Keith Paul Bishop reports that:
In FDIC v. Hawker, 2012 U.S. Dist. LEXIS 79320 (E.D. Cal. June 7, 2012), the FDIC brought suit for $42 million against the former officers of County Bank, a state chartered bank. The defendants moved to dismiss pursuant to Rule 12(b)(6) of the Federal Rules of Civil Procedure on the basis that the business judgment rule provided them with immunity from personal liability for acts of ordinary negligence under California law. U.S. District Court Judge Lawrence J. O’Neill, however, denied the motion.
As an initial matter, Judge O’Neill found that the defendants as officers were not entitled to rely on Corporations Code Section 309:
Defendants seek to blend their conduct as directors with that of officers. However, as noted by FDIC, the roles of officers and directors are distinct given officers’ performance-based compensation and larger stake in a corporation compared with directors’ limited com-pensation and corporate holdings. Defendants fail to substantiate their claim that “there is no basis under California law to conclude that the business judgment rule’s protections for officers was repealed by implication upon the enactment of Section 309.”
The defendants also claimed that the common law business judgment rule foreclosed the court from second guessing their decisions. Judge O’Neill, however, found that the business judgment rule is an affirmative defense that involves factual issues that made its application inappropriate to a motion to dismiss.
I am inclined to think that the common law business judgment rule should apply to officers.
It is reasonably well settled that officers owe a duty of care to the corporation.[1] It is less well settled that officers get the benefit of the business judgment rule. Under the ALI Principles, the rule applies to both directors and officers.[2] Judicial precedents are divided, however.[3] Most of the theoretical justifications for the business judgment rule extend from the boardroom to corporate officers. For detail on those justifications, see Stephen M. Bainbridge, The Business Judgment Rule as Abstention Doctrine (July 29, 2003).
Many corporate decisions are made by officers, for example, who are likely to be even more risk averse than directors. Accordingly, insulation from liability may be necessary to encourage optimal levels of risk-taking by officers. Just as the board of directors is properly regarded as a production team, so is the so-called top management team.[4] Accordingly, internal team governance may be preferable to external review. In sum, the better view is that officers are eligible for the protections of the business judgment rule.
[1] See ALI Principles § 4.01 cmt. a; see, e.g., MBCA § 8.42(a)(2) (requiring that officers exercise the “care that a person in a like position would reasonably exercise under similar circumstances”).
[2] ALI Principles § 4.01.
[3] Compare Galef v. Alexander, 615 F.2d 51, 57 n.13 (2d Cir. 1980) (holding that the business judgment rule “generally applies to decisions of executive officers as well as those of directors”); FDIC v. Stahl, 854 F. Supp. 1565, 1570 n.8 (S.D. Fla. 1994) (holding that the rule “applies equally to both officers and directors”) with Platt v. Richardson, 1989 WL 159584 at *2 (M.D. Pa. 1989) (holding that the rule “applies only to directors of a corporation and not to officers.”). At least one court claims that the former view is the majority position, rejecting an argument that “the business judgment rule applies only to the conduct of corporate directors and not to the conduct of corporate officers” on grounds that it was “clearly contrary to the substantial body of corporate case law which has developed on this issue.” Selcke v. Bove, 629 N.E.2d 747, 750 (Ill. App. 1994).
[4] See Susan G. Cohen and Diane E. Bailey, What Makes Teams Work: Group Effectiveness Research from the Shop Floor to the Executive Suite, 23 J. Mgmt. 239, 265-76 (1997) (describing research on top management teams).
