Recent Decisions Places Directors Who Act As Officers in Jeopardy

In FDIC v. Faigin ([1].pdf), the US District Court for the Central District of California confronted the liability of corporate directors who were also acting as company officers.  The FDIC brought suit against the directors and officers of a bank it had taken over to recover for losses it claimed arose from mismanagement of the bank's real estate lending operations.  With regard to officers' liability, the Court started with the premise that the business judgment rule protects directors, but not officers, in California.  (The officers had tried to argue that Delaware law applied because it is more protective of officers).  The business judgment rule generally protects corporate decision-makers from liability arising from erroneous business decisions when they act in a non-self-interested manner and in good faith.  The Court then considered the actions of the individuals.  Where their actions involved the acts ordinarily performed by officers (e.g., the evaluation of specific loans), the Court's decision suggested that the individuals would not receive the benefits and protections of the business judgment rule.  The Court refused to dismiss any of the claims against the individual directors or officers. This decision places corporate directors who also perform the acts of corporate officers in California at greater risk of liability because those individuals may be stripped of the protections of the business judgment rule.