Bank was unable to fulfill its obligations under the Order, the Bank was closed, and FDIC-R filed a complaint against the Bank, seeking damages against the named officers and directors (“officers”) of the Bank for negligence, gross negligence, and breach of their fiduciary duties in approving certain loans in 2007 and 2008. The named officers and directors moved to dismiss the claims on the grounds that North Carolina law does not allow for negligence claims against officers and that, even if it did, the business judgment rule would shield them from negligence and breach of fiduciary claims. The district court denied their motions to dismiss, and after discovery, both parties filed for summary judgment. The district court granted summary judgment for the officers because FDIC-R failed to provide any evidence that would strip the officers of the protection of the business judgment rule, and FDIC-R appealed.

The Fourth Circuit began its analysis by setting forth that the proper review of summary judgment is de novo. The Court first addressed FDIC-R’s contention that the district court incorrectly interpreted the business judgment rule, and while the Court found that the lower court correctly interpreted the rule, it incorrectly applied that rule. The Court examined director liability first, and determined that unless there is a genuine issue of material fact that the directors breached their duty of good faith, they are protected under an exculpatory provision in the Banks’ articles of incorporation, and the Court found that there was no genuine issue of material fact. The Court affirmed that part of the judgment. The Court next examined officer liability, noting that the articles of incorporation do not cover officers and thus must be examined through the business judgment rule. The Court noted that the business judgment rule can be rebutted if FDIC-R presents sufficient evidence, and determined that in this case, FDIC-R presented sufficient evidence to rebut the presumption, and that they did not act in accordance with general business practices. Specifically, FDIC-R presented the affidavit of Brian Kelley, an independent banking consultant, who stated that the Bank’s practices of approving loans over the telephone, often without first receiving the documents, were inconsistent with other banking institutions, and that furthermore, the Bank had not complied with its obligations to correct the problems brought up in its yearly evaluations. The Court therefore vacated summary judgment on the claims of ordinary negligence and breach of fiduciary duties of the officers. The Court then turned to the gross negligence claims, disagreeing with FDIC-R’s argument that North Carolina law does not require intentional wrongdoing for a claim of gross negligence. After examining the case law, the Court found that North Carolina, in enacting its gross negligence statute, only abrogated the common law definition of gross negligence in cases where the plaintiff seeks punitive damages. Since the FDIC-R was not seeking punitive damages, the common law definition, and not the statutory definition, of gross negligence applied, and so FDIC-R was required to show that there was a genuine issue of material fact that the officers and directors’ conduct amounted to “wanton conduct done with conscious or reckless disregard for the rights and safety of others.” However, the Court concluded that the FDIC-R had not provided sufficient evidence to fulfill the definition, and affirmed the district court on this claim. Finally, the Court addressed the officers and directors’ claims that summary judgment could be entered on alternative grounds that the district court did not address. The Fourth Circuit quickly dispensed with those arguments. The Court therefore affirmed in part, reversed in part, vacated in part, and remanded those parts of the case that were not affirmed.  

Full Opinion

Jennie Rischbieter