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    The Lawletter Blog

    CORPORATIONS: Does the Business Judgment Rule Apply to Corporate Officers?

    Posted by Gale Burns on Wed, Jan 28, 2015 @ 09:01 AM

    The Lawletter Vol 39 No 11

    Paul Ferrer, Senior Attorney, National Legal Research Group

         In a classic formulation, the "business judgment rule" is defined as "a presumption that in making a business decision the directors of a corporation acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company." Aronson v. Lewis, 473 A.2d 805, 812 (Del. 1984) (emphasis added), overruled on other grounds by Brehm v. Eisner, 746 A.2d 244 (Del. 2000). The business judgment rule plays a crucial role in protecting corporate directors from liability for business decisions, because "[a]bsent an abuse of discretion, th[eir] judgment will be respected by the courts" and the burden to establish facts rebutting the presumption is on the party challenging the decision in question. Id.

        The question of whether the business judgment rule should also apply to protect business decisions made by corporate officers has been the subject of much academic debate. See generally Amitai Aviram, Officers' Fiduciary Duties and the Nature of Corporate Organs, 2013 U. Ill. L. Rev. 763, 766 & n.15 (2013) (collecting articles). However, the issue has not been addressed in many cases. In those cases in which the question has been presented, the courts have given the issue little attention in consistently holding that the business judgment rule does not apply to corporate officers.

         For example, in FDIC v. Perry, No. CV 11-5561-ODW MRWX, 2012 WL 589569 (C.D. Cal. Feb. 21, 2012), a bank's chief executive officer ("CEO") was alleged to have negligently permitted the production of a pool of more than $10 billion in risky, residential loans intended for sale into a secondary market. The bad loans eventually caused the bank to suffer losses in excess of $600 million, leading to the bank's closure and the appointment of the Federal Deposit Insurance Corporation ("FDIC") as its receiver. The FDIC sued the former CEO, alleging that he had breached his fiduciary duties to the bank and had acted negligently in allowing the bank to continue to generate and purchase risky loans for sale into the secondary market. The CEO moved to dismiss the FDIC's complaint, arguing that the business judgment rule "protects corporate officers as well as directors from judicial second guessing [of] business decisions made on behalf of the corporation" and that the FDIC had failed to plead facts sufficient to overcome the presumption of the business judgment rule in his favor. Id. at *2. But the court denied the motion to dismiss, agreeing with the FDIC that the business judgment rule does not apply to corporate officers. The court considered the CEO's proposition to be literally "unprecedented as the Court's research reveal[ed] no judicial decision in California applying [the] common law [business judgment rule] to corporate officers." Id. at *3. Another federal court applying Florida law followed suit in FDIC v. Florescue, No. 8:12-CV-2547-T-30TBM, 2013 WL 2477246, at *4-5 (M.D. Fla. June 10, 2013). Thus, unless a state extends the protection of the business judgment rule to corporate officers by statute, which the courts in Perry and Florescue both found not to be the case in California and Florida, respectively, the trend is not to do so judicially.

    Topics: business law, corporations, corporate officers, business judgment rule

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