Magazine article American Banker

Appeals Court in Pa. Eases U.S. Path in Suing Thrift Directors

Magazine article American Banker

Appeals Court in Pa. Eases U.S. Path in Suing Thrift Directors

Article excerpt

The federal appeals court in Philadelphia has made it easier for the government to successfully sue directors and officers of failed thrifts, reigniting a legal debate the industry thought it had already had won.

The U.S. Court of Appeals for the Third Circuit, ruling June 26 in Resolution Trust Corp. v. Cityfed Financial Corp., said the government has to prove only that directors erred.

The 2-to-1 decision directly contradicts rulings by four other federal appeals courts, all of which said the government must show that directors made business decisions they should have known were wrong. That standard, known as gross negligence, is harder to prove.

Cityfed's directors plan to ask the court to reconsider, said Douglas Kraus, a partner at Skadden, Arps, Slate, Meagher & Flom, who represented four outside directors. If that fails, the directors will appeal to the Supreme Court, he said.

The high court would likely accept the case because it often hears appeals when the circuits split on a case, said Michael Crotty, deputy general counsel for litigation at the American Bankers Association.

The Cityfed decision allows the RTC to use the easier standard in negligence suits brought in Pennsylvania, New Jersey, Delaware, and the Virgin Islands.

"I am very disappointed," said Philip Gasteyer, general counsel at America's Community Bankers. "To my mind, there is a direct conflict with the clear language of" the 1989 thrift bailout law.

In the decision, the court made two key interpretations of the Financial Institutions Reform, Recovery, and Enforcement Act of 1989, the law at issue. …

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