California Dividend Statutes Found To Preempt Common Law Claims

by Allen Matkins
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Chapter 5 of the California Corporations Code imposes specific limitations on “distributions to shareholders”, a term defined in Corporations Code section 166.  Directors who approve the making of any distribution to shareholders in violation of the provisions of Sections 500 to 503 may be jointly and severally liable to the corporation.  Cal. Corp. Code § 316.  The Corporations Code, however, does not discuss the liability vel non of directors when the limitations set forth in those statutes have been met.

In FDIC v. Ching, 2014 U.S. Dist. LEXIS 92687 (E.D. Cal. July 8, 2014), the FDIC sued 11 former members of the board of directors of a failed bank for, among other things, approving of a dividend.  The FDIC did not allege violations of California Corporations Code sections 316, 500, 501 or 506.  Rather, it asserted claims based on common law fraud and negligence theories.  Although the defendants did not cite any apposite authority, they argued that California’s statutes governing dividends preempted the FDIC’s common law claims.  The FDIC argued that these statutes ”establish[ only] a minimum threshold for any distribution by a bank” and do not “prohibit any stricter duty established by law or contract, . . . [or] supplant a director’s obligation to always act in the best interest of the corporation or excuse a director from liability from doing so.”

Judge Kimberly J. Mueller granted summary judgment for the defendants, ruling that the FDIC’s common law claims were preempted by statute.

 

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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