Another Federal Judge Spurns Application Of The Business Judgment Rule To Officers

Last week, I covered the choice of law issue in FDIC v. Faigin, 2013 U.S. Dist. LEXIS 94899 (C.D. Cal. July 8, 2013) and promised more, When The Parent Is A Blue Hen And The Subsidiary Is A 49er, What Law Governs?

Faigin is one of many cases brought by the Federal Deposit Insurance Corporation against officers and directors of failed insured financial institutions.  In Faigin, the FDIC is seeking to recover just over $100 million for losses incurred on nine “acquisition, development, and construction” and “commercial real estate” loans.  Both the officer and director defendants moved for dismissal under Rule 12(b)(6) of the Federal Rules of Civil Procedure, claiming among other things the protection of the business judgment rule.  The officer defendants relied heavily on Biren v. Equality Emergency Medical Group, 102 Cal. App. 4th 125 (2002).

Judge Dean D. Pregerson, however, didn’t agree citing Gaillard v. Natomas Co., 208 Cal.App.3d 1250 (1989) and FDIC v. Van Dellen, 2012 U.S. Dist. LEXIS 14664.  The latter case, I discussed last December in Is FDIC v. Van Dellen California’s Smith v. Van Gorkom?

But what about Delaware?  Surely, the availability of the business judgment rule to officers must be clear there, and yet it seems that it is not.  In a forthcoming article, Professor Lyman P.Q. Johnson at Washington & Lee University School of Law states:

Surprisingly, given Delaware’s extensive corporate law jurisprudence, it is not settled today whether in cases involving corporate officers, judges will doctrinally deploy the business judgment rule in the same all-encompassing manner that it has been used for corporate directors.

Unsettledness in Delaware Corporate Law: Business Judgment Rule, Corporate Purpose, forth coming 38 Del. J. Corp. Law, 2013 (footnote omitted).

Nevada in contrast explicitly includes officers in NRS 78.138(3) :

Directors and officers, in deciding upon matters of business, are presumed to act in good faith, on an informed basis and with a view to the interests of the corporation.

For more Nevada’s presumption, see my book, Bishop & Zucker, Bishop and Zucker on Nevada Corporations and Limited Liability Companies.