Court: RTC Must Prove Directors' Gross Negligence

Article excerpt

WASHINGTON - Directors and officers at federally chartered institutions scored a huge legal victory last week.

A federal appeals court said the Resolution Trust Corp. must prove directors and officers at failed national thrifts were grossly negligent.

The RTC argued that its burden of proof should be "simple negligence," which is much easier to prove. But the U.S. Court of Appeals for the Seventh Circuit in Chicago said Nov. 9 that the RTC must prove "gross negligence" to convict 13 former directors and officers of Concordia Federal Savings and Loan Association, which failed in 1990.

Bailout Act Cited

The court said the 1989 thrift bailout law established a national gross negligence standard for all cases against directors and officers at nationally chartered institutions. The court did not rule on whether this national standard preempts state laws.

"The plain language" of the Financial Institutions Reform, Recovery, and Enforcement Act, the court said, "establishes a gross negligence standard of liability for officers and directors of failed financial institutions. …