Standard of Care for Directors and Officers of Federally Insured Depository Institutions

• Publication year: 1993
• Pages: 269
• Citation: Vol. 22 No. 2 Pg. 269

22 Colo.Law. 269 Colorado Lawyer 1993.

1993, February, Pg. 269. Standard of Care for Directors and Officers of Federally Insured Depository Institutions

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269

Vol. 22, No. 2, Pg. 269

Standard of Care for Directors and Officers of Federally Insured Depository Institutions

by Patrick B. Augustine

The financial industry is in a state of turmoil due in part to the number of bank failures and increased regulation. In the midst of this turmoil, federal statutes are changing constantly as Congress and federal regulators attempt to deal with the crisis at hand. The Financial Institutions Reform and Recovery Act of 1989 ("FIRREA")(fn1) was followed closely by the Comprehensive Thrift and Bank Fraud Prosecution and Taxpayer's Recovery Act of 1990 ("TBFP").(fn2) The following year, Congress enacted the Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA").(fn3)

In today's environment, directors and officers of depository institutions must manage, direct and operate their institutions consistent with the standard of care expected and imposed by the laws mentioned above. The basic principles of prudent management are simple, straightforward and, in the end, involve a great deal of common sense. An officer or director can be personally liable for damages if (1) he or she does not use due care when performing the three basic duties of obedience, diligence and loyalty or breaches fiduciary obligations to the institution and (2) that failure results in financial damage to the institution.

A comprehensive review of the legal principles applicable to the conduct of directors, officers and attorneys is beyond the scope of this article. Its purpose is to review some basic principles of the duties of diligence, obedience and loyalty for directors and officers of financial institutions. The article also formulates recommendations for officers and directors to consider in discharging their duty.

Relevant Standard of Care

In addition to common law, a statute may specifically provide that directors are personally liable for violations of law. For example, under the National Bank Act, directors are personally liable for "knowingly" violating certain provisions of the Act, such as violations of the lending limits.(fn4) State law also may provide a basis for liability for violations of state law prohibitions against such things as concentrations of credit and lending limits. Even if a statute does not specifically provide the director liability, it may provide a standard for "per se negligence." Violation of such statutes may be actionable if they (1) relate to the harm sought to be prevented by the statute and (2) are raised by a party within the class the statute seeks to protect.(fn5)

In addition, FIRREA contains a provision relating to the standard of care to which directors and officers may be held in the FDIC's professional liability suits.(fn6) FIRREA preempts state laws that would not hold a director liable for gross negligence.(fn7)

As a result of FIRREA, a question has arisen concerning the applicable standard of care of officers and directors. Defendants in professional liability suits have argued that § 212(k) of FIRREA sets a uniform national standard of gross negligence by providing, in pertinent part, as follows:

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 or conduct that demonstrates a greater disregard of a duty of care...