“However, the Court will briefly discuss the FDIC’s claim that the “Great Recession” was not only foreseeable, but was actually foreseen by the defendants. The Court discusses this claim only due to the absurdity of the FDIC’s position…In sum, the FDIC claims that defendants (former Officers and Directors of Cooperative Bank) were not only more prescient than the nation’s most trusted bank regulators and economists, but that they disregarded their own foresight of the coming crisis in favor of making risky loans. Such an assertion is wholly implausible…

…The surrounding facts, and public statements of economists and leaders such as Henry Paulson and Ben Bernanke belie FDIC’s position here. It appears that the only factor between defendants being sued for millions of dollars and receiving millions of dollars in assistance from the government is that Cooperative was not considered to be “too big to fail.” Taking the position that a big bank’s directors and officers should be forgiven for failure due to its size and an unpredictable economic catastrophe while aggressively pursuing monetary compensation from a small bank’s directors and officers is unfortunate if not outright unjust…The Court finds that defendants are entitled to the business judgment rule’s protection as a matter of law and indisputable fact. Therefore the Court enters judgment against plaintiffs claims for negligence and breach of fiduciary duty.”, United States District Judge Terrence W. Boyle, September 10, 2014 Order Granting Defendants’ Motion for Summary Judgment in FDIC, as receiver for Cooperative Bank v. Frederick Willetts III, et.al.

“Unlike my home state of California, I am heartened to see that The Rule of Law and Business Judgment Rule (for both directors AND officers) still exists in other regions of our Country. California’s Federal Courts allowed the FDIC to sue me civilly for simple negligence, and seek $600 million in alleged damages against me personally. The FDIC sued me as an officer only, because in California, the lower federal courts ruled that ONLY directors were protected by the BJR and the 9th Circuit Court of Appeals refused to hear my appeal of this matter, until after a costly and lengthy trial was completed. I was not a negligent banker, but I was inappropriately denied my right to protection under the BJR, as I would have had in every other state in America.”, Mike Perry, former Chairman and CEO, IndyMac Bank

“Nevertheless, the FDIC insisted on pursuing an equally baseless simple negligence claim, alleging that Mr. Perry should have had a crystal ball, seen the financial crisis coming and stopped making loans sooner than IndyMac did.” D. Jean Veta, Covington & Burling (M. Perry’s FDIC Settlement Statement #35 and M. Perry’s Resolution of All Government Matters Statement #39)

Key Excerpts from United States Eastern District of North Carolina, Southern Division, Judge Terrence W. Boyle’s September 10, 2014 Order Granting Defendants’ Motion for Summary Judgment in FDIC, as Receiver for Cooperative Bank v. Frederick Willetts, III, et.al.:

“Cooperative Bank…was a commercial banking institution charted under North Carolina law with deposits insured by the Federal Deposit Insurance Corporation. In June 2009, the North Carolina Commissioner of Banks declared Cooperative insolvent and named the FDIC as Receiver of the Bank….the FDIC succeeded to all rights, titles, powers, and privileges of Cooperative and Cooperative’s shareholders with respect to Cooperative, including, but not limited to, Cooperative’s claims against Cooperative’s former directors and officers for negligence, gross negligence, and breaches of fiduciary duty or other legal duties.”

“The FDIC filed this suit against former officers and directors of Cooperative for negligence, gross negligence, and breaches of fiduciary duty in connection with their approval of 86 loans made between January 5, 2007 and April 10, 2008. In approving the Subject Loans, the complaint alleges and the FDIC submits that the proof at trial will show that defendants deviated from prudent lending practices established by Cooperative’s loan policy, published regulatory guidelines, and generally established banking practices, such as obtaining and verifying current financial information, adhering to minimum loan-to-value (“LTV”) ratios and adhering to maximum debt-to-income (“DTI”) ratios.”

“As the Court held in ruling on the motion to dismiss in this case:The business judgment rule serves to prevent courts from unreasonably reviewing or interfering with decision made by duly elected and authorized representatives of a corporation. Robinson on North Carolina Corporations, § 14.06. “Absent proof of bad faith, conflict of interest, or disloyalty, the business decisions of officers and directors will not be second-guessed if they are ‘the product of a rational process,’ and the officers and directors have ‘availed themselves of all material and reasonably available information’ and honestly believed they were acting in the best interest of the corporation.”

“Now, however, the facts have been fully developed and the Court finds that the business judgment rule applies and shields defendants from liability on the ordinary negligence and breach of fiduciary duties claims. Under the business judgment rule, there can be no liability for officers and directors even when “a judge or jury considering the matter after the fact, believes a decision substantively wrong or degrees of wrong extending though ‘stupid,’ to ‘egregious’ or ‘irrational,’ … so long as the court determines that the process employed was either rational or employed in a good faith effort to advance the corporate interests.”

“The business judgment rule involves two presumptions. First, it establishes “‘an initial evidentiary presumption that in making a decision the directors [and 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. Second, the business judgment rule establishes, absent rebuttal of the first 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. Here plaintiff cannot rebut either presumption on the evidence before the Court.”

“The substantial discovery produced in this case, which includes voluminous records, 15 depositions of party, third party, and expert witnesses including Cooperative’s regulators at the FDIC, fails to reveal any evidence that suggests any defendant engaged in self-dealing or fraud, or that any defendant was engaged in any other unconscionable conduct that might constitute bad faith. Although the decisions of defendants to engage in various forms of lending and to make the particular loans challenged in the complaint, and the wisdom of such decisions raise interesting discussion points in hindsight, the business judgment rule precludes this Court from delving into whether or not the decisions were “good” and limits the Court’s involvement to a determination of whether the decisions were made in “good faith” or were founded on a “rational business purpose.” Considering the absence of any indication of bad faith, conflict of interest, or disloyalty, the Court now considers whether defendants employed a rational process in making the challenged loans.”

“Therefore the facts show that the process that defendants used to make the challenged loans were expressly reviewed, addressed, and graded by FDIC regulators in the 2006 ROE. The regulators assigned defendants a passing grade of “2” in the CAMELS system and to now argue that the process behind the loans is irrational is absurd. Further, each of the loans at issue was subject to substantial due diligence and an approval process that defies a finding of irrationality.”

“The Court therefore finds, as a matter of law, that defendants’ processes and practices for the challenged loans were rational and that plaintiff has failed to rebut the first presumption of the business judgment rule.”

“Therefore the Court moves to considering whether the challenged actions of the defendants can be attributed to a rational business purpose. The Court concludes they can be, as a matter of law. The burden of defeating the business judgment rule when the first presumption survives is extraordinarily high especially in conditions, as here, of a tumultuous market.”

“Cooperative’s pursuit of the challenged loans was in furtherance of Cooperative’s goal to grow to a $1 billion institution and stay competitive with other regional and national banks making substantial inroads into its territory. The record can simply not support a finding that the defendants’ business purpose fell so far beyond lucid behavior that it could not even be considered “rational.” Although there were clearly risks involved in Cooperative’s approach, the mere existence of risks cannot be said, in hindsight, to constitute irrationality. Further, corporations are expected to take risks and their directors and officers are entitled to protection from the business judgment rule when those risks turn out poorly. Where, as here, defendants do not display a conscious indifference to risks and where there is no evidence to suggest that they did not have an honest belief that their decisions were made in the company’s best interests, then the business judgment rule applies even if those judgments ultimately turned out to be poor.”

“The Court finds that defendants are entitled to the business judgment rule’s protection as a matter of law and indisputable fact. Therefore the Court enters judgment against plaintiffs claims for negligence and breach of fiduciary duty.”

“The FDIC has presented no 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. The FDIC cannot show that any of the defendants engaged in wanton conduct or consciously disregarded Cooperative’s well-being. As the FDIC can point to no evidence supporting such a finding, defendants are entitled to summary judgment on the gross negligence claim.”

“However, the Court will briefly discuss the FDIC’s claim that the “Great Recession” was not only foreseeable, but was actually foreseen by the defendants. The Court discusses this claim only due to the absurdity of the FDIC’s position.”

“The FDIC relies on several pieces of evidence to support its claim that defendants foresaw the downturn in the economy as early as October 2006. However, it ignores the unique historical factors happening at the same time including numerous economists and economic forecasters’ prognosis of a strong economy going forward at that time….Even as late as April 2007, the United States Treasury Secretary was pushing the idea that the economy was strong and healthy and that the housing market had reached its bottom….Further, throughout 2007 and into 2008, North Carolina and national economists continued to publish upbeat economic forecasts.”

“After the fact, Federal Reserve Chairman Ben Bernanke observed that “a ‘perfect storm’ had occurred that regulators could not have anticipated,” and former Chairman Alan Greenspan confessed that “it was beyond the ability of the regulators to ever foresee such a sharp decline.” Financial Crisis Inquiry Commission, Final Report of the National Commission on the Causes of the Financial and Economic Crisis in the United States, January 2011. Further the Federal Crisis Inquiry Commission has concluded that “[c]laims that there was a general failure of risk management in financial institutions or excessive leverage or risk-taking are part of what might be called a ‘hindsight narrative.”‘(concluding this narrative to be false). In sum, the FDIC claims that defendants were not only more prescient than the nation’s most trusted bank regulators and economists, but that they disregarded their own foresight of the coming crisis in favor of making risky loans. Such an assertion is wholly implausible. The surrounding facts, and public statements of economists and leaders such as Henry Paulson and Ben Bernanke belie FDIC’s position here. It appears that the only factor between defendants being sued for millions of dollars and receiving millions of dollars in assistance from the government is that Cooperative was not considered to be “too big to fail.” Taking the position that a big bank’s directors and officers should be forgiven for failure due to its size and an unpredictable economic catastrophe while aggressively pursuing monetary compensation from a small bank’s directors and officers is unfortunate if not outright unjust.”

“CONCLUSION: For the forgoing reasons, defendants’ motion for summary judgment is GRANTED, plaintiffs motion for partial summary judgment is DENIED AS MOOT, the various motions to seal are GRANTED, Defendants’ motion to exclude is GRANTED, and plaintiffs motion to strike is DENIED AS MOOT. The clerk is directed to enter judgment accordingly and to close the file. SO ORDERED.

This the 10th day of September, 2014.

TERRENCE W. BOYLE

UNITED STATES DISTRICT JUDGE”

(Order Granting Summary Judgment: FDIC, as Receiver for Cooperative Bank v. Frederick Willetts, et. al.)

FDICvWilletts-SummaryJudgmentDecision

Posted on September 24, 2014, in Postings. Bookmark the permalink. Leave a comment.

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