Pub. 4 2015 Issue 4

The CommunityBanker 14 D irector and officer liability is a topic that gets a lot of attention. What gets less attention is that the exposure of officers and directors is not the same and that it can vary from state to state. It also can vary between state banks and national banks. Of- ficers can be at greater risk than directors. Potential plaintiffs in an action against an officer include the corporation, a shareholder who sues on behalf of the corporation and the FDIC. FDIC v. Rippy, decided by the Fourth Circuit Court of Appeals in 2015, is a great illustration. Rip- py arose out of the 2009 failure of Cooperative Bank, a North Carolina state bank. The FDIC as receiver sued the bank’s directors and officers. Its allegations included the usual things – loan approvals that did not follow bank policy and a failure to address examination concerns. When the FDIC sues officers and directors of a failed state bank for breach of duty, state law governs, just as it would in a shareholder suit. So in Rippy North Carolina law determined whether a director or officer could be liable to the FDIC. In North Carolina a corporation may include in its articles of incorporation language that eliminates director liability in all cases except where a director knows or believes that his conduct is clearly against the corporation’s best interests. The FDIC’s claim against Cooperative’s directors was dismissed because the FDIC did not allege that the directors knew or believed they were acting against the bank’s interests. Sadly for Cooperative’s officers, North Carolina law doesn’t allow a corporation to eliminate officer liability – meaning that officers are held to a higher standard than directors. Cooperative’s officers were ordered to defend them- selves in a trial. Virginia law is different from North Carolina law, but like North Carolina, does not protect officers as it does directors. Virginia law does allow a bank or bank holding company to avoid a result like Rippy – but it isn’t automatic. Three similar, but distinct, concepts control a corpo- rate officer’s liability in Virginia. They are the standard of conduct for officers, limits on officer liability and the right to indemnification. Virginia law does not have a statutory standard of con- duct for officers. In contrast, a director benefits from a statu- tory standard that protects him as long as he acts according to his good faith business judgment of the best interests of the corporation. An officer might be held to a negligence standard Wayne A. Whitham, Jr., Esquire Understanding Bank Officer Liability F E A T U R E