California Officers Need to Be More Careful than Directors
In California, corporate directors are protected by the so-called Business Judgment Rule (“BJR“): They are not responsible for honest mistakes of business judgment. A recent case revealed that in California the BJR does not protect corporate officers.
During 2007, Indymac Bank bought more than $10 billion in risky residential loans, ultimately generating losses of more than $600 million. Indymac closed, and the Federal Deposit Insurance Corporation was appointed receiver.
The FDIC brought suit against Matthew Perry, Indymac’s former CEO, alleging negligence in continuing to generate and purchase loans. Perry moved to dismiss the complaint, claiming that he was protected by the BJR.
The U.S. District Court for the Central District of California denied Perry’s motion (FDIC v. Perry). The court noted that the statute setting forth the BJR (Corporations Code Section 309) expressly applies only to directors, not to officers.
Bottom line: If you are acting in your capacity as an officer – even if you also are a director – you have an obligation to be aware of corporate affairs and not to act negligently.
Related post: Directors’ Fiduciary Obligations: Delaware vs. California
Dana H. Shultz, Attorney at Law +1 510 547-0545 dana [at] danashultz [dot] com
This blog does not provide legal advice and does not create an attorney-client relationship. If you need legal advice, please contact a lawyer directly.
Dana Shultz is a business-savvy lawyer located in Northern California's San Francisco Bay Area (in the East Bay, near Oakland) who has in-depth knowledge of law, business, technology, and the needs of startup and early-stage companies.