Federal Deposit Insurance Corporation v. Rippy

The Federal Deposit Insurance Corporation (FDIC) as receiver for Cooperative Bank (Cooperative) (FDIC-R) (plaintiff) sued nine Cooperative officers and directors including Richard Rippy (defendants) alleging negligence, gross negligence, and breach of fiduciary duties resulted in the bank’s failure. Cooperative focused on single-family housing loans over a century. In 2002 directors adopted a growth strategy focused on expanding commercial real estate lending. An annual FDIC examination in 2006 gave the bank satisfactory scores but identified problems the FDIC ascribed to oversight weaknesses. A year later, state regulators gave Cooperative the same scores but found management had been slow to correct the problems, and external review gave a sample of loans passing grades. However, the next external review gave most loans failing grades and identified deficiencies. Regulators in 2008 gave Cooperative extremely low ratings because of its high concentration of commercial real estate loans, noted management had not adequately addressed previously identified concerns, and traced Cooperative’s overall condition back to pursuing commercial lending as a growth strategy. Meanwhile, the Great Recession caused many bank closures and bailouts. Ultimately state regulators closed Cooperative, and the FDIC-R sued the officers and directors to recover its losses. However, Cooperative’s articles of incorporation included an exculpatory provision that protected directors from liability for ordinary negligence. An FDIC-R expert testified the officers did not follow generally accepted banking practices and approved loans over the phone without reviewing loan documents, and some loans should never have been approved. The trial judge granted the officers and directors summary judgment, reasoning the business-judgment rule protected them from liability for ordinary negligence or breach of fiduciary duty and that the evidence did not show gross negligence. The FDIC-R appealed.