Appeals Courts May Soon Tackle Key Issue in Failed-Bank Suits

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Byline: Joe Adler

WASHINGTON a Although the Federal Deposit Insurance Corp.'s failed-bank suits have not yet gone to trial, a key issue in many of them may soon be taken up by appeals courts, which could have a large impact on the agency's lawsuits.

A common defense for officers and directors in FDIC cases is the "business-judgment rule," which shields business decisions that seemed prudent but later had harmful results.

But the scope of various business-judgment rules a which are established by state laws a are still being debated, and parties in at least two cases are looking to appeals courts for possible help in setting the ground rules.

"It's not surprising at all that they want to go to the appeals court immediately to get a ruling on the extent of protection that the business-judgment rule provides, because it's central to determining the viability of many claims," said Christopher Bruner, a law professor at Washington and Lee University in Lexington, Va. "The bottom line is that this is a very unsettled question, by and large."

In California, lawyers for former IndyMac Bank chief executive Michael Perry are waiting for the Ninth Circuit Court of Appeals to decide if it will hear their case for overturning a lower-court ruling. The lower-court judge had said the FDIC's claim against Perry could proceed a ruling that California's business-judgment rule only protects board members but not executives a but agreed to suspend the case as Perry sought an appeal.

In a separate case, the FDIC wants a reversal of a Georgia court's ruling that the agency cannot bring simple negligence claims against the former leaders of Integrity Bank. The judge in that case said the state's business-judgment rule protects the defendants, but the FDIC has asked the judge either to reconsider or, alternatively, allow the agency to appeal the decision to the Eleventh Circuit Court of Appeals.

While the treatment of business judgment rules tends to vary somewhat by state, Bruner said, an appeals court can "have a role in helping us understand what the business judgment rule protects in that given state."

Yet this legal maneuvering is all transpiring even before any of the FDIC's nearly 30 failed-bank lawsuits stemming from the crisis have reached the trial phase. …