Officers’ Duty to Obey Board of Directors’ Instructions Overrides Duty to Provide Information

by Pillsbury Winthrop Shaw Pittman LLP

Pillsbury Winthrop Shaw Pittman LLP

Citing duty to obey the board’s lawful instructions, the Seventh Circuit rejects breach of fiduciary duty claims under Indiana law against bankrupt bank holding company’s former officers.


  • Corporate officers of a distressed enterprise have a keen interest in seeing that the boards who instruct them receive independent advice and make well-informed decisions through thoughtful procedures.
  • Taking instruction from a procedurally well-advised board can shield officers from independent claims for breach of fiduciary duty.

The U.S. Court of Appeals for the Seventh Circuit recently affirmed summary judgment for two former officers of a bankrupt bank holding company denying breach of fiduciary duty claims brought by its chapter 7 trustee. (See Levin v. Miller, No. 17-1775, 2018 WL 3946093 (7th Cir. Aug. 17, 2018).) The trustee’s primary claim was that the officers breached their fiduciary duty by failing to provide the holding company’s board with “material information” concerning a tax refund that the bank holding company distributed—at the board’s direction—to its subsidiary banks in an unsuccessful effort to prevent them from failing. The Court of Appeals held that the officers had no such duty because the board was well informed by relying on the advice of independent counsel and various regulatory agencies. Consequently, rather than having a duty to inform the board of all possible options, the officers had a superseding duty to the board’s lawful directions.

Irwin’s Board Tries to Save its Subsidiary Banks

Irwin Financial Corporation (“Irwin”) was a holding company for Irwin Union Bank and Trust Company (“Bank and Trust”) and Irwin Union Bank, FSB (“Savings Bank,” and with Bank and Trust, the “Banks”), both of which failed in the wake of the 2007-2008 financial crisis. Irwin’s ten-member board of directors included a supermajority of independent, i.e., outside, directors, who met regularly in executive session to discuss concerns and develop recommendations for management. Irwin and its subsidiaries were heavily regulated by several agencies, including the Federal Reserve and the Indiana Department of Financial Institutions (IDFI).

After the Banks experienced liquidity constraints resulting from the financial crisis, the Board interfaced regularly with regulators to formulate capital and liquidity preservation plans. Also, the Board retained independent outside counsel to advise it of its duties. Importantly, the Board’s counsel advised the Board of Irwin’s duty under the Fed’s source-of-strength doctrine, which provided that bank holding companies were expected to use all available resources to support their banking subsidiaries. (The source-of-strength doctrine was later codified in section 616 of the Dodd-Frank Wall Street Reform and Consumer Protection Act.)

In February 2008, the Board adopted a resolution that emphasized “the importance of ensuring that the enterprise maintains adequate capital to support its business operations.” Over the next nineteen months, the Board heeded its counsel’s advice (and direction from regulators) and took a number of actions trying to save the Banks, including authorizing the transfer of $76 million in tax refunds paid to Irwin (as the consolidated tax filer) to the Banks. (A timeline of Irwin’s collapse and the Board’s actions is detailed below.) Importantly, the transfer was (a) consistent with Irwin’s practices since 1999; (b) made pursuant to a written agreement that permitted Irwin to transfer to a subsidiary the portion of any refund that the subsidiary would have received had it filed separately; and (c) based on the Board’s belief (consistent with prior regulatory directions) that the subsidiaries owned the allocated portion of any refund.

Despite its efforts, on September 18, 2009, Irwin filed chapter 7, and the FDIC was named the receiver for the Banks.

Chapter 7 Trustee Sues Irwin’s Former CEO and CFO for Breach of Fiduciary Duty

In September 2011, Irwin’s chapter 7 trustee sued Irwin’s former CEO and CFO. He alleged that they breached their duty to provide the Board with material information that Irwin, not the Banks, owned the tax refund. Thus, the trustee argued, Irwin could have maximized its value if it had filed bankruptcy before transferring the tax refund to the Banks. The district court granted summary judgment for the officers, and the trustee appealed.

The Seventh Circuit noted that the trustee’s “complicated theory” rested on the following assumptions:

  1. “the officers should have seen the writing on the wall and realized that the banks were doomed to fail and that transferring the tax refund would be a waste”;
  2. the officers “should have investigated whether filing for bankruptcy earlier was a better option”;
  3. “had [the officers] investigated, they would have hired a tax and bankruptcy expert who would have advised that Irwin could claim the refund as an asset in bankruptcy” (based on a New York bankruptcy court decision[1]); and
  4. “had the officers reported this information, the Board would have declared bankruptcy before transferring the tax refund, thus maximizing Irwin’s value.”

The court dismissed the theory as “dubious” and relying on an “a series of speculative and increasingly questionable links.” The court took special exception to the assertion that the Board would have relied on the New York bankruptcy court decision, which would have been contrary to both regulatory guidance and Irwin’s long-standing practice.

The court also concluded that the trustee’s theory failed on a more fundamental basis; namely that the officers’ duty to provide information was qualified by their duty to obey the Board’s lawful instructions—even if they believed that filing for bankruptcy would have been better for Irwin and its creditors. The Board’s directives that focused on strengthening the Banks to obtain TARP funding (see below timeline) were “plainly incompatible with declaring bankruptcy,” which would have killed any chances of government relief. As agents of the Board, Irwin’s officers had no right—much less a duty—to pursue actions that directly contradicted the Board’s instructions. Likewise, the officers had no duty to hire an expert to second-guess the Board’s judgment of attempting to save the Banks, which was formed after receiving the advice of numerous regulatory agencies and “deeply experienced outside counsel.” Indeed, “the officers had no right to spend company resources pursuing a different strategy.”


The Levin decision underscores the importance of officers ensuring that their boards have independent advisors when the company enters financial distress. Not only will independent advisors help ensure that directors properly exercise their duties and receive unbiased advice, board instructions based on a good process and independent advice can insulate managers from accusations that they breached their independent fiduciary duties. Moreover, Levin should remind management to follow lawful board directives—and that even investigating alternatives could run afoul of that duty if the board is well informed.


Irwin Collapse Timeline

  • February 2008 – Board adopts resolution to keep banks adequately capitalized and retains independent outside counsel.
  • July 2008 - Board directs Irwin’s management to deliver a memorandum of understanding to the Fed and IDFI requiring Irwin to obtain a $50 million infusion by the end of August 2008.
  • October 2008 - After Irwin failed to obtain the $50 million by August 2008, the Board, on the advice of outside counsel to do whatever it could to ensure the banks’ solvency, directed Irwin’s CEO to execute a formal “Written Agreement” with the Fed and IDFI, which required Irwin and Bank and Trust to develop a plan to “improve management of [their] liquidity positions” and “maintain sufficient capital.”
  • November 2008 – With Board authorization, Irwin applied for $148 million in TARP funds, understanding getting the funding was an “uphill battle.”
  • December 4, 2008 – Board affirmed that the Written Agreement’s capital sufficiency-requirement was “of critical importance and should remain a primary focus of management” and authorized the transfer of $14 million from Irwin to Bank and Trust.
  • December 17, 2008 – Fed downgraded Bank and Trust’s rating, but outside counsel advised board that banks with a similar rating had survived with additional capital.
  • January 2009 – Irwin’s CEO and lead independent director asked the Fed what to do to win support for its TARP application. After several weeks, the Fed responded that Irwin would need to raise $150 million in additional capital and replace its CEO. Irwin’s investment bank advisor dismissed the possibility of raising $150 million as “remote” and cautioned against basing future plans on that possibility.
  • Q1 2009 – Board reauthorized (at it had since 1999) Irwin to transfer to a subsidiary any tax refunds received that would have been due to a subsidiary if it had filed separately.
  • March 2009 – Irwin’s auditor advised Board that, due to revised SEC guidance, Bank and Trust was no longer considered adequately capitalized.
  • May 2009 – Board meets in executive session with outside counsel, IDFI, FDIC, and Chicago Fed, at which Chicago Fed suggested the tax refund could help with Bank and Trust’s liquidity. Board directed officers to keep the banks solvent and to follow a dual-track strategy to secure new capital with a government partnership and if that effort fails to manage a resolution process for the banks.
  • June 2, 2009 – Chicago Fed and IDFI advised Irwin that it needed substantially more than $150 million to remain viable and that Bank and Trust’s “likelihood of failure [was] imminent.” Later that day, outside counsel advised that after discussions with the Chicago Fed, the regulators clarified that they “were not saying [Bank and Trust] is in imminent danger of failure,” and that Bank and Trust needed to remain adequately capitalized through June 30 to buy enough time to negotiate its TARP application with Treasury.
  • June 4, 2009 – CEO advised the Board that Irwin had received its tax refund, describing it as “great news for liquidity.”
  • June 11, 2009 – Irwin transferred $76 million in tax refunds to the Banks.
  • TARP application never approved.
  • September 18, 2009 – Irwin filed chapter 7 and FDIC named receiver for the Banks.

[1] Superintendent of Ins. for the State of N.Y. v. First Cent. Fin. Corp. (In re First Cent. Fin. Corp.), 269 B.R. 481 (Bankr. E.D.N.Y. 2001) (holding that a consolidated tax refund was property of the parent and any amounts owed to subsidiaries were unsecured claims against the parent), aff’d sub nom. Superintendent of Ins. for the State of N.Y. v. Ochs (In re First Cent. Fin. Corp.), 377 F.3d 209 (2d Cir. 2004).

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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