Federal Deposit Insurance v. Rippy

PUBLISHED
UNITED STATES COURT OF APPEALS
FOR THE FOURTH CIRCUIT
No. 14-2078
FEDERAL DEPOSIT INSURANCE CORPORATION, as Receiver for
Cooperative Bank,
Plaintiff - Appellant,
v.
RICHARD ALLEN RIPPY; JAMES D. HUNDLEY; FRANCES PETER FENSEL,
JR.; HORACE THOMPSON KING, III; FREDRICK WILLETTS, III;
DICKSON B. BRIDGER; PAUL G. BURTON; OTTIS RICHARD WRIGHT,
JR.; OTTO C. BUDDY BURRELL, JR.,
Defendants – Appellees.
------------------------------
NORTH CAROLINA COMMISSIONER OF BANKS,
Amicus Curiae,
THE CHAMBER OF COMMERCE OF THE UNITED STATES OF AMERICA;
AMERICAN ASSOCIATION OF BANK DIRECTORS; INDEPENDENT
COMMUNITY BANKERS OF AMERICA; THE CLEARING HOUSE
ASSOCIATION, LLC; AMERICAN BANKERS ASSOCIATION; ALABAMA
BANKERS ASSOCIATION; ALASKA BANKERS ASSOCIATION; ARIZONA
BANKERS ASSOCIATION; ARKANSAS BANKERS ASSOCIATION;
CALIFORNIA BANKERS ASSOCIATION; COLORADO BANKERS
ASSOCIATION; CONNECTICUT BANKERS ASSOCIATION; DELAWARE
BANKERS ASSOCIATION; FLORIDA BANKERS ASSOCIATION; GEORGIA
BANKERS ASSOCIATION; HAWAII BANKERS ASSOCIATION; HEARTLAND
COMMUNITY BANKERS ASSOCIATION; IDAHO BANKERS ASSOCIATION;
ILLINOIS BANKERS ASSOCIATION; ILLINOIS LEAGUE OF FINANCIAL
INSTITUTIONS; INDIANA BANKERS ASSOCIATION; IOWA BANKERS
ASSOCIATION; KANSAS BANKERS ASSOCIATION; KENTUCKY BANKERS
ASSOCIATION; LOUISIANA BANKERS ASSOCIATION; MAINE BANKERS
ASSOCIATION; MARYLAND BANKERS ASSOCIATION; MASSACHUSETTS
BANKERS ASSOCIATION; MICHIGAN BANKERS ASSOCIATION; MINNESOTA
BANKERS ASSOCIATION; MISSISSIPPI BANKERS ASSOCIATION;
MISSOURI BANKERS ASSOCIATION; MONTANA BANKERS ASSOCIATION;
NEBRASKA BANKERS ASSOCIATION; NEVADA BANKERS ASSOCIATION;
NEW HAMPSHIRE BANKERS ASSOCIATION; NEW JERSEY BANKERS
ASSOCIATION; NEW MEXICO BANKERS ASSOCIATION; NEW YORK
BANKERS ASSOCIATION; NORTH CAROLINA BANKERS ASSOCIATION;
NORTH DAKOTA BANKERS ASSOCIATION; OHIO BANKERS LEAGUE;
OKLAHOMA BANKERS ASSOCIATION; OREGON BANKERS ASSOCIATION;
PENNSYLVANIA BANKERS ASSOCIATION; PUERTO RICO BANKERS
ASSOCIATION; RHODE ISLAND BANKERS ASSOCIATION; SOUTH
CAROLINA BANKERS ASSOCIATION; SOUTH DAKOTA BANKERS
ASSOCIATION; TENNESSEE BANKERS ASSOCIATION; TEXAS BANKERS
ASSOCIATION; VERMONT BANKERS ASSOCIATION; VIRGINIA BANKERS
ASSOCIATION; UTAH BANKERS ASSOCIATION; WASHINGTON BANKERS
ASSOCIATION; WASHINGTON FINANCIAL LEAGUE; WEST VIRGINIA
BANKERS ASSOCIATION; WISCONSIN BANKERS ASSOCIATION; WYOMING
BANKERS ASSOCIATION,
Amici Supporting Appellees.
Appeal from the United States District Court for the Eastern
District of North Carolina, at Wilmington. Terrence W. Boyle,
District Judge. (7:11-cv-00165-BO)
Argued: May 13, 2015 Decided: August 18, 2015
Before GREGORY and HARRIS, Circuit Judges, and HAMILTON, Senior
Circuit Judge.
Affirmed in part, reversed in part, vacated in part, and
remanded by published opinion. Judge Gregory wrote the opinion,
in which Judge Harris and Senior Judge Hamilton joined.
ARGUED: James Scott Watson, FEDERAL DEPOSIT INSURANCE
CORPORATION, Arlington, Virginia, for Appellant.
Thomas E. Gilbertsen, VENABLE LLP, Washington, D.C., for
Appellees. ON BRIEF: Mary L. Wolff, Douglas A. Black,
WOLFF ARDIS, P.C., Memphis, Tennessee; Colleen J. Boles,
Assistant General Counsel, Kathryn R. Norcross, Senior
Counsel, Steven C. Morrison, Counsel, FEDERAL DEPOSIT INSURANCE
CORPORATION, Arlington, Virginia, for Appellant.
Ronald R. Glancz, Meredith L. Boylan, VENABLE LLP, Washington,
2
D.C.; Camden R. Webb, Kacy L. Hunt, WILLIAMS MULLEN P.C.,
Raleigh, North Carolina, for Appellees. Katherine M.R. Bosken,
Raleigh, North Carolina, for Amicus North Carolina Commissioner
of Banks. Kate Comerford Todd, Steven P. Lehotsky, U.S. CHAMBER
LITIGATION CENTER, INC., Washington, D.C.; John K. Villa,
Kannon K. Shanmugam, Ryan Scarborough, Richard Olderman,
WILLIAMS & CONNOLLY LLP, Washington, D.C., for Amicus The
Chamber of Commerce of the United States of America.
Michael A.F. Johnson, Nancy L. Perkins, Elliott C. Mogul,
Joanna G. Persio, ARNOLD & PORTER LLP, Washington, D.C., for
Amici American Bankers Association, Alabama Bankers Association,
Alaska Bankers Association, Arizona Bankers Association,
Arkansas Bankers Association, California Bankers Association,
Colorado Bankers Association, Connecticut Bankers Association,
Delaware Bankers Association, Florida Bankers Association,
Georgia Bankers Association, Hawaii Bankers Association,
Heartland Community Bankers Association, Idaho Bankers
Association, Illinois Bankers Association, Illinois League of
Financial Institutions, Indiana Bankers Association, Iowa
Bankers Association, Kansas Bankers Association, Kentucky
Bankers Association, Louisiana Bankers Association, Maine
Bankers Association, Maryland Bankers Association, Massachusetts
Bankers Association, Michigan Bankers Association, Minnesota
Bankers Association, Mississippi Bankers Association, Missouri
Bankers Association, Montana Bankers Association, Nebraska
Bankers Association, Nevada Bankers Association, New Hampshire
Bankers Association, New Jersey Bankers Association, New Mexico
Bankers Association, New York Bankers Association, North
Carolina Bankers Association, North Dakota Bankers Association,
Ohio Bankers League, Oklahoma Bankers Association, Oregon
Bankers Association, Pennsylvania Bankers Association, Puerto
Rico Bankers Association, Rhode Island Bankers Association,
South Carolina Bankers Association, South Dakota Bankers
Association, Tennessee Bankers Association, Texas Bankers
Association, Utah Bankers Association, Vermont Bankers
Association, Virginia Bankers Association, Washington Bankers
Association, Washington Financial League, West Virginia Bankers
Association, Wisconsin Bankers Association, and Wyoming Bankers
Association. Matthew P. Previn, Joseph J. Reilly,
Ali M. Abugheida, BUCKLEY SANDLER LLP, Washington, D.C., for
Amici American Association of Bank Directors, Independent
Community Bankers of America, and The Clearing House
Association, LLC.
3
GREGORY, Circuit Judge:
The Federal Deposit Insurance Corporation, as Receiver for
Cooperative Bank (“FDIC-R”), brought this civil action against
the several officers and directors of a failed North Carolina
bank, Cooperative Bank (“Cooperative” or the “Bank”), alleging
that the officers and directors were negligent, grossly
negligent, and breached their fiduciary duties, resulting in the
failure of the Bank. In this summary judgment appeal, the FDIC-
R argues that the district court erred in finding that North
Carolina’s business judgment rule shields the officers and
directors from allegations of negligence and breach of fiduciary
duty, and that there was insufficient evidence to support claims
of gross negligence. For the reasons that follow, we vacate the
district court’s award of summary judgment to the Bank’s
officers on the FDIC-R’s claims of ordinary negligence and
breach of fiduciary duty and remand those claims for further
proceedings. We also reverse and remand the district court’s
order denying as moot the FDIC-R’s cross-motion for summary
judgment, as well as its order denying as moot the FDIC-R’s
motion to exclude the declaration of Robert T. Gammill and the
attached exhibits. We affirm the district court’s judgment with
respect to the remaining claims.
4
I.
Cooperative first opened in Wilmington, North Carolina in
1898 as a community bank and operated as a thrift until 1992.
As such, it focused on single-family housing loans. In 1992,
the Bank converted to a state-chartered savings bank regulated
by the FDIC. 1 Cooperative became a state commercial banking
institution in 2002, following the board of director’s decision
to increase the Bank’s assets from $443 million to $1 billion by
2005. The Bank’s growth strategy focused on commercial real
estate lending.
1 The FDIC in its corporate capacity is an insurer and
federal regulator, and it performs a separate function from the
FDIC in its capacity as receiver of failed banks. We refer to
the FDIC in its corporate capacity simply as the “FDIC,” and in
its receiver capacity as the “FDIC-R” throughout this opinion.
As the Second Circuit aptly explained:
Created by Congress to “promot[e] the stability of and
confidence in the nation’s banking system,” Gunter v.
Hutcheson, 674 F.2d 862, 870 (11th Cir.), cert.
denied, 459 U.S. 826 (1982), the FDIC is authorized by
statute to function in two separate and distinct
capacities: “the Corporation shall insure the
deposits of all insured banks as provided in this
chapter,” 12 U.S.C. § 1821(a)(1) (1988); “the
Corporation as receiver of a closed national bank
. . . shall have the right to appoint an agent or
agents to assist it in its duties as such receiver,”
12 U.S.C. § 1822(a) (1988). . . . [T]hey are discrete
legal entities . . . .
FDIC v. Bernstein, 944 F.2d 101, 106 (2d Cir. 1991) (first
alteration in original).
5
The FDIC and the North Carolina Commission of Banks
(“NCCB”), as Cooperative’s regulators, performed annual reviews
of the Bank.
During July and August of 2006, the FDIC conducted an
annual examination of Cooperative as of June 30, 2006. At the
conclusion of the examination, the FDIC issued the Bank’s 2006
Report of Examination (“2006 FDIC Report”). Cooperative was
scored in each of the following categories: Capital, Asset
Quality, Management, Earnings, Liquidity, and Sensitivity to
Market Risk. The examination categories collectively are
commonly referred to by the acronym CAMELS, and are scored on
scale from 1-5, with “1” being the best and “5” being the worst.
Cooperative received a “2” for each of its CAMELS ratings. The
majority of the observations in the 2006 FDIC Report were
positive. However, the Report identified deficiencies in credit
administration and underwriting, which the FDIC ascribed to
oversight weaknesses. Additional problems with audit practices,
risk management, and liquidity were also discussed in the
Report. Bank management certified that the Report had been
reviewed, and the appropriate officials agreed to address the
issues.
In September 2007, the NCCB conducted its annual review of
Cooperative as of June 30, 2007. At the conclusion of the
examination, the NCCB issued its 2007 Report of Examination
6
(“2007 NCCB Report”). Like the 2006 FDIC Report, the 2007 NCCB
Report awarded the Bank a rating of “2” for each CAMELS
category. Overall, the NCCB concluded that Cooperative was
functioning in a satisfactory manner. However, the 2007 NCCB
Report also observed that Cooperative’s management had been slow
to correct deficiencies and weaknesses identified in previous
examinations. Such deficiencies included weak credit
administration practices, the use of stale financial information
in the loan approval process, and problematic audit practices.
Again, Bank management promised to address the issues.
Cooperative additionally underwent an external loan review
in 2007, which was conducted by Credit Risk Management, L.L.C.
(“CRM”). CRM reviewed a sample of the loans originating during
or after April 2006. At the conclusion of the review, CRM
issued a written report (“2007 CRM Report”). The Report
indicated that the reviewed loans had received passing grades.
CRM also observed that credit file documentation for the sample
loans was generally sufficient, and that the Bank had recently
hired additional credit analysts. However, CRM also suggested
that credit file documentation should be updated periodically to
more accurately reflect the changing status of various
construction projects.
CRM conducted a second external loan review in June 2008,
which examined new loans made since its 2007 review. CRM issued
7
a written report of its findings (“2008 CRM Report”). The 2008
CRM Report criticized Cooperative for deficiencies relating to
loan documentation and monitoring, and for use of stale
financial information. The Report reflected the downward trend
in grades given to the sample loans. Unlike the 2007 review,
many of the loans reviewed in 2008 received failing grades.
In November 2008, the FDIC and the NCCB conducted a joint
annual review of Cooperative as of September 30, 2008. At the
conclusion of the review, the agencies issued the 2008 Report of
Examination (“2008 Joint Report”). Cooperative was given a
rating of “5,” the lowest possible rating, in all but one of the
CAMELS categories. The sole exception was Sensitivity to Market
Risk, in which Cooperative was awarded a “4.” The 2008 Joint
Report was extremely critical, and faulted the Bank for its high
commercial real estate loan concentration. The Report also
noted that Cooperative’s management had ignored or inadequately
addressed previously raised concerns about credit
administration, underwriting practices, and liquidity.
Cooperative’s overall condition was traced back to the decision
to aggressively pursue commercial real estate lending in its
effort to grow the Bank’s assets.
On March 12, 2009, the FDIC issued a Cease and Desist
Order, to which the Bank, the NCCB, and the FDIC all consented.
The Order set forth certain actions that the Bank was required
8
to take, including developing a capital restoration plan.
Cooperative was ultimately unable to comply with the terms of
the Cease and Desist Order, and on June 19, 2009, the NCCB
closed the Bank and named the FDIC-R as the receiver. According
to a Material Loss Review conducted by the FDIC Office of
Inspector General, the FDIC-R suffered losses of $216.1 million
due to the Bank’s failure.
The FDIC-R filed a complaint against Cooperative in August
2011, alleging that the named officers and directors were
negligent, grossly negligent, and breached their fiduciary
duties in their approval of 78 residential lot loans and 8
commercial loans between January 2007 and April 2008. The
complaint seeks damages from each named officer and director in
amounts ranging from $4.4 million to over $33 million. The
Appellees responded with a motion to dismiss arguing, among
other things, that North Carolina law does not contemplate
negligence claims against officers and directors and, in any
event, the North Carolina business judgment rule shielded them
from claims of negligence and breach of fiduciary duty. FDIC v.
Willetts (Willetts I), 882 F. Supp. 2d 859, 862 (E.D.N.C. 2012).
They also argued that the FDIC-R had failed to state facts
sufficient to support its claims of gross negligence. Id. The
district court denied the motion to dismiss.
9
The Appellees thereafter filed an answer. Their answer
included several affirmative defenses, including that “[t]he
FDIC[-R]’s claims are barred in whole or in part by its failure
to mitigate damages,” and are also barred “in whole or in part
by the doctrine of superseding or intervening cause.” J.A. 42-
43.
After lengthy discovery, the Appellees filed motions for
summary judgment on all of the FDIC-R’s claims against them.
The FDIC-R filed a cross-motion for partial summary judgment on
the Appellees’ affirmative defenses of failure to mitigate and
superseding or intervening cause. 2
2The parties also filed Daubert motions. The Appellees
sought “to exclude Harry Potter as an expert witness because
they allege[d] his opinions on [shared loan loss agreements]”
were of little value and were “not rebuttal testimony, but
instead an untimely attempt to produce a previously undisclosed
expert on damages issues.” FDIC v. Willetts (Willetts II), 48
F. Supp. 3d 844, 848 (E.D.N.C. 2014). The district court
excluded Mr. Potter’s report because it found both that he had
an insufficient basis for forming his opinions, and that the
report was submitted after the deadline for expert reports had
passed. Id. The FDIC-R does not challenge this ruling.
The FDIC-R sought to exclude the declaration of
Robert T. Gammill and the attached exhibits, arguing that the
declaration “contains new expert opinions and previously
undisclosed facts and data supporting them and because it was
submitted after the expert witness disclosure deadline.” Id. at
852. Because the district court granted summary judgment in
favor of the Appellees on all claims, the motion was denied as
moot. Id. As discussed below, we reverse the district court’s
grant of summary judgment to the Officer Appellees on the FDIC-
R’s claims of ordinary negligence and breach of fiduciary duty.
Accordingly, the FDIC-R’s motion to exclude is no longer moot
(Continued)
10
The district court granted summary judgment in favor of the
Appellees, and denied the FDIC-R’s cross-motion for summary
judgment as moot. The court held that the FDIC-R “fail[ed] to
reveal any evidence that suggests any defendant has engaged in
self-dealing or fraud, or that any defendant was engaged in any
other unconscionable conduct that might constitute bad faith,”
and that their actions were thus protected by the business
judgment rule from claims of ordinary negligence and breach of
fiduciary duty. FDIC v. Willetts (Willetts II), 48 F. Supp. 3d
844, 850 (E.D.N.C. 2014). The court further found that the
FDIC-R had failed to adduce evidence “that any of the defendants
approved the challenged loans and made policy decisions knowing
that these actions would harm Cooperative and breach their
duties to the bank” and thus “[could not] show that any of the
defendants engaged in wanton conduct or consciously disregarded
Cooperative’s well-being.” Id. at 852.
This appeal followed. The FDIC-R argues that: (1) the
district court improperly applied the business judgment rule;
(2) it presented evidence sufficient for a reasonable juror to
conclude that the directors and officers were grossly negligent;
and (3) there are disputed issues of material fact that preclude
with respect to these claims and must be addressed by the
district court on remand.
11
granting summary judgment to the Appellees on alternative
grounds. For the reasons that follow, we affirm the district
court in part and reverse in part.
II.
Our review of a grant of summary judgment is de novo.
French v. Assurance Co. of Am., 448 F.3d 693, 700 (4th Cir.
2006). “Summary judgment is appropriate when there is no
genuine issue of material fact and the moving party is entitled
to judgment as a matter of law.” Id. It is axiomatic “that in
ruling on a motion for summary judgment, [t]he evidence of the
nonmovant is to be believed, and all justifiable inferences are
to be drawn in his favor.” McAirlaids, Inc. v. Kimberly-Clark
Corp., 756 F.3d 307, 310 (4th Cir. 2014) (quoting Tolan v.
Cotton, --- U.S. ---, 134 S. Ct. 1861, 1863 (2014) (per curiam))
(internal quotation marks omitted).
This matter presents several questions of North Carolina
state law. We have held that,
in determining state law a federal court must look
first and foremost to the law of the state’s highest
court, giving appropriate effect to all its
implications. A state’s highest court need not have
previously decided a case with identical facts for
state law to be clear. It is enough that a fair
reading of a decision by the state’s highest court
directs one to a particular conclusion.
12
Assicurazioni Generali, S.p.A v. Neil, 160 F.3d 997, 1002 (4th
Cir. 1998). If the state’s highest court does not provide an
answer, then a federal court must seek guidance from an
intermediate state court. Id. In so doing, “we defer to a
decision of the state’s intermediate appellate court to a lesser
degree than we do to a decision of the state’s highest court.
Nevertheless, we do defer.” Id. (citing, among others, West v.
AT&T, 311 U.S. 223, 237 (1940) (“Where an intermediate appellate
state court rests its considered judgment upon the rule of law
which it announces, that is a datum for ascertaining state law
which is not to be disregarded by a federal court unless it is
convinced by other persuasive data that the highest court of the
state would decide otherwise.”)).
III.
The FDIC-R first attacks the district court’s reading of
North Carolina’s business judgment rule. While we agree with
the district court’s interpretation, we find that the court
improperly applied the rule.
As the Supreme Court explained in Atherton v. FDIC, “state
law sets the standard of conduct” which bank officers and
directors must follow “as long as the state standard (such as
simple negligence) is stricter than that of the federal
statute.” 519 U.S. 213, 216 (1997). At issue in Atherton was a
13
federal statute, 12 U.S.C. § 1821(k), which provides that “[a]
director or officer of an insured depository institution may be
held personally liable for monetary damages in any civil action
by” the FDIC-R “for gross negligence, including any similar
conduct or conduct that demonstrates a greater disregard of a
duty of care (than gross negligence) including intentional
tortious conduct, as such terms are defined and determined under
applicable State law.” 12 U.S.C. § 1821(k). The Supreme Court
interpreted § 1821(k) as “set[ting] a ‘gross negligence’ floor,
which applies as a substitute for state standards that are more
relaxed.” Atherton, 519 U.S. at 216.
North Carolina, in turn, provides the following standard:
(a) A director shall discharge his duties as a
director, including his duties as a member of a
committee:
(1) In good faith;
(2) With the care an ordinarily prudent person in a
like position would exercise under similar
circumstances; and
(3) In a manner he reasonably believes to be in the
best interests of the corporation.
N.C.G.S. § 55-8-30(a); see also id. § 55-8-42(a) (providing
identical standard for corporate officers). Further, “[a]
director is not liable for any action taken as a director, or
any failure to take any action, if he performed the duties of
his office in compliance with this section.” N.C.G.S. § 55-8-
30(d); see also id. § 55-8-42(d) (officer liability). Thus,
14
under North Carolina law, a director or an officer can be held
liable for ordinary negligence. In line with Atherton and 12
U.S.C. § 1821(k), the FDIC-R may sue bank directors and officers
for both ordinary negligence and gross negligence.
North Carolina law also allows corporations to protect
directors from liability for ordinary negligence by including
exculpatory clauses in their articles of incorporation.
N.C.G.S. § 55-2-02(b)(3) provides:
(b) The articles of incorporation may set forth any
provision that under this Chapter is required or
permitted to be set forth in the bylaws, and may
also set forth:
. . .
(3) A provision limiting or eliminating the personal
liability of any director arising out of an action
whether by or in the right of the corporation or
otherwise for monetary damages for breach of any
duty as a director. No such provision shall be
effective with respect to (i) acts or omissions
that the director at the time of such breach knew
or believed were clearly in conflict with the best
interests of the corporation . . . .
In other words, a corporation may limit personal liability for a
director’s breach of a duty of care, so long as the director did
not know or believe his or her actions to have been clearly
contrary to the corporation’s best interests. Section 55-2-
02(b)(3) does not allow for the limitation of the duty of
loyalty or the duty of good faith. Id.
Officer and director liability for ordinary negligence is
constrained by the business judgment rule. While the Supreme
15
Court of North Carolina has not ruled on the issue, the North
Carolina Court of Appeals has recognized that § 55-8-30(d) “has
been interpreted as codifying the common law theory of the
business judgment rule.” Jackson v. Marshall, 537 S.E.2d 232,
236 (N.C. Ct. App. 2000). Judicial application of North
Carolina’s business judgment rule has been explained by “[a]
leading authority on business law” as follows:
[The business judgment rule] operates primarily as a
rule of evidence or judicial review and creates,
first, an initial evidentiary presumption that in
making a decision the directors acted with due care
(i.e., on an informed basis) and in good faith in the
honest belief that their action was in the best
interest of the corporation, and second, absent
rebuttal of the initial presumption, a powerful
substantive presumption that a decision by a loyal and
informed board will not be overturned by a court
unless it cannot be attributed to any rational
business purpose.
State ex rel. Long v. ILA Corp., 513 S.E.2d 812, 821-22 (N.C.
Ct. App. 1999) (quoting Russell M. Robinson, II, Robinson on
North Carolina Corporation Law § 14.06, at 281 (5th ed. 1995))
(alteration in original). “[P]roper analysis” of an officer’s
or director’s actions “requires examination of [those] actions
in light of the statutory protections of N.C. Gen. Stat. § 55-8-
30(d)(1990)(amended 1993) and the business judgment rule, either
or both of which could potentially insulate him from liability.”
Id. at 821. Indeed, Robinson suggests that “a director may be
protected by the business judgment rule even if he fails to meet
16
the prescribed standards of conduct” set forth in North
Carolina’s statute. Robinson, Robinson on North Carolina
Corporation Law § 14.06 n.2.
With this framework in mind, we turn to the FDIC-R’s
claims.
A.
We consider director liability first. Cooperative’s
articles of incorporation include an exculpatory provision, as
permitted by N.C.G.S. § 55-2-02(b)(3):
A director of the Bank shall not be personally liable
to the Bank or its shareholders for monetary damages
for breach of any fiduciary duty as a director;
provided, however, that this limitation of liability
shall not be effective with respect to (i) acts or
omissions that the director at the time of such breach
knew or believed were clearly in conflict with the
best interests of the Bank. . . .
J.A. 683 (emphasis supplied). In accordance with § 55-2-
02(b)(3), the exculpatory provision in the Bank’s articles of
incorporation does not eliminate liability for breaches of the
duty of loyalty or the duty of good faith. Nor does the
provision eliminate liability for gross negligence.
The FDIC-R does not contend that the Director Appellees
breached a duty of loyalty. Thus, unless there is a genuine
issue of material fact as to whether the Director Appellees
breached their duty of good faith, the exculpatory provision
17
will protect them from liability for ordinary negligence and
breach of fiduciary duties.
Under North Carolina law, “the duty of good faith requires
[corporate] directors to avoid self-dealing.” ILA Corp., 513
S.E.2d at 819. Here, there is no allegation or evidence in the
record that the directors engaged in self-dealing or fraud or
otherwise acted in bad faith. Rather, the FDIC-R argues only
that the evidence suggests that the Director Appellees took
actions harmful to the Bank, in part by making decisions without
adequate information. This is insufficient. The exculpatory
clause protects directors from monetary liability unless the
directors “knew or believed [that their acts or omissions] were
clearly in conflict” with the Bank’s best interests. N.C.G.S.
§ 55-2-02(b)(3) (emphasis added). Actions that might have been
harmful or decisions that could have been better made do not
rise to the level of bad faith in this context, especially in
light of the fact that the Bank received CAMELS scores of “2”
from both of its regulators despite the Director Appellees’
actions. We find that the FDIC-R has not presented sufficient
evidence of a breach of the duty of good faith to raise a
genuine issue of material fact.
We therefore affirm the district court’s award of summary
judgment to the Director Appellees as to the FDIC-R’s claims of
ordinary negligence and breach of fiduciary duty.
18
B.
We turn next to officer liability. The Bank’s exculpatory
provision does not cover Bank officers. Thus, we analyze
officer liability through the lens of North Carolina’s business
judgment rule.
As discussed above, courts begin with the “initial
evidentiary presumption that in making a decision the directors
acted with due care (i.e., on an informed basis) and in good
faith in the honest belief that their action was in the best
interest of the corporation.” ILA Corp., 513 S.E.2d at 822
(quoting Robinson, Robinson on North Carolina Corporation Law
§ 14.06 at 281). Given the structure of the business judgment
rule, the initial presumption can be rebutted with evidence
showing that the Officer Appellees: (1) did not avail
themselves of all material and reasonably available information
(i.e., they did not act on an informed basis); (2) acted in bad
faith, with a conflict of interest, or disloyalty; or (3) did
not honestly believe that they were acting in the best interest
of Cooperative.
The FDIC-R has presented adequate rebuttal evidence.
Specifically, its evidence is sufficient to rebut the
presumption that the Officers Appellees acted on an informed
basis. The FDIC-R presented the expert affidavit and reports of
Brian H. Kelley, an independent banking consultant and former
19
“senior bank executive, lender, and attorney at both regional
and large commercial banks.” J.A. 219-20. His expert report
and expert rebuttal report each discuss the general problems
with the Appellees’ lending and underwriting processes, and also
incorporate by reference his loan reports addressing each
individual loan.
Kelley stated that, in his opinion, the officers did not
act in accordance with generally accepted banking practices.
His affidavit states that the Appellees often approved loans
over the telephone, without first examining relevant documents.
Moreover, they often did not receive the loan documents until
after the phone calls, and sometimes not until after the loans
had already been funded. Kelley further stated that the review
process was inconsistent with practices at other banking
institutions, and did not comport with his understanding of
officer and director duties. He further noted that the
Appellees had failed to address warnings and deficiencies in the
Bank’s examination reports.
To be sure, the Bank’s regulators awarded it “2” ratings on
its CAMELS. But, as Kelley observed, the Bank’s reports of
examination also contained several indications that
Cooperative’s credit administration and audit processes, among
others, needed substantial improvement. He also thought it
20
clear from his review that certain loans should never have been
approved.
Kelley’s affidavit and reports thus provide a sufficient
basis for rebutting the presumption that the Bank’s officers
acted on an informed basis. Having found that there is evidence
to support the notion that the Officer Appellees did not act on
an informed basis, we need not address the other two avenues of
rebuttal. See ILA Corp., 513 S.E.2d at 821-22 (explaining the
business judgment rule presumption that officers “acted with due
care (i.e., on an informed basis) and in good faith in the
honest belief that their action was in the best interest of the
corporation” (emphasis added)).
We move to the second evidentiary presumption only “absent
rebuttal of the initial presumption.” Id. (quoting Robinson,
Robinson on North Carolina Corporation Law § 14.06 at 281).
Because we find that there is sufficient evidence to rebut the
initial evidentiary presumption of the North Carolina business
judgment rule, we vacate the district court’s grant of summary
judgment on the FDIC-R’s claims of ordinary negligence and
breach of fiduciary duty as to the Officer Appellees.
21
IV.
The FDIC-R argues that North Carolina law does not require
a showing of intentional wrongdoing in order to sustain a claim
of gross negligence. We disagree.
Traditionally, under North Carolina law, the North Carolina
Supreme Court “has often used the terms ‘willful and wanton
conduct’ and ‘gross negligence’ interchangeably to describe
conduct that falls somewhere between ordinary negligence and
intentional conduct.” Yancey v. Lea, 550 S.E.2d 155, 157 (N.C.
2001). Further, the court has defined “‘gross negligence’ as
‘wanton conduct done with conscious or reckless disregard for
the rights and safety of others.’” Id. (quoting Bullins v.
Schmidt, 369 S.E.2d 601, 603 (N.C. 1988)). The court has also
noted that “‘[a]n act is wanton when it is done of wicked
purpose, or when done needlessly, manifesting a reckless
indifference to the rights of others.’” Id. (quoting Foster v.
Hyman, 148 S.E. 36, 37-38 (N.C. 1929)).
In 2005, the North Carolina Supreme Court seemed to change
course. In Jones v. City of Durham (Jones II), the court
acknowledged that “gross negligence” had previously been equated
with “wanton conduct,” but “note[d] that N.C.G.S. § 1D–5(7),”
North Carolina’s statute concerning the recovery of punitive
damages in civil actions, “defines ‘willful and wanton conduct’
and establishes that such conduct, necessary for the recovery of
22
punitive damages, see N.C.G.S. § 1D-15(a), is more than gross
negligence.” 622 S.E.2d 596, 600 (N.C. 2005), superseded and
withdrawn by Jones v. City of Durham (Jones III), 638 S.E.2d 202
(N.C. 2006). The North Carolina Supreme Court continued that
“[i]n light of this distinction, we conclude that while willful
and wanton conduct includes gross negligence, gross negligence
may be found even where a party’s conduct does not rise to the
level of deliberate or conscious action implied in the combined
terms of ‘willful and wanton.’” Id.
The district court here initially relied on Jones II in its
opinion denying the Appellees’ motion to dismiss. Willetts I,
882 F. Supp. 2d at 865. But in its summary judgment opinion,
the court backtracked, noting that “its earlier reliance” on
Jones II “was misplaced as the North Carolina Supreme Court
withdrew the Jones [II] opinion and no North Carolina court has
applied the withdrawn reasoning of Jones [II] while several have
defined gross negligence in its traditional terms.” Willetts
II, 48 F. Supp. 3d at 851 n.2. Aside from the district court’s
denial of the motion to dismiss in this case, only one other
federal court has relied on the withdrawn Jones II opinion, and
it did so in an unpublished opinion. See Snow v. Oneill, No.
1:04CV00681, 2006 WL 1837910, at *3 (M.D.N.C. June 5, 2006).
The district court here correctly observed that no North
Carolina state courts have relied on the withdrawn opinion.
23
The FDIC-R urges this Court to view Jones II as an
indication of how the North Carolina Supreme Court will decide
future gross negligence cases. But in Jones III, the North
Carolina Supreme Court withdrew its Jones II opinion “[f]or the
reasons stated in the dissenting opinions [in the court of
appeals] as to the gross negligence claim.” Jones III, 638
S.E.2d at 203 (citing Jones v. City of Durham (Jones I), 608
S.E.2d 387, 394-95 (N.C. Ct. App. 2005) (Levinson, J.,
dissenting in part and concurring in part)). Jones I, in turn,
relied on the traditional definition of “gross negligence.” The
North Carolina Supreme Court thus withdrew its reasoning as to
the difference between gross negligence and willful and wanton
conduct.
Even absent Jones III, we nonetheless find the reasoning in
Jones II inapposite. Jones II addressed the definition of gross
negligence within the context of North Carolina’s punitive
damages statute. Another provision of that same statute
provides:
This Chapter applies to every claim for punitive
damages, regardless of whether the claim for relief is
based on a statutory or a common-law right of action
or based in equity. In an action subject to this
Chapter, in whole or in part, the provisions of this
Chapter prevail over any other law to the contrary.
N.C.G.S. § 1D-10 (emphasis added). Thus, to the extent that the
enactment of N.C.G.S. § 1D–5(7) signaled the abrogation of the
24
common law definition of gross negligence, it did so only in the
context of cases where a plaintiff seeks punitive damages.
The FDIC-R makes no claim for punitive damages in its
complaint. Because there is no claim for punitive damages, the
traditional common law definition of gross negligence applies.
Accordingly, to survive summary judgment, the FDIC-R must show
that there is a genuine issue of material fact as to whether the
Appellees’ conduct amounted to “‘wanton conduct done with
conscious or reckless disregard for the rights and safety of
others.’” Yancey, 550 S.E.2d at 157 (citation omitted) (“‘An
act is wanton when it is done of wicked purpose, or when done
needlessly, manifesting a reckless indifference to the rights of
others.’” (citation omitted)).
Here, the FDIC-R has failed to present evidence that the
Appellees’ actions were grossly negligent. To be sure, the
Appellees failed to address deficiencies outlined in examination
reports issued by the FDIC and the NCCB. But those same reports
repeatedly awarded Cooperative ratings of “2” in the CAMELS
categories. In the face of this contradiction, we find that
there is insufficient evidence that the Appellees acted wantonly
or with reckless indifference. We thus affirm the district
court’s award of summary judgment to all of the Appellees on the
issue of gross negligence.
25
V.
The Appellees argue that summary judgment can be entered on
alternative grounds. The district court did not address any of
these arguments below.
First, the Appellees argue that they “made the challenged
loans in reliance on reports, opinions, appraisals, financial
data and other information developed and provided by
Cooperative’s experienced loan officers and credit
administrators.” Br. of Appellees 54. In advancing their
argument, they cite N.C.G.S. § 55-8-30(b), which provides:
In discharging his duties a director is entitled to
rely on information, opinions, reports, or statements,
including financial statements and other financial
data, if prepared or presented by: (1) One or more
officers or employees of the corporation whom the
director reasonably believes to be reliable and
competent in the matters presented . . . .
N.C.G.S. § 55-8-30(b) (emphasis added); see also N.C.G.S. § 55-
8-42 (providing the same protection to officers of a
corporation). Here, there is evidence in the record that
Cooperative’s regulators, as well as its independent auditor,
found its commercial loan administration and underwriting
process lacking. The FDIC-R’s expert, as detailed above,
similarly criticized the loan and credit administration process
as contrary to standard banking practices. Accordingly, there
is a genuine issue of material fact about whether the Officer
26
Appellees’ reliance on the reports of their credit
administrators and loan officers was reasonable.
Next, the Appellees argue that the FDIC-R “failed to
produce evidence that the defendants, rather than the Great
Recession, proximately caused the loan defaults pled.” Br. of
Appellees 59. Proximate cause is “a cause that produced the
result in continuous sequence and without which it would not
have occurred, and one from which any man of ordinary prudence
could have foreseen that such a result was probable under all
the facts as they existed.” Mattingly v. North Carolina R.R.
Co., 117 S.E.2d 844, 847 (N.C. 1961) (citation and internal
quotation marks omitted). Foreseeability is necessary for a
finding of proximate cause, but “does not require that [the]
defendant should have been able to foresee the injury in the
precise form in which it actually occurred.” Hairston v.
Alexander Tank & Equip. Co., 311 S.E.2d 559, 565 (N.C. 1984).
Rather, a plaintiff need only prove that “in ‘the exercise of
reasonable care, the defendant might have foreseen that some
injury would result from his act or omission, or that
consequences of a generally injurious nature might have been
expected.’” Hart v. Curry, 78 S.E.2d 170, 170 (N.C. 1953)
(emphasis added) (citation omitted). Moreover,
[t]here may be two or more proximate causes of an
injury. These may originate from separate and
distinct sources or agencies operating independently
27
of each other, yet if they join and concur in
producing the result complained of, the author of each
cause would be liable for the damages inflicted, and
action may be brought against any one or all as joint
tort-feasors.
Batts v. Faggart, 133 S.E.2d 504, 506 (N.C. 1963) (citation
omitted).
Certainly, it is convenient to blame the Great Recession
for the failure of Cooperative, and in turn for the losses
sustained by the FDIC-R when it took over the Bank. However,
there is evidence in the record, as outlined above, that
suggests that “in the exercise of reasonable care,” the Bank
officers could have “foreseen that some injury would result from
[their] act[s] or omission[s], or that consequences of a
generally injurious nature might have been expected.” Hart, 78
S.E.2d at 170 (emphasis added) (citation omitted). Even before
the Recession, exam reports from both of Cooperative’s
regulators indicated that the Bank was utilizing unsafe
practices. And while the Recession undoubtedly contributed to
the failure of the Bank, it may have been only one of many
contributing factors. This is a genuine issue of material fact,
and thus this is a question for a jury. See Adams v. Mills, 322
S.E.2d 164, 172 (N.C. 1984) (“[P]roximate cause of an injury is
ordinarily a question for the jury.”).
Finally, the Appellees argue that the FDIC-R has not
adequately determined its damages. Under North Carolina law, in
28
an action “in tort rather than contract, . . . damages must be
the natural and probable result of the tortfeasor’s misconduct.”
Olivetti Corp. v. Ames Bus. Sys., Inc., 356 S.E.2d 578, 585
(N.C. 1987). Additionally, “[i]t is a well-established
principle of law that proof of damages must be made with
reasonable certainty.” Id. There is no requirement for
absolute certainty, but rather the evidence of damages “must be
sufficiently specific and complete to permit the jury to arrive
at a reasonable conclusion.” Weyerhaeuser Co. v. Godwin Bldg.
Supply Co, Inc., 234 S.E.2d 605, 607 (N.C. 1977) (quoting
Service Co. v. Sales Co., 131 S.E.2d 9, 22 (N.C. 1963)).
While the Appellees argue briefly that the FDIC-R’s damages
calculations were speculative and did not pass muster below, the
district court in reality stated only that it was excluding the
FDIC-R’s damages expert, Harry Potter (a ruling not challenged
here) because his report “merely relies on information found in
[Office of Inspector General] and FDIC publications,” and “[a]n
expert is not needed to relay this type of information to the
jury.” Willetts II, 48 F. Supp. 3d at 848. The district court
never concluded that the FDIC was not able to prove its damages
with reasonable certainty, and we decline to determine that
question in the first instance.
29
VI.
For the foregoing reasons, the judgment of the district
court is
AFFIRMED IN PART, REVERSED IN PART,
VACATED IN PART, AND REMANDED.
30